The 2020 CARES Act Implements Lessons Learned From the 2008 TARP Act

cares act covid 19

    In Brief:

    • Congress has officially passed the CARES Act in an effort to stave off a depression due to the coronavirus pandemic.
    • The CARES Act provides stimulus directly to ordinary Americans, contrasting greatly with the TARP Act of 2008.
    • What can small business owners expect from the act? Find out below.
    • There have been several large-scale bailouts throughout American history including the one we now face.

The most important and fundamental concept of economics is scarcity. The mass hoarding of essential products, food, medicine and rampant unemployment are stark reminders that the global economy is a delicate system that can easily be derailed.

According to data released by the U.S. Labor Department, 3.28 million Americans filed for unemployment just last week due to the COVID-19 pandemic. The figure shatters the record of 665,000 Americans who filed for unemployment at the peak of the Great Recession in March 2009. Some experts now claim that 10 million Americans may find themselves out of work over the next few weeks.

Faced with a skyrocketing unemployment rate, the complete shutdown of numerous industries, and a potential for civil unrest, the federal government passed the historic $2.2T stimulus package known as the CARES Act (Coronavirus, Aid, Relief, and Economic Security Act).

On Wednesday, the Senate unanimously passed the CARES Act 96-0 (four senators remain in self-quarantine). There was some political drama as Thomas Massie (R-KY), an MIT educated engineer, pledged that he would stall the vote by calling for a recorded vote rather than a voice vote.

A recorded vote would mean that representatives would need to be present on the House floor, a move that many were hoping to avoid due to the pandemic. Massie explained that the Constitution requires at least a 50 percent attendance for legislation to pass. The Kentucky congressman received plenty of criticism in the past day including from President Trump.

trump tweet

What Is the CARES Act?

For the second time in the last dozen years, the federal government has approved a bailout to aid the battered economy. As the U.S. economy continues its freeze for the prolonged future, there is much debate to how much is needed to stave off a Great Depression and who should get what. Here’s just some of what the act entails.

Health-Care: $153 billion for the beleaguered health care-system as well as $50 billion for hospital equipment, protective masks and clothing, medical training, research, and patient housing.

Direct Payments: An estimated $390 billion will go directly to Americans that earn less than $150,000 per year. Single Americans who earn less than $75,000 will receive a one-time payment of $1,200. Married couples would each receive a check and $500 per child. 

Unemployment: $260 billion will be injected directly into unemployment payments. The act will pay $600 per week on top of what state unemployment pays. For instance, a worker who receives $300 per week in state unemployment will also collect $600 from the federal government per week for a total of $900 per week. This federal payment will last for up to four months.

Freelance and Gig Workers: A 2016 study conducted by the consulting firm McKinsey found that the number of freelance workers has grown exponentially. To combat the massive loss of freelance layoffs during the outbreak, the CARES Act will create a temporary Pandemic Unemployment Assistance that will last through 2020.

State and Local Governments: State and local governments will receive $339.8 billion, most of which will go to directly combatting COVID-19. The rest will go toward education. 

Tax Day: The federal government has extended the deadline to file 2019 tax returns to July 15th. 

Insurance: The CARES Act mandates that private insurance must cover COVID-19 treatments and vaccines. Testing is also free. 

Emergency Grants: $10 billion will be provided as emergency grants for small businesses. Grants of up to $10,000 will go to small businesses in order to cover operating costs.

Forgivable Loans: The Small Business Administration will provide $377 billion in loans, up to $10 million per business, to cover payroll, mortgages, and rent. The bill aims to ensure that workers stay employed by their respective companies. Existing debt will be forgiven provided workers stay employed through June. There is another $17 billion for small businesses already enrolled the SBA program to make payments.

cares act 2020

A Detailed Look At Small Business Provisions

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act in the Senate (the “CARES Act”).  The act increases the maximum Small Business Administration’s 7(a) loan amount to $10 million and expands allowable uses of 7(a) loans to include payroll support (including paid sick or medical leave), employee salaries, mortgage payments, insurance premiums and any other debt obligations.

