I am past due to clear up some confusion and misinformation about our decision to participate in the Paycheck Protection Plan (PPP). This is simple and straightforward, unless you are committed to misunderstanding it.
On March 27, the CARES Act was signed into law. Its purpose was to preserve jobs, to keep people getting paychecks during the COVID-19 lockdown. The PPP‘s mechanism for this is the Small Business Administration (SBA) lending program. Two rounds of funding totaling more than $650 billion dollars in guarantees was made available to small businesses from their banks as SBA loans. These come with very favorable terms: 1% interest rate + 6 month grace period. As of this writing, $140 billion in assets remain available for lending to small businesses.
Distinguish between a bank loan and a bailout: Unlike the companies I wrote about in Bailout Nation – AIG, Bear Stearns, Lehman Brothers, Countrywide, etc. – my firm was not a cause of this Coronavirus crisis. We were not rescued from our own folly for events we precipitated; we did not take huge bonuses with taxpayer dollars; we did not sell appreciated stock right before a collapse we knew was coming and/or actively helped to create. We are not leveraged 40-to-1 — our leverage is precisely zero. Nor did we engage in fraudulent underwriting, Repo 105s, accounting fraud, insider trading, foreclosure fraud, or any of the unpunished crimes I detail in my book.
JP Morgan Chase has been our bank for most of the past 7 years. They were one of the 5513 banks that lent $510 billion dollars in PPP loans to 4.47 million small businesses.
RWM is one of those businesses. Bill Sweet, our CFO, knew more about this program than did the JPM bankers who helped us apply. He taught them more about the program than their own lawyers. Bill not only shepherded our application through the process, he helped dozens of our clients and other businesses we work with to apply for PPP loans themselves. In no small part, Bill is responsible for 1,000s of people still getting a paycheck despite the pandemic-related collapse of their businesses.
Why did we apply for this loan?
Bill McNabb, former CEO and Chairman of the Vanguard Group, is one of those people whose thinking influences how I look at our business. While we were in the worst of this, I recalled a story he told during our first Masters in Business conversations in 2015. During the 2008-09 financial crisis, he became aware how nervous and tentative his employees sounded when speaking with Vanguard’s clients. Staffers worried about their own jobs are anxiety-ridden, and not exactly confidence-inspiring. When panicked clients call in to discuss their portfolios, they prefer a calm, rational voice on the other end of the phone. McNabb’s solution? The CEO called a company-wide meeting, and told his entire 5,000-person team that there will be no layoffs and no firings. Soon after, everybody exhaled and relaxed. There was a noticeable improvement in calls and client satisfaction. That was a key turning point in Vanguard’s history, and the start of its march from $800 billion towards $6 trillion in assets under management.
I consider Bill a mentor. We all thought this was a brilliant idea, and we borrowed it from McNabb. In our weekly Monday morning meeting, Josh informed the entire firm that their jobs were secure, that there would be no layoffs. Their only responsibility was to make sure the 1100 families we work with understand what was going in the world, and was comfortable with the level of risk built into their portfolios. We let our our clients know we were there to help in any way we could, with whatever they needed.
Our guarantee of no layoffs was made possible by our PPP loan.
Lest you forget: In the midst of the worst economic collapse since the Great Depression, everyone was fearful. We were all on the verge. It is easy to overlook how you felt in the midst of the storm, when genuine panic gripped the stock market, and people had no idea how they were going to make rent. I am not a prepper or a believer in the Apocalypse, but when no one can find toilet paper anywhere for weeks, one begins to wonder how unstable society has become.
As the models forecasting millions of Americans deaths were changed to “only” 100s of thousands of deaths, collective memories began to get rewritten. Mid-April, I tweeted a warning that we would be soon be getting a visit from the Hindsight Bias fairy. Leave your accurate memories under your pillow, and in exchange you get an after-the-fact reimagining of what you will swear you knew in advance (And a quarter! So much better than the tooth fairy).
The truth is, no one had any idea WTF was going to happen. It was a Hindsight Bias Free for All. In some ways, the Covid-19 collapse was parallel with the GFC, only 15X as fast. The 07-09 period encompassed a relatively fast 18-month, 56% collapse, and a 4-year recovery. The 2020 collapse took 5 weeks, recovered in 8. The collective amnesia paralleled the move off of the March 23rd lows.
Back to our loan: We borrowed enough money to cover two and half months of staff salary. We have a crew of 32, half of whom are eligible employees. Note the PPP loans covers only those making less than $100,000 (plus rent and utilities); it does not go to those making more (e.g., partners and client facing advisors). RWM’s employee equity partners are the ones responsible for the repayment of that loan. If this all goes south, we are the ones who are on the hook. As the largest shareholder, that means me – I am the one who assumed the greatest liability for that debt – with Josh right behind me, followed by Kris, Mike, Ben, Bill and all of our other partners.
This is a loan, not a bailout. We have no intention of applying for forgiveness of our loan. We do not believe in unearned financial windfalls, or free money. Our loan will be fully repaid on time on October 2022.
The positive residual is we now have a credit history with JPM Chase. This is new for us – we built this firm by bootstrapping it with our own capital. We never used outside investors or any debt whatsoever. (Prior to this, we never even had a line of credit). No private equity, no borrowed money, just me and Josh putting up all the capital to launch. Monthly expenses go on an Amex that gets paid off in full each month. We may be socially progressive, but when it comes to debt and finances, we are very, very conservative.
I recall the early days of the firm, the pre-CFO days, when I would watch our bank account dwindle towards the end of each quarter, and stress over whether we would make payroll. I made sure we always did, even if that meant the founding partners skipping a paycheck, or reaching into my own pocket to cover the staff. Since Bill became CFO, that never happens anymore.
But the pandemic lockdown and market collapse raised that as a real possibility. We recognized the potential for this to get very ugly, very quickly. Clients losing jobs, revenues collapsing, firm-wide pay cuts, then layoffs, then closing the firm’s doors. No one could guarantee us that could not happen. We refused to let that become a possibility.
When the opportunity to take out an SBA loan arose, one that would guarantee RWM employees would be safe, of course we took it. It would have been irresponsible not to.
There has been some criticism of our doing this. Some people purposefully mischaracterized our loan as a bailout. Our high media profile meant we would get pushback, but I expected it to be rational and fact-based. I can’t get angry at armchair critics who have never had to make payroll, because they don’t know. The people who do know, who sent encouraging emails and tweets and phone calls, were a delightful surprise. And (upside surprise!), clients loved our transparency discussing this, whether it was on TV or radio or in blogposts.
This is who we are. This is how we built RWM, a decade before we even launched. We let it all hang out there for those who appreciate it. If you don’t like the way we roll, no worries, there are millions of other things for you to read or watch or listen to. Click here to move on. For the people who do get it, we appreciate your kind words of support; I spoke to many of you this past month, and I thank you for your encouragement. It was unexpected and gratefully received.
Hopefully, we are on the road to recovery, and everything continues to get better. There remains significant risks of a second wave in Q4. That was where much of the damage was done with the Spanish Flu in 1918. In the meantime, stay safe, and thank you for all of your support. We all hope to see you again soon, and in person.
Ritholtz Wealth Management
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