Analysis: A New Challenge for Debtors Who Received PPP Loans Under the CARES Act

The CARES Act and corresponding paycheck protection program (PPP) provisions continue to provide fertile ground for discourse concerning policy implications and legislative intent amid an unprecedented pandemic, according to an analysis by David M. Barlow of the U.S. Bankruptcy Court for the District of Arizona in Phoenix. In the early months of implementing the CARES Act’s PPP provisions, the bankruptcy world was particularly fraught with such debate. Courts across the country grappled with the SBA’s authority to enforce rules prohibiting access to the $659 billion of relief afforded to small businesses solely based on their status as debtors in bankruptcy. Although that phase of litigation appears to have concluded, debtors who received PPP loans and are now seeking loan forgiveness may need to clear a new hurdle. Specifically, lenders of the PPP loans may refuse to process a borrower’s application for loan forgiveness because the applicant’s filing of bankruptcy constituted a default under the terms contained in the PPP loans. Despite going to a lot of places and engaging in what has affectionately been referred to by one commentator as the “SBA Tango,” debtors may end up somewhere they have already been: in front of a bankruptcy court seeking the relief necessary to have their PPP loan forgiven.

U.S. Economy Contracted at Fastest Quarterly Rate on Record from April to June as Coronavirus Walloped Workers, Businesses

The U.S. economy shrank 9.5 percent from April through June, the largest quarterly decline since the government began publishing data 70 years ago and the latest, sobering reflection of the pandemic’s economic devastation, the Washington Post reported. The second quarter report on gross domestic product covers some of the economy’s worst weeks in living memory, when commercial activity ground to a halt, millions of Americans lost their jobs and the nation went into lockdown. Yet economists say the data should also serve as a cautionary tale for what is at stake if the recovery slips away, especially as rising coronavirus cases in some states have forced businesses to close once again. On Thursday, the government also reported that jobless claims increased once again last week to 1.4 million, another sign any recovery is stalling out. GDP shrank at an annual rate of 32.9 percent, according to the Bureau of Economic Analysis. While it usually stresses the annualized rate, that figure is less useful this quarter because the economy is unlikely to experience another collapse like it did in the second quarter. Still, while a tailspin at the second quarter rate is unlikely, the nascent recovery that began appearing earlier this summer appears to be in jeopardy. On Wednesday, Federal Reserve Chair Jerome H. Powell warned that the most recent surge in infections has begun to weigh on the economy, while reemphasizing a recovery cannot be sustained unless the virus is under control.

Republican Stimulus Package May Come with a Benefit for Big Banks

Big banks may get a big gift in the stimulus bill being drafted by Senate Republicans, the New York Times reported. Lawmakers are expected to include language that would give the Federal Reserve authority to relax a requirement surrounding capital levels at the biggest banks, essentially allowing firms to load up on riskier assets. The push is the culmination of a months-long effort by industry lobbyists and a top Federal Reserve official to change a restriction put in place in the wake of the 2008 financial crisis to prevent banks from engaging in risky behavior. Sen. Mike Crapo (R-Idaho), chairman of the Senate Banking Committee, is working on legislation that would give regulators the discretion to let banks exclude certain items on their balance sheets when calculating how much capital they are required to hold. The change could allow banks to be less conservative in their risk-taking than in recent years. It could be particularly useful for banks with large Wall Street trading operations, because it would let them increase their holdings of certain kinds of financial assets, like government bonds, without requiring a corresponding increase in capital reserves. Critics, however, say the leverage ratio is blunt, because it in effect views U.S. government bonds as risky as, say, credit card loans. But backers of the leverage ratio say there are times when even the safest assets can be risky for banks to own. There was evidence for this during the turmoil in the markets in March, when Treasuries were sold off, a major reason the Fed stepped in to support markets.

