FinTech Is Game Changer For Small Business Relief: Former SBA Head

that Bloomberg dot com. At least, it was reported just recently that that three billion dollar program to help small businesses reeling from the COVID nineteen outbreak that could actually be exhausted by Thursday, a top White House advisor said, but negotiations in Congress to replenish it remains stalled. They get to lay us on what this means for small businesses.

We welcome our next guest, Karen Mills. She's a senior fellow at the Harvard Business School, formerly a small business administrator for President Obama from two thousand nine to two thousand thirteen. Karen is so good to speak with you talk to us about the state of the small business owner out there, How tough is it and how quickly can AID get to that small business owner? Nice to talk to you. Well, you know, this is the worst

crisis for small businesses that I've ever seen. And as you mentioned, I was in the seat two thousand nine and we thought that was pretty bad. Um. You know, we lost two million small businesses the first quarter. Well, when we look at our unemployment numbers, we're seeing six million last week. Most of those are small businesses, UH and their employees. As you know, this has a critical impact on the economy because half the people who work in this country own or work for a small business.

It's actually forty seven percent of the jobs. And these small businesses are now three or four weeks into a crisis and they only have on average three or four weeks worth of cash, so they have had to lay off people. And the question is how are they going to get the money from the p p P program and the other government relief in time for them to make a decision to keep operating, Because we know if we lose them, it's a very long and slow recovery. It's six months at least to get a new business

to start up if an old one failed. So the next two weeks are critical. So these loans, let's talk a little bit about them and the logistics of it. We have heard that more than half of the three hundred and fifty billion dollars so so far allocated to the SBA program has been distributed. That program is expected to run out of cash in the next couple of days. What are the parameters around these loans? Do companies have to make sure to keep their employees on staff, they

have to repay them? What do we know? So it's an actually amazing number. Two hundred and sixty three billion as of yesterday, which is seventy of the three hundred nine billion has been approved. Now only a very small percent of that apparently has been funded. So we'll come back to that issue, because until you have the money,

doesn't really do you any good. But one thing that is amazing in my tenure, the first year we were in office, we did all kinds of UH increases in the guarantees and we had a record year of thirty billion, a record year. Now in one month we're trying to get out ten times that much. So it's it's unbelievable that banks have have been um actually able to get

this done. Now, why aren't we getting money into the hands of small business owners from the s B a. The banks actually have to fund this money into the accounts of the small businesses, and they haven't yet been doing that, in part because the Fed and Treasury have said they will buy all these loans from the bank's balance sheet. There are a hundred percent guaranteed by the government,

and that program has not gotten up and running. And the second thing that hasn't quite gotten up yet is that a bunch of the new fin techs like Square and PayPal and quick books are only just getting their approvals and they are really critical for the smallest small businesses. You know, they still proprietorships that have been included here. And folks who are looking for a forty dollar loan, at ten thousand dollar loan, a six thousand dollar loan, well,

the banks don't do those small loans. So I am hopeful that this week will be a turnaround for them. Here's the problem. We're going to run out of money tomorrow, so Congress has to get this pipe refilled so the rest of the small businesses can get their money. So, Karen, give us a sense of kind of what's really the issue here for this next round of small business loans that we've heard. It's two and fifty billion. Maybe the Democrats would like to move it up to five billion,

include hospital funding and thinking things like that. How do you think this is really going to play out? Well, I'm talking to a lot of the Senators this afternoon. I've been in touched with the House Offices, and you know, they're having a fight over um, you know, a whole set of things. But what I'm saying is the matter is absolutely urgent. We've finally gotten the fire hose attached to all the pipes. We have to get this in

the hands of small business owners. And you asked me earlier how do they get it and what's it used for? And the answer is the bill is actually pretty smartly crafted to encourage small business owners to keep their people on the payroll and instead of being alone. The p p P program actually is a grant. It's a refundable loan that, um, you don't owe if you use the money to pay for eight weeks of payroll or other

permitted expenses. And the other permitted expenses are paying your rent, which you know is going to come up May first, so that's important, and mortgages and interest on your other loans.

