The PPP Bubble!

With everything else going on during the Covid-19 crisis, it's been easy to miss what might be one of the biggest financial consequences of Trump's mismanagement: the financial bubble caused by the government's Paycheck Protection Program, or PPP.

The PPP was formed as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to help businesses cover payroll and other expenses while customers self-quarantine at home. So long as certain criteria are met regarding how the money is spent - 75% percent of it on payroll, for instance - the loan would be completely forgiven.

Sounds great, right? Certainly some of it has worked. It's the main reason May's job report showed an employment rate which was much higher than expected. Employees who were furloughed, but still got a paycheck through PPP loans, were listed as "employed," even though they were actually laid off. That looked great for Trump's numbers, at least temporarily. Isn't that a good thing?

Not so fast! Because the loans are not being administered by the government! They are being administered by private banks! The Trump administration, which hates government bureaucracy, made sure that these loans would not add to the government's paperwork. So PPP loans got funneled through private banks instead, which actually issue the loan. The banks handle the application process, the banks pay the money, and the banks receive the loan forgiveness money - IF the applicant meets the criteria.

But will the small business meet the criteria? That's the catch! The banks have not been forthcoming about what the requirements are for such forgiveness! They've been very helpful with getting small businesses to apply for the loan. They've been very ready to get the funds into the hands of the small businesses, themselves. But they have not been very good at all about informing the businesses about what they need to do in order to have the loan forgiven.

There's a specific reason for that. If the criteria are not met for loan forgiveness, the bank has the power to demand that the loan be repaid - at interest!

Surprise! That money wasn't free! You OWE it!

And, of course, the bank makes a tidy profit every time one of these loans fails to meet the criteria.

Holy shit, right? How could this story not be one of the biggest? Because, as usual, it bets bogged down in the details. It's not sexy. But it has the potential to bring down the economy yet again. After suffering the initial blow of the first coronavirus wave, and now currently experiencing the second, the PPP loan bubble bursting has the potential to hit our economy with a THIRD shock-wave!

And this shock-wave could very easily hit in October! How's that for an October surprise?

Some people on Capitol Hill have spotted this problem, and even acted on it. To help prevent the bubble, Congress passed the Paycheck Protection Flexibility Act, which the president signed into law back in early June. It loosens the requirements for loan forgiveness. So, for example, only 60% of the money needs to be used for payroll, and businesses have 24 weeks to spend the money instead of the original eight weeks.

But did it go far enough? Probably not, because most small businesses aren't even being made aware of what the criteria is! Loosening the criteria might mean a few more businesses meet that criteria, but it doesn't guarantee that they know what pitfalls to watch out for! And, I should also point out, 24 weeks is six months. Since most PPP loans were applied for in late April, that means most loans that fail to meet criteria will get hit with this new debt in late October!

Right. Before. The. Election!

Did I say holy shit? I meant to say holy FUCKING shit!

I became aware of this huge problem during my prolonged job hunt this past April and May. Like many people, I found myself out of work due to the Covid-19 crisis, and tried to quickly bounce back. (Normally, in such circumstances, I take work whenever and however I can to bridge the gap in my income until I find more permanent work, but this time, my wife begged me to stay home and take unemployment benefits instead. She couldn't stand the thought of me exposing myself to Covid-19 by driving groceries for Shipt or delivering pizzas.) By late June, I had some interesting job prospects on the line, and one of them was with a small accounting firm which liked my experience and expertise with Quickbooks. While interviewing at this firm, the wizened, old accountant quizzed me about various things.

"What do you know about PPP loans?" he asked.

"Not much," I admitted. "I haven't had time to research it, yet."

"Well, they're a big deal," he told me. "These small business owners aren't being told what they need to do to qualify for loan forgiveness." And then he described to me just how the application process was being pushed so quickly, but how small businesses were falling for it left and right.

"But why wouldn't they be told about this?" I asked.

"Because the banks don't want them to know about it," he answered.

"The banks?"

"Oh, yes. These loans don't come directly from the government. So the banks only ask, 'Do you qualify?' and if the answer is 'yes,' they say, 'Sign here!'"

And that's when the penny dropped, and I understood. Since private banks were administering the loans, they had a vested interest in small businesses being fooled into spending their money in a way which disqualified them for forgiveness. That way the banks could demand a payment plan, and, of course, interest on that payment plan!

Lemming? Meet cliff.

I think I said something like, "That's cold!"

"Yes it is," he agreed. And then he went on to describe how his was one of the few accounting firms which tried to help its clients avoid these types of financial traps. "I want someone who will help me guide these businesses to better decisions for their money," he said. And he pointed out how other accounting firms who did this sort of thing tended to charge far more for their services.

I admire him, I really do. But his quixotic campaign to save small business owners from themselves was one of the reasons I opted not to take the job, and go with my current employer instead. One, lone accounting firm, working itself to death against the riptide of unscrupulous banks did not sound like the sort of job that would last very long.

Sort of like the jobs that won't last long when these PPP loans come due right before the election.

I seldom say this, but if you believe in a god, now might be a good time to pray.


Eric

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