Unsanitized: Congress Objects to the Bailout It Approved

Plus, will corporations sue governments over the pandemic, and private equity seems troubled. This is The COVID-19 Daily Report for May 20, 2020.

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First Response

The Senate Banking Committee hearing with Fed chair Jerome Powell and Treasury Secretary Steve Mnuchin was a pretty boring affair, with the usual assortment of Senators seeking not-very-veiled endorsements of their own bills or just grandstanding speeches. Even Sherrod Brown’s alleged Kodak moment, asking Mnuchin whether workers should risk their lives to raise the Dow, wasn’t really on point with the policymaker aims of the witnesses.

See, Mnuchin and Powell are the architects of the bailout, the real bailout, the one that’s gotten almost no attention over the past couple months. They are assembling corporate lending facilities, the first of which just started buying shares linked to low-grade corporate bonds last week. These facilities dwarf the amount of money reserved for any other recipient in the CARES Act, and as I’ve been mentioning, the money cannon has already succeeded in protecting the investor class from fallout from the pandemic. It’s called “liquidity” or “market functioning” but it’s best thought of as insurance that only an elite class can buy.

Sen. Elizabeth Warren (D-MA) was about the only member to cut to the heart of the matter by looking at the lack of restrictions placed on this bounty for corporations and their shareholders. She explained how the CARES Act invests the Treasury Secretary with specific authority to set terms for the bailout. Over and over she asked whether that meant that no company will receive funds without a commitment to maintaining payrolls. Over and over Mnuchin demurred, saying only that Treasury will “fulfill the spirit and details of the law.”

Read all of our Unsanitized reports

Technically there’s a requirement in the Main Street Lending Program to have companies make “commercially reasonable efforts” to keep employees, which to me reads like you can hang onto workers if you can afford it, and if not all bets are off. With the corporate bond purchases and other announced facilities, there are no similar conditions.

I should mention here that the blame for this lies fully at the feet of Congress. They built this money cannon, and they deferred to Treasury and the Fed on virtually all of the terms. If they wanted to foreground employee retention they could have said so. If they didn’t like it they could have voted against the bill. It passed 96-0, including the support of Sen. Warren, the questioner today. Congress failed the public on that vote, and too few of them will admit it. It’s notable and good that Joe Biden picked up on Warren’s questioning, demanding “more conditions” to “ensure relief goes to… workers, not their CEOs.” But expecting Steve Mnuchin to make that happened is a fool’s errand.

Mnuchin, in fact, pointed out that the airline bailout has a job retention component, which is true, because Congress wrote that directly into the bill. If you want a policy outcome, put it in writing. If not, don’t expect regulators to fight your battles for you. Yes, Steve Mnuchin is “boosting Wall Street buddies and leaving the rest of Americans behind,” as Warren said. Yes, Treasury and the Fed will prioritize Wall Street, and “any economic recovery will be slowed” as a result, as Sen. Jack Reed (D-RI) said in the hearing.

There was another interesting section with Sen. Chris Van Hollen (D-MD) where he correctly questioned why the Fed was buying junk bonds, many of which were already under stress before the crisis hit. Powell’s answer was slippery (he claimed he was only buying bonds of companies that had slipped into junk bond status, which doesn’t seem to be true), but earlier he pretty well explained it: “We want to be a backstop for those markets.” This isn’t the profile of a crisis manager and it’s why ultimately the Fed rescue won’t work, at least not for the general population. Congress can set parameters, even ban junk bond purchases if they want. It can direct money where it’s most needed. It can act. In its absence, you just get investor class protection.

Odds and Sods

Over at the Prospect, we have Kalena Thomhave from our new issue, on state unemployment insurance systems, already underfunded and outdated even before the surge in demand during the pandemic. Federalize 'em! That’s here.

The excellent economics writer Jeff Spross explains why the crisis has heightened the case for both a federal job guarantee and the universal basic income, though supporters of both often set the two ideas at odds. That’s here.

And Ted Tatos looks at the dangers of opening the college football season, finding that football athletes have comorbidities that make them highly susceptible to severe illness from COVID-19. That’s here.

All of our coronavirus coverage can be found at prospect.org/coronavirus. And email me with tips, comments, and experiences.

Corporations’ Last Dance

For years, progressive trade reformers have singled out one piece of the modern trade agenda above almost all else: investor-state dispute settlement (ISDS). This provision, which came to prominence in the original NAFTA agreement, allows corporations to sue entire countries for costing them money when laws or regulations change. The cases are heard in extrajudicial tribunals composed of three corporate lawyers. And they can cause severe stress on smaller governments, who are held up for cash. I wrote back in 2016 about how financiers were using ISDS to make bets, funding lawsuits or buying companies with the sole purpose of filing a claim. The idea is to lock in a low level of regulation or extract cash if any country dares to try to protect their citizens.

Trump severely minimized ISDS in the updated NAFTA agreement, USMCA. But it still exists in over 3,000 binational and multilateral trade agreements. While countries are in the midst of revising model agreements or even dissolving ISDS, it still exists in enough texts to threaten virtually every country that trades (in other words every country).

Which is why it’s so unbelievably shocking to see corporate lawyers actively discussing having foreign investors use ISDS to challenge countries over their coronavirus lockdown measures, and try to extract “expected future profits” from them. So far this is at the level of discussion, albeit from recognized stalwarts like Quinn Emanuel, Ropes & Gray, Sidley, Debevoise, Hogan Lovells, Dechert, and Alston & Bird. This could take the form of a utility company suing a country over being forced to provide clean water; expropriation of private hospitals during emergency spikes in patients; requirements to provide affordable COVID-19 treatments and vaccines; mandated rent and mortgage relief; or just locking down and preventing businesses from opening.

A lawyer at Reed Smith points out that measures taken during the Argentine debt crisis and the Arab spring triggered ISDS cases, so capitalizing on crisis has been a feature of the regime, not a bug. “For companies with foreign investments, investment agreements could be a powerful tool to recover or prevent loss resulting from COVID-19 related government actions,” reads one alert.

There is no example yet of a foreign investor filing such a claim. And if they did it would be absolutely seismic. I would argue that the entire ISDS process would be completely dismantled if there were a wave of lawsuits seeking damages for coronavirus restrictions. But if corporations think that ISDS is already on the way out, why not take a last flyer and recoup potentially billions in losses?

This bears watching, or maybe a pre-emptive strike to defuse this ticking time bomb. Incidentally, the Columbia Center on Sustainable Investment has proposed an ISDS moratorium during the pandemic.

Today in the Retail Apocalypse

Pier One Imports is going to shut all its stores after failing to find a buyer out of bankruptcy. There’s a strong rumor that Amazon will purchase JCPenney, which just got into bankruptcy. I’m hearing that this is mostly about real estate, JCPenney has some good locations in its warehouse infrastructure, and even the mall sites could be converted into distribution centers.

What’s interesting is who’s not coming forward right now: private equity. These are the kinds of sick companies that private equity usually feasts upon. While the retail business is sick right now—pretty much the only rents not being paid in widespread fashion—They could flip Pier One or JCPenney real estate and make back their investment. Add the management fees and it’s a profit machine. Debt markets are fairly open and funding wouldn’t be a problem, and firms have trillions in undeployed money (known in the industry as dry powder).

The problem, then, looks to be private equity’s business model. They have been battered by losses in overvalued portfolio businesses they can’t unload, and stymied in at least some areas of government relief. There are deals to be made on the other side of the crisis; but a lot of firms might not be able to get to that other side. We may be flattening the curve of the PE industry.

Today I Learned

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