Banks will make out with $18 billion in fees for processing small business Paycheck Protection Program relief loans during the pandemic, according to calculations by Amanda Fischer, policy director at the Washington Center for Equitable Growth, a progressive economic think tank.
That’s money taken directly out of the overall $640 billion pot of funding Congress allocated to the program it created as part of the CARES Act. “If we did it through a public institution, there would be [more than] $140 billion left,” Fischer noted, as opposed to the $130 billion still up for grabs. The Washington Center for Equitable Growth is releasing an analysis of the government response to the pandemic as soon as this week.
The fees compensate the banks for some of the costs that come with processing loans — call center time to handle business owners’ questions, employee hours spent on processing paperwork for both loan and forgiveness applications — and some of the risk they shoulder if any of the loans they extend end up being fraudulent. But there is no credit risk; if business owners who qualified for PPP loans later default, the Small Business Association takes the hit, not the banks. “Basically it’s free money,” Fischer said.
For some banks, this money represents a hefty windfall. New Jersey-based Cross River Bank’s estimated $163 million haul would be more than double its net revenue last year. JPMorgan Chase could make $864 million.
The fact that banks are siphoning money off of the relief program is thanks to the fact that the United States had no existing public infrastructure ready to quickly get money out to struggling businesses when the pandemic hit. Fischer characterized it as “a failure of preparedness,” adding, “We should have invested in better systems.” The Small Business Association, which is running the PPP program, has long been criticized for struggling to process emergency relief quickly during past natural disasters. So when the time came to respond to the coronavirus crisis as fast as possible, the SBA was in no position to do it itself, and Congress mandated that the loans be run through banks instead. There weren’t many other options. “It’s hard to build the plane while you’re flying it,” Fischer said.
But on top of the fact that the program leaked money to banks, relying on these firms meant an uneven distribution of funds. One study found that areas served by the country’s four largest banks — JPMorgan Chase, Wells Fargo, Citibank, and Bank of America — underperformed in terms of how many businesses got PPP funding. On the flip side, another found that places with large numbers of mid-sized and community banks saw more businesses get PPP loans. That meant that whether a small business received the money it needed to stay afloat depended in large part on the composition of financial institutions in its area. “That’s a really perverse outcome,” Fischer said.
The other major business relief program, the Federal Reserve’s Main Street Lending Program, is also being run through private Wall Street firms. The Fed contracted with asset management firms BlackRock and Pimco to help it purchase hundreds of billions of dollars worth of commercial bonds and short-term borrowings to shore up mid-sized companies, doing so without soliciting bids from any other firms.
“This is another example where, theoretically, it could have been done in-house,” Fischer said. She notes that the Fed has 23,000 employees, some of whom could have been deployed to purchase investments for the Fed themselves. Instead, advocates are warning of vast conflicts of interest in having BlackRock and Pimco do it, as both firms are also shareholders or bondholders in many of the companies from which they may buy investments at the behest of the Federal Reserve. BlackRock can even purchase its own exchange-traded funds. Financial reform advocates have also warned that BlackRock could use inside information from the Federal Reserve to make its own proprietary trades.
BlackRock stands to make as much as $40 million a year from the program through the fees it will charge for setting up the program and on each bond or loan it purchases. Still, that’s not a huge windfall for a firm that manages trillions of dollars in assets. What Fischer sees it accruing is, instead, power. “I imagine [BlackRock CEO] Larry Fink has [Federal Reserve Chair] Jay Powell on speed dial,” she said. “If the Fed needs to rely on you to stabilize the entire economy, then there’s not a lot of room for them to push back and regulate you rein in your conduct in other circumstances.”
Instead of using such a privatized system, governments of other European countries have just directly paid companies for their payroll costs to keep them from firing employees. The approach dampened skyrocketing unemployment numbers in the beginning of the crisis. In Denmark, businesses simply applied for money directly from the government’s Danish Business Authority. “They had the capacity to just, in-house, accept all the applications … and get money to small businesses in a time-effective way,” Fischer noted. “The SBA could never do that.” But if the SBA had already been well-funded and organized, and if it had relationships with the Internal Revenue Service or payroll processing companies, it could have played a similar role.
Fischer noted that there has been little public outrage over the fact that banks skimmed PPP money in the form of fees, whether or not it was authorized. Instead, outrage has been directed at companies and people that received PPP loans but don’t appear deserving, or the IRS sending stimulus checks to dead people. The $18 billion captured by banks “is technically above board,” she noted. “But it’s a much bigger grift than some elderly person getting a check because their spouse died three months ago.”