Brown on Business
March 30 - April 5, 2020
By Wesley Brown
COVID-19 brings America into a “new normal”
As the nation prepares for a supposed temporary hibernation due to the COVID-19 crisis, our minds wonder what the end of this surreal moment in time will be – this madness or what many are calling the “new normal.”
If we think back, there are other frozen pictures in our minds that can help this nation get beyond what could be an economic blackhole that could take years to climb out of and then become healthy again.
As in other situations involving America’s economic well-being, we have always left it up to our elected officials in Washington, D.C., to oversee picking the winners and losers that come out of such calamities. Still, only a decade and a few years after the Great Recession, we are back at a place that seems eerily familiar.
The first real recession-proofing legislation that came out of the near collapse of the U.S. economy in the last downturn was the Economic Stimulus Act of 2008. It was signed into law on Feb. 13, 2008 by President George W. Bush with the support of both Democratic and Republican lawmakers.
That historic law provided tax rebates of $300 to low- and middle-income U.S. taxpayers, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by Fannie Mae and Fannie Mac, the government owned mortgage financiers that are publicly traded conglomerates owned by private shareholders.
In retrospect, that first stimulus had very little effect on preventing the U.S. economy from falling deeper into a recession that began in December 2007 and later ended in June 2009, making it the longest economic slump since World War II.
Just before Bush left office later that year following the historic election of the nation’s first black president in November, Congress passed the Emergency Economic Stabilization Act in October, know now as the “Bank Bailout of 2008.” The financial crisis in 2007 and 2008 was partly due to a subprime mortgage crisis, causing the failure or near failure of major financial institutions like Lehman Brothers and American International Group.
Seeking to prevent the collapse of the financial system, then-Treasury Secretary Henry Paulson called for the U.S. government to purchase about several hundred billion dollars in distressed assets from financial institutions. Paulson negotiations with Congress led to the creation of the $700 billion Troubled Asset Relief Program (TARP) for the purchase of distressed assets to inject capital into banks and other financial institutions.
At the beginning, all TARP recipients were subject to the executive compensation restrictions until they have fully satisfied their obligations to the Treasury and exited the program. A “special master” appointed to oversee the $700 billion fund review and approved any payment of compensation to the five senior executive officers and 20 next most highly paid employees at the companies receiving “exceptional assistance” from Treasury.
The U.S. Treasury used the first $250 billion from the TARP fund to buy preferred stock in eight major banks, including Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, Chase Morgan, Wells Fargo, Morgan Stanley and State Street.
Today, nearly all those big banks have rebounded and gone back to the business of ruling Wall Street with executive deals that make the head spin. Just last week, in the wake of talks by current Treasury Secretary Steven Mnuchin on another TARP-like $2 trillion deal to rescue the U.S. economy from the COVID-19 pandemic, Goldman Sachs gave CEO David Solomon a 20% raise to push his total 2019 compensation to $27.5 million.
Earlier in late January, JPMorgan Chase CEO Jamie Dimon got a half-million-dollar raise for 2019, bringing his total compensation for the year to $31.5 million. Bank of America CEO Brian Moynihan’s 2019 compensation was not far behind, banking a cool $26.5 million for his work.
Of that lot, Wells Fargo is the only “too-big-to-fail” bank not to see its financial fortunes soar since the U.S. economy has rebounded with nearly 120 straight moneys of GDP growth. Instead, Wells Fargo has mostly used its TARP funds to pillage its customer with fake account swindles and other fraudulent rip-offs that has led to few consequences for the West Coast banking giant.
Among many things, Wells Fargo scams of all sorts have caused thousands of hard-working Americans, including seniors, military personnel and targeted minorities, to lose their homes, cars and then seen credit destroyed by not ill-actions of their own.
But the lion’s share of the TARP fund ($475 billion) was not just handed out to Wall Street banks and investment firms, the corporate welfare also touched hundreds of financial institutions across every corner of America. In Arkansas, eleven banks based received a total of $302.7 million through the Treasury’s Capital Purchase Program (CPP).
Another $81 billion in TARP funds also went to bail out the Big Three auto companies and GMAC, now Ally Bank. Those former auto giants except for are all doing reasonably well now but could be pushed back into bankruptcy if the COVID-19 crisis lasts too long, or more consumers learn to buy new cars online.
By the time this is read, Congress will have passed a new $2 trillion stimulus package that looks a lot like the stimulus deal amid the Great Recession. On one end, American taxpayers get a $500 billion slice of the pie that will be meted out in $1,200 payments, depending on your filing status. Another $350 billion will provide bridge loans aimed at keeping businesses and nonprofits afloat with 500 workers or less.
Beyond the loan guarantees to small businesses and other aid in two earlier bills, the act also appropriates $500 billion in direct loans and guarantees to businesses to provide liquidity to cover losses incurred as a direct result of the COVID-19 epidemic. Some funds are already earmarked for the air transportation industry, while the majority is left uncommitted. As further aid to the hard-hit airline industry, the act suspends air travel and aviation fuel excise taxes during the COVID-19 emergency.
Opponents of bailout provisions in the so-called Coronavirus Aid, Relief, and Economic Security (CARES) Act are already calling on Congress to rein in executive compensation, excessive fees and jack-up travel costs the airline industry has hoisted on Americans since the industry was last bailed out after Sept. 11.
Here’s the rub. Corporate America is only three years out from another $1.8 trillion stimulus called the Tax Cut and Jobs Act that was supposed to trickle down to Main Street. That deal cut the corporate tax rate from 35% to 21%, the lowest rate since 1939. However, instead of jumpstarting the U.S. economy with outsized growth that was promised, corporate America has used that tax bounty mostly for cash dividends and stock buybacks for billionaire shareholders and company insiders.
Congress and corporate America should be forewarned that small business owners and taxpayers are hurting, angry, praying and hoping this stimulus package will work once the coronavirus pandemic has come and gone and the U.S. gets back to whatever “new normal” is ahead.
If it doesn’t, we will likely be back in a worst place a few years down the road wondering why we should put our trust in Washington, D.C., again.