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The Fed’s $4 Trillion Lifeline Never Materialized. Here’s Why.

WASHINGTON — As companies furloughed millions of workers and stock prices plunged through late March, Treasury Secretary Steven Mnuchin offered a glimmer of hope: The government was about to step in with a $4 trillion bazooka.

The scope of that promise hinged on the Federal Reserve. The relief package winding through Congress at the time included a $454 billion pot of money earmarked for the Treasury to back Fed loan programs. Every one of those dollars could, in theory, be turned into as much as $10 in loans. Emergency powers would allow the central bank to create the money for lending; it just required that the Treasury insure against losses.

It was a shock-and-awe moment when lawmakers gave the package a thumbs up. Yet in the months since, the planned punch has not materialized.

The Treasury has allocated $195 billion to back Fed lending programs, less than half of the allotted sum. The programs supported by that insurance have made just $20 billion in loans, far less than the suggested trillions.

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The programs have partly fallen victim to their own success: Markets calmed as the Fed vowed to intervene, making the facilities less necessary as credit began to flow again. They have also been undercut by Mr. Mnuchin’s fear of taking credit losses, limiting the risk the government was willing to take and excluding some would-be borrowers. And they have been restrained by reticence at the central bank, which has extended its authorities into new markets, including some — like midsize business lending — that its powers are poorly designed to serve. The Fed has pushed the boundaries on its traditional role as a lender of last resort, but not far enough to hand out the sort of loans some in Congress had envisioned.

Lawmakers, President Trump and administration officials are now clamoring to repurpose the unused funds, an effort that has taken on more urgency as the economic recovery slows and the chances of another fiscal package remain unclear. The various programs are set to expire on Dec. 31 unless Mr. Mnuchin and Jerome H. Powell, the Fed chair, extend them.

Here’s how that $454 billion failed to turn into $4 trillion, and why the Fed and Treasury are under pressure to do more with the money.

The Fed can lend to private entities to keep markets functioning in times of stress, and in the early days of the crisis it rolled out a far-reaching set of programs meant to soothe panicked investors.

But the Fed’s vast power comes with strings attached. Treasury must approve of any lending programs it wants to set up. The programs must lend to solvent entities and be broad-based, rather than targeting one or two individual firms. If the borrowers are risky, the Fed requires insurance from either the private sector or the Treasury Department.

Early in the crisis, the Treasury used existing money to back market-focused stabilization programs. But that funding source was finite, and as Mr. Mnuchin negotiated with Congress, he pushed for money to back a broader spate of Fed lending efforts.

The central bank itself made a major announcement on March 23, as the package was being negotiated. It said it was making plans to funnel money into a wide array of desperate hands, not just into Wall Street’s plumbing. Officials would set up an effort to lend to small and medium-size businesses, the Fed said, and another that would keep corporate bonds flowing. It would go on to expand that program to include some recently downgraded bonds, so-called fallen angels, and to add a bond-buying program for state and local governments.

Congress allocated $454 billion in support of the programs as part of the economic relief package signed into law on March 27. When the Congressional Budget Office estimated the budget effects of that funding, it did not count the cost toward the federal deficit, since borrowers would repay on the Fed’s loans, and fees and earnings should offset losses.

Mr. Mnuchin and congressional leaders did not settle on that sum for a very precise economic reason, a senior Treasury official said, but they knew conditions were bad and wanted to go big.

Overdoing it would cost nothing, and the size of the pot allowed Mr. Mnuchin to say that the partners could pump “up to $4 trillion” into the economy.

It was like nuclear deterrence for financial markets: Promise that the government had enough liquidity-blasting superpower to conquer any threat, and people would stop running for safer places to put their money. Crisis averted, there would be no need to actually use the ammunition.

Still, the huge dollar figure stoked hopes among lawmakers and would-be loan recipients — ones that have been disappointed.

Key markets began to mend themselves as soon as the Fed promised to step in as a backstop. Companies and local governments have been able to raise funds by selling debt to private investors at low rates.

Corporate bond issuance had ground to a standstill before the Fed stepped in, but companies have raised $1.5 trillion since it did, Daleep Singh, an official at the New York Fed, said on Tuesday. That is double the pace last year. The companies raising money are major employers and producers, and if they lacked access to credit it would spell trouble for the economy.

While self-induced obsolescence partly explains why the programs have not been used, it’s not the whole story. The Main Street program, the one meant to make loans to midsize businesses, is expected to see muted use even if conditions deteriorate again. In the program that buys state and local debt, rates are high and payback periods are shorter than many had hoped.

Continued lobbying suggests that if the programs were shaped differently, more companies and governments might use them.

The relatively conservative design owes to risk aversion on Mr. Mnuchin’s part: He was initially hesitant to take any losses and has remained cautious. They also trace to the Fed’s identity as a lender of last resort.

Walter Bagehot, a 19th-century British journalist who wrote the closest thing the Fed has to a Bible, said central banks should lend freely at a penalty rate and against good collateral during times of crisis.

In short: Step in when you must, but don’t replace the private sector or gamble on lost causes.

That dictum is baked into the Fed’s legal authority. The law that allows it to make emergency loans instructs officials to ensure that borrowers are “unable to secure adequate credit accommodations from other banking institutions.” The Fed specified in its own regulation that loan facilities should charge more than the market does in normal conditions — it wants to be a last-ditch option, not one borrowers would tap first.

The Fed has stretched its “last resort” boundaries. The Main Street program works through banks to make loans, so it is more of a credit-providing partnership than a pure market backstop, for instance.

Yet Bagehot’s dictum still informs the Fed’s efforts, which is especially easy to see in the municipal program. State finance groups and some politicians have been pushing the central bank to offer better conditions than are available in the market — which now has very low rates — to help governments borrow money for next to nothing in times of need.

The Fed and Treasury have resisted, arguing that the program has achieved its goal by helping the market to work.

Congress is not uniformly on board with wanting a more aggressive Fed that might become a first option for credit. Senator Patrick J. Toomey of Pennsylvania, a Republican on the committee that oversees the central bank, has repeatedly underlined that the Fed is a backstop.

And replacing private creditors during times of crisis would put central bankers — who are neither elected nor especially accountable — in the position of picking economic winners and losers, a role that worries the Fed.

Such choices are inherently political and polarizing. Already, many of the same people who criticize stringency in the state and local programs regularly argue that the programs intended to help companies should have come with more strings attached.

And it could become a slippery slope. If the Fed shoulders more responsibility for saving private and smaller public entities, Congress might punt problems toward the central bank before solving them democratically down the road.

“It’s opening Pandora’s box,” said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University.

Being too careful could also carry an economic risk if it meant that the Fed failed to provide help where needed. The midsize business segment, which employs millions of people, has had few pandemic relief options. Struggling states and cities are also huge employers.

Yet those entities may be past the point of needing debt — all the Fed can offer — and require grants instead. And it is worth noting that just because the Fed and Treasury are not rewriting their programs to support broader use now does not mean the Fed would stand back if conditions were to worsen.

If that happens, “it’s going to stop pointing to the fact that it has a fire hose,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. “It’s going to take it out and turn it on.”

Alan Rappeport contributed reporting.

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U.S. Budget Deficit Hit $3.1 Trillion Amid Virus Spending Surge

WASHINGTON — The federal budget deficit soared to a record $3.1 trillion in the 2020 fiscal year, official figures showed on Friday, as the coronavirus pandemic fueled a surge in spending and a drop in tax receipts brought by households and businesses struggling with economic shutdowns.

The federal government spent $6.55 trillion in 2020, while tax receipts and other revenue trailed at $3.42 trillion. Much of the spending came from the $2.2 trillion economic relief package that Congress passed in March, which was financed by government borrowing. Total debt held by the public topped $21 trillion at the end of September, a record level.

The shortfall underscores the long-term economic challenge facing the United States as it tries to emerge from the sharpest downturn since the Great Depression. Interest rates are low — meaning it costs less for the government to borrow money — but the ballooning deficit is already complicating policy choices as Republicans resist another large stimulus package, citing concerns about the U.S. debt burden.

The deficit — the gap between what the U.S. spends and what it earns through tax receipts and other revenue — was $2 trillion more than what the White House’s budget forecast in February. It was also three times as large as the 2019 deficit of $984 billion.

According to the nonpartisan Committee for a Responsible Federal Budget, the nation’s debt has now surpassed the size of the economy, amounting to 102 percent of gross domestic product.

“It is hard to believe we now owe a full year’s worth of output,” said Maya MacGuineas, president of the committee. “We weren’t supposed to cross this threshold for over a decade, but here we are.”

Ms. MacGuineas noted that the last time America’s debt exceeded the size of the economy was at the end of World War II, and that it took years of balanced budgets to bring it down.

The annual deficit was the largest since 2009, when the United States recorded a $1.4 trillion shortfall during the financial crisis.

In a statement accompanying the annual budget report, Treasury Secretary Steven Mnuchin highlighted the extraordinary level of money that has been pumped into the economy this year to combat the recession and prop up the economy. Russell T. Vought, the director of the Office of Management and Budget, said that as the recovery continued, the fiscal picture would improve as companies hired back workers and people began spending more money.

Federal agencies including the Treasury Department, the Small Business Administration, the Department of Agriculture and the Department of Health and Human Services saw their spending soar as they funneled loans to small businesses, subsidized farmers and provided funding for hospitals. Much of the money also went to households through stimulus checks and enhanced unemployment benefits that gave workers an extra $600 per week.

That spending was crucial to preventing families from falling into poverty and keeping businesses afloat. New research from the Federal Reserve released this week showed that Americans used one-time stimulus checks to save money and pay off debt.

Households spent just 29 percent of the money they received earlier this year, the Federal Reserve Bank of New York said in a post on its website, citing its Survey of Consumer Expectations, conducted in June and August. Another 36 percent of the cash was saved, while 35 percent was used to pay down debt.

Even the most ardent deficit hawks agreed that the virus, which shut down large swaths of the economy and tossed millions out of work, necessitated a huge fiscal response.

But with Election Day approaching, Republican lawmakers have shown little appetite for more spending, despite the fact that millions remain unemployed and previous aid has largely dried up. While the White House and Democrats want to bankroll another $1 trillion-plus aid package, Senate Republicans are preparing a $500 billion bill to vote on later this month. Speaker Nancy Pelosi and House Democrats support a $2.2 trillion package, while President Trump has endorsed going higher than the $1.8 trillion proposal the White House previously proposed.

On Thursday, he told Mr. Mnuchin, who is leading the negotiations, to make a bigger offer and said, “go big or go home.”

The Treasury secretary acknowledged this week that the deficit is a long-term concern but said now is not the time to worry about bringing it down. Given low interest rates and the severe nature of a health crisis that has stalled so many parts of the economy, he said the deficit was not an immediate priority.

“When you’re in a war — and we’re in a war against Covid — you spend what it takes to get rid of it,” Mr. Mnuchin said on Wednesday at the Milken Institute conference. “And that’s what we’ve done.”

Treasury officials had no estimate for next year’s deficit, but it is likely to be smaller unless another aid package is approved.

It appears unlikely that either Mr. Trump or his Democratic opponent, Joseph R. Biden Jr., would make significant progress in reducing the debt. While Mr. Trump has promised to tackle the deficit in a second term, he has also pledged to continue cutting taxes for individuals and corporations, while offering few details about how those would be paid for.

