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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.

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**** 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."

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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."

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Days Without a Bailout Oversight Chair

17
5.

We Can't Do This Without You

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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