Lydia DePillis

They promised quick and easy PPP loans. They only delivered hassle and heartache

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Series: The Pandemic Economy

Fiscal Responses to COVID-19

In May 2021, Terry Kilcrease thought he saw a lifeline. He was out of work, living in a hotel in Lewisville, Texas, when he ran across a promising ad on Facebook. People who worked for themselves, it said, could still get loans from the government’s then-13-month-old pandemic Paycheck Protection Program.

Kilcrease had just started selling credit card processing systems to small businesses in early 2020 before the pandemic killed much of the need for cash registers. He hadn’t thought he was eligible for the $800 billion program. But the ad, posted by a company called Blueacorn, convinced him it was worth a try.

“We’ve created a 60-second quiz that can tell you if you qualify and how much you can get,” one ad promised. So Kilcrease registered on the Blueacorn site and answered a few basic questions about his business.

“With a few clicks of a mouse, I had applied,” Kilcrease said. It was so quick, he doesn’t recall many details. Blueacorn checked for all required documents before passing along Kilcrease’s approved application to a lender, Prestamos.

Soon after, Kilcrease received loan documents from the Small Business Administration saying he'd been approved for a $4,790 forgivable loan, which he signed electronically and returned. The money would arrive in his bank account within ten business days, Blueacorn estimated.

Kilcrease was relieved.

“It was everything I needed to get going,” he said. “Just that little bitty bit.”

But the money never made it to Kilcrease. And it never appeared for hundreds of thousands of other applicants, either.

ProPublica has been tracking PPP loans since the government first posted millions of them in July 2020. We kept updating our interactive database as the SBA disclosed more loan information. When the last round of the PPP closed, in May 2021, we noticed something strange: The number of loans the government said it had made kept shrinking with every new release.

By the time the SBA posted its latest update in late November, about 575,000 loans had disappeared, subtracted from an original total of 11.8 million. Most of them came through non-bank online lenders or banks that worked with web platforms such as Blueacorn, which solicited and processed huge volumes of applications for small-dollar loans in the final months of the program.

When we checked with the SBA, they told us the total number of cancelled loans actually topped 1 million. A sizeable number of those were likely applied for by people who were attempting to defraud the program and didn’t make it through additional screening — it’s unclear how many, since the lenders we talked to declined to specify.

But plenty of would-be borrowers were acting in good faith. Scores of them wrote in to our tip lines, perplexed that they had been listed as loan recipients, since they had applied but never received any money.

Their situations sounded a lot like Kilcrease’s: a quick approval in spring 2021, followed by some kind of snafu, and then a monthslong runaround from companies like Blueacorn, eventually resulting in no money after the lender the companies worked with withdrew its initial approval.

The phenomenon prompted the law firm Bailey Glasser to file a pair of lawsuits late last year against Prestamos and another Blueacorn client called Capital Plus Financial on behalf of people who had similar experiences. Prestamos has denied wrongdoing, and Capital Plus Financial declined to comment on pending litigation except to say that the plaintiff was ineligible for a loan.

This game of pingpong was maddening for prospective borrowers who had been told money was on the way, whether they were eligible for the program or not. It was also a hassle for lenders, who never got paid for hundreds of thousands of loans they sent to the SBA (though they reaped billions for those that did get funded). And it likely could have been prevented if the SBA had required more screening on the front end, before approving loans in the first place.

SBA spokesperson Christalyn Solomon said that the agency delegated that responsibility to lenders, which acted as “agents of the government to approve and disburse loans.” The SBA then assigned each loan a number, which confirmed that the government would guarantee it.

“Loans were removed for the FOIA Public Data Set because they were canceled by the lender,” Solomon wrote in an email. Several hundred thousand loans were also approved and then canceled before the SBA started publishing data on loans worth less than $150,000 in December 2020.

Blueacorn said it worked hard to reach as many self-employed people as possible, but wasn’t able to quickly obtain some information that would have been helpful in filtering out ineligible applicants. Prestamos, the lender to which Blueacorn submitted Kilcrease’s application, declined to comment on individual borrowers, citing confidentiality guidelines. But Prestamos said that a majority of its approximately 50,000 canceled loans resulted from borrowers not signing their loan documents.

Kilcrease’s bank rejected his PPP loan deposit in early June, yet Blueacorn continued to assure him the money was coming. “Don’t worry, your funds are secure and you will be funded soon,” a Blueacorn support worker wrote in a July message. “Both management and engineering are working on a solution as we speak.”

For weeks, not much happened. In August, Kilcrease got through to someone at Prestamos, the lender Blueacorn was working for. She asked for his 2020 tax return, which documented $5,600 in gross income. Then, e-mails show, she told Kilcrease he had provided conflicting numbers to Blueacorn and to the IRS, and his application would be formally denied.

Kilcrease said that he might have been confused about what information Blueacorn was initially asking for when he clicked a few buttons to apply back in May. But then why would they have approved him in the first place, and put him through months of hope, frustration and disappointment?

“They saw a whole lot of profit in people like me, sole proprietors,” said Kilcrease, citing the fee that lenders received for successfully funding small PPP loans. “They were given a hope, and it was just dashed, with no remorse and no recourse for anybody.”

The first round of the PPP, which kicked off in April 2020, mostly went to the largest small businesses. Clogged by applications from companies big enough to have bankers and accountants, the $349 billion fund was exhausted within weeks.

Realizing the need among actual mom-and-pops, Congress authorized another $320 billion in June 2020. That round reached millions more main-street-type companies: coffee shops, hair salons, restaurants, real estate agents.

By winter, the coronavirus recession was still hammering people who’d missed out on earlier rounds. Congress authorized the lending of unused funds and added more, while the incoming Biden administration tailored the rules to help sole proprietorships and independent contractors.

That’s when financial technology companies — user-friendly websites with automated application platforms that often partner with lenders to supply loans — saw a big opportunity.

In the earlier stages of the PPP, banks mostly served existing customers that already had documents on file, making it easy to process their government-backed loans. But as Congress pushed to include businesses on the fringes of the financial system, lenders had to deal with huge numbers of applicants they’d never assessed before.

They often outsourced that task to websites — we’ll call them loan processors — that marketed PPP loans to the self-employed and other small businesses and performed the basic checks required by the SBA. The SBA paid a fee for each funded loan to the lender, which in turn gave a cut to the processor for finding and vetting a borrower.

December’s stimulus package boosted fees up to $2,500 or 50% of small loans, whichever was less. Loan processors, which utilized aggressive social media outreach to people who had had any kind of self-employment income before Feb. 15, 2020, churned through millions of loan applications quickly.

In an effort to keep barriers to entry low, the SBA required very little verification on the front end. Once an application was approved and assigned an SBA loan number, borrowers were forbidden from applying elsewhere. So loan processors had every reason to lock them in quickly, with few anti-fraud measures, said independent fintech analyst Jason Mikula — even if it meant dealing with verification questions later on.

“At the end of the day, if they end up rejecting someone for being suspicious, they’re actually losing money,” said Mikula, noting that building automated fraud models takes time and money, even under normal circumstances. “There were no incentives in place to encourage these companies to be particularly careful about how they went about funding these things.”

An arms race followed. Fintechs competed for the self-employed, advertising their easy routes to quick, forgivable cash; some said they employed rigorous verification tools following SBA approval. But Blueacorn was the one that got really lucky.

By May 2021, the Biden administration had changed the rules again to prioritize loans made by community development financial institutions, which have access to special funding from the Treasury Department to support underserved populations. Blueacorn, which launched in Phoenix in 2020, happened to partner with two of them: Prestamos CDFI, an arm of the nonprofit service group Chicanos Por La Causa, and Capital Plus Financial, the CDFI subsidiary of a larger holding company called Crossroads Systems.

Those relationships allowed Blueacorn to keep lending through the end of the PPP on May 31, while other lenders were locked out.

By the end, the two CDFIs appeared to have processed more than $15 billion in loans to 955,000 small businesses, nearly all with Blueacorn. Blueacorn declined to detail its fee split arrangement with banks and other vendors. But Crossroads Systems said in an earnings report that it had made approximately $930 million on the program, $606 million of which went to its loan processors. (Crossroads also paid out a $40 per share special dividend as a result of what it called the “windfall” fee income, while keeping $120 million to reinvest in lower-income communities.)

Fintechs have positioned themselves as champions of the little guy, reaching truck drivers and dog walkers, especially people of color, who’d been overlooked by the big banks.

The companies’ promises to get money to thousands of independent workers from underserved communities is broadlytrue — but also somewhat overblown.

In May, June, and July, about 285,000 loans disappeared from the SBA’s loan database. The companies that originally processed the loans told ProPublica there were a number of reasons why so many ended up canceled after having been approved by the SBA. Some appear to have been held up by borrower errors and second thoughts, but many cancellations were the result of the SBA’s loose requirements for pre-approval screening.

One of the largest sources of canceled loans was Biz2Credit, an online lender founded in 2007, which withdrew about 115,000 loans after approving an original total of more than 300,000. A representative of the company, crisis communications consultant Michael Sitrick, said that the company employed “detailed underwriting protocols” after submitting the loans to the SBA. Canceled loans, he said, resulted from a combination of applications determined to be fraudulent after further checks, people who didn’t respond to additional requests for documentation and people who voluntarily withdrew their applications.

“Lenders were required to stop fraud whenever they found it,” Sitrick wrote in an email. “Given the sophistication of widely available document forgeries and other enterprise fraud, it was virtually impossible to detect fraud only by reviewing select documents prior to submission to the SBA.”

The pile of canceled loans also included about 30,000 made by an entity newly created by the lender Fountainhead, which prior to the pandemic had specialized in SBA-backed loans. Still, they had thousands of borrowers who didn’t sign their loan documents and inexplicable cancellations by the SBA itself after the agency had approved loans and banks had paid out the money.

“On occasion it would say ‘duplicate tax ID discovered,’” said Fountainhead’s chief operating officer, Michael Bland, referring to the SBA. “OK, well, what was your screening on the front end for? You went through your process and approved it, we closed it, I don’t know why that might be an issue now.”

Last month, Blueacorn lending partner Crossroads Systems agreed to purchase Fountainhead for an undisclosed amount.

When the SBA posted its most recent database update the day before Thanksgiving, it had dropped another 294,000 loans. About 140,000 of them belonged to the two CDFIs that had primarily worked with Blueacorn, Prestamos and Capital Plus, which accelerated their business in the three weeks after the program closed to regular lenders. In May alone, they approved at least 458,300 loans.

At the peak of the program, Blueacorn said, it had 300 people in the Phoenix area reviewing a deluge of loan applications. A quick scan of each one would usually lead to a quick signoff by the SBA.

