Phantom Companies Got More Than $1 Billion in Coronavirus Aid

Phantom Companies Got More Than $1 Billion in Coronavirus Aid

ABI Bankruptcy Brief

August 27, 2020

ABI Bankruptcy Brief

Phantom Companies Got More Than $1 Billion in Coronavirus Aid

A federal program meant to help small businesses hurt by the coronavirus pandemic may have sent more than $1 billion to places it shouldn’t have gone, according to a Bloomberg Businessweek analysis of Small Business Administration data. In some parts of the country the SBA approved far more $10,000 Economic Injury Disaster Loan (EIDL) grants than the number of eligible businesses, the analysis found. The epicenter was six adjacent congressional districts in the Chicago area, where 81,000 grants were approved even though there are only 19,000 eligible recipients. That’s more than $600 million going to phantom entrepreneurs. The SBA declined to comment on the discrepancies, saying in a statement it had “stringent fraud-protection safeguards” and noting that it had been under pressure to move the money quickly. Bloomberg identified 52 congressional districts across the nation where the number of $10,000 grants exceeded the number of eligible small businesses, for a total of $1.3 billion in suspect payments. Illinois’s 2nd District, which includes a swath of Chicago and its suburbs, had the greatest excess, with 24,278 grants going to businesses that listed addresses there. But the most recent U.S. Census Bureau data show that only 1,925 small businesses in the district have at least 10 employees, the number required to qualify for the maximum $10,000 grant. Districts in Georgia, Texas, Florida, and other states also showed payments to more than the number of eligible companies. The Census data are from 2017, and the number of businesses in each district may have changed since then. But the discrepancies uncovered in Bloomberg’s analysis are so large that potential increases in business activity alone can’t explain them. The suspect payments far exceed the $47.8 million that SBA Inspector General Hannibal “Mike” Ware identified in a preliminary report in July that warned of “potentially rampant fraud” in the $20 billion grant program. The SBA said in its statement that its anti-fraud safeguards had “prevented the processing of thousands of invalid applications.” It also said it was “balancing the agency’s fiduciary duties against the urgent need to provide the small-business sector with more than $207 billion — including $20 billion in EIDL Advances — needed to weather the precipitous challenges created by this pandemic.”

Another 1 Million Americans Filed for Unemployment Insurance Benefits Last Week

The Labor Department reported today that another 1 million American workers filed for first-time unemployment benefits last week on a seasonally adjusted basis, reported. Continued jobless claims, which count people filing at least two weeks in a row, stood at 14.5 million on a seasonally adjusted basis. The ongoing decline in continued claims is a good sign that some people who lost their jobs in this crisis are returning to work. All in all, 27 million American workers filed for some form of jobless assistance under various government programs during the week ending August 8, representing a decrease of around 1 million claims — but still highlighting that this jobs crisis due to the pandemic remains in full force.

In related news, more than half the U.S. states have received federal approval to offer an extra $300 per week in “lost wages assistance” per an executive order that President Donald Trump signed on August 8. If you are currently receiving unemployment benefits, the federal government could be sending you additional funds soon. And although local governments themselves are cash-strapped, some states will also be contributing an additional $100. Experts are warning Americans tapping into unemployment assistance to remember that, come April 2021, unemployment benefits will be considered taxable income. While they won’t have to pay payroll taxes on unemployment, such as Social Security and Medicare withholdings, Americans will get taxed according to their income level for 2020.

Staying Afloat by Any Means, Tenants Face Difficult Future Amid Pandemic

Whether it has been with government checks, family help, personal savings, church charity, nonprofit rescue funds or even GoFundMe campaigns. the nation’s tenants have for the most part made their rent through five months of economic dislocation, the New York Times reported. Almost from the moment the coronavirus upended the economy in March, there has been a persistent fear that the loss of wages and employment, concentrated among lower-income service workers, would lead to widespread evictions. According to one study, as many as 40 million people in 17 million households risk eviction by the end of the year — an astounding figure. Yet interviews with dozens of landlords across the country returned comments like “no difference,” “pleasantly surprised” and “seems like normal.” That view is reinforced by the corporate earnings reports of housing providers and a weekly survey of big landlords by the National Multifamily Housing Council, which for several months has shown little difference from rent collections a year ago. On its face, the disconnect between upbeat landlords and anxious tenants seems to expose a glitch in the data or an example of the growing economic dissonance — like the stock market’s rise to new heights despite a 10.2 percent unemployment rate. What it actually shows is that for all of the government’s problems in containing the virus, financial rescue efforts were largely effective in keeping tenants in their homes. The $2 trillion CARES Act, with its $1,200 stimulus payments and $600 a week in extended unemployment benefits, helped laid-off renters stay current, while federal, state and local eviction moratoriums guaranteed stability for those who could not. But those efforts have largely lapsed: The $600 payments ended in July, and about 20 states have eviction moratoriums, down from 43 in May. President Trump signed an executive order telling federal agencies to help avoid evictions, but the provisions were vague. Congress has been at an impasse over new aid, and a stopgap $300 weekly unemployment supplement announced by Trump has reached few workers so far and will provide only a few weeks of relief. In the meantime, mounting bills are prompting tenants to take ever more desperate measures, with potentially devastating long-term effects.

