Small Business Guarantees Are a Bucket of Moral Fraud

Mish

The coronavirus Small Business Relief program is a bucket of first come first serve moral fraud.

The New York Times says Small-Business Relief Effort ‘a Mess’

The Hill says Small businesses still struggling for loans even as $100B is approved

The Trump administration has approved roughly $100 billion of the $350 billion allocated for emergency loans to small businesses devastated by the coronavirus outbreak, Treasury Secretary Steven Mnuchin told lawmakers on Wednesday.

But the figure has done little to ease the rising fears of smaller businesses still struggling to access the funds — and growing ever-more concerned that the program is tilted in favor of larger enterprises with existing relationships with banks.

The concern from small businesses is simple: they fear the money will run out before they can access it.

"A lot of money [is] first-come, first-serve, and many unbanked people who are underbanked or unserved ... don't have banking relationships, sophisticated in a way that others do," House Speaker Nancy Pelosi (D-Calif.) said Wednesday in an interview with NPR.

Money Might Run Out

Let's tap into that idea that money might run out with an investigation of the Small Business Loan Rules.

​The program offers loans of up to $10 million to cover eight weeks of payroll plus some additional expenses, like rent and utilities.

The loan can effectively turn into a grant. Most, and in some cases all, of the loan will be forgiven if a company uses the money to retain workers or hire back positions it had to cut. The S.B.A. has waived many of its usual requirements for these loans and will not require collateral for them.

Businesses can have their loans forgiven in full if they maintain their full-time equivalent head count (based on a 40-hour workweek) and wages for eight weeks after the loan is disbursed, the Treasury Department said. The agency said that “not more than 25 percent” of the forgiven amount may be used for nonpayroll costs, like rent.

Companies can borrow up to two months of their average monthly payroll costs for the past year, plus an additional 25 percent, up to $10 million. “Payroll costs” include salary, wages, tips, commissions, paid leave benefits, employer-paid health insurance premiums, and state and local payroll taxes.

The CARES Act text says that you can claim your “wage, commission, income, net earnings from self-employment or similar compensation,” up to $100,000 a year.

You’ll have two years to pay off the balance, at a 1 percent interest rate. No payments are due for the first six months after you get the loan.

Hooray I am Qualified!

Check this out.

  • Self-employed people are eligible for benefits.
  • Benefits will be based on previous income, using a formula from the disaster unemployment assistance program.
  • Self-employed workers are also eligible for the additional $600 weekly benefit provided by the federal government as part of the CARES Act.

Moreover, one does not even have to request an amount.

The S.B.A. will determine how much someone like me can borrow using a formula intended to approximate six months of my operating expenses.

This is despite the fact that I have not lost a penny in earnings.

Let that sink in.

I cannot find any requirement anywhere that prevents someone like me from making an outright bundle.

Hooray! Six Months Double Income

Nowhere does the application (that I am aware of) ask me if I have lost any income.

Even if it did, all I would have to do is stop paying myself salary, let the profits accumulate, and use the loan to cover my previous income.

Since the loan is used to pay salary, (my own), it would be forgiven. Heck, I could even hire my wife and kids except for the fact I have no kids.

On top of that, and despite the fact I have not lost a dime, I will receive an automatic check because the government is sending out blanket $1,000 checks to everyone.

Moral Hazard?

You bet. I will not take advantage but under the rules I easily could.

Some will.

From the Bank Perspective

Assume the banks are getting flooded with loan requests.

Who do they want to lend to?

  1. Someone who does not need the money at all and is no credit risk OR
  2. Someone who might go out of business

Any reasonable credit scoring algorithm would direct these loans to the safest place, category number one.

Lesson of the Day

When government fires money out of cannons, it generally does not get into the hands that government intended.

The more cynical will believe it actually does get to the intended people, just not the alleged beneficiaries.

Mike "Mish" Shedlock

Comments (48)
No. 1-24
Zardoz
Zardoz

The fraud is the point. The virus outbreak has been a gift to political criminals.