So it's actually a good bill because it understands people need money and they don't need a loan, they need a grant, and that it's important that they keep their folks on the payroll so that they can get healthcare and that they can be there when hopefully businesses get to reopen their doors whenever it's safe to do so. Karen wouldn't just after Ray Dalio spoke. My mindset is

how will this world look after this scenario? And one thing that you pointed to was that fintech lenders, into it, Square, et cetera, have been instrumental in this whole effort to extend credit to small businesses. How will they emerge from this whole event in terms of providing finances going forward? Well, Quick Books told me that they have spent the last two or three weeks while they were waiting for their SBA approval to you know, taking the turbo tax engine

and making a user friendly front end. I mean, these poor small business owners are trying to figure out how did they sell out the paperwork and even if it's easy, they have to bring different documentation and banks didn't know what documentation they needed for a while. Now this new app is, you know, automated and it asked you a bunch of questions. And if you use quick books that uploads your documents, PayPal has a similar user friendly opening

for these small business owners. So I think this could be a game changer for the smaller small businesses who have been having trouble getting into their banks and you know, getting in the line, because the bigger small businesses are more prepared and they're they're getting to the front of

the line. And if you see if you have a small business and suddenly a new fintech becomes a trusted provider with a good consumer experience, you could see the fin techs doing a lot of good but also ending up with a lot of goodwill because all business customers are going to remember who was there for them in this crisis. Karen Mills, thank you so much for being

with us. Karen Mills, Senior Fellow at the Harvard Business School, former Small Business Administrator for President Obama from two thousand and nine two thou thirteen, overseeing the efforts during that financial crisis, with some valuable insights into this one. David cast joining us now chief Investment Officer of Matrix Asset Advisors,

joining by phone from New York David. When we look at the bank loan loss provisions totaling twenty four billion dollars so far from Bank of America, Wells Fargo, JP, Morgan, as well as City Group, do you feel like the market is inadequately pricing in the carnage that we're expecting in this earning season. Uh, we actually don't. We think that the banks are the bank prices are far more sensitive to the current trends than most other companies will be.

And the reason behind that is when you're looking at industrial companies or corporate general corporations, the real concern is not how they did this quarter, but are they going to be able to survive it? And where are they going to be in six months. When you're looking at the banks, there's a concern that they're leveraged, and if the loans are this bad now and they get worse later, are they going to be able to pay the dividends?

Are they going to be able to survive? Is it going to be two thousand and eight, two thousand nine? So number one, we'd make that distinction. We don't expect other stocks and other industries and sectors to react like the banks that's first number two. We actually think when the dust settles, the banks are going to start to do much better. We've been on all of these calls and and basically what the banks did is they were

in a pretty draconian way, uh said, these loans. You know, there's going to be an enormous uptick in negative loans or non paying loans. They took a big hit now And because the banks don't want to over promise and under deliver, they and said and if things get worse, these numbers are going to get a lot worse. So everyone is looking at the bank numbers and assuming the worst. We think that they've taken a significant reserve. One thing that they did say is that they will get through this.

At their balance sheets are in very good shape. They're over reserved. You know. One of the things people are trying to get a sense of is is this big move up off the bottom. Is it a head fake? Is it real? Are we're gonna retest lows because there's gonna be a lot of dire data coming out over

the next several months. Well, we think that the last three weeks is a great lesson in teaching people that you simply can't time the market on a short term basis, and you really shouldn't spend a whole heck of a lot of time trying to call a bottom, because the people that were trying to call a bottom all of a sudden missed the first. So we think the key for investors is take a nine to twelve month time horizon, look at what's going to be happening. By the end

of this year. The market is going to be looking at two thousand and twenty one earnings, and on that basis, we think stocks are pretty cheap and a that's your mindset, and you're able to do that. You're able to buy some pretty decent companies at very attractive prices that are going to get through this period, and we think that's the most important question. We expect a lot of volatility. We would be buying in days like today, We would not be chasing the rallies of the last few weeks.

