Mortgage Lenders Demand Fed Bailout… After Blaming Fed For Forcing “Staggering, Unprecedented” Margin Calls
There’s another ‘epidemic’ ripping through America that, for many on Wall Street, is just as terrifying as COVID-19… and this time The Fed is to blame.
We reported last week on the multitude of mortgage companies that were facing an existential threat from massive margin calls:
First, its was AG Mortgage Investment Trust which on Friday said it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Then it was TPG RE Finance Trust which also hit a liquidity wall and could not repay its lenders. Then, on Monday it was first Invesco, then ED&F Man Capital, and now the mortgage mayhem that erupted as a daisy-chain of mortgage REITs suddenly imploded, has taken down MFA Financial, whose crashing stock was halted after the company reported that “due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements.”
All of which means – in no surprise whatsoever – that these mortgage-related firms are demanding a bailout!! Because ‘Murica… and capitalism, right?
And most ironically, mortgage bankers are demanding The Fed STOP buying mortgage bonds. As Bloomberg reports, bankers are sounding alarms that The Fed’s unprecedented buying of $183 billion of bonds tied to home loans last week are unintentionally putting their industry at risk by triggering a flood of margin calls on hedges lenders have entered into to protect themselves from losses.
In a Sunday letter, the Mortgage Bankers Association (MBA) urged the U.S. Securities and Exchange Commission (SEC) and the nation’s main brokerage regulator to address the problem by telling securities firms not to escalate margin calls to “destabilizing levels.”
The MBA letter, signed by CEO Robert Broeksmit, said that when lenders issue new loans, they often simultaneously short mortgage-backed securities. This is done because the loans might fall in value before a banker can sell them to Fannie Mae and Freddie Mac. The bet against mortgage bonds helps protect the lender if that happens, Broeksmit wrote.
“The dramatic price volatility in the market for agency mortgage-backed securities [MBS] over the past week is leading to broker-dealer margin calls on mortgage lenders’ hedge positions that are unsustainable for many such lenders.”
Now, with lenders getting crushed on these hedges, they’re facing a wave of demands from brokers that they sell holdings or put more money in their trading accounts.
“Broker-dealers’ margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the past week,” Broeksmit wrote.
“The inability of a large set of responsibly-managed lenders to meet these margin calls would jeopardize the very objective of the Federal Reserve’s agency MBS purchases – the smooth functioning of both the primary and secondary mortgage markets.”
Some lenders, the letter exclaimed, may not be able to meet their margin calls in a day or two, and Barry Habib, founder of MBS Highway, a leading industry advisor who was among the first to publicly sound the alarm bell last week, warned ominously:
“This is a collapse of the system… It’s as simple as the Fed stops buying for a period of time.”
The MBA, whose members underpin the housing market, asked the watchdogs to issue guidance directing brokers to work constructively with lenders.
Additionally, as Bloomberg notes, the surge in margin calls is also inflicting major pain on commercial real estate with the threat of widespread loan defaults prompting a wave of selling of commercial mortgage-backed securities. Colony Capital’s CEO Tom Barrack reiterated his desperate pleas for a bailout on Sunday calling for a moratorium on margin calls and Fed buying to halt the sell-off for bonds tied to commercial properties.
So – to sum up the America we live in:
MBS – Residential mortgage lenders have been crushed from hedging-implosions thanks to massive, unprecedented Fed buying in their market… and are demanding The Fed stop buying and offer them a bailout.
CMBS/ABS – mREITs and funds have been crushed by a liquidity squeeze on their over-levered, borrow-short-lend-long-get-rich-quick plan (supported by endless Fed liquidity and rates suppression)… and are now demanding The Fed buy even more, lift accounting rules, and vanquish all margin calls.
Moral hazard and unintended consequences are everywhere as America’s elite refuse to let this crisis go to waste.
Oil Hovers Just Above 18 Year Low After Putin-Trump Hold Phone Call
WTI prices are back above $20.00 (barely) but remain notably down on the day after reports that Presidents Trump and Putin spoke on the phone today – with the Kremlin making clear that the call was at the request of the US president.
Per the Kremlin, the heads of state “expressed serious concern over the scale of the spread of coronavirus in the world and informed each other about measures taken in Russia and the United States to counter this threat. The possibilities of closer interaction between the two countries in this direction were discussed.”
The two leaders reportedly agreed to continue personal contacts (which we are sure will trigger the liberal media) and to work towards closer COVID-19 response coordination.
Additionally, the two “exchanged views on the current state of the world oil market” and agreed on further Russian-American consultations on this subject at the ministerial level.
Finally, several other “bilateral issues” were also discussed.
How long before a transcript of the call is ‘demanded’ by Nadler and Schiff, we wonder?
Markets did not react much to the news which follows Trump’s earlier comments that Saudi Arabia and Russia “both went crazy” in their oil-price war.
Additionally, Trump said in an interview with Fox News Channel before the call with Putin:
“I never thought I’d be saying that maybe we have to have an oil (price) increase, because we do… The price is so low now they’re fighting like crazy over, over distribution and over how many barrels to let go.”
“Company ABC is priced at $20/share and pays $1/share in a dividend each year. The dividend yield is 5%, which is calculated by dividing the $1 cash dividend into the price of the underlying stock.
Here is the important point. You do NOT receive a ‘yield.’
What you DO receive is the $1/share in cash paid out each year.
Yield is simply a mathematical calculation.“
At that time, the article was scoffed at because we were 8-years into an unrelenting bull market where even the most stupid of investments made money.
Unfortunately, the “mean reversion” process has taken hold, which is the point where the investment thesis falls apart.
The Dangers Of “I Bought It For The Dividend”
“I don’t care about the price, I bought it for the yield.”