But sometimes, between approval and funding, Blueacorn would find flags of fraudulent activity like an improbable concentration of applicants with very similar paperwork in a small geographic area — hairdressers making more than $100,000 a year on the south side of Chicago, for example. The processor would ask those borrowers for more documentation, and if they failed to provide it, cancel the loans.

Blueacorn said that thousands of loans it had approved and attempted to fund, meanwhile, were rejected by banks where applicants had savings accounts. Some of the banks had run their own know-your-customer checks on the accounts and sent them back to the processor for additional verification. Others cut off fintech processors entirely if they seemed to be vectors for fraud, causing problems for those who were genuine.

“Towards the end of the program, the willingness of recipient banks to work with PPP lenders got worse by theminute,” said Barry Calhoun, Blueacorn’s CEO.

Eric Kinney is the senior vice president for risk at Oxygen, a banking platform for small businesses. He said he saw so many people attempting to move PPP money into offshore accounts or into cryptocurrency assets that he blocked loan proceeds from “four main PPP lenders.”

“There are a couple lenders who we’ve said no to, we’re not going to accept any more payments,” Kinney said, declining to name the companies. “A referral channel that has a high fraud rate on it, it’s our job as a company to monitor that and block certain situations.”

Loan processors would try to work with borrowers and their banks to provide the requested information. If that didn’t succeed, they had the option of putting the money on a debit card, but that required even more documentation from borrowers, resulting in an outpouring of angry posts on internet message boards like Trustpilot, the Better Business Bureau, Reddit and Facebook.

Now, borrowers who were approved but never received their money are plaintiffs in two lawsuits filed against Prestamos CDFI and Capital Plus Financial last October and December, saying that the failure to fund the loans constitutes a breach of contract. In a motion to dismiss, Prestamos said that the loan document created no obligation to actually fund the loan, and a spokesperson declined to comment further on the case. Capital Plus Financial hasn’t yet filed any responses, but told ProPublica that the sole named plaintiff had provided an “illegible” tax return that wasn’t signed, which is why the company decided to revoke his loan.

Blueacorn’s Calhoun said much of the hassle could have been avoided from the beginning had the SBA allowed lenders to access more documents that would ensure the borrower was legitimate. Creating a quick way for certified, regulated loan processors to pull an applicant’s tax records, for example, would have provided a hard check on who was eligible.

“A few adjustments would’ve gotten rid of a lot of the lazy fraud,” said Calhoun. “Because there was so much ambiguity, it encouraged a lot of people.”

This happened more smoothly in other countries where companies file federal taxes quarterly or even monthly, allowing the government to know their exact income without the need for lenders to request documentation that was sometimes difficult to verify. Instead, the SBA allowed applicants to file draft tax returns, which can easily be manipulated.

The whole experience left Terry Kilcrease feeling cynical.

“The big companies made out like fat cats, the lenders made out like fat cats, all these companies that already had plenty of money,” Kilcrease said. “The people like me who are struggling to get there were just completely forgotten about.”

Here's why rapid COVID tests are so expensive and hard to find

This was first published by ProPublica, a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

A few weeks ago, a ProPublica reporter decided to test his kids for COVID-19. They had the sniffles, and with a grandparent set to visit he wanted to minimize the risk that they were infectious.

This was the problem that quick, cheap COVID-19 tests were supposed to help fix. No need to go to a clinic or wait days for results. Just pick up a pack of tests at a local pharmacy whenever you want, swab your nose and learn within 15 minutes if you're likely to pass the virus along.

So the ProPublican went to his neighborhood CVS, hoping to buy the required pack of two for $23.99. They were out of stock. Then he went to Rite Aid. They didn't have the tests either. Then Walgreens, then another CVS. All out of stock. The only supplier with a few tests to offer was his sister, who happened to have a few tucked away.

It's a familiar experience for many Americans. But not for people in Britain, who get free rapid tests delivered to their homes on demand. Or France, Germany or Belgium, where at-home tests are ubiquitous and as cheap as a decent cappuccino.

So why are at-home tests still so pricey and hard to find in the United States?

The answer appears to be a confounding combination of overzealous regulation and anemic government support — issues that have characterized America's testing response from the beginning of the pandemic.

Companies trying to get the Food and Drug Administration's approval for rapid COVID-19 tests describe an arbitrary, opaque process that meanders on, sometimes long after their products have been approved in other countries that prioritize accessibility and affordability over perfect accuracy.

After the FDA put out a call for more rapid tests in the summer of 2020, Los Angeles-based biotech company WHPM, Inc. began working on one. They did a peer-reviewed trial following the agency's directions, then submitted the results this past March.

In late May, WHPM head of international sales Chris Patterson said, the company got a confusing email from its FDA reviewer asking for information that had in fact already been provided. WHPM responded within two days. Months passed. In September, after a bit more back and forth, the FDA wrote to say it had identified other deficiencies, and wouldn't review the rest of the application. Even if WHPM fixed the issues, the application would be “deprioritized," or moved to the back of the line.

“We spent our own million dollars developing this thing, at their encouragement, and then they just treat you like a criminal," said Patterson. Meanwhile, the WHPM rapid test has been approved in Mexico and the European Union, where the company has received large orders.

An FDA scientist who vetted COVID-19 test applications told ProPublica he became so frustrated by delays that he quit the agency earlier this year. “They're neither denying the bad ones or approving the good ones," he said, asking to remain anonymous because his current work requires dealing with the agency.

FDA officials said they simply want to ensure that rapid tests detect even low levels of the virus, since false negative test results could cause people to unwittingly spread the disease. They blame the test shortages on an absence of the kind of sustained public funding that European governments have provided. Without it, manufacturers have lacked confidence that going through the FDA's process would be financially worth the trouble.

“Where we have seen tests truly coming to the marketplace, the big difference has been government investment," said Dr. Jeff Shuren, head of the FDA's Center for Devices and Radiological Health, which authorizes tests. “Folks will come and do larger volumes because you're supporting production, which can also help drive down prices."

Both the Trump and Biden administrations banked on vaccines putting a swift end to the pandemic, holding off on large-scale purchases of COVID-19 tests that Americans could keep in their medicine cabinets.

As a result, one of the few companies that has successfully gotten tests authorized and onto shelves — Abbott Laboratories — has dominated the market. Its BinaxNOW tests account for around 75% of U.S. retail sales, according to data from NielsenIQ, even though they're sold here for several times the price of the same Abbott tests in Europe.

In the past two months, the Biden administration has takensteps to make home tests more widely available. As more tests are authorized and more purchase orders are signed, pharmacy shelves are starting to fill up.

But that still may not be enough, as manufacturers scramble to build supply chains capable of delivering the tens of millions of tests per week that public health experts estimate will be necessary to keep schools and workplaces open and safe. Employers charged with testing their entire workforces have found themselves in bidding wars in order to secure adequate supply.

As with the slow ramp-up of lab testing at the beginning of the pandemic, the delays have come with a cost.

“It feels like in one place we're in a rocket ship and in another place we're on training wheels," said Rep. Kim Schrier, D-Wash., contrasting vaccines and testing. Schrier, a former pediatrician who has been pushing the agency to authorize more rapid tests, said, “You can't count on the free market during a pandemic."

The U.S. testing response has been troubled from the beginning of the pandemic, seesawing between caution and overcorrection.

In February 2020, the Centers for Disease Control and Prevention took weeks to develop its own test, which later turned out to have falsely flagged other viruses, allowing the one that causes COVID-19 to gain a foothold in the U.S.

Then the FDA became more permissive, allowing privately developed tests that detected antibodies from previous infections to enter the market after only cursory review. When dozens of the tests turned out to be inaccurate, the FDA prohibited their use.

Meanwhile, the FDA grappled with thousands of applications for “emergency use authorizations," or EUAs. The process for EUAs is less involved than for full approval but still requires extensive clinical and real-world evaluation. Most EUAs issued have been for PCR tests, which are highly sensitive — meaning they can detect even low levels of the virus — but typically take days to return results.

Another form of diagnostics, antigen tests, can return results quickly and cheaply, similar to a pregnancy test. They're less sensitive, but usually good enough to determine whether someone is infectious.

Recognizing the potential market for antigen tests, companies began submitting more EUA applications in late 2020. But the FDA was wary about this type of test, mostly warning of the danger of false negatives in the earliest stages of infection.

FDA officials were particularly concerned about allowing tests to be administered outside the purview of a trained health care provider. “To mitigate the impact of false results, all Covid-19 tests authorized to date have been made available only by prescription, so that clinicians can interpret results for patients," wrote Shuren and his deputy Dr. Tim Stenzel in an October 2020 column in The New England Journal of Medicine.

That cautious approach persisted all through the winter and early spring, despite rising agitation from the White House and Congress around the availability of tests.

“I actually have been saying that for months and months and months, we should be literally flooding the system with easily accessible, cheap, not needing a prescription, point of care, highly sensitive and highly specific" tests, White House chief medical advisor Dr. Anthony Fauci said under questioning from Schrier in a hearing on March 17.

Stenzel, a microbiology Ph.D. who in 2018 became director of the office that authorizes diagnostic tests, holds the most day-to-day power over whether a test gets approved. He worked at biotech companies for most of his career before coming to the FDA, leading some to wonder if those prior relationships played a role in determining which testmakers became the most important players in the market.

Among Stenzel's former employers were Abbott and the San Diego-based Quidel Corporation, the first two companies to sell self-administered, prescription-free COVID tests in large volumes.

Quidel CEO Doug Bryant said in a promotional video that in early 2020, the company wasn't planning on designing a COVID-19 test until he got a call from a trusted contact at the FDA. That contact was Stenzel, the agency confirmed.

Quidel and Abbott had their at-home tests approved about a year later. On an earnings call, Quidel's Bryant said it was “the most significant inflection point for our company." In the third quarter of 2021, Quidel made $406 million from its various COVID-19 tests, blowing past Wall Street's expectations. “There is no denying Quidel has put itself in position to win big in COVID-19 testing," wrote an analyst with the firm William Blair. Abbott made $1.9 billion globally on its COVID-19 tests.

Ethics disclosures show that Stenzel holds no Abbott or Quidel stock, and it's been several years since he worked at either company. But Stenzel's ties to the two major test manufacturers and the slow pace of authorizations for other companies' at-home tests drew a letter from an anti-monopoly think tank, the American Economic Liberties Project, calling for an investigation.

Stenzel denied any improper conduct, and pointed out that his office issued recalls to both Abbott and Quidel for problems with other COVID-19 tests. He also noted that the office designed relatively easy-to-follow templates for new types of COVID-19 tests to help companies that hadn't dealt with the FDA before.

“We understood that there were a bunch of companies that were new to the FDA, and we provided them an immense amount of support, saying, 'This is how you do it,'" Stenzel said.

The FDA has said it “engaged with more than 100 test developers" about making diagnostics. The agency declined to provide the names, citing confidentiality concerns.