Mr. Biden wants to raise taxes on corporations and the wealthiest Americans to help pay for additional spending on health care, infrastructure and education. But those tax increases, while estimated to raise about $4.3 trillion, would not completely cover the costs of his spending proposals, according to the Committee for a Responsible Federal Budget.

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Struggling Hotel Owners, Some With Trump Ties, Seek Federal Bailout

Thomas J. Barrack Jr., the billionaire investor and major donor to President Trump, has run into an unexpected patch of red ink thanks to the pandemic: He has struggled to keep up with payments on $1.97 billion in Wall Street debt he used to buy a collection of more than 160 hotels.

Monty Bennett, another big donor to Mr. Trump, is in a similar tough spot after he recently halted payments owed on the $2.6 billion worth of Wall Street debt used to acquire his own hotel collection.

Imminent monetary default” is the term a Wall Street research firm used this summer to describe more than $300 million in debt on a luxury hotel in Austin, controlled by Doug Manchester, whom Mr. Trump nominated to serve as ambassador to the Bahamas after Mr. Manchester and his wife donated more than $3 million to Mr. Trump’s political causes.

The precarious financial position that some friends of Mr. Trump and other hotel executives are now in has fueled an intense lobbying campaign aimed at persuading the Trump administration, the Federal Reserve and Congress to rescue hundreds of hotel industry players that relied on riskier Wall Street debt to finance their lodging empires before the virus hit.

Industry executives and their lobbyists say a federal rescue will save thousands of jobs and help local economies, and are hoping their argument resonates with a president who is a hotelier himself. They are making the case that Treasury Secretary Steven Mnuchin has the power — and access to the billions of federal funds he needs — to extend existing coronavirus relief efforts to the commercial real estate sector, which so far has been cut off from most of the stimulus money.

But Congress prevented Mr. Mnuchin from tapping the main pot of $454 billion in coronavirus relief funds on his own, and doubts exist in the Treasury Department about the economic case for propping up a relatively small slice of the market that would primarily benefit wealthy investors who knowingly made high-risk bets.

One industry lobbyist involved in the negotiations said department officials remained concerned that some of the borrowers — which include hotels, shopping malls and other commercial real estate — might be “zombies” that are not going to survive, and taxpayer money sent to help them out would be lost.

Those concerns have not deterred the industry, which has embarked on an aggressive campaign to convince Congress, the Treasury Department and others that the sector will go bust without a big bailout.

“We need you to act — as often as possible — through calls, letters, and social posts to flood the offices of members of Congress,” the American Hotel & Lodging Association wrote on Thursday in an email to its members.

At a Senate Banking Committee hearing on Wednesday, a top industry lobbyist said Congress should make a “technical amendment” to an earlier relief package to explicitly allow a Treasury bailout. The committee’s chairman, Senator Michael D. Crapo, who has written two letters in recent months pushing Mr. Mnuchin and the Fed chairman, Jerome H. Powell, to act, said during the hearing that the commercial real estate industry, including hotels, was “one of the most significant industries to lack access” to relief funds.

The campaign has put the Trump administration in a tough spot.

Mr. Mnuchin may not be able to set up the type of program hoteliers want without new congressional action. Industry lobbyists privately acknowledge that any effort to bail out the industry will generate criticism, given Mr. Trump’s dual role as both president and owner of a small luxury hotel brand.

“The president clearly understands our industry: He’s a hotelier,” Chip Rogers, the chief executive of the American Hotel & Lodging Association, said in a webcast with a hotel industry broker in May, a few weeks after Mr. Rogers and executives from the nation’s largest hotel chains met privately at the White House with Mr. Trump.

“It’s not like we had to explain to him how things work. He gets that,” Mr. Rogers said on the call. “The problem is he and his entire administration are very sensitive to this idea that anything they’re doing is specifically helping hotels because the media is going to accuse him of helping his own business.”

Credit…Milken Institute

The hotel industry is running into trouble in part because it spent years loading up on a type of debt, known as commercial mortgage-backed securities, which must make regular payments to the bondholders who own the debt.

But as hotel occupancy has fallen, the owners of these properties in many cases have lacked the cash flow to cover payments on the loans, which had been bundled together and then sold off to Wall Street investors as bonds.

Over all, there are $550 billion worth of commercial mortgage-backed securities outstanding in the United States, financing hotels, shopping centers, office buildings and even self-storage facilities.

During the last recession, another class of securitized mortgages — then mostly home loans made to risky borrowers — played a major role in the economic crash, as homes suddenly lost value and homeowners defaulted, saddling investors, banks and other financial institutions with huge losses.

A similar pattern is emerging in the hotel industry, with $20 billion or 23 percent of the securitized debt held by the lodging industry at least 30 days delinquent on payments, according to Trepp, a company that tracks the sector. In the last recession, the total value of delinquent commercial mortgage-backed securities, known as CMBS, peaked at $13.5 billion.

While financial agencies are paying close attention to the commercial real estate market, defaults in CMBS alone are seen as unlikely to cause an economic collapse rivaling what happened when residential mortgage-backed bonds began unraveling in 2008.

In part, that is because the debt is less concentrated and the riskier slices — the ones that absorb the first losses — are generally held outside the banking sector. In 2008, banks’ exposure to securitized residential mortgages brought major lenders to their knees, choking off credit to the real economy and reverberating through the financial system.

But the experience is still creating pain. As the pandemic has dragged on, an increasing number of CMBS borrowers, particularly in the hotel industry, are giving up on paying their debt obligations and preparing to turn their properties over to lenders, according to Trepp, which as of August had counted at least 35 such loans worth a total of $1.6 billion.

In some particularly hard-hit markets like Houston, as much as 66 percent of the hotels financed with securitized debt are now delinquent, according to Trepp, or $664 million worth of delinquent CMBS loans.

Republican lawmakers have been pressing the Treasury Department and the Fed to help.

Representative Van Taylor, Republican of Texas, has introduced legislation that would direct the Treasury Department to make “preferred equity” investments in borrowers that are struggling to handle their CMBS debt. That would allow the federal government to take a small ownership stake in hotels and other companies, giving borrowers new cash without violating limits on their existing debt agreements that prohibit them from taking on new loans.

“Millions of jobs and the prosperity of entire communities depend on keeping these properties open,” Mr. Taylor said in a statement as he introduced the bill. Before he was elected to the House in 2018, Mr. Taylor worked in the real-estate finance industry and Mr. Bennett of the Ashford hotel group is among his campaign contributors.


Credit…Anna Moneymaker for The New York Times

Publicly, Mr. Mnuchin has indicated that he is open to finding a way to help the industry — but he said it was not an easy problem to solve.

“This is a large challenge,” Mr. Mnuchin told House lawmakers in late June. “Working with the Fed, we have not yet figured out a way to set up a facility” that could assist holders of this debt, “so it’s not out of a lack of interest or a lack of desire.”

The Fed has already taken steps to stabilize the market for commercial real estate securities — potentially benefiting hotel owners. The central bank is accepting older private commercial mortgage-backed securities as collateral in one of its emergency lending programs and it is buying government agency-backed commercial mortgage securities, broadly helping alleviate a cash crunch in commercial real estate markets.

But the Fed probably could not participate in the type of direct bailout the industry wants, absent new congressional action, because of limits on how much credit risk the central bank can assume, among other restrictions.

Ethan Penner, a real estate investor credited with helping create CMBS, said the federal government should not be bailing out hotel and shopping center owners — borrowers he called “greedy and risk-loving, or the clueless” — after they turned to Wall Street to borrow heavily.

“The idea of bailing out owners of real estate does not even make sense to me,” Mr. Penner said in an interview. “What could make that rise to the top of anyone’s priority list when so many individual people are suffering and need help. These businesses should be allowed to fail.”

Hotel employees have also argued through their union that rescuing investors who turned to Wall Street to finance hotel buying sprees will not save jobs.

“Jobs are driven by occupancy, and only ending the pandemic can fix that,” said Gwen Mills, the secretary-treasurer of Unite Here, a union that represents 300,000 workers at hotels, casinos, cafeterias and other retail outlets. About 85 percent of those workers have lost their jobs, at least temporarily.


Credit…Ronen Tivony/Getty Images

Hotel executives, including those who have given large sums to powerful politicians, have grown frustrated with the lack of action and say the industry’s reliance on debt ahead of the crisis should not exclude it from assistance.

“In an election year, nobody wants to be viewed as bailing out overleveraged industries — even if that’s not what is happening,” Mr. Barrack told Bloomberg in April. Mr. Barrack, who was the chairman of Mr. Trump’s inauguration gala, has donated at least $721,000 to Mr. Trump or his political causes.

Mr. Bennett, whose company owns or provides services to 130 hotels across the United States, practically begged Mr. Mnuchin and Mr. Powell to help.

“This crisis is significantly worse than 9/11 and the financial crisis combined!” Mr. Bennett wrote in an April letter.

Mr. Bennett said in a statement that he was frustrated at how things had played out. His hotels and related companies applied for more than $120 million in loans through the Paycheck Protection Program, but returned the money amid criticism that his corporate entities were not meant to benefit from small business loans.

In August, Ashford disclosed that the Securities and Exchange Commission was investigating its companies over potential self-dealing that predated the pandemic.

“The government destroyed our business through their shutdowns, offered P.P.P. loans to help repair the damage, jerked them back and then launched an investigation into us,” Mr. Bennett said. “Now the U.S. Treasury won’t lend the hardest-hit businesses in America a dime.”

“I think it’s fair to say that my contributions to the Trump campaign haven’t helped us much,” he added.

For now, Mr. Bennett’s companies have negotiated an agreement with some lenders to put off paying interest through November, and to allow his company to use accounts set aside for things like renovations to avoid having the loans foreclosed upon, according to a filing with the S.E.C.

These kind of “forbearance” arrangements have been negotiated by many hotel companies. But just in the last three weeks, after lenders moved to sell off or seize some of its properties, Ashford gave up ownership of at least nine of its hotels, including the Embassy Suites Midtown Manhattan.

Stephanie Brown, a spokeswoman for Mr. Manchester, said in a statement that he had not contacted Mr. Mnuchin and that the company disputed any suggestion that it would default on the loan for its Austin hotel.

“Zero ‘imminent monetary default’ and zero contact with U.S. Treasury,” she said.

Alan Rappeport contributed reporting.

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Steven Mnuchin Tried to Save the Economy. Not Even His Family Is Happy.

One spring day, not long after President Trump signed the largest economic stimulus package in American history in March, a group of his top aides and cabinet officers gathered in the Oval Office.

The $2.2 trillion government rescue — which delivered cash to individuals, small businesses and giant companies — was a crucial victory for Mr. Trump, who was facing withering attacks for his failures to respond to the fast-spreading coronavirus.

It also was a much-needed win for the program’s chief architect, Treasury Secretary Steven Mnuchin. He didn’t have a lot of fans. The president ran hot and cold on him. Conservatives distrusted him as a Republican in Name Only. Liberals demonized him as a plutocrat. Even members of Mr. Mnuchin’s immediate family distanced themselves; his liberal father said he was appalled by his son’s politics.

When the pandemic hit, the task of saving the economy was an opportunity for Mr. Mnuchin to transform himself from an unremarkable Treasury secretary into a national hero.

