The PPP Shows Veiled Government Bias

Dear Rich Lifer,

I don’t know how closely you’ve been following the various stimulus measures that have been undertaken or the new ones being discussed … but, wow.

Putting aside the many trillions of dollars that have already been committed, things are hardly running smoothly.

Let’s just limit today’s discussion to the PPP – the Paycheck Protection Program that was supposed to aid small businesses during the COVID crisis.

What Does The PPP Cover?

Here’s the explanation straight from the U.S. Treasury:

“The Paycheck Protection Program (“PPP”) authorizes up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis.

“All loan terms will be the same for everyone. The loan amounts will be forgiven as long as:

“The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and Employee and compensation levels are maintained.

“Payroll costs are capped at $100,000 on an annualized basis for each employee. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. Loan payments will be deferred for 6 months.”

Who’s Eligible?

Again, the answer straight from our illustrious Treasury:

“All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.”

Sounds pretty reasonable on the surface …

Basically, the government is giving money to small businesses that agree to use the funds to keep employees on the payroll or pay critical expenses like rent.

Given what’s happening right now, it’s no surprise that demand was absolutely incredible and all of the money was gone inside of two weeks.

But let’s talk about some of the companies that got big payments.

And, Who REALLY Benefited from the PPP?

According to new reports starting to surface, many of the recipients were hardly the mom-and-pop restaurants and stores average taxpayers pictured when they first heard about the PPP.

From CNN Business:

“As a result of a heavily lobbied exemption, larger food-service operations landed $10 million loans from the PPP. These include Potbelly (PBPB) Sandwich Shop and Shake Shack (SHAK), which has upward of $100 million in cash on hand, as well as Fiesta Restaurant Group Inc (FRGI)., the owner of Taco Cabana.

“Kura Sushi USA Inc (KRUS)., the largest revolving sushi chain in the US, disclosed a nearly $6 million loan. Operators behind the Ruth’s (RUTH) Chris steakhouses and the J. Alexander’s (JAX) restaurant chains received loans of $20 million and $15.1 million, respectively.

“Non-restaurant companies also landed large loans, including coal miner Hallador Energy (HNRG), which announced its $10 million PPP loan alongside other liquidity maneuvers such as suspending dividends and amending its credit agreement to free up $50 million more; and windmill maker Broadwind Energy (BWEN), which said its subsidiaries received $9.5 million in PPP loans.”

Now, yes, the program was first come, first serve and everyone knew there would be plenty of businesses missing out.

And yes, the money was ear-marked for employees and that’s exactly where it’s going. Maybe it shouldn’t matter whether it’s a line cook at a Shake Shack or your local hamburger shop.

Still, I hardly think this is what most Americans thought they were funding… 

The Problem The PPP Poses

At a bare minimum, none of the recipients should have been public companies. They already have a very large source of funding that they can turn to when things go south.

The last thing taxpayers should be funding are more programs that bail out shareholders and other investors … on top of the airline bailouts and other egregious examples that have already been happening.

Please realize, I’m saying this as an investor.

Heck, I own shares in Southwest Airlines (LUV)!

The reality is that investors, creditors, and business owners – myself included – should bear as much of the risk as possible when problems arise.

Otherwise, we’re creating a perverse system of one-way capitalism … which is being exacerbated by lobbyists and other forms of favoritism like long-standing relationships between certain banks and their customers.

By the way, Bloomberg has suggested even hedge fund managers and other Wall Street professionals might have gotten in on the PPP funds!

Who’s To Blame?

I blame anyone – including plenty of Republicans – who insisted we didn’t need oversight on the PPP program.   

Of course, as Congress has been arguing over the details of a follow-on cash injection to the PPP, we’re hearing some more crazy ideas … many of them from the other side of the aisle.

Just as an example: Speaking to ABC’s “This Week”, Nancy Pelosi said:

“Overwhelmingly, my caucus, and we’re working closely with the Senate Democrats, know that we have an opportunity, and an urgency, to do something for our hospitals, our teachers and firefighters and the rest, right now.”

I’m sorry, but what do teachers have to do with this current crisis?

Yes, many of them are being burdened with new ways of conducting their classes and other related hardships, but no more than the rest of the American workforce.

If anything, teachers have some of the steadiest jobs in the country and it is almost certain that their workplaces will remain open in some fashion throughout this crisis and on the other side of it.

So why would Pelosi have them at the top of her mind? Could it possibly be the intimate relationship between her party and teacher unions? 

At the end of the day, this is what troubles me the most about bailouts – they often end up rewarding a lot of the wrong people … in the wrong ways … for the wrong reasons.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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