March ’21

The BAN Report: SBA Update / What? Me No Worry, Says Fed on Deficit / Travel Update / Microsoft Re-Opens Offices-3/25/21

SBA Update

With the PPP deadline approaching next Wednesday, the US Senate appears very close to extending the program through May 31, as seven Republicans have signed on to the plan.

Seven Republicans have signed on to a Senate bill that would extend the Paycheck Protection Program for two months, putting Democrats closer to the necessary 60 votes on a measure that Majority Leader Charles E. Schumer said must pass this week.

If the Senate’s 50 Democrats and the seven Republicans support the bill, they would need only three more votes to prevent a potential filibuster. The House passed its bill by a 415-3 vote on March 16. 

We think its nearly a fait-accompli that PPP will get extended.    The SBA also announced that it was expanding the EIDL program, increasing the maximum loan amount.

The U.S. Small Business Administration is increasing the maximum amount small businesses and non-profit organizations can borrow through its COVID-19 Economic Injury Disaster Loan (EIDL) program. Starting the week of April 6, 2021, the SBA is raising the loan limit for the COVID-19 EIDL program from 6-months of economic injury with a maximum loan amount of $150,000 to up to 24-months of economic injury with a maximum loan amount of $500,000.

Businesses that receive a loan subject to the current limits do not need to submit a request for an increase at this time.  SBA will reach out directly via email and provide more details about how businesses can request an increase closer to the April 6 implementation date.  Any new loan applications and any loans in process when the new loan limits are implemented will automatically be considered for loans covering 24 months of economic injury up to a maximum of $500,000.

This new relief builds on SBA’s previous March 12, 2021 announcement that the agency would extend deferment periods for all disaster loans, including COVID-19 EIDLs, until 2022 to offer more time for businesses to build back. In order to shift all EIDL payments to 2022, SBA will extend the first payment due date for disaster loans made in 2020 to 24-months from the date of the note and to 18-months from the date of the note for all loans made in the calendar year 2021.

While they will begin accepting applications for the shuttered venue operators grant program on April 8, details on the implementation of the $28 billion Restaurant Revitalization Fund are a few weeks out.

Patrick Kelley, associate administrator for the SBA’s Office of Capital Access, told committee members that the SBA is working on developing a technology solution capable of deploying hundreds of thousands of grants to restaurants, bars, and other eligible providers of food and drink.

“We are focused like a laser on starting it up as quickly as possible,” he said.

The SBA is aiming to work with the White House Office of Management and Budget (OMB) to build a platform scaled in a way that it can leverage partners such as point-of-sale vendors, which can provide relevant sales data, Kelley said. The new platform could use that information to help automate parts of the application and grant calculation process.

“By drafting off (the point-of-sale vendors) and posting our own web application, we believe we can reach the broadest market segment fast,” Kelley said.

Ideally, he said, the SBA would be able over the next seven to 10 days to begin posting RRF information, such as guidance and required documentation, relevant to potential applicants. The program would then move to a pilot phase, in which the program would begin accepting applications based on prioritization established in the American Rescue Plan Act, which sets aside $5 billion for the smallest applicants ($500,000 or less in 2019 gross receipts) and requires that during the first 21 days of the grants, the SBA will prioritize applications from restaurants owned and operated or controlled by women, veterans, or socially and economically disadvantaged individuals.

The Restaurant Revitalization Fund will be oversubscribed. The restaurant industry did roughly $200 billion less in 2020 versus 2019, so a $28 billion fund will only cover a percentage of the lost revenue in 2020.

What, me worry, says Fed on Deficit

While Federal Debt has doubled since 2011, and is up nearly 20% since 2019, Fed Chair Jerome Powell does believe one should worry about it right now, although it should be addressed in the future.

Federal Reserve Chairman Jerome Powell said that the federal government can manage its debt at current levels but that fiscal-policy makers should seek to slow its growth once the economy is stronger.