Fannie, Freddie Earnings Improve Amid Signs of Housing-Market Recovery

Government-controlled mortgage giants Fannie Mae and Freddie Mac said their earnings improved in the second quarter, adding to evidence of a rebound in the U.S. housing market, the Wall Street Journal reported. Fannie Mae, the larger of the two companies, said 5.7% of the single-family loans it guarantees — representing about 972,000 mortgages — had suspended payments as of June 30, down from the 7% it reported May 1, when it released first-quarter earnings. The improvement came amid a decline in unemployment as parts of the economy reopened. More recent government data on unemployment claims, however, suggest that the labor market’s recovery may be stalling amid a resurgence in coronavirus cases. Fannie Mae said Thursday that its net income rose to $2.55 billion in the second quarter from $461 million in the previous three months. Net income in the second quarter of 2019 was $3.43 billion. Fannie’s latest results were buoyed by a decline in credit-related expenses, which had ballooned in the first quarter as the company braced for a wave of homeowners requesting a break on their mortgage payments because of the pandemic. A surge in refinancing activity to a 17-year-high due to record-low interest rates also helped the company’s bottom line. “Housing has been one of the only bright spots in the economy,” said Isaac Boltansky, director of policy research at investment bank Compass Point Research & Trading LLC. “It’s clear that the pandemic has hit certain segments of the economy harder. It’s impacted folks who are less likely to be homeowners.”

Analysis: How Congress Is Preventing a Medicare Bankruptcy During COVID-19

As the novel coronavirus continues to spread throughout the country and shows no signs of cessation, that’s especially bad news for seniors, and in more ways than one, The Hill reported. Everyone knows of the disproportionate health risks the nation’s elderly face from this virus, but the threat it poses to Medicare has received far less attention. It shouldn’t come as a surprise that COVID-19 is running the government program dry. It was already in dire straits before the pandemic. A 2020 trustee report found that parts of it will run out of money as early as 2023 and become insolvent by 2026. However, with Medicare Part B now covering all coronavirus testing costs, and the Centers for Medicare & Medicaid Services (CMS) also waiving Medicare participation conditions, the system could come to a breaking point in a matter of years. Over 61 million Americans — 18 percent of the population — depend on Medicare for their health needs. This month, Sens. John Cornyn (R-Texas) and Michael Bennet (D-Colo.) introduced the Increasing Access to Biosimilars Act (IABA). This bipartisan bill, previously introduced in the House by Reps. Richard Hudson (R-N.C.), Angie Craig (D-Minn.) and Brian Fitzpatrick (R-Pa.), will create a pilot program that incentivizes providers to use low-cost biosimilar drugs in the Medicare program whenever possible. These drugs, developed to be similar to already-existing FDA medicines, cost up to 30 percent less than brand-names, and a 2017 RAND study estimated that they could save the U.S. health care system as much as $150 million over a 10-year period.

Analysis: A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks

As the coronavirus began shuttering the global economy in March, critical parts of U.S. financial markets edged toward collapse. The shock was huge and unexpected, but the vulnerabilities were well known, the legacy of risk-taking outside regulatory reach, according to an analysis in the New York Times. To head off a devastating downward spiral, the Federal Reserve came to Wall Street’s rescue for the second time in a dozen years. As investors sold a vast array of holdings and rushed to the comparative safety of cash, the Fed pledged to become a buyer of last resort to restore calm to critical markets. That backstop bailed out many people and investment firms, including a class of hedge funds that had been caught on the wrong side of a trade with ample risks. The story of that trade — how it went wrong and how it was salvaged — offers a cautionary tale about important issues Congress did not address in the 2010 Dodd-Frank financial law and the Trump administration’s hands-off approach to regulation, according to the analysis. A decade after Dodd-Frank, America’s sweeping post-2008 crisis fix, was signed into law, commercial banks like JPMorgan Chase and Bank of America are better regulated and safer, but they may be less willing to help smooth over markets in times of stress. Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street — areas that Dodd-Frank left largely untouched. In addition, the powers that policymakers have to deal with persistent vulnerabilities have been undermined by Trump administration officials who entered office seeking to weaken financial rules, according to the analysis. The result is a still-brittle system, one in which financial players rake in profits in good times but the government is forced to save them or leave the economy to suffer when things go awry.

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