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A 'Black Swan' fund posted a massive 4,000% return after the coronavirus blew up markets

Wed, 04/08/2020 - 5:05pm

  • A "Black Swan" hedge fund posted a 4,144% return last quarter after the novel coronavirus outbreak tanked markets.
  • Universa Investments' chief, Mark Spitznagel, trumpeted the massive gain in a letter to clients, The Wall Street Journal reported on Wednesday.
  • Spitznagel — a protégé of Nassim Nicholas Taleb, the author of "The Black Swan: The Impact of the Highly Improbable" — recently predicted markets would fall further.
  • "For people who are worried about having missed it, this sell-off has only taken back a few months of gains. I expect a true crash to take back a decade."
  • Visit Business Insider's homepage for more stories.

A "Black Swan" hedge fund that specializes in profiting from market shocks posted a 4,144% return last quarter thanks to the coronavirus sell-off.

Mark Spitznagel, the chief of Universa Investments, touted the stunning fortyfold gain from the fund's tail-risk hedging strategy in a recent letter to clients, The Wall Street Journal reported on Wednesday.

If an investor had just 3.3% of their assets in Universa and the balance in a S&P 500 tracker fund, they would have made a 0.4% return last month despite the benchmark slumping more than 12%, the newspaper said.

Spitznagel is a protégé of Nassim Nicholas Taleb, the author of "The Black Swan: The Impact of the Highly Improbable." Spitznagel worked at Taleb's now closed Empirica Capital, and Taleb is Universa's scientific adviser.

Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

The Universa boss said in the letter that after a record bull run, markets have further to fall, The Journal reported.

"If the pandemic doesn't pop this bubble then, of course, it will be something else that eventually accomplishes this," Spitznagel said.

A Universa representative declined to comment in an email to Business Insider.

Spitznagel made a similar observation in The Journal in March after a "great month" for Universa in February.

"For people who are worried about having missed it, this sell-off has only taken back a few months of gains," he said. "I expect a true crash to take back a decade."

Read more: C.T. Fitzpatrick has ranked in the top 1% of value managers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

Spitznagel has scored outsize returns in the past. Universa netted more than $1 billion in a day — a 20% return at the time — when the Dow plunged by over 1,000 points in August 2015, The Journal reported.

The hedge-fund boss is a veteran at stomaching small losses for years in anticipation of the next market crash. Malcolm Gladwell quoted him in "Blowing Up," his 2002 New Yorker profile of Taleb.

"It's like you're playing the piano for ten years and you still can't play 'Chopsticks,'" Spitznagel told Gladwell, "and the only thing you have to keep you going is the belief that one day you'll wake up and play like Rachmaninoff."

Read more: Gavin Baker has navigated 4 bear markets. He shares his exact investment strategy for today's volatile environment — and explains why he's laser-focused on 2 areas in particular.

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

A Wall Street wealth chief breaks down why the coronavirus bear market may be unique in history — and pinpoints the areas where traders should be buying right now

Wed, 04/08/2020 - 5:05pm

  • Glenmede's Jason Pride and Michael Reynolds say it's possible to identify three types of bear markets. And so far, the current downturn matches the shortest and least severe type.
  • However, they say that if anti-pandemic measures stay in place long enough, the result would be the longest and most severe type of bear market, associated with recoveries that take almost a decade.
  • In the face of that frightening prospect, they're telling investors to think very long-term.
  • Visit Business Insider's homepage for more stories.

If investors didn't have enough to worry about already, they might have to contend with a bear that won't stay in its lane.

Jason Pride, the chief investment officer for Glenmede's private wealth division, and investment strategy officer Michael Reynolds say it's possible to put stock market downturns in three categories. For now, the current coronavirus-driven downturn is in the briefest and mildest type, but that might not last.

The team categorizes this bear market as "event-driven," brought on by the pandemic and the dramatic efforts to stop it — which have amounted to shutting down about a third of the global economy. In the past, event-driven bear markets have been brought on by oil shocks and wars.

Those downturns are the shortest, and the subsequent market recoveries are the fastest, according to the Glenmede team. It's an outcome that matches Wall Street's fondest wish. Investors have hoped that the global economy would quickly improve and markets would heal when this crisis passes.

But Pride and Reynolds warn that this bear market might break out of the event-driven category.

"If the economic fallout from quarantine efforts proves to be more material and persistent than expected, it could cause the type of imbalances consistent with structural bear markets, which tend to be longer and of greater magnitude," they wrote.

In an interview, Reynolds said we may know one way or the other around the four-month mark. If COVID-19 case counts start falling and there are signs the economy can get back to normal after two or three months, a quicker recovery is more likely.

"If it takes a longer period of recovery and people staying at home, that could lead to more structural problems in the economy," he said, adding that if the shutdown passes that four-month mark, more businesses are likely to fail.

Structural bear markets have historically been caused by problems like financial bubbles. And Pride and Reynolds say a structural problem is what enforced social distancing, high unemployment, reduced spending, and business bankruptcies could eventually become.

According to a chart they created, that would bring about a three-year bear market and, in percentage terms, stocks fall twice as far as they do in other slumps. An average recovery for stocks would take almost nine years. 

While a protracted lockdown would bring more economic pain, it would also create a larger bounce-back afterward.

"Containment efforts may need to remain in place for longer to sustain any improvement," they say. "The magnitude of economic decline increases with the expected length of the containment periods, but the magnitude of the expected rebound in the quarters that follow increases as well."

Reynolds says there is evidence that markets in China and South Korea bottomed when data showed new infections were peaking, as investors reacted strongly to hints the worst of the outbreak was behind them. He says that could happen in the US as well.

Where Pride and Reynolds say to invest

For an investor willing to endure a lot of volatility and stay on course for the long-term, they offer these tips. 

"US small-cap and emerging market stocks tend to have relatively high sensitivity to economic prospects, so they may contain some of the larger beneficiaries of a potentially consequent market rebound," they wrote. "Long-term investors should value equities – investments in companies – according to their longterm ability to generate earnings."

Investors can apply those recommendations using exchange-traded funds. Two well-known small-cap offerings are the iShares Core S&P Small-Cap ETF and the SPDR S&P 600 Small-Cap ETF. Options that provide broad exposure to emerging markets include the Schwab Emerging Markets Equity ETF and Goldman Sachs ActiveBeta Emerging Markets Equity ETF.

Reynolds adds that it will be good news for small-caps if the government delivers more support for small businesses. And Glenmede is especially attentive to the growing middle class in Asia as a source of investment opportunities, as people in that group are gaining wealth and could drastically outnumber the US middle class in time.

"Middle class emerging Asia is going to be a force to be reckoned with over the next couple years, if not decades," he said. "We've seen some pretty attractive buying opportunities in that space."

SEE ALSO: Coronavirus investing 3-1-1: A global fund manager beating 98% of his peers shares 3 stocks that are must-haves, one he'll buy when opportunity strikes, and one he doesn't trust anymore

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

These 5 staggering estimates for weekly unemployment claims show just how deeply the coronavirus crisis has damaged the US economy

Wed, 04/08/2020 - 5:04pm

  • The consensus economist estimate is that 5 million Americans filed for unemployment insurance in the week ending April 3. The report will be released by the Labor Department on Thursday. 
  • During the week ending March 21, 3.3 million Americans filed for unemployment benefits. And in the following week, 6.6 million more filed, bringing the total to nearly 10 million in just two weeks. 
  • "There were broad signs that state governments were increasing hiring or shifting resources to better process filings for unemployment benefits given the deluge in recent weeks," Bank of America economists wrote Wednesday. "Some states believed the worst was yet to come."
  • Visit Business Insider's homepage for more stories.

Economists expect another week of jarring unemployment insurance claims as the coronavirus pandemic wears on. 

The consensus estimate among economists is that the US will have 5 million jobless claims for the week ending April 3, according to Bloomberg data. Estimates range from 2.5 million to as high as 7.5 million. 

In March, the number of Americans filing for unemployment skyrocketed to record levels as coronavirus-induced layoffs began suddenly as the US shut down parts of its economy to curb the spread of COVID-19. During the week ending March 21, 3.3 million Americans filed for unemployment benefits, and in the following week, 6.6 million filed. That brought the total to nearly 10 million in just two weeks. 

"We believe risks are tilted to the upside," wrote Bank of America economists Alexander Lin and Michelle Meyer in a Wednesday note. The bank's estimate is that weekly jobless claims will be 6.5 million. 

Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

"While scanning through the news, there were broad signs that state governments were increasing hiring or shifting resources to better process filings for unemployment benefits given the deluge in recent weeks," the economists wrote. "Some states believed the worst was yet to come."

Thursday's report from will be the first glimpse at the labor market since Friday's nonfarm payroll report showed that the US lost 701,ooo jobs in March, more than economists expected. The report also only included data before March 14, leaving out two key weeks of job losses.

Economists, including those at Bank of America and JPMorgan, have also pointed to Google trend data that shows that searches for "unemployment benefits" and "filing for unemployment" continue to climb, which could mean that weekly claims come in higher than expected. 

Read more: C.T. Fitzpatrick has beaten 99% of his peers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

Unemployment insurance claims could also be boosted by the $2 trillion coronavirus stimulus package, according to Bank of America. The CARES Act — which was passed on March 27 — expands benefits to those who may not have previously been eligible, including those who are self-employed or gig workers. The act also extends the number of weeks one can receive benefits and adds up to $600 per week through July. 

It remains to be seen if the report, due Thursday from the Labor Department, will show a record surge in Americans applying for unemployment benefits for the third week in a row. Even if it shows claims below the consensus estimate, it will take another week or more of data to see if the trend of coronavirus layoffs is actually slowing.

If jobless claims have peaked, it will be the most rapid uptick on the books. The two previous peaks in unemployment claims — during the financial crisis in 2008 and in the 1980s— happened "more gradually over time," Barclays chief economist Michael Gapen told Business Insider. 

But this is a different scenario, he said, as the coronavirus pandemic lock-downs and social distancing measures have led to a near-halt of all business activity.

Read more: A Wall Street wealth chief breaks down why the coronavirus bear market may be unique in history — and pinpoints the areas where traders should be buying right now

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

'I no longer feel defense should be favored': Billionaire investor Howard Marks urges clients to take advantage of bargains in the market

Wed, 04/08/2020 - 5:04pm

  • Attractive entry prices and new details about the economic toll of the coronavirus pandemic make for an appealing investing environment, Oaktree Capital founder Howard Marks said in a memo to clients on Monday.
  • Those who aren't willing to take on risk will miss out on a likely uptrend when the virus threat subsides, he wrote.
  • Even the most cautionary buyers should take on more offensive strategies to capture value while it lasts, Marks added.
  • Investors aiming to time the market bottom are using an "irrational" strategy and should instead "buy on the way down," the billionaire investor said.
  • Visit Business Insider's homepage for more stories.

Widespread virus fear and depressed asset prices make for a promising investment opportunity, Oaktree Capital founder Howard Marks told clients in a memo on Monday.

The "uncertain, low-return environment" seen throughout the financial sector before the coronavirus pandemic tanked markets has given way to one rife with value, he said.

Marks said that returns on bonds had rotated "from paltry to attractive" and that economic risks are now broadly recognized among investors. Those who can't see the value in taking on moderate risk stand to lose out on a major upswing when the virus threat ends, he said.

"I no longer feel defense should be favored. Yes, the fundamentals have deteriorated and may deteriorate further, and the disease makes for risk (remember, I'm the one who leans toward the negative case)," Marks wrote. "But there's a big difference between a market where no one can find a flaw and one where people have given up on risk-taking."

Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

The billionaire investor's latest advice followed weeks of cautionary notes. Memos sent throughout March advised Oaktree clients to take the defensive as news about the coronavirus pandemic and its economic consequences trickled in.

Uncertainty clouding the outbreak's future and the lack of relevant guidance created a troublesome investing environment. But as markets tanked and investors fled for safe-haven assets, Marks' outlook skewed further to the buy side.

Fund managers' jobs are increasingly focused on the balance between offense and defense, he said in his most recent memo. The exodus from risk assets leaves a hole for braver investors to fill; even the most cautionary buyers "can reduce their overemphasis on defense" and take on a more aggressive strategy, he said.