But today the newsflow feels horrible. Two days ago, you know, one day ago the news flow felt great. Don't get caught up in the daily news flow because it'll make you crazy. But if you can buy a good business that's paying a four percent yield that is going to live to fight another day, is going to get through this with pretty good economics. You do that, uh, and and try not to focus as much on the day

to day volatility. When you say it's a good time to buy certain companies that you think that can withstand this. Other people seem to think big tech is the place to go. We've seen those shares rally with the exceptions, say of Alphabet due to the advertising revenue, which is like behind which companies are you really focusing on here? So we're looking at companies like V or Comcast, or CVS or A T and T. All are paying very very healthy dividends. They absolutely will get through this. CVS

is business has been pretty good. Abby has reaffirmed the dividend. They'll be growing the dividend. Their earnings are very good. Uh. A T and T is paying over a six and a half percent yield while you wait, we think they're gonna get through this in pretty good form. All of those are pretty good businesses. We also if again we wouldn't put too much in, but we also think that banks are going to come through this in very good form.

And if you don't mind the additional volatility. Uh, that you can buy companies like a Wells Fargo or p n C. P n C announced earnings today. Uh, it was it was actually a pretty good call. They really have their arms around this. They said that one thing that's going to come out of this when all said and done, is the quality of their loan portfolio, and it's paying over almost a five percent dividend. Uh. So those are the type of companies you can buy a

year from now. We think you're gonna be pretty happy and feel that you're pretty smart. How concerned are you about balance sheets? A couple of companies you mentioned, most notably A T and T and Comcast carrying a tremendous amount of debt. Now they've got good cash flows, but if this thing gets really ugly and for longer, how concerned are you about credit and balance sheets? We're very

concerned about balance sheets. If you're in a leveraged business or business is going to be impacted by the coronavirus. So what would that include? That would include the automobile companies, hotel chains, restaurants, the cruise lines, airlines. Those companies, if they've got too much debt, are going to have no revenues. In terms of Comcast, their revenues are going to be absolutely solid. They're going to come through this. They've got great cash flow. People are not going to be cutting

off their services. Same with a T and T. We think that, um, you know people right now, we're all working from home, so they either need their wireless or they need Internet connections. Uh So A T T will get through this. Uh So in both of those cases, you know, we're very, very comfortable that the companies have the cash flow to get through this. But your point is exactly right. We would avoid companies and industries that are going to see a cut in revenues and have

debt because they can get caught and really hurt. David, I'm struggling with the historical reference point to this moment, and people talk about the numbers and how you can't really look at the numbers. Right now. We're getting, you know, horrible retail sales. The Empire Manufacturing Survey dreadful record lows, record plunges, record job losses, record this, record that, and and how do you sort of create a compass forward.

It's faith, it's faith that we're going to recover. On the other side is there anything that you're clinging to that's beyond faith that things will revert to normal in terms of data. That underscore your point, which is things will essentially eventually go back to the way that they were, and you can count on these previous ideas of stable balance sheets and companies that seem to have a viable

business model. That's that's exactly the point. So basically, the vast majority of the time, the market looks out at earnings twelve to fifteen months out, So if you do that, you're really talking about two thousand and twenty one earnings, and that's how financial markets work. So the part of faith that our analysis relies on is that right now the pharmaceutical companies are spending tens of billions of dollars

to find a solution to the coronavirus. So we think at some point, whether it's three months from now or six months from now or nine months from now, we're going to be in a more normal environment. There will be either a treatment for the coronavirus. Uh hopefully Johnson and Johnson that said that they're going to have a vaccine by next um February or March is successful in that endeavor. And if something like that happens, all of

a sudden, people will start to behave more normally. They'll be less scared about getting something and dying, which is a perfectly rational fear right now. And then the economy starts to open up. And at that point the market looks beyond current earnings and current horrific economic ends, and the surviving companies are going to be valued on two thousand and twenty one earnings, and on that basis you're able to get a lot of really good businesses at