As Job Losses Loom, the Airline Recovery Is Under Threat

The future is bleak for airline employees, and the latest round of job cuts doesn’t even come with a silver lining for investors, the Wall Street Journal reported. American Airlines said this week that it would lay off roughly 19,000 staff when the industry’s federal-aid package expires on Oct. 1. While American is the most troubled of the three major U.S. full-service carriers, United Airlines and Delta Air Lines have also warned of potential cuts in the fall. Airlines and their unions have unsuccessfully pushed Washington to approve a second $25 billion package, which would prevent redundancies until March 2021. Yet the Dow Jones U.S. Airlines Index has gained 13 percent over the past month, outpacing the S&P 500. Financial markets have already discounted the need for long-term changes, and major airlines’ cash buffers seem adequate to ensure their survival. Importantly, July air traffic showed that people are still eager to hop on a plane to go on vacation. Recent signs, however, suggest the pain may be greater than investors expect. For one, 85% percent of routes around the world are still restricted, the same percentage as in the beginning of May, UBS data shows. Back in July, as COVID-19 cases rose again, the International Air Transport Association updated its forecast for global passenger traffic, saying that it wouldn’t return to its pre-pandemic level until 2024 — a year later than previously thought. Ever since, trends have taken a worrying turn. According to data by travel analytics firm OAG, global scheduled capacity has now fallen for three weeks in a row. Capacity is still set to continue its recovery, but the August lull is a bad omen for the industry’s prospects. An optimistic explanation for a slowing number of seats flown would be sensible efforts by airlines to restrict supply and push up ticket prices. American has indeed moved away from its aggressive July strategy. Broadly, though, it is more likely that uncertainty is weighing simultaneously on demand for flights and on the price customers are paying for them. (Subscription required.)

Fed Unanimously Approves Shift on Inflation Goal, Ushering in Longer Era of Low Rates

The Federal Reserve unanimously approved today a new strategy that will effectively set aside a practice it has followed for more than three decades to pre-emptively lift interest rates to head off higher inflation, the Wall Street Journal reported. Fed Chairman Jerome Powell unveiled the updates in a speech set for delivery at a virtual symposium today, the most ambitious revamp of the Fed policy-setting framework since it was first approved in 2012. The practical effect is that it may be a very long time before the Fed considers raising interest rates. Powell said that the changes reflected lessons the central bank officials had learned in recent years about how inflation didn’t rise as anticipated when unemployment fell to historically low levels. The Fed had been moving in this direction over the last 18 months, a point made clear in early 2019 when officials abruptly abandoned plans to continue lifting interest rates. Powell initiated a policy-setting strategy review in late 2018, motivated by the sobering probability that central banks around the world will face greater difficulty than in the past to spur growth due to low levels of interest rates. (Subscription required.)

Real Estate Investors Skip Paying Loans While Raising Billions

Some of the largest real estate investors are walking away from debt on bad property deals, even as they raise billions of dollars for new opportunities borne of the pandemic, Bloomberg News reported. The willingness of Brookfield Property Partners LP, Starwood Capital Group, Colony Capital Inc. and Blackstone Group Inc. to skip payments on commercial mortgage-backed securities backed by hotels and malls illustrates how the economic fallout from the coronavirus has devalued some real estate while also creating new targets for these cash-loaded investors. “Just because a prior investment didn’t work out doesn’t necessarily mean that should tarnish the reputation for future endeavors,” said Alan Todd, head of U.S. CMBS research for Bank of America Securities. “It’s not like something was done in bad faith.” While cutting losers to buy winners is an age-old investment proposition, the COVID-19 pandemic may create even more openings than the past crises that became bonanzas for real estate investors. The mass exodus of Americans from public spaces has hammered already-weak retailers and their landlords, crippled business travel, crushed restaurants unable to fill all of their tables, and sown chaos for office towers whose tenants may never need as much space again. Hotels and malls have been the biggest CMBS losers during the pandemic. Lodging and retail debt turned over to so-called special servicers — workout specialists — is at the highest level since 2010, according to industry tracker Trepp.