Under the current draft of the CARES Act, the SBA is authorized to guarantee up to $349 billion in SBA 7(a) loans to businesses with no more than 500 employees or the applicable size standard established by the SBA for the industry in which the business operates, if greater. The loan period for this program would begin on February 15, 2020, and end on December 31, 2020.

Eligibility evaluations are to be limited to whether a business or certain non-profits was:

  1. Operational on February 15, 2020, and
  2. had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and
  3. is substantially impacted by public health restrictions related to COVID-19. (Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.) There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.

Loan Amount and Purpose.

  • Maximum Amount of Loan
      • The maximum loan amount is thelesser of $10 million or the product obtained by multiplying average total monthly payments for payroll costs during the 1-year period before the loan is made by 2.5.  (2.5 x Average monthly payroll [covers employees making up to $100k/year]
      • So if the loan was made on April 1, 2020, and average monthly payroll costs for the period April 1, 2019, to April 1, 2020, were $1,500,000, the maximum loan amount would be $3,750,000
      • Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees, but does not include compensation of individual employees in excess of annual salary of $100,000,as prorated for the relevant period
  • Allowable uses expanded to include:
    • Payroll support (including paid sick or medical leave);
    • Employee salaries;
    • Mortgage, rent and utility payments;
    • Insurance premiums; and
    • Other debt obligations.
  • Allowable uses expanded to include:
    • Loan Forgiveness. Certain borrowers would be eligible for loan forgiveness equal to the amount spent during an eight-week period after the origination date of the loan on:
    • Payroll costs;
    • Interest payment on any mortgage incurred before Feb. 15, 2020;
    • Rent on any lease in force before Feb. 15, 2020; and
    • Utilities for which service began before Feb. 15, 2020.

Disaster Business Loan Application:

You can apply for an SBA loan through its site. Be prepared to provide the following information:

Note that a 2020 CARES Act loan requires the information listed below. Note that it requires tax returns and personal financial statements.

Finally, the CARES Act includes $349 million for the U.S. Small Business Administration (SBA) to guarantee loans through its 7(a) loan program. The SBA is also offering Economic Injury Disaster Loans for qualifying small businesses. These are low-interest loans with terms potentially as long as 30 years for small businesses and nonprofits. You can apply for an SBA loan through its site. Be prepared to provide the following information:

  • SBA Loan Application SBA Form 1919)
  • Statement of Personal History (SBA Form 912)
  • Business Financial Statements
  • Tax Information Authorization (IRS Form 4506T), completed and signed by each principal or owner
  • Recent federal income tax returns
  • Personal Financial Statement (SBA Form 413)
  • Schedule of Liabilities listing all fixed debts (SBA Form 2202)
  • You may also need to provide profit and loss statements, recent tax returns, and balance sheets.

Here’s who qualifies for relief checks from the government and how much they will receive:

cares act checks

How Does the CARES Act Differ From the TARP Act of 2008?

When the $700 billion rescue measure known as TARP passed through Congress in 2008, the act was met with heated criticism by much of the American populace. While politicians including President Obama assured the public that the relief measure was not a bailout for Wall Street, average Americans on Main Street thought otherwise.

As Gary Gensler, the chairman of the Commodity Futures Trading Commission under President Obama suggests, the act was essentially used to buy corporate debt and pass the tab onto the American taxpayer. In return, ordinary Americans were left with underwater mortgages and stagnant wages.

Financial institutions that issued volatile loans regardless of credit, income, or employment, generally survived unscathed, save for Bear Stearns and Lehman Brothers. Yet the country had little choice as these institutions, deemed “too big to fail” because they issued credit to everyone from mom and pop stores to Fortune 500 conglomerates, were and still remain the life blood of the global financial system.

The current bailout, in contrast to TARP, targets the mainstream economy rather than the financial sector. The difference spans from the nature of the situation the globe now finds itself in. Practically all aspects of the economy have screeched to a halt in the wake of the worst pandemic since the 1918 Spanish Flu outbreak.

