White House, Democrats close in on PPP deal; are small-fry firms getting edged out?

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Refilling the pot

Congressional Democrats and Treasury Secretary Steven Mnuchin said they were "close to striking a deal to replenish” the $350 billion Paycheck Protection Program for small businesses, which ran out of money last week. “Both Democrats and Mr. Mnuchin said they hoped an agreement could be completed in time for consideration by the Senate early this week, ” The Wall Street Journal said.

“I’m hopeful we can reach an agreement the Senate can pass [Monday] and the House can pass Tuesday,” Mr. Mnuchin said Sunday on CNN. “We’re making a lot of progress.”

Treasury Secretary Steven Mnuchin.
Treasury Secretary Steven Mnuchin.

“The agreement would include $300 billion to replenish the” PPP, the New York Times said, plus $50 billion for the Small Business Administration’s disaster relief fund, $75 billion for hospitals and $25 billion for testing.

But the amount of money being discussed to replenish the PPP may “not go far enough,” the Financial Times said, as several banks said they are still sitting on tons of unfilled applications. There also could be “a massive bottleneck if the scheme resumed, as banks rush to file applications on behalf of their clients.”

Many small businesses complain they were “left empty-handed” while bigger businesses got “millions” from the program, the FT said. “On Friday it emerged that burger chain Shake Shack was among the scheme’s beneficiaries, as was Ruth’s Chris Steakhouse, which got $20 million with help from JPMorgan Chase, America’s biggest bank.”

Online lenders, which were approved to make PPP loans a week before it ran out of money, hope they will quickly get more funding so they can help steer relief to the smallest companies, American Banker’s Penny Crosman reports.

Wall Street Journal

Dodging defaults

“China has dodged a wave of coronavirus-related defaults with a large, coordinated effort by regulators and banks to allow companies and individuals defer their loan payments,” the Journal reports. “It is also delaying a reckoning for the country’s lenders, potentially for years.”

“While the U.S. financial system struggles with billions of dollars in missed loan payments by individuals and companies, China is already more than two months into a massive forbearance effort. Since late January, its banks have allowed many borrowers to leave debts unpaid—or extend loan maturities—while their revenues and personal incomes have dived, on the encouragement of financial regulators and government authorities.”

Financial Times

Hunkering down

Big U.S. banks “are battening down the hatches to deal with an expected surge in loan losses as the pandemic casts serious doubts over the capacity of consumers and companies to pay their debt,” the FT reports. “Loan loss charges at [the] six [largest] American banks reached a total of $25.4 billion in the first quarter. This marks a 350% surge in collective provisions versus a year earlier, as charges soared to levels not seen since the financial crisis.”

“The change illustrates how banks are ramping up reserves to deal with anticipated loan problems among their clients, as top economists warn that the world economy has already fallen into recession. The provisions are additions to reserves so banks have enough in their rainy-day fund to cover future losses.”

“Might there be more to come? Bank bosses are not in a better position than anyone else to guess where the country or the world might be in a week, a month or a year from now. When pressed, they said as much.”

Still cleaning up the last crisis

The European Central Bank and the European Commission are discussing a plan to “create a eurozone bad bank to remove billions of euros in toxic debts from lenders’ balance sheets left over from the 2008 financial crisis.” The ECB is worried that “the coronavirus pandemic will trigger another surge in non-performing loans (NPLs) that risks clogging up banks’ lending capacity at a critical time.”

“But the idea faces stiff opposition within the European Commission, where officials are reluctant to waive EU rules requiring state aid for banks to be provided only after a resolution process imposes losses on their shareholders and bondholders.”

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Paycheck Protection Program Marketplace lending Mortgage defaults Corporate defaults Steven Mnuchin Coronavirus