“Given the low level of interest rates, there’s no issue about the United States being able to service its debt at this time or in the foreseeable future,” Mr. Powell said Thursday in an interview with National Public Radio. “Nonetheless, there will come a time—and that time will be when the economy is back to full employment, and taxes are rolling in, and we’re in a strong economy again—when it will be appropriate to return to the issue of getting back on a sustainable fiscal path.”

Fed officials voted unanimously at their March 16-17 meeting to maintain overnight interest rates near zero and continue purchasing at least $120 billion a month of Treasury debt and mortgage-backed securities.

In a series of public appearances this week, Mr. Powell and his colleagues have reiterated that they don’t anticipate changing the central bank’s easy-money policies soon.

A more immediate concern for the Fed will be what to do later this year if the economy begins to overheat, and inflation escalates. Adding $1.9 trillion in stimulus (and a proposed $3 trillion infrastructure program) while GDP growth is in the high single-digits could require a swift increase in interest rates.

But, how do we know when the economy is overheating?  The New York Times had an interesting debate amongst economists between the worriers and the Alfred E. Neuman camp.

As the economy reopens and Americans spend their stimulus checks and the money they saved during the pandemic, demand for certain goods and services will outstrip supply, driving up prices. That is now pretty much an inevitability.

The Biden administration and its allies are betting this will be a one-time event: that prices will recalibrate, industries will adjust and unemployment will fall. By next year they expect a booming economy with inflation back at low, stable levels.

The overheating worriers, who include prominent Clinton-era policymakers and many conservatives, believe there is a more substantial chance that one of two more pessimistic scenarios will come true. As vast federal spending keeps coursing through the economy, they fear that high inflation will come to be seen as the new normal and that behavior will adjust accordingly.

If people believe we are entering a more inflationary era — after more than a decade when inflation has been persistently low — they could alter their behavior in self-fulfilling ways. Businesses would be quicker to raise prices and workers to demand raises. The purchasing power of a dollar would fall, and the bond investors who lend to the government would demand higher interest rates, making financing the budget deficit trickier.

“I don’t think anyone will be too surprised to see massive airfare inflation” in the short term, for example, as the economy reopens, said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution. “Instead, I worry if we start to see signs that people, businesses and financial markets are responding to the level of overheating as if it were permanent.”

That situation would leave policymakers, especially at the Federal Reserve, faced with two bad choices: Allow inflation to take off in an upward spiral, or stop it by raising interest rates and quite possibly causing a recession.

The over-heating risk is real, as it could happen later this year. After unprecedented levels of stimulus, the Fed could be forced to raise rates abruptly while many of these stimulus efforts wear off, thus creating a potentially severe shock to the economy. But, does anyone really know anything given the uniqueness of the present?

Travel Update

On Sunday, the total TSA checkpoint number exceeded 1.5MM for the first time since March 15, 2020, representing 69% of the prior period. On most days, TSA is showing about 50-60% of travel compared to 2019. While TSA doesn’t break down business versus consumer travel, we suspect this is mostly leisure travel with a high concentration of young people enjoying spring break. Overly enthusiastic spring breakers have overwhelmed Miami Beach, for example, causing 8 PM curfews. Meanwhile, the cruise industry is worried that this could be another lost summer.

Other countries including Singapore, Italy and the U.K. have authorized cruises or set a clear target date for them to set sail. Almost 400,000 passengers have sailed since some countries first began allowing cruises in July 2020, according to the industry’s trade group.

But to get started in the U.S., the cruise industry needs direction from the Centers for Disease Control and Prevention.

The CDC lifted its no-sail order in October and replaced it with a conditional set of rules; industry officials say the 40 pages of rules are either indecipherable or impractical, such as a measure requiring cruise lines to conduct “simulated voyages” with volunteer passengers.

“I refer to it as the ‘impossible-to-sail order’ because no business could operate profitably,” Capt. John Murray, Port Canaveral’s chief executive officer, said.