In January of 2018, Exxon Mobil, for example, was slated to pay an out an annual dividend of $3.23, and was priced at roughly $80/share setting the yield at 4.03%. With the 10-year Treasury trading at 2.89%, the higher yield was certainly attractive.
Assuming an individual bought 100 shares at $80 in 2018, “income” of $323 annually would be generated.
Not too shabby.
Fast forward to today with Exxon Mobil trading at roughly $40/share with a current dividend of $3.48/share.
Investment Return (-$4000.00 ) + Dividends of $323 (Yr 1) and $343 (Yr 2) = Net Loss of $3334
That’s not a good investment.
In just a moment, we will come and revisit this example with a better process.
There is another risk, which occurs during “mean reverting” events, that can leave investors stranded, and financially ruined.
Dividend Loss
When things “go wrong,” as they inevitably do, the “dividend” can, and often does, go away.
These companies, and many others, have all recently cut their dividends after a sharp fall in their stock prices.
I previously posted an article discussing the “Fatal Flaws In Your Financial Plan”which, as you can imagine, generated much debate. One of the more interesting rebuttals was the following:
“If a retired person has a portfolio of high-quality dividend growth stocks, the dividends will most likely increase every single year. Even during the stock market crashes of 2002 and 2008, my dividends continued to grow. The total value of the portfolio will indeed fluctuate every year, but that is irrelevant since the retired person is living off his dividends and never selling any shares of stock.
Dividends usually go up even when the stock market goes down.”
This comment is the basis of the “buy and hold” mentality, and many of the most common investing misconceptions.
Let’s start with the notion that “dividends always increase.”
When a recession/market reversion occurs, the “cash dividends” don’t increase, but the “yield” does as prices collapse. However, your INCOME does NOT increase. There is a risk it will decline as companies cut the dividend or eliminate it.
During the 2008 financial crisis, more than 140 companies decreased or eliminated their dividends to shareholders. Yes, many of those companies were major banks; however, leading up to the financial crisis, there were many individuals holding large allocations to banks for the income stream their dividends generated. In hindsight, that was not such a good idea.
But it wasn’t just 2008. It also occurred dot.com bust in 2000. In both periods, while investors lost roughly 50% of their capital, dividends were also cut on average of 12%.
While the current market correction fell almost 30% from its recent peak, what we haven’t seen just yet is the majority of dividend cuts still to come.
Naturally, not EVERY company will cut their dividends. But many did, many will, and in quite a few cases, I would expect dividends to be eliminated entirely to protect cash flows and creditors.
As we warned previously:
“Due to the Federal Reserve’s suppression of interest rates since 2009, investors have piled into dividend yielding equities, regardless of fundamentals, due to the belief ‘there is no alternative.’ The resulting ‘dividend chase’ has pushed valuations of dividend-yielding companies to excessive levels disregarding underlying fundamental weakness.
As with the ‘Nifty Fifty’ heading into the 1970s, the resulting outcome for investors was less than favorable. These periods are not isolated events. There is a high correlation between declines in asset prices, and the dividends paid out.”
Love Dividends, Love Capital More
I agree investors should own companies that pay dividends (as it is a significant portion of long-term total returns), it is also crucial to understand that companies can, and will, cut dividends during periods of financial stress.
It is a good indicator of the strength of the underlying economy. As noted by Political Calculations recently:
Dividend cuts are one of the better near-real-time indicators of the relative health of the U.S. economy. While they slightly lag behind the actual state of the economy, dividend cuts represent one of the simplest indicators to track.
In just one week, beginning 16 March 2020, the number of dividend cuts being announced by U.S. firms spiked sharply upward, transforming 2020-Q1 from a quarter where U.S. firms were apparently performing more strongly than they had in the year-ago quarter of 2019-Q1 into one that all-but-confirms that the U.S. has swung into economic contraction.
Not surprisingly, the economic collapse, which will occur over the next couple of quarters, will lead to a massive round of dividend cuts. While investors lost 30%, or more in many cases, of their capital, they will lose the reason they were clinging on to these companies in the first place.
You Can’t Handle It
EVERY investor has a point, when prices fall far enough, regardless of the dividend being paid, they WILL capitulate, and sell the position. This point generally comes when dividends have been cut, and capital destruction has been maximized.
While individuals suggest they will remain steadfast to their discipline over the long-term, repeated studies show that few individuals actually do. As noted just recently is “Missing The 10-Best Days:”
“As Dalbar regularly points out, individuals always underperform the benchmark index over time by allowing “behaviors” to interfere with their investment discipline. In other words, investors regularly suffer from the ‘buy high/sell low’ syndrome.”
Behavioral biases, specifically the “herding effect”and “loss aversion,” repeatedly leads to poor investment decision-making. In fact, Dalbar is set to release their Investor Report for 2020,and they were kind enough to send me the following graphic for investor performance through 2019. (Pre-Order The Full Report Here)
These differentials in performance can all be directly traced back to two primary factors:
Psychology
Lack of capital
Understanding this, it should come as no surprise during market declines, as losses mount, so does the pressure to “avert further losses” by selling. While it is generally believed dividend-yielding stocks offer protection during bear market declines, we warned previously this time could be different:
“The yield chase has manifested itself also in a massive outperformance of ‘dividend-yielding stocks’ over the broad market index. Investors are taking on excessive credit risk which is driving down yields in bonds, and pushing up valuations in traditionally mature companies to stratospheric levels. During historic market corrections, money has traditionally hidden in these ‘mature dividend yielding’ companies. This time, such rotation may be the equivalent of jumping from the ‘frying pan into the fire.’”
The chart below is the S&P 500 High Dividend Low Volatility ETF versus the S&P 500 Index. During the recent decline, dividend stocks were neither “safe,” nor “low volatility.”
