Back in 2008, the banks and rating agencies failed America. The financial crisis and housing bubble collapse that followed was catastrophic.
Twelve years later, the banks are doing it again.
This time, however, it has nothing to do with subprime debt. Instead, it’s the misguided distributions of small business loans from the federal Payroll Protection Program (PPP).
Public companies – many of which already had ample liquidity – were applying for PPP loans over the last few weeks. Banks, in an attempt to help their biggest customers, gladly forked over the cash designated for small businesses struggling during the COVID-19 outbreak.
Treasury Secretary Steven Mnuchin revealed in a pre-market interview with CNBC that the government will audit past, present, and future PPP disbursements over a certain amount.
“I’m going to be putting out an announcement later this morning that for any loan over $2 million, the Small Business Administration will be doing a full review of that loan before there is loan forgiveness,” Mnuchin said.
“This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity.’”
Data from analytics firm FactSquared found that over 220 public corporations applied for PPP loans totaling $870 million, including the likes of Auto Nation, Ruth’s Hospitality Group (of Ruth’s Chris Steak House fame), and even the Los Angeles Lakers.
Mnuchin found the Lakers’ loan in particular “outrageous.” On Monday, the team announced that it had already repaid the funds.
“We don’t think they ever should have been allowed to [get a loan],” Mnuchin remarked.
“We put out an FAQ clarifying the certification.”
Mnuchin doesn’t fault the banks for authorizing the PPP loans to public companies, but rather, the companies themselves. And though corporations certainly deserve much of the blame, it could also be argued that the banks that failed to protect the economy.
Again.
Just like in 2008.
“I just want to know who made the bad loans. Somebody did,” said “Mad Money” host Jim Cramer this morning, suggesting that the names of the banks should be made public.
“I think that banks were complicit. I think banks gave loans to very good customers, maybe because they needed to keep them afloat.”
Cramer continued, adding that the PPP was a great program that got abused by lenders and corporations alike. As a result, Mnuchin, Cramer himself, and the rest of America “got had.”
Going forward, the Treasury Department will get the PPP working as desired. Companies are already repaying their loans intended for small businesses.
That cash will eventually end up in the right pockets.
And when it does, a true “shot in the arm” effect could result for the U.S. economy.
Stocks are treading water as of noon today, but once small businesses get their PPP allotment, don’t be surprised to see sentiment shift positive once again.
The market’s already enjoyed a massive rally since bottoming in late March. Still, it looks like it wants to go higher.
With states re-opening, COVID-19 cases on the decline, and more treatment solutions in the works, equities could erupt in the coming weeks.
That’s not to say those gains will stick, though. There’s plenty of variables still at play.
But now that the “bad actors” of the PPP are being taken to task, investors can safely say that at least one economic hazard is being dealt with.
And, more importantly, small companies will get their potentially “business-saving” funds that they so desperately need.
