In return for the emergency loans, which could be spun by the Federal Reserve into up to $4.5 trillion, companies will face temporary limits on what they can pay executives. They’ll also need to keep their workforces stable or at least not lay off more than 10% for several months. And they’ll face restrictions on stock buybacks and dividend increases.
Yet loopholes may lurk in the legislation. “On paper, it looks like we learned the lessons,’’ said James Angel, an associate professor of finance at Georgetown University’s McDonough School of Business. “But the devil is in the details. ... There’s a lot of room around the edges.”
The legislation establishes a system of oversight on how companies use the rescue money. The oversight is widely thought to exceed the standards for the bailouts of banks and automakers in the 2008-09 financial crisis. Critics have long attacked those bailouts as an unwarranted giveaway to corporations whose conduct contributed directly to the crisis.
Under the just-enacted $2.2 trillion package, a government watchdog and a panel appointed by Congress will monitor how the billions in aid are deployed and whether its corporate recipients are meeting the restrictions.
President Donald Trump wasted little time, though, in throwing the oversight system into question. After signing the relief package Friday, Trump issued a statement that seemed to reject the independence of a new inspector general’s office. He said he wouldn't recognize the inspector general's right to report to Congress without “presidential supervision.” Trump's statement went on to dispute other aspects of the oversight rules, including that Congress should be consulted in the allocation of relief money.
It will be up to Trump to appoint the special inspector general for the bailout fund, who will have to be confirmed by the Senate. By any standards, the overall package is a staggering pot of money — by far the largest in the history of crisis relief for industries and local governments. About $425 billion is to be used by the Treasury Department to support the Fed's emergency lending programs. These include loans for small and medium-sized businesses. Because the companies, states and cities are deemed likely to repay the loans, the Fed is able to to leverage the money into up to roughly $4 trillion in actual lending.
“A program of this scale and scope ... when things are moving so fast, will need vigorous scrutiny,” said Phil Angelides, a former California state treasurer who led the 10-member congressional oversight panel for the financial-crisis bailout.
Peter Henning, a law professor at Wayne State University and a former Justice Department attorney, notes that the bailout program gives wide latitude to Treasury Secretary Steven Mnuchin. “Secretary Mnuchin has authority to basically negotiate any kind of loan that he wants," Henning said. “We'll see who gets favored and who doesn't."
For companies that receive emergency aid, there may be wiggle room in the conditions attached to it. While they can’t shrink their workforce by more than 10% through the fall, there’s no prohibition against cutting employee wages — except for airlines that receive direct grants. These grants must be used for employee pay and benefits.
Companies could also reduce workers’ hours and overtime without running afoul of a ban on breaching union contracts. “A lot of people are going to see their compensation fall even though they still have a job,” Georgetown’s Angel said. “Just the fear of that puts the brakes on the economy.”
In addition, some corporate recipients of aid will likely find ways to bypass limits on executive compensation, Angel suggested, through how stock options are valued or through non-financial perks like housing and travel expenses.
During the financial crisis, public advocates railed against revelations of excessive pay packages for executives at some banks and automakers that received billions in taxpayer aid. The Treasury did take equity stakes in the companies in exchange for emergency loans — an idea that Trump has endorsed for the new aid program. This is likely to be the case for airlines that receive direct federal grants.
Another condition is that recipient companies cannot buy back their own shares from investors for at least a year after the loan term ends. This restriction may be easier than others to monitor because of public reporting requirements for stock transactions.
Buybacks tend to inflate stock prices by reducing the number of shares in circulation. This can produce a bonanza for executives whose compensation comes mainly in stock awards and options rather than salary. Better to use the aid, critics say, to preserve employee jobs or wages, invest in expansion or build cash reserves for future emergencies.
Four big airlines — American, United, Delta and Southwest — spent a combined $39 billion in the past five years on share buybacks, according to S&P Global. The new $500 billion relief fund earmarks up to $50 billion for loans and grants to airlines; $8 billion for cargo carriers; and up to $17 billion for “businesses critical to maintaining national security" — regarded as a life vest for Boeing. The struggles of the aircraft giant, reeling from the grounding of its 737 Max jet, have deepened as air travel has nearly halted.
In addition to airlines, the distressed industries that have pleaded for federal help include hotels, restaurants, retailers and manufacturers. The emergency loans for corporations, to run up to five years, bar executives at recipient companies who earned over $425,000 last year from receiving compensation that would exceed their 2019 total. Nor will “golden parachutes” payments for senior executives who are let go be allowed to exceed twice an executive's 2019 compensation if it topped $425,000. And executives who earned over $3 million last year cannot receive compensation exceeding $3 million plus half of any 2019 pay over $3 million.
__ Follow Gordon on Twitter at @mgordonap