Large businesses received the bulk of PPP loans for coronavirus relief during the first tranche of stimulus, causing an uproar from small business owners. Neil Barofsky, Former TARP Special inspector General and Jenner & Block Partner joins Yahoo Finance’s On The Move to weigh in on the state of PPP loans.
We also want to bring in Julia La Roche. Let me start, though, with you, Neil, with this. You said in a recent column that this time, the stakes are even higher than they were during the great financial collapse, regarding taxpayer funds. And you say that the legislation was flawed that set up the PPP. Can you help us understand what that means and where we're going?
So just by sheer numbers, the stakes are higher. The dollar amounts are higher as well. And the legislation that created the PPP, it created these bad incentives. And so what we saw during the initial rollout was that the money wasn't going-- to use the term used earlier, it wasn't a level playing field. It wasn't going to all businesses, big or small, within the definition of small business equally. It was really tilted towards the larger, more established business, who gobbled up a lot of those funds.
And when the funds ran out, there was a lot of mom and pop smaller businesses that we think of when we think of small businesses when we think of Main Street that were left waiting. And the legislation was part of the reason why.
NEIL BAROFSKY: Well, I think the biggest solution, just to start with the last part of your question, is more money, right? And so one of the reasons why the PPP program got off to such a poor start and there was such an imbalance as to where the money was going is that there just wasn't enough money in the program.
And so when you have that, when you have a lot of demand and scarce supply, and you depend on the banks to distribute the money, because again, it was the banks were making decisions as to who gets the loans and where different players are, where do they stand in line or even if they get in line at all.
And so when you set up a program like that, where the incentives are for the banks to favor their existing customers, their most established and profitable customers for a bunch of reasons that are baked into the statute and including the documentation, the underwriting, and the fee structure.
And so when you do that, not surprisingly, in a world of limited resources, the money went where the incentives drove them, which was to their bigger, more established clients, leaving the smaller businesses to the side.
Now the good news is we've got another slug of funds. And that seems to be help making it a little bit more equitable, although there still is a lot of demand out there that might not be met. But the question is, is that this program was opened up more than a month ago. And if by the time it gets to the smaller businesses that so desperately need it, where some of the bigger companies, which maybe need it but not as immediately. Those small businesses could be gone forever because of the way this thing was structured.
And so we're going to probably have to put even more money into this program for it to finally have impact. But because of the inefficiencies, because of the way it was created, the question is, will it be too little, too late? And the bigger picture there is that you have another government program similar to the ones in 2008, 2009, where the big guys they're taking care of, and those on Main Street get left behind.
And that just fuels a lot of anger and resentment that we're just beginning to see, but is reminiscent of that post-crisis anger that we saw in Occupy Wall Street and in the Tea Party. And that's my real concern here.
JULIE HYMAN: So Neil, as you point out-- it's Julie here-- the banks are not philanthropic organizations, right? They are profit making operations, profit prioritization operations, one could say. So what does an incentive look like for the banks to do this differently?
Or should this not be funneled through the banks at all? Should it be funneled more directly through the government? The SBA has been overwhelmed also, and its process has not been terribly efficient. So what does a proper incentive system look like?
NEIL BAROFSKY: Well, I think it could have been done differently, right? It could have been directed through the IRS, that it's certainly a possibility. But there's sort of no point in going back to that. That genie is out of the bottle.
I think on the front end, it would have just been addressing the incentives, understanding and recognizing that if you don't give incentives to banks, or whoever it is that are distributing your funds, to act in a way consistent with your policy, then the profit motive is going to take over, as-- and look, of course, it should. So it could have been things like they could have changed the fee structure.
JULIE HYMAN: But is it too late to fix it, do you think? I mean, if they do inevitably have to add more money to it, is there also a way to structure it better at this point?
NEIL BAROFSKY: No, I think addressing the fee structure is one way. Making the banks preserve a certain number of the amount of money or loans to truly smaller businesses, say, with fewer than 100 or 50. But really, at this point, the best thing to do is just make sure it's adequately funded. Because most of the big guys will be taken care of already, and it's really just a race now to get the funds to the small businesses that might otherwise not survive.
And so I think, you know, in the initial, it was important to get it right. We didn't get it right. It created this real sense of inequity. Now, it really should be-- the priority should be on making sure it's adequately funded so that the money can get to all the businesses, not just the big guys who are in the front of the line.