Read more: C.T. Fitzpatrick has beaten 99% of his peers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

"One way to think about the balance between offense and defense is to consider the 'twin risks' investors face every day: the risk of losing money and the risk of missing opportunity," Marks wrote. "At least in theory, you can eliminate either one but not both. Moreover, eliminating one exposes you entirely to the other."

Grasping at value doesn't require precise timing, the founder added. Marks debunked investors aiming to buy at markets' bottom, deeming it an "irrational statement." Market troughs are discovered only in retrospect, and buying "on the way down" gives impatient investors the best chance of capturing bargain prices before they're gone.

"To insist on buying only at bottoms and selling only at tops would be paralyzing," he said.

Now read more markets coverage from Markets Insider and Business Insider:

Goldman Sachs is looking to raise a fund of up to $10 billion to serve cash-strapped companies hit by coronavirus, new report says

US cuts oil production forecast through 2021 — padding the crushed market before a critical OPEC meeting

Coronavirus investing 3-1-1: A global fund manager beating 98% of his peers shares 3 stocks that are must-haves, one he'll buy when opportunity strikes, and one he doesn't trust anymore

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

America's small-business owners hoped a $349 billion lifeline from Washington would pull them through the pandemic. Here's the inside story of how its launch spectacularly unraveled in 24 hours.

Wed, 04/08/2020 - 4:31pm

  • The federal government promised that relief funding for small businesses ravaged by coronavirus would be up and running on April 3.
  • But in the 24 hours before applications were scheduled to open, media reports showed that a critical piece of the plan was already falling though.
  • Banks threatened to opt out of lending to America's struggling businesses until the Treasury addressed key concerns.
  • A signature provision of the $349 billion assistance package called the Payroll Protection Program was promised as a lifeboat for US small businesses.
  • This is the story of how, in the days leading up to the PPP's April 3 launch, a combination of high demand, conflicting information, and uneasy cooperation between the public and private sector threatened to sink it.
  • Click here for more BI Prime content.

The morning of Friday, April 3, dawned with so much hope: It was when thousands of business owners expected to get a step closer to the $349 billion in government relief they desperately needed to maintain payroll, afford rent, and otherwise keep America's economy chugging during a historic pandemic.

That hope soured by midday.

Entrepreneurs and founders rushed to apply for the financial lifeline through their banks, the federally designated gatekeepers of the loans and grants, only to be met with chaos. Online portals flashed delay notices. Webpages broke. Emails asked they patiently keep waiting.

John Resnick, an entrepreneur, raged on Twitter that two different banks told him they weren't ready to process loans. Fellow business owner Eric Martel fumed that Bank of America quickly denied him funds to help pay his employees, despite his being a business customer there for 17 years.

"Being a #bankofamerica business customer is like being one of the poor on the Titanic," founder Lisa Dye wrote on her own Twitter feed. "We don't get the lifeboats!"

These and the countless other grievances that flooded social media and the inboxes of Business Insider reporters throughout that day paint a picture of a system completely unprepared to handle what many had already predicted would be historic volumes of financial-aid requests.

About 30 million small businesses in the US employ half the country's labor force. By the time night fell on April 3 — and by then, a quarter of US small businesses had been forced to shutter, furlough, or otherwise drastically scale back — only 17,000 loans had been successfully processed.

Business Insider spoke with experts and business owners, pored through reports from our newsroom and other media sources, and stayed glued to the grumblings of exasperated entrepreneurs across social media to piece together a troubling puzzle: how a much anticipated federal-relief program floundered so spectacularly in 24 hours, leaving the bedrock of America's economy without aid or hope just when both were most needed.

The government sets a game plan for relief

The hope that Washington would swoop in to save small businesses first flared on March 27, when President Trump signed into law the $2 trillion Coronavirus Aid, Relief, and Economic Security Act. The ballyhooed bill with the publicity friendly name featured Congress' plan to bail out small-business owners, who were left particularly reeling as coronavirus quarantines turned Main Streets across the US into ghost towns.

The legislation established a $350 billion fund for a pair of small-business-assistance measures, most notably the Paycheck Protection Program that would provide loans for employers and independent contractors to cover payroll and expenses during the crisis. It was even reported that businesses that were able to fully keep or rehire employees would not have to pay back PPP loans.

To make sure struggling founders had fast access to this cash, the law set down a simple plan. Congress tasked the US Treasury with setting loan terms, while the Small Business Administration (SBA) was responsible for approving and guaranteeing the loans through E-Tran, its system for processing electronic applications. Banks across the country would dole out funds to business owners, who could spend the money on certain taxes, mortgage or rent payments, utilities, interest on preexisting debt, and a variety of costs associated with workers' pay and benefits.

Treasury Secretary Steven Mnuchin set a big date on the calendar: Small-business owners would be able to visit their usual banks or fintech platforms to apply for funds on April 3 — barely a week after the bill was signed into law.

"We expect this will be very, very easy," he told Fox Business on March 29.

Red flags mount days before PPP opens to public

It quickly became clear that some of the plan's key players weren't on board with the government's financial Hail Mary.

Representatives from national and community banks told Reuters they didn't want to take on the legal and financial liability of vetting applications on such a short timeline because it meant they'd bear the brunt of any fraud.

Smaller banks also worried about how long they'd have to keep loans on their books. They appealed to the Treasury to create a secondary market that would allow financial institutions to buy and sell PPP loans from each other much like they do with mortgages. Freeing up their balance sheets would increase the number of customers they could reach without holding a dangerous amount of debt.

Revised guidance from the Treasury released late on Tuesday, March 31, further infuriated banks and created a melange of shifting rules that added to the confusion of the short timeline.

The Treasury slashed the allowed interest rate from 4.75% to just 0.5%, which dramatically reduced the promised payout for lenders. (Banks would still collect fees up to 5% of the loan principal.) Additionally, loan terms were reduced from 10 years to just two, dramatically raising possible monthly payments for borrowers whose loans aren't forgiven. A new requirement also said that only 25% of nonpayroll expenses would be forgiven, instead of the 100% originally promised.

Big and small banks alike lobbied the Treasury and the SBA to amend their terms, according to Bloomberg. Bank of America even reached out to Ivanka Trump, since the first daughter had long been the administration's de facto entrepreneurship czar.

For the whole plan to work, the government had to get the banks to agree to participate. But with less than a day to go before PPP loan applications opened, Reuters reported that thousands of banks were threatening to opt out.

JPMorgan Chase emailed customers on April 2 to say it would "most likely not be able to start accepting applications" the next day, CNBC reported.

Jill Castilla, the CEO of Citizens Bank of Edmond in Oklahoma, tweeted, "Right now, there is too much ambiguity and too little structure."

All this wrangling worked to the banks' advantage, sort of. On the evening of April 2, Mnuchin increased interest rates from 0.5% to 1%. He also announced that independent contractors (the freelancers or consultants that small-business owners often hire on a temporary basis) would not be included in employee counts. This meant that entrepreneurs could only use costs spent on full-time employees to determine the dollar amount of their PPP loan, while their true costs might be much higher in reality.

The controversy over the changing loan terms masked another problem: Most financial institutions were still scrambling to set up technology systems capable of handling the mass volume of borrower applications. The SBA's own electronic loan-approval platform was hastily scaled up to handle over 60 million applicants. For comparison, it processed just 52,000 loans in all of 2019.

Small-business owners are met with disarray and denial

Brent Underwood, owner of the HK Austin hostel, in Texas, shut down his business for three months because of the coronavirus pandemic. "We have a mortgage payment, utilities, employees, and an empty building," he told Business Insider. "We've somehow made it work for six years now, but this is looking like it may be the end."

The government's PPP loans were the best chance of survival for his business.

When the application floodgates opened on the morning of April 3, Underwood was one of thousands of business owners who were met with a patchwork of inconsistent bank protocols.

"The information and procedures seem to be changing daily," Underwood said. "Keeping up with them has become a part-time job in itself!"

Andy LaPointe, owner of Traverse Bay Farms, in Bellaire, Michigan, needed $10,000 to keep his business alive and five employees on staff. He told Business Insider he was up at 6 a.m. that Friday to prepare all his documents and information, even though his local bank didn't open applications until noon.

When he called the number the bank designated for the loans, he says he was disconnected three times in the two hours he was on hold.

This tracks with reporting from Marketplace Morning, which wrote that many banks said they weren't ready for the high demand — and that they blamed Mnuchin's last-minute tweaks on April 2 for the confusion.

It was fast becoming clear that the volume of applications would exceed the system's capacity. By 9 a.m., the time at which many banks open, 700 loans totaling $2.5 million had already been processed, The New York Times reported.

Many business owners logged on to their bank's website to find they were not yet accepting applications. Others were directed to broken webpages.

Bank of America was the first major bank to open applications about 9 a.m., a spokesperson told Business Insider. But screenshots from about noon showed it had imposed new lending restrictions, requiring that applicants already have a credit card or previous loans with the bank as of February 15 to be eligible. Customers with savings and checking accounts didn't meet this bar and were blocked from applying for loans.

One frustrated Twitter user posted that she couldn't get a PPP loan regardless of the years she's used Bank of America.

Being a #bankofamerica business customer is like being one of the poor on the Titanic. We don't get the lifeboats! No previous loan, no #ppploan regardless of years with them. Shame on you! #leaveBofA #bankofamericasucks #uselocalbanks

— Lisa Dye (@lisamdye) April 3, 2020

JPMorgan Chase started lending at noon. Wells Fargo and Citibank weren't accepting applications, saying they were holding out until receiving more clarifications from the Treasury, according to Reuters.

Virginia Democratic congressman Don Beyer posted images of broken webpages and delay notices from Chase, Capital One, and Citibank. "Here's what small business owners are looking at right now when they try to get PPP loans from banks," he wrote.

Yesterday @stevenmnuchin1 stood at the White House podium and assured American small business owners that the Paycheck Protection Program "will be up and running tomorrow."

Here's what small business owners are looking at right now when they try to get PPP loans from banks: pic.twitter.com/8SOKCA8y4Z

— Rep. Don Beyer (@RepDonBeyer) April 3, 2020

According to Beyer's images, Chase's site showed an error message. Capital One told site visitors that it was still awaiting information from the SBA and Treasury. Citibank's site displayed a message saying the SBA was "currently developing regulations and guidelines" and that when received, the bank would begin lending.

Entrepreneurs raged on social media, specifically over Bank of America's surprise requirements. By early afternoon, the hashtags #PPPloans and #bankofamerica were trending on Twitter.

LaPointe, the Michigan business owner, told Business Insider that he was finally able to reach a branch manager who took his application over the phone. She told him their system was overloaded with callers and she had another customer waiting on the line to apply.

"As a small-business owner, you have to be patient and persistent," he said.

At the end of the day, SBA Administrator Jovita Carranza announced on Twitter that the Paycheck Protection Program had processed more than 17,000 loans valued at more than $5.4 billion in its first day, more than doubling the agency's $2.2 billion disaster lending total for the year before.

But smaller banks said they experienced slowdowns in the SBA system throughout the day on Friday, and had trouble reaching federal agencies for help, according to The New York Times and American Banker.

"The expectation that this $2 trillion package would go through Congress and that the money would be flowing three days later, that was never a realistic expectation," Patrick Ryan, the chief executive of New Jersey lender First Bank, told The Times.

The headaches become a days-long affair

The chaos spilled into the weekend. On Saturday, April 4, Jim Axelrod reported on "CBS This Morning" that the SBA loan-application page turned out to have a disturbing glitch that displayed small-business owners' personal details — including names, date of birth, Social Security numbers, and other contact information — to others applying for the same loan.

In a Twitter thread on Saturday, Florida Sen. Marco Rubio acknowledged the issues with Friday's launch, including website problems, contradicting and incomplete guidance, and the need for more money. He said the "complications" were to be expected from a $349 billion plan that had been passed only a week before.

Brad Bolton, the CEO of Community Spirit Bank, in Mississippi, said on an April 7 conference call with Trump (which Business Insider reporters attended) that his institution had been "locked out" of the SBA system until Sunday.

"We worked through the weekend preparing applications," Bolton said. "As a matter of fact, I was up three nights until 2 a.m. submitting loans to get the money flowing."

While Trump congratulated Bank of America, the US Treasury, the SBA, and local banks on Twitter, business owners spent the weekend anxiously awaiting approval — sometimes after applying to multiple banks.

