Bankers Warn Of Challenges Ahead For Economy, Call For More Action

JPMorgan Chase CEO Jamie Dimon and Jefferies CEO Richard Handler, two of the top bankers in America, are optimists by nature. But there’s no sugar coating the catastrophic economic impact the coronavirus pandemic has wrought on the U.S. economy, and Dimon and Handler believe further action is needed.

In his annual letter to shareholders, Dimon warned of a “bad recession” ahead for the U.S. and called for unity overcome what will be real hardship for many. “The world is confronting one of the greatest health threats of a generation, one that profoundly impacts the global economy and all of its citizens,” he said.

Dimon applauded the Treasury Department and Federal Reserve’s various actions to ease the flow of credit and get emergency cash into the hands of businesses and citizens. Some $6 trillion in capital and loans has been dedicated to bridging the business stoppage brought about by the pandemic. “The Fed’s overwhelming actions have already dramatically reduced the financial stress in the system, and there is still more they could do if they need to,” said Dimon.

He broached the idea of further balance sheet expansion by the Fed, as well as the implementation of new lending facilities and regulatory relief so banks could pump even more cash into the economy.

“We hope to be at the forefront of using this assistance to help our customers get through what is certain to be a difficult next few months. We will not use this relief funding for ourselves,” said Dimon, who pointed out JPMorgan corporate clients have drawn on $50 billion of cash and the firm’s bankers originated a record $85 billion in investment grade rated debt in the first quarter.

One Monday afternoon, the Fed opened an up an unprecedented facility to buy small business loans, potentially helping to funnel credit to the small business that may be most vulnerable to the business stoppage. The central bank said it will provide term financing to the Small Business Administration’s Paycheck Protection Program.

Richard Handler, the CEO of investment bank Jefferies, was even more urgent than Dimon in his call for new action. In a weekend letter to shareholders, Handler made the argument the government’s resources should be used to stabilize the entire economy.

“Very simply, in our view, not much less than an economy-wide buyout of the economic damage from the Coronavirus will allow a reasonable and healthy recovery to ensue,” said Handler. “Remember, this was not the fault of any company, employee or investor, so the normally correct fears of enabling moral hazard are not present in this remarkably unique circumstance.”

While he said that the “falling knife that had us near the abyss two weeks ago has been slowed,” he also argued more work needs to be done in a quick time frame.

“Right now, the world needs comfort that we have a fighting chance to restore to the greatest extent possible the demand for goods and services that was extant only six weeks ago. To do this, government must rapidly communicate a cohesive commitment to a truly economy-wide set of support mechanisms,” said Handler. “The more this lingers, the more people that are forced to file for unemployment support and the more the overall appetite for risk and consumption is dissipated, the harder this recovery will be.”

In particular, Handler highlighted the need for financial support to businesses with over 500 employees. “This is a massive portion of the economy, and these companies represent an enormous number of jobs and are the lynchpin of some of the structures that finance economic growth — securitized instruments. We are not seeking to bail out CLOs, private equity firms or LBOs, but rather to return previously high quality companies employing millions of people to the same position they were in before we were at war with the Coronavirus,” he said.

Handler suggests a facility for private investors to invest equity of $100-to-$500 million to mid-sized businesses and the government provides leverage of ten times that amount to invest on a first loss basis. While these types of companies would likely be predominantly backed by private equity investors, Handler advocates a number of protections for the government, from reasonable interest rates, to fee waivers and layoff provisions, which would ensure the facility wasn’t exploited.

His recommendations didn’t stop at mid-sized companies. “There is need for much more support than already earmarked for hospitals, municipalities, institutions of higher learning, mortgage servicers and originators, and many others. Again, there is no choice but to do “whatever it takes.””

In his annual letter, Dimon began also floating recommendations for how the country could reopen for work, and conveyed optimism that treatments and better testing would soon be available to aid the restart of the economy.

“The country was not adequately prepared for this pandemic – however, we can and should be more prepared for what comes next. Done right, a disciplined transition would maximize the health of Americans and minimize the time, extent and suffering caused by the economic downturn,” he said.

“Of course, we do not know how this crisis will ultimately end, including how long it will last, how much economic damage it will do, or how fast or slow the recovery will be,” Dimon added, and concluded, “We have the resources to emerge from this crisis as a stronger country.”
Source: Forbes