But what about previous “bear markets?” Since most ETF’s didn’t exist before 2000, we can look at the “strategy” with a mutual fund like Fidelity’s Dividend Growth Fund (FDGFX)
As you can see, there is little relative “safety” during a market reversion. The pain of a 38%, 56%, or 30%, loss, can be devastating particularly when the prevailing market sentiment is one of a “can’t lose” environment. Furthermore, when it comes to dividend-yielding stocks, the psychology is no different;a 3-5% yield, and a 30-50% loss of capital, are two VERY different issues.
A Better Way To “Invest For The Dividend”
“Buy and hold” investing, even with dividends and dollar-cost-averaging, will not get you to your financial goals. (Click here for a discussion of chart)
So, what’s the better way to invest for dividends? Let’s go back to our example of Exxon Mobil for a moment. (This is for illustrative purposes only and not a recommendation.)
In 2018, Exxon Mobil broke below its 12-month moving average as the overall market begins to deteriorate.
If you had elected to sell on the break of the moving average, your exit price would have been roughly $70/share. (For argument sake, you stayed out of the position even though XOM traded above and below the average over the next few months.)
Let’s rerun our math from above.
In 2018, an individual bought 100 shares at $80.
In 2019, the individual sold 100 shares at $70.
Investment Return (-$1000.00 ) + Dividends of $323 (Yr 1) and $343 (Yr 2) = Net Loss of $334
Not to bad.
Given the original $8,000 investment has only declined to $7,666, the individual could now buy 200 shares of Exxon Mobil with a dividend of $3.48 and a 9.3% annual yield.
Let’s compare the two strategies.
Buy And Hold: 100 shares bought at $80 with a current yield of 4.35%
Risk Managed: 200 shares bought at $40 with a current yield of 9.3%
Which yield would you rather have in your portfolio?
In the end, we are just human. Despite the best of our intentions, emotional biases inevitably lead to poor investment decision-making. This is why all great investors have strict investment disciplines they follow to reduce the impact of emotions.
I am all for “dividend investment strategies,” in fact, dividends are a primary factor in our equity selection process. However, we also run a risk-managed strategy to ensure we have capital available to buy strong companies when the opportunity presents itself.
The majority of the time, when you hear someone say “I bought it for the dividend,” they are trying to rationalize an investment mistake. However, it is in the rationalization that the “mistake” is compounded over time. One of the most important rules of successful investors is to “cut losers short and let winners run.”
Unfortunately, the rules are REALLY hard to follow. If they were easy, then everyone would be wealthy from investing. They aren’t because investing without a discipline and strategy has horrid consequences.
“This Could Be Devastating” – Amazon, Instacart Workers Plan Strikes Today
As the virus crisis worsens in the US, employees at Amazon and Instacart are planning to strike today.
Amazon workers at a New York fulfillment center are preparing to strike around lunchtime to call attention to the company’s “lack of safety protocols during the COVID-19 pandemic,” reported NBC New York.
The union that represents workers at the Staten Island warehouse claims Amazon is more concerned about profits than the health of its employees:
“All employers need to prioritize the health and safety of their workforce at this time. Unfortunately, Amazon appears to be prioritizing maximizing its enormous profits even over its employees’ safety – and this is unacceptable,” said Stuart Appelbaum, Retail, Wholesale, and Department Store Union (RWDSU) president.
Around 100 employees are expected to strike around noon on Monday outside the Staten Island warehouse. They are demanding the facility be closed for sanitizing. Recently, the e-commerce giant closed a warehouse in Queens after an employee contracted the virus. We noted last week that a total of ten Amazon warehouse employees across the country have tested positive in March. The workers are also requesting all employees at the facility to be compensated during the shutdown.
NBC New York obtained a statement from Amazon:
“Like all businesses grappling with the ongoing coronavirus pandemic, we are working hard to keep employees safe while serving communities and the most vulnerable. We have taken extreme measures to keep people safe, tripling down on deep cleaning, procuring safety supplies that are available, and changing processes to ensure those in our buildings are keeping safe distances. The truth is the vast majority of employees continue to show up and do the heroic work of delivering for customers every day.”
Amazon says that all employees who test positive for COVID-19 will receive pay for two weeks. The warehouse in Staten Island will immediately start temperature checks of employees entering the facility.
Workers for Instacart will also be staging a strike on Monday, demanding hazard pay and increased safety precautions to protect them from the virus. However, the strike will be nationwide.
Instacart’s delivery workers are demanding hazard pay of $5 per order, freehand sanitizer, and disinfecting wipes, and paid sick leave for workers with pre-existing medical conditions.
Companies are soon going to recognize they are nothing without their low-income workers as many are starting to walk off the job due to hazardous health conditions related to the virus.
“This could be devastating.” A number of workers for two delivery service giants, Amazon and Instacart, are preparing to go on strike. They’re demanding added protections from the coronavirus and a boost in pay because of a massive increase in business, @SamBrockNBC reports. pic.twitter.com/6zQpodtCf1
Walking off the job and strikes could be the early beginnings of social unrest forming in the US. The Federation of Red Cross and Red Crescent Societies warned last Friday that riots and protests could hit major Western cities in the next several weeks.
I visited China on a press junket 10 years ago, before Premier Xi Jinping arrived on the scene and ended his country’s brief flirtation with perestroika (“authoritarian deliberation,” in academic parlance). Even during that golden age of openness, Beijing’s autocrats clearly controlled the messaging about everything. Every official at every level of government we met gave the exact same answer to every question, as if reading talking points from a national memo.