Mr. Mnuchin, a former banker and film financier, sought advice from his former Goldman Sachs colleagues, a cable-TV host, a Hollywood superagent, a disgraced Wall Street tycoon and Newt Gingrich. Unburdened by his own ideology and with a detail-disoriented boss, Mr. Mnuchin worked with Democrats to devise and pass the landmark stimulus bill.

Afterward, Mr. Trump hailed Mr. Mnuchin as a “great” Treasury secretary and “fantastic guy.”

The acclaim didn’t last. Republicans argued that Mr. Mnuchin had been outfoxed by Speaker Nancy Pelosi, the embodiment of free-spending liberals and, in Mr. Trump’s words, “a sick woman” with “mental problems.”

The conservative critique began to resonate with the president.

Thanks to the stimulus package, the economy had stabilized, but it was still on life support. Millions continued to lose their jobs. More help was needed. Was Mr. Mnuchin’s initial bipartisan success a fluke, or would he be able to save the American economy again?

The omens were bad. That spring day in the Oval Office, the president was venting about the stimulus package.

“I never should have signed it,” Mr. Trump bellowed, according to someone who was there. He pointed at his Treasury secretary. “You’re to blame.”

Mr. Mnuchin is the rare cabinet secretary who does not seem to have strong political beliefs. “I don’t know if Steve is a Republican or Democrat,” said Larry Kudlow, the White House economic adviser. “I do know he’s smart and a hard worker.”

Mr. Trump has told people that he suspects that, deep down, Mr. Mnuchin is a Democrat. (Mr. Mnuchin has said he has always been a registered Republican. Still, he donated to Kamala Harris’s Senate campaign in 2016.)


Credit…The New Journal

Mr. Mnuchin attended Yale. He was publisher of The Yale Daily News during the 1983-84 school year. A fan of the “objectivist” novelist Ayn Rand, he showed little interest in journalism or the causes of the day. What he cared about was turning a profit. Mr. Mnuchin persuaded the future media mogul Sumner Redstone to become an advertiser and kept a tight lid on costs.

“What struck me at the time was a really narrow insistence on the paper’s profit at the expense of what I thought we were there to do, which was inform, entertain, enlighten,” said Anndee Hochman, the editor in chief during Mr. Mnuchin’s tenure.

Brett Ratner, Mr. Mnuchin’s longtime Hollywood partner, producing films such as “The Lego Batman Movie,” said he had no inkling that Mr. Mnuchin cared about politics. Then one day in 2016 Mr. Mnuchin announced that he was joining the fledgling Trump campaign as finance chairman.

“I nearly fell out of my chair,” Mr. Ratner said.

Mr. Mnuchin had no political fund-raising experience. But he had a social and business relationship with the candidate. And after watching an adoring Indianapolis crowd scream for Mr. Trump — the only thing Mr. Mnuchin could compare it to was when Mick Jagger had taken him to a Rolling Stones concert — Mr. Mnuchin was convinced that Mr. Trump would win.

Credit…Darron Cummings/Associated Press

On the surface, the flamboyant candidate and the often dour Mr. Mnuchin appeared to have little in common. But the two men shared an interest in deals, especially of the real estate variety. Mr. Mnuchin made his name at Goldman Sachs in the mortgage-backed bonds business. And like Mr. Trump he owned a portfolio of luxury properties: a mansion in the Bel Air neighborhood of Los Angeles, a duplex in Manhattan’s prestigious 740 Park Avenue building, a waterfront estate in Southampton, N.Y. — the list went on. Days after being confirmed as Treasury secretary he paid $12.6 million for a nine-bedroom mansion in Washington.

Mr. Mnuchin and Mr. Trump also both had to vie for the attention of wealthy, self-made fathers. Robert Mnuchin, himself a former top executive at Goldman Sachs, has said that as he pursued his Wall Street career, he spent little time with Steven and his brother. (He has mused to acquaintances about whether his neglect fueled his son’s ambitions.) Like Mr. Trump, Mr. Mnuchin had a gilded youth; his red Porsche featured custom plaid upholstery.

After the election, Mr. Trump tried to recruit Jamie Dimon, the JPMorgan Chase chief executive, to be Treasury secretary. Mr. Dimon, a Democrat, said no, according to a person with direct knowledge of the discussions.

Mr. Mnuchin showed up for his job interview at Mr. Trump’s golf club in Bedminster, N.J., with three pages of notes detailing his credentials: He made partner at Goldman; he ran a hedge fund, Dune Capital; he earned a fortune buying and selling IndyMac Bank in California; he financed a slate of Hollywood movies.

Mr. Mnuchin’s career was a success — his net worth was more than $400 million — but he was hardly a top-tier financial player. He had never been a candidate to lead Goldman; Dune was small by hedge fund standards; IndyMac was tainted by allegations of abusive foreclosures; quite a few of his films were flops.


Credit…Sam Hodgson for The New York Times

Mr. Mnuchin got the job, but things didn’t get off to a great start. Republicans jeered him when he pleaded to raise the national debt limit. Critics in the administration derided him as a Wall Street apologist. The White House trade adviser, Peter Navarro, likened him to Neville Chamberlain — the British prime minister who infamously appeased the Nazis — for his aversion to a trade war with China.

But Mr. Mnuchin cemented his bond with Mr. Trump after the president said white supremacists who had marched in Charlottesville, Va., included some “very fine people.”

Mr. Mnuchin wrote an open letter to former Yale classmates who had called on him to resign: “I feel compelled to let you know that the president in no way, shape or form believes that neo-Nazi and other hate groups who endorse violence are equivalent to groups that demonstrate in peaceful and lawful ways.”

Then, at the end of Mr. Trump’s first year in office, Mr. Mnuchin eased a $1.5 trillion package of tax cuts through the Republican-controlled Congress. It was the president’s signature legislative achievement.


Credit…David Williams for The New York Times

One day last year, Howard Saunders encountered Robert Mnuchin at the Matthew Marks art gallery in Manhattan. The two strangers — Mr. Saunders an artist, Mr. Mnuchin a prominent gallery owner and art dealer — struck up a conversation. It turned awkward when Mr. Saunders realized he was speaking to the Treasury secretary’s father. Sounding disgusted, Mr. Saunders asked Mr. Mnuchin about his son.

The elder Mr. Mnuchin appeared pained. “His politics appall me, too, really appall me,” he replied, according to Mr. Saunders. “But he’s my son.”

Robert Mnuchin didn’t respond to requests for comment for this article. When a New York Times reporter asked him about his son last year, he demurred but seemed to be near tears.

Robert Mnuchin’s wife, Adriana, has reminded people that she is not Steven’s biological mother. (The couple married when he was a toddler.) She reluctantly attended Steven’s 2017 wedding to the Scottish-born actress Louise Linton. Ms. Mnuchin pretended her arm was injured in order to avoid having to shake hands with Mr. Trump, according to her grandson Zan Mnuchin Rozen.

Even Ms. Linton has said people shouldn’t assume she shares her husband’s politics.

Mr. Rozen, 22, wrote on Facebook in June that “my uncle has been complicit in, and in some cases directly culpable for, many years of the marginalization, persecution and stereotyping of black people in the United States.” His actions “cannot and will never be defensible.”



Mr. Rozen deleted the post but said he stood by what he had written. “It’s a very complicated relationship,” he said. “There’s definitely some tension.”

Mr. Mnuchin said in one of two recent interviews for this article that he tried to avoid discussing politics with his family.

Mr. Mnuchin, 57, is tall and lanky. He keeps fit by taking his Secret Service detail on roughly 40-mile bike rides to and from Mount Vernon. He recently took up boxing.

Before the coronavirus pandemic, Mr. Mnuchin had not accumulated much good will outside the Trump administration. He comes across as stiff and aloof. He rarely smiles or indulges in small talk, at least in public. (To break the ice, he occasionally impersonates Inspector Clouseau from the “Pink Panther” films.)

Democrats and independent watchdogs have pilloried Mr. Mnuchin for appearing to help his old banking buddies. He was accused of conflicts of interest for urging to get China to let more Hollywood films, like those he produced, into the country. Last year he flew from Washington to Los Angeles on the private aircraft of Michael R. Milken, the billionaire junk-bond pioneer convicted of conspiracy and fraud. Mr. Mnuchin at the time was pushing for him to receive a presidential pardon.

Mr. Mnuchin is a self-proclaimed micromanager. Career members of the tax policy staff rarely met with Treasury secretaries in previous administrations; they are regularly called to brief Mr. Mnuchin. On March 2, as financial markets were in upheaval, Mr. Mnuchin held a one-hour meeting about the “grain glitch,” a technical wrinkle in the 2017 tax law.

Until the second week of March, Mr. Mnuchin, like most people in the Trump administration, regarded the coronavirus as a minor threat to the U.S. economy.

Mr. Mnuchin opposed aggressive efforts to curb the virus, arguing in White House meetings that it was no worse than the seasonal flu and worrying that halting flights from China would provoke the Chinese government. (Monica Crowley, a Treasury spokeswoman, said Mr. Mnuchin did not oppose restricting flights.)

Mr. Trump imposed the flight ban. Mr. Mnuchin accepted Mr. Trump’s decision and moved on, which colleagues say is typical: He offers opinions when asked, even when he knows Mr. Trump will disagree, and then executes whatever the president decides. He appears to have little stake in particular outcomes. Does he agree or disagree with Mr. Trump’s stance on a given issue? In Mr. Mnuchin’s view, that is irrelevant. He is there to follow orders.

In early March, investors were panicking at the prospect of a prolonged national emergency. Airline travel collapsed. Unemployment claims leapt. By the end of the month’s first week, stock markets were down nearly 20 percent from their high.

The next week got off to an even worse start, with stock markets plunging another 8 percent on Monday, March 9.


Credit…Patrick Semansky/Associated Press

That afternoon, Mr. Mnuchin joined Mr. Trump and his coronavirus task force at the White House. Dr. Anthony S. Fauci, the head of the National Institute of Allergy and Infectious Diseases, delivered grim news: The virus was spreading in the United States at an exponential rate.

“There’s big trouble coming,” Mr. Mnuchin said to Mr. Kudlow as they left the room.

“I’m afraid you’re right,” Mr. Kudlow agreed.

The next day, Mr. Trump spoke about the virus on Capitol Hill. “Just stay calm,” he urged. “It will go away.”

Mr. Mnuchin, however, had shifted into crisis mode.

He spoke with Ms. Pelosi that afternoon to talk about an economic rescue plan. Mr. Mnuchin was pretty much the only member of the administration on speaking terms with the House speaker. (They had developed a working relationship while negotiating an increase in the national debt ceiling last year.) They discussed bailouts for the airline and hotel industries, cash payments to workers, and aid for small businesses.

Afterward, Mr. Mnuchin called the Senate majority leader, Mitch McConnell, and got his blessing to pursue the negotiations on his own.


Credit…Anna Moneymaker/The New York Times

“The secretary of the Treasury is going to have ball control for the administration,” Mr. McConnell told reporters after their talk. “We’re hoping that he and the speaker can pull this together.”

Stress was building in the credit markets, the lifeblood of the modern financial system. Trading of commercial paper — a vital day-to-day financing source for major companies — was drying up. Investors were dumping municipal bonds, jeopardizing the ability of states and cities to borrow money and pay employees.

