Federal loan programs seek borrowers; ECB to encourage more bank mergers

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Editor's note: Morning Scan will not publish on Friday, July 3, in observance of Independence Day.

Receiving Wide Coverage ...

To play or not to play

“More than two months after the program was announced, some bankers say they are still trying to decide whether to take part” in the Federal Reserve’s new $600 billion Main Street Lending Program. “The central concern: Companies in dire need of cash aren’t likely to be approved, while more creditworthy borrowers are likely to find similar or better terms on their own.” They also “cite less-than-appealing terms, which changed repeatedly before the official June 15 launch, and anemic interest among potential borrowers.”

Under the program, “commercial banks lend to companies and then sell all but a small portion of each loan to the Federal Reserve. The Treasury Department stands ready to cover the Fed’s losses if companies fail to repay.”

Meanwhile, the House Wednesday agreed to extend the Paycheck Protection Program for small businesses for another five weeks, through August 8. The bill now goes to President Trump for his signature.

“The program shuttered on Tuesday with more than $130 billion in unspent loan money, after allocating $520 billion in loans to nearly five million businesses nationwide. The move came as Republicans and Democrats remained divided over how much additional federal assistance to provide to businesses and individuals.”

Breaking up

SoftBank, which helped arrange a $1 billion investment in Wirecard “months before the German payments company went bust, is seeking to terminate a five-year partnership its investment arm formed with Wirecard in April 2019,” the Wall Street Journal reported. “The partnership agreement called for SoftBank to introduce Wirecard as a digital payments provider to other companies in SoftBank’s sprawling portfolio of tech firms. SoftBank also agreed to help Wirecard expand in Japan and South Korea.”

“The partnership was struck at the same time that a SoftBank-run investment vehicle agreed to plow €900 million ($1 billion) into Wirecard through a convertible bond. It was an unusual deal in which SoftBank ended up not putting in any of its own money when it closed later that year.”

“The head of Germany’s financial watchdog denied that the regulator had protected Wirecard instead of investigating it properly, as MPs in Berlin grilled him on the agency’s role in one of the country’s worst-ever corporate scandals,” the Financial Times reported. “Felix Hufeld, head of BaFin, told members of the Bundestag on Wednesday that the agency’s ability to act was limited because Wirecard was classified as a technology company rather than a financial services provider, and so was not fully under BaFin’s purview. The agency only oversaw Wirecard Bank.”

“Though he expressed regret at what happened with Wirecard, he denied that BaFin could have done more than it did,” said one member of Parliament.

Meanwhile, German prosecutors “said Wednesday they had searched five buildings as part of investigations into the company, three in Munich and two in Vienna where [former CEO Markus] Braun is from,” the Journal said. The defunct company is also under investigation in Singapore, Mauritius and the Philippines.

“The company’s market value has crashed to less than €600 million ($673 million) from nearly €13 billion on June 17, the day before it first revealed [$2 billion in] cash was missing in one of the biggest corporate scandals in recent years.

Financial Times

Matchmaker

The European Central Bank is seeking “to persuade more of the region’s lenders to merge by clarifying its approach to takeovers in an effort to reassure executives that such transactions will be encouraged. In its latest effort, the ECB on Wednesday published a guide to how it would handle banking deals in three key areas, all of which it believes may have been perceived in the past as hurdles to lenders considering a merger.”

“The supervisor said it would recognize the accounting gain — known as negative goodwill, or ‘badwill’— that can be generated when a bank buys a rival for less than the fair value of its assets minus its liabilities. The ECB also said it would not automatically impose higher capital requirements on banks that merge. Finally, the supervisor said it would allow merging banks to continue to use their existing internal risk-assessment models to calculate their capital needs for a period of time.”

New York Times

Warning signs

"Minutes from the Federal Reserve’s June meeting show that officials remained seriously concerned [about the economy], even as states reopened."

Scourge

Mehrsa Baradaran, author of “The Color of Money: Black Banks and the Racial Wealth Gap,” wrote an op-ed titled "What Private Equity Reveals About the Myth of Free Markets."

"As inequality, unemployment and evictions climb, the Dow Jones surges right alongside them — one line compounding suffering, the other compounding returns for investors," Baradaran writes. "One reason is that an ideological coup quietly transformed our society over the last 50 years, raising the fortunes of the financial economy — and its agents like private equity firms — at the expense of the real economy experienced by most Americans."

Quotable

“It’s a little bit of a Catch-22. We’re all kind of struggling, to be honest, to figure out who this sort of unicorn borrower might be.” — Lauren Anderson, senior vice president at the Bank Policy Institute, on which companies will want to borrow from the Fed’s new Main Street Lending Program.

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Small business lending Paycheck Protection Program Main Street Lending Program European Central Bank Wirecard Federal Reserve Private equity
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