Conditions for companies that get virus aid: Room for abuse?
WASHINGTON — A $500 billion federal aid package for companies and governments hurt by the coronavirus includes rules aimed at ensuring that the taxpayer money is used in ways that would help sustain the economy. But questions are being raised about whether those guardrails will prevent the kinds of abuses that have marked some corporate bailouts of the past.
In return for the emergency loans, which could be spun by the Federal Reserve into up to $4.5 trillion, companies will face temporary limits on what they can pay executives. They’ll also need to keep their workforces stable or at least not lay off more than 10% for several months. And they’ll face restrictions on stock buybacks and dividend increases.
Yet loopholes may in the legislation.
“On paper, it looks like we learned the lessons,” said James Angel, an associate professor of finance at Georgetown University’s McDonough School of Business. “But the devil is in the details. There’s a lot of room around the edges.”
The legislation establishes a system of oversight on how companies use the rescue money. The oversight is widely thought to exceed the standards for the bailouts of banks and automakers in the 2008-09 financial crisis. Critics have long attacked those bailouts as an unwarranted giveaway to corporations whose conduct contributed directly to the crisis.
Under the $2.2 trillion package, a government watchdog and a panel appointed by Congress will monitor how the billions in aid are deployed and whether its corporate recipients are meeting the restrictions.
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President Donald Trump wasted little time, though, in throwing the oversight system into question. After signing the relief package March 27, Trump issued a statement that seemed to reject the independence of a new inspector general’s office. He said he wouldn’t recognize the inspector general’s right to report to Congress without “presidential supervision.”
Trump’s statement went on to dispute other aspects of the oversight rules, including that Congress should be consulted in the allocation of relief money.
It will be up to Trump to appoint the special inspector general for the bailout fund, who will have to be confirmed by the Senate.
The overall package is a staggering pot of money, by far the largest in the history of crisis relief for industries and local governments. About $425 billion is to be used by the Treasury Department to support the Fed’s emergency lending programs. These include loans for small and medium-sized businesses. Because the companies, states and cities are deemed likely to repay the loans, the Fed is able to leverage the money into up to roughly $4 trillion in actual lending.
“A program of this scale and scope when things are moving so fast, will need vigorous scrutiny,” said Phil Angelides, a former California state treasurer who led the 10-member congressional oversight panel for the financial-crisis bailout.
Peter Henning, a law professor at Wayne State University and a former Justice Department attorney, notes that the bailout program gives wide latitude to Treasury Secretary Steven Mnuchin.
“Secretary Mnuchin has authority to basically negotiate any kind of loan that he wants,” Henning said. “We’ll see who gets favored and who doesn’t.”
For companies that receive aid, there may be wiggle room in the conditions attached. While they can’t shrink their workforce by more than 10% through the fall, there’s no prohibition against cutting employee wages — except for airlines that receive direct grants. These grants must be used for employee pay and benefits.
Companies could also reduce workers’ hours and overtime without running afoul of a ban on breaching union contracts.
“A lot of people are going to see their compensation fall even though they still have a job,” Georgetown’s Angel said. “Just the fear of that puts the brakes on the economy.”