Quidel acknowledged the administration had reached out, but didn't comment on its discussions with Stenzel, while Abbott said it had spoken to “many people across multiple areas of government" early in the pandemic.

Most companies don't have the same familiarity with the people adjudicating their applications.

Nanōmix, a diagnostics designer based in Emeryville, California, developed a rapid test with the help of a federal grant and submitted it to the FDA in February. In early June, an FDA reviewer sent back a list of questions, giving Nanōmix a deadline of 48 hours to respond. The company couldn't provide answers that quickly, so it was sent to the back of the line.

“We start development on a set of guidance," said Nanōmix CEO David Ludvigson. “Then they change the guidance after we're done, and expect us to have conformed to their revised guidance."

The FDA has been particularly circumspect with more novel approaches to testing, such as an olfactory test that detects the common COVID-19 symptom of loss of smell. The agency's reviewers deprioritized an application for the scratch-and-sniff card even though it had been proven to stem transmission, said inventor Derek Toomre, a professor at the Yale School of Medicine.

Other companies, big and small, have been tripped up by FDA demands that seem minor in view of the urgency of the situation.

For example, the biopharmaceutical giant Roche told ProPublica that it submitted a home test in early 2021, but it was rejected by the FDA because the trials had been done partly in Europe. The test had comparedfavorably with Abbott's rapid test, and received European Union approval in June. The company plans to resubmit an application by the end of the year.

A smaller company, which didn't want to be named because it has other contracts with the U.S. government, withdrew its pre-application for a rapid antigen test with integrated smartphone-based reporting because it heard its trial data from India — collected as the delta variant was surging there — wouldn't be accepted. Doing the trials in the U.S. would have cost millions.

The FDA reviewer who quit this May described what the delays looked like from the inside. With a background in virology, he could evaluate the hundreds of pages in an application within a few days. But then, something strange happened: The applications would go nowhere for months as higher-up officials seemed paralyzed by indecision.

“I could easily process dozens of them, but I ended up with one or two in my queue constantly. They would stay there forever," he said. “I had a lot of free time."

His experience is reflected in an outside review of the EUA process conducted by the consulting firm Booz Allen Hamilton, which found that the median number of days it took the FDA to issue a decision on original applications rose to 99 in November 2020 from 29 the previous April, with denials taking substantially longer than authorizations. The assessment also found “limited understanding in the test developer community on how to appropriately validate a diagnostic test."

Stenzel said that any delays were a consequence of careful review, and that the office received many applications that were incomplete or had shoddy data.

“If we have questions or concerns about a test, they will not be prioritized the same way a test will be that we have fewer questions about," Stenzel said. “Those will be cycled to the front, and it makes good public health sense to move forward those tests that are most likely to pass muster and get authorized. ... There are always good reasons for why something is delayed."

European countries generally maintain similar guidelines for the accuracy of tests, but are less particular about how trials must be conducted. For example, test developers are allowed to limit their samples to subjects with high viral loads, for whom antigen tests perform better.

The FDA, however, remains concerned that the typical method for measuring viral load isn't consistent, leading to the risk of overestimating the accuracy of the test. Advocates of the European approach point out that being able to identify an infection in its earliest stages won't help much if a PCR result doesn't come back for days, so even a less sensitive at-home antigen test is valuable — especially since people are much more likely to be able to access them in the first place than PCR tests.

Europe's differing approach has resulted in 39 rapid self-administered antigen tests being authorized by the European Union, according to a database maintained by Arizona State University. The U.S. has authorized 12, nine of which are available without a prescription.

A consultant who works with smaller companies trying to get products through the FDA — and who asked for anonymity in order to protect his clients who have business before the agency — said he understands the argument that more robust applications from companies with larger manufacturing capacity should go first.

The problem with this logic, he said, is that it's now fall and the pandemic is ongoing, with the possibility of new variants still unknown. “And it's not like you can flip a switch with the Defense Production Act and you're going to get magically much more capacity," he said. “We needed a 'thousand flowers bloom' approach. We needed everyone and their brother pitching in with these tests."

The federal government could also have buttressed the supply of rapid COVID-19 tests by purchasing large quantities from companies able to manufacture them in bulk, and then providing them to consumers at low or no cost.

Shuren and Stenzel recommended as much a year ago in their New England Journal of Medicine column. They wrote that the U.S. government should have authorized a handful of tests and had the CDC contract with those manufacturers, rather than trying to vet thousands of diagnostics, which they called “an inefficient use of resources."

European countries essentially did both, authorizing dozens of rapid antigen tests to be sold while contracting with a few companies to provide millions of them free of charge to individuals. The U.K., for example, allocated $50 billion over two years to set up a national test and trace program that delivers rapid tests to anyone upon request. It hasn't worked perfectly or averted lockdowns, but advocates argue it's better than the U.S. alternative of rapid tests being nearly impossible to find.

For Germany's free testing program, which ran from March through October, the government initially bought 800 million rapid tests and 200 million home tests from a shorter list of manufacturers that had undergone additional vetting. The country also required the unvaccinated to present fresh test results for most activities that involve congregating with other people.

Although the U.S. government has spent billions of dollars on testing — estimates of the total vary, given the number of funding streams — self-administered tests are usually not covered by insurance, and there is no centralized system for distributing them.

In the late winter and early spring of 2020-21, the federal government spent hundreds of millions of dollars to buy point-of-care tests, but they were mostly reserved for use in facilities like nursing homes and military bases. The economic stimulus bill that passed in March allocated $10 billion for screening in schools, which don't usually rely on home tests. Then, the focus shifted to vaccines.

In May, the CDC leaned hard into the message that vaccines were almost completely protective, mitigating the need for frequent testing. Manufacturers took that as a bad sign for testing volume. Abbott ramped down manufacturing of its popular home test.

At that time, Stenzel seemed satisfied with the availability of tests. “We believe we're doing a great job at meeting the public health need at this point," he said in June on his weekly town hall call with test developers.

With no long-term government purchasing programs in place, companies had less interest in getting new tests through the pipeline, making it difficult for even promising concepts to get commercial pickup. With the help of a federal grant meant to accelerate COVID-related technologies, Iowa State University professor Nigel Reuel developed a mailable paper test in April, but he said he's not sure it'll be worth it to take the step of clinical trials.

It's really hard, Reuel said, for a company to “say we're going to invest tons in this when we don't know what the long-term market for it is."

All this meant that when the delta variant hit in July, not only were PCR appointments suddenly hard to get, but home tests became vanishingly rare and reliant on a single manufacturer: Abbott, whose BinaxNOW test peaked during late summer at 90% of the market in retail over-the-counter sales. That dipped somewhat in September, when a few additional companies were able to get on shelves.

On an earnings call in October, Abbott CEO Robert Ford said the company anticipated dropping its price to maintain its market share, but wouldn't if competition didn't make it necessary.

Asked why its rapid tests are abundant and cheap in Europe and scarce in the U.S., Abbott spokesperson John Koval chalked it up to Europe's public support, both in its regulatory system and through government funding.

“It has taken more than a year for the American public, scientific experts and academia to accept the important role of rapid testing in the U.S.," Koval said. “Overseas, that was not the case, because the value of rapid testing was better understood prior to the pandemic."

Sentiment in Washington has been changing. In late October, Sen. Dick Durbinsent a letter urging “appropriate flexibility in regulatory standards" for at-home tests. And over the past month, the White House has thrown more weight behind rapid testing, announcing $1 billion in purchase commitments for home tests. Recognizing the difficulty of quickly securing the necessary volume of raw materials for tests, the Department of Health and Human Services awarded another $560 million to 13 companies for test components like swabs, pipette tips, packaging and other production capabilities.

Still, some of the government's efforts haven't added up to much.

In September, the White House announced that Walmart, Amazon and Kroger would sell COVID-19 tests at cost for the following three months. But no subsidy was involved, and for most of the first two months, the retailers were often out of stock. Tests available online are often sold by third-party distributors, and Amazon and Walmart said they don't control those prices, so they remain high.

At CVS, which didn't participate in the agreement with the White House, a Quidel kit — which costs $12 wholesale — still sells for $23.99.

Same with Rite Aid, but when one of us visited a store in Brooklyn this Wednesday, employees said they hadn't received a shipment of BinaxNOW kits in a month, until they got seven the day before. “They immediately sold out. And that was limiting it to one per person," said Roxanne, a pharmacy technician who declined to give her last name.

Meanwhile, the U.S. is moving to take on more responsibility over the validation of tests. Last week, the National Institutes of Health announced a new program to do much of the work for test developers, mitigating the back and forth around what's good enough. That resembles the process run by some European governments, although Shuren said the U.S. will still maintain tougher standards.

All of those steps would have been more helpful when experts began calling for them a year ago.

“We need to have a rethinking, during and after this pandemic, to talk about the role of testing," said Mara Aspinall, who co-founded the Biomedical Diagnostics program at Arizona State University's College of Health Solutions. “It's a fundamental piece of our fight. And that was realized too late."

Do you have information about COVID-19 testing that we should know? Email or message her on Signal at 202-913-3717. Email or message him on Signal at 917-687-8406.

The US government gave free PPP money to publicly traded companies despite warning them not to apply

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

As Congress launched a historic bailout to keep businesses afloat at the outset of the pandemic, government officials stressed that the loans were for mom-and-pop operations that didn't have another easily available lifeline.

“This was a program designed for small businesses," then-Treasury Secretary Steven Mnuchin said, as companies like Shake Shack and Potbelly made headlines for grabbing millions from the newly created Paycheck Protection Program. “It was not a program that was designed for public companies that had liquidity."

House Minority Leader Kevin McCarthy was even clearer. “We will go after those big companies that cheat the system," he told Fox News that spring.

But the tough talk hasn't translated into action. Instead, a ProPublica review has found, the government gave out generous loans to companies that may not have needed them. And it has often forgiven the loans, despite having said that publicly traded companies would be unlikely to merit such generous treatment.

Take Lazydays Holdings, a publicly traded collection of RV dealerships that got a nearly $9 million loan. The company had $31 million in cash on hand at the end of 2019, and then prospered as Americans turned to RVs for socially distanced vacations. Lazydays' stock price has shot up more than 500% during the pandemic. (Lazydays did not respond to requests for comment.) The government has forgiven nearly all of it, allowing Lazydays to keep the money.

The ProPublica analysis of Securities and Exchange Commission filings found at least 120 publicly traded companies that received loans of more than $500,000, grew their revenues last year and have been allowed to keep the money.

In addition, at least 30 companies announced plans to go public after receiving their loans, bringing in truckloads of investor cash that they often used to pay off other debts — but not the ones they owed to the federal government, all of which were forgiven.

