Wall Street Redemption— 9 Ideas for Helping America Sustain and Recover from the Pandemic

This memo was published in 2020 during the peak of covid-19 pandemic as I was battling through it myself and on medical leave from BlackRock. The intent was to provide a summary of non-partisan, results-focused ideas that could help NYC and DC provide beneficial, market-based solutions for Middle America— thereby also reducing the blow-back risk that Wall Street and Policymaker stakeholders experienced from the various “bail out” actions of 2008 financial crisis.

https://dulacadvisory.blogspot.com/2020/10/ideas-for-helping-america-sustain-and.html

Ryan Scott

Director

DuLac Capital Advisory L.L.C.

04/21/2020

Wall Street Redemption: 9 Ideas for Wall Street to Help America through the Covid Crisis

Never in modern history have so many nations been forced to shut down their economies to save lives from a viral pandemic. We should applaud leadership at all levels for their unity and resolve in steering our country across these COVID-19 troubled waters. With the effort to “win the fight” against COVID-19, our nation’s leaders rightfully forced people to stay at home. This effectively became the rallying cry to help reduce hospital bottlenecks and slow the spread. This is an ironic contra-positive to the historic trumpeting of previous during war time efforts where strength was projected outward.

Entire livelihoods are now in limbo. The economy will certainly go back to what it has before when knocked down. However, the pace and slope of the decline, let alone the ramp back up will remain a mystery. These times are rather unique and therefore will require a culture of “idea crowdsourcing” if we are to help America and its allies sustain and recover from this disaster. It is the duty of Millennials and Gen Y to contribute to the table of solutions— just as generations in the past. Below are a few broad stroke ideas that I believe can proactively help businesses and individuals steer through this perfect storm of events. As someone who started his career during the financial crisis, I also hope that by leading with ideas to help everyday businesses, municipalities, and individuals, Wall Street’s image can be redeemed after the tarnishing it experienced during the 2008 crisis.

Direct Liquidity to Consumers and Small Businesses—

1. Support for Front-Line Workers: The U.S. should implement measures to support the heroes on the front lines. We cheer and pray for our Medical Professionals, Hospital Administrators, First Responders, sanitation workers, transport drivers, and delivery service professionals (USPS, FedEx, UPS) that have been in the streets every day since the crisis. They need our help now and will certainly need it once our nation heals from the pandemic. Gov. Cuomo has introduced a Hazard Workers Compensation Fund to the lawmakers in DC; the fund will need to be billions of dollars. This could be financed through bond programs similar to the US AID programs in the 1980s and TLGP in 2009. These funds can help these workers and needed liquidity injections via negative tax credits, grants for rental credits, loan deferment, and boosts to Health Savings Accounts.

2. Support for those forced to Stay at Home with “Kurzarbeit”: Additionally, the Federal and State governments should continue to support similar measures enacted to support people being told to stay at home—the ounce of prevention to save lives, has resulted in the worst recession since the 1930s. This is an incredible sacrifice that no American should be penalized for as we seek to help people heal. Implementing a version of the German “Kurzarbeit program” can help stem the rising unemployment wave. This genius program emerged after the fall of the Berlin Wall. Policymakers and business leaders sought to stave off the frictions of union of two very different economic systems. The Federal program pays companies to keep their employees but reduces their work hours down to 80%. This is effective in two ways: it decreases the costs of the hiring/firing/hiring cycle that plagues every cycle. The program enables people to maintain their skills during a business slowdown and helps people maintain important social cohesion. The longer people are out of work, the higher the health costs, and the harder it will be to retrain them.

Real Estate—

3. Federal and State governments should expand the “80-20” Rule: This program emerged in the 1980s and helped provide affordable housing for many working-class people in newly developed buildings. In exchange for setting aside 20% of units in newly developed buildings for hard-working tenants, taxpayers allot tax abatement for real estate investment trusts and landlords. New York is replete with great examples of the success of this program— the beautiful area nearby New York’s Lincoln Center, along Riverside Boulevard is an example of this. In the 1990s, it was converted from Vanderbilt-era railroads to mixed use commercial and residential buildings. that have provided housing for thousands of New Yorkers, Expand the program at both ends of the pole: increase in duration of tax abatement for Real Estate owners, and expanded boundaries for those renters in the “20%” cohort. After we are through this crisis, there will be many more people that will be reclassified as at or near the poverty line. Thus, policy makers should consider stretching this program to a “60-40” and Wall Street should help finance these efforts via loan issuance with some degree of federal support. Creating win-win situations in the housing space is key to maintaining stability and order in society.

Consumer Lending—

4.  Transitory Duration modification of Consumer Loans: Loans to consumers via mortgages and credit cards can be adjusted to help our consumer economy walk across this bridge. With the expansion and modification of the Federal PPE program thanks to bipartisanship in the Senate, many businesses have been kept afloat during this “black swan” of black swan events.

5.  Credit Balance payment adjustments: Banks can work with customers (business and consumer) to proactively modify loan terms on transitory terms: duration extension, conversion to pik-toggle terms, debt for equity stake conversions, are all ways to lift the U.S.  economy during its time of need. In the Old Testament, as Moses records the Law of God of Israel, we learn that even God believes in debt forgiveness— he instructs his people to extinguish debts every seven years. Our modern economy certainly has too many savers dependent on debt cash flows to implement a debt jubilee. Nonetheless, perhaps we can use this critical time to implement supportive debt payment jubilees of various types This may be ever more essential given America’s economy post-recession has become ever more consumer based and service oriented.