China’s talking points now seem to have gone international, if the headlines about its allegedly stellar success in fighting the coronavirus are any indication. The World Health Organization went on a “fact-finding trip” to the country and came back congratulating it on its “unique and unprecedented public health response.” Yale University’s Nicholas Christakis has dubbed Chinese autocrats’ ability to restrict the movement of hundreds of millions of people “deeply impressive.” He added that China’s “collectivist culture and…authoritarian government” had “allowed this enormous, widespread response.” (The Uighurs might have a different point of view.) The New York Times‘ Donald McNeil has praised China’s “enormous success in beating down its epidemic” compared to America’s sluggish response.
But China might not be revealing the full human cost of its totalitarian tactics.
It is clear now that authorities in Wuhan, the town of 11 million where the disease originally broke out, kept denying that human-to-human transmission was happening even after 739 people, including 419 medical staff, had become infected (a claim that the World Health Organization, to its eternal shame, endorsed until mid-January). They closed the live animal market where the disease had originated—without any notice or explanation to the perplexed vendors—and called it a day. The doctor who raised an alarm and tried to warn his international colleagues was booked for “severely disturbing the social order” and put under house arrest. (He died in February from the virus.) The scientists who proved this was a new and serious disease were forced to destroy their samples and branded “rumormongers.” If researchers in other countries had been allowed access to those samples, we might be closer to a cure or a vaccine by now. All of this allowed the disease to spread freely for almost two months in China and beyond.
Had the Chinese authorities been open even three weeks sooner, a study by U.K’s University of Southampton assessed, the number of corornavirus cases could have been reduced by 95 percent and the world may well have been spared a pandemic. Why didn’t they do so? It’s not because they wanted to infect the world, as conspiracy theorists are claiming; it’s not because they have strange culinary habits, as xenophobes are nattering. It’s because the country’s closed system blocked the flow of information and thwarted the spontaneous alarm systems that open societies have.
To be sure, President Donald Trump also initially downplayed the threat. And federal bureaucrats repeatedly blocked the University of Washington’s Helen Chu from pursuing her suspicions that the disease had made an appearance in her state. But Chu, in contrast to the Chinese doctor, has become a national hero, and the Trump administration has been severely criticized for ignoring such early warnings.
This experience will be a lesson for future administrations. But China, unlike America, has a long history of epidemics and yet seems to have learned no lessons at all. Some of the most devastating flu pandemics of the 20th century—such as the Asian flu of 1957, which killed 1.1 million people worldwide and 116,000 in the U.S.—originated in China. More recently, China generated the bird flu and SARS. Yet its first instinct is to shoot the messenger, given that it imprisoned the doctor who raised the alarm during SARS too.
Why do the Chinese rulers keep making the same mistake over and over again? Because authoritarian regimes care about the survival of their people only to the extent that it ensures their own survival. Opening channels for the hoi polloi to communicate creates too many dangerous possibilities for subversion. But the absence of these channels also means that China’s autocracy can use ruthless measures to combat the crisis without fearing public criticism—let alone a revolt—when it so chooses.
And, boy, was it ruthless.
Once Xi woke up to the corona threat, he declared war not so much on the virus as on the Chinese people themselves, using high-tech surveillance and social control to monitor every move, every action. As leaders in other countries pleaded with their people to stay at home and self-quarantine, his Communist authorities moved with lighting speed to lock down 60 million Chinese in the Hubei province—most of who had no idea that an epidemic was brewing, thanks to aggressive censorship. They also mobilized the country’s omnipresent army of monitors to keep tabs on every move of every Hubei resident without any regard for individual privacy or human rights.
They required popular apps like AliPay and WeChat, China’s Venmos, to install software to track users’ movements. China Telecom color-coded phones in traffic-light red, green, and yellow, based on their risk of carrying the virus. This let guards at train station checkpoints know who to let through and who to stop.
Pharmacies were told to take the temperature of anyone who bought cold medicine and notify authorities of the results. Every apartment building and every residential complex implemented something called “closed management.” Using private cars was banned, and residents were barred from leaving the complex without permission, which was given for only a few hours a day to one family member to purchase essentials. Meanwhile, 300,000 “grid workers”—paid employees of the Communist Party and volunteers—patrolled the streets and guarded complexes. Those who didn’t cooperate were promptly reported to the local police.
Local governments outside Hubei offered hundred of dollars in rewards to those who reported returning migrant workers from Wuhan and family members who hosted them. In other words, neighbors were rewarded for snitching on neighbors. More chillingly, authorities reportedly barged into homes, and hauled away sick patients, and put them in quarantine camps. In one eastern province, they barricaded a family that had returned from Wuhan, essentially imprisoning it in its home.
China has dazzled the world by building two hospitals in 10 days and many quarantine shelters by employing (read: conscripting) thousands of people round the clock. As an authoritarian country, China could single-mindedly focus on one goal—containing the spread of the disease. Its primary purpose in building hospitals and quarantine shelters was separating and isolating patients, not necessarily treating them or helping them. (One of those rapidly built quarantine hotels collapsed, killing 10.)
In democratic countries, by contrast, the policy response has focused on both containment and treatment. Even as states have imposed lockdowns or quarantines to flatten the curve, they have also simultaneously tried to boost their treatment capacity to maintain their standards of care.
Over the past few weeks, the world has been horrified by stories from hard-hit Western countries like Italy and Spain about doctors having to do a grim triage to determine whether to save the young or the old, the healthy or those with preexisting conditions. In America, it’s a national scandal that not every patient who needs a ventilator might get one. But in China, the government essentially performed an even grimmer triage with entire towns and provinces. The New York Times‘ Javier Hernandez reports that there is a widespread sense among Wuhan residents that they were sacrificed to save the country.
The Chinese government is trying to tell us that it heroically stopped corona. Instead of falling for it, the world should question the spin. Only when China’s autocrats open themselves to scrutiny—both by a robust domestic press and outside media—will the world have any confidence that they are serious about avoiding the next pandemic. So far, they aren’t offering any cause for optimism.