I will immediately ask Congress for more money to support small businesses under the #PPPloan if the allocated money runs out. So far, way ahead of schedule. @BankofAmerica & community banks are rocking! @SBAgov @USTreasury

— Donald J. Trump (@realDonaldTrump) April 4, 2020

"I will immediately ask Congress for more money to support small businesses under the #PPPloan if the allocated money runs out. So far, way ahead of schedule," he wrote.

But loans approved are not necessarily loans disbursed, and America's harried business owners entered another week still in urgent need of working capital.

One in 4 businesses are on the verge of permanent failure

Monday, April 6, the second day of lending, was plagued with a continued rash of SBA system outages.

Wells Fargo began lending on Monday, but announced its participation would be capped at $10 billion, primarily focused on smaller borrowers. Regulators had instituted the lending cap after the bank was found guilty of fraudulently opening millions of accounts over several years. The ability of the San Francisco giant — once the country's largest small-business lender — to assist even its own customers was now severely limited. On Wednesday, April 8, the Federal Reserve announced it would "narrowly modify" the restrictions on the bank's participation in the relief program.

Wells Fargo declined an interview for this story and instead directed us to its PPP website, which mentions the bank's focus on nonprofits and businesses with fewer than 50 employees.

When asked for an interview, Bank of America emailed Business Insider that as of 9 a.m. on April 6, it had received about 178,000 applications seeking some $33 billion in loans.

A senior administration official at the US Treasury sent Business Insider a statement saying the "unprecedented $350 billion Main Street assistance program" had approved $35 billion in disbursements to more than 100,000 small businesses. It added that it would set up a hotline starting April 6 to answer questions from banks.

A spokesperson from JP Morgan Chase said by email that the bank was "optimistic that the process for inputting the applications into the SBA system will get easier and faster this week so that we can work really quickly to get our customers the help they need."

The SBA did not return a request for comment.

Discontent continued to bubble as days passed

In a webinar video obtained by The Washington Post, SBA Nevada district director Joseph Amato flayed big banks for delays and resistance to federal directives. "Some of the big banks ... and this is just editorial ... that had no problem taking billions of dollars of free money as bailout in 2008 are now the biggest banks that are resistant to helping small businesses," Amato said.

On Tuesday, April 7, as tensions between public officials and private institutions simmered, Mnuchin announced that he had requested an additional $250 billion for small-business loans from Congress. Senate Majority Leader Mitch McConnell issued a statement saying he expected to call a vote as soon as Thursday.

America's businesses can't wait much longer.

A report from MetLife and the US Chamber of Commerce notes that one in four small or midsize businesses are less than two months from shutting down for good.

In hindsight, April 3 seems like the beginning of what will be a long process of trial and error. Those who weren't able to apply on Friday persist in their efforts this week.

Joe Shamie had been waiting for nearly a month to apply for the $2.5 million loan he needs to keep payroll for his 300 employees at the furniture maker Delta Children. He said his banker at Wells Fargo told him his company would be one of the first in line to receive emergency funding.

But when the bank opened applications on Monday, Shamie said he was shoved to the end of the line, along with many other business owners scrambling to find another way in once Wells Fargo reached its lending threshold.

"We were devastated," Shamie said.

He has already contacted his accountant, lawyer, friends, and several other banks to exhaust all his options. At this point, the last thing he can do is give up hope.

"If I gave up on the loan, there would be a lot of people out of work," he said.

SEE ALSO: PRESENTING: How American businesses are handling production delays, heightened demand, and economic fallout amid the coronavirus pandemic

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Senator who dumped stocks after confidential briefing says she'll divest from individual shares

Wed, 04/08/2020 - 4:31pm

Sen. Kelly Loeffler will divest from her ownership in individual stocks, following controversy over her investments and stock sell-off following a confidential coronavirus briefing. 

The Georgia Republican said in a Wall Street Journal op-ed on Wednesday that she is making the decision "because the issue isn't worth the distraction."

"Although Senate ethics rules don't require it, my husband and I are liquidating our holdings in managed accounts and moving into exchange-traded funds and mutual funds," she said. 

Loeffler was widely criticized after the Daily Beast reported in March that she dumped stocks likely to fall due to the coronavirus, and bought shares in a company that makes telecommuting software. A second report from the Atlanta Journal-Constitution earlier this month showed she sold shares in Lululemon and TJ Maxx and bought stock in a company that makes protective equipment. 

The senator says that she did not make the trades herself, and that they were executed by third-party managers.

"My family's investments are managed by third-party advisers at Morgan Stanley, Goldman Sachs, Sepio Capital and Wells Fargo," she said. "These professionals buy and sell stocks on our behalf. We don't direct trading in these accounts." 

"I have never used any confidential information I received while performing my Senate duties as a means of making a private profit," Loeffler said in the op-ed. "Nor has anyone in my family."

Loeffler is married to the CEO of Intercontinental Exchange, which owns the New York Stock Exchange. 

The senator is up for reelection this fall, facing Republican Rep. Doug Collins. Collins is ahead of Loeffler in internal polling, Politico reported

 

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The Dow surges 780 points on COVID-19 recovery efforts as oil prices spike

Wed, 04/08/2020 - 4:06pm

  • US stocks gained on Wednesday as investors cheered a slowdown in new US coronavirus cases and the White House's early plans for economic recovery.
  • The gains came after Tuesday's wild reversal that saw all three major US indexes erase sharp early gains and close lower.
  • The Trump administration said on Tuesday that it planned to reopen economies in smaller cities and towns less harmed by the outbreak before allowing larger, heavily hit cities to resume activity.
  • Oil surged as much as 12% amid mounting expectations that an upcoming OPEC+ meeting will lead to production cuts.
  • Watch major indexes update live here.

US stocks gained on Wednesday as traders mulled Tuesday's market whipsaw and President Donald Trump's plans for economic recovery.

Investors continued to buy risk assets amid hopes of coronavirus cases slowing throughout the US. The number of daily new reported cases has fallen since Friday's highs, according to data collected by Johns Hopkins University.

The White House said on Tuesday that it planned to first reboot the nation's economy in smaller cities and towns less affected by the outbreak before reopening larger, heavily hit cities. The plan is still being developed but gave investors the first signs of how the crippling economic shutdown could end.

Here's where major US indexes stood at the 4 p.m. ET market close on Wednesday:

Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

"The difference between now and the start of the pandemic is that we can at least see the end," Brad McMillan, chief investment officer at Commonwealth Financial Network, told Business Insider. "We can see that we have flattened the curve, and we can reasonably project when the pandemic will be brought under control. We are not at that point yet, but at least we can see it."

WTI crude oil spiked 12% at intraday highs as investors continued to monitor developments in a price-war truce. Production hikes and price cuts from Saudi Arabia and Russia have pushed oil's price near two-decade lows. A meeting of OPEC, Russia, and other producers may usher in the first major de-escalation in the global conflict.

The US on Tuesday slashed its oil-production forecast through 2021 to boost demand during the virus-driven supply glut. The Energy Information Administration said it sees the price of Brent crude averaging out to $33 per barrel through 2020 before rebounding to an average of $46 per barrel the following year.

The EIA also expects the US to become a net importer of oil by the third quarter of 2020 for the first time since 2019, returning to net-exporter status in 2021.

Read more: C.T. Fitzpatrick has beaten 99% of his peers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

Minutes from the Federal Open Market Committee's emergency March 15 meeting published Wednesday revealed the central bank's view of the pandemic as it first began gripping the US. The Board saw either a short-lived outbreak giving way to recovery in the second half of 2020 or a prolonged pandemic placing the rebound in 2021.

The current economic downturn is "temporary," and the "healthy state of the US banking system" differentiates the coronavirus-induced slump from the 2008 financial crisis, the directors said in the mid-March session. 

Wednesday's rebound came after Tuesday ended with mild losses after surging more than 3% early in the day. All three indexes jumped into a technical bull market on Tuesday morning before reversing gains. Stocks have moderately rebounded from late-March lows as fewer new virus cases and trillions of dollars in government stimulus eased concerns of economic collapse.

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Oil surges 12% on hopes that a deal to cut production is coming soon from OPEC and its allies

Wed, 04/08/2020 - 3:21pm

Oil gained Wednesday on hopes that Saudi Arabia and Russia will soon agree to a historic production cut, lowering supply as demand craters amid the coronavirus pandemic. 

US West Texas Intermediate crude spiked as much as 12% to $26.45 per barrel on Wednesday before paring some of those gains to trade about 8% higher. International benchmark Brent crude gained nearly 4% to $33.87 per barrel the same day. 

Oil prices have plummeted with demand amid the coronavirus pandemic, which has led to canceled non-essential travel around the world. At the same time, a price war between OPEC and Russia threatened to boost supply to record levels. 

Read more: C.T. Fitzpatrick has ranked in the top 1% of value managers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-stricken market — and rattles off 6 companies that will benefit from the fallout.

The US Energy Information Administration on Tuesday slashed its 2020 outlook and said it would again be a net importer of oil in a move that could pave the way for a global deal to reduce oil production. 

Now, all eyes are on OPEC and its allies as they work on the details of what could be a historic production cut plan. The group will meet virtually on Thursday and Friday and is reportedly considering slashing output by as much as 10 million barrels a day or more, Bloomberg reported, citing a delegate.

The meeting was originally scheduled to take place Monday but was postponed as a dispute between Russia and Saudi Arabia intensified, Reuters reported.

Still, Russia is skeptical of US involvement in the deal as the output decline proposed is being driven by market forces, Bloomberg reported Wednesday.

Despite recent gains, oil is trading down more than 50% year-to-date.

 

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

The Fed estimated a 'more adverse' coronavirus outbreak would plunge the US into a year-long recession, meeting minutes reveal

Wed, 04/08/2020 - 3:05pm

  • The Federal Reserve's directors envisioned two economic scenarios of differing intensity as the coronavirus began driving business shutdowns and layoffs, Federal Open Market Committee meeting minutes released Wednesday showed.
  • A short-lived outbreak would bring an economic recovery in the second half of the year, the board said in the emergency session, while a prolonged crisis would push a rebound into 2021.
  • Several directors agreed that the "healthy state of the US banking system" and the virus's "temporary nature" set the current downturn apart from the 2008 financial crisis.
  • The March 15 meeting yielded a 100 basis-point rate cut that brought interest rates near zero, as well as up to $700 billion worth of Treasury purchases.
  • Visit Business Insider's homepage for more stories.

In the month before the Federal Reserve's emergency March meeting, the coronavirus took the US by storm, the 11-year bull market ended, and the economy was dragged into a likely recession. 

Minutes for the March 15 session released Wednesday revealed the central bank's directors envisioned two economic scenarios before the harshest lockdown measures were announced. A calmer outbreak would bring an economic recovery in the second half of the year, while its "more adverse scenario" saw the rebound taking longer to arrive and "not materially under way until next year."

Members of the Fed board emphasized that the coronavirus-induced downturn was crucially different from the 2008 meltdown, according to the minutes. The current slump is "temporary," and the "healthy state of the US banking system" sets the pandemic apart as an unprecedented drag on the US economy, the directors said.

The Fed's March 15 meeting yielded a "forceful" policy response, the minutes stated, including a 100 basis-point rate cut that brought the benchmark interest rate close to zero for the first time since 2008. Additional purchases of up to $700 billion in Treasury notes lifted the liquidity-parched market, and bank reserve requirement ratios were lowered to zero percent.

Read more: A Wall Street wealth chief breaks down why the coronavirus bear market may be unique in history — and pinpoints the areas where traders should be buying right now

The relief measures signal a "whatever it takes" attitude from the central bank not seen since the global financial crisis, but the Fed's policy playbook is also markedly different from the last recession, Bob Miller, head of Americas fundamental fixed income at BlackRock, said.

"We expect the FOMC will do what is necessary to maintain accommodative financial conditions for the balance of this year," Miller said in an email to Business Insider. "When attempting to judge extraordinary crisis measures of this kind, it's natural to try to find historical analogies to ground expectations, but even the economic rescue measures put in place during the 2008/09 financial crisis are unlikely to serve as an adequate analog."

The mid-March FOMC session arrived before the Fed took its most drastic steps to prop up the ailing economy. The central bank announced later in the month it would lift the limit on its asset purchases to further boost liquidity in financial markets. Three new lending facilities would provide monetary aid to employers, small businesses, and companies amid the virus-fueled shutdown.