JULIA LA ROCHE: Neil, I want to go back to something you said that caught my attention, and it kind of took me aback. You were talking about anger. You took us back to Occupy Wall Street. We do remember that Zuccotti Park occupation, the Tea Party movement. You're talking about potentially something even bigger than that, even more ire. I was wondering if you could kind of unpack that scenario for us.
NEIL BAROFSKY: Well, I think when we're looking at the PPP program, we should remember this is early innings of the total stimulus that's involved, right? We saw some money that went out to individuals with the direct deposit, some support of unemployment. And we saw the PPP for small businesses.
But there's still trillions more to come, particularly in the Treasury and Federal Reserve programs. And what we've seen so far is a disturbing pattern of a real slant where the biggest, the biggest companies, most profitable companies, are getting the support, and the smaller businesses, the individuals, are left behind. That's exactly what happened in 2008 and 2009 with the TARP bailout. The big banks, the big companies got taken care of. The little guys who were also supposed to be helped got left behind.
And so my concern is now we've seen some problems with the PPP, and now we have these Federal Reserve programs and what is going to happen to the true Main Street businesses. You know, we're not really worried about the big companies. They're going to get taken care of. They always do.
And if we see a repeat of 2008 and 2009 where it's individuals, then it was the struggling homeowners who got left behind. If it's small businesses that get left behind where the biggest companies return to printing huge profits, you're going to see those same levels of anger and unfairness and inequity.
And here, you know, part of the reason why it might be worse is it's not just the economic impact, but people are sick, people are dying. And if we start seeing unequal treatment in the medical community, [AUDIO OUT] do have a second or third wave. You know, what all that's going to look like is people get down to their last penny and their last cents. It is a really volatile situation.
And, you know, we haven't seen the mass protests yet because people are inside. They're home. But if this anger is not addressed and we don't see a level playing field, I do fear for what the consequences are going to be.
BRIAN CHEUNG: Neil, it's Brian Cheung here. I want to tap into your experience as an inspector general in that role and how you think transparency plays into this whole process. The CARES Act does have an oversight commission. I think it's Bharat Ramamurti who is going to be heading that.
Then the Federal Reserve, for their part, you mentioned their liquidity facilities. They just announced a few weeks ago that they would be transparently offering details on the loans, the borrowers themselves, and the terms of those loans that it will be offering through its facilities. Do you think that's enough so far, and do you worry that, you know, maybe there are some other areas where the government can be more transparent about what they're doing here?
NEIL BAROFSKY: Well, I think it's pretty unbelievable that the government hasn't committed to making all the recipients transparent on the PPP program, who all the borrowers are. They will. They almost will have to. I mean, you can't have the Federal Reserve disclosing borrowers in one program and the SBA and Treasury not disclosing the borrowers in the PPP program.
And, you know, there's really no rationale for it, other than they're disturbed to see what, you know, that the news might not be so good. The political aspects of it might not be so good. But this is taxpayer money. And it was true in 2008 and 2009 and it's true today that we are funding these programs. We have a right to understand exactly what's going on in them. And so I think there does need to be more transparency.
I think also there's going to need to be more transparency about the decision making process. What programs were selected? How were different programs designed or intended to address different sectors of industry? And that's where the oversight functions become so important.
And so you mentioned the congressional oversight committee. It still doesn't have a chair. I mean, it's unbelievable that here we are in early May and we still don't have a chair. We're finally getting a confirmation hearing today for a new special inspector general for pandemic recovery, sort of the equivalent of my old job back in the bank ballot. He's having his confirmation hearing today finally. But who knows how long that will take before that office is up and running?
There is another oversight body called the PRAC, and if you may remember, this is when Donald Trump fired the chair of it a few weeks ago or almost a month ago. And we still don't have a new chair. And so we're not going to get that transparency and accountability if the oversight functions that Congress set up are not up and running and up and running quickly. And for some of these things, it's just inexcusable that we don't have those oversight provisions in place.
ADAM SHAPIRO: Neil Barofsky has been on the front lines before. We appreciate your insight here on Yahoo Finance. The former TARP Special Inspector General, now a partner at Jenner and Block, we appreciate your comment.