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As you’ve probably already heard, the US government unleashed a giant tsunami of money on Friday, passing a $2 trillion stimulus bill to help boost the economy during the Covid pandemic.
Let’s put that number in context:
$2 trillion is more than it cost to wage 18+ years of war in Afghanistan and Iraq.
It’s nearly THREE times the size of the bailout from 2008.
It exceeds ALL corporate and individual income tax revenue collected by the IRS last year
We are clearly living in unprecedented times… and that this bailout is equally unprecedented.
Among the bailout’s many provisions (which go on for more than EIGHT HUNDRED pages!) is a whopping $350 billion to the Small Businesses Administration.
The Small Business Administration is ordinarily a tiny federal agency. But this funding exceeds the budgets of the Army and Navy COMBINED. It’s 8x the size of the United States Marine Corps. It’s more than the entire market capitalization of Walmart.
You get the idea. The SBA just became one of the biggest organizations in the world.
Now, in normal times, the SBA’s mission is to help startups and small businesses obtain bank loans; it’s usually pretty difficult for a startup to borrow money from a bank loan because the business is too risky, and banks don’t want to lend.
So the SBA’s role is to provide a guarantee for the loan. They’re essentially telling the bank that if the business fails and doesn’t pay back the loan, the federal government (i.e. American taxpayers) will make up some of the difference.
This guarantee doesn’t make a small business loan risk-free for banks– there are still things that can go wrong. But the guarantee helps reduce the risk.
But typically, in order to receive an SBA guarantee, business owners have to provide their own ‘personal guarantee’ to the government. In other words, if the business owner defaults, the government can seize their assets in order to recover loan losses.
That’s the way SBA loans normally work. But these times are not normal.
According to this new bailout legislation, “no personal guarantee shall be required,” and the government “shall have no recourse against any individual shareholder, member, or partner . . . for nonpayment”.
In other words, the legislation implies that these loans don’t have to be paid back.
Moreover, the law also states that “no collateral shall be required for the covered loan.”
So you don’t even need any assets to qualify. In fact you need barely anything to qualify… except a pulse.
According to the legislation, “any business concern, nonprofit organization, veterans organization, or Tribal business. . . shall be eligible to receive a covered loan” as long as you have fewer than 500 employees.
Honestly the only real requirement is that you have to keep paying your employees. That’s the entire point of the legislation– lawmakers wanted to provide funds so that small businesses could continue paying workers.
The maximum loan amount is equal to your payroll costs over the last 12 months multiplied by 2.5.
*Payroll costs include salaries, wages, and payments paid to employees and independent contractors, including yourself, up to $100,000 each. It also includes medical insurance payments, retirement benefits, state/local tax, and payments for sick leave, family leave, or vacation.
*Payroll costs do NOT include federal income or unemployment tax withholdings, or compensation for employees based outside of the United States.
So if you had, say, $400,000 of qualifying payroll costs over the past year, your maximum loan amount is $1 million.
And the maximum interest rate (according to the legislation) is just 4%.
[If you have a pulse qualifying business and you want free money to apply for a loan, you can do so here: https://covid19relief.sba.gov/]
Now, I’m sure that plenty of people will use these loans as intended– to stay in business, continue paying workers, etc. And eventually they’ll do the honorable thing– pay the loans back, with interest.
But let’s be honest. Countless people are going to completely abuse this. They’ll borrow as much money as they can with absolutely no intention of paying back a single penny.
This means there’s going to be a ton of loan losses.
Remember– banks are the ones who will be making these loans, using their depositors’ money. YOUR money.
And even with the SBA guarantee, there are still things that can go wrong. If the paperwork was wrong, if the loan wasn’t made in the prescribed way, if the business didn’t actually qualify, etc. the banks can still suffer losses.
(Taxpayers will obviously suffer huge losses as well.)
But despite these risks, the legislation specifically tells banks that “a covered loan shall receive a risk weight of zero percent.”
Translation: banks should count these small business loans as ‘risk free’ even though there’s a strong chance that tons of people will never pay them back.
The legislation also says that banks “shall not be required to comply” with accounting rules that require them to disclose when their loans go bad.
So the government is essentially telling banks to make loans to everyone, with no personal guarantee, no recourse, and no collateral… and to maintain these loans on their books as risk free. And even when these loans default, to continue reporting them as risk-free.
What could possibly go wrong???
It’s clearly a great time to be a borrower. That’s one thing we learn from bailouts—they’re always going to take care of people in debt, and help people go into more debt.
But it’s more concerning to be a depositor.
Even with the SBA guarantee, it’s obvious that banks are riskier than they want you to believe.
I visited China on a press junket 10 years ago, before Premier Xi Jinping arrived on the scene and ended his country’s brief flirtation with perestroika (“authoritarian deliberation,” in academic parlance). Even during that golden age of openness, Beijing’s autocrats clearly controlled the messaging about everything. Every official at every level of government we met gave the exact same answer to every question, as if reading talking points from a national memo.
China’s talking points now seem to have gone international, if the headlines about its allegedly stellar success in fighting the coronavirus are any indication. The World Health Organization went on a “fact-finding trip” to the country and came back congratulating it on its “unique and unprecedented public health response.” Yale University’s Nicholas Christakis has dubbed Chinese autocrats’ ability to restrict the movement of hundreds of millions of people “deeply impressive.” He added that China’s “collectivist culture and…authoritarian government” had “allowed this enormous, widespread response.” (The Uighurs might have a different point of view.) The New York Times‘ Donald McNeil has praised China’s “enormous success in beating down its epidemic” compared to America’s sluggish response.
But China might not be revealing the full human cost of its totalitarian tactics.