The Fed is now coordinating with the Treasury Department to ensure aid set aside in the government's $2 trillion stimulus bill reaches businesses in need. Investors expect the central bank to extend aid to local governments as states and cities face weakening tax revenues and risk of budget deficit.

The previous FOMC meeting's minutes were published on February 19, the same day the S&P 500 reached an all-time high.

Now read more markets coverage from Markets Insider and Business Insider:

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Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

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NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

The Dow climbs 700 points after Trump administration shares COVID-19 recovery plan

Wed, 04/08/2020 - 2:58pm

  • US stocks gained on Wednesday as investors cheered a slowdown in new US coronavirus cases and the White House's early plans for economic recovery.
  • The gains came after Tuesday's wild reversal that saw all three major US indexes erase sharp early gains and close lower.
  • The Trump administration said on Tuesday that it planned to reopen economies in smaller cities and towns less harmed by the outbreak before allowing larger, heavily hit cities to resume activity.
  • Oil continued to slide as traders held their breath for the upcoming OPEC+ meeting to offer new details on a price-war truce.
  • Watch major indexes update live here.

US stocks gained on Wednesday as traders mulled Tuesday's market whipsaw and President Donald Trump's early plans for economic recovery.

Investors continued to buy risk assets amid hopes of coronavirus cases slowing throughout the US. The number of daily new reported cases has fallen since Friday's highs, according to data collected by Johns Hopkins University.

The White House said on Tuesday that it planned to first reboot the nation's economy in smaller cities and towns less affected by the outbreak before reopening larger, heavily hit cities. The plan is still being developed but gave investors the first signs of how the crippling economic shutdown could end.

"The difference between now and the start of the pandemic is that we can at least see the end," Brad McMillan, chief investment officer at Commonwealth Financial Network, told Business Insider. "We can see that we have flattened the curve, and we can reasonably project when the pandemic will be brought under control. We are not at that point yet, but at least we can see it."

Here's where major US indexes stood at 3 p.m. ET Wednesday:

Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come

Equities closed Tuesday's session with mild losses after surging more than 3% in early trading. All three indexes jumped into a technical bull market on Tuesday morning before reversing gains. Stocks have moderately rebounded from late-March lows as fewer new virus cases and trillions of dollars in government stimulus eased concerns of economic collapse.

WTI crude oil climbed roughly 12% as investors continued to monitor developments in a price-war truce. Production hikes and price cuts from Saudi Arabia and Russia have pushed oil's price near two-decade lows. A meeting of OPEC, Russia, and other producers may usher in the first major de-escalation in the global conflict.

Read more: C.T. Fitzpatrick has beaten 99% of his peers since the financial crisis. He shares his 4-part strategy for dominating a coronavirus-hit market — and names 6 companies that will benefit from the fallout.

The US on Tuesday slashed its oil-production forecast through 2021 to boost demand during the virus-driven supply glut. The Energy Information Administration said it sees the price of Brent crude averaging out to $33 per barrel through 2020 before rebounding to an average of $46 per barrel the following year.

The EIA also expects the US to become a net importer of oil by the third quarter of 2020 for the first time since 2019, returning to net-exporter status in 2021.

Minutes from the Federal Open Market Committee's emergency March 15 meeting published Wednesday revealed the central bank's view of the pandemic as it first began gripping the US. The Board saw either a short-lived outbreak giving way to recovery in the second half of 2020 or a prolonged pandemic placing the rebound in 2021.

The current economic downturn is "temporary," and the "healthy state of the US banking system" differentiates the coronavirus-induced slump from the 2008 financial crisis, the directors said in the mid-March session. 

Now read more markets coverage from Markets Insider and Business Insider:

'I no longer feel defense should be favored': Billionaire investor Howard Marks urges clients to take advantage of bargains in the market

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NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

Knotel is scrambling to pay millions in bills that started stacking up before the coronavirus hit, and hasn't paid April rent at some locations

Wed, 04/08/2020 - 2:32pm

  • Knotel has stopped paying rent on some of its huge New York City portfolio of office space and cut off other payments to key partners, such as CBRE and Cushman & Wakefield, sources told Business Insider.
  • The company's once surging flexible-space business has been hit hard by the coronavirus crisis, which has left tenants unable to occupy workspaces and prompted many to cease payments. 
  • Knotel's chief financial officer said in an internal email seen by Business Insider that the company was "completely clamping down on any and all payments."
  • Click here for more BI Prime stories.

The flexible-office provider Knotel's heavy cost-cutting measures extend well beyond last month's 50% staff cut.

The New York-based company has stopped paying some rent and vendors — and it has a backlog of payments that predates the coronavirus by many months, a Business Insider investigation, which included talking to nine current and former employees and Knotel business partners, found. 

Financial data reviewed by Business Insider showed Knotel had substantially missed sales targets as recently as the fourth quarter of 2019 and accrued hundreds of thousands of square feet of vacant space months before the economic crisis touched off by the coronavirus began.  

That may make it especially vulnerable to the downturn sweeping across the flexible-workspace industry.

Until recently, Knotel was one of the fastest-growing brands in the booming coworking and flexible-space field, emerging as a chief competitor to WeWork.

COVID-19 has upended the soaring sector as small businesses, startups, and entrepreneurs that flooded into flexible workspaces in recent years have shed those locations or stopped paying rent, leaving companies such as Knotel with less cash flow to pay landlords.

Several sources with direct knowledge of Knotel's 2.5 million square feet of space in New York said the company hasn't paid rent for the month of April at several locations, including spaces at 40 Exchange Place, 5-9 Union Square West, and 61 Broadway. The sources said it was still possible the company could avoid missing the payments by settling the outstanding rent bills before the close of the month.

The cutoff of money could be painful for landlords. The Moinian Group, a large Manhattan property owner, for instance, is both an investor in Knotel and one of its largest landlords, hosting Knotel locations at several of its office buildings, including 545 Fifth Ave., 60 Madison Ave., and 90 John St.

The landlord's chief executive, Joseph Moinian, declined to comment on whether he stood to lose money from his investment into Knotel's business and whether the company was still paying rent at locations within Moinian's portfolio.

Flex-space providers are looking to cut costs as space sits empty

Knotel is one of several major workspace brands that have sought to cease hemorrhaging money by cutting back — or abandoning — their rent obligations. 

Convene, a workspace and conference company, is also cutting the rent payments it makes to landlords across its portfolio, according to an investor in the company.

"Convene is working with all landlords individually and on a case-by-case basis," a spokesman for Convene said.

And WeWork has sought to renegotiate leases in its over 7 million-square-foot portfolio in New York to reduce its rent burden, according to the Financial Times and other media reports. 

Businesses of all kinds have sought to hold back commercial rents as social-distancing rules have prevented many from occupying their office space. Landlords, which are prohibited by a New York state moratorium from evicting both residential and commercial tenants, have urged office occupants to continue to pay rent.

But because of the widespread economic dislocation from the crisis, many owners are expected to be flexible with late or discounted payments and not pursue wide-scale evictions.

"Given the unprecedented times we are witnessing due to the effects of Covid-19, the Knotel team is focused on balancing the interests of customers, partners, and investors, in efforts to build a sustainable, long-term business," Ivy Chiou, a spokeswoman for Knotel, said in a statement. "We are taking these steps to ensure we are well-positioned for both current times of great crisis, as well as when business returns to a new normal."

Chiou said the company would not confirm whether it had suspended rent payments, nor whether it was current on its rent in any specific locations.

Knotel struggled to hit its targets well before the coronavirus hit, its internal financial reporting, which was viewed by Business Insider, showed.

Knotel has said publicly that it had $350 million in annual revenue lined up at the start of 2020. According to internal documents seen by Business Insider, the company had $335 million in annual revenue signed on near the end of the fourth quarter of 2019, $80 million short of its $422 million forecast.

In New York, Knotel signed just $5.8 million in net new contracts in the fourth quarter, compared with a goal of $51.5 million.

Across the 15 cities globally where the company operates, it added about $50 million of new revenue in the quarter, $50 million short of its target. 

Flex-office companies generally saw a slowdown in leasing activity in the fourth quarter, according to CBRE data. Much of that industrywide decline was driven by WeWork, though Knotel's drop in leasing — 70,000 square feet of new deals in the fourth quarter, a decline of 80% from its quarterly activity over the previous year — was much more precipitous than its competitor Industrious, which was down 6.5%.

The leaked financial documents also showed that Knotel had about 500,000 square feet of vacancy in its portfolio in December, a number that is projected to grow to 1.5 million square feet as it takes possession of additional spaces it has committed to lease.  

Hundreds of thousands owed to brokerages

One current Knotel employee said the company's legal and finance teams were "combing through the leases to see where we can stop paying rent" so that the company could fund its payroll. 

The source, who spoke on condition of anonymity because they were not authorized to speak with the media, said Knotel considered payments to vendors, general contractors, and brokers its last priority, with those payments likely to be deferred for three to six months or longer. The source also said Knotel was evaluating the possibility of extracting itself from spaces by encouraging landlords and the occupants of its spaces to strike deals directly, with Knotel no longer serving as the middleman.

"Knotel would get out of an unfavorable real-estate deal, the landlord would get a paying client, and the tenant would remain in the space, however, without Knotel's workspace management operations," the source said. 

Knotel has also fallen behind on commission payments to major brokerage firms that have arranged leases for occupants to take space in Knotel's portfolio. According to two sources with direct knowledge of the agreements, CBRE and Cushman & Wakefield, two of the largest commercial-real-estate brokerage companies, are each owed hundreds of thousands of dollars. CBRE and Cushman & Wakefield declined to comment on the commission payments. Knotel's spokeswoman declined to comment.

Another brokerage firm, SquareFoot, is also owed a commission, two sources with direct knowledge of that debt said. One source described the commission as a five-figure sum.

Stiffing brokerage companies could dissuade those firms from bringing Knotel tenants in the future, which could deal a blow to its future growth plans in the city. 

A former Knotel employee, who spoke with Business Insider on the condition of anonymity, said the company had unpaid bills that total in the millions of dollars. The former employee based that information on vendor negotiations in which they were directly involved. Knotel's spokeswoman declined to comment on outstanding bills.

One vendor, for example, was owed $500,000 — and their unpaid bill dated from at least summer, this source, who left earlier this year, said.

Once, a Knotel employee accidentally copied a number of vendors on an email about vendors Knotel planned not to pay. In most instances while the source worked at Knotel, vendors were eventually paid, at least in part. 

"Most of them at least got paid at least some of what they were owed. That was enough to keep them at bay, and our finance team was keeping track of how frustrated everyone was at them," this source said. 

Knotel's chief financial officer, John Jureller, who was hired into the position in March, wrote in a recent internal email, which was viewed by Business Insider, that the company was looking at payments to vendors and landlords to try to stabilize its deteriorating financial position.

"At this time, we are completely clamping down on any and all payments other than our obligations to employees and our contractors / temps," Jureller's email said. "Together with legal, we are carefully analyzing the impacts to landlords, vendors and other statutory payments."

In a dramatic cost-cutting measure last month, Knotel laid off or furloughed half of its 400-person staff. CEO Amol Sarva, a tech entrepreneur who cofounded Knotel five years ago and pushed the business aggressively to compete alongside WeWork, continued to strike a cheerful tone on his LinkedIn page despite the company's recent setbacks.

"Knotel is hiring," his page says. "Join us."

Business Insider previously reported that Sarva had sent a companywide email laying out Knotel's plans to bury upcoming staff reductions by running a positive news story about real estate's role in helping the community during the coronavirus pandemic.

Alex Nicoll contributed reporting.

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SEE ALSO: Leaked memo reveals Knotel CEO's playbook for burying news about jobs cuts at the flex-office startup

DON'T MISS: WeWork board members are suing SoftBank for backing out of its plan to buy $3 billion of shares, and former CEO Adam Neumann is still weighing legal options

UP NEXT: Days after laying off 20% of its workforce, Brookfield-backed Convene furloughs more than half of remaining employees due to coronavirus closures

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NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

Short-term rental managers are ramping up their amenities to include masks, hand sanitizer, and large cases of wine as city dwellers look for their 'destination isolation'

Wed, 04/08/2020 - 2:31pm

  • Coronavirus has hit the travel and hospitality industries hard, leading some short-term rental operators to offer their properties up as places for customers to quarantine. 
  • Property managers are adjusting their amenities to include pandemic-ready items like protective masks and large cases of wine. 
  • The slowdown has hit urban areas the hardest, while rural areas have seen upticks in demand. 
  • D.Alexander, a short-term rental company, has started a campaign called "Destination Isolation," offering their properties for stays as long as three months and no shorter than one month.
  • Click here for more BI Prime stories.