Overall, ProPublica found at least $250 million that went to publicly traded companies with growing revenues and that has already been forgiven by the government. That's just a sliver of the $800 billion PPP program. But it's also almost certainly a significant undercount of the amount of taxpayer dollars that went to well-heeled companies. The count, for instance, doesn't include any of the billions of dollars that went to firms backed by giant private equity funds. Their finances are not publicly disclosed.

The government had no rules requiring companies to pay back loans if it turned out they didn't need the money.

Instead, the government had one modest requirement particularly relevant to publicly traded companies: It made all applicants for loans attest that pandemic-related uncertainty made the loan “necessary." And it warned in a follow-up advisory that having access to cash elsewhere — as public companies usually do via investors — would make it difficult to take that pledge in good faith.

But the government has rarely followed up. The Small Business Administration, which oversees the PPP, discarded a questionnaire it had begun sending companies to quiz them on their financial situations.

In response to questions from ProPublica, the SBA said that it is examining all forgiveness applications to make sure they comply with the rules. “We are continuously aware of our role in the stewardship of federal funds to ensure the integrity of our programs, and we have rigorous processes in place to ensure appropriate oversight of loans of all sizes," spokesperson Christalyn Solomon said.

But the SBA declined to provide evidence of how it is evaluating whether public applicants were honest when they said their loans were “necessary." Experts say that's because lawmakers offered no specifics on what they meant by “necessary" from the outset, leaving the program's administrators with no objective basis on which to demand repayment.

“Congress needed to say to the SBA, 'This is what constitutes need,'" said Liz Hempowicz, director of public policy at the nonprofit Project on Government Oversight. “If you have access to excess capital in any form, that absolutely should've been baked into the program from the beginning."

By many metrics, the federal government's response to the pandemic succeeded in alleviating the worst effects of the most abrupt pause in economic activity America has ever experienced. Unlike most safety net programs, it did so by erring on the side of generosity. The government's supplemental unemployment insurance and stimulus checks were enough to actually lower poverty last year.

The same philosophy applied to relief for businesses. The government kept the PPP application simple to encourage companies to participate, and banks were paid to move the loans along without asking many questions. While the program was built on the chassis of the SBA's standard loan program, it dispensed with many of its rules, such as a requirement that applicants demonstrate they couldn't obtain reasonably priced credit elsewhere.

In the first round of the bailout, which was quickly depleted, companies did not have to prove that they had actually been impacted by COVID-19.

Instead, the application required them to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant." Facing confusion from corporate lawyers who said the language was vague, the SBA released further guidance in late April 2020.

The clarification specifically warned public companies that they probably wouldn't meet the threshold. “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity," the agency wrote. “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith."

That admonition had some effect. According to a study forthcoming in the Review of Corporate Finance Studies, half of all public companies qualified for the loans, but only 42% of those eligible chose to take them. That compared to 87% of all eligible private companies. (The PPP generally excluded companies with more than 500 employees.) On average, the 812 public firms that took loans had less cash and more debt than those that didn't borrow. The public companies collectively borrowed $2.2 billion, but 13.5% of them repaid their loans, mostly soon after the SBA's April guidance.

But because Congress didn't impose any actual requirements to return the money, many companies didn't. Some even shrugged off congressional pressure to do so.

In May 2020, a House oversight subcommittee sent letters asking five large public companies to return their $10 million loans. One of them did. The other four refused, and they eventually allreceivedforgiveness (with one asking for slightly less than the whole amount).

They included a contractor for the U.S. Postal Service called EVO Transportation and Energy Services, which hasn't filed financial reports for all of 2020 after discovering problems with its 2019 disclosures.

The company didn't respond to a request for comment.

The SBA began processing forgiveness applications after the first round of PPP loans was exhausted in August 2020. It decided that all borrowers of less than $2 million would automatically be “deemed" truthful in their pledges that their loans were necessary.

For those who borrowed more, it issued a nine-page “loan necessity questionnaire" that asked about the recipient's ownership structure, cash on hand pre-pandemic, revenues during the time when the loan was supposed to be used and access to other capital.

That didn't go over well.

Last December, a construction industry trade group sued, saying the SBA questionnaire violated the original guidance that implied forgiveness would be determined by what companies knew at the time they applied, without regard to what happened later. In July, the agency stopped using the questionnaire, saying that the form was burdensome for borrowers and a drain on auditing resources.

Without companies' answers, the SBA has developed a machine-learning algorithm that flags loans for signs of potential fraud, such as payroll numbers that don't add up. As of last month, agency data showed, investigators had reviewed 65,000 loans, 8,000 of which, totaling $2.7 billion, were referred for further analysis. Of those, only 300 loans were for more than $2 million.

The agency declined to say how many forgiveness applications have been rejected after going through this process, or how, without using the discontinued questionnaire, it has evaluated whether the loans were necessary.

The Securities and Exchange Commission also issued inquiries to some companies about their representations to investors, but a spokesperson declined to say whether any enforcement actions had been taken as a result.

A former finance manager at one company that received millions in PPP money and hasn't paid it back said that he'd hoped the government would more closely examine his employer's finances.

“I remember that questionnaire coming out, and we were thinking, 'This might not get forgiven,' because our cash position was a lot better at the end of the year," the employee said. Since the questionnaire has been thrown out, he figures, companies that didn't need the cash will end up keeping it. “The only reason to give it back is public sentiment. At that point, it's free money."

Waste is inevitable in any economic rescue mission. But some of it is avoidable. Experts say Congress could have created a threshold of financial health at which PPP loans would have to be repaid — without denying the lifeline many firms needed.

“We're talking about a ridiculously low interest rate," Hempowicz said. “There is a benefit either way, especially for bigger companies, to have received these loans, even if they aren't then converted into grants."

All PPP loans were forgivable if the cash was mostly spent on payroll. If a company was still seeing steady business, it could use that freed-up income for other priorities, like paying off debt and buying other companies.

That's the happy outcome for many companies that performed well in 2020, often profiting from the very pandemic that they said put them in the position of needing a taxpayer bailout.

A chain of powersports dealers called RideNow collectively received $19 million, despite nearly tripling its net income from 2019 to 2020 as interest in motorbikes and all-terrain vehicles skyrocketed. In March 2021, the publicly traded online motorcycle sales platform RumbleOn announced it would acquire RideNow to create what it called the “only omnichannel customer experience in powersports and the largest publicly traded powersports dealership platform." RideNow's loans were fully forgiven in June, and RumbleOn's forgiveness application for its original $5.1 million loan is pending.

Other examples abound. Acme United Corporation saw its sales increase 15% in 2020 because of strong demand for first-aid supplies. Its $3.5 million loan was fully forgiven. So was the $2.7 million borrowed by Conifer Holdings, an insurance company that attributed revenue growth to lower claims by businesses that were temporarily shuttered but maintained their policies — which explicitly did not cover business interruption due to infectious diseases. And the ammunition manufacturer Ammo Inc. kept $1 million after seeing its revenues triple to $62.5 million in 2020, fueled by increased consumer demand for bullets. None of those companies returned requests for comment.

Public companies aren't the only borrowers that took more than they likely needed. Securities and Exchange Commission filings are also a window into privately held companies that have raised money in the public markets or later listed themselves on an exchange.

The venture-capital-backed person-to-person lending marketplace Prosper files earnings statements because it sells its loans to investors. The company had $64 million in unrestricted cash on hand at the end of 2019, but it still suspended its 401(k) match and cut salaries above $100,000 across the board in early 2020 — a collective reduction in compensation almost equal to the $8.4 million PPP loan it received. The pay cut also applied to the C-suite, but they had already received up to 10% base salary bumps in March 2020, so it hurt less.

In November, the company instituted a retroactive two-year bonus plan for executives — potentially totaling $3 million for five people.

Prosper did not respond to a request for comment, and its forgiveness request is still pending.

Some companies did pay the money back. At least 27 companies decided to do so while in the process of going public, since the sale of stock often generates large amounts of cash.

Luminar Technologies, an autonomous driving technology startup, gave back its $7.8 million before its Nasdaq debut.

“We decided to return the PPP loan as soon as we realized we didn't need it anymore," said Anthony Cooke, Luminar's vice president for policy and regulation. “We decided to apply for a PPP loan because it gave us the flexibility to withstand uncertain times while protecting our employees. We were able to protect employees, grow our business and take it public in 2020, and we repaid our PPP loan as soon as it was feasible."

Other companies kept the taxpayer money, even while paying off other debts.

That's what another company in the autonomous driving business did. A Ford-backed designer of sensors called Velodyne Lidar got $10 million in government money, which a spokesperson said was “used to support our employees during a time of uncertainty."

The company went public in September of last year, giving it $222 million in cash. The government forgave Velodyne's loan this June.

Battery-powered bus maker Proterra got $10 million. Its revenues increased last year, and it went public this year. The company decided to keep the money, which spokesperson Shane Levy said “supported our ability to maintain a full workforce as we've navigated the uncertainty caused by the COVID-19 pandemic." A Volkswagen- and UPS-backed self-driving truck company called TuSimple kept its $4.1 million after going public in a deal that generated about $1 billion; a spokesperson didn't respond to a request for comment.

Several companies hadn't yet had any income at all — they had been funded by investors through their entire existence, suggesting that they probably had access to other credit.

A pre-revenue electric vehicle maker called Faraday Future got $9.2 million. This past July, it launched a public offering that generated $1 billion; its loan forgiveness request is still pending. A spokesperson told ProPublica that the investor proceeds will be “budgeted to produce vehicles," not to pay back taxpayers. Space launch services company Astra took $4.9 million in government money. As it applied for forgiveness in June, it told investors that COVID-19 “has not materially affected our future growth outlook" and that it had seen “some signs of positive effects for its long-term business prospects and partnerships as a result of the pandemic." Astra's Nasdaq debut in July generated $463 million, and its PPP loan was forgiven last month. A spokesperson didn't respond to a request for comment.

Another category of large PPP recipients consisted of clinical and early commercial-stage medical device and pharmaceutical companies, which are heavily investor-backed and which sometimes profited from COVID-related activity. A biotech company called PolarityTE, which makes regenerative tissue products, cut staff by 47% in 2020 and raised revenues by 79% by serving as a COVID-19 testing lab. It received $3.6 million, which was forgiven; the company didn't respond to a request for comment.

Anything having to do with residential real estate also did well.

Fast-growing homebuilder Dream Finders Homes saw 52% earnings growth in 2020, which it attributed in part to pandemic-induced migration to suburban developments. It went public in January 2021, generating $134 million, and was granted full forgiveness on its $7.2 million loan. The company didn't respond to a request for comment.

The home improvement services platform Porch told investors that spiking home sales in late 2020 helped it rebound from a spring business dip. It applied for forgiveness for its $8.1 million PPP loan in December, the same month it debuted on Nasdaq. With $122 million of the proceeds from its IPO, it bought four other companies; it hasn't paid back the PPP loan, which was forgiven in June. A spokesperson declined to comment.