The CDC said guidance is coming soon. “Future orders and technical instructions will address additional activities to help cruise lines prepare for and return to passenger operations in a manner that mitigates Covid-19 risk among passengers, crew members,” spokesman Jason McDonald said in a statement, declining to comment further.

Until the CDC provides its updated guidance, the cruise industry is basically on hold. It would seem that with rapid testing, limited to no disembarkment, and vaccines increasingly available, cruise ships could operate safely. While the cruise industry employs 178K people, they have not received federal support, but all three major carriers have been able to raise sufficient debt and equity to survive. The airline industry has been the biggest beneficiary of federal support, receiving $50 billion in grants. Andrew Ross Sorkin argues that the airline bailouts were not necessary.

The good news is that the rescue money likely saved as many as 75,000 jobs, most remaining at full pay. And that money also kept the airlines from filing for bankruptcy, and in a position to ferry passengers all over the country to jump start economic growth as the health crisis subsides.

The bad news is that it is also likely that taxpayers massively overpaid: The original grant of $25 billion in April meant that each of the 75,000 jobs saved cost the equivalent of more than $300,000. And with each additional round of bailout money, that price has grown.

Sorkin makes a compelling argument.    Does anyone seriously believe that the US airline industry, which has effectively used the US bankruptcy system in the past to restructure, was at risk of being completely shuttered? Nevertheless, business travel has been anemic since the pandemic. Business travel represents about 30% of all travel spending, but 75% of the profits for the airline industry.

Along with the durability of the remote work phenomenon, the recovery of business travel has broad implications for major cities, downtowns, and the businesses that support. The good news is that business travel is starting to come back.   We asked our friends at Bank Director, who switched their largest event in January to online-only, about their next in-person event, and they are scheduling one in mid-September. We expect to see some conferences do a combination of in-person and online in order to accommodate their clients preferences.

We are interested in your attitudes towards business travel today and in the future. Please fill out this 5-minute survey and we will share the results next week.

Microsoft Re-Opens Offices

Microsoft is welcoming its employees back to the office next week, as it embraces a hybrid-work model.

Microsoft’s Redmond, Wash., headquarters and nearby campuses will start shifting to a hybrid-work approach on March 29, with some employees returning to office desks while others work from home, the company said Monday.

“Our goal is to give employees further flexibility, allowing people to work where they feel most productive and comfortable, while also encouraging employees to work from home as the virus and related variants remain concerning,” Microsoft said in a blog post.

The software company’s office locations spanning 21 countries will be ready to accommodate additional workers in compliance with guidance from local authorities, the company said. The initial guidance affects roughly 20% of Microsoft’s more than 160,000 employees, the company said.

Microsoft said it doesn’t expect to recall all employees soon. Once the pandemic is no longer a significant threat to communities, Microsoft said, the company expects a partial work-from-home schedule to be routine for many of its jobs. The company previously has said it would allow some workers to work remotely on a permanent basis with their manager’s approval.

Microsoft’s blog gives some additional color on its evolving hybrid philosophy.    It seems as people are getting tired of zoom calls! Citigroup banned them on Friday’s.

Citigroup CEO Jane Fraser told staff that she is banning internal video calls on Fridays, encouraging staff to set boundaries for a healthier work-life balance and instituting a firmwide holiday called Citi Reset Day as Covid pandemic fatigue takes a toll on employees.

Fraser, who took over for predecessor Mike Corbat this month, told staff of the changes in a memo sent Monday afternoon to her 210,000 employees around the world, according to a person with knowledge of the matter.

The blurring of lines between home and work and the relentlessness of the pandemic workday have taken a toll on our well-being,” Fraser said in the memo. “It’s simply not sustainable. Since a return to any kind of new normal is still a few months away for many of us, we need to reset some of our working practices.”

How companies handle the delicate issues of returning to their offices, allowing some or all workers to work remotely, and the degree to which they induce inoculation are some of the biggest HR challenges in decades.

