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April 27, 2020

Wealthfare Cheats

Trotters in the Trough Threaten Relief Programs.

The Payroll Protection Program(PPP) is a pretty good idea, especially seeing how quickly it was thrown together and the partisan atmosphere that produced it. Money is lent to “small” employers if they need it to keep the doors open and people on payroll. The loan is at 1% interest but can be forgiven if used for rent, mortgage, utilities, or salary; essentially it is free money but well-spent compared to having the businesses close and more people go on unemployment, potentially for a long time. Obviously businesses which don’t have to lay everyone off will have a better chance of restarting once the crisis abates.

Businesses which want the money must certify “Current economic uncertainty makes the loan necessary (emphasis mine) to support your ongoing operations” according to the terms factsheet. The banks which actually make the loans on behalf of the Small Business Administration (SBA) are not required to verify this assertion for the very good reason that the money would not be dispersed in time to keep people employed if there were a verification process. But lack of verification immediately led to abuse.

We’ve all read about public corporations like Shake Shack which were shamed into giving back the 100s of millions they’d scoffed up. The Treasury Department made it clear that it is not “necessary” to have this money if you have other sources of cash, as public companies usually do.

Nominally the loans were restricted to organizations with 500 employees or less, but this limitation is riddled with exceptions left over from other SBA programs (footprints of lobbying past). The total loan to any one company was supposed to be $10,000,000 but companies were able to apply multiple times through multiple subsidiaries.

Not surprisingly, the money ran out long before the needs of small organizations were met. You must apply through a bank which is a certified SBA lender (most are). If you were an organization with a good banking relationship, you found a banker on your doorstep with an application (almost no risk for the bank and they get the deposit). But, if your organization needed to establish a banking relationship, by the time you’d done this, the money was gone. Not good.

A fair amount has been written about abuses in the private sector and shaming seems to be correcting some although it’s hard to know what’s happening in companies which aren’t public. What has not been written about (that I’ve seen), is abuses by non-profits, which I think may be more widespread than we’d hope.

I was on four boards when the program was announced, three nonprofit and one for-profit. All were approached by their banks urging applications for PPP money (and making light of the word “necessary”). One of the nonprofits had already had a layoff and would’ve had to cut further without a loan. The PPP loan was clearly necessary and was approved. Two of the other nonprofits, like everyone, were anxious about what the future will be; but they finally decided that, since they were not facing near-term layoffs, they should not take money from those organizations that would otherwise let people go. The for-profit company was also not immediately affected, and its investors made some funds available because of uncertainty and their feeling that they should not personally profit from the receipt of PPP funds. No application there either.

Nevertheless, the cavalier attitude that bankers, lawyers, accountants and advisors take towards the certification of necessity make me certain that there are abuses of PPP waiting to be discovered in the nonprofit world.

We need emergency programs like PPP. However, it becomes impossible to reach the needy when the well-connected jump into line ahead of them. The programs are, of necessity, light on pre-verification because the money is needed now. However, we the people must make clear that there will be post-accounting. Fraud must be punished legally; unethical behavior, which may not be illegal, should be punished in the marketplace.

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