Finally, the type of companies that arranged the capital for all these public offerings and funding rounds — investment advisory firms — also dipped into the PPP.

Cohen & Company, a financial services firm with $2.8 billion under management, got $2.2 million. The firm saw dramatically higher income last year. Nearly all of its loan was forgiven. Another asset manager and investment banking firm, JMP Group, had $3.8 million forgiven despite having $50 million in cash at the end of 2019 and 15% revenue growth in 2020. Neither firm responded to a request for comment.

Some investment advisory firms may have used inflated claims. One study found that at least 6% of the $590 million granted to those firms was more than they could have justified given their payroll, which has to be reported to the SEC.

Writing laws is often a balancing act. One approach draws bright lines that lay out exactly what's required, which companies often figure out a way to game. The other leaves rules more vague, relying on the regulated party to abide by the program's intent. That eases the process for beneficiaries who really need help, but runs the risk the others will also benefit.

The PPP leaned toward the latter approach. It told companies that they probably shouldn't apply if they had other resources at their disposal, but gave them a window to do so if they wanted. In order to make that work, there would need to be a credible threat of enforcement, or at least public shaming if they took advantage of funds meant for the truly disadvantaged.

Erik Gordon, a professor at the University of Michigan's Ross School of Business, said the SBA should have held public companies to a higher standard of need and then audited them to ensure they'd been truthful.

“If I ran the SBA, I would say, 'You certified that this loan request was necessary — walk us through that. You had this much cash, or you had this much loan facility open or you had no trouble raising this money,'" Gordon said.

Of course, if you don't want public companies to apply, you could just bar them from applying. That's what Congress did when it created a second round of the PPP in December 2020. That time around, companies were also required to demonstrate that their revenues had declined substantially in at least one quarter in order to qualify.

Sam Rosen, a finance professor at Temple University who co-authored the study on public firm participation in the PPP, said it isn't that complicated. “If we were in a similar situation in the future, do we want public firms to have access to this?" he said. “I think it's just about being clear up front."

'Deely Nuts' and 'Beefy King': Hundreds of PPP loans worth $7 million went to fake farms in absurd places

Hundreds of PPP Loans Went to Fake Farms in Absurd Places

by Derek Willis and Lydia DePillis

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

The shoreline communities of Ocean County, New Jersey, are a summertime getaway for throngs of urbanites, lined with vacation homes and ice cream parlors. Not exactly pastoral — which is odd, considering dozens of Paycheck Protection Program loans to supposed farms that flowed into the beach towns last year.

As the first round of the federal government's relief program for small businesses wound down last summer, “Ritter Wheat Club" and “Deely Nuts," ostensibly a wheat farm and a tree nut farm, each got $20,833, the maximum amount available for sole proprietorships. “Tomato Cramber," up the coast in Brielle, got $12,739, while “Seaweed Bleiman" in Manahawkin got $19,957.

None of these entities exist in New Jersey's business records, and the owners of the homes at which they are purportedly located expressed surprise when contacted by ProPublica. One entity categorized as a cattle ranch, “Beefy King," was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township.

“There's no farming here: We're a sandbar, for Christ's sake," said Mancini, reached by telephone. Mancini said that he had no cows at his home, just three dogs.

All of these loans to nonexistent businesses came through Kabbage, an online lending platform that processed nearly 300,000 PPP loans before the first round of funds ran out in August 2020, second only to Bank of America. In total, ProPublica found 378 small loans totaling $7 million to fake business entities, all of which were structured as single-person operations and received close to the largest loan for which such micro-businesses were eligible. The overwhelming majority of them are categorized as farms, even in the unlikeliest of locales, from potato fields in Palm Beach to orange groves in Minnesota.

The Kabbage pattern is only one slice of a sprawling fraud problem that has suffused the Paycheck Protection Program from its creation in March 2020 as an attempt to keep small businesses on life support while they were forced to shut down. With speed as its strongest imperative, the effort run by the federal Small Business Administration initially lacked even the most basic safeguards to prevent opportunists from submitting fabricated documentation, government watchdogs have said.

While that may have allowed millions of businesses to keep their doors open, it has also required a massive cleanup operation on the backend. The SBA's inspector general estimated in January that the agency approved loans for 55,000 potentially ineligible businesses, and that 43,000 obtained more money than their reported payrolls would justify. The Department of Justice, relying on special agents from across the government to investigate, has brought charges against hundreds of individuals accused of gaming pandemic response programs.

Drawn by generous fees for each loan processed, Kabbage was among a band of online lenders that joined enthusiastically in originating loans through their automated platforms. That helped millions of borrowers who'd been turned down by traditional banks, but it also created more opportunities for cheating. ProPublica examined SBA loans processed by several of the most prolific online lenders and found that Kabbage appears to have originated the most loans to businesses that don't appear to exist and the only concentration of loans to phantom farms.

In some cases, these problems would've been easy to spot with just a little more upfront diligence — which the program's structure did not encourage.

“Pushing this through financial institutions created some pretty bad incentives," said Naftali Harris, the CEO of Sentilink, which helps lenders detect potential identity theft. “This is definitely a case where companies that decided they wanted to be more careful in terms of giving out loans were penalized for doing so."

Presented with ProPublica's findings, SBA inspector general spokeswoman Farrah Saint-Surin said that her office had hundreds of investigations underway, but that she did “not have any information to share or available for public reporting at this time." Reuters reported that federal investigators were probing whether Kabbage and other fintech lenders miscalculated PPP loan amounts, and the DOJ declined to confirm or deny the existence of any investigation to ProPublica.

Kabbage, which was acquired by American Express last fall, did not have an explanation for ProPublica's specific findings, but it said it adhered to required fraud protocols. “At any point in the loan process, if fraudulent activity was suspected or confirmed, it was reported to FinCEN, the SBA's Office of the Inspector General and other federal investigators, with Kabbage providing its full cooperation," spokesman Paul Bernardini said in an emailed statement.

As soon as the pandemic swept across America, Kabbage was in trouble.

The online lending platform had launched in 2009 as part of a generation of financial technology companies known as “non-banks," “alternative lenders" or simply “fintechs" that act as an intermediary between investors and small businesses that might not have relationships with traditional banks. Based in Atlanta, it had become a buzzy standout in the city's tech scene, offering employees Silicon Valley perks like free catered lunches and beer on tap. It advertised its mission as helping small businesses “acquire funds they need for their big breaks," as a recruiting video parody of Michael Jackson's “Thriller" put it in 2016.

The basic innovation behind the burgeoning fintech industry is automating underwriting and incorporating more data sources into risk evaluation, using statistical models to determine whether an applicant will repay a loan. That lower barrier to credit comes with a price: Kabbage would lend to borrowers with thin or checkered credit histories, in exchange for steep fees. The original partner for most of its loans, Celtic Bank, is based in Utah, which has no cap on interest rate, allowing Kabbage to charge more in states with stricter regulations.

With backing from the powerhouse venture capital firm SoftBank, Kabbage had been planning an IPO. Its model foundered, however, when Kabbage's largest customer base — small businesses like coffee shops, hair salons and yoga studios — was forced to shut down last March. Kabbage stopped writing loans, even for businesses that weren't harmed by the pandemic. Days later, it furloughed more than half of its nearly 600-person staff and faced an uncertain future.

The Paycheck Protection Program, which was signed into law as part of the CARES Act on March 27, 2020, with an initial $349 billion in funding, was a lifeline not just to small businesses, but fintechs as well. Lenders would get a fee of 5% on loans worth less than $350,000, which would account for the vast majority of transactions. The loans were government guaranteed, and processors bore almost no liability, as long as they made sure that applications were complete.

At first, encouraged by the Treasury Department, traditional banks prioritized their own customers — an efficient way to process applications with little fraud risk, since the borrowers' information was already on file. But that left millions of the smallest businesses, including independent contractors, out to dry. They turned instead to a collection of online lenders that have sprung up offering short-term loans to businesses: Kabbage, Lendio, Bluevine, FundBox, Square Capital and others would process applications automatically, with little human review required.

For the platforms, this was also easy money. In the first funding round that ran out last August, Kabbage completed 297,587 loans totaling $7 billion. It received 5% of each loan it made directly and an undisclosed cut of the proceeds for those it processed for banks; its total revenue was likely in the hundreds of millions of dollars. A lawsuit filed by a South Carolina accounting firm alleges that Kabbage was among several lenders that refused to pay fees to agents who helped put together applications, even though the CARES Act had said they could charge up to 1% of the smaller loans (a provision that was later reversed). For Kabbage, that revenue kept the company alive while it sought a buyer.

“For all of these guys, it was like shooting fish in a barrel. If you could do the minimum amount of due diligence required, you could fill up the pipeline with these applications," said a former Kabbage executive, one of four former employees interviewed by ProPublica. They spoke on the condition of anonymity to avoid retaliation at their current jobs or from industry giant American Express.

To handle the volume, Kabbage brought back laid-off workers starting at $15 an hour. When that failed to attract enough people, they increased the hourly rate to $35, and then $40, and awarded gift cards for reaching certain benchmarks, according to a former employee with visibility into the loan processing. “At a certain point, they were like, 'Yes, get more applications out and you'll get this reward if you do,'" the former employee said. (Bernardini said the company did not offer incentive compensation.)

In a report on its PPP participation through last August, Kabbage boasted that 75% of all approved applications were processed without human review. For every 790 employees at major U.S. banks, the report said, Kabbage had one. That's in part because traditional banks, which also take deposits, are much more heavily regulated than fintech institutions that just process loans. To participate in the PPP, fintechs had to quickly set up systems that could comply with anti-money laundering laws. The human review that did happen, according to two people involved in it, was perfunctory.

“They weren't saying, 'Is this legitimate?' They were just saying, 'Are all the fields filled out?'" said another former employee. As acquisition talks proceeded, the employee noted, Kabbage managers who held the most company stock had a built-in incentive to process as many loans as possible. “If there's anything suspicious, you can pass it along to account review, but account review was full of people who stood to make a lot of money from the acquisition."

One situation in which Kabbage approved a suspicious loan became public in a Florida lawsuit filed by a woman, Latoya Clark, who received more than $1 million in PPP loans to three businesses. When the funds were deposited into accounts at JPMorgan Chase, the bank discovered that Clark's businesses hadn't been incorporated before the PPP program's cutoff and froze the accounts. Clark sued Chase, and Chase then filed a counterclaim against the borrower and Kabbage, which had originated the loan despite its questionable documentation. In its response, Kabbage said it had not yet completed its investigation of the incident.

Although the Justice Department rarely names lenders that processed fraudulent PPP applications, Kabbage has been named at least twice. One case involved two loans worth $1.8 million to businesses that submitted forged information, and the other involved a business that had inflated its payroll numbers and submitted a similar application to U.S. Bank, which flagged authorities. Kabbage had simply approved the $940,000 loan. American Express' Bernardini declined to comment further on pending litigation.