PecuniaNonOlet
PecuniaNonOlet

No one has talked about what happens if these loans dont get paid back at all. Who owns the assets after bankruptcy?

sangell
sangell

Yeah, it stinks but so do the mortgage and rent grace periods and now the Fed buying junk bonds. Its a gigantic fraud financed with make believe money. The Fed's balance sheet is where all the unpayable debt will end up.

Bam_Man
Bam_Man

Ain't "capitalism" great?

numike
numike

I know someone that has a small business and is going thru this loan process. What a mess! She is convinced she will get nothing.

Tony Bennett
Tony Bennett

"The program offers loans of up to $10 million to cover eight weeks of payroll plus some additional expenses, like rent and utilities."

...

"Some" is the operative word.

Payroll might well be biggest expense, but many businesses have substantial other expenses (inventory for one). How do they pay those if business has crashed? What if business does not have an existing banking relationship? What if business not sophisticated enough to apply? A loan that may well turn out to be a grant, but can business be SURE of that? Money runs out before application gets through crashing website? Business does not feel virus will leave anytime soon, or least not before 8 weeks of payroll support ends?

I can see many just closing or deciding bankruptcy best bet.

Captain Ahab
Captain Ahab

How about some basic rules?

  1. A business cannot receive more in handouts than what it paid in Federal taxes last year. If it was a losing proposition in the best economy ever, it needs to die. If it was a tax fraud, as so many small businesses are, it also needs to go away.
  2. Ditto for individuals. Don't file in 2019, you don't qualify. I've met too many people in the underground economy, driving new trucks, with expensive boats.
bradw2k
bradw2k

Mish, what does the Fed purchasing of HYG starting next week mean ... does it really mean HYG cannot go down below some floor that they choose? Or is there still significant risk that they will fail to prop up prices on HYG and other things (purchases of stocks likely coming)? My guess is they can try to prop prices but they will fail, even in 2020 time frame, because they can slap a bull on the ass but they cannot fight off a bear ... but what do I know.

sangell
sangell

Obviously this is just disguised 'helicopter money'. The government doesn't really expect every closed bar, restaurant, movie theater, travel agency even strip club to come back when and if social distancing is removed. Still, having a business license is way to limit who gets the helicopter money to keep it out of the hands of drug addicts, winos, the homeless and other parasites.

tokidoki
tokidoki

Moral frauds are impossible in a country whose economic foundation is based on zero morals.

davebarnes
davebarnes

Don't worry.
Now that Ivanka is in charge, she will make sure all the money flows to her Daddy's businesses.

lol
lol

After 09 bank collapse,banks became too big to fail(at least in the open)Corona is just convenient cover for banking crisis/collapse 2.0...PBOC,Fed,ECB hatched this scheme to shutdown world economy to buy time and protect the banks,the repo crisis was not containable so CB's decided to manufacture an excuse to shut everything down and shift blame while they recapitalize (takeover)banks.

numike
numike

Coronavirus Crisis Legacy: Mountains of Debt
The government and the private sector are going deeper in the hole to survive the economic shutdown, which could be a drag on recovery if it spurs a period of thrift

Carl_R
Carl_R

Mish, in order to apply for a loan, one thing that you must certify is:
"Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."

You also have to certify that you understand that it is a criminal fraud to apply fraudulently. I doubt many businesses that aren't seeing a revenue downturn will apply.

Carl_R
Carl_R

This program is just helicopter money. We all wondered how helicopter money would end up being delivered. Now we know. It's designed to all flow through through the small business directly to the employees, though the businesses can use a small portion of it for rent, mortgages, and utilities. The thing is that it's cheaper for the government to pay wages by having businesses keep their employees paid than it is to let the employees go on unemployment. Not only is there more paperwork when someone is unemployed, but with the bonus $600/week, many/most employees now make far more unemployed than they would if they were working. That's going to make it very, very hard for any business to hire anyone, if there are any businesses that need additional employees.

wtlf555
wtlf555

A couple comments from the trenches

  • yes its helicopter money . . . and never in my wildest dreams as a small business owner would I have expected the drop to be on small business owners.