Peter and Brynn, a twenty-something professional couple based in San Francisco, are repeat customers of Airbnb, having used the vacation rental company for travel in the past. 

Now, they're using it to quarantine. 

Peter and Brynn, who asked not to use their last names because of the sensitivity around traveling right now, felt compelled to move closer to their parents, who live in Connecticut and are in their fifties and sixties. They are both working remotely and wanted to find a way to travel home that didn't put their parents at risk. 

The solution came in the form of a short-term rental property near the beach in West Haven, Connecticut. Their friends, still finishing up their own two-week quarantine, had flown home to Connecticut and booked this property. This weekend, their friends will leave and Peter and Brynn will take their place for two weeks, quarantining near the beach before they are in the clear to see their parents.

Coronavirus has put nearly all tourism on hold, triggering layoffs in the hotel and short-term rental industries and the stirrings of a revolt among some property managers who rent their properties on Airbnb. Property managers who relied on tourism revenue have had to find ways to adjust. 

Property managers and short term rental companies have adjusted their strategies to meet the needs of customers who are looking to quarantine after a flight or to find a rural escape from the city. They're changing their marketing strategies to attract customers with different needs, offering amenities that are specifically tailored for social distancing, and opening up their properties to longer stays.

Even Airbnb is getting into the action: the company's blog post announcing its $1 billion fundraising round on Monday highlighted longer-term stays as a "core product" for the future of the company, a first for the company.

How property managers pivot in a pandemic

Vered Schwarz, the COO of short-term rental property management software company Guesty, told Business Insider that her customers are repurposing their properties in ways that fit current needs. 

For rural properties, that means opening them up to long stays for what Vered calls "cityscapers."

"These are folks that are escaping from the center of town, and prefer to go to the Catskills," Schwarz said. These customers often have families and are searching for areas where they can ride out months of isolation in a home that has a backyard for their kids to play. 

Guesty data showed that this time last year the Catskills, a mountain range in upstate New York, had an occupancy rate of about 30%. This year it's more than 60%. Schwarz said that she has seen similar increases in other rural areas. A study by hospitality data company AirDNA also found that remote areas in the US were seeing spikes in short-term rentals.

For suburban and some urban properties, property managers have focused on customers like Peter and Brynn that are looking to quarantine. Properties in dense, urban areas have seen a precipitous decline.

Customers are staying longer than usual across all locations, Schwarz said, with the average length of stay doubling to nine days, from four-and-half days. Some of these property managers are offering discounts for longer stays, a trend that Peter and Brynn noticed when they were booking their stay.

Property managers are also providing coronavirus-specific amenities to support customers looking to isolate. Schwarz said that she's seen property managers offer extra cleaning products, masks and hand sanitizer on their properties, and shipments of food to a customer's front door.

Marketing strategies have also changed, as property managers are no longer trying to attract tourists, and instead draw in "cityscapers" that are only a gas tank away or people looking for a place to quarantine after a flight. The specific changes in strategy are contingent on the types of customers they're trying to attract: with property managers advertising in local Facebook groups and looking for direct reservations instead of trying to attract tourists on sites like Airbnb and VRBO.  

"Destination Isolation"

D.Alexander, a short-term rental company that operates properties on Florida's Emerald Coast, Sedona, Arizona, and in the Great Smoky Mountains of Tennessee, unveiled its "Destination Isolation" campaign at the beginning of April. 

The program offers stays for one to three months at a fixed rate for people searching for a place to isolate, and D.Alexander pledges to donate 10% of the cost of booking to a coronavirus-related charity. The company will also provide customers with a collection of wine and Malin & Goetz cleaning products and Sheets & Giggles linen.

The idea came as the D.Alexander team was brainstorming how the company could potentially help people to isolate, Alex Allison, CEO and co-founder of D.Alexander told Business Insider.

"We recognized very early that this won't be a two week isolation period," Allison said.

One thing that is much shorter with this campaign, Allison said, is the lead time between a customer booking a stay and their stay beginning. 

"If you booked a property today, you wouldn't stay there for 115 days," Allison said. "That's now shortening from 115 days to one week."

The prices are also reduced: a three-month stay in Sedona, Arizona has been discounted to $46,000 from an original cost of $79,000.

While D. Alexander has been able to adjust to the change in demands, other property managers haven't been able to. Joanna Ahrens, who lives in Florida, owns a rural property in Swain County, North Carolina near the Great Smoky Mountains. Before the coronavirus hit, she had most of March and 28 days in April booked up. 

Customers started to cancel in mid-March, but within days, the same dates were being booked by different, more local customers. 

"People started booking from the Carolinas, Georgia, Tennessee: a gas tank's drive away," Ahrens told Business Insider. 

That changed when Swain County, which draws a lot of tourists, shut down all short-term rentals in the county because of coronavirus fears. Ahrens had to cancel most of her bookings, though she's kept her late April bookings in case the county reopens short-term rentals. 

"It's all up to the county at this point," Ahrens said. 

SEE ALSO: 7 charts show how the coronavirus could clobber real estate, from retail vacancies of nearly 15% to plunging office rents in Texas cities

SEE ALSO: Knotel is scrambling to pay millions in bills that started stacking up before the coronavirus hit, and it's late on payments to some of New York's biggest brokerages

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

McKinsey says payments companies could see a $210 billion hit from the coronavirus pandemic. Here are the 10 most important things execs need to know about managing the crisis.

Wed, 04/08/2020 - 2:22pm

  • The coronavirus pandemic is impacting every industry, and payments companies are no exception.
  • A recent report from McKinsey & Company predicts that payments revenues could drop by as much as $210 billion in 2020. 
  • But payments companies are well-positioned to help a global economic recovery and play a role in establishing a new normal for how we pay.
  • From collaboration to product development, here are 10 things payments companies will need to focus on as they look toward recovery.
  • Click here for more BI Prime stories.

The coronavirus is upending global markets and economies, and payments companies in particular could see a revenue hit of up to $210 billion this year.

Businesses and consumers have been spending less, and 80% of the decline in overall payments revenues will be a result of lower transaction volumes, McKinsey & Company said in a recent report on the impact of the coronavirus on the payments industry.

With non-essential businesses shut down and consumers staying at home, foot traffic and in-store spending has fallen. People aren't making big-ticket splurges on travel and live entertainment. And the coronavirus is hitting luxury spending on both the supply and demand side, the report said, with purchases from China slowing dramatically and production of premium brands in Italy halted. 

With fewer purchases, payments companies lose out on fees like interchange. And when people are spending, they're rethinking daily habits and switching to digital options, both online and in stores.

The payments landscape is broad, from card giants like Visa and Mastercard to tech players like PayPal and Square. And since the ability to send and receive payments plays a role in any businesses, startups like Finix and Stripe have found a market in payments-as-a-service, selling plug-and-play platforms to other businesses.

But payments companies are also poised to help the global economy recover. There have yet to be any major reported outages, and there continues to be a high level of consumer trust. 

So in the long term, payments companies may be well positioned to establish a new normal in how we pay post-coronavirus. But they'll have to prioritize things like collaboration and product development in order to get a piece of any eventual bounceback.

Here are the 10 things payments companies should keep in mind if they want to play a part in changing the way we pay, according to McKinsey's report. 

Digital options

Given concerns of the spread of COVID-19, consumers and businesses have moved away from spending with cash and checks. Banks are closing branches and encouraging their customers to bank online and over the phone. Payments players will need to promote and design more digital options for their customers.

Financial inclusion

Today, a cashless economy means the underbanked are left behind. And merchants that aren't set up for digital commerce are also at a disadvantage. Payments companies should design inclusive platforms to ensure both consumers and businesses are able to adapt quickly in a digital transformation. 

"Limits in the payments infrastructure or prices should not be used as an excuse," the report said.

Reliable digital currencies

"With values collapsing and trust eroding, digital currencies have proved incapable of delivering on their promise of a universal payments solution in a time of need," the report said.

The current crisis has highlighted the essential role governments play in keeping the global financial system stable. While digital currencies can provide efficient means of moving money, they'll need to be more reliable in times of crisis.

Both JPMorgan and Wells Fargo have launched their own digital currencies to quickly move money in and out of client accounts. But both banks pegged their digital coins 1:1 to a reserve of US dollars, meaning their values are static.

Bridging in-store and online spending

Building omnichannel payments platforms, meaning those that can accommodate different ways of shopping including in-store and online, will be key.

Square, for example, started as an in-store point-of-sale provider, and has since launched a suite of online payments products to support merchants' ecommerce efforts.

Bridging physical payments with digital options will be essential for all payments players, especially as retailers begin to reimagine how they reach consumers. Ecommerce continues to grow, and retailers that have closed their brick-and-mortar stores amid the coronavirus pandemic will likely seek ways to reach shoppers online.

Touchless payments 

Contactless payments have taken a while to catch on in the US. But in the UK and much of Europe, tap-to-pay technology using both cards and digital wallets is more common.

And today, consumers and merchants are trying to limit the amount of contact required to make day-to-day purchases. By encouraging their customers to use contactless options, merchants can help drive consumer adoption, the report said. So payments companies should embrace and facilitate these contactless technologies.

Offering more for digital wallets

Digital wallets are widely available on popular devices like smartphones and watches. But further adoption is still needed. By offering more features, like digital IDs, could boost usage. And by monitoring transactions at merchants, digital wallets could offer features like alerts to users when a store is too crowded or when items ordered for pick up are ready.

"Companies that provide viable options for integrated and contactless payments, to both customers and merchants, will probably have a distinctive edge over competitors," the report said.

Data protection and fraud prevention

Fraud prevention and data security for payments players' customers must be a priority as consumers get more comfortable with the use of data for security measures amid the coronavirus pandemic.

And to sustain users' comfort with data sharing, payments companies can preemptively prioritize user-focused fraud prevention measures.

Market-wide cooperation

During times of crisis, cooperative mindsets tend to set in. And challenging market conditions will put fintechs in a position where they need to pursue more collaboration with other players. 

"We believe this development will lead to a new fintech landscape, geared more to marketwide cooperation and win–wins and less to challenging the incumbents," the report said. As valuations and market outlooks change, industry consolidation through M&A could continue, but partnerships will also play out as payments players look for growth.

In 2019, the payments space had a buzzy year for M&A, from FIS' acquisition of WorldPay to Visa buying Plaid. But more and more, fintechs are seeking partnerships with incumbents. Larger payments players also look for partnerships through their own venture arms.

Payments-as-a-service partnerships with banks

Payments are a major cost for most banks. And tech budgets are often used to maintain outdated systems as opposed to building new ones. By embracing tools like automation and cloud-based tech, banks could lower their long term costs for processing payments.

Payments-as-a-service fintechs, which sell payments systems to other companies, could also see a bump, especially as IT budgets get reduced amid tough market conditions.

The regulatory landscape

Payments companies should seek partnerships with regulators to establish the new normal. Regulators should support innovation in payments as players in the space find new models that solve real-world problems. 

And early indicators are hopeful, the report said, citing the US Federal Reserve, the FDIC, and the OCC's move to delay companies' adoption of regulatory liquidity standards. This frees up more cash and helps boost lending activity amid the coronavirus pandemic.

SEE ALSO: People are rethinking daily habits like touching dirty dollar bills as coronavirus spreads. This could be the catalyst that finally triggers the US to tap their phones to pay.

SEE ALSO: The boom in online payments has companies like Airbnb, OkCupid, and Nordstrom looking for new ways to fight fraud. Here are 10 startups — and the VCs backing them — helping tackle everything from catfishing to money laundering.

SEE ALSO: Companies make hundreds of billions of dollars selling your data — and there's one app that actually lets you enjoy a slice of the profits

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The best checking accounts

Wed, 04/08/2020 - 2:20pm

A checking account is like ground zero for managing your money.

