Bankruptcy and COVID-19.

AuthorBrannon, Ike
PositionWorking Papers: A SUMMARY OF RECENT PAPERS THAT MAY BE OF INTEREST TO REGULATION'S READERS.

* "Encouraging Equity Investments in Medium-Sized Businesses," by Douglas Elliott. Oliver Wyman Policy Paper. May 29, 2020.

In this succinct paper, Douglas Elliott makes the cogent and possibly urgent point that since the global pandemic began, the U.S. economy has transitioned from a corporate liquidity problem--which the Federal Reserve successfully alleviated--to the cusp of a corporate solvency problem. Unfortunately, solving the new problem will be much more difficult and likely cost more money than the liquidity problem.

Virtually no one anticipated the nationwide shutdown from COVID-19. A wide swath of businesses saw demand for their goods crater or were legally obligated to shut down. For instance, passenger air travel declined 95% in a single month and cruise ships shut down entirely. In most states, restaurants were limited to selling only takeout meals, and even that was impeded by curfews. Most brick-and-mortar retailers such as clothing stores also saw demand plummet.

While large corporations were able to tap credit markets to cover their liquidity needs, many mid-sized and small businesses were not able to do so immediately. To alleviate their capital needs, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act, which created (among other things) the Payroll Protection Program, a funding mechanism that provided small and medium-sized businesses forgivable loans to cover payroll and a portion of other costs for eight weeks.

The Federal Reserve also created a variety of credit facilities to help businesses obtain financing, although credit markets ultimately rebounded from the early days of the crisis and most viable businesses were able to obtain financing from private lenders. Some aver that the Fed's willingness to jump into the market helped the private sector to resume lending.

While the short-term liquidity crunch has passed, we still do not know how long the COVID crisis and the concomitant quarantines will continue, stifling consumer demand across a wide variety of goods and services. The personal savings rate in the United States in May 2020 was 32%, quadruple the level of the previous May and indicating a tremendous decline in consumer demand. Even the most optimistic scenario suggests that vaccines against the SARS-CoV-2 virus--necessary to return the economy to something approaching normalcy--will not be widely available until well into 2021, if then.

It is also worth noting that not all the decline...

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