The BAN Report: Stimulus Bill Passes / PPP Update / Cash-Out Refinance Boom / $4 Gas This Summer? / RIP GE Capital-3/11/21

Stimulus Bill Passes

President Biden is expected to sign into a law Friday another $1.9 trillion in stimulus. The final package is a boon for American businesses, who will benefit from stimulating the consumer while the economy is re-opening and will not be forced to raise wages.

The legislation, expected to be signed into law by President Biden on Friday, includes $1,400 checks to many Americans and an extension of a $300 weekly unemployment-aid supplement. It doesn’t include a proposed increase in the minimum wage to $15 over four years, meaning retailers, restaurants and others don’t have to worry about higher payrolls for now.

Executives and economists said that unlike the last round of stimulus payments, which came in the midst of lockdowns and heightened economic uncertainty, these checks are more likely to flow into the economy as families face fewer financial constraints, more people are vaccinated and restrictions on travel, dining and other activity are lifted.

The Business Roundtable, which counts the chief executive officers of dozens of the biggest U.S. companies as members, said Wednesday, “While we advocated for a more targeted approach, enactment of this package will help deliver urgent resources to strengthen the public health response and provide assistance for individuals and small businesses hardest hit by the pandemic.”

The U.S. Chamber of Commerce also said it would have preferred a narrower bill. Economic data already points to building strength, the Chamber said in a statement last week, while the current bill “means less money for other priorities, including infrastructure and education.”

The $1.9 trillion package includes $360 billion in aid to state and local governments, $410 billion for $1,400 stimulus checks, $123 billion for COVID-19 (mostly vaccine and testing), $246 billion in expanded unemployment with another $300 / week through September 6, $143 billion in expanded tax credits, $176 billion for education, and $59 billion for small businesses, including $25 billion in grants to restaurants and bars that lost revenue during the pandemic.

The $25 billion Restaurant Revitalization Fund, administered by the SBA, will be of high interest by banks and lenders. A presentation from the National Restaurant Association had some great details.

A restaurant may receive a grant equal to the amount of its Pandemic-Related Revenue Loss by subtracting its 2020 gross receipts from its 2019 gross receipts.

Any PPP loans will be deducted from the grants. So, a business that was down 50% in revenue from 2020 ($600K in revenue versus $1.2MM in 2019) would be eligible for $400K in grants, assuming they received $200K in PPP loans.

With GDP projected at nearly 10% for the first quarter, the risk is we end up with an overheated economy, thus forcing the Fed to put the brakes on the economy later this year.

“It’s unprecedented,” Oxford Economics chief U.S. economist Gregory Daco said of the fiscal response to the pandemic. He expects the latest legislation to add 3 percentage points to U.S. GDP growth this year, and between 3 million and 3.5 million jobs.

At least in the short-run, the economy looks like its heading into a period of unprecedented growth.

PPP Update

With the PPP program ending at the end of the month, lenders are having difficulty adapting to the President Biden’s recent overhaul two weeks ago.

President Biden announced an abrupt overhaul two weeks ago to funnel more money to very small companies, some of which qualified for loans as small as $1 under the old guidelines. But the Small Business Administration updated its systems only on Friday, and with just three weeks before the program is set to expire, some lenders say there just isn’t enough time to adapt to the changes.

The result has been gridlock and uncertainty that have left tens of thousands of self-employed people frantic to find lenders willing to issue the more generous loans before the program ends on March 31.

JPMorgan Chase, the program’s largest lender this year in terms of dollars disbursed, doesn’t plan to act on the new loan formula before it stops accepting applications on March 19. Bank of America, the second-biggest lender, opted against updating its loan application and said it would contact self-employed applicants to manually sort out their applications — but stopped accepting new ones on Tuesday.

“We have 30,000 applications in process and want to allow enough time to complete the work and get each client’s application through the S.B.A. process,” said Bill Halldin, a Bank of America spokesman.

