Shadow Bank Weaknesses Forced Fed’s Market Rescue, Quarles Says

Shadow Bank Weaknesses Forced Fed’s Market Rescue, Quarles Says

ABI Bankruptcy Brief

July 16, 2020

ABI Bankruptcy Brief

Shadow Bank Weaknesses Forced Fed’s Market Rescue, Quarles Says

A top Federal Reserve official is issuing a warning about fast-growing and largely unregulated shadow lenders: They were a big factor in why central banks had to save markets earlier this year, and much more needs to be done to assess the risks posed by the sector, Bloomberg News reported. The coronavirus crisis has exposed potential weaknesses tied to nonbank financial firms, including excessive leverage, interconnectedness and instances of assets freezing up that investors assumed were akin to cash, according to Federal Reserve Vice Chairman Randal Quarles. Such factors left central banks with no option other than intervening, he said, speaking in his capacity as chairman of the global Financial Stability Board. “While extraordinary central bank interventions calmed capital markets, which remained open and enabled firms to raise new and longer-term financing, such measures should not be required,” Quarles wrote in a letter dated Tuesday to his counterparts at other central banks. It’s “more important than ever” to understand the possible threats of nonbanks, he added. In mid-March, the Fed started rolling out emergency lending facilities focused on ultra-short-term credit markets that dried up as companies, banks and investors began hoarding cash. One of the quickest programs established was the Money Market Fund Liquidity Facility. It was crucial to restoring order because institutional investors began withdrawing rapidly from so-called prime money market funds, vehicles that invest partly in short-term company IOUs. Since the disruption, at least one big provider of institutional prime money funds, Fidelity Investments, announced it would shut down those funds and steer customers mainly into funds that invest exclusively in government-backed securities. Boston Fed President Eric Rosengren reacted by saying he hoped other fund providers would follow suit.

1.3 Million Americans Filed First-Time Unemployment Claims Last Week

The Department of Labor reported this week that another 1.3 million people filed first-time jobless claims on a seasonally adjusted basis for the week ending July 11, CNN Business reported. That's down 10,000 from the prior week's revised level. On an unadjusted basis, more than 1.5 million people filed first-time claims, up almost 109,000 from the week before. The seasonal adjustments are traditionally used to smooth out the data, but that has tended to have the opposite effect during the pandemic. Continued claims, which count workers who have filed claims for at least two weeks in a row, stood at more than 17.3 million for the week ending July 4, down 422,000 from the prior week. These seasonally adjusted claims peaked in May at nearly 25 million. On an unadjusted basis, however, continued claims rose by more than 838,000 to 17.3 million. The federal government spent more than $80 billion in June to pay for Congress's historic enhancement to the nation's jobless program, bringing the total spent to nearly $171.5 billion this fiscal year, Treasury Department data shows. In addition to the pandemic unemployment assistance program and the 13-week extension of benefits, lawmakers also boosted weekly benefits by $600, which the jobless receive in addition to their state payments.

In related news, Speaker Nancy Pelosi (D-Calif.) yesterday signaled a willingness to compromise with Republicans on the size of renewed expanded unemployment benefits, which are currently set to expire at the end of the month, The Hill reported. Pelosi indicated that the size of the expansion would depend on whether the next coronavirus relief package includes another round of direct stimulus payments to individuals and families. "That pillar is about putting money into the pockets of the American people. One piece of it is unemployment insurance and the benefit you are talking about, and another part of it is how we put direct payments into the families," she said. "So we'll see what that entire package looks like." GOP lawmakers and the Trump administration have argued that the extra $600 per week in unemployment insurance payments established in March disincentivizes people to return to work if they're collecting more money than they did before the pandemic. But in recent weeks, some have suggested renewing the weekly benefit at a lower amount, such as $400 or less.