In the words of financial expert Ramit Sethi, a checking account is best used like an "email inbox" for your income — once the cash is deposited, you can filter appropriate sums out to your other accounts to pay bills, save, and invest.

At the very least, your checking account should be easy to access, whether online or in person, and incredibly cheap to maintain, if not free. With so much competition among financial institutions, legacy banks, and fintechs, it's easier than ever to find a checking account that fits your needs.

Still, sifting through the fine print can be tedious, so we've done the legwork for you. Below you'll find our picks for the best checking accounts right now. Bearing in mind that "best" is often subjective — some people may prefer the convenience of a physical bank branch to the absence of fees, for example — we reviewed nearly three dozen checking accounts available at over 20 national and online-only banks to identify the strongest options.

Each of these accounts comes with a debit card, FDIC insurance, and mobile app access. Most are free of monthly maintenance fees too, or could be after meeting certain deposit or balance requirements.

Capital One 360: Best checking account overall

Why it stands out: Access to over 39,000 Capital One and AllPoint ATMs; no monthly service, overdraft, or foreign transaction fees; mobile check deposit available; connects to Zelle for digital money transfers; multiple overdraft protection options; and all balances earn 0.20% APY. Plus, Capital One ranks No. 4 on J.D. Power's US National Banking Satisfaction Study.

Monthly fee: $0

What to look out for: Minimal branch locations. Though Capital One Cafés are popping up in big cities around the US, the bank only operates about 470 branches in nine states.

Discover CashBack Debit: Best checking account for rewards

Why it stands out: Access to over 60,000 ATMs; no monthly service or overdraft fees; mobile check deposit available; and earns 1% cash back on up to $3,000 in debit card purchases every month.

Monthly fee: $0

What to look out for: Location restrictions. You can only use your Discover debit card in the US, Canada, Mexico, and the Caribbean.

Chase Total Checking: Best checking account for branch and ATM access

Why it stands out: Access to 16,000 ATMs and nearly 4,900 branches; mobile check deposit available; connects to Zelle for digital money transfers; and cash bonus offer for new Chase customers who open an account and set up direct deposit within 90 days. Plus, Chase ranks No. 2 on J.D. Power's US National Banking Satisfaction Study.

Monthly fee: $12 — waived if you set up direct deposit of at least $500 a month; or have a $1,500 daily balance; or have $5,000 in combined balances across Chase accounts.

What to look out for: Overdraft/insufficient funds fee and non-Chase ATM fee. You may be charged an insufficient funds fee if you're not signed up for overdraft protection. You'll be charged a $2.50 fee for using any non-Chase ATM.

Chase College Checking: Best checking account for students

Why it stands out: Access to 16,000 ATMs and nearly 4,900 branches; mobile check deposit available; connects to Zelle for digital money transfers; and $100 cash bonus offer for new Chase customers who open an account and make qualifying purchases. Plus, Chase ranks No. 2 on J.D. Power's US National Banking Satisfaction Study.

Monthly fee: $6 — waived if you're between the ages of 17 and 24 and enrolled in college; or set up monthly direct deposit in any amount; or have an average daily balance of $5,000 in this account.

What to look out for: Overdraft/insufficient funds fee and non-Chase ATM fee. You may be charged an insufficient funds fee if you're not signed up for overdraft protection. You'll be charged a $2.50 fee for using any non-Chase ATM.

HMBradley: Best checking account/savings account hybrid

Why it stands out: When you deposit money into your HMBradley account, the platform tracks how much you spend vs. how much you save over the course of the quarter. HMBradley has a tiered APY based on the percentage of deposits you save. The tiers are as follows:

  • Tier 1: Earn 3.00% APY when you save at least 20% of your deposits
  • Tier 2: Earn 2.00% APY when you save 15% to 19.99% of your deposits
  • Tier 3: Earn 1.00% APY when you save 10% to 14.99% of your deposits
  • Tier 4: Earn 0.50% APY when you save 5% to 9.99% of your deposits

You have to set up direct deposits to earn interest with HMBradley, but there's no required initial deposit or minimum account balance. 

Monthly fee: $0

What to look out for: Percentage of deposits saved. You have the potential to earn more than you would with other checking accounts or even high-yield savings accounts, but if you don't save at least 5% of your deposits, you won't earn any interest the following quarter.

Simple Online Checking: Best online-only checking account

Why it stands out: Access to 40,000 AllPoint ATMs; mobile check deposit available; built-in budgeting feature that automatically portions out fixed expenses after each paycheck is deposited and leaves you with a "safe to spend" amount; and the ability to open and easily transfer excess funds into a high-yield companion account that earns 1.55% APY.

Monthly fee: $0.

What to look out for: Limited overdraft options. If you attempt to make a purchase with your debit card that requires more funds than are available in your account, Simple will decline the transaction. At this time, there are no other options for overdraft protection.

Other checking accounts we considered and why they didn't make the cut:
  • Charles Schwab High-Yield Investor Checking Account: This no-fee checking account earns just 0.03% on all balances, and you have to open a brokerage account at the same time.
  • Ally Interest Checking Account: This no-fee account is comparable to Simple's online checking account, although Simple has a budgeting feature and offers a higher-earning savings account than Ally. However, Ally does have more overdraft options and earns 0.10% APY on balances under $15,000, if that's important to you.
  • Chase Premier Checking: The only way to waive the $25 monthly fee on this account is to have a $15,000 daily balance or link it to a mortgage account with automatic payments.
  • CitiBank Simple Checking: A fine checking account with options to waive the $12 monthly fee, but customer satisfaction is below average, according to J.D. Power's US National Banking Satisfaction Study.
  • US Bank Easy Checking: A standard checking account with options to waive the $6.95 monthly fee, but customer satisfaction is about average, according to J.D. Power's US National Banking Satisfaction Study.
  • CIT Bank eChecking: The minimum opening deposit for this account is $100 and it only offers up to $15 of fee-free ATM visits a month, otherwise it's a fine account earning 0.10% APY on balances below $25,000.
  • Betterment Everyday: This is still in beta, but it has the makings of a solid checking account: ATM fees reimbursed worldwide, no monthly service fees or overdraft fees, and a boosted rate on your savings account.
  • TD Bank Convenience Checking: While TD Bank ranked No. 1 on J.D. Power's US National Banking Satisfaction Study, its only ATM and branch locations are on the East Coast, and there's a $3 fee each time you use a non-TD ATM.
  • TD Bank Beyond Checking: While TD Bank ranked No. 1 on J.D. Power's US National Banking Satisfaction Study, this account is favorable for people with high balances. Non-TD ATM fees are reimbursed, but only with a $2,500 minimum daily balance.
  • PNC Performance Select Checking: PNC ranked "better than most" on J.D. Power's US National Banking Satisfaction Study, but in order to waive the $25 monthly fee, you need $5,000 or more in monthly direct deposits, or a $5,000 average balance, or $25,000 in all PNC accounts (including investments). You also need $25 to open the account and branch access is limited to the Eastern US.
  • PNC Performance Checking: PNC ranked "better than most" on J.D. Power's US National Banking Satisfaction Study, but in order to waive the $15 monthly fee, you need $2,000 or more in monthly direct deposits, or a $2,000 average balance, or $10,000 in all PNC deposit accounts. You also need $25 to open the account and branch access is limited to the Eastern US.
  • HSBC: HSBC offers a good variety of checking accounts, although only those with high minimum balance or deposit requirements get ATM fees reimbursed.
  • Axos Essential Checking: A solid online-only checking account with unlimited ATM fee reimbursement, but nothing extra special.
  • Axos Cash Back Checking: This account offers up to 1% cash back on purchases (up to $2,000 per month), but doesn't count transactions from grocery stores and requires an average daily balance of $1,500 to earn the cash back. If your balance falls below that limit, you get 0.50% cash back.
  • Axos Rewards Checking: This account touts up to 1.25% APY, but to get the full rate you need to have monthly direct deposits totaling $1,000 or more and a total of 15 transactions per month (min $3 per transaction) on your debit card. You also need $50 to open the account.
  • Chime: A solid online-only checking account with overdraft protection options, quick direct deposit, and access to over 38,000 ATMs, but additional features are not as good as Simple. 
  • TIAA Basic Checking: A solid account that waives the already low $5 fee with a daily average balance of $25. To enjoy unlimited ATM reimbursement, however, you need to keep an average daily balance of at least $5,000.
  • TIAA Yield Pledge Checking: No monthly service fees and all balances earn 0.50% APY for the first year; after that, the rate drops to between 0.20% to 0.35%. To enjoy unlimited ATM reimbursement you need to keep an average daily balance of at least $5,000. You also need at least $100 to open the account.
  • Wells Fargo Everyday Checking: Wells Fargo's account is comparable to Chase's Total Checking Account, but Wells Fargo ranked below Chase on J.D. Power's US National Banking Satisfaction Study and has about 3,000 fewer ATMs.
  • SoFi Money: This hybrid checking account/savings account offers 20% cash back on Lyft rides and unlimited ATM reimbursements worldwide, but its 0.20% APY is less than what you could earn with HMBradley.
Frequently asked questions: Why trust our recommendations?

At Personal Finance Insider, we strive to help smart people make the best decisions with their money. We spent hours comparing and contrasting the features and fine print of nearly three dozen checking accounts available at over 20 national and online-only banks so you don't have to.

We understand that "best" is often subjective, however, so in addition to highlighting the clear benefits of a checking account — no fees, for example — we outline the limitations, too.

How did we choose the best checking accounts?

We considered offerings at over 20 financial institutions, as well as reviews at popular comparison sites like Bankrate and Nerdwallet, to determine the strongest options for online banking, college students, branch access, low fees, and rewards. We gave precedence to the accounts with no monthly fees or the option to waive monthly fees with qualifying activities; overdraft protection options; widespread ATM access and/or reimbursement for ATM fees; and mobile banking capabilities.

We also polled Business Insider employees for their favorite picks and considered J.D. Power's US National Banking Satisfaction Study for 2019, which measures customer satisfaction at America's largest retail banks.

Unlike a savings account, a checking account doesn't need to have a high interest rate to be good. In fact, the annual percentage yield (APY) shouldn't matter much if you're using your checking account to pay your monthly bills and cover expenses in short order. If your money is constantly flowing in and out of your checking account, it won't get a chance to earn much interest anyway.

What banks offer free checking accounts?

You can find no-fee checking accounts at a few big retail banks and nearly every online-only bank, including Ally, Capital One, Charles Schwab, Discover, Axos, and SoFi Money.

What's the best bank for a checking account?

We believe Capital One offers the best checking account available right now, in large part thanks to $0 in monthly fees, multiple overdraft options, access to 39,000 Capital One ATMs and AllPoint ATMs, and mobile check deposit. As an added bonus, it also earns 0.20% APY on all balances. 

Can I open a second checking account at the same bank?

Many banks allow you to open more than one checking account, but it's usually unnecessary unless you need an individual account and a joint account.

Is it bad to have multiple checking accounts?

It's not bad to have multiple checking accounts, but it's usually not necessary. A checking account should hold cash that you are using to cover your expenses each month and no more than that. Any excess cash is best stored in a high-yield savings account, where it can earn up to 200 times more interest than a checking account, or in an investment account.

Tanza Loudenback has been writing about money every day for more than three years. She is an expert on strategies for building wealth and financial products that help people make the most of their money. She is a candidate for the CFP® certification.

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Larry Summers says this stimulus package would be hard to execute by the most competent government, calling the US government one 'run like a highly opportunistic family real estate business'

Tue, 04/07/2020 - 11:38pm

 

  • Former US Treasury Secretary Larry Summers is worried about the execution of the stimulus package which he says would be enormously difficult for the most competent of governments.
  • Instead, he adds, "we have a government that is run like a highly opportunistic family real estate business where people who aren't in the family aren't treated so well."
  • The economic cost will probably be greater than it needs to be because we are not moving as fast as we could, according to Summers, and too much of that pain is going to borne by ordinary citizens. 
  • Summers expects about 20% of the population to be unemployed over the summer and doesn't expect the job market to return to normal for a year and a half after we are free and clear of the disease — but he stresses that it will a long time before we are free and clear of this disease. 
  • The former advisor to President Barack Obama says the current administration needs to be using the Defense Production Act more effectively to mobilize supplies and testing. 
  • He says we should have a massive infrastructure initiative as opposed to slashing infrastructure investment as state and local budgets are hit by the crisis. 
  • Visit Business Insider's homepage for more stories.