The anxiety was pouring into the stock markets, which Mr. Trump viewed as a barometer for the health of the economy and his presidency. On Thursday morning, Mr. Mnuchin had breakfast with Jerome H. Powell, the Federal Reserve chair, in the Treasury secretary’s private dining room. They came up with a plan for the Fed and Treasury to intervene in financial markets to provide a modicum of stability.

That day, as stocks fell another 10 percent, Mr. Mnuchin had eight phone calls with Ms. Pelosi as they worked out details of a relief package.

Mr. Mnuchin was amenable to what looked like a Democratic wish list of economic remedies: paid sick leave, paid family medical leave and aid to states to expand unemployment benefits.

The next day, they spoke 18 times. That night they agreed on a roughly $200 billion package to help struggling families. It had come together in barely two days. Mr. Trump signed it the next week.

On Monday, March 16, Mr. Mnuchin joined the president and a half-dozen other advisers for what Mr. Mnuchin said was the most difficult decision of the Trump presidency. The coronavirus was out of control. It was time to shut down large swaths of the American economy.

It was already clear that the $200 billion wouldn’t be enough: The government would need to go to the rescue of failing businesses and the millions of unemployed. Mr. Mnuchin said Mr. Trump had advised him to “think big.”

This would be the real test for Mr. Mnuchin. Democrats were happy to go big, but Republicans were already grumpy about the size of the previous relief bill. Did Mr. Mnuchin agree or disagree with Republicans? It was irrelevant. He needed to get something done.

He and Ms. Pelosi began sketching out an enormous stimulus plan. Republican senators immediately balked. They told Mr. Mnuchin that another $500 billion seemed ample. Mr. Mnuchin warned of dire economic consequences — including unemployment of more than 20 percent — if senators failed to get on board with something closer to $1 trillion.


Credit…Mark Lennihan/Associated Press

Some of those scary consequences were already visible. The stock market continued to crater. In an early-morning phone call that week with David Solomon, the chief executive of Goldman Sachs, Mr. Mnuchin discussed the draconian idea of shortening trading hours at major stock exchanges in an effort to ease the sell-off, according to a person briefed on the call. Mr. Solomon said such a move would worsen the panic.

Mr. Mnuchin also was consulting with an eclectic cast from Wall Street and Hollywood. He spoke repeatedly to his friend Mr. Milken, whom Mr. Trump pardoned in February. (Geoffrey Moore, a spokesman for Mr. Milken, said that “Mike and Mr. Mnuchin have spoken from time to time about general health and economic issues.”)

He also chatted twice that week with Ari Emanuel, one of Hollywood’s premier agents, who warned that the entertainment and sports industries were in serious trouble.

Mr. Mnuchin and Mr. Powell, the Fed chair, began unveiling emergency measures to thaw crucial markets. They and their staffs were working round the clock, ordering in burgers and Nando’s chicken; a measure to shore up money market funds was announced at midnight. The Fed would go on to buy $1 trillion of commercial paper as well as junk bonds.

Newt Gingrich, the former Republican House speaker, was in Rome, where his wife, Callista, is the American ambassador to the Vatican. Italy was locked down as the virus rampaged. Mr. Gingrich marveled at the sight of the deserted Colosseum.


Credit…`Domenico Stinellis/Associated Press

He had been out of office for two decades, but he did have a newsletter. “We should be planning for a worst-case pandemic and using the kind of intensity of implementation which served us so well in World War II,” he wrote.

Mr. Gingrich sent the newsletter to Mr. Trump. Mr. Mnuchin read it. A few days later, he called Mr. Gingrich. The Treasury secretary outlined the package that he and Ms. Pelosi were envisioning, including industry bailouts and $1,200 payments to millions of Americans. What did Mr. Gingrich think of the roughly $1 trillion effort?

“That’s not nearly enough,” he responded, again invoking World War II. “It should be $3 trillion.”

Mr. Mnuchin said in a recent interview that he had “always thought $1 trillion was a lot,” but he agreed with Mr. Gingrich that this “was a war we had to win.”

The Treasury secretary began to think bigger. Soon the package swelled to about $2 trillion.

Something needed to be done for small businesses. Mr. Mnuchin spoke regularly to the CNBC host Jim Cramer. Mr. Cramer seemed positioned to understand the plight of small companies because he owned a Mexican and an Italian restaurant in Brooklyn. When Mr. Mnuchin called in to his show, Mr. Cramer said small businesses needed money but couldn’t afford to go deeper into debt. Mr. Mnuchin unveiled a forgivable-loan program.


Credit…Steven Ferdman/Patrick McMullan

Over the next week, the Treasury secretary all but moved into the Capitol, occupying the Senate office once belonging to Lyndon Johnson.

Republicans were not happy. The whole thing was too big. They were particularly displeased with a Democratic proposal to expand unemployment benefits by $600 a week, which meant some unemployed workers would collect more in benefits than they had earned while working.

Mr. Mnuchin wasn’t thrilled, either, but he gave in to Democrats to speed the bill through the House. He told Republicans that it wasn’t technically feasible to tailor the size of the unemployment benefit to a worker’s previous wages.

For a while, that looked like it might be a deal breaker for Republicans. The stock market seesawed along with the perceived odds of a deal. By Friday, March 20, the S&P 500 index was down 34 percent from its February peak — below where it was when Mr. Trump took office.

Mr. Mnuchin spent the weekend working the phones, with 49 phone calls on Sunday alone, including to influential Republican senators. “We need to get this deal done today,” he told Mr. Cramer on CNBC on Monday.

Republican senators slowly got on board, fearful of the fallout if they were seen as blocking a rescue package. The Senate passed the bill, markets soared, and Mr. Trump signed the $2.2 trillion CARES Act.

At a news conference, the president declared himself pleased with “our great secretary of the Treasury.” He added, “He’s a fantastic guy and he loves our country, and he’s been dealing with both sides — Republican and Democrat.”

The stimulus package had glitches. Hospitals received bailouts and then fired workers. Unemployment benefits were slow to materialize. Large companies got multimillion-dollar loans intended for small businesses.

But to a remarkable degree, the law worked. The unemployment rate, which was 14.7 percent in April, declined to 10.2 percent in July. By August, stock markets were at record levels.

“Not many Treasury secretaries could have gotten something that size done so quickly,” gushed Mr. Dimon, Mr. Trump’s first choice for Treasury secretary.

But Republicans were furious with Mr. Mnuchin. The $600-per-week unemployment benefit was a particular sore spot.

Tomas Philipson, a former acting head of the White House Council of Economic Advisers under Mr. Trump, faulted Mr. Mnuchin for monopolizing the president’s ear. “There wasn’t any debate,” he said. “He implemented probably the fastest stimulus program ever implemented, but Mnuchin is not a policy formulator or policy evaluator.”

Fox News and The Wall Street Journal’s editorial page went on the warpath. Republican lawmakers grumbled that Mr. Mnuchin — and therefore the Trump administration — had caved to Ms. Pelosi and her caucus.

For a president who views politics as a zero-sum game, it was a potent line of attack.


Credit…Erik Tanner for The New York Times

“When people ask why have I succeeded in this job, one, I understand why the president is the president. I was there — I saw why he won,” Mr. Mnuchin said in a mid-August interview in a Treasury Department conference room overlooking the White House.

He insisted that he didn’t take the criticism personally. After all, Mr. Mnuchin said, he is simply acting on behalf of Mr. Trump. “Anything that’s significant or material I check with the president.”

As for Mr. Trump yelling at him in the Oval Office, Ms. Crowley, the Treasury spokeswoman, said, “We do not comment on the secretary’s conversations with the president.”

In July, key elements of the stimulus package — including the generous unemployment benefits — were set to expire. Negotiations got underway to provide businesses and individuals with additional relief. House Democrats passed legislation calling for more than $3 trillion in additional spending. The White House countered with proposals that added up to about $1 trillion.

This time, Mr. Mnuchin was chaperoned to Capitol Hill by Mark Meadows, the White House chief of staff and a former right-wing congressman from North Carolina.

Emboldened by a soaring stock market, Mr. Trump told the men to play hardball. They were not to accept another bill packed with Democratic policies. Did Mr. Mnuchin agree or disagree? It was irrelevant.

The conciliatory Mr. Mnuchin whom Democrats had come to appreciate in March was now largely muzzled by Mr. Meadows, who at one point pounded his fist on a table and yelled at Ms. Pelosi.

“You’re supposed to be a good influence on him,” Chuck Schumer, the top Senate Democrat, quipped to Mr. Mnuchin, according to a person familiar with the conversation. “He’s not supposed to be a bad influence on you.”

When unemployment benefits expired, and both sides remained at an impasse, Mr. Meadows seemed unfazed. He told Republican senators that he was happy to be “the skunk at the party,” according to someone who was there.

Mr. Mnuchin professes to be happy with Mr. Meadows at his side. “We make a great team,” he said.

That team, however, was unable to strike a deal with Democrats. The White House walked away from the talks this month. The president instead issued a series of executive actions that would defer taxes, slow evictions and provide $300 a week in jobless benefits. Critics from both parties questioned the actions’ legality and practicality.

Mr. Mnuchin reached out to Ms. Pelosi to try once more. He hewed to the White House’s refusal to extend the $600-a-week unemployment benefit or to provide federal aid to big-spending (and generally Democratic-voting) states. After they talked, Ms. Pelosi publicly accused Mr. Mnuchin of not taking the crisis seriously. Mr. Mnuchin responded that her comments were “not an accurate reflection” of their conversation.

The talks appeared dead.

Asked to comment on Mr. Mnuchin, a White House spokesman, Brian Morgenstern, provided a statement that did not mention the Treasury secretary. Mr. Morgenstern said the president’s team worked “under his leadership and direction.” He added: “President Trump was elected because he is an outstanding negotiator.”

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How TikTok’s Talks With Microsoft Turned Into a Soap Opera

SAN FRANCISCO — When Microsoft began talking this summer with the popular video app TikTok and its Chinese parent company, ByteDance, no one had any intentions of pursuing a blockbuster deal.

With tensions swirling between the United States and China, along with the complexities of running a social media company, any large acquisition appeared too treacherous to navigate. So Microsoft discussed taking a small stake in TikTok and becoming one of the app’s minority investors, said four people briefed on the conversations.

Even a small deal would be a win-win, the thinking went.

For Microsoft, a minority investment would potentially bring TikTok over to using its Azure cloud computing service, immediately making the app one of Microsoft’s biggest cloud clients, said the people, who declined to be identified because the details are confidential. (TikTok has been using Google’s cloud computing services to power its videos.)

For ByteDance and TikTok, a deal with Microsoft could help propel the valuation of the app’s business outside China to as high as $80 billion, the people said. It would also provide TikTok with the endorsement of a blue-chip American company to mollify the Trump administration, which had called TikTok’s Chinese ties a national security threat.

Yet what started as discussions about a small investment morphed into a big, messy, political soap opera. Pushed by President Trump, who has ordered TikTok’s U.S. operations to be sold or to cease operating, ByteDance is now discussing selling parts of TikTok’s global operations to several potential bidders. And with so many groups jumping into the talks to get a piece of any deal, all are trying to drive their own interests and agendas.

