Questions are already being raised as to whether the federal dollars flooding the U.S. economy during the Covid-19 crisis are reaching their intended recipients. Rightly so, when billions of taxpayer dollars are at stake. But it should make companies think twice before taking federal money.
Clearly, there should be a financial lifeline for the hundreds of thousands of small American businesses and the 22 million unemployed. When the government orders the shutdown of your “non-essential” business (although it is essential to your livelihood and that of your employees), it is only reasonable that they will compensate you.
But beware of the borrower! Flexible businesses loan deposited on same day should seriously consider how accepting federal loan terms or other support can be a Faustian good deal. The ultimate cost can far outweigh the temporary gain.
Thanks to the Congressional Oversight Commission established under the Cares Act, the new Special Inspector General for Pandemic Recovery, and many other newly funded Inspectors General, the ground is already laid for aggressive investigation and review of companies that received – and how they spent – federal emergency funds.
Having served on the Congressional Oversight Committee for the Distressed Assets Relief Program in the years following the 2008-2009 financial crisis, I understand that the bilateral effect of taking federal funding can be both a relief and a risk to the reputation and functioning of a company. .
In 2008, the $ 700 billion TARP program was enacted primarily to respond to a financial sector crisis caused by government housing and monetary policy and market responses. Banks and automakers have been given a lifeline – in some notable cases, necessary for their survival. The Treasury Department has intimidated many reluctant banks to âvoluntarilyâ seek TARP funding in the name of systemic safety and soundness, in order to prevent more willing banks from appearing weak. The effort backfired, making the entire industry appear weak, and it tarnished the banking industry for more than a decade.
Copying TARP, the new Congressional Oversight Commission will oversee the $ 2.2 trillion in Cares Act spending. Since the pandemic is a truly global force majeure event and the recipients of funds are not sector specific, surveillance will be more complicated. Few, if any, companies were prepared for Covid-19, and most will be negatively affected in one way or another. On the recipient side, businesses large and small seek help before relevant regulations have been fully drafted or implemented.
Although different in scope and detail, TARP and Cares have enough similarities that some lessons learned from TARP days are worth considering here. On the one hand, expect aggressive monitoring and enforcement. Whenever public money is distributed to private hands, anomalies will arise and accusations of favoritism, discrimination and fraud will follow. Investigations by the TARP Special Inspector General have resulted in 24 enforcement actions and 380 convictions, for a total of more than $ 11 billion to date.
Already, the old man saw that “optics matters” come into play. Harvard,
the Los Angeles Lakers and other well-known entities have already returned Cares Act funds. We may only see the beginning of corporate naming and shame – in an election year, hitting the right organization can make a candidate a cultural hero. And that’s all before the supervisory board and inspectors general start digging through the payment rolls. Lawmakers and others are already signaling that otherwise successful businesses or their owners who receive Cares Act money today will have a lot to answer for tomorrow.
To deter self-service, the Treasury and Small Business Administration incorporated from the outset a much needed loan application certification stating that the loan is “necessary to support the applicant’s ongoing operations” and that criminal penalties apply. impose if this is not the case. It is entirely possible that the Special Inspector General will interpret ânecessaryâ restrictively, as there will be many tempting targets to recover taxpayer dollars and tarnish reputation. It will not be nice for companies caught in the crossfire. When in doubt, stay away.
Another consideration that companies should think about is the potential for regulatory control. The company whose SBA loan is canceled under current Paycheck Protection Program guidelines could face future government demands for environmental regulations or corporate governance. Helping businesses avoid certain bankruptcies today is a great way for politicians to impose special post hoc obligations tomorrow.
Policy makers can avoid some of these troubles. By writing the final rules for these programs, for example, the Treasury and the SBA can clarify that organizations with sufficient alternative resources are not eligible and will not have their loans canceled.
That’s not to say that companies shouldn’t take federal funding if they absolutely need it and qualify, but they should be aware of the potential long-term implications. In the interests of taxpayers and businesses, policymakers should adopt clear public guidelines to focus relief on those who really need it, thereby reducing the likelihood of poisonous recriminations. Clarity will help secure the economic recovery we desperately need.
Mr. Atkins, CEO of Patomak Global Partners, is a former commissioner of the Securities and Exchange Commission.
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