Former US Treasury Secretary and World Bank economist Larry Summers spoke to Business Insider editor-at-large Sara Silverstein about how painful this recession will be, who will be hurt, and how to quickly recover. Following is a transcript of the video. 

Sara Silverstein: Larry, you have seen so many economic disruptions in your time, I'm sure nothing like this. What has been the one thing that has surprised you the most, either about the economic reaction to the coronavirus or about how leadership has behaved?

Larry Summers: I've been struck by how pervasive this is in almost every respect. It's everywhere in the world. It's affected companies of all kinds. It isn't just about people's wallets, it's about their lives. It's got a major short-run aspect, and a major long-run aspect as well. I don't think I've ever seen so much history made in so short a time.

Even during the worst of the 2008 financial crisis, there were traffic jams in New York City. Even at the worst of the Asian financial crises, there were planes flying in and out of Seoul airport. Even at the worst of the depression, people were having meetings with each other around conference tables and not thinking that didn't happen. The extent to which so much has changed so quickly is I think the unique feature of this crisis.

Silverstein: And help me understand and anyone watching, Trump removed the inspector general that was set to oversee the $2 trillion stimulus package — to avoid fraud and abuse and waste. Help us understand what does that mean and are you worried about it?

Summers: Look, it's important to avoid fraud because it's stealing. It's waste of valuable money, but mostly it's important so the people have a trust in the way things are being done. Ultimately, a society relies on trust.

You asked me to do this interview at two o'clock, and you assume that I would be here at two o'clock. We didn't know each other before, but we trusted each other. We trusted each other to do our part because we both had — Business Insider and I had reputations of a kind. And that's what enabled it all to happen smoothly.

And when you stop policing for fraud, and when you are unconcerned about fraud, it benefits the dishonest relative to the honest. And it erodes trust. You don't see the adverse effect of that instantly. But over time it's probably the most important difference between successful and unsuccessful societies is the amount of trust that they have.

Silverstein: And when you look at the $2 trillion stimulus or relief package, what parts of it are you worried about or what parts do you think will be really strong?

Summers: I think we will successfully make payments to households, to a large number of households, and I think that will be important support for those households and that's a positive thing. Whether we will successfully and in what way we will get resources to businesses in order to preserve employment, I think that's much less clear.

I think for the most extraordinarily competent of governments, this would be an enormous execution task, and we've seen enough to know that we don't have one of the most extraordinarily competent governments. In terms of execution, we have a government that is run like a highly opportunistic family real estate business where people who aren't in the family aren't treated so well. And to turn the running of the United States in the most complex public policy situation in this century over to that has to give grave cause for concern.

Silverstein: And you've talked a little bit about how quickly you think this economic recovery can happen once things return to normal, what will be the linchpin in making sure that things move along quickly?

Summers: Look, I want to be very clear because I think I've been misunderstood. I've said that if we put the public health problems behind us, I think then there is the prospect for quite rapid recovery, but we are a long way from putting the public health problems behind us.

There is no sense right now we're going to — we will turn the curve in terms of the pandemic sometime in the next few weeks. I'm pretty confident for that. And that curve will turn down pretty sharply. But do we have mechanisms in place that will enable us to restore normality without there being many future outbreaks? I don't think we have those mechanisms in place.

I think in the best of situations, you couldn't put them completely in place, and you'd have to be monitoring for a long time and we're well short of the best of situations. We need a much greater administrative infrastructure for testing, following, responding than seems likely to be in place.

Silverstein: And what sort of longterm economic effects do you expect to survive the coronavirus?

Summers: I think it's going to be a long time before travel is where it was. I think it's going to be a long time before crowded sports events, crowded rock concerts are going to be where they were before.

I think there's going to be a lasting bump to working at home and to technologies that support working at home.

I think that there are going to be involved in public health-related questions to a much greater extent than we have been previously. So I think we're going to feel the effects of this for a long time.

I think this is going to have some profound impact on our financial system because it's all very well to say that people shouldn't pay their rent when they don't have income or shouldn't pay their mortgages when they don't have income. But there's a chain there, and you have to ask where are those losses going to sit? I think the perspective we're going to need to have is that America is going to lose several trillion dollars of GDP.

And ultimately that has to be borne by something. It can be borne by households, it can be borne by corporate shareholders [inaudible] and taxes down the road. But can't pretend that nobody's going to be suffering losses as a consequence of this.

Silverstein: And based on how we're reacting right now and the mechanisms we are trying to put in place, who looks like they're going to be paying that cost?

Summers: I think it's looking like the costs are going to be greater than they need to be because I'm not convinced we're moving as rapidly as we could be to put in place the best health infrastructure we have for detecting this, containing after detection, treating. When those two mechanisms fall, and I think ultimately too much of the burden is going to be held by ordinary citizens. And I see things like the appropriation for the Kennedy Center that was snuck into the CARES Act. And I worry that there's going to be too much support for those who least need it.

It's going to be a byproduct of the support for the economy that is provided. I think it's very important that we not do business bailouts in ways to primarily benefit fortunate shareholders. The CEO of Boeing said a week ago that if the government was going to take any equity in his company then he would pursue some of their other many options. Well, I think that's what he ought to do, pursue some of their many other options, if that's true. Because I can't imagine why at a moment like this, the government should be providing support for the Boeing Corporation without taxpayers getting a commensurate benefit in terms of the possibility of sharing any upside. I don't think the government should be a voting shareholder in Boeing.

Just to be absolutely clear, I am absolutely opposed to the government becoming a voting shareholder in any of these companies. But I think where the government provides support, taxpayers should get some of the upside if that support works out. As they did in the TARP, as they did in the automobile bailout, as they did many years ago when the Carter administration bailed out Chrysler.

But I think it's a real mistake not to focus on the fact that everybody has to do their part and certainly the most fortunate among us need to bear their responsibility when companies that they've been part of that have taken risks run into a difficult period like the present.

Silverstein: One of the people in our Facebook audience is asking, what's your advice for middle-class Americans to get through this recession?

Summers: I think you need to recognize that this is a time to be prudent. This is not a time for major new expenditures. This is not a time to take extra risks.

In general, my advice to people is that unless you have some kind of special edge, trying to trade in markets at moments like this is not a good idea. That if you're buying somebody else is selling, you're selling somebody else is buying and unless you think you know more about it than they do, you should probably be pretty careful about deciding to trade in markets. And most people who wake up and read the headlines and then adjust their portfolios end up regretting the adjustments they make.

Silverstein: Absolutely. How bad do you think that the unemployment situation will get as we go through this? And how long will it take for us to get back those jobs once the coronavirus is under control?

Summers: I'd expect, I don't know how the statisticians will measure it because there'll be many people who are, in effect, furloughed from their companies who are staying home and who are not working and just what the rules will be on whether counted as unemployed or not. I don't know.

But in a real sense, I would expect 20% of the population to be unemployed at some point this summer. Though the measured unemployment rate may be lower than that.

I think it will take a year to a year and a half after we're basically pretty free and clear of disease issues for the unemployment rate to get back into a normal kind of range of 5%. But don't misunderstand me. I'm not saying that a year and a half from now we're going to be there because I think it's going to be quite some time before we're free and clear of disease issues.

Silverstein: And is there something that you think that some of us are missing about how quickly we'll be free and clear of disease issues? Because the timelines that we hear some people talking about for plans that they're making seem a lot quicker than that.

Summers: I think we're going to see some sets of it — I think what people need to recognize is that there's a very wide ground between where we are right now, where we're all basically home except those of us who have to be out, and normal. And that we're going to be in that middle ground probably until a vaccine is pervasively available.

And I think we'll be doing very well if a vaccine is universally available and has been universally delivered next summer. That will, I think, have been a relatively successful outcome for the world, and I very much hope it will happen and it certainly may happen. I don't think it's something we can count on happening.

Silverstein: What will the US-China relationship look like on the other side of this?

Summers: You would hope that a common foe would be a source of unity for the United States and China. You would hope that if there was an invasion from Mars that the United States and China would put aside some of their differences and an invasion by a virus would have some of the same character. That's what you would hope.

You haven't seen much of that yet if you look at some of the things that we have said, calling it the Wuhan flu. If you look at some of the things that the Chinese foreign ministry has said, blaming it on the United States in quite unreasonable ways.

But I guess hopefully as the gravity of this situation around the world becomes clear, it will provide some kind of basis for more dialogue and better cooperation between the United States and China, at least with regard to these issues. But I don't think that's something we can be certain about on the basis of what we've seen.

Silverstein: Is there any specific action that the administration isn't taking that you think that they should be taking or vice versa? Something that they are doing that they should absolutely not be doing?

Summers: I think they need to be using the Defense Production Act more effectively to mobilize testing and adequate supplies.

I think they need to be providing funds to municipalities and to hospitals. It is a crime that nurses, physician's assistants, technicians are being furloughed at hospitals in Massachusetts, which is at the epicenter of this epidemic.

This is a devastating blow as the economy shrinks, to state and local budgets. As a consequence, they are cutting back their infrastructure advancement. They're doing much less maintaining of roads and highways. Maybe we should, I kind of think we should have a massive new infrastructure investment initiative, but the least we can do is not be slashing infrastructure investment at a moment like this.

And the most important thing the administration can do right now, stop making statements that are not rooted in fact and expertise. The most important asset that a government has is its credibility. When that is squandered for temporary rhetorical political advantage, the consequences for quite some time are very severe. So those would be the steps that I'd like to see change.

SEE ALSO: Nobel Prize-winning economist Paul Krugman says we are ignoring a 'huge fiscal time bomb' set to detonate when the pandemic subsides

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A group of tech billionaires is funding 'fast grants' of up to $500,000 for COVID-19 research, with every grant decision made in less than 48 hours

Tue, 04/07/2020 - 5:58pm

  • A new venture fund is offering grants of $10,000 to $500,000 to coronavirus researchers, and every grant decision will be made in less than 48 hours.
  • The fund, Fast Grants, has raised $10 million from 10 backers including Paul Graham, Stripe cofounders John and Patrick Collison, and LinkedIn cofounder Reid Hoffman.
  • Backers say they were inspired by the World War II-era National Defense Research Committee, which sidestepped traditional grant approval processes to fund scientific research quickly. 
  • Visit Business Insider's homepage for more stories.

A group of tech entrepreneurs and venture capitalists have committed $10 million to COVID-19 research, aiming to sidestep the lengthy grant approval process that academics typically face.

The fund promises "Fast Grants" of $10,000 to $500,000 that will go to researchers that focus on coronavirus prevention and treatment. Starting April 12, every grant application will be approved or denied in less than 48 hours, after which researchers will receive payment "as quickly as your university can receive it."

Backers include Y-Combinator cofounder Paul Graham, billionaire entrepreneur brothers John and Patrick Collison, and venture capitalist Reid Hoffman, among other entrepreneurs and VCs. The grants will be administered by George Mason University's Emergent Ventures.

Typically, the grant approval process for academics can take months or years — but the Fast Grants fund prioritizes speed.

"Science funding mechanisms are too slow in normal times and may be much too slow during the COVID-19 pandemic. Fast Grants are an effort to correct this," the fund's website says. "We'll prefer projects that are cheap (so that our fund dollars go further) and that will yield results quickly (during COVID-19, days matter)."

The fund was inspired by the National Defense Research Committee, an organization created during World War II that aimed to fund emergency scientific research as quickly as possible. From 1940 to 1941, it allocated $6.5 million, or over $120 million when adjusted for inflation.

Researchers can apply at the Fast Grants website.

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Twitter CEO Jack Dorsey is putting $1 billion of his own wealth into a fund for coronavirus relief and other aid efforts (SQ, TWTR)

Tue, 04/07/2020 - 4:35pm

  • Jack Dorsey, the CEO of both Twitter and Square, announced on Twitter he created a new charity fund backed by $1 billion of his equity in Square.
  • Dorsey estimated it amounts to about 28% of his total wealth. 
  • The fund, named Start Small LLC, will initially focus on helping tackle the coronavirus pandemic. 
  • Eventually, the fund will shift its attention to funding girls' health and education and universal basic income.
  • Visit Business Insider's homepage for more stories.

Jack Dorsey is using his substantial wealth to help tackle the coronavirus pandemic.