Apart from Microsoft, the bidders include Oracle, the enterprise software company, the people with knowledge of the talks said. Bankers and investors, some authorized and some simply trying to gin up a deal, have also called Netflix and Twitter about buying TikTok, they said, though it is unclear if those companies have a genuine interest in an acquisition. Microsoft, with the deepest resources and a market value of more than $1.6 trillion, still appears the furthest along for now, the people said.

Credit…Shannon Stapleton/Reuters

The sale scenarios on the table are head-spinning, the people said, because all of the parties — ByteDance, TikTok, their investors, and the bidders — want to get the most out of any deal. The talks have covered everything from selling just TikTok’s North American operations all the way to every part of TikTok, minus ByteDance’s Chinese-only video app Douyin, they said.

A deal price is unclear, though numbers have ranged from $20 billion to $50 billion depending on what parts of TikTok will be sold, the people said. The talks are fluid and no deal may ultimately be reached.

Even if one does take place, a TikTok sale — which has become a referendum on the U.S.-China relationship — may still be disrupted if Beijing or Mr. Trump weigh in. Mr. Trump has been highly involved, including talking to Microsoft’s chief executive, Satya Nadella, and saying that Oracle could handle buying TikTok. In an Aug. 6 executive order, he imposed a deadline for TikTok’s U.S. operations to be sold by Sept. 15.

On Monday, TikTok sued the U.S. government, arguing that the executive order had deprived it of due process. The suit could give TikTok more time to operate in the United States if the courts order it, a stalling tactic that may help the app wait it out past the Nov. 3 election.

Steven Davidoff Solomon, a law professor at the University of California in Berkeley, who contributes to The New York Times, said the United States’ forcing such a huge company to sell itself was “really unprecedented.” He added, “This is a forced sale, and ByteDance is trying to keep it from being as much of a fire sale as possible.”

This account of TikTok’s deal discussions was based on interviews with more than a dozen people who were involved in or were briefed on the situation. They spoke on condition of anonymity because they were not authorized to speak publicly.

Representatives from TikTok and ByteDance, Microsoft, Netflix, Twitter, Oracle and the White House declined to comment.

A spokesman for China’s Foreign Ministry, Wang Wenbin, called Mr. Trump’s executive order a “naked act of bullying,” and added that the U.S. government would eventually “reap what it sows.”

TikTok, which ByteDance created partly out of a $1 billion purchase of the lip-syncing app in 2017, has become a phenomenon in the United States and elsewhere. More than 100 million Americans regularly use the app, the company has said, especially teenagers and twentysomethings.

Last year, as tensions between the United States and China grew worse, the Trump administration began scrutinizing TikTok and ByteDance. In November, the Committee on Foreign Investment in the United States, a powerful panel known as Cfius that reviews foreign acquisitions, opened an inquiry into ByteDance’s deal to buy after lawmakers voiced concerns that TikTok was giving data on its American users to Beijing.


Credit…Jeenah Moon for The New York Times

TikTok has denied that it helps Beijing. To reduce the U.S. pressure, Zhang Yiming, ByteDance’s chief executive, began consulting with a small group of investors in his internet company, including Sequoia Capital and General Atlantic. ByteDance, which is privately held, has been valued at about $100 billion.

Doug Leone, one of Sequoia’s partners, and Bill Ford, chief executive of General Atlantic, became Mr. Zhang’s bridge to the White House, the people with knowledge of the talks said. In their conversations, the Trump administration had specific stipulations: First, it wanted TikTok to overhaul its governance and shareholder structure to reduce ByteDance’s ownership of the app. Second, it wanted guarantees that TikTok’s American user data be stored on U.S. servers.

The firms needed a major U.S. tech partner to get the deal done, the people close to the talks said. Mr. Zhang and the investors figured that Facebook, Google and Amazon were under too much antitrust scrutiny. But Microsoft, with its cash hoard of $137 billion, cloud expertise and strong government relationships, could work.

Mr. Zhang, a former Microsoft engineer, reached out to Microsoft executives to gauge their interest, said one person with knowledge of the talks. Sequoia and General Atlantic declined to comment.

By July, Microsoft joined the talks. At the time, the discussions centered on Microsoft making a minority investment in TikTok, the people said. Between the U.S.-China tensions and the pressures of operating a social media company, Microsoft executives were hesitant about a big deal, said people briefed on the conversations. ByteDance and Mr. Zhang also wanted to retain some ownership of TikTok, they said.


Credit…Doug Mills/The New York Times

Yet as the talks progressed, Microsoft grew warmer on a potentially larger deal with TikTok. While Microsoft has lots of data about industries like gaming and workplace software, it has little information about people’s social media behavior. TikTok’s user interaction information could strengthen Microsoft’s data science operation, the people briefed on the talks said.

TikTok could also be linked to Microsoft’s $7 billion advertising business. Together, that could make a meaningful difference to Microsoft’s growth, they said.

ByteDance and Microsoft came to see an acquisition of TikTok’s U.S. operations as a cleaner option, they added. Microsoft could allow TikTok to operate as a stand-alone unit, similar to how it had treated past large acquisitions, such as its $2.5 billion acquisition of the company behind the video game Minecraft in 2014 and its $26 billion purchase of professional networking site LinkedIn in 2016.

All the while, Trump administration officials were keeping an eye on the situation. Last month, Treasury Secretary Steven Mnuchin, who is chairman of Cfius and holds the final word on the panel’s recommendations of ByteDance’s purchase of, spoke with TikTok and Microsoft about how TikTok’s data should be on U.S. servers, three of the people said.

On July 31, Mr. Mnuchin presented the Cfius analysis of the deal to Mr. Trump, two people said. The recommendation: that ByteDance be ordered to sell TikTok to an American owner, with Microsoft acquiring most of TikTok’s business and the stakes held by ByteDance’s Chinese shareholders winnowed to a minority investment.

A spokesman for the Treasury and Mr. Mnuchin declined to comment.


Credit…Ian C. Bates for The New York Times

But aboard Air Force One later that day, President Trump said he planned to ban TikTok entirely. Several of Mr. Trump’s advisers were furious at the derailment of their recommendation, saying that China hawks like Peter Navarro, the White House director of trade and manufacturing policy, had exerted too much influence, according to White House officials and others close to the president.

In a statement, Mr. Navarro said, “Nobody exerts ‘influence’ over President Donald J. Trump. He listens carefully to a wide range of often sharply competing views and then he makes the best and most informed decision. That’s why he is such a great president.”

The next 72 hours were chaotic. News leaked that Microsoft was in talks to acquire TikTok. Private equity firms and bankers circled. That briefly included Stephen A. Schwarzman, chief executive of the Blackstone Group, said people familiar with the talks. Blackstone declined to comment.

That weekend, Mr. Trump called Mr. Nadella about TikTok. Mr. Trump said ByteDance had 45 days to complete a sale of TikTok’s business in the United States. He added that any deal should help the U.S. government in some way, perhaps in the form of job creation or other economic benefits, or some kind of offering to the Treasury Department.

Privately, officials at Microsoft and TikTok were shocked. The 45-day window put TikTok at a disadvantage in negotiating the best deal. Mr. Trump also seemed to be arguing for “tipping the waiter,” essentially offering a percentage of the deal to the Treasury, the people said.

On Aug. 2, Microsoft issued a statement about its pursuit of TikTok and said it would provide “proper economic benefits to the United States, including the United States Treasury.” It did not elaborate on what that meant.

A few days later, Mr. Trump signed his executive order to block TikTok if it was not sold by mid-September. A week later, he issued another executive order giving ByteDance 90 days to close such a deal.

Since then, other potential suitors have emerged, including Oracle. ByteDance, backed into a corner by the White House, wants the best price for TikTok — and not only from one bidder in Microsoft. And sensing ByteDance’s weakness, more potential acquirers are kicking the tires on the hot, fast-growing app. All of that may turn off Microsoft from a purchase.

Even as deal discussions have continued, TikTok sued the U.S. government on Monday over Mr. Trump’s executive order.

“We far prefer constructive dialogue over litigation,” the company said in a statement. But given the executive order, it said, “we simply have no choice.”

Mike Isaac reported from San Francisco, and Andrew Ross Sorkin from New York. Reporting was contributed by Ana Swanson, Maggie Haberman, Michael J. de la Merced, Raymond Zhong and Alan Rappeport.

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Mnuchin Paved Way for U.S.P.S. Shake-Up

WASHINGTON — In early February, Treasury Secretary Steven Mnuchin invited two Republican members of the Postal Service’s board of governors to his office to update him on a matter in which he had taken a particular interest — the search for a new postmaster general.

Mr. Mnuchin had made clear before the meeting that he wanted the governors to find someone who would push through the kind of cost-cutting and price increases that President Trump had publicly called for and that Treasury had recommended in a December 2018 report as a way to stem years of multibillion-dollar losses.

It was an unusual meeting at an unusual moment.

Since 1970, the Postal Service had been an independent agency, walled off from political influence. The postmaster general is not appointed by the president and is not a cabinet member. Instead, the postal chief is picked by a board of governors, with seats reserved for members of both parties, who are nominated by the president and confirmed by the Senate for seven-year terms.

Now, not only was the Trump administration, through Mr. Mnuchin, involving itself in the process for selecting the next postmaster general, but the two Democratic governors who were then serving on the board were not invited to the Treasury meeting. Since the meeting did not include a quorum of board members, it was not subject to sunshine laws that apply to official board meetings and there is no formal Postal Service record or minutes of what was discussed.

Nearly six months later, that meeting, along with other interactions between Mr. Mnuchin and the postal board, has taken on heightened significance as the Trump administration confronts allegations it sought to politicize the Postal Service and hinder its ability to handle a surge in mail-in ballots in November’s election. In interviews, documents and congressional testimony, Mr. Mnuchin emerges as a key player in selecting the board members who hired the Trump megadonor now leading the Postal Service and in pushing the agenda that he has pursued.

Mr. Trump’s animus toward the agency dates to at least 2013, but his criticism of its finances escalated once he took office and found new focus in late 2017, when he first bashed it for essentially subsidizing Amazon, another target of his ire. Amazon’s founder and chief executive, Jeff Bezos, owns The Washington Post, whose coverage has often angered Mr. Trump.

“This Post Office scam must stop. Amazon must pay real costs (and taxes) now!” the president wrote on Twitter on March 31, 2018, one of several such attacks over the years.

Twelve days later, he issued an executive order putting Mr. Mnuchin in charge of a postal reform task force. But it was not until earlier this year that the administration found a way to enforce its postal agenda — one that has now collided with the pandemic and the approaching election.

A few weeks after the February meeting with Mr. Mnuchin, one of the attendees, Robert M. Duncan, the chairman of the board of governors, who was appointed by Mr. Trump in 2017, threw a new name for postmaster general into the mix: Louis DeJoy.

Mr. DeJoy, a longtime logistics executive, was known for his hard-charging leadership style and his ability to convert disorganization into efficiency, as well his generous donations to the Republican Party, including to Mr. Trump. In October 2017, Mr. DeJoy had hosted a fund-raiser for the president’s re-election campaign at his North Carolina home.

His résumé was far different than recent postmasters general, most of whom had risen through the Postal Service ranks. Megan J. Brennan, who had announced in October 2019 her intention to retire as postmaster general at the end of January, began her career as a letter carrier in Pennsylvania.