The two-week exclusivity period for borrowers with less than 20 employees expired on Tuesday. The new rules make it easier for independent contractors to qualify for larger loans. Even though the SBA did increase the fees to make smaller loans, banks have difficulty originating and processing these smaller loans, especially under a short time window. Banks are pushing to extend the deadline.

Banks and other businesses are pressing the Biden administration and Congress to keep the government’s largest small business aid program running beyond its March 31 expiration date, warning that struggling employers need more time to obtain the economic lifeline.

“They don’t have any answers,” Consumer Bankers Association general counsel David Pommerehn said. “They’re preparing for the worst-case scenario, and that is the program shuts down completely on March 31 at 11:59.”

The uncertainty marks the latest drama around the massive Covid-19 relief program, which has provided nearly 7.6 million loans to employers since its creation in March 2020. The loans are popular because they can be forgiven if employers agree to keep paying employees. But since its inception, PPP has been a roller coaster for borrowers and lenders alike because of ever-changing rules and shifting deadlines.

Even though demand for PPP loans has been more muted, it does seem sensible to allow lenders to finish meeting the demand, especially after some new rules were established just a week ago.

Cash-Out Refinance Boom

American consumers extracted more home equity via cash-out refinances in 2020 than any year since the financial crisis.

U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant Freddie Mac. It was a blockbuster year for mortgage originations in general as well: Lenders churned out more mortgages than ever in 2020, fueled by about $2.8 trillion in refis, according to mortgage-data firm Black Knight Inc.

Some borrowers viewed cash-out refis as a way to cushion themselves against an uncertain economy last year. Others wanted to build and redecorate, and being stuck at home gave them the time to do the paperwork. Homeowners also had more equity available to tap: Though home prices tend to fall during economic downturns, they jumped during the Covid-19 recession.

“The support coming from home equity is unparalleled in helping smooth out the degradations from Covid,” said Susan Wachter, an economist and professor at the University of Pennsylvania. “For those who are in the position to refinance, it’s a major source of support.”

The median credit score of new refis last year approached 800, near the top of the scoring range, according to the Federal Reserve Bank of New York. That includes refis in which the borrower didn’t take cash out.

Todd Kennedy lowered the mortgage interest rate on his North Texas home by almost a percentage point when he refinanced late last year. Mr. Kennedy, who has a credit score around 780, also cashed out about $30,000 in equity to pay for home improvements including repairs to his home’s foundation and new flooring.

So, how worried should we be about this? We believe this is a modest risk.   For one thing, most of these are cash-out long-term fixed rate loans, which are typically sold to one of the GSEs.    HELOC volume has been modest, as most banks have not regained their appetite for HELOCs since the financial crisis.

As of the most recent Quarterly Banking Profile, total HELOCs on banks’ balance sheets stood at $300 billion. At the end of 2015, HELOC balances stood at $465 billion. At the end of 2018, they stood at $667 billion. So, rather than taking out HELOCs and using the loans when they need them, consumers are getting larger lump-sum payments. Perhaps, banks should be doing more HELOCs, so that consumers would only pay interest when they need the money.

$4 Gas This Summer?

Oil and gas producers, humbled by 2020 and their lenders, are being cautious in their drilling efforts, which could lead to much higher oil prices later this year.

The oil industry is predictably cyclical: When oil prices climb, producers race to drill — until the world is swimming in petroleum and prices fall. Then, energy companies that overextended themselves tumble into bankruptcy.

That wash-rinse-repeat cycle has played out repeatedly over the last century, three times in the last 14 years alone. But, at least for the moment, oil and gas companies are not following those old stage directions.

An accelerating rollout of vaccines in the United States is expected to turbocharge the American economy this spring and summer, encouraging people to travel, shop and commute. In addition, President Biden’s coronavirus relief package will put more money in the pockets of consumers, especially those who are still out of work.

