A globe and stand made out of dollar bills.
May 7, 2020

Axios Capital

Some things have become more popular during the lockdown. Hearteningly, donations from Fidelity Charitable's donor advised funds are up 30% from the same period a year ago. In-store purchases of "spirits including tequila and gin," however, are up an even greater 39% year-on-year.

  • In this week's newsletter: Politicians' use of moral suasion, the markets' seemingly bottomless pockets, how Jeffrey Epstein maintained his Harvard connections after his sex-crime conviction, and more. All in 1,587 words, a 6-minute read.
1 big thing: Why businesses say no to free money

Illustration: Sarah Grillo/Axios

Most people should and will accept free money from the government whenever it's offered. The CARES Act was designed to funnel trillions of dollars into workers' bank accounts, and was written with the expectation that few people or businesses would say no to such a gift.

  • Then the messaging changed.

Why it matters: Politicians lost no time in ratifying the anger and resentment aimed at some of the recipients of government-backed funds. The result has been a slew of businesses voluntarily rejecting government assistance.

Driving the news: The New York Times' Neil Irwin noted this week that "with stunning speed, the political conversation has pivoted from whatever-it-takes determination toward a different feeling: outrage."

The big picture: Legislation tends to be gamed, especially when it is written in a hurry. The government's Paycheck Protection Program in particular was the focus of a lot of anger after it became clear that relatively large and well-connected companies had managed to receive funding even as many very small — and even needier — businesses had been shut out of the first round.

  • By the numbers: In the initial tranche of the PPP, 44.5% of the money lent out — some $152 billion —went to businesses requesting more than $1 million. In the first week of the second round, by contrast, only 27% of the money went out in the form of seven-figure checks.
  • The average loan amount in the second round is $79,000, down sharply from $206,000 in the first round.

Between the lines: To some extent, the drop-off in average loan sizes is a function of the bigger recipients' ability to receive their money in the first round. But it's also a function of the fact that bigger businesses are listening to politicians, including Treasury Secretary Steven Mnuchin.

  • What they're saying: Mnuchin announced last week that the government would carefully scrutinize every PPP loan over $2 million before agreeing to forgive the money. What's more, he said, those businesses could face criminal liability. He concluded: "I encourage everybody to look at this and pay back these loans now, so we can recycle the money, if you made a mistake.”
  • No business wants that kind of government scrutiny, even if they are sure they qualify for the money.
  • It's easy for members of Congress to summon CEOs into public hearings designed to generate maximum negative publicity. If a CEO doesn't accept the money, she effectively avoids any risk of finding herself in that position.

For the record: Four of the top five businesses on the TrumpBailouts.org list of big recipients of PPP funds, put together by an anti-corruption watchdog group, have subsequently announced that they will be returning the money. Axios has done likewise.

  • Such announcements often come with a statement that "we have decided to return the loan with the hope it finds a home where it is more urgently needed," or words to that effect.
  • There's plenty of money left in the PPP coffers, however. The second $310 billion tranche of PPP money had more than $126 billion remaining at the end of Wednesday, with new loans in the second week so far amounting to just $7.8 billion. Fears that the money would be gone on day one did not come true.

The bottom line: Jawboning works. Even when businesses are legally entitled to bailout funds, they will often avoid taking that money when faced with political or popular opprobrium.

2. The market bailout

Illustration: Aïda Amer/Axios

Forgoing public funding is a lot easier if you can tap private markets to get the money — which is exactly what a lot of troubled companies have been able to do.

Why it matters: In the early days of the crisis, while markets were plunging, strong companies borrowed billions of dollars in cash just because they could. Now, with markets looking much healthier, weaker companies are finding themselves able to issue new debt and equity in an attempt to avoid bankruptcy.

Exhibit A: Boeing asked for a $60 billion bailout when the crisis hit, and ended up with $17 billion of federal loans earmarked for it as part of the CARES Act. The company still hasn't recovered from its 737 MAX crisis, and none of its airline customers are buying planes in any case. But investors are happy to lend it money all the same.

  • Boeing accepted no government money, in the end. Instead, it comfortably raised an astonishing $25 billion the private debt markets, with maturities stretching out as far as 2060.
  • The company's new $4.5 billion 10-year bond came at a yield of 5.15%, well below initial expectations that it would have to yield about 5.9%. Even the $3.5 billion 40-year bond pays less than 6%.

Airlines have also been raising private funds. There was $5 billion of new debt for Delta, $2 billion of loans for Southwest alongside another $2 billion in new equity, and a $1 billion sale of new shares by United.

  • Airlines famously go bankrupt a lot. Delta only emerged from bankruptcy in 2007, for instance. But in this case they seem to be able to continue raising money by borrowing against their assets, such as landing slots.
  • Bankruptcy makes it easier for airlines to cut union jobs and pensions, but those aren't the problem in this crisis.