The CARES act seeks to provide relief while the economy remains on ice for what could be months. Unlike 2008 when the blame was squarely placed on banks, there is no villain this time around. Afterall, who could foresee the COVID-19 pandemic? There are critics who contend that many companies who are receiving part of the stimulus have spent years enriching their own pockets with stock buybacks.

The CARES Act Is Far More Strict

Although the TARP Act included stipulations against executive compensation, dividends, and stock buybacks, executives were still able to receive large bonuses. Architects of the bailout argued that, in order for all banks to participate in the program, they could not add too many punitive measures. Recipients of funding from the CARES Act are barred from laying off more than 10% of employees, outsourcing, paying dividends, or buying back stock. There are also stipulations against executive compensation as well.

wall street bailout

How Can Americans Take Advantage of the CARES Act?

There are several ways that Americans can take advantage of the CARES Act.

Collecting Unemployment Benefits:

To apply for unemployment benefits, visit your state’s unemployment website. You will need to provide your Social Security number, your driver’s license or state ID. You will also need to provide the Social Security number of any dependents as well.

Receiving A Small Business Loan From The Government:

The SBA offers assistance through Economic Injury Disaster Loans. These low-interest loans can last as long as 30 years for small businesses and nonprofits. The American Banking Association also provides a list of programs that are available across the country. Furthermore, the National Governors Association lists where small businesses can find loan information in various counties, states, and cities.

What About Student Loans?

Due to the COVID-19 epidemic, the Department of Education is allowing a 60-day grace period for those with federal student loans. Debtors do not have to make a payment during the 60-day period and will not accrue interest. 

A History of American Bailouts

There have been several well-known federal government bailouts in just the last 100 years. Find out more about each bailout below:

The Great Depression (1930s)

When the stock market crashed in 1929, millions of Americans lost their jobs and savings. When FDR became president in 1933, he knew it was time to stop the bleeding. At the time that FDR took office, the unemployment rate hovered around 25%. To combat the rise in homelessness, the government established the Home Owner’s Loan Corporation. The newly established emergency aid program purchased defaulted mortgages and refinanced them at lower rates. Up to one million homeowners immediately benefited from the program.

The government also created several initiatives to put millions of unemployed Americans to work. Thousands of new jobs were created in construction to provide a steady flow of money to American workers. During this time, the Hoover Dam was constructed as were new post offices and government buildings. Writers were hired to write state guidebooks, faulty infrastructure was repaired, and farmers received massive subsidies for their crops and livestock.

great depression food line

The Savings Loan and Bailout (1989)

American Saving and Loan institutions (S&L’s) were a nationwide group of lenders that helped spur the post-WWII housing boom by providing mortgage loans to prospective homeowners. Many S&L’s invested in commercial real estate as a viable option to rake in millions. Yet, many of these investments did not prove to be as fortuitous as many thought. When the Federal Reserve raised interest rates in the mid-1980s, S&L’s had to pay more interest in deposits then the return they received from fixed-rate loans.

From 1986 to 1995, more than have of all S&L’s failed. Billions in loans were defaulted and federally-insured deposits had to be covered by the government. Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989, pumping some $293.3 billion into the floundering industry, one of the most costly and extensive government bailouts of all time.

savings and loans bailout

The Great Bank Bailout (2008)

The Emergency Economic Stabilization Act of 2008 authorized the U.S. Treasury to buy risky debt from lending institutions. Debt from mortgage loans, auto loans, and student loans were all bought by the U.S. Treasury. A cash injection of $250 billion was also used to stimulate lending between banks.

To fund the rescue plan, the federal government issued Treasury bonds with varying maturities. As a result, consumer confidence in financial institutions increase, a result that greatly stimulated the economy.

2008 bank bailout

Ultimately, Will the CARES Act Succeed?

Only time will tell if the CARES Act will succeed. The world is faced with an unprecedented situation that it never adequately accounted for. Ultimately, the efficacy of any relief plan relies on the impact of COVID-19. Will the virus slow down its deadly spread? Can the world develop a vaccine in time? Will the virus continue to return as some experts warn? At least for the moment, the CARES Act provides much needed stimulus to a frozen, American economy.