twelve times earnings. And the other part of the equation is when the fear factors at and when the world returns to normal, interest rates are essentially at zero, the federal government will have spent trillions of dollars, whether it's two trillion or five trillion dollars, all that money will be at their interest rates will be at zero, bonds

are not offering any reasonable alternative. Stocks will become pretty attractive. Uh. And that again leads to looking at IT earnings, looking at its companies, and valuations based on the last one years evaluations. David Kat's President and chief investment officer Matrix Asset Advisors, David Thanks so much for staying on the line with us. Well, the horrendous economic data just keeps

rolling in this morning. In addition to the Empire manufacturing data that fell u gird at Pace, we also saw a record decline in retail sales and joining us to really put this in their perspective at a time when people don't know what numbers to cling to a Smasha, director of consumer and Retail Trends at Credit Intel joining us on the phone from Long Island, Seema, so glad

to have you on the phone here. I'm wondering what are you looking at in terms of the retail numbers to give you some gauge of how bad this is going to get. I think the biggest and those obvious trend that came out of the numbers, it just sort of highlights the shift away from discretionary spending and two essentials. You saw grocery stores at a really strong number and

ends up. But if you look at what happened to clothing, furniture department stores, I think that just at that risk will continue to grow the longer we're in this shelter in place situation. Then it begs the question what happens when we come out, how will these discretionary retailers be able to perform, Like what do they need to do and what does that mean for them? I think that's

the biggest takeaway I'm seeing right now. Yeah, it's interesting to seem I think the you know, one of the questions that we we've been one of the areas of discussion most we've had today and over the last several days, is how do we think the consumer will change, if

at all. On the other side of this is is there any data that you've seen that suggesting that there will be a fundamental change, or if any of the retailers you've spoken to, if they suggested that they expect a fundamental change, or will the consumer on the other side of this just kind of go back to kind

of normal. I think it's more likely you'll see a change in the consumer because now we're going to be going on almost two months pretty soon of sheltering in place, changing your behavior, having six feet between you and anybody else when you go to the grocery store. So I feel like some of those habits will be hard to change, and it might require retailers to change how they are running their stores. How restaurants. We know that in Hong Kong they've set up table six ft away from each

other and they're sanitizer everywhere. So I think people be behavior will change, certainly, But I think the bigger question is how when their finances will change and what does that mean for discretionary retailers When you know over seventeen million people are filing for unemployment claims, retailers across the board have for a loowed many many, if not all, of their employees. Other companies are also struggling, So how

do these people come back right? And I don't think that the stimulus that they're going to get at some point one time check is going to be enough for them to shift their spending back to the way that it was. But is actually what I'm concerned about. Well, when people talk about the retail sector, they've talked about how Amazon has really consolidated share, and we've seen a shift that's just accelerated to online ordering just because nobody is allowed to go out and the stores were all closed.

It was interesting in your notes you said that actually there is a potential positive outcome from this, that there will be a re emphasis on brick and mortar. Can you talk a little bit about that. Yeah. Absolutely. I think one of the things that you notice when you come away from this is like when people really need something, they want something, they want to go and get it themselves.

And you saw with Amazon having these huge supply chain issues, despite having one of the best supply chains out there, they just could not bring in the essential product on time. They're not even taking new grocery deliveries. You cannot get

a spot to get Amazon fresh delivery. Even regular goods were taking a long time up until recently, and they halted essential you know, non essential sales, and I think that's a huge risk, and it it was a benefit to people like Target and Walmart who are selling some of those merchandise, but that you could go and get it right away, and I think for them it was even better economically because it's cheaper for a client or customer to go pick up a product from the store

than having the retailer ship that product to them. And I think that type of that was really highlighted, I think in this crisis, and it shows why you need to have an omni channel strategy, not an online strategy, and not a brick and mortar only strategy seem a bit about the balance sheets some of the retailers you look at. I mean, you know a lot of retailers they operate on you know, very tight margins. I'm not sure how much cash they carry. How are you thinking