U.S. Retail Sales Jump 7.5 Percent in June, but Fresh Coronavirus Outbreak Poses New Hurdle

Sales at U.S. retailers posted a big increase in June for the second month in a row, but a surge in coronavirus cases that’s led to more restrictions on business threatens to sap the momentum of the economic recovery, reported. Retail sales climbed 7.5 percent last month following a record 18.2 percent increase in May, the government said today. Sales still haven’t returned to pre-crisis trends, however, after a huge drop in the first two months of the pandemic. The recent upturn could also stall if the virus continues to rage and more states reimpose restrictions on retailers and other businesses that rely on customers visiting their stores. Sales jumped 8.2 percent at auto dealers, which have gotten a big boost from plunging interest rates. Car buyers with secure jobs and good incomes have been snapping up new vehicles to take advantage of low rates. Sales more than doubled at apparel stores and leaped 20 percent at food and drinking establishments, one of the sectors hit hardest by the pandemic. Yet the latest viral outbreaks are putting renewed pressure on them, especially bars. Sales are still 26 percent lower compared to a year ago, and an increasing number of bars and restaurants are closing for good.

The Coronavirus Retail Shakeout: Who’s Closing or Opening Stores

U.S. retailers are on track to close as many as 25,000 stores this year as the coronavirus pandemic is upending shopping habits, the Wall Street Journal reported. That is more than double the 9,832 stores that closed in 2019, according to Coresight Research. So far this year, major U.S. chains have announced more than 5,000 permanent closures. More buying is shifting online, and consumers are spending less than they did a year ago as they shelter at home, get furloughed or lose their jobs. A growing number of chains that were struggling before the health crisis have filed for bankruptcy protection in recent months. “Bankruptcies are driving a lot of the closures,” said Deborah Weinswig, chief executive of Coresight Research, which compiled the data. Many clothing retailers were in bad shape before the pandemic, as consumers shifted spending to travel, entertainment and other experiences, and as new online startups siphoned sales from established players. Gap Inc. and Victoria’s Secret, owned by L Brands Inc., which once dominated the nation’s malls with hundreds of stores, are shrinking. Brooks Brothers Group filed for bankruptcy in July and plans to close 51 stores. Conversely, dollar stores and discounters are bucking the trend. Dollar General Corp. is moving ahead with nearly 1,000 new stores this year, and its rivals Dollar Tree and Family Dollar also are adding hundreds of new locations. With high unemployment and other workers furloughed, these chains are benefiting as shoppers are forced to tighten their purse strings. Department stores were in decline before the pandemic, as shoppers increasingly had been shunning indoor malls. J.C. Penney Inc. and Stage Stores Inc. filed for bankruptcy in May and are pulling back from many malls, and Macy’s Inc. plans to close a fifth of its stores over the next three years. The owner of Sears and Kmart filed for chapter 11 in 2018, and although its assets were bought out of bankruptcy in 2019, it has continued to close stores this year. (Subscription required.)

U.S. Industrial Production Picked Up Again in June

U.S. manufacturing increased in June for a second straight month, a sign of economic recovery in the weeks before the recent surge in coronavirus cases, the Wall Street Journal reported. Industrial production — the measure of output from factories, mines and utilities — rose a seasonally adjusted 5.4 percent in June from May, the Federal Reserve said yesterday. The index for May was unrevised at 1.4 percent, while the index for April was revised down to a 12.7 percent drop from a 12.5 percent drop. As U.S. factories reopened in May and June, they helped drive a recovery from April’s record decline. Still, despite the recent gains, the index for the second quarter as a whole fell at an annual rate of 42.6 percent, the largest quarterly decrease since World War II. (Subscription required.)

COVID-19 Whiplash Jolts California’s Small Businesses

Reopenings throughout California have been damped by capacity restrictions, stringent cleaning protocols, conflicting guidance from authorities at different levels of government and concerned clients. On top of financial challenges, business owners have been wrestling with the fear of putting their employees and customers at risk, the Wall Street Journal reported. After seeing the number of COVID-19 cases across the state rise in recent weeks, Gov. Gavin Newsom Monday ordered a halt to indoor activities at bars, restaurants, salons and gyms — many of them already struggling — less than a month after allowing them to reopen. Small-business owners said that they found the parameters around applying for and spending federal forgivable loans under the Paycheck Protection Program confusing and inconsistent, and said that rent is a bigger problem than payroll anyway. Many rushed to spend PPP funds under the initial rules, which set tight limits on how, and how quickly, they had to be used. Those restrictions have since been relaxed. Business owners and trade groups are calling for more government assistance in light of extended shutdowns. “California won’t be the last state to reverse or delay the return of independent restaurants and bars,” said Caroline Styne, co-founder of high-end Los Angeles restaurant operator Lucques Group and member of the Independent Restaurant Coalition Advisory Board, in a statement urging Congress to pass a relief program for the industry. “Restaurants placing their first supply orders since March can’t turn the delivery trucks around,” she said. “These reclosings are creating more debt for businesses that were just beginning to find their footing after accumulating four months of unpaid bills.” Read more. (Subscription required.)