Dorsey, who is the CEO of both Twitter and Square, announced on Twitter on Tuesday that he's created a new fund called Start Small LLC that will be funded by $1 billion in his Square equity. He said it's about 28% of his wealth. 

I’m moving $1B of my Square equity (~28% of my wealth) to #startsmall LLC to fund global COVID-19 relief. After we disarm this pandemic, the focus will shift to girl’s health and education, and UBI. It will operate transparently, all flows tracked here: https://t.co/hVkUczDQmz

— jack (@jack) April 7, 2020

After the coronavirus outbreak has been contained, Start Small will shift its focus to funding girls' health and education, as well as universal basic income, a regular cash payment made to citizens by the government, Dorsey said.

"Why UBI and girl's health and education? I believe they represent the best long-term solutions to the existential problems facing the world," Dorsey said in a follow-up tweet. "UBI is a great idea needing experimentation. Girl's health and education is critical to balance."

Dorsey said that having a separate LLC allows for some flexibility and specifically dedicates his shares to causes. Start Small will hand out grants directly to beneficiaries, which Dorsey said he's done in the past anonymously to the tune of $40 million. Going forward, all the grants will be public "so I and others can learn," Dorsey said. 

"Suggestions welcome. Drop your cash app ;)," Dorsey tweeted.

Dorsey will be sharing all transactions made by the fund in a public spreadsheet, beginning with $100,000, which he gave to America's Food Fund. 

Start Small is funded by Square equity because Dorsey owns more shares, and he'll need to pace sales of the shares over time, he said. He decided to set up Start Small now because "the needs are increasingly urgent," and he said he wanted "to see the impact in my lifetime."

Since its founding in 2009 by Dorsey and Jim McKelvey, Square has continued to grow market share as an alternative payments company to traditional payments infrastructures. In 2013, Square launched the Cash App, a mobile app that allows users to transfer money and invest.

A spokesperson for Square declined to comment. 

"I hope this inspires others to do something similar," Dorsey said. "Life is too short, so let's do everything we can today to help people now."

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Silicon Valley startups are being forced to cut costs or die in the worst financial crisis in a generation. Here are the investors whose companies are feeling it the worst.

Tue, 04/07/2020 - 4:23pm

After years of founder-friendly investing, the power is back with the venture capitalists, and startup employees have so far borne the brunt of that power shift.

In a tight labor market and cash-rich startup scene, employees were able to enjoy extravagant perks and substantial equity packages on their employers' dime. But the coronavirus-led economic downturn has forced founders to look long and hard at their balance sheets and start making deep cuts in an effort to survive.

All in, Business Insider has counted nearly 60 startups that have conducted layoffs in efforts to save their businesses. At least three venture-backed companies have shut down entirely when cuts weren't enough. 

These startups cover almost every industry, from logistics and enterprise software to consumer retail and on-demand services. Travel, hospitality, and vacation rentals were by far the hardest hit, but other growth-stage companies were not immune to changing customer behaviors and the universal desire to cut costs. It is almost easier to list the industries, companies, and stages that haven't been affected.

Investors themselves are also scaling back, and several venture capitalists have told Business Insider they are delaying new investments in favor of using current funds to help their portfolios make it out of a recession in one piece. According to PitchBook data, at least 26 venture-capital firms have portfolio companies that have instituted cost-saving layoffs.

Similar to the companies in which the layoffs are occurring, the firms vary just as widely. Some of Texas' biggest funders, like Capital Factory and Silverton Partners, have benefited from the recent boom of Austin's startup scene but have seen cuts of their own. 

IVP, which specializes in late-stage investing, has 11 portfolio companies that have conducted layoffs, but early-stage firms have shouldered the majority of the brunt as younger companies try to reel in spending. 

Founders Fund and NEA each have 14 companies in their respective portfolios that have conducted layoffs, the most of any venture-capital firm in the US. 

Blue-chip firms like Andreessen Horowitz, which recently started a growth-stage fund in addition to its more traditional early-stage investing practice, haven't been spared either, even though their portfolios tend to be much larger than industry-specific or stage-specific firms. Andreessen has 10 layoff-stricken companies, the most in its peer group. Accel and Kleiner Perkins both have eight in their portfolios, and Sequoia has seven.

Many firms have gone through similar economic downturns in the past and used that experience to counsel founders through the current uncertainty, so it is not surprising that some founders have ultimately taken their advice. However, it's not entirely altruistic on the firms' part, as poor portfolio performance could hinder their own fundraising efforts down the line. Venture-capital firms are trying to weather the storm like any other financial institution and battening down the hatches when the storm worsens. 

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Goldman Sachs is looking to raise a fund of up to $10 billion to serve cash-strapped companies hit by coronavirus, new report says

Tue, 04/07/2020 - 4:18pm

  • Goldman Sachs is looking to raise between $5 billion and $10 billion for a fund meant to serve companies struggling for cash, Bloomberg reported Tuesday.
  • The coronavirus and related business closures have left countless firms with less revenue than expected and little detail around when activity can return to normal.
  • Goldman's fund will prioritize lending that keeps companies afloat until the economy reboots, Bloomberg reported.
  • JPMorgan and Blackstone have expressed interest in similar vehicles.
  • Visit the Business Insider homepage for more stories.

Goldman Sachs aims to plow up to $10 billion into a fund for companies hungry for cash amid the coronavirus-induced economic slowdown, Bloomberg reported Tuesday.

Widespread quarantine activity and business closures to curb the pandemic's contagion have left firms with fractions of the revenue they expected for the start of 2020. Where some firms are rushing for cash, the investment bank sees a multibillion-dollar opportunity.

The vehicle will prioritize buying debt-like instruments meant to keep companies afloat until the economy comes back online, Bloomberg reported. The bank isn't looking to enter battles for control of participating firms. 

Should the fund take in between $5 billion and $10 billion, it will pay out several hundred million dollars to ailing businesses, Julian Salisbury, head of Goldman's investing business, said told Bloomberg.

"Everyone is drinking from the same fire hose. There's a long list of companies looking for capital, and we want to be the solution provider," he told Bloomberg.

Read more: Goldman's credit-investing chief told us how investors can profit from the Fed's mammoth stimulus — including a strategy that would reasonably earn 15% within a year

The fund will be helmed by Tom Connolly and Greg Olafson, according to Bloomberg, forming a collaborative team between Goldman's private credit business and its special-situations group. The latter division's participation marks its first management of outside capital, as it previously only dealt with holdings on Goldman's balance sheet.

Goldman isn't the only firm jumping on the idea of a mid-pandemic lending business. JPMorgan aims to create a funding operation of the same size, Bloomberg reported. Blackstone CEO Stephen Schwarzman is "looking aggressively" at using some of the firm's $150 billion in cash for such operations.

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American Airlines could be staring down a bankruptcy as the coronavirus pandemic unwinds the airline industry, a JPMorgan analyst warns (AAL)

Tue, 04/07/2020 - 4:17pm

The situation for airlines in the US is beginning to look even more grim, analysts for JPMorgan wrote in a research note on Monday.

When the airline industry initially began to see the impact of the novel coronavirus, the damage was expected to be mainly contained to the China market, and eventually the larger Asia region. Impact to the US was expected to mainly take the form of a decrease in visitors from China, while a recovery was expected to be V-shaped.

The situation changed rapidly, with a quick devolution to what stands today — subsections of airline fleets grounded at airports and storage facilities around the world, while the planes that continue to fly are doing so with few passengers on board.

Now as evidence of a prolonged recovery for the airlines becomes increasingly evident – paired with the reality that smaller carriers with tight margins may not survive – the tone among industry analysts has changed.

"In a best-case scenario, warming weather and slowing case growth result in demand returning to the pre-outbreak trend by mid-2021," Stifel's Joseph DeNardi wrote in an April 1 research note, outlining a worst-case scenario that saw resurgences of the virus in the fall, effective suspensions of flying, and a deterioration of airlines' finances as they take on increasing amounts of debt to weather the storm.

"Currently, the bearish scenario is playing out," he added. The firm downgraded several airline stocks, including American Airlines and JetBlue, from "Buy" to "Hold."

In an April 6 note from JPMorgan, the severity of the situation became even clearer.

"We are growing increasingly convinced that industry recovery to 2019 levels of output will be a multi-year affair, resulting in the material shedding of aircraft and headcount along the way," JPMorgan analysts led by Jamie Baker wrote. "Our revised base case now assumes 2021 EBITDAR" — earnings before interest, taxes, depreciation, amortization, and rent or restructuring costs — "will recover to within only ~75% of 2019."

"Whereas we once expected 2021 industry recovery to within sight of 2019's result, that's no longer the case," he added. "-80/-45/-25% is our 2Q/3Q/4Q20 revenue cadence (roughly 10 points worse than earlier), and we now expect 2021 revenue and EBITDAR to emerge no better than ~25% below 2019."

The JPMorgan report focuses primarily on American Airlines, but notes that the same trends in the analysis and modeling apply to numerous US airlines.

The analysts wrote that they expect to see demand among corporate travelers begin to recover sooner than leisure travel because "businesses are expected to put workers back on the road before families develop the same confidence." However, they said, the ultimate recovery of corporate-traveler demand will likely be slowed by the fact that remote work has been proven feasible during the pandemic, which could prompt companies to question the value of flying their employees for business purposes.

With workers achieving productivity from home and through video conferencing, the expenses associated with in-person meetings could be cut for longer than the airlines would like to see.

According to Helane Becker, an analyst at Cowen, business travelers only make up 15-20% of airlines' traffic, but provide half of their revenue.

The federal CARES Act — the coronavirus stimulus bill — offers US airlines up to $29 billion in loans to help weather the crisis, and an additional $29 billion in payroll grants to continue paying workers through at least September, albeit generally less than they were making before the crisis.

By accepting either form of aid, airlines are required to not lay off or furlough workers until at least September 30. However, assuming the crisis of reduced travel demand lasts beyond that date — which analysts, airlines, and epidemiologists are all increasingly expecting — airlines have warned that staff reductions would be practically unavoidable after that point.

Expecting a slow recovery for American, combined with a projected $10 billion in additional debt taken on by the airline, the report portends a recovery that will likely be difficult, even compared to other airlines. 

While the analysts wrote that American is not necessarily "mortally wounded," they went on to explain that the risk of a bankruptcy is, arguably for the first time in the crisis, becoming more pronounced, given the fact that the airline will likely need to significantly downsize its staff and its aircraft fleet.

There are "five, and basically only five, reasons why airlines file for bankruptcy," the report said: Labor costs above what the airline can afford, and an inability to negotiate a way to lower the expenses; pension costs, which can be shifted under the federal Pension Benefit Guaranty Corporation to reduce outbound cash flow; fleets filled with older, no-longer-needed or wanted aircraft given a resizing or restructuring, or a significant debt load on newer planes; high cost "other" debt, or just too much debt, such as what the airline could emerge from the current crisis with; and dangerously low levels of liquidity.

Given those historical reasons for past bankruptcies, the report says, it's theoretically possible that a bankruptcy would be the most effective play for the airline following the crisis.

"We were initially focused on a brief 8-16 week dislocation and a relatively quick snap back to some degree of normalcy," the report said. "This no longer seems likely to us given the depth of the crisis."

In the past few weeks, "managements here and abroad appear to be targeting much smaller footprints than we first factored into our modeling," the report added.

The report cautions that this is only one possible scenario: "We don't think management is rushing to file for bankruptcy. We also don't think it's inevitable."

However, the uncertainty of the situation means that it's becoming a larger possibility.

"We simply do not know the degree to which Washington will have the industry's back if more support is necessary to prevent bankruptcies – and further action could mean the difference between American seeking court protection or not, or at a minimum could influence the timing."

But even though the airline could manage to raise more cash without debt — for example, by pre-selling frequent-flyer miles to credit card partners, or other methods — and even though much of the debt is relatively low-cost, the debt remains concerning to the analysts.

"It's the sheer amount of debt that we are worried about, and the cost of carrying this debt against a top line that could potentially emerge 20-30% smaller," the report said.

"In our opinion, the margin for error for American management to navigate this crisis outside of the courts is growing uncomfortably thin."

SEE ALSO: Warren Buffett's Berkshire Hathaway sold nearly $390 million worth of Delta and Southwest shares this week

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