Other troubled companies are also finding new money. The movie-theater chain AMC raised $500 million, for instance. And Carnival Cruises — which has announced that it will resume sailing on Aug. 1, despite grave concerns from the CDC — raised $6.25 billion.

The big picture: Junk-rated companies are able to issue new senior debt because previous lenders allowed them to. As Axios' Dion Rabouin has reported, loan covenants — the things that normally prevent existing lenders from being subordinated — weakened significantly in the run-up to the crisis. That has made it easier for companies to find new sources of funds.

The bottom line: The Fed has not yet started buying up corporate bonds. But by wading into the market and spending trillions of dollars on Treasury bonds and other risk-free assets, it has effectively unleashed billions of dollars of new money well down the credit spectrum.

3. "The Leon Black route" at Harvard

Illustration: Sarah Grillo/Axios

When Jeffrey Epstein was barred from donating money to MIT, a university development officer suggested that "the Leon Black route" be used instead. As I reported back in September, Epstein engineered donations to MIT from Black, the chairman and CEO of private equity giant Apollo. Now it looks like he did something very similar at Harvard.

Driving the news: Harvard's official report on its Epstein connections has now been published , showing how professor Martin Nowak was funded after Epstein was convicted of sex crimes in 2008.

  • Background: Nowak's Program for Evolutionary Dynamics "was established in 2003 by Harvard University President Lawrence H. Summers following an imaginative proposal by Jeffrey Epstein." That's according to the first version of the center's website.

Barred from donating to the university after his conviction, Epstein remained very close to Nowak.

  • When Nowak needed more money after Epstein's initial $6.5 million ran out, the pedophile financier introduced him to Black.
  • Black had no pre-existing relationship with Nowak, but ended up providing $7 million in unrestricted gifts to allow the professor to keep paying rent on his research space in Brattle Square.
  • After those checks cleared, Epstein maintained an office in the research quarters that Black's money paid for. According to the report, "it is likely that he visited PED's offices more than 40 times between 2010 and 2018, including visits as recently as October 2018."
  • The report adds: "Epstein was routinely accompanied on these visits by young women, described as being in their 20s, who acted as his assistants."

Black confirms to Axios via a spokesperson that he was introduced to Nowak by Epstein, and says that the funds he gave to Nowak were not "provided by Mr. Epstein."

The bottom line: At MIT, Black was viewed as a donor who owed Epstein favors, and who could be relied on to provide cash at Epstein's behest. Black has an MBA from Harvard, making donations to his alma mater look slightly less suspicious. But they do seem to follow the same pattern.

4. Coming up: April payrolls

Illustration: Eniola Odetunde/Axios

The April jobs report comes tomorrow, writes Axios' Courtenay Brown. It will be almost incomprehensibly grim.

Why it matters: The report will tell us a lot of what we don't know about the coronavirus-ravaged job market: How widespread the job losses are by industry and demographic, how many layoffs are temporary, and whether worker pay has been cut.

The headline number will be the unemployment rate, which is expected to hit 16%. The best estimate for peak unemployment during the Great Depression is that the number hit 25%.

  • In two months, the rate will have more than quadrupled.
  • 22 million net jobs are expected to have been lost during the Labor Department's survey period, which ended in mid-April.

Of note: You're only counted as unemployed if you're actively looking for work. But because of state-imposed lockdowns, many Americans aren't looking for work.

  • Broader measures of joblessnesslike the U6 — may paint a more useful, and even bleaker, picture.

The bottom line: Economists warn the key figures from the report may understate the devastation of job losses.

  • The report "wasn't designed for a pandemic, and it is unclear how well it will capture all the unusual nuances that the current crisis presents," as the New York Times points out.
5. Severed spots update

"88 Holes," 2020. Image via MSCHF

The final bid for "88 Holes," the Damien Hirst print with all the spots cut out that I wrote about last week, came in at $261,400.

  • Bring your own scalpel: If you missed out, I can confirm that an identical print is available from Rosenbaum Contemporary in Boca Raton for the bargain price of $27,000. If you are brave enough to chop it up yourself, maybe you can send the removed spots to 88 of your closest friends as an art-themed 2020 holiday present.
6. Building of the week: The Mousebunker, Berlin

Photo: John MacDougall / AFP via Getty Images

Berlin has some amazing architecture from the Cold War era, but the Zentrale Tierlaboratorien — universally known as the "Mäusebunker," or Mousebunker — is undeniably one of the most striking buildings of the period.

  • Designed in the late 1960s by Gerd and Magdalena Hänska, it was built between 1971 and 1981 as the animal testing facility for Berlin Free University.
  • The facade, dominated by temperature-regulation pipes, is often likened to something out of "Star Wars."
  • The interiors are currently empty, but two separate architecture faculties in Berlin are working on plans for adaptive reuse of the structure.

The Mousebunker is currently slated for demolition. A petition to save it has almost 5,000 signatures.