The "Real Economic Support that Acknowledges Unique Restaurant Assistance Needed to Survive" (RESTAURANTS) Act of 2020, introduced on June 18 by Rep. Earl Blumenauer (D-Ore.), was one of the measures discussed yesterday at a House Small Business Committee hearing on long-term solutions for small-business recovery. The legislation calls for a $120 billion restaurant-stabilization grant program designed to help independent restaurants deal with the long-term structural challenges facing the industry due to COVID-19 and to ensure they can re-employ 11 million workers. Click here for more information on the hearing.

Maryland Uncovers $500 Million Coronavirus Unemployment Fraud

Maryland Gov. Larry Hogan announced yesterday that state officials had uncovered a massive fraudulent scheme involving 47,500 falsified unemployment insurance claims, adding up to more than $501 million, reported. The scheme involved identity theft from previous security breaches and did suggest that any of the personal information submitted in the legitimate claims had been compromised in some way. “This criminal enterprise seeking to take advantage of a global pandemic to steal hundreds of millions, perhaps billions, of dollars from taxpayers is despicable,” said Hogan. The governor said the fraud was detected when state employees with the unemployment insurance website noticed an unusual uptick in the number of out-of-state claims being submitted, prompting an investigation and eventually notifying federal authorities. Maryland Labor Department Secretary Tiffany Robinson noted that the unusual activity occurred on the fourth of July.

Upcoming abiLIVE Webinars Look at Evolution of Consumer Bankruptcy Practice in the COVID-19 Era, Distressed Debt Market Trends and Evolving M&A Activity

Three upcoming abiLIVE webinars present experts looking at key issues to both consumer and business bankruptcy practice:

- Sponsored by ABI's Consumer Bankruptcy Committee, the "Evolution of Consumer Bankruptcy Practice in the COVID-19 Era" abiLIVE webinar tomorrow will look at what trends for consumer bankruptcy practice have emerged during the COVID-19 pandemic and what consumer practice will look like going forward. Featured speakers include John Crane of Robertson, Anschutz, Schneid & Crane LLC (Duluth, Ga.), Jenny L. Doling of J. Doling Law, PC (Palm Desert, CA) and Charissa Potts of Freedom Law PC (Eastpointe, Mich.) with chapter 13 trustee Margaret A. Burks (Cincinnati) serving as moderator. Register here for free.

- SRS Acquiom will sponsor a special abiLIVE roundtable on Distressed Debt Market Trends on July 21. The discussion on current trends will include how we got here, what we're seeing, and how today's market compares to other distressed times. Experts will also provide their viewpoints on how COVID-19 is turning lending markets upside-down, and provide tips on how best to respond to the challenging times. Speakers include Harrison Denman of White & Case LLP (New York), Thomas Finnigan, IV, of White Oak Financial, LLC (San Francisco), Samantha Good of Kirkland & Ellis LLP (San Francisco), Renee Kuhl of SRS Acquiom (Minneapolis), Eric McDonald of SRS Acquiom (New Orleans) and Paul St. Mauro Seaport Global Securities LLC (New York). Register here for free.

- Sponsored by Prosakuer, the "Evolving Landscape of Distressed M&A Activity" abiLIVE webinar on July 22 will highlight the current challenges facing insolvency professionals working on deals in the COVID-19 world and what to expect in the coming months. Featured speakers include Harold Bordwin of Keen-Summit (New York), Jeff Marwil of Proskauer (Chicago) and Rich Morgner of Jeffries (New York). Register here for free.

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New on ABI’s Bankruptcy Blog Exchange: CFPB Slaps Chicago Mortgage Lender with Redlining Lawsuit

The Consumer Financial Protection Bureau alleges that Townstone Financial's CEO and president made statements on a radio show discouraging applicants living in Black neighborhoods from seeking home loans, 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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