Mr. DeJoy, who ran New Breed Logistics before selling it to XPO Logistics in 2014, would be coming from the private sector to assume control of a highly unionized, sprawling bureaucracy with more than half a million employees. His companies had experience working with the Postal Service, moving bulk shipments of packages from fulfillment centers and ferrying them to local Postal Service centers. But both companies had fewer than 10,000 employees, none of them unionized, and he had never worked in the public sector.

The companies were also the subject of a litany of complaints from workers, including more than a dozen lawsuits accusing managers — but not Mr. DeJoy personally — of presiding over a hostile environment rife with sexual harassment and racial discrimination and where workers were fired for getting sick or injured.

Credit…Erin Schaff/The New York Times

The board’s vice chairman at the time, David C. Williams, raised concerns about Mr. DeJoy’s candidacy and Mr. Mnuchin’s involvement, telling lawmakers during sworn testimony this week that he “didn’t strike me as a serious candidate.” Mr. Williams, a Democratic appointee, resigned before the vote as it became clear that Mr. DeJoy would be the pick.

Three months after the meeting in Mr. Mnuchin’s office, the board of governors announced Mr. DeJoy’s selection as the nation’s 75th postmaster general. Within weeks, he began carrying out changes, including cuts to overtime and limiting mail delivery trips. He curtailed postal hours and mandated that carriers must adhere to a rigid schedule. A July memo from the Postal Service warned that the changes might temporarily result in “mail left behind or mail on the workroom floor or docks.”

The measures matched up with recommendations in the task force report, which blamed the Postal Service for losing billions because of waste, inefficiency and a failure to respond to declining mail volumes.

But the rapid-fire moves just months before the November election concerned Postal Service insiders, who said that, since at least the Obama administration, the agency had generally sought to avoid significant changes within two or three months of a general election.

Soon, mail was piling up at post offices, veterans were not receiving their medications, bills were arriving late and questions began surfacing about the ability of the Postal Service to handle what is expected to be a record number of mail-in ballots this November because of the pandemic.

Amid an outcry from lawmakers, civil rights groups and state officials, Mr. DeJoy suspended many of the changes on Tuesday, including some that had been underway before he took the helm of the Postal Service. Yet he made clear during a Senate hearing on Friday that he planned to move ahead with “dramatic” measures after the election, including raising prices and limiting overtime.

Postal Service employees and union officials say significant damage has already been done. Hundreds of mail-sorting machines have been removed, and the day-to-day changes have caused confusion and delays among drivers, carriers and other workers.

In his Senate testimony on Friday, Mr. DeJoy chalked that up to growing pains as the organization tries to get leaner. “We all feel, you know, bad” he told lawmakers upset about mail delays affecting their constituents.


Credit…Andrew Harrer/Bloomberg

Mr. DeJoy stressed that the changes had nothing to do with the election and noted that the removal of mailboxes and sorting machines had begun before his tenure. He said that he had been unaware of the equipment removal until it became a source of scrutiny. “This has been going on in every election year, and every year, for that matter,” he said, adding that he had “no idea” that it was happening.

Kevin Tabarus, a local president of the mail handlers’ union, questioned Mr. DeJoy’s qualifications and the selection process. “The guy has been to way more Republican fund-raisers than post offices,” he said, emphasizing just how delayed some of the mail has been under Mr. DeJoy’s watch.

After the task force issued its report, Mr. Mnuchin sought to ensure that the president nominated postal governors who would enact Treasury’s recommendations and would pick a like-minded postmaster general to carry them out. Mr. Mnuchin referred prospective candidates to the White House, according to a Treasury spokeswoman, and then regularly asked his staff for updates, a former Treasury official involved in the process said.

Over the last two years, Mr. Mnuchin met privately on multiple occasions about postal matters with Mr. Duncan, a former chairman of the Republican National Committee who was confirmed by the Senate as a postal board member in August 2018, according to people familiar with the meetings.

Mr. Mnuchin also arranged a meeting with John M. Barger, a California lawyer and financial investment adviser who was recommended to the Treasury secretary by a mutual associate who knew of Mr. Barger’s work as chairman of the board of the Los Angeles County pension fund. After a meeting in Washington, Mr. Mnuchin recommended that Mr. Trump appoint Mr. Barger to the board of governors.

Mr. Barger was confirmed by the Senate last summer, and was tapped to lead the committee to select a new postmaster general. He attended the February meeting in Mr. Mnuchin’s office with Mr. Duncan.

S. David Fineman, a former member and chairman of the Postal Service’s board, called Mr. Mnuchin’s close involvement in the affairs of the Postal Service “absolutely unprecedented.”

During his tenure in the Clinton and George W. Bush administrations, he said the board had minimal interaction with the administrations, and “certainly no communication regarding the hiring of the postmaster general.”

The board hired two search firms to assist in the selection process by conducting a nationwide search. One of them, Russell Reynolds Associates, compiled a database of prospective candidates and provided a subset of dozens of names it deemed most promising to the board.

Mr. DeJoy’s name was not among those initially provided, according to people familiar with the process. But Mr. Duncan raised Mr. DeJoy’s name during a discussion among board members about other prospective candidates. Mr. Duncan, who has been involved in a super PAC that supports Mr. Trump’s re-election, had met Mr. DeJoy through Mr. DeJoy’s wife, Aldona Wos. Both had been appointed by Mr. Trump to help lead the President’s Commission on White House Fellowships.

After the board received a readout from Russell Reynolds, which indicated that Mr. DeJoy was already in the firm’s database and was qualified, Mr. Barger went to lunch with Mr. DeJoy to assess his interest in, and suitability for, the post.

Mr. Barger was impressed, and reported his impressions to the full board the same day. “It’s uncommon to find somebody from outside the Postal Service who also has a history of success working with the Postal Service,” Mr. Barger said in an interview on Friday.

Nearly two months after the meeting in Mr. Mnuchin’s office about the search process, Mr. Duncan wrote a follow-up letter to the Treasury secretary indicating that the board had “narrowed the search to a small number of finalists, each of whom would serve the country well.”

Mr. Barger rejected suggestions that Mr. Mnuchin was playing politics with the Postal Service, noting that Democratic governors had met with top Treasury officials under Mr. Mnuchin. Mr. Mnuchin was not involved in the board’s decision to select Mr. DeJoy, Mr. Barger said, adding that the board “viewed Secretary Mnuchin as a stakeholder who was doing his job in having an interest in how our process was moving forward, but certainly nothing more than that.”

A Treasury spokeswoman acknowledged that Mr. Mnuchin urged the board to act expeditiously to find a new postmaster general when Ms. Brennan announced her retirement. The spokeswoman noted that Postal Service board members are part of the executive branch and that, as the head of the postal reform task force, Mr. Mnuchin had a right to be involved in the selection process and interview board candidates.

On Friday, the Treasury Department released a “fact sheet” to rebut allegations that have been leveled at Mr. Mnuchin in recent days, including that he politicized the Postal Service and used the department’s role as its lender to leverage influence over postal policies.

The department denied that Mr. Mnuchin had a role in selecting Mr. DeJoy and said his contact with board members was part of his “normal course of fulfilling his obligations” as chairman of the Federal Financing Bank, which lends money to the Postal Service and other federal agencies, and the presidential postal task force that produced the 2018 report.


Credit…Anna Moneymaker for The New York Times

Mr. DeJoy, 63, had transformed his father’s Long Island trucking company from a small shop with 10 employees into a national logistics and supply-chain provider that won lucrative contracts with Boeing, Verizon and the Postal Service. By 2014, around the time that he sold it XPO for $615 million, the company had about 7,000 employees.

That kind of growth came at a cost. In the logistics industry, speed is supreme. New Breed Logistics competed with Amazon in the hustle to deliver products to people’s homes as fast as possible. In pursuit of that goal, New Breed Logistics pushed their workers to extremes, according to a New York Times investigation published in 2018.

The company’s warehouse in Memphis offered a glimpse into the grueling culture that played out under Mr. DeJoy’s leadership. Inside the warehouse, hundreds of workers, many of them women, lifted and dragged boxes that could weigh up to 45 pounds. To save money, there was no air-conditioning, even in the middle of southern summers, causing temperatures to rise past 100 degrees.

Employees at the warehouse were disciplined using a “point system,” in which they could be fired once they racked up 10 points. Asking for a break to go to the doctor could earn you a point, as could taking too long on a break.

In 2013, New Breed was ordered to pay $1.5 million after the Equal Employment Opportunity Commission sued, accusing the company of retaliating against three female employees who said they had been sexually harassed.

There was no reprieve for women who were pregnant or sick, according to interviews and lawsuits. Those who asked for lighter work loads were often denied.


Credit…Miranda Barnes for The New York Times

Credit…Miranda Barnes for The New York Times

That included women like Tasha Murrell, who pleaded with her supervisor in 2014 to leave early because she was pregnant and lifting had become unbearable. Instead of a reprieve, her supervisor told her to get an abortion, according to a discrimination complaint that she later filed with the employment commission. Shorting after asking for a break, Ms. Murrell woke up in a pool of her own blood. She rushed to the hospital, where she learned that she had miscarried.

“It was like a sweatshop,” Ms. Murrell said. “All they cared about was their profits.”

XPO declined to comment for this article. A spokeswoman previously told The Times the company was “surprised by the allegations of conduct that either predate XPO’s acquisition of the Memphis facility or weren’t reported to management after we acquired it in 2014.”

During his testimony on Friday, Mr. DeJoy said he spoke to Mr. Mnuchin during discussions about the terms of a loan that the Postal Service was receiving as part of the virus economic relief legislation. He said that they did not discuss his operational plans in “grave detail.”

“I told him I was working on a plan,” Mr. DeJoy said, explaining that he had mentioned improving service and gaining “cost efficiencies.”

Mr. DeJoy and Mr. Duncan are scheduled to testify on Monday before the Democratic-controlled House Oversight and Reform Committee, whose members have signaled interest in Mr. DeJoy’s hiring, the changes he enacted and Mr. Mnuchin’s involvement in the Postal Service.


Credit…Michael A. Mccoy/Getty Images

Kenneth Vogel, Alan Rappeport and Hailey Fuchs reported from Washington, and Jessica Silver-Greenberg from New York. Kitty Bennett contributed research.

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Will Trump’s Executive Directives Provide Relief?

President Trump, in announcing his executive measures on Saturday, said he was bypassing Congress to deliver emergency pandemic aid to needy Americans. But his directives are rife with so much complexity and legal murkiness that they’re unlikely, in most cases, to bring fast relief — if any.

Because Congress controls federal spending, at least some of Mr. Trump’s actions will almost certainly be challenged in court. They could also quickly become moot if congressional leaders reach an agreement and pass their own relief package. Speaker Nancy Pelosi of California on Sunday dismissed Mr. Trump’s actions as unconstitutional and said a compromise deal was still needed. Treasury Secretary Steven Mnuchin said he would be open to further talks with Democratic leaders: “Anytime they have a new proposal, I’m willing to listen.”

Mr. Trump’s executive steps on Saturday focused on four areas: extending supplemental unemployment benefits, suspending some payroll taxes, extending relief for student loan borrowers and offering eviction relief. Of the four, the student loan memorandum seems likely to be the least controversial and the easiest to carry out.