  • when Pelosi and Schumer realize that MMT is a zero sum game and small businesses got money at the expense of public pensioners and the unemployed they're gonna be pissed. They're trying to back out of the second round of $250 billion now but they've already defined "small business" as sole-proprietors, contractors and non-profits so backing out now is screwing 75% of the population.

  • as to the loan itself I think its written well. Banks get 5% for servicing smaller loan amounts and down to 1% for large loans. They still might give the loans to larger companies to keep key clients happy. 500 employees is a pretty big "small" company

  • the "affiliate" rules are generally in place so an owner that has a bunch of smaller companies cannot get a loan

  • VC/PE backed companies cannot get loans. I thought this would go away fast with the Silicon Valley lobby but for some reason "small business angels?" the wording stayed in. I think Trump and Mnuchin really wanted to screw California and Pelosi

  • there will be fraud but being in the trenches it might not be too bad. Most of the loans are going through smaller banks. Not sure how this happened. Maybe Trump really hates big banks from Chapter 11 fights and this is a chance to screw them - or more likely smaller banks have smaller clients. For the most part you have to work through an established relationship. Banks are REALLY worried about fraud. You are either Tier 1 (with a current loan with bank) in which case you are pretty well vetted - or Tier 2 (current account at bank) in which case you have less priority and further vetting. If your not Tier 1 or 2 NO LOAN. I'm in contact with a business broker who works with many businesses and have had direct contact with 4-5 banks. They are all working from the same playbook. I have a small (4 person) client services business that will be hit hard by COVID19. I went to the bank that did my SBA loan and which I paid-off 5 months ago - they wouldn't take me. Ended up with my operating account bank (10 year relationship) and they did a lot of vetting. I also work for an auto company that is applying and same with that bank. The banks require 940/941s and payroll registers to verify payroll. There will be fraud but it will be difficult. The fraud will be very wealthy people getting 2.5 months of free payroll

  • a lot of businesses that might not need the money will get it. But who really knows (other than travel and restaurant businesses) how much affect this will all have

  • I'm in contact with a lot of small businesses and not one has received any EIDL or PPP funds yet

  • If all of the businesses that I'm dealing with who really need the funds are funded I think this will be a success. I think the chances for this are 60%

  • I'm aware of 2-3 business with a lot of contacts and little need for the funds. If they get funding and others do not this will be an abject failure and Mish will be right - I give this a 40% chance

  • we will probably know next week

DaveH2
DaveH2

Um, the government ALWAYS uses these things to trap regular people. Forget the application, look for the traps in the regulations. If you don't get screwed there, don't worry. The law and regulations will later be changed to make your life FAR worse.

Of course the marks won't see it because they have desperation and hope, the curse throughout all time.

oldereb
oldereb

???? A COUP, ACCOMPLISHED ????
The virus, and MSM, has been successfully used.


OPEN LETTER TO CONGRESS
Dear Congress Critter,
Is Congress going to give exploitative rapists trillions of dollars under the pretext of saving the US economy which they have wrecked??
It is the perpetrators of the pernicious chaos that are being offered the reins of government control, and they have the audacity to ask for immunity from exposure ?
Your constituent,
John Q. Public


If the rumor that the US Treasury (i.e., Mnuchin of Goldman Sachs) has been authorized as of March 27 to purchase bad debt from the Fed and drop the bad debt that was purchased from Too Big To Fail banks [TBTF] onto the US taxpayers [to save Wall Street from bankruptcy] is true --- [[[[and it appears to be confirmed]]]---, we must conclude Wall Street, as hidden owners of the Federal Reserve Board of Governors, Inc., [BOG] has formulated a coup and Wall Street, who is the creators of the crisis, is now wanting to control the economic reins of the Nation to save their *$$.
And the Fed wants to be exempt from FOIA requests ???    I can see why. Wall Street wants to hide all the trashy MBS’s, derivatives, and such they created and now want to dump them on the taxpayers and citizens of this nation. In addition, they want to hide their embezzlement of $23 trillion over the past 100 years.
Pundits have claimed bad debts of the TBTF banks exceed $1,500 trillion. And the bankers will eventually want the citizens of this nation to buy this debt from them ?? Of course, they will start with a paltry $200 billion for a few small businesses they have loaned money.


