WSJ opinion: Borrower Beware: Cares Loans Carry a Steep Cost
Questions are already arising about whether the federal dollars flooding the U.S. economy during the Covid-19 crisis are reaching the intended recipients. Rightly so, when trillions in taxpayer dollars are at stake. But it should make businesses think twice before they take federal money.
Clearly there should be a financial lifeline for America’s hundreds of thousands of small businesses and 22 million unemployed. When the government orders your “nonessential” business to close (despite its being essential to your and your employees’ livelihoods), it’s only reasonable that it should compensate you.
But borrower beware! Businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The ultimate cost may dramatically outweigh the temporary gain.
Through the congressional oversight commission established under the Cares Act, the new Special Inspector General for Pandemic Recovery, and numerous other freshly funded inspectors general, the groundwork is already laid for aggressive investigation and review of which businesses received—and how they spent—federal emergency funds.
Having served on the Congressional Oversight Panel for the Troubled Asset Relief Program in the years following the 2008-09 financial crisis, I appreciate that the two-sided effect of taking federal funding can be both a succor and a risk to a business’s reputation and operation.
In 2008 the $700 billion TARP package was enacted mainly to respond to a financial-sector crisis caused by government housing and monetary policy and market responses. Banks and automobile companies received a lifeline—in some notable cases necessary to their survival. The Treasury Department browbeat many reluctant banks to seek TARP funding “voluntarily” in the name of systemic safety and soundness, as a way of preventing more-eager banks from looking weak. The effort backfired by making the whole industry look weak, and it has tarnished banking for more than a decade.
Copying TARP, the new Congressional Oversight Commission will oversee the $2.2 trillion in Cares Act spending. Because the pandemic is a truly global force majeure event and the recipients of funds are not industry-specific, the oversight will be more complicated. Few if any companies were prepared for Covid-19, and most are going to be negatively affected in some way. On the recipient side, companies large and small are filing for assistance before the relevant regulations have been fully drafted or implemented.
While different in scope and detail, TARP and Cares have enough similarities that some lessons from the TARP days are worth consideration here. For one, expect aggressive oversight and enforcement. Whenever public money is distributed to private hands, anomalies will arise and accusations of favoritism, discrimination and fraud will follow. The TARP special inspector general’s investigations have led to 24 regulatory enforcement actions and 380 convictions, totaling more than $11 billion to date.
Already, the old saw that “optics matter” is coming into play. Harvard, AutoNation, Shake Shack, the Los Angeles Lakers and other well-known entities have already returned Cares Act funds. We may be seeing only the beginning of the naming and shaming of businesses—in an election year, smacking the right organization can make a candidate a cultural hero. And that’s all before the oversight commission and inspectors general start digging into the payout rolls. Lawmakers and others are already signaling that otherwise successful companies or their owners that receive Cares Act money today will have a lot to answer for tomorrow.
To deter freeloading, the Treasury and the Small Business Administration incorporated from the outset a much-needed loan-application certification stating that the loan is “necessary to support the ongoing operations of the Applicant,” and criminal penalties attach if it is not. It is entirely possible the special inspector general will interpret “necessary” narrowly, as there will be many tempting targets to recoup taxpayer money and tarnish reputations. It won’t be pretty for the businesses caught in the crossfire. If in doubt, stay out.
Another consideration firms should mull is the potential for regulatory whipsawing. The company whose SBA loan is forgiven under today’s Paycheck Protection Program guidelines may face future government demands for environmental or corporate-governance regulations. Helping businesses avert certain bankruptcy today is a great hook for politicians to impose special post hoc obligations tomorrow.
Policy makers can head off some of this turmoil. In writing the final rules for these programs, for instance, the Treasury and SBA can clarify that organizations with ample alternative resources aren’t eligible and won’t have their loans forgiven.
This isn’t to suggest that companies shouldn’t take federal funding if they absolutely need it and qualify, but they should know the potential long-term implications. For the sake of taxpayers and businesses alike, policy makers should adopt clear, public guidelines to focus relief on those that truly need it, reducing the likelihood of poisonous recriminations. Clarity will help ensure the economic revival we desperately need.