But his various executive actions did not include several forms of relief that have been part of recent negotiations, including lump-sum payments to citizens and additional relief for small businesses.

If all of Mr. Trump’s directives take effect, here’s how experts believe they could play out.

The expiration at the end of July of the extra $600 a week in federally paid unemployment benefits, supplementing whatever eligible Americans get from their state, created an urgent crisis for the estimated 30 million people relying on that cash.

Mr. Trump described his action as creating “an extra $400 per week in expanded benefits.” But policy analysts said the plan laid out in Mr. Trump’s memo was so complicated, and potentially costly, for states that people won’t get that money quickly, if at all.

“Nobody is going to see this money in August, and we’ll be lucky to see it in September,” said Andrew Stettner, a senior fellow at the Century Foundation, a public policy research group.

The plan is full of caveats. First: It actually translates to an additional $300, not $400, for recipients because the federal government would pay for only 75 percent of cost. States would have to kick in the other 25 percent, or $100 per recipient, per week.

States can use the benefits they’re already paying to meet that criteria, a White House official said. But some people currently get less than $100 a week from their states, and they would be left out entirely unless their state agreed to increase their payments. That means the hardest-hit recipients, with the least financial support, “wouldn’t get anything at all from this,” Mr. Stettner said.

There are two more major catches. A big one is that the federal money is likely to vanish quickly. Mr. Trump directed the Federal Emergency Management Agency to use up to $44 billion from its Disaster Relief Fund, which usually pays for emergency help after catastrophes like hurricanes and earthquakes, to cover the federal portion of the payments.




Trump Sidesteps Congress on Coronavirus Relief Actions

President Trump signed four actions on coronavirus relief Saturday after Congress negotiations stalled. It’s unclear what authority he has to do so, and the orders are likely to be challenged in the courts.

“I am providing a payroll tax holiday to Americans earning less than $100,000 per year. In a few moments I will sign a directive instructing the Treasury Department to allow employers to defer payment of the employee portion of certain payroll taxes. Second, I’m signing an executive order directing the Department of Housing and Urban Development, H.H.S. and C.D.C., to make sure renters and homeowners can stay in their homes. I’m taking action to provide an additional, or an extra, $400 per week in expanded benefits. Earlier this year we slashed student loans’ interest rates to 0% and suspended student loan payments, and Congress extended that policy through Sept. 30. Today I’m extending this policy through the end of the year and will extend it further than that, most likely.” “Mr. President, though, this is expected to be tied up in the courts, so this relief is going to be delayed or blocked —” “Oh I don’t think so — I think this is going to go very rapidly through the courts. This will go very — if we get sued. Maybe we won’t get sued. If we get sued, it’s somebody that doesn’t want people to get money. OK? And that’s going to be a very popular thing.” [crosstalk] “… trying to go around Congress, are you trying to set a new precedent that the president can go around Congress and decide how many —” “You ever hear the word obstruction? They’ve obstructed. Congress has obstructed. The Democrats have obstructed people from getting desperately needed money. Go ahead, please. Right here.” [crosstalk] “No, no, you’re finished. Go ahead, please.” [crosstalk] [cheering] “You said that you passed Veterans Choice. It was passed in 2014 —” “OK, excuse me, go ahead please.” “But it was a false statement, sir.” “OK, thank you very much, everybody. Thank you very much.” [cheering]

President Trump signed four actions on coronavirus relief Saturday after Congress negotiations stalled. It’s unclear what authority he has to do so, and the orders are likely to be challenged in the courts.CreditCredit…Anna Moneymaker for The New York Times

Michele Evermore, a senior policy analyst for the National Employment Law Project, projected that at current claims’ rates, the $44 billion would run out in about five or six weeks. The Committee for a Responsible Federal Budget, a research organization, also estimated that the money would last just five weeks.

Also, state governors must opt in and request the aid and must agree to distribute it through their regular unemployment insurance system as a supplemental payment. That’s a heavy demand on state systems that are already “stressed to the point of breaking,” Ms. Evermore said.

A FEMA spokeswoman did not answer questions on Sunday about whether any states had contacted the agency to formally seek the federal aid. Gov. Andrew M. Cuomo of New York said that the president’s executive measures were on “shaky ground legally” and that asking states facing financial crises to increase their unemployment benefit payments is “just laughable.”

FEMA said the program would be applied retroactively to the week ending Aug. 1 and would last until Dec. 6 or until the authorized disaster funding is depleted, whichever comes first.

You would still owe your payroll taxes under the terms of the president’s memorandum, and so would your employer, if you have one. What might change would be when some of the taxes for the period from Sept. 1 to Dec. 31 are due.

If you are not self-employed, what usually happens is that your employer pays half of the 12.4 percent in Social Security payroll taxes that most people owe and then withholds the other half from your paycheck. For the four months that are now in question, the withholding of the employee share — 6.2 percent — would stop, which means you would see more money in your paycheck.

This would only be true, however, for people who earn under $4,000 every two-week pay period, according to the memorandum, or about $104,000 a year. Those who earn more than that would still be subject to withholding, up to the annual limit of $137,700. And because the cap is per individual and not per household, two-income families who are well into the higher income tax brackets might have at least one working adult qualify.

At some point soon, the Internal Revenue Service will presumably issue guidance saying when the money is due, under what the White House is calling a “deferral” of these taxes. But the order also states that the Treasury Department shall “explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred.”

Such a measure would face long-shot odds. Meanwhile, pity the payroll processors who have to interpret the memorandum. Mike Trabold, director of compliance at Paychex, outlined a number of scenarios in an interview. Employers could decide to be conservative and continue to withhold on their employees’ behalf. Or employers could stop withholding the money starting Sept. 1, and let those workers deal with the consequences of potentially owing money later, assuming the taxes eventually come due.

Then, some employers might formally let some employees continue to withhold even if all the other workers are getting the extra money in their paychecks. Or an employer might try to do the reverse — say, give an enraged employee, perhaps one threatening to sue, the opportunity to take home the 6.2 percent extra, even if the company chooses to continue withholding on all other employees’ behalf.

Assuming the income cap is itself legal, Pete Isberg, vice president for government relations at another payroll specialist, ADP, said that employers would need some flexibility. After all, an employee might show up for a new job on Sept. 15 having already earned too much elsewhere to be under the income cap. Other employees have side income throughout the year. Still more of them may simply make adjustments via a W-4 withholding form on their own, no matter what sort of default withholding strategy their employer selects.

The self-employed face their own questions, since they pay both halves of the 12.4 percent. Minnie Lau, a certified public accountant in San Francisco, is keeping her advice simple for most people who do not urgently need the boost in pay. “I am still telling clients not to spend the money, if they’re thinking this will be forgiven,” she said. “Because it literally hasn’t been yet.”

Here, the White House memorandum aims to extend relief by three months.

Under the terms of the CARES Act, the Education Department and its loan servicers put all federal student loan borrowers into administrative forbearance. That means there are no payments due through Sept. 30 on federal loans that the government controls. Interest is not accruing either, though there was no outright loan cancellation associated with the relief. People can keep making principal payments if they choose to.

If the memorandum holds — and it’s not clear who would stand against providing relief to millions of people who borrowed to pay for higher education — the forbearance will last through Dec. 31. The Department of Education has not yet said how it might carry out the memorandum. It has an extensive FAQ page about how pandemic forbearance works (according to the prevailing CARES Act rules) on its website.

The president’s executive order on assistance to renters doesn’t offer much immediate hope for people on the brink of losing their housing.

Until its expiration during the last week of July, an eviction filing moratorium that the CARES Act put into place protected millions of Americans. They included people who lived in public housing, qualified for the Section 8 rental assistance program or rented from landlords with certain kinds of federally backed mortgages.

Now that the federal freeze has expired, those renters have no governmental protection unless state or local officials have put their own moratoriums in place. The order directs various federal agencies to consider what they can do with existing authority or budgets to help further, but immediate relief for desperate renters seems unlikely via this order.

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A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks

WASHINGTON — As the coronavirus began shuttering the global economy in March, critical parts of U.S. financial markets edged toward collapse. The shock was huge and unexpected, but the vulnerabilities were well known, the legacy of risk-taking outside of regulatory reach.

To head off a devastating downward spiral, the Federal Reserve came to Wall Street’s rescue for the second time in a dozen years. As investors sold a vast array of holdings and rushed to the comparative safety of cash, the Fed pledged to become a buyer of last resort to restore calm to critical markets.

That backstop bailed out many people and investment firms, including a class of hedge funds that had been caught on the wrong side of a trade with ample risks. The story of that trade — how it went wrong and how it was salvaged — offers a cautionary tale about important issues Congress did not address in the 2010 Dodd-Frank financial law and the Trump administration’s hands-off approach to regulation.

A decade after Dodd-Frank, America’s sweeping post-2008 crisis fix, was signed into law, commercial banks like JPMorgan Chase & Company and Bank of America are better regulated and safer, but they may be less willing to help smooth over markets in times of stress. Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street — areas that Dodd-Frank left largely untouched.

In addition, the powers policymakers have to deal with persistent vulnerabilities have been undermined by Trump administration officials who came into office seeking to weaken financial rules. Treasury Secretary Steven Mnuchin, who leads a panel created by Dodd-Frank to identify financial risks, has moved to release big financial firms from oversight and abandoned an Obama-era working group that was examining hedge fund risks.

The result is a still-brittle system, one in which financial players rake in profits in good times but the government is forced to save them or leave the economy to suffer when things go awry.

“It’s very dangerous to have a regime in which you know this can happen,” Janet L. Yellen, the former Federal Reserve chairwoman, said in an interview. “The Fed did unbelievable things this time.”

Credit…Anna Moneymaker for The New York Times

Relying on the central bank to save the day is not a long-term solution, she said. There is no guarantee that the Fed and the Treasury Department, which must provide the money to support many of the central bank’s emergency programs, will be so aggressive in the future.

Hedge funds are one risk left unaddressed. Some regulators had warned for years that a certain type of hedge fund — so-called relative value funds — could struggle in a stressed market. Officials also warned that they could not tell how big a risk such funds posed because they did not have enough information about their trades and how much money they were borrowing.

Of particular concern: The hedge funds were using trading strategies similar to those employed by Long-Term Capital Management, a fund that collapsed in 1998 and nearly caused a financial meltdown.

The bet hedge funds were making earlier this year was simple enough. Called a basis trade, it involved exploiting a price difference in the Treasury market, generally by selling Treasury futures contracts — promises to deliver a bond or note at a set price on a set date — and buying the comparatively cheap underlying securities.

The hedge funds made a tiny return as the price of a security and its futures contract converged. To turn those mini payoffs into real money, they tapped a form of short-term borrowing, called repo, and used it to amass huge holdings of Treasuries. Such trades are often incredibly leveraged.

The problems started as markets became very volatile in mid-March. The repo funding essential to the trades was suddenly hard to come by as financial institutions that provide the loans backed away. Historical pricing patterns broke down, and many trades were no longer profitable. Some hedge funds were forced to dump government debt.

Banks could have acted as stress relievers by buying securities and finding buyers. But they were already holding many government bonds, and could not handle more in part because of regulations established after 2008. Everyone was selling — ordinary investors, foreign central banks and hedge funds. Hardly anyone was buying.

