David Dayen’s update on the effects of COVID-19
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Unsanitized: The COVID-19 Report for Sept. 17, 2020
Corporations Can Do a Lot With ‘Just Loans’
Surprisingly, companies with market power can use money to make money
TransDigm supplies spare parts for military aircraft like this. (Charlie Riedel/AP Photo)
First Response
A couple days ago I linked to a story at ProPublica that was essentially a version of Upstairs/Downstairs, and an indicator of our bifurcated economy right now. Upstairs, the suits on the 30th floor at TransDigm, a predatory airplane parts distributor, capitalized on the Federal Reserve-fueled opening of the corporate bond spigot, and with their help maintained its stock price and 40 percent profit margins in an industry that’s been largely grounded; downstairs, the newsstand in the mall on the ground floor is struggling as office drones work from home, as federal programs offer little help, as his business withers. In between floors, 3,000 TransDigm workers lost their jobs, getting lean so profits could stay fat.

I thought it was a pretty straightforward depiction of who mattered in the CARES Act rescue and this economy. But some people are either ideologically incapable of incorporating economic structure into their analysis or so temperamentally incapable of admitting error that they resist this critique, instead claiming that there was nothing to see here. I don’t really know where leftist Matt Bruenig fits on that continuum, but his response to this article yesterday reflects a zombie argument I thought had died in the last crisis, that Federal Reserve or bond market support is “just loans.”

Bruenig objects to the article positing no difference between a loan and a cash transfer, citing various graphics to that effect. Because people got unemployment and stimulus checks, and small businesses grants, while all large corporations got was asset inflation and access to widespread lending, then obviously the playing field was tilted in favor of the little guy.

This is the equivalent of saying that the bank bailout of 2008 wasn’t a big deal because they were “just loans” that the banks paid back. Sometimes this argument is topped off by saying the government “made money” on the deal. It all betrays a fundamental misunderstanding of the role of corporate debt. And in the specific case related here with TransDigm, it shows a total ignorance of their entire business model.

During the financial crisis, the banks took loans with microscopic interest rates at the discount window. It’s literally their business to take in money cheaply and spin it back out to make profits. The simplest way was to lend it right back to the government at a higher rate than they paid for it. Or they could invest in an asset with a higher return. This strategy of borrowing cheap and using it to make money is known as the “carry trade,” and it’s based on the simple notion that money you borrow is more lucrative than putting money out of your own pocket at risk. If you invest $100 with all your own money and make $5, you have a 5 percent return; if you invest $100 with $50 in borrowed money and make $5 you have a 10 percent return. It’s basic leverage.

Just as important for our purposes, borrowed money in the form of corporate bonds can be rolled over essentially endlessly, as long as there are willing purchasers. With the Fed positioning itself as a purchaser of last resort in this case, but really in any case with a company that isn’t falling apart, there is always going to be a degree of borrowing. The money will not be “paid back,” at least not through several business cycles. And by that time, the holder of the borrowed money has used it to earn money many times over.

Corporations are more financial actors in the modern economy than producers. Apple has its own hedge fund, businesses as varied as Southwest Airlines and Koch Industries came to prominence with trading strategies, tax planning strategies rely on the preference for debt over equity and other forms of financial engineering, and so on. The idea that a large corporation is like a family with respect to debt is seductive but stupid. Corporations have plenty of options to turn borrowed money into profits.

That’s particularly true of TransDigm, which is best thought of as a private equity roll-up firm. (There’s a whole chapter about TransDigm in my book Monopolized, but you can also read here.) The company uses borrowed money to buy smaller firms that make aerospace parts for civilian and military aircraft, in an often successful attempt to corner the market and gouge customers. TransDigm had to give back $16 million to the Defense Department last year when Congress realized it was charging markups as high as 4,451 percent for some of its items.

For our purposes here, the notion that TransDigm was “only getting loans” when it issued $1.5 billion in bonds in April is completely ridiculous. Debt is literally the lifeblood of companies like TransDigm; they use it to buy up companies, so they can engage in fraudulent markups. That’s not speculation but literally what the chairman of TransDigm, Nick Howley, said the money was for: “I think we will continue to pile up cash, and we will develop very substantial firepower. When we feel more comfortable and we feel like we got a little clearer view of the world, then we'll decide what to do with that.”
TransDigm has no maturities on its large debt holdings until 2024. Its interest payments are manageable because it’s converting that debt into monopolized positions in spare parts, which allow it to continue to enjoy very high profit margins.

So asking the question “What’s a company like TransDigm going to do with debt” shows either ignorance or a real dedication to not getting basic concepts. I’ll be charitable with Bruenig and say the former; he should stick to sports.

Everyone else gets less leeway. If you understood that banks were getting far more than “just loans” in the financial crisis then you get that corporations are getting far more than “just loans” now. They’re having their stock price propped up, and are being gifted more leverage to earn higher profits through a frenzy of bond issuance. Bond traders are literally having extra money stuffed in their hands, with the Fed paying above par on its bond purchases. The market across most asset classes has been granted its every wish.

Meanwhile, smaller businesses with no access to capital markets are seeing banks close up their windows and the Fed’s Main Street Lending Program has been almost useless. The Municipal Liquidity Facility, the subject of a hearing in the Congressional Oversight Commission as we speak, has made two loans. If there was an equitable distribution of the Fed’s abilities across the board, for example a creative application of their muscle to prevent state and local austerity, the critical hurdle to recovery, that would be one thing. It’s giving one sliver of large corporates, investors, and financial actors a bonanza, and that’s it.

The Fed policy is to keep interest rates low in a recession, which is great. The past several recessions have shown that this doesn’t trickle down to any meaningful degree. Relying on this just expands inequality. Billionaires have increased their wealth by $845 billion during a crisis. That’s a design flaw where the ultimate problem lies with Congress. But don’t insult my intelligence with this nonsense about “just loans.”

Days Without a Bailout Oversight Chair
Today I Learned

    • Trump says only blue states have high deaths from COVID, which isn’t true, but I did say that Trump said it, so that’s redundant. (TPM)
    • High levels of dementia deaths. It seems like another hide-the-COVID-fatality strategy. (Politico)
    • The White House waits until the Problem Solvers relief package is rejected by Democrats before saying “we totally would have done that.” (Bloomberg)
    • CDC Director says there’s no way a vaccine gets out to everyone soon, Trump responds that the director “made a mistake.” (The Hill)
    • Eli Lilly artificial antibodies appear to be working well, though mass production is unlikely. (Stat News)
    • Airlines want another $25 billion. (CNBC)
    • The Postal Service was on the verge of sending 5 masks to every household, but it was scrapped. (Washington Post)
    • The University of Georgia closes polling places due to COVID, pre-empts criticism by saying “but college football happens outside.” (LGM)

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