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Socialized Risk for the Wealthy

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Why did the Payment Protection Program become a mechanism for the upward distribution of wealth? The New York Times provides one possible answer: the big banks who were best prepared to disburse funds favored their wealthy clients.

[S]ome of the nation’s biggest banks, including JPMorgan Chase, Citibank and U.S. Bank, prioritized the applications of their wealthiest clients before turning to other loan seekers, according to half a dozen bank employees and financial industry executives who spoke on the condition of anonymity because they were not authorized to discuss the banks’ operations.

Customers of Citi’s private bank, where the minimum account size is $25 million, didn’t have to use an online portal to apply for a loan; they could simply submit paperwork to their banker, who would put in an application on their behalf. At Chase, the nation’s largest bank, nearly all private and commercial banking clients who applied for a small-business loan got one, whereas only one out of every 15 retail banking customers who sought loans was successful. Some banks provided highly personalized, so-called concierge service to their richest clients by enlisting representatives to walk them through every step and submit their paperwork.

The two-tiered system paid off for well-to-do customers: By the time the Paycheck Protection Program ran out of money last week, many top clients of national and regional banks had already had their loans approved.

The piece discusses or implies a number of incentives: the desire to keep holders of large accounts happy, the bigger commissions made on bigger loans, and the relative ease of submitting applications for non-retail account holders. But don’t worry, the second PPP “sets aside” $60 billion of its $360 billion for “for loans through small banks and community development financial institutions, which reach more mom-and-pop customers.”

Obviously, all major stimulus programs in the United States will see fraud and abuse. The GOP insistence that the American Recovery and Reinvestment Act of 2009 was a failure if it picked losers or didn’t all flow into shovel-ready projects was simply political theater. Here, though, it certainly feels we’re looking at a design feature and not a bug.

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