about that? Yeah, so credit until we put out a couple of reports recently which we keep updating, and one of those the retailers at risk. And you know why are they at risk? Well, first of all, they have most of them with through their guidance. They closed their stores, they furloughed their employees, most if not all of them have drawn down and on their revolvers just to make sure they have a bit of a cap cushion, and suspended uh their operating expensive including in some cases not

paying their rent for the month of April. And we'll

see how long this goes. But the way we're looking at it is just like, how long can these companies, uh, when we look at the credit r how long can they sustain in this type of environment when you don't have a zero revenue environment based on your balance sheet and how much cash you're able to get, right, And so there are retailers, you know, we're hearing a lot about J C. Penny and we Credit Hill had a cash burn analysis on it that, based on certain assumptions,

if they cut their capital spending by uh, they wind down accounts payable and accrude libilities by and a couple of other assumptions, including the fact that they paid rent that in a good scenario they have liquidity for five

point one month. Right, So this has certain assumptions, but you have to think about we're doing this many of our retailers to see who is at most at risk, and so retailers like J. C. Penny who were already sort of struggling, and then you also have like the Stage Doors or a g n C or those type of players, how did they come out of this um In many cases, I think it's going to be really hard for them because if even you can't even go

to bankruptcy at this point because you can't liquidate your inventory, right so models and pure One even that is on hold. So I think that it just makes it a lot more difficult for these guys. Take this to back though, I mean trying to find a silver lining, just because right now everything looks pretty dismal, and I'm trying to I'm trying to be more optimistic here, but I mean, some of these retail chains have been struggling for a

long time. You talk about J. C. Petty, it's been on the chopping block for a long time, with a lot of traders betting against that company. There are a number of other retailers as well that have been sort of the slow burn, and it's been accelerating in the burn over the past few years. We'll just wash out some of the weaker players and allow some of the stronger retailers to actually consolidate share and put up a bitter fight against Amazon and other retailers. I think so.

And it's hard to say exactly who will make it out because companies don't want to fail and people protect them to extend. But I think, yeah, you're gonna see, uh, those that have been struggling and sort of being able to muddle along for the last couple of years when the you know, the consumers quote unquote strong and they

were still struggling. Yeah, I think you'll see a shakeout and you'll see the longer retailers take that share, and you know, and I think that will also include Amazon, right, I think that gives them more leverage because they continue to take share as well. So even though they have their own share of problems, they have the whole foods, they have the relationship with colds and right aids, so they are building sort of an omnichannel strategy. So I

definitely think you'll see that trend. So it's not like all retail go away or everything is going to go online, but you'll definitely see who the winners are, and it will be most difficult for the smaller retailers who maybe didn't have any omni channel strategy to begin with, or you know, just don't have the balance sheet to sort of sustain a zero revenue environment for multiple months. See Michew, thank you so much for joining us, who really appreciate

your insight. As always seems. She's a director of Consumer and Retail Trends at Credit Intel. The focus today, in addition to just see incredibly terrible economic data, has been on the banks reporting earnings kicking off the earning season and loan lost provisions have been the key indicator of how steep the recession, maybe at least in the eyes of the major banks. And there's no one better to talk to about this than Alison Williams, Senior analyst for

the Global Investment Banks for Bloomberg Intelligence. She joins us. Now, Allison, now that we've had a couple of hours to process the earnings and the twenty four billion dollars of loan loss provisions set aside for souring loans in the in the weeks and months ahead by City Group, JP Morgan at Wells Fargo, UH and and City Group, what's your big takeaway here? So the takeaway, UM, I think my big takeaway from the border is that we've sort of only just begun, and I think, um, you know, that's

probably the main concern among investors. So as you said, you know, we've had twenty four billion provisions twenty five if you include UM Goldman UM, that's an increase of about twenty billion compared with a year ago. And you know, when the managements are talking, uh, you know, yesterday's managements were quite negatives. You're sort of hearing some mixed comments.