The – [Ft. Detrick] – virus is the distraction from the economic collapse which was already pending from the Federal Reserve//Wall Street high-risk fool-hardy agenda.
A New York doctor who has treated >500 cases with 100% cure rate. Relief can be in 4-6 hours and cure in 6 days: https://newsthud.com/ny-doctor-successfully-treats-patients-with-drug-cocktail-zero-deaths-zero-hospitalizations-zero-intubations/ The open letter was sent to White House 10 days ago. Also, https://forward.com/news/national/442285/coronavirus-hydroxychloroquine-trump-doctor/ with 500 patients; and https://techstartups.com/2020/03/28/dr-vladimir-zelenko-now-treated-699-coronavirus-patients-100-success-using-hydroxychloroquine-sulfate-zinc-z-pak-update/; https://therightscoop.com/watch-ny-doctor-says-his-hospital-already-using-chloroquine-for-coronavirus-patients-and-have-had-zero-deaths/; and 4 other sites.

The virus was discussed years before the spread from Ft. Detrick; the cure was known. https://vinsuprynowicz.com/?p=8359 . The origin of the virus is identified as Ft. Detrick. Ref. https://www.altermidya.net/opinion-origin-of-covid-19-ecological-historical-and-geopolitical-perspective/

The virus is going to be blamed as the cause of the economic collapse. The TBTF banks have led the nation to insolvency and will use the Fed to cover the bankruptcy of its owners. Then they will use the Fed to foreclose on the US national debt.

The select Primary Dealers/TBTF banks own shares of the BOG, Inc. The BOG is [alleged to be] a closely held corp that does not have to file SEC reports. They have skimmed $22 trillion [illegal] profit over 100 years. They are using the Fed to protect their [bankrupt] banks and their ownership of six mega-corporations. Ref. https://www.spartareport.com/2019/11/the-federal-reserve-a-different-view/.

The ultimate end is the Fed will be used to foreclose on the $23 trillion national debt of the US. https://ppjg.me/2019/11/18/scenario-of-national-bankruptcy/.

The scheme can be exposed by FOIA. Ref. https://thedailycoin.org/2020/02/19/federal-reserve-transparency/.

Moe G7
Moe G7

I’m no fan of this govt but I think the PPP is a smart program even if people/businesses don’t pay it back. It can be way cheaper than unemployment and a better alternative to it.

amigator
amigator

Payroll Tax Holiday!

We should all be pushing for this. And Trump wants to make it permanent!
Pay Roll taxes collect about 1.6 trillion. That is just a small part of the overall bailout.
A major drain of the swamp!

Let's get this rolling!! C'mon man!

aqualech
aqualech

I think coup is a valid concept. Those elected “reps” have decided that avoiding deflation of the bubble is worth risking the reserve currency. Period. Savers are third class. Equity gamblers including derivatives to be made whole at all costs. Period.

TigerRose27
TigerRose27

We just went through the PPP application process where I work, and it should be pointed out that business owners are obligated to certify under fraud laws and penalty of perjury laws, on both the application and the loan itself, that "this loan request is necessary to support ongoing operations." It's not enough to prevent all fraud from unscrupulous actors, I know, but it does go beyond your claim that applicants don't have to need the money to get it. They do have to swear on the docs that they need it. For whatever that is worth. Just FYI.

Lorence
Lorence

Small or medium business, sooner or later we will all be faced with the choice of where to go next, whether it will be global economic disasters or just an unknown computer virus that will devour everything that we have been creating for so long
[link=https://osome.com/hk/company-registration/]click to read more[/link] then I advise everyone to better think about expanding as soon as possible your influence, expand your land, just see where you can open a branch, and maybe it's very close and you don’t have to go far, check.


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