The market for U.S. government debt, the very core of the global financial system, was grinding to a standstill.

“The severe dislocation in one of the world’s most liquid and important markets was startling,” the Bank for International Settlements, a bank to central banks, wrote in its annual report last month.


Credit…Anna Moneymaker/The New York Times

Credit…Ting Shen for The New York Times

The Fed stepped in to avert catastrophe, pledging during an emergency Sunday afternoon meeting to buy huge sums of government-backed bonds.

It remains unclear how big of a role hedge funds played in March’s meltdown — even how many and which funds were involved remains hazy. The funds are not required to disclose detailed data about the size of their bets and what and when exactly they sold. By the Bank for International Settlements’s telling, the relative value unwinding was a “key driver” of the turmoil.

Researchers writing for the Treasury Department’s Office of Financial Research said in a report that basis trades definitely went bad in March and some hedge funds sold their securities, but it is not clear how much the sales impaired Treasury market liquidity. Still, the report acknowledged that the Fed’s intervention may have prevented more dire consequences.

Michael Pedroni, an executive vice president at the Managed Fund Association, which represents hedge funds, said in a statement that “a growing body of evidence” showed that “hedge funds were able to continue providing some liquidity even as banks pulled back on providing financing” and that the funds were not a systemic risk.

While few had predicted the pandemic, many experts had long warned that the financial system was vulnerable.

Long before the turmoil this spring, the Financial Stability Oversight Council, established by Dodd-Frank, had repeatedly identified hedge fund leverage as a risk. Under the Obama administration, it formed a hedge fund working group to consider the potential risks of many hedge funds employing similar trading strategies.

On Nov. 16, 2016, the working group warned that hedge funds could be a source of instability during turbulent times.

“Forced sales by hedge funds could cause a sharp change in asset prices, leading to further selling, substantial losses or funding problems for other firms with similar holdings,” Jonah Crane, the council’s deputy assistant secretary at the time, told the group. “This could significantly disrupt trading or funding in key markets.”

The working group recommended that regulators gather more information about hedge funds, including their trades — the type of granular data missing from the filing fund managers made to the Securities and Exchange Commission, known as Form PF.

“Our recommendation was to fix Form PF so we could get the underlying data,” Mr. Crane, now a partner at the consulting firm Klaros Group, said in an interview. “These strategies we thought we saw seemed an awful lot like the Long-Term Capital Management strategies and suggested to us that one should at least be aware of who had exposure to those.”


Credit…Jacquelyn Martin/Associated Press

The S.E.C. chairwoman at the time, Mary Jo White, agreed with the recommendation. But with a new administration coming in, there was little chance to address the issue in the last weeks of the Obama administration.

Early in 2017, Mr. Mnuchin, a former hedge fund manager, assumed control of the Financial Stability Oversight Council and the hedge fund working group was deactivated.

Richard Cordray, who sat on the council as head of the Consumer Financial Protection Bureau from 2012 to November 2017, said that once Mr. Mnuchin took over, discussion turned to relaxing oversight.

“It was clear from the beginning that he wanted to move the FSOC in a different direction, which was a deregulatory direction,” Mr. Cordray said.

A Treasury spokeswoman said that the council “continues to monitor hedge funds, as it monitors all sectors of the financial system.”

Relative value funds were not the only financial vulnerability exposed in March. Money market mutual funds, bailed out in 2008, required another rescue. Corporate bonds faced a wave of predictable ratings downgrades. That market ground to a standstill, prompting the Fed to undertake its first-ever effort to buy big-company debt.

Risks at lightly regulated financial firms “were not only predictable, but well-documented,” Lael Brainard, a Fed governor, said during a University of Michigan and Brookings Institution conference in late June. “We’ve now seen not once but twice in only 11 years” risks that were considered highly unlikely threatening the economy.

Ms. Yellen and other policymakers said Congress might need to make regulators responsible not just for individual institutions but for the overall safety of the financial system. Only the Fed has a financial stability mandate, and it applies just to banks.

“There was a flaw in Dodd-Frank,” Ms. Yellen said. “Dodd-Frank gave FSOC the responsibility for dealing with financial stability threats,” but did not convey it with the power to do much beyond cajole other regulators. “If FSOC is to be meaningful, it needs to have power of its own.”

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A Coffee Chain Reveals Flaws in the Fed’s Plan to Save Main Street

WASHINGTON — La Colombe, a Philadelphia-based purveyor of fancy coffee and canned draft lattes, has seen its business fall off sharply in 2020 as the coronavirus pandemic shuttered its cafes and closed the upscale restaurants that serve its brew. But the company has fallen through the cracks when it comes to government relief.

La Colombe didn’t think it qualified for the government’s forgivable small-business loan program given its size and canned coffee manufacturing business. It is too small to have ready access to the debt markets big companies use to raise funds — markets that are chugging along with the help of Federal Reserve backstops.

The company’s leaders thought that another Fed program, one intended to help midsize businesses by providing loans, would be their best shot at getting help. But when the central bank announced the details in early April, it was clear that La Colombe would not qualify. The company has too much debt relative to earnings to meet the Fed’s leverage restrictions.

“That just doesn’t make sense for companies like La Colombe, because we’re growing so quickly,” said Aren Platt, who leads special projects for the company.

The Fed’s Main Street loan program for medium businesses was destined to be a challenge. The central bank had never tried lending to midsize companies before, and it is difficult to help a very diverse group of businesses without putting taxpayer money at risk. The Fed, the Treasury Department and members of Congress have also at times appeared to be on different pages about what they want the program to achieve.

The central bank and the Treasury, which is providing money to cover any loans that go bad, spent months devising the program, negotiating over credit risk and vetting terms. Many officials within the Fed wanted to create a program that businesses would actually use, but some at Treasury saw the program as more of an absolute backstop for firms that were out of options. Steven Mnuchin, the Treasury secretary, has resisted taking on too much risk, saying at one point that he did not want to lose money on the programs as a base case.

What has emerged after three months, two overhauls and more than 2,000 comments filed with the Fed is a program that seems to be incapable of pleasing much of anyone.

First announced on March 23, the Main Street program finally allowed banks to register as lenders in mid-June — but only about 450 of the nation’s thousands of eligible banks have registered so far. Banks have reported that many clients are not interested in using the program, the Fed chair, Jerome H. Powell, acknowledged to concerned lawmakers during testimony in late June.

Credit…Pool photo by Bill O’Leary

Small-town bankers say some clients have gotten spooked by the substantial paperwork involved in using the program. Big companies often have more attractive options elsewhere in the market. Some, like La Colombe, have too much debt to apply. That problem is echoed across the comment letters by companies that were expanding their footprint pre-pandemic.

It will be hard to declare the program an outright failure even if few companies use it, because the Fed and Treasury have set out limited — and often fuzzy — goals. Officials say that they want to give healthy companies an option for credit access if market conditions worsen, but want to be responsible with the loans they make.

“Success would be that we have broad national coverage,” said Eric Rosengren, president of the Federal Reserve Bank of Boston, which is overseeing the effort. “This is for businesses that have a good business model, that were disrupted by the pandemic, and that are going to be able to recover from that so that they will be able to pay off the loan.”

The program is intended to help a narrow set of companies, particularly given its strict terms, experts said.

The Fed takes on 95 percent of the risk, but banks have to retain 5 percent of any loan they underwrite through the Main Street program, a stipulation meant to discourage them from dumping bad debt on the Fed. Because they must have “skin in the game,” they are likely to avoid underwriting loans if the economy is in crisis and it looks like a big chunk of borrowers might default.

The program also comes with reporting requirements and other restrictions — including limitations on executive pay and capital distributions, like dividends, that Congress set out in the relief legislation. If the economy is muddling along and credit is basically available, some companies will find borrowing through the Main Street program unattractive because of the strings attached.

It’s a Goldilocks design: Firms won’t use it if credit conditions are healthy and banks won’t use it if they are too unhealthy. It could help companies access credit if the situation is just right — for instance, if credit conditions tighten with a second virus wave in the fall, but banks and borrowers expect the economy to recover before long.

“There are some tough conditions that go with taking that money,” Bruce Winfield Van Saun, chief executive at Citizens Financial Group, said at a May 27 investor conference. “So I think many companies will seek other funding from banks or from asset-based lenders if they can achieve that.” He added that “if the situation stays tough or worsens, then I think you’ll see more companies avail themselves of Main Street lending.”


Credit…Kathy Willens/Associated Press

The program fully opened on Monday, and Mr. Rosengren said banks had already offered loans for companies that had been hard-hit, like movie theaters. He declined to say how many, and said he expected demand to ramp up over time. The Boston Fed disclosures show that hardly any of the biggest banks, other than Bank of America, are willing to publicly say that they will make loans to new customers through the program.

  • Frequently Asked Questions

    Updated July 7, 2020

    • What are the symptoms of coronavirus?

      Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.

    • Is it harder to exercise while wearing a mask?

      A commentary published this month on the website of the British Journal of Sports Medicine points out that covering your face during exercise “comes with issues of potential breathing restriction and discomfort” and requires “balancing benefits versus possible adverse events.” Masks do alter exercise, says Cedric X. Bryant, the president and chief science officer of the American Council on Exercise, a nonprofit organization that funds exercise research and certifies fitness professionals. “In my personal experience,” he says, “heart rates are higher at the same relative intensity when you wear a mask.” Some people also could experience lightheadedness during familiar workouts while masked, says Len Kravitz, a professor of exercise science at the University of New Mexico.

    • I’ve heard about a treatment called dexamethasone. Does it work?

      The steroid, dexamethasone, is the first treatment shown to reduce mortality in severely ill patients, according to scientists in Britain. The drug appears to reduce inflammation caused by the immune system, protecting the tissues. In the study, dexamethasone reduced deaths of patients on ventilators by one-third, and deaths of patients on oxygen by one-fifth.

    • What is pandemic paid leave?

      The coronavirus emergency relief package gives many American workers paid leave if they need to take time off because of the virus. It gives qualified workers two weeks of paid sick leave if they are ill, quarantined or seeking diagnosis or preventive care for coronavirus, or if they are caring for sick family members. It gives 12 weeks of paid leave to people caring for children whose schools are closed or whose child care provider is unavailable because of the coronavirus. It is the first time the United States has had widespread federally mandated paid leave, and includes people who don’t typically get such benefits, like part-time and gig economy workers. But the measure excludes at least half of private-sector workers, including those at the country’s largest employers, and gives small employers significant leeway to deny leave.

    • Does asymptomatic transmission of Covid-19 happen?

      So far, the evidence seems to show it does. A widely cited paper published in April suggests that people are most infectious about two days before the onset of coronavirus symptoms and estimated that 44 percent of new infections were a result of transmission from people who were not yet showing symptoms. Recently, a top expert at the World Health Organization stated that transmission of the coronavirus by people who did not have symptoms was “very rare,” but she later walked back that statement.

    • What’s the risk of catching coronavirus from a surface?

      Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.

    • How does blood type influence coronavirus?

      A study by European scientists is the first to document a strong statistical link between genetic variations and Covid-19, the illness caused by the coronavirus. Having Type A blood was linked to a 50 percent increase in the likelihood that a patient would need to get oxygen or to go on a ventilator, according to the new study.

    • How can I protect myself while flying?

      If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)

    • What should I do if I feel sick?

      If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.