Big business is getting 92% of this stimulus portion. You would think that this would be enough tax payer backed money for wall street, but they also stand to profit off of your new SBA backed loan.

Before I explain why, I need to provide some brief context to the CARES package SBA loans.

There was a lot of pressure on small businesses to apply as quickly as possible. Viral videos like this one illustrated this urgency so well:

"Divide $10 billion by $10,000 and that is 1 million applicants for $30 million small businesses."

Two of the most appealing factors of the small business portion of the stimulus package were the loan forgiveness options and a forgivable 3 day $10,000 emergency loan advance. After the bill was passed, business owners quickly realized that accessing these features would not be as easy as promised.

It turned out that the $10,000 forgivable loan advance would not take 3 days. The approval process took anywhere from 2 weeks to a month. It was later revealed that the 10 grand was not guaranteed but instead would be $1,000 per employee up to a total of $10,000. This outraged businesses and even prompted a lawsuit.

To add to the confusion, the forgivable emergency advance was separate from the forgivable loan. This means that any amount not requested in the advance would be charged 3.75% interest on a 30 year loan.

It was also was later revealed that 75% of the forgivable portion would need to consist of payroll expenses. This along with many other rules and guidelines were not communicated clearly by the SBA and the banks servicing these loans. Reading through the Small Business reddit thread showed just how frustrated small business owners were over this rollout.

For more information on these loans, we complied a list of resources here.

The banks are just the first in a whole chain of individuals and institutions who will be able to profit from these loans intended for struggling small businesses.

And the dot that most people don't seem to be connecting is that these well connected financial firms with lobbying influence profit more from SBA loans with higher interest rates and less loan forgiveness. So whether this was intended or not, these lobbyists have more to gain on the confusion around the SBA loan rollouts.

In order to reveal the chain of third party beneficiaries, we need to dig through a convoluted alphabet soup of federal programs and financial terms. It is intended to make your eyes bleed for a purpose. It is the reason why lobbying groups like the American Investment Council never make any headlines. Or the the reason no one is concerned that one of the lobbying financial firms, Blackstone has a long history with the primary beneficiary of corporate bond bailouts, Black Rock.

If mass ignorance and confusion is the instrument of power for the ultra rich, then informing our selves is how we stand against them.

We may not have the power to write laws, but we can elect officials that campaign to remove this kind of lobbying. We can also use this information to have a more informed conversation with our bank when applying for loans.

In order to understand this chain of beneficiaries, we need to start with a remnant from the 2008 financial crisis.

The SPV is an ingenious accounting trick that allows the Fed to add risky credit assets to its balance sheet. Through this sleight of hand, banks and investors get easy money as everyone else scrambles through the chaos and confusion of the small loans and unemployment benefits.

To understand this sleight of hand, you need a little context first.

In 2008, the Fed knew that it would need to bail out more than just the big banks. The way they traditionally pumped liquidity back into a faltering economy was through purchasing treasury bills.

Treasury bills are essentially an IOU from the government. 

There is a reason why this kind of open market transaction is called printing money. The Fed purchases these treasury bills just by digitally-punching a few zeros to the end of their balance sheet. The bills turn into liquid cash for the banks and they begin lending again. All of this is permitted because the US government does not run the risk of default.

You may be asking why the Fed is concerned about defaults when it can just print more money. In order for the Fed to maintain its influence on the economy, it needs to have both inflationary powers and deflationary powers. If the Fed adds a few zeros to save the economy from the collapse of liquidity, it also needs to be able to subtract those zeros in order to save it from a run of too much liquidity and hyperinflation.

So ideally, when a treasury bill purchased by the Fed is paid back, that money just disappears, restoring balance to the economy.

When the Fed saw that buying all of the bank’s treasury bills wouldn’t provide enough liquidity to save the economy in 2008, they created a loophole to this rule. They created the SPV to make the purchase of the riskier assets on their behalf.

The SPV is a third party enlisted by the Fed to buy and sell assets that no one else is wanting to touch. The lucky winner in 2020 is the investment firm Black Rock.

How this works

This opens the door to a flood of investors rushing to Black Rock for risk-free money. We can already see the opportunistic glee expressed by firms like Man GLG. The risky corporate bond market that was already inflated to historic levels of $9 trillion is bullish once again.

Now there is a whole slew of SPVs set up by the Fed to address the COVID-19 financial crisis. The one with a vested interest in newly issued SBA loans is called Term Asset-Backed Securities Lending Facility (TALF).

I know it is another mouth full, but bear with me as we take some time to define these terms.

The stated intent of TALF is not as insidious as I am making it sound. The goal is to provide liquidity to consumer loans like auto loans, student loans, and small business loans.

The Term Asset-Backed Securities Lending Facility does this through buying and selling Asset-Backed Securities (ABS).

A bank takes a series of assets like SBA and auto loans, mixes the good credit ratings with the bad into a security that can be bought and sold for profit. Here is what the ABS credit exposure can consist of:

• Auto loans and leases
• Student loans
• Credit card receivables (both consumer and corporate)
• Equipment loans
• Floorplan loans
• Insurance premium finance loans
• Certain small business loans that are guaranteed by the Small Business Administration; or
• Eligible servicing advance receivables.

This video from Investopedia does a great job explaining this:

So let’s take a second to recap. The Fed lends money to the SPV. In this case the SPV buys the ABS from the Banks. The Treasury secures these assets so that they can be sold on a non-recourse basis.

Remember that non-recourse means that the investment uses tax payer dollars to protect the investor from any loss if the loan defaults.

The SPV then sells the federally backed ABS to a private equity firm like Blackstone.

Banks and investors made historic gains from buying and selling similar packaged mortgage-backed securities in 2007-2008. The rush of liquidity mixed with a blind eye to risk inflated housing prices to unsustainable levels and ultimately tanked the market.

TALF provides this sort of speculative instrument to banks and investors but instead guarantees profits with taxpayer dollars.

Now the argument is that securing the Asset-Back Securities provides liquidity not otherwise available to consumers. It contributes to the much-needed grease to the halted COVID-19 economy.

It is reasonable to argue that there is nothing wrong with profiting off of someone else’s success; however, it is not reasonable when you share none of the risks and your borrower is responsible for all of the interest and risk.

The unfortunate reality to all of this is that the more credit you are exposed to through your CARES Act SBA loans, the more attractive and profitable your loan will be in an ABS. Here is the full chain of profiters from these loans:

Banks

Banks will be quicker to approve the application and turn the loan into quick cash by selling it to the SPV.

The SPV

The SPV will then make money charging transaction fees by selling the ABS to an investor.

The Investor

That investor will either make money from the interest paid (the yield) or break-even if if the loan defaults. 

Reddit threads and busy or unresponsive bank phone lines demonstrated how confused and frustrated people were over this process. It is in incredibly hard for businesses to plan when it is unclear how long these lockdowns will last and how the economy will respond when this is over. The more people that requested the maximum loan amounts without taking the time to untangle the confusion, the more profit banks and investors will be able to make.  

These institutions are profiting off of the CARES Stimulus with close to no effort, while small businesses are struggling to stay afloat and meet their loan forgiveness requirements. 

Once Congress provides more funds for these loans, it is important that applicants carefully review their finances to determine how much credit they can be exposed to. A major component of this is understanding the forgiveness requirements and how to use the PPP and EIDL loans together.

We need to make sure this information reaches all applicants and the electorate so that these SBA Loan yields are not exploited by outside investors. If the government's objective is to pump liquidity to struggling businesses, then we should hold them accountable to that goal. They should not be using that money to fill the pockets of the ultra rich.