Analysis: The Corona Credit Binge Is Dominated by the Biggest Companies

The Bank for International Settlements said that companies with annual revenues above $1 billion dominate corporate borrowing now more than any time in at least a decade, Bloomberg News reported. These firms account for 78 percent of global issuers of dollar bonds so far this year, according to data compiled by Bloomberg. While their bigger peers are setting records for blockbuster deals at historically low rates, many smaller companies are getting muscled out or losing access altogether. Tighter financing conditions and falling revenues raise the specter of a fresh wave of bankruptcies that could imperil the economic recovery. “Led by easier access to bond markets, large firms significantly increased their borrowing,” BIS researchers Tirupam Goel and José María Serena wrote this month in a report about credit during the COVID-19 crisis. “The rest of the firms faced bottlenecks due to their reliance on a strained syndicated loan market and hurdles in switching to bond markets.” Although the Federal Reserve is taking unprecedented steps to help smaller companies and buying their debt for the first time, many of the neediest remain outside its reach. Researchers at Princeton University and the University of Chicago found that a decline in the long-term interest rate leads to “more concentrated markets” by encouraging market leaders to borrow relative to followers, and inhibits “aggregate productivity growth.” The trend echoes the aftermath of the global financial crisis, when banks also pulled back funding to small and medium-sized companies. A decade of balance sheet repair has made banks much healthier now than then; yet it’s also made them more risk-averse as they prepare for a wave of loan defaults, according to the BIS report.

Proposed Amendments to Bankruptcy Rules and Forms Published for Public Comment

On June 23, 2020, the Judicial Conference Committee on Rules of Practice and Procedure (Standing Committee) approved publication of proposed amendments to the following:

• Appellate Rule 25;
• Bankruptcy Restyled Rules Parts I and II; Rules 1007, 1020, 2009, 2012, 2015, 3002, 3010, 3011, 3014, 3016, 3017.1, 3017.2 (new), 3018, 3019, 5005, 7004, and 8023; and Official Forms 101, 122B, 201, 309E-1, 309E-2, 309F-1, 309F-2, 314, 315, and 425A;
• Civil Rule 12 and Supplemental Rules for Social Security Review Actions Under 42 U.S.C. § 405(g); and
• Criminal Rule 16.

The comment period is open from Aug. 14, 2020, to Feb. 16, 2021. For information on the proposed amendments and instructions on how to submit comments, please click here.

Next Big Wave of Chapter 11s, Force Majeure and Business Insurance and Bankruptcy Issues Related to PPP Loans Among ABI Sessions Featured at Insolvency 2020 Summit

ABI sessions at the Insolvency 2020 Restructuring, Insolvency and Distressed Debt Virtual Summit will highlight and examine the key issues facing the commercial bankruptcy landscape. Sixteen leading insolvency organizations are participating in the Virtual Summit from Sept. 16 – Oct. 27 to bring thought leaders from the worlds of restructuring, insolvency and distressed debt for insightful online programming and engaging networking via a state-of-the-art virtual platform. ABI will be contributing its top-rated sessions, including Great Debates, to add the Summits flexible schedule of online sessions, creative optional events and virtual networking opportunities. More than 170 leading industry professionals will be taking part on panels at the Summit to offer more than 50 hours of educational content.

ABI sessions at the Insolvency 2020 Restructuring, Insolvency and Distressed Debt Virtual Summit include:

• Views from the Bench: Great Debates
• Force Majeure and Business-Interruption Insurance
• Views from the Bench: Dilemmas of an Official Committee
• Views from the Bench: Mass Torts
• Views from the Bench: Sales — Chapter 11 or § 363?
• Views from the Bench: Confirmation Roundtables: Competing Interests in Today's Chapter 11
• ABI: How to Restructure an Industry that Has Been Shut Down, and How to Prove Feasibility When You're Starting from Ground Zero
• ABI: Next Big Wave of Chapter 11's: Corporate Real Estate
• ABI: Bankruptcy Issues Related to PPP Loans and Other Pandemic Governmental Lending Programs
• Views from the Bench: Ethics

For more information and to register, please click here.

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New on ABI’s Bankruptcy Blog Exchange: Regulators Finalize Rule Changes to Help Banks Weather Pandemic

The agencies completed steps to ease a community bank capital measure temporarily and to delay a new credit-loss accounting standard, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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