It is clear now that authorities in Wuhan, the town of 11 million where the disease originally broke out, kept denying that human-to-human transmission was happening even after 739 people, including 419 medical staff, had become infected (a claim that the World Health Organization, to its eternal shame, endorsed until mid-January). They closed the live animal market where the disease had originated—without any notice or explanation to the perplexed vendors—and called it a day. The doctor who raised an alarm and tried to warn his international colleagues was booked for “severely disturbing the social order” and put under house arrest. (He died in February from the virus.) The scientists who proved this was a new and serious disease were forced to destroy their samples and branded “rumormongers.” If researchers in other countries had been allowed access to those samples, we might be closer to a cure or a vaccine by now. All of this allowed the disease to spread freely for almost two months in China and beyond.
Had the Chinese authorities been open even three weeks sooner, a study by U.K’s University of Southampton assessed, the number of corornavirus cases could have been reduced by 95 percent and the world may well have been spared a pandemic. Why didn’t they do so? It’s not because they wanted to infect the world, as conspiracy theorists are claiming; it’s not because they have strange culinary habits, as xenophobes are nattering. It’s because the country’s closed system blocked the flow of information and thwarted the spontaneous alarm systems that open societies have.
To be sure, President Donald Trump also initially downplayed the threat. And federal bureaucrats repeatedly blocked the University of Washington’s Helen Chu from pursuing her suspicions that the disease had made an appearance in her state. But Chu, in contrast to the Chinese doctor, has become a national hero, and the Trump administration has been severely criticized for ignoring such early warnings.
This experience will be a lesson for future administrations. But China, unlike America, has a long history of epidemics and yet seems to have learned no lessons at all. Some of the most devastating flu pandemics of the 20th century—such as the Asian flu of 1957, which killed 1.1 million people worldwide and 116,000 in the U.S.—originated in China. More recently, China generated the bird flu and SARS. Yet its first instinct is to shoot the messenger, given that it imprisoned the doctor who raised the alarm during SARS too.
Why do the Chinese rulers keep making the same mistake over and over again? Because authoritarian regimes care about the survival of their people only to the extent that it ensures their own survival. Opening channels for the hoi polloi to communicate creates too many dangerous possibilities for subversion. But the absence of these channels also means that China’s autocracy can use ruthless measures to combat the crisis without fearing public criticism—let alone a revolt—when it so chooses.
And, boy, was it ruthless.
Once Xi woke up to the corona threat, he declared war not so much on the virus as on the Chinese people themselves, using high-tech surveillance and social control to monitor every move, every action. As leaders in other countries pleaded with their people to stay at home and self-quarantine, his Communist authorities moved with lighting speed to lock down 60 million Chinese in the Hubei province—most of who had no idea that an epidemic was brewing, thanks to aggressive censorship. They also mobilized the country’s omnipresent army of monitors to keep tabs on every move of every Hubei resident without any regard for individual privacy or human rights.
They required popular apps like AliPay and WeChat, China’s Venmos, to install software to track users’ movements. China Telecom color-coded phones in traffic-light red, green, and yellow, based on their risk of carrying the virus. This let guards at train station checkpoints know who to let through and who to stop.
Pharmacies were told to take the temperature of anyone who bought cold medicine and notify authorities of the results. Every apartment building and every residential complex implemented something called “closed management.” Using private cars was banned, and residents were barred from leaving the complex without permission, which was given for only a few hours a day to one family member to purchase essentials. Meanwhile, 300,000 “grid workers”—paid employees of the Communist Party and volunteers—patrolled the streets and guarded complexes. Those who didn’t cooperate were promptly reported to the local police.
Local governments outside Hubei offered hundred of dollars in rewards to those who reported returning migrant workers from Wuhan and family members who hosted them. In other words, neighbors were rewarded for snitching on neighbors. More chillingly, authorities reportedly barged into homes, and hauled away sick patients, and put them in quarantine camps. In one eastern province, they barricaded a family that had returned from Wuhan, essentially imprisoning it in its home.
China has dazzled the world by building two hospitals in 10 days and many quarantine shelters by employing (read: conscripting) thousands of people round the clock. As an authoritarian country, China could single-mindedly focus on one goal—containing the spread of the disease. Its primary purpose in building hospitals and quarantine shelters was separating and isolating patients, not necessarily treating them or helping them. (One of those rapidly built quarantine hotels collapsed, killing 10.)
In democratic countries, by contrast, the policy response has focused on both containment and treatment. Even as states have imposed lockdowns or quarantines to flatten the curve, they have also simultaneously tried to boost their treatment capacity to maintain their standards of care.
Over the past few weeks, the world has been horrified by stories from hard-hit Western countries like Italy and Spain about doctors having to do a grim triage to determine whether to save the young or the old, the healthy or those with preexisting conditions. In America, it’s a national scandal that not every patient who needs a ventilator might get one. But in China, the government essentially performed an even grimmer triage with entire towns and provinces. The New York Times‘ Javier Hernandez reports that there is a widespread sense among Wuhan residents that they were sacrificed to save the country.
The Chinese government is trying to tell us that it heroically stopped corona. Instead of falling for it, the world should question the spin. Only when China’s autocrats open themselves to scrutiny—both by a robust domestic press and outside media—will the world have any confidence that they are serious about avoiding the next pandemic. So far, they aren’t offering any cause for optimism.
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Faced with nationwide closures and an empty release schedule, movie theaters are asking for bailout money. The chief of the theater owner’s lobby pitched it this way: As public gathering places, theaters are uniquely affected by the spread of COVID-19, and also comparatively inexpensive to prop up. The theater industry hasn’t named a dollar figure, but for less than the price of bailing out one airline, you could save the entire theater industry, he told The New York Times. What’s one more airplane brand next to the magic of the silver screen? Besides, people will need someplace to go when it’s all over.
