Mr. Trump’s failed covenant light economy…
Workers across America have taken a powerful hit. As of this month, more than 23 million are receiving unemployment, even as Trump celebrates a “recovery.” As of August, some 12 million had lost employer-based health-care coverage when they lost their jobs. As of Aug. 31, some 98,000 businesses — primarily small businesses — had closed permanently, according to one survey. One in 6 renters are behind on their payments. Moratoriums on evictions and foreclosures delay what will be a flood of expulsions.
- U.S. workers have taken a powerful hit. Any true recovery must include them – Washington Post
By JM Hamilton (10-31-2020)
An article caught my attention in the FT this week with ramifications for the debt market and our highly leveraged US economy, A disturbing new signal from the CDS market. At issue, CDS (credit default swaps) are insurance contracts that provide coverage for bonds, in the event of default. Like property insurance itself (which covers the difference between the value of the property and any undamaged property, in the event of loss), the CDS covers the differential between the face value of the bond and any recovery value from the bankrupt enterprise.
What we are coming to find out is the recovery value is increasingly less and less, because private equity firms & management -- thanks to a tidal wave of liquidity provided by central banks, and thanks to interest rate suppression provided by central banks – are finding cheap loans in the marketplace for highly distressed businesses (often referred to as zombies). This last tier of lender is sweeping up assets (that the PE firm or management teams haven’t already pilfered) and leaving bondholders and the enterprises providing CDS out in the cold; that is to say, with little or no recovery value from the bankrupt enterprise.
But the crux of the story is this: The CDS issuers and bondholders have only themselves to blame, because they are issuing covenant light insurance products (CDS) and covenant light debt. That is to say, there’s no - or very little - caveats, conditions, or stipulations w/in the bonds, or CDS contracts, that state management can’t steal the collateral (the assets of the enterprise) or run out and offer the assets/collateral to yet another tier of lender. None. Of course, all this goes back to our hyper-leveraged economy and the financialization of same…. Where too much money (see comments above on central banks & monetary policy) is chasing too few investment opportunities. It’s also a testament to the ongoing wave of consolidation, M&A, and the monopolization of the global economy… which means fewer businesses and investment opportunities. (And let’s not forget to stick it to both the bond & CDS underwriters for a complete lack of discipline.)
Again, all fueled by your friendly neighborhood central banker.
Financial instruments, however, aren’t the only areas where we see covenant light practices… and no strings attached giveaways to the business community. The New York Times ran an interesting piece this week, entitled: Trump’s Manufacturing Promises Disappoint as Economy Sours.
For me, two key points in the article stand out. One, after Foxconn failed to build the factory it promised in Wisconsin… it now appears that Foxconn will be denied tax credits, but the State of Wisconsin is still out the hundreds of millions of taxpayer dollars it sunk into the project. Meanwhile, it appears that Foxconn will not use the facility for its intended purpose, nor invest capital - or hire – at anywhere near the levels agreed upon. The much-celebrated Foxconn project – by Trump and former Wisconsin Governor, Scott Walker - was a boondoggle from the beginning… w/ Republicans making commitments w/ taxpayer money that would never be offset with equal or greater tax revenue, even under the rosiest of hiring scenarios.
And two, this same article pointed out that the Trump tax cuts were delivered with the idea that America’s business royalty would repatriate jobs and factories back home to America. But there was no contractual obligation, no covenants in the legislation concerning the tax cuts. So surprise, surprise… businesses receive a massive tax giveaway, the deficit and the national debt continue to spiral out of control, under POTUS Trump, and the US economy and labor continue to suffer. Talk about your trillion-dollar looting; talk about failed trickle-down.
Of course, Republicans always claim to be the party of business, and the CEO -in- Chief is no exception. So why is Trump’s administration mired in failure, particularly in regards bringing home the bacon to America: jobs and opportunity? Again, much of it goes back to fecklessness in placing caveats, covenants, and taxpayer protections into government deals/laws/legislation with the business community. And not unlike the covenant light bond and CDS contracts and agreements, Federal and State governments fail – again & again – to protect the United States, American labor, and our economy.
Establishment Dems are equally complicit.
See the gross corruption surrounding the looting and sacking of the PPP program, as well as, the tax giveaways, by and for the connected & the powerful, under the CARES Act ... allegedly, designed for small and medium sized businesses and workers in distress.
Is it just me or is it truly time to turn the tables? Is it time for elected officials to actually stand up for Americans and the economy… and place serious teeth into agreements/legislation, with real substantive monetary penalties and repercussions for businesses & ownership that fail to deliver on their end of the bargain? Detractors and naysayers may ask, how can you hold businesses accountable in a globalized world, where M&A and consolidation leave fewer and fewer businesses and jobs? Where corporations have the power of nation states?
That response, itself, speaks directly to neoliberalism’s failure.
But – until the real structural defects of failed neoliberalism are addressed - the correct response is easy enough for any political leadership that actually wants to lead. To wit, if businesses want access to the world’s biggest economy (what remains of it), then they need to play by America’s rules. The least of America’s rules should be: what is sold in America is manufactured & serviced in America, from the ground up; a living wage is required for all American labor, starting at $15 an hour; eliminate the gig-economy; and companies will be required to pay at tax rates no less than the highest income tax bracket, based upon EBITDA.
As for those remaining businesses that have not been destroyed by too much leverage, from financial engineering and private equity robber barons, there should be very serious caps placed on the amount of debt that can be piled onto balance sheets. And if companies & multinationals don’t want to play by the rules, caveats, conditions, and covenants… they no longer get to play in the American economy.
Good luck in totalitarian China.
Copyright JM Hamilton Publishing 2020
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