Shortly after the application period for PPP's first round closed on Aug. 8, American Express announced the Kabbage purchase. But the transaction included none of Kabbage's loan portfolios, either from the PPP or its pre-pandemic conventional loans. The PPP loans had either been sold to SBA-approved banks or bought by the Federal Reserve. Bernardini wouldn't say which banks now own the loans, however, and said that no potentially fraudulent loans had been pledged to the Fed.

In April, an Ocean County, New Jersey, resident contacted ProPublica after seeing his name attached to a Kabbage loan for a nonexistent “melon farm." To see whether it was an isolated incident, ProPublica took basic information the government released after a Freedom of Information Act lawsuit by ProPublica and others and compared it with state business entity registries. Although registries don't pick up all sole proprietorships and independent contractors, the absence of a name is an indication that the business might not exist.

As it turned out, Kabbage had made more than 60 loans in New Jersey to unlisted businesses. Fake farms also showed up repeatedly in the SBA's Economic Injury Disaster Loan Program, according to reports from localnewsoutlets.

A common tie became apparent when the resident of the home to which one nonexistent business was registered said that he was a client of the certified public accountants at Ciccone, Koseff & Company. In March 2020, the firm notified its clients of what it called an “ultimately unsuccessful ransomware attack" that occurred the previous month. According to information filed with Maine's attorney general, the attackers acquired Social Security numbers and financial information.

Several other clients of the accounting firm, including Mancini, the Long Beach mayor, also had loans registered to their addresses. Reached by phone, firm founder Ray Ciccone declined to comment.

But that CPA's data breach didn't account for all of the suspicious loans ProPublica found across the country. Searches for PPP applicants that didn't show up in state registration records yielded hundreds in 28 more states, with dense clusters in Florida, Nebraska and Virginia. Other lenders had nonexistent businesses as well, but fake farms only showed up in Kabbage loans. Most followed a distinctive naming convention, with part of the name of a resident or former resident of the home to which the business is registered, plus a random agricultural term.

Some of the fake loans listed addresses of people who'd also legitimately applied for their businesses. Hartington, Nebraska, anesthesiologist Bruce Reifenrath received a PPP loan for his practice in nearby Yankton, South Dakota. That's why the idea of one being approved for a “potato farm" was so strange. “We did a PPP loan last spring and it's pretty extensive, the documentation," Reifenrath said.

Reifenrath was part of a cluster of dubious Kabbage loans in Hartington that also included the home of J. Scott Schrempp, the president of the Bank of Hartington, who confirmed that he did not own a strawberry farm. Schrempp said he had noticed the fake loan, and reported it to the SBA.

The SBA data only reflects approved applications received from lenders, some of which are then caught and not funded. The SBA also periodically updates its dataset to remove loans canceled by lenders. But none of the suspicious loans pulled by ProPublica show undisbursed funds, and they all have remained in the dataset for more than eight months.

One possible mechanism for the invented businesses is a technique known as synthetic identity theft, in which a criminal obtains pieces of personally identifiable information — such as a home address, a Social Security number and a birthdate — and combines it with fake information to build a credit profile. The associated bank account then routes to the fraudster, not the owner of the original information.

None of the residents of the phony farms ProPublica contacted were getting notices that they needed to repay the loans they didn't apply for, because they didn't get any money. But that doesn't mean they're not at risk, according to James Lee, chief operating officer at the Identity Theft Resource Center.

“Just having an address linked to your name on a fraudulent loan can impact your credit," Lee said. It can also pose problems for pre-employment background checks, insurance applications or new identification documents like passports and driver's licenses.

Meanwhile, if not corrected, the fabricated identities will stay in circulation and become better at fooling other financial institutions. “Those records get built into the credit and authentication systems used by government and commercial entities," Lee said. “Each next time they are used and authenticated, the more 'real' they become. That's what makes synthetic identity fraud so insidious."

This, however, is largely not Kabbage's problem anymore.

After its huge blitz of PPP loans last summer, Kabbage had hundreds of thousands of borrowers whose loans would need to be serviced until they were closed out. The loans could either be forgiven, if the borrower demonstrated that they spent most of the money on payroll, or paid back with interest. To finish the job, American Express spun off a separate entity called K Servicing, which would also take applications for a second PPP draw that Congress funded in December. The new entity is led by former Kabbage employees and its website looks very similar to Kabbage's, but American Express says it has no affiliation.

If Kabbage was understaffed for the volume of PPP loans it took on before the acquisition, the situation has apparently worsened since then. Reddit, Yelp, Consumer Affairs, Trustpilot, Facebook and Better Business Bureau threads are replete with complaints from customers whose applications were denied or who received no communication from the company. When the SBA changed the rules in February to make the program more generous to independent contractors, K Servicing couldn't incorporate the new forms into its processing system. So it told all new applicants to apply through another company, SmartBiz, which had operated as a mostly online processor of SBA loans even before the pandemic.

K Servicing is run by Kabbage's former head of program management, Laquisha Milner, who also runs her own consulting firm. “Due to extenuating circumstances beyond our control, currently, our processing function is delayed," Milner emailed in response to detailed questions from ProPublica. “We are relentlessly exploring all available options to ensure our existing customers are able to maximize their loan forgiveness."

Jennifer Dienst is a freelance travel and events writer who received her first-draw loan from Kabbage and wants to apply for forgiveness before her window for doing so closes in the fall, but she has been stymied by K Servicing's failure to make the forms available. “Please be patient with us as we prepare for the new forms," a message on the loan portal reads.

Meanwhile, Dienst's account has started accruing interest, which Milner said will not be charged if the loan is forgiven. But it's making Dienst nervous.

“It's always the same response from K Servicing — we're updating our forgiveness forms and they'll be made available soon," Dienst said. “They've been saying that for months."

The federal government will now give PPP loans to borrowers in bankruptcy

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Series: The Pandemic Economy

Fiscal Responses to COVID-19

The federal government has quietly reversed course on a policy that had kept thousands of businesses from applying for pandemic economic aid, with only weeks to go before funds are expected to run out.

In late March, ProPublica reported on a Small Business Administration rule that disqualified individuals or businesses currently in bankruptcy from getting relief through the Paycheck Protection Program, an $813 billion pot of funds distributed to small businesses in the form of loans that are forgiven if the money is mostly spent on payroll. The agency had battled in court against several bankrupt companies attempting to apply for PPP loans, and did not change course even after Congress explicitly passed legislation in December allowing it to do so.

Referencing ProPublica's story, the National Association of Consumer Bankruptcy Attorneys wrote a letter to newly installed SBA Administrator Isabella Guzman urging her to follow Congress' suggestion and tell the Executive Office for U.S. Trustees — a division of the Justice Department that oversees most American bankruptcy courts — to allow debtors to receive PPP loans.

The agency has not yet contacted the Justice Department. But on April 6, the SBA released new guidance as part of its frequently asked questions for the program, redefining what it means to be “presently involved in any bankruptcy." Under the new interpretation, debtors who filed under Chapter 11, 12 and 13 — which cover businesses, family farms and individual consumers, respectively — are eligible for PPP loans once a judge has approved their reorganization plan. A spokesperson for the SBA said the explanation had been added for “clarity."

A reorganization plan specifies the debtor's path to paying off obligations to creditors, and is monitored by a trustee. In simple cases, a judge can confirm it within a few months of filing. This is what often happens in consumer Chapter 13 cases, about 279,000 of which were filed in 2019, as well as in relatively straightforward Chapter 11 cases that don't require extensive litigation. About 5,500 companies filed for Chapter 11 in 2019.

The Administrative Office of the U.S. Courts doesn't track how many of those companies have confirmed reorganization plans in place, but it's estimated to be in the thousands. Now, companies on the road out of bankruptcy — which usually takes years to complete — can apply for PPP loans before the program's May 31 deadline. With $50 billion left after several extensions, PPP funds are likely to run out before then.

Ed Boltz, a bankruptcy attorney on NACBA's board who circulated the organization's letter, said he believes the SBA changed its position after becoming “aware of the foolishness of the prior administration's position."

The change would not have helped all the companies that sued the SBA over its policy. Florida-based Gateway Radiology Consultants, for example, didn't have a confirmed reorganization plan before it applied for a PPP loan last year, prompting a lawsuit. But the bankruptcy lawyer in that case, Joel Aresty, said plenty of his current clients could benefit.

“If they were lucky enough to already be confirmed, they could freely qualify for a PPP loan — the fact that you were in bankruptcy is no longer a deterrent," Aresty said. “It's amazing how difficult they made such a simple proposition, really."

The new definition may now help Mark Shriner, a coffee shop owner in Lincoln, Nebraska, who filed for Chapter 13 bankruptcy in 2018 following a divorce. His plan was confirmed the same year. The SBA's exclusion of debtors from the PPP originally prevented him from applying, forcing him to take on higher-interest loans to keep his doors open.

His cafe likely would have qualified for up to $25,000, and Shriner said he could have used some of the money to improve his online ordering or devise a takeout-friendly menu. Even now, he said, getting PPP money would help him plan for the future and bring back more staff.

Informed of the change last week, Shriner sent an application to his bank, which said it would hear back from the SBA within a couple weeks.

“Wow," Shriner said. “That would be great."

How a federal agency excluded thousands of viable businesses from pandemic relief

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

Series: The Pandemic Economy

Fiscal Responses to COVID-19

Like every other storefront in downtown Lincoln, Nebraska, the Coffee House — a cavernous student hangout slinging espresso and decadent pastries since 1987 — saw its revenue dry up almost overnight last spring when the coronavirus pandemic made dining indoors a deadly risk. Unlike most, however, the business wouldn't have access to the massive loan fund that Congress made available for small enterprises in late March.

This article originally appeared on ProPublica,.

The reason had nothing to do with the business itself, which had been having one of its best years ever, according to its owner, Mark Shriner. Rather, it all came down to one box on the application for the Paycheck Protection Program money, which asked whether the company or any of its owners were “presently involved in any bankruptcy." Shriner had filed for Chapter 13 in 2018 after a divorce and was still making court-ordered debt payments, so he checked “yes." He was automatically rejected and lost about $25,000 in payroll and other costs that the program would have covered.

“My money is my store's money. When I got divorced and she was entitled to half, it's not like a company can raise money real quick," Shriner said, noting the way in which many small businesses are structured as pass-through entities that pay taxes on any profits as individual income. “All these businesses that had a tough time and are trying to make payments at the same time are getting kind of hosed."

Thousands of people file for Chapter 13 bankruptcy every year — 282,628 did so in 2019 alone. Although it's not clear how many of them own businesses, all of those individuals were barred from the PPP program, along with the thousands of businesses currently working through a reorganization plan under Chapter 11 and the family farms that file under the lesser-known Chapter 12.