Even before Congress approved that legislation, oil and gasoline prices were rebounding after last year’s collapse in fuel demand and prices. Gas prices have risen about 35 cents a gallon on average over the last month, according to the AAA motor club, and could reach $4 a gallon in some states by summer. While overall inflation remains subdued, some economists are worried that prices, especially for fuel, could rise faster this year than they have in some time. That would hurt working-class families more because they tend to drive older, less efficient vehicles and spend a higher share of their income on fuel.

In recent weeks oil prices have surged to over $65 a barrel, a level that would have seemed impossible only a year ago, when some traders were forced to pay buyers to take oil off their hands. Oil prices fell by more than $50 a barrel in a single day last April, to less than zero.

That bizarre day seems to have become seared into the memories of oil executives. The industry was forced to idle hundreds of rigs and throttle many wells shut, some for good. Roughly 120,000 American oil and gas workers lost their jobs over the last year or so, and companies are expected to lay off 10,000 workers this year, according to Rystad Energy, a consulting firm.

The events of last April were so extraordinary that it will take a while before oil producers regain their mojo. In the meantime, higher oil prices seem inevitable.

RIP GE Capital

At its peak GE Capital stood at 637 billion in assets, nearly $100 billion larger than say US Bank today and twice as large as Washington Mutual when it failed in 2008. With its latest deal, in which GE is ultimately divesting out of the aircraft leasing business, GE Capital will no longer be a stand-alone division within GE, as it will only have $21 billion in assets remaining, largely a headache legacy insurance unit with some toxic long-term-care policies.

On Wednesday, GE agreed to combine its jet-leasing unit, GE Capital Aviation Services, with rival AerCap Holdings NV in a deal worth more than $30 billion. It will create a leasing giant with more than 2,000 aircraft at a time when global travel has been hobbled by the Covid-19 pandemic. The Wall Street Journal reported Sunday that the two companies were near a deal.

GE will get about $24 billion in cash and 46% ownership in the new merged company, a stake it valued at about $6 billion. It will transfer about $34 billion in net assets to AerCap along with more than 400 workers. The deal is expected to close in nine to 12 months.

Mr. Culp will use the proceeds from the AerCap deal to pay down debts and fold the rest of GE Capital into the company’s corporate operations. GE will take a $3 billion charge in the first quarter and cease to report GE Capital as a stand-alone business segment. The company maintained its financial forecasts for 2021.

“This really does mark the transformation of GE into a more focused, simpler, stronger company,” Mr. Culp said in an interview. GE will essentially return to being a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.

The jet-leasing Gecas unit was the biggest remaining piece of GE Capital, accounting for more than half of the unit’s $7.25 billion of revenue in 2020. The remainder is a legacy insurance business that has plagued the company and a small equipment-leasing operation that helps finance purchases of GE power turbines and wind turbines.

The dismantling of GE Capital is one of the biggest casualties of the financial crisis. While other non-bank lenders like CIT pivoted successfully to become part of depository institutions, GE Capital was dismantled in parts, often by selling the best assets and keeping the toughest assets, including the long-term care policies, which have already required over $20 billion in additional reserves. No one should read former CEO Jeff Immelt’s book, who at least blamed mostly himself for GE’s demise.

Another misstep came in 2004, when GE spun off its Genworth insurance business but kept a large batch of money-losing policies, forcing GE in 2018 to take a $6.2 billion charge and set aside $15 billion in reserves.

Immelt said he saw “zero” fraud in the insurance business when he was there. “There’s a difference between being wrong and being wrong on purpose.” He added that GE “spent lots of time to make sure we got things right.”

To put it simply, Jack Welch chose the wrong CEO, hiring someone who didn’t understand GE Capital, which could have been successfully re-positioned and de-risked by the right leader. It’s ironic that Welch chose the tall marketing guy who crushed PowerPoint presentations, instead of the two other grittier candidates. Beware sometimes of the person that looks the part!

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