I am a little bit sympathetic to this line of thinking. I rarely fly, but I see movies frequently. Over the course of my life, movie theaters have provided me with thousands of hours of escape, entertainment, and engagement, both by myself and in the company of others. I genuinely believe that theaters, as director Christopher Nolan recently wrote, are a “vital part of social life.”
Still, I have to wonder: Have any of these people seen Bloodshot?
Bloodshot is a PG-13 action film starring Vin Diesel, based on a somewhat obscure comic book from the 1990s, directed by a first-timer with a background in computer animation. If you asked a machine learning program to survey the last several years of theatrical releases and then generate its own by algorithm, it would probably come up with something like this. Bloodshot is very nearly the median Hollywood film.
The movie was initially released in theaters two weeks ago, playing on about 2,800 movie screens domestically. Since then, a few things have changed.
Today, barely any movie theaters are still open in the United States. As a result, many movies that were scheduled to open in the next several months have been delayed until after our viral apocalypse. In the meantime, several recent theatrical releases have found their way to video on demand. Normally this takes months, since theater owners have negotiated an exclusivity period with movie studios. But what’s a theatrical release window when there are no theaters to release into?
That is why, for a mere $19.99, you can now own-to-stream a 4k digital copy of Bloodshot from Amazon, iTunes, and other fine purveyors of high-quality ones and zeroes.
It’s appropriate for a movie about a soldier given a digital rebirth. Diesel plays Ray Garrison, who is resurrected after losing both his wife and his life on a mission abroad. In his reincarnated form, he’s a supersoldier held together by nanites, tiny bio-machines that rapidly heal wounds and give him super strength. Naturally, he seeks revenge, and with the help of a similarly super-powered squad of nano-soldiers, brought together by Dr. Emil Harting, a twitchy scientist played by Guy Pearce, he embarks on a mission to take down the sociopathic Martin Axe (Toby Kebbell), who stole everything from him.
From there, the movie goes roughly where you expect it to go—and then, perhaps, a little further, with a twist that essentially turns into a kind of over-muscled sci-fi action-movie riff on Groundhog Day, albeit without the wit or light-footedness that made Edge of Tomorrow so enjoyable. Connoisseurs of slow-motion punching will no doubt appreciate the many slow-motion punches, along with the reasonably competent action scenes that director David S.F. Wilson builds with them. Generally speaking, you can tell what’s going on, which is high praise for today’s mid-budget action movies.
As Garrison, Diesel spends the movie hulking and glowering in hopes that this will serve as a rough substitute for acting. He has a volcanically low voice that will challenge even the most competent subwoofer, but it’s the only place his character shows signs of depth. You learn more about Garrison from the various performance monitors set up in Dr. Hartin’s lab than from Diesel’s one-note performance. At one point, the camera cuts to a screen purporting to monitor his “brain activity.” It’s low.
In some ways, this is just par for the course for Diesel—an international superstar thanks to the Fast and the Furious franchise, but better understood as B-movie brawn. He has frequently dabbled in modestly budgeted action cheese. This has occasionally produced high-quality results, as in Pitch Black…but it has also occasionally given us movies like The Last Witch Hunter. (With a title like that, one can at least take solace in the hope that there won’t be any sequels.).
Diesel has a predilection for gloomy pulp, the sort of enjoyable trash that’s best enjoyed in a college dorm room around 2 a.m. or as a television matinee on an afternoon spent channel surfing or app browsing. Bloodshot is no exception. It’s a movie that was intended for theaters, and it even briefly surfaced in them. But it works better at home, from the comfort of one’s own couch, probably while keeping a distracted eye on one’s phone. It’s not a movie that needs to be watched so much as one that you wouldn’t mind having on. Bloodshot is not a great movie by any means, but watching it from the comfort of my basement living room, I thought: This is not too bad.
I like movies—especially movies seen in a theater—as much as anyone. I hope our theaters reopen soon. And I genuinely worry that if this pause in theatrical viewing extends long enough, it will ultimately eliminate much of the theatrical experience as we have always known it. But I am also mindful of the potential for salutary effects from this otherwise awful scenario.
It’s true, as the theater owners say, that when this stay-at-home nightmare is over, people will need someplace to go. But no one needs to go out to see a replacement-level actioner like Bloodshot. Perhaps, in our post-viral rebirth, movies like this will more frequently find a fast route to the couch-based viewing where they are best appreciated.
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From Lakewood (N.J.), where there has been a good deal of noncompliance with the ban on gatherings, and police response to such noncompliance (see here and here for past incidents):
Ocean County Prosecutor Bradley D. Billhimer and Lakewood Township Police Chief Gregory Meyer announced that on Sunday, March 29, 2020, Eliezer Silber, 37, and Miriam Silber, 34, both of Lakewood, were charged with five counts of Child Endangerment in violation of N.J.S.A. 9:6-1.
On March 29, 2020, members of the Lakewood Township Police Department were summoned to a residence on Alamitos Drive for a report of a gathering of people blocking the street. This gathering was in violation of Executive Order No. 107 signed by Governor Phil Murphy on March 21, 2020, which bans gatherings of individuals, whether they be at weddings, parties, celebrations, or other social events.
Upon arrival, Officers discovered a gathering of approximately 40-50 people, including children, on the front lawn and in the street in front of the residence. The Officers ordered the crowd to disperse, and made contact with the owners of the residence, Eliezer and Miriam Silber. Eliezer Silber was charged with Violating Any Rule or Regulation Adopted by the Governor in violation of APP.A: 9-49h, as well as Endangering the Welfare of his five children who were at the gathering. Miriam Silber was likewise charged with Endangering the Welfare of her five children. They are both required to appear at a future court date in Ocean County Superior Court.