In December, Congress allowed the Small Business Administration to give exceptions to some debtors. But so far the SBA has stuck to its position that debtors in bankruptcy aren't entitled to government aid. “Currently, the SBA is administering the law as written," SBA spokeswoman Shannon Giles emailed in response to questions.

Although Shriner did receive the $10,000 Economic Injury Disaster Loan advance payment, which doesn't have to be repaid, the SBA turned him down for a larger Economic Injury Disaster Loan because of his personal credit. Instead, he took out two loans worth $107,000 from Square — with total fees of nearly $12,000 — to keep the lights on and the staff paid as they operated on a drastically limited basis, still down by more than half since before the pandemic.

“The biggest consequences are that we haven't had the time to take a week and shut down and plot our way forward, come up with a to-go menu or some new things, because we're busy working the counter trying to save money," Shriner said. “A lot of other businesses that got PPP have been able to hire people to help them head in a different direction, get apps made, fix their websites, that kind of thing."

The prohibition on PPP loans going to debtors began with the SBA's original concept for the program: It extended its 7(a) loan program, its most common credit offering for small businesses, which already bars bankrupt companies. New pandemic relief measures were basically grafted on to those rules, which reflect an agency position dating back to its beginnings in the 1950s that bankrupt companies were more likely to default.

“SBA has an institutional prejudice against people who file bankruptcy," said Ed Boltz, a North Carolina bankruptcy lawyer who serves on the board of the National Association of Consumer Bankruptcy Attorneys. “The attitude of government in a lot of things is, 'Bankruptcy is hard and confusing and these people are probably bad people.'"

Almost immediately, this position was challenged in courts across the country. In Hidalgo County, Texas, for example, an emergency medical transportation company in bankruptcy sued after it was denied a PPP loan. A bankruptcy judge issued a temporary injunction against the SBA, saying it was in the public interest during the pandemic to make sure the company's trucks and helicopters could keep ferrying patients to hospitals. In June, the 5th U.S. Circuit Court of Appeals vacated that decision, saying the judge had exceeded his authority.

Meanwhile, the SBA hastily published a rule explicitly barring companies in bankruptcy from participating in its pandemic relief program. “The Administrator, in consultation with the Secretary, determined that providing PPP loans to debtors in bankruptcy would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans," the rule read. “In addition, the Bankruptcy Code does not require any person to make a loan or a financial accommodation to a debtor in bankruptcy."

Around the same time, a Florida radiology center also serving COVID-19 patients received a PPP loan, even though it was reorganizing under Chapter 11 bankruptcy. When it filed for approval with its bankruptcy court to take on the additional debt, the SBA objected again. The bankruptcy court found in favor of the radiologists in June, writing that “it is plain Congress did not intend to exclude chapter 11 debtors from the Paycheck Protection Program." In December, however, the 11th Circuit overturned the lower court and sided with the government.

Maury Udell, the radiology company's lawyer, said he plans to appeal to the Supreme Court. The PPP is more of a grant than a loan, he argues, since all companies had to do in order for the money to be forgiven is spend most of it on payroll. Bankrupt companies are arguably more likely to do so, given that they're on court-ordered plans for how they must manage their expenses. Besides, the program did not require that companies demonstrate their ability to repay — plenty of businesses on very shaky footing applied for and received funding, sometimes filing for bankruptcy later.

“The SBA's argument for not allowing Chapter 11 debtors is that the risk of nonpayment is high," Udell said. “That's not a factor in whether you were approved. It's just as high as anyone else, because there's no other underwriting guidelines."

Frustration with the SBA's position mounted through the fall until December, when Congress passed a fresh round of $900 billion in pandemic-related relief, along with the regular budget. It included $285 billion for a second draw of PPP loans, and a bit of potential relief for debtors: an amendment to the U.S. Bankruptcy Code that allows PPP loans to businesses that have filed for bankruptcy under Chapters 12, 13 and Subchapter V, a new category for small businesses established in 2019. (Chapter 11 debtors were left out.)

However, there was a catch: In order to trigger the exemption, the SBA would have to write a letter to the Executive Office of the U.S. Trustee, an division of the Justice Department that oversees U.S. bankruptcy courts, alerting it to the change. So far it has not done so, even as Congress has extended the deadline for PPP applications to May 31, with $103 billion in authorized funds yet to be expended.

President Joe Biden's choice to run the SBA, Isabella Guzman, was confirmed on March 16. The SBA would give no indication of whether she plans to change course. Spokespeople for senators on the committees of jurisdiction either had no comment or said they were looking into the issue.

Last week, as his hope of getting a PPP loan waned, Mark Shriner set up a GoFundMe page to try to keep his doors open. More than $21,000 has flowed in. Meanwhile, he also learned about the Restaurant Revitalization Program established by the $1.9 trillion American Rescue Plan. So far, since it's a straightforward grant rather than a loan, it doesn't seem to prohibit applications from companies — or company owners like him — who've filed for bankruptcy. But he's not counting on anything, since aid programs have been so disappointing.

It's a difficult contrast, he said, when he looks around town and sees all the federal money that helped people who didn't always need it.

“I'm not a wealthy person at all, but I have many millionaire friends who own businesses, insurance firms, architecture firms," Shriner said. “These millionaires got money and money and money and money from the government, and they're all driving on the golf course. It is tough when I think about it."

'We’re on the point of attack': Steve Bannon fanned the flames of insurrection — will he be stopped?

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Late at night on Jan. 5, the day before President Donald Trump was scheduled to deliver a defiant speech before thousands of his most dedicated supporters, his former adviser Steve Bannon was podcasting from his studio near Capitol Hill. He had been on the air several times a day for weeks, hyping the narrative that this was the moment that patriots could stand up and pull out a Trump win.

“It's all converging, and now we're on the point of attack tomorrow. It's going to kick off, it's going to be very dramatic," Bannon said in his fluent patter, on a day that would see four of his “War Room" shows posted online, up from his usual two or three. “It's going to be quite extraordinarily different. And all I can say is strap in. You have made this happen and tomorrow it's game day."

The next morning Bannon was back. “We're right on the cusp of victory," Bannon said, as protesters massed at the Ellipse to hear from Trump.

“This is not a day for fantasy, this is a day for maniacal focus. Focus, focus, focus," Bannon went on. “It's them against us. Who can impose their will on the other side."

To the protesters massing in Washington, Bannon's message was clear: They could force the outcome by pressuring Vice President Mike Pence and Congress not to certify the electoral vote.

Ultimately, the day resulted in a bloody brawl that took the lives of both police and protesters, in a security breach unlike any America has seen in decades. It was planned in explicit detail across websites that were taken offline, like Parler, or censored, as Twitter did with thousands of QAnon-affiliated accounts and even the president's.

But Bannon, who himself was banned from YouTube and Twitter after saying in November that Dr. Anthony Fauci and FBI Director Christopher Wray should be beheaded, continues to reach an enormous audience via Apple's podcast app, which is installed by default on every iPhone. Although the app doesn't show the number of times the show has been streamed, Bannon gives updates every few days on its popularity. As of last week, he claimed total downloads of 29 million.

Bannon did not respond to a request for comment.

It's not just Bannon. Several podcasts that spread baseless claims of election fraud, including shows by former Trump strategist Sebastian Gorka and Judicial Watch's Tom Fitton, continue to be broadly available on major platforms. The fact that such beliefs were the battle cry of a violent mob that threatened congressional leaders has brought podcasting platforms face to face with a difficult question: What are their responsibilities when it comes to stifling what otherwise could be seen as protected speech?

In the weeks since Nov. 3, Bannon has spent several hours a day exploring the minutiae of baselessly disputed elections in several states, giving ample airtime to Trump defenders like Rudy Giuliani, Sidney Powell and presidential adviser Peter Navarro. Using a mix of football, military and religious analogies, Bannon speaks often in apocalyptic terms about the risk of losing.

“It's the children of light and the children of darkness," he said on Jan. 3, after interviewing the right-wing Archbishop Carlo Maria Viga, whom Pope Francis fired as the Vatican's ambassador to the United States after he sided with anti-gay culture warriors. “One side's going to win and one side's going to lose. Everything that the Judeo-Christian West represents is at stake. That's what this battle is about. That's what Wednesday is about."

While social media companies have become more willing over the past few months to censor accounts that engage in hate speech, podcasts are still largely unmoderated. Part of that has to do with the industry's structure: The main podcast portals merely index the shows, like Google indexes websites. Despite canceling Bannon's YouTube channel, Google Podcasts still indexes “War Room." (Apple accounts for more than half of the number of podcast streams, with Spotify a distant second.)

“Online platforms know that rhetoric promoting violence and disinformation absolutely matters. That is why most of them ban such activities in their own terms of service," said Megan Squire, a computer science professor at Elon University who has studied the right-wing podcasting ecosystem.

“However, in the case of podcasts, Apple usually explains that they are just cataloging the show and not actually distributing it," Squire said. “For example when they banned Alex Jones, they just stopped listing him, but what guidelines they used were a bit unclear. Contrast this to their app store guidelines, which are very clear."

Apple declined to comment on how it evaluates whether to de-list a podcast. Its terms of service prohibit “content that is illegal or promotes illegal activity, self-harm, violence, or illegal drugs, or content depicting graphic sex, gore, or is otherwise considered obscene, objectionable, or in poor taste."

Audio files themselves are supported by a much more fragmented network of hosting services — which costs money, unlike simply being catalogued by a portal like Apple's. “War Room" is hosted by Podbean, which did not return a request for comment. Its terms of service forbid content that is “malicious, false, or inaccurate."

To be clear: Since his “heads on pikes" episode, Bannon has shied away from advocating violence. He sometimes caveats his calls to arms by cautioning that he's talking about political protest or “coloring inside the lines." He has downplayed allegations against Dominion Voting Systems, which threatened to sue other Trump allies and news outlets for spreading baseless claims of fraud. In the wake of Jan. 6, like many in the right-wing media ecosphere, he has praised peaceful protest and claimed the riot was instigated by liberal agents provocateurs rather than Trump supporters.

However, extremism experts say the rhetoric still feeds into an alternative reality that breeds anger and cynicism, which may ultimately lead to violence. Julia DeCook, an assistant professor at Loyola University Chicago's school of communications, notes that listeners who are convinced about one conspiracy theory are more likely to accept others, which is what makes more mainstream commentators like Bannon “dangerous."

“It's not like they hit you with the crazy stuff all at once. It's the little things that sow distrust and skepticism," DeCook said. “Steve Bannon goes right up to the line of what is acceptable and what is hate speech. But platforms are really bad at understanding borderline content."

