When 74-year-old President Donald Trump signed the unprecedented $2.2 trillion CARES Act March 27, there were already rumbling about potential fraud in the Payroll Protection Program [PPP], designed to help small businesses pay overhead, including payroll, rent, utilities, etc. When program ran out of cash, spending $320 billion in two weeks, it raised some red flags that the government loans went to greedy, not the needy. Reports of publicly traded companies like ShakeShack taking millions out of the program raised eyebrows. On closer inspection, 67-year-old Transportation Secretary Elaine Chow’s family business, Foremost Maritime Shipping, received up to $6.6 million. Chow’s married to 78-year-old Senate Majority Leader Mitch McConnell (R-Ky.), getting the attention of the Justice Department. Numerous publicly traded companies also took cash from the PPP.
Small businesses complained that the PPP ran out of cash, leaving many sole proprietorships to close their doors. Congress allocated some $320 billion the PPP to aid small businesses in making payrolls, allowing borrowers to have their loans forgiven if they used the cash for paying basic overhead. Deputy Asst. Atty. Gen. Brian Benczkowski, head of the criminal division, said he’s starting to look a startling fraud in the PPP program, not only with large publicly traded companies but also small businesses that overstated their employees and operating expenses. “There are unfortunately businesses that are sending in loan applications for large amounts of money that are overstating their payroll costs, overstating the number of employees they’ve had, overstating the nature of their businesses,” Benczkowski said. Congress is busy working on a second multi-trillion dollar bailout.
Federal Reserve Board Chairman Jerome Powell clearly anticipated devastation to the U.S. economy, cutting the Federal Funds Rate to zero March 15, 2020. Powell admitted that the Fed, in his lifetime, has never dealt with a global pandemic, something not seen in the U.S. since the 1918 Spanish Flu plague. Powell ordinarily has some sense what it will take to revive the economy, but called on the White House and Congress to do its part to pass more stimulus. Passing the CARES Act was a good first step but obviously not enough, giving the continued shelter in place orders, preventing many businesses from reopening. Many businesses reopened only to close down again, prompting more economic distress to small, medium and large-sized businesses. Whatever fraud the Justice Department finds, many businesses were left out completely when the cash ran out.
Benczkowski said when so much cash was available for distribution, it was inevitable that some fraud would take place. “Whenever there’s a trillion out on the street that quickly, the fraudsters are going to come out of the woodwork in an attempt to get access to that money.” When the next bailout happens, more controls need to be in place to assure that small businesses don’t get aced out of the program. No one denies that large cap businesses like restaurants, airlines, hotel chains, cruise lines, etc., need PPP help, it’s also true that may publicly traded businesses do not need government help. When national chains like Ruth Chris Steakhouse, T.G.I. Fridays, Shake Shack, P.F. Changs and Fiesta Group took millions in PPP, it prompted a backlash in Congress and elsewhere. Small business, like neighborhood laundromats, dry cleaners, nail parlors, hair salons and barbershops couldn’t get loans.
Treasury Secretary Steve Mnuchin asked businesses that didn’t need the money to return the cash or face audits. Businesses borrowing money from PPP wanted loans converted eventually into government grants, something that happens when the cash was used to pay appropriate overhead. “The owners should be apologizing that they took this, not just giving the money back,” Mnuchin said. AutoNation, the nation’s largest car dealership chain, took $80 million from the PPP program, now embarrassed that they must return the money. While the car market, like all markets, are affected by the Covid-19 recession, cars continue to sell, even while things get worse economically. When bankruptcies, foreclosures and more unemployment kicks in, AutoNation and CarMax may need funds from the next bailout, expected at end of July. It’s going to be a mammoth task auditing the PPP program.
No one knows for the exact amount of the next bailout bill, somewhere close to the $2.2 trillion CARES Act. But GOP lawmakers are growing nervous about the mushrooming federal debt now a $26,571,303 trillion, requiring $3,828,897 trillion in interest payment to the Federal Reserve. If interest rates rise beyond their zero-to-quarter percent rate, interest payments could bankrupt the U.S. economy. When the federal budget deficit hit $1.4 trillion Nov. 6, 2009, it looked like the protracted recession at the height of the 2008 Financial Crisis. With today’s budget deficit at $2,806 trillion, over double the previous record, the Fed knows that it can’t keep bailing out the economy. Whatever happens in the next bailout legislation, more safety checks must be in place to prevent well-heeled companies from taking precious cash away from small businesses. No amount of government auditing can stop the waste, fraud and mismanagement in the next bailout.