“As I have previously stated, it is my sworn duty to protect all of the residents of Ocean County. That obligation applies across the board,” stated Prosecutor Billhimer. “My Office will prosecute any individual who defies or breaks the law, State of Emergency or otherwise. Everyone must respect and follow the law,” the Prosecutor stated. “The men & women of the Lakewood Police Department have done an exceptional job in the face of a public health crisis. Their efforts are truly commendable,” Prosecutor Billhimer concluded.
The public and media are reminded that all defendants are innocent until proven guilty beyond a reasonable doubt in a court of law.
Thanks to Larry Seltzer for the pointer.
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If, like me, you’ve received not one but three mailings from the U.S. Census Bureau proclaiming “Your Response Is Required By Law,” you’re probably wondering whether to respond, toss the questionnaire in the trash, or fill it with bogus information. We’re in good company, since about a third of households plan to ignore the census, according to the government itself.
In the past, I’ve filled in preposterous answers, then repeated them with a straight face when a harried-looking census field worker knocked on my door (that’s a pleasure I’ll miss this year, with in-person interviews suspended). It’s good fun, it denies potentially dangerous information to a government agency that has a history of misusing the data it collects and, if repeated far and wide, it might spur nosy bureaucrats to try something less intrusive.
Less intrusive would be nice. Census questions, you may have noticed, go a bit beyond the simple head count authorized by the Constitution. Article 1, Section 2 of the Constitution specifies an “actual Enumeration … within every subsequent Term of ten Years, in such Manner as they shall by Law direct.”
There’s nothing in there about demanding names, the types of our homes, the nature of our relationships with the people with whom we live, our ethnicity, or the details of our finances (if you were unlucky enough to get the old long form or the modern American Community Survey). That’s all just bureaucratic curiosity.
Our answers are supposed to be confidential.
“The Census Bureau cannot release any identifiable information about you, your home, or your business, even to law enforcement agencies. The law ensures that your private data is protected and that your answers cannot be used against you by any government agency or court,” the Census Bureau website assures us.
If only that were true. In reality, laws change, and governments use information however they please once they have it—sometimes in nasty ways.
“Despite decades of denials, government records confirm that the U.S. Census Bureau provided the U.S. Secret Service with names and addresses of Japanese-Americans during World War II,” Scientific Americanreported in 2007. “The Census Bureau surveys the population every decade with detailed questionnaires but is barred by law from revealing data that could be linked to specific individuals. The Second War Powers Act of 1942 temporarily repealed that protection to assist in the roundup of Japanese-Americans for imprisonment in internment camps in California and six other states during the war.”
More recently, “the Census Bureau provided neighborhood data on Arab-Americans to the U.S. Department of Homeland Security in 2002,” the article added.
So when the Census Bureau frets that “fewer than seven in ten householders said they intend to fill out the census form,” with many Americans citing “privacy concerns, fear of repercussions, and general distrust of government,” you’re looking at self-inflicted wounds. The Census Bureau worked hard to earn that distrust.
Fortunately, there’s a game plan for dealing with a hostile population that refuses to answer nosy questions posed by government workers. Even before the U.S. Census Bureau alienated the public, its Dutch counterpart, Statistics Netherlands, managed to do the same. As a result, people stopped responding and the Dutch government had to find a solution.
“The last traditional census in the Netherlands, in 1971, met with many privacy objections against the collection of integral information about the population living in the Netherlands,” according to Eric Schulte Nordholt of Statistics Netherlands, writing in 2015. “This increased the non-response problem, and non-response was expected to be even higher if another traditional census were to be held in the Netherlands.”
With questionnaires increasingly ignored, Statistics Netherlands stopped bugging people and switched to using publicly available data along with samples and statistical adjustments.
While head counts in the Netherlands are now less intrusive than the old census, not everything the Dutch do translates to the American context. Statistics Netherlands relies on standardized population registers that don’t exist in the United States, and would be difficult—justifiably so, I think—to impose on a mobile and distrustful population. People worried about the abuse of data collected every 10 years aren’t going to want to continuously update their whereabouts with Big Brother.
But government has plenty of information on us as it is, from its own records and from private sources. The Census Bureau is already considering “starting the 2030 Census with an ‘in-office’ enumeration of the population using existing government administrative records,” reveals a 2016 report. Between Social Security and the Internal Revenue Service, 90 percent or more “of the U.S. population could be located.”
The Census Bureau would then fill in the gaps as needed. That approach may turn out to be more accurate than a traditional census faced with growing noncompliance and deliberately misleading responses.
As for the interesting questions about finances, ethnicity, and plumbing that the Census Bureau likes to add to the authorized tally… I could point out that the government is only supposed to count us, not interrogate us. But the Census Bureau concedes that most of the information it wants exists in government records, if only it would look.
Figuring out how many Americans there are based on existing administrative records may not only be more accurate than the old-style census, it would likely be a lot cheaper.
“A register-based census costing less than 1 percent of a traditional census is not exceptional,” points out Nordholt of Statistics Netherlands. “A traditional census in the Netherlands would cost a few hundred million euros, while with this method it costs ‘only’ around 1.4 million euros.”
Elsewhere, Statistics Netherlands reveals that the total staff required for the 2011 census was 15 people.
A national head-count based on administrative records would not only be less intrusive, cheaper, and closer to constitutional intent than old-style questionnaires; it would also be safer. Census workers would never again have to go door-to-door in a world that will probably retain concerns about contagion even after the COVID-19 pandemic passes.
Was the guy at the last house coughing because he was sick or just to needle an unwelcome visitor? That won’t be a concern for bureaucrats working desks rather than pounding pavement.
So, if you’re worried at all, toss away that census form or fill it with nonsense with a clear conscience. You’re helping to push the feds to count us in a less annoying way.
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