PPP set for revisions; Berkshire Hathaway unloads Goldman shares

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Tweaking the PPP

The Trump administration and Congress “are preparing to make significant changes to the Paycheck Protection Program, amid cooling demand for government-backed loans and criticism from business owners who say they can’t tap the funds,” the Wall Street Journal said. “The changes are likely to include giving businesses more flexibility to spend the money” and “to extend the time to spend the loan money beyond the two months it originally set. Both changes follow complaints from restaurants, hair salons and others who say they can’t hire back staff while they are closed during the coronavirus pandemic and need more money to cover their overhead costs.”

“The steps being considered will mean a shift in the program’s focus—from one that was primarily aimed at keeping employees on the payroll, to also helping to keep small businesses from failing.”

“Citing concerns that minority-owned businesses are being overlooked, Earvin ‘Magic’ Johnson said his EquiTrust Life Insurance Co. will provide $100 million in capital to fund loans” through the PPP. “EquiTrust will partner with MBE Capital Partners, a Fort Lee, N.J., based nonbank lender that specializes in financing minority- and women-owned companies,” to offer the loans.

We’re going to save a lot of small, minority businesses because they can’t just walk into the bank and get that loan,” Johnson told the Journal.

Century-old Bank of North Dakota “put business lenders in the rest of the country to shame” during the first round of the PPP, the Washington Post reported. “Even before the PPP officially rolled out, [it] coordinated and educated local bankers in weekly conference calls and flurries of calls and emails. According Eric Hardmeyer, BND’s president and chief executive, BND connected the state’s small bankers with politicians and U.S. Small Business Administration officials and even bought some of their PPP loans to help spread out the cost and risk.”

Meanwhile, Maurice “Mo” Fayne, “a trucking company owner who appears regularly on the reality show ‘Love & Hip Hop: Atlanta,’ has been charged with using more than $1.5 million in [PPP] funds to enrich himself rather than for paying workers and small business expenses as the program requires.” According to the Washington Post, Fayne spent $85,000 on jewelry, $40,000 on child support payments and bought “a 2019 Rolls-Royce Wraith luxury coupe.”

Fayne was arrested May 13 and charged with bank fraud. “We will investigate and charge anyone who inappropriately diverts these critical funds for their own personal gain,” U.S. Attorney Byung J. "BJay" Pak said.

Unloading Goldman

Warren Buffett’s Berkshire Hathaway sold 10 million of its nearly 12 million shares in Goldman Sachs in the first quarter. Berkshire’s “stake in the bank, now less than 0.6%, was worth $330 million as of Friday. Goldman’s share price fell 33% in the first quarter as banks suffered with the coronavirus pandemic slamming the brakes on the global economy.”

The 10 million shares Berkshire sold “was worth $2.3 billion at the end of last year and represented 2.9% of the investment bank,” the Financial Times said. “Berkshire also trimmed its holding in JPMorgan Chase from 1.94% to 1.88%.”

Growing strains

“U.S. banks risk losses from the coronavirus crisis that could strain their finances, the Federal Reserve warned on Friday, as it laid out a litany of vulnerabilities and risks to the financial system including high corporate debt levels and excessive concentration among hedge funds.”

The Fed said lenders “could face ‘material losses’ from lending to struggling borrowers who are unable to get back on track after the crisis,” the FT said. “The strains on household and business balance sheets from the economic and financial shocks since March will probably create fragilities that last for some time,” the Fed wrote. “Financial institutions — including the banking sector, which had large capital and liquidity buffers before the shock — may experience strains as a result.” Financial Times, New York Times

Wall Street Journal

Balancing act

“Banks and financial institutions face a balancing act in the months ahead” as they grant relief to their consumer lending customers. “Efforts to maintain customer relationships now could stave off a wave of potential defaults, finance professionals say. But companies with weakening consumer debt on their books need to figure out how much payment relief they can afford to provide, allowing that some consumers won’t be able to pay later, potentially driving up losses for lenders.”

Risky business

The Federal Reserve’s new Main Street Lending Program “is shaping up to be one of the trickiest things it has ever done. Under the Fed’s middle-market program, a company would get a loan from a bank, which would then sell up to 95% of the debt to the Fed. This leaves the bank with less additional debt on its books and free to make more loans to other borrowers.”

“The risk for the Fed is that it goes where the central bank has rarely ventured and that not many businesses seek help, creating both financial and political headaches.”

Wound too tight

Credit unions, which have built themselves around “common bonds,” such as working for the same company or industry, are finding out that is a big detriment during the coronavirus crisis, when many of their borrowers are losing their jobs all at once. At WestStar Credit Union, for example, “which caters to the employees of Nevada’s gaming industry,” one in five borrowers “has asked for a deferral on a car or home loan. Thousands of blackjack dealers, bartenders and hotel housekeepers who have loans and savings accounts there are now out of work.”

“Almost a third of the nation’s 5,200-plus credit unions are tied to a single employer, industry or other association, according to the Credit Union National Association.

Financial Times

Ready for anything?

“As the world reels from coronavirus … it is striking that the question of whether banks will again need new capital is barely being asked,” the FT says. “Are they sufficiently resilient to absorb the impact and then power an economic recovery?

Quid pro quo?

Some of the largest banks in the U.K. “are investigating whether they pressured corporate clients into giving them extra business in return for loans, after the country’s financial watchdog warned against the practice during the coronavirus pandemic. Lenders including Barclays, Deutsche Bank, HSBC and Santander are conducting internal reviews to find out whether any of their investment bankers tried to link emergency financing to more lucrative services.”

Another shoe drops

Wirecard stock dropped as much as 16% on Friday after the German payments company’s “most significant business partner of recent years, a Dubai business central to whistleblower allegations that the company fraudulently inflated sales and profits, announced its liquidation. The liquidation of payment processor Al Alam Solution Provider comes after KPMG said late last month that it could not verify that large portions of Wirecard revenues and profits were genuine.”

Quotable

“We see the good parts of having that tight community all the time—we know our members, we know their employers, we know what they need. The bad part we’re seeing now.” — Rick Schmidt, CEO of WestStar Credit Union in Nevada, many of whose members work in the state’s gaming industry, which has been closed due to the coronavirus.

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Paycheck Protection Program Berkshire Hathaway Federal Reserve Credit unions
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