Markets—

6.  Reduce Taxes for Investing in Companies and Hospitals: Investing in companies that are producing ventilators, antiviral medication, and vaccines has been the traditional way finance has helped fight various pandemics of the past. It is heartening that companies such as Medtronic and Space-X are teaming up to produce ventilators. Given the crisis has increased the Weighted Average Cost of Capital for nearly all companies, one way to help sustain them through the crisis could be offsets via the tax structure. If the government permits a temporary reduction in taxes for both equity and debt investments in companies geared towards health care, and other companies that have repurposed business lines for PPE, Wall Street will be able to help scale support for these companies via financial products.

 7. Reward “Code Sharing Economy”: Apple developed a covid-19 diagnostic app for smart phones, has started manufacturing face shields and shared a prototype design for anyone to use. This new “Mega-cap to Start-Up sharing economy” could be just what we need to MacGyver our way through this foggy period. Large companies with technical expertise and scale readily sharing basic prototypes for DIY entrepreneurs will be a bridge to help scrappy startups chip in vital PPE production. For example, Brooklyn based home design furnishing company, stitchoom,  marshaled their logistical and sewing expertise to produce over 5,500 face masks to donate to health care workers. Following the CDC advice to urge Americans to walk with DIY face masks, CEO Ella Rooney has also seized a business opportunity to help keep work for her employees by now making stylish face masks for hip BK. Wall Street has focused on including metrics that value companies’ efforts at meeting sustainability goals in the environmental, social, and governance. It should clearly reward companies that are aiding in this effort ESG Ratings.

 8.  Private Capital Markets:   After the 2007-2009 financial crisis, banks had to increase regulatory capital to boost equity. The upside for less systemic financial risk came at the cost of decreased lending for small businesses. Non-traditional banks stepped in to help regenerate the U.S. economy.  These non-traditional banks have the expertise in developing innovative combinations of equity, debt, and hybrid capital financing that traditional banks may not be able to support. They may act as a lifeblood for many businesses that have run into problems due to no fault of their own. Given the essential capital that these non-traditional institutions provide medium and small businesses, they should be eligible to tap various federal and state liquidity programs, when they assume a direct owner status.

 9. “Make America Make Again”:   Foreign Affairs magazine  published this cheekily titled but prophetic essay by Katherine S. Newman and Hella Winston in 2016. They called for the need to start retraining Americans on design and building. Vocational training at all levels needed to be supported to help people re-learn basic production skills and learn new age methods with 3-D printing.  Wall Street can aid Federal and state efforts to increase the manufacturing and supply chain reorientation capability of the U.S. via the municipal finance market: Build America Bonds (“BABS”) was a tremendous program in 2009-2012 that helped municipalities fund water, infrastructure, and rail projects. The BABS can be resurrected to help fund the traditional areas and our dire need for vocational education funding.

Mark Andreesen sheds more light on this problem and its root cause in his recent essay It’s Time to Build. The West has lost the “will to build” over the last four decades—it is obviously now in our vital interests to reorient production domestically. He points to the nearly identical story across the West where hospitals are experiencing shortages of key material needed to mitigate infection risk of their doctors, nurses, and staff. To reduce future problems, we will need to begin producing PPE and other key items of national interest, including medicines. It is imperative for national and economic security within America and its allies.  Given the nature of this pandemic is linked to urbanization in China and climate change, COVID19 will likely not be the last viral pandemic. Therefore, Finance can help provide an investment roadmap to companies seeking to re-engineer their production and supply chains. Congress can create complimentary incentives to help with this relocation of human and production capital.

 
Moving Forward

With the unemployment rate likely to touch 15-20% in the coming months, there has been severe strain by many hard-working Americans. This is a tragedy as the U.S. economy had reached its best heights ever in March 2020 by any measure: lowest unemployment rate in history, high quit-rate, low minority unemployment. Given the Federal Government is now able to borrow at near 0% for 30 years, they should provide the financial backstop for these programs. The fortunes are hanging in balance—if we act quickly and as one nation at both Federal and State Levels, we can help heal the hurt.

Once the economy resumes, and people are back on their feet, the loan terms can get back to normal times. Just as the U.S. consumers helped bring Wall Street back to life, the financial industry can repay the favor in defense of our economy. For the time being though, the entire society is in an “All Hands on Deck” moment in history—finance, an industry in which I have been grateful for work over the last 11 years, also is at a unique moment to make a stand to help America sustain and recover once the virus is over.

Proactively implementing measures to keep people in their homes, keep small and medium sized businesses open, keep hospitals afloat, and help support municipal workers are all essential measures to help sustain America through this storm. Doing so is the compassionate path— “concern with the alleviation of suffering” as described by Dr. Kristin Neff. By proactively leading the way, Wall Street may also be able to help redeem its image that was bruised during the last round of financial crisis. Wall Street has a unique role to help keep society’s essential services in-tact, keep people in their homes, keep businesses afloat, and help the consumer get to the other side of this torrential river.

Ryan Scott

Executive Director and Founder

DuLac Capital Advisory

(+1) 516-939-6833

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