But when we look at some of the expectations that are built in and also just hearing from these managements that we're only at the beginning, it's it's qualitative in a way. It's just a guestiment, so we really, you know, have no idea how bad this can get. Yeah, that's interesting because you can't really go back to the playbook of two thousand eight two thousand nine eight very different situations. So we're the management team saying, listen, we're kind of

taking a best guess here. We're probably gonna you may even see us come back in future quarters with even more Is that kind of the message they're trying to send.

So JP morgan Um to begin with said very distinctly that we were definitely or we're probably going to have more reserves in two CUE, being that you know today's reserves, yesterday's reserves took into account, you know, their economic forecast um from their firm of unemployment and over ten percent i'm sorry over drop in g d P over ten percent unemployment rate. Those estimates already are worse down g B g d P unemployment expected for two QUE. So

already their estimates are stale. And then the second part of it is the government programs. As you said, you know that the OH nine playbook doesn't work, but even at other cycles, we don't really know what the impact is going to be of these government programs of all these deferrals, how much of these deferrals you know we'll end up going back to good and how much UM will end up having to get charged off. And so we really won't know that until we start to move

throughout this quarter. So you know, ten ques, we might get some update may conferences if they go virtual, we make at some update, UM, but we really just don't know. So one, JP Morgan and Bank of America leading the declines that we're seeing today in the major US banks. So I think you know, when we saw the numbers come out yesterday, UM, I think some investors just sort of looked at the top line of reserves and with

those numbers, perhaps thought JP Morgan is conservative. Look at Wells They're much lower, you know they we take we look at the dollar provisions, but we look at those provisions versus their loan book. JP Morgan with the two and a half percent ratio, you know, Wells Fargo sort

of less than half of that. But then we saw a city group come out today UM with granted less dollar provision number, but their ratio UM while exceeding that now of JP Morgan, perhaps making JP Morgan who appeared conservative now seeming less so and um, you know a Bank of America as well. You know, again the question is sort of sort of how bad they are going

to get from here? How all you prepared the card business where all the all three of the banks that we just discussed are very big in this wells Fargo is less big. Um. You know, that's where we're seeing the majority of the provisions that that product tends to have the highest class rate. It's unsecured, the thing that people don't pay first. Um. And so I think that's you know, going to be the area of focus in

the coming month or so. So Alis and I know you listen to all these conference calls in these big bank ceo s, they really have great visibility in terms of they see lots of the global economy around the world that they suggest how long they anticipate a downturn to last. I think most people kind of dropped the discussion of a V shaped but now more of a you or an L What are they kind of thinking at this point? Well, I think, um, you know, one contrast maybe and again I think a lot of these

managements are sort of calling on their research departments. Um. And again this goes to the quality of their reserves. So Bank of America, you know, expecting a big drop into Q like everyone else, but also expecting negative um growth or declines in GDP for several quarters to come versus JP morgan um that is currently factoring in more

of a rebound in the back half. That being said, I think all managements do sort of acknowledge um that we don't necessarily know how long this is going to go on, and so the key risk I think they're two investors. Obviously, yes, it's it's the provisions, but it's the dividends where managements are committed. The FED said they don't see any need for cuts at this time, but to the extent that this downturn is unprecedented and we

don't know how long it's going to go on. We don't know if there will um become more pressure, if this becomes a prolonged situation. Alison Williams, thanks so much for joining us. Really appreciate it. We know you're busy with all these big bank earnings, but we appreciate it taking the time. Alison Williams, she's a senior annals covering all things financials for Bloomberg Intelligence, giving us her perspective and kind of Lisa frankly sharing that the management teams

really don't know. These are the provisions we have as of right now, but there could be more. Yeah, and and typically banks do take a conservative approach. The question is just how do you even know what a conservative of approaches when you have no idea what we're heading into. Yeah, exactly right. And I think they're just trying to simply say, um, this is kind of what we know now. We're relying upon the data we have now. But to the extent this thing goes even longer, it could be even worse.

Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. M Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyd's I'm on Twitter at Lisa Abram woits one before the podcast, you can always catch us worldwide. I'm Bloomberg Radio