Bannon seems to understand very well how the information he's putting out in the world influences his audience. On the eve of the Capitol riot, one of his co-hosts interviewed a young man at a pregame rally in downtown Washington who said his whole family had been dejected after the election. After discovering “War Room," they were increasingly encouraged and listened to every episode, resulting in his presence at Freedom Plaza that night. The “War Room" crew celebrated this exchange as evidence of its impact.

“As soon as you're able to create the structure or the context, and let them come to their own conclusions, they're going to be able to have their own mental map, they can then start making their own decisions, and then become disciples or force multipliers," Bannon said. “We've helped provide the information to people who are jacked up."

(Of course, Bannon also has an interest in helping Trump, who could still use his pardon powers to dismiss a federal charge concerning Bannon's alleged misuse of funds donated to a charity that said it was helping to build a wall on the border with Mexico.)

De-platforming Bannon, however, would be tricky.

Podcast directories and hosting services are loath to open the Pandora's box of content moderation. Todd Cochrane runs one of the largest, called Blubrry, which hosts 85,000 shows and indexes 1.3 million of them. Since Jan. 6, he said that many of his customers — especially Christian shows — are worried about being de-listed from other podcast directories. As long as they aren't using hate speech or inciting violence, which Blubrry's terms of service forbid, he said they're safe on his platform.

“This is a fine line for us," Cochrane said. Blubrry has a formal process for submitting complaints about shows with objectionable content and has only ever removed a handful. “Let's say I respond to a social justice campaign saying this show is ultimately resulting in violence. It's an internal decision of whether or not we want to host that content, but I wouldn't want to be in Podbean's position today."

Even if “War Room" were kicked out of Apple's directory or dumped by Podbean, that might fuel the argument — which Bannon has already exploited after being booted by Twitter and YouTube — that Big Tech has it out for conservatives. Plenty of liberal-leaning shows aren't paragons of truth either, but they haven't been banned.

“The inconsistency is a huge catalyst for these folks, because it gives them an endless supply of pretty accurate grievances to raise about 'why are we being shut down in this way,'" said Peter Simi, an associate professor of sociology at Chapman University. “It amplifies their sense that there's this left-wing conspiracy that's hell-bent on preventing them from even expressing their views."

Though Apple offers access to an enormous audience, it may only be a matter of time before Bannon and others are able to build up an alternative streaming universe that doesn't depend on the grace of Silicon Valley tech giants. On Jan. 13, Bannon talked on his show with Andrew Torba, the founder of, which has become a haven for conspiracy theorists. Torba boasted of having built up enough of his own data-center capacity to support all of the traffic from people leaving Twitter and Facebook, but service is still groaning under the weight of new traffic. In emails to Gab members, Torba has been soliciting donations to support the expansion. “No one is coming to save us," he wrote on Jan. 8. “We must save ourselves."

“It's a conundrum, because now you have the right wing moving into their own silos," said Adele Stan, the editor of Right Wing Watch, a project of the left-leaning People for the American Way. “The thing we know about the right is that they're good at building infrastructure, in the way that the left has never gotten their act together on. We're just at this moment of chaos where it's hard to know if there's a base that's radicalized enough to be there for the long haul, when things start to not look very good for their side."

In the meantime, Bannon seems to know exactly how far he can go before his remaining platforms have an excuse to yank his access.

Also on Jan. 13, having just been booted off YouTube after the site banned videos that spread false election fraud statements, Bannon again had Giuliani as a guest. The leader of Trump's legal team said he had acquired videos showing “Antifa" agitators leading the Capitol violence, and at one point he suggested that one of them had actually shot Ashli Babbitt, the Air Force veteran who was, in fact, killed by a Capitol Police officer.

Bannon tried to rein in Giuliani and finally cut him off. “I don't mind being shut down for my craziness, but I'm not going to be shut down for yours," he told the former New York City mayor, who seemed offended. “I don't say crazy things," Giuliani responded, after Bannon had directed listeners to Giuliani's website to view the videos.

“I know, I'm teasing you," Bannon said.

Consortium of news organizations wins legal fight against Small Business Administration

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

After a monthslong legal fight over the transparency of one of the federal government's largest coronavirus relief programs, a judge in Washington required the disclosure of data on thousands of smaller business loan recipients.

The Small Business Administration's Paycheck Protection Program, created by the Coronavirus Aid, Relief, and Economic Security Act in March, has so far dispensed more than $525 billion in loans that can be forgiven if the money is mostly spent to keep employees. The Treasury Department originally declined to release the names of borrowers, maintaining that doing so would expose “proprietary information."

In May, ProPublica, together with several of the nation's largest news organizations, filed a Freedom of Information Act lawsuit to obtain the information. Two months later, the SBA released information on 650,000 businesses that received loans in amounts between $150,000 and the maximum of $10 million, representing a fraction of the total number of borrowers.

But the SBA only disclosed the loan amounts in broad ranges, saying that to be more specific would reveal confidential information about the businesses' payrolls, and it declined altogether to release borrower-level data on 4.5 million loans worth less than $150,000. It also withheld information on sole proprietorships and independent contractors receiving Economic Injury Disaster Loans, a program that disbursed $192 billion in total, saying that to do so would violate the recipients' privacy rights.

On Thursday, District of Columbia Circuit Judge James Boasberg rejected that contention, noting that borrowers had been informed via the loan application that such data could be revealed as a result of a FOIA lawsuit. The program is at significant risk of fraud, he added — in September, the Justice Department charged 57 people with violating the rules — and would therefore benefit from additional scrutiny.

“The significant public interest in shedding light on SBA's administration of the PPP and EIDL program dramatically outweighs any limited private interest in nondisclosure," Boasberg wrote.

The order requires the SBA to release the names, addresses and precise loan amounts of all PPP and EIDL borrowers by Nov. 19.

The previously released data (which ProPublica has collected into a searchable database) illuminated widespread abuse of the program, from businesses that took out more loans than they should have using multiple subsidiaries, to temporary help agencies that got outsized loans because their contracted workers were technically on their payroll. The data also helped to expose deep inequities in how the program was administered, with minority-owned businesses disproportionately receiving assistance late or not at all.

How Trump's trade representative blew up 60 years of trade policy

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

On a spring day in 2017, Robert Lighthizer walked through the doors of the office of the United States Trade Representative to introduce himself to the career staff who had shepherded American trade policy for a generation. After a chaotic few months awaiting Lighthizer's confirmation, officials were eager for stability; Lighthizer offered deep expertise in a cabinet full of government neophytes. As a Washington operative with years of experience in international trade, he seemed like the best appointment they were likely to get under the circumstances.

There was, nonetheless, considerable apprehension among the few hundred USTR staff gathered in the auditorium. President Donald Trump had built his campaign on scathing criticism of the treaties the people in the room had forged over years of hard work. “Free trade can be wonderful if you have smart people," Trump had said, the very first time he rode down the escalator in Trump Tower to announce his candidacy. “But we have people that are stupid."

Lighthizer offered a conciliatory tone at that first meeting — acknowledging, one official said, “that he would have a different approach that some of us might disagree with, but that he would be open to hearing our views.'' Remembered another: “He set out the broad goals of righting the wrongs that had been visited upon us but also tried to be reassuring and respectful of staff capabilities."

Over the next 3½ years, Lighthizer did listen to the staff he inherited. But this child of the Rust Belt, whose views were honed through years of fighting unfair practices by America's trading partners, made it clear he shared Trump's critique of U.S. trade policy in substance, if not tone.

Lighthizer set out on an audacious plan to rebalance American trade relationships around the world, levying sweeping tariffs, hamstringing international institutions, pulling out of agreements and threatening to ditch even more. His boss, a self-styled dealmaker, loved the tactics. Lighthizer delivered what Trump demanded and did it without claiming credit — preserving his post while other White House personnel came and went.

With the election just a few weeks away, it's worth taking stock of how this signature element of the Trump agenda has worked out. This story is based on interviews with dozens of current and former career staff at USTR, their counterparts in other countries, and interest groups — most of whom spoke on the condition of anonymity to preserve relationships with the Trump administration. Lighthhizer himself declined to be interviewed, as did most of his former top deputies.

The picture that emerges is complex. Even critics of the administration said that Lighthizer had a point when he argued that the gentler tactics of his predecessors had not been effective. And they acknowledge that the once-obscure USTR is more powerful than it's ever been, its mission reoriented from easing corporate investment barriers overseas to erecting hurdles that might force those companies to keep jobs in America after decades of manufacturing decline.

Along the way, Lighthizer has bent the rules of the international trading system and thrown businesses into turmoil as they race to comply with changes to import costs. He's ruptured international relationships, maintained tariffs on $350 billion worth of imports, and constructed a series of piecemeal and delicate agreements with trading partners that are as good as the next president's dedication to enforcing them.

So far, the promised benefits of this upheaval are hard to see. The gap between American imports and exports of goods is as big as it's ever been, while manufacturing output and job growth flatlined in 2019. To the extent that manufacturers have pulled out of China, they've shifted to countries like Vietnam and Mexico, rather than set up factories in the U.S. And Lighthizer has failed to achieve his most ambitious goals, as a tempestuous president's abrupt twists and turns sabotaged the patient, insistent approach on which his trade representative had built his reputation.

In their defense, turning the ship of global trade may take more than one four-year term. Lighthizer's stated goal is to return to a world in which everyone plays by the same rules, without the need for punitive barriers, and it's possible he could get there with time.

But it doesn't look likely. Lori Wallach, who runs the Global Trade Watch arm of the liberal watchdog group Public Citizen gives Lighthizer credit for trying to break down the mainstream bipartisan consensus that freer trade is always better. Still, she thinks that Trump's tactics have undermined his goal of reviving America's industrial might.

“Lighthizer has changed a lot of thinking in dramatic ways, which is terrific," Wallach said. At the same time, she acknowledged, “he has not been able to reverse decades of boneheaded, job-killing trade policies, such that we still see a trade deficit today that's bigger than when Trump took office, and ongoing outsourcing of jobs, despite good efforts to try and turn around a mess."

The Petitioners Bar

Despite spending his entire career in Washington, for the last few decades, Lighthizer's skeptical views of trade set him apart from the consensus that saw the North American Free Trade Agreement and other treaties passed with the enthusiastic support of both parties.

A native of Ashtabula, Ohio, on the shores of Lake Erie, he grew up in relative affluence, insulated from the struggles of a region in the throes of a massive steel industry contraction. A product of Catholic schools, Lighthizer headed to college at Georgetown, and stayed there for law school. He then worked at the prestigious firm Covington & Burling until 1978, when Republican Senator Bob Dole of Kansas asked a partner there for any smart conservative lawyers who might join his Finance Committee staff. He became Capitol Hill's youngest staff director, and positioned himself squarely in the middle of the conservative mainstream, paring budgets and shepherding Ronald Reagan's massive tax cut package through Congress.

In 1983, he joined Reagan's White House as deputy trade representative, which required tackling everything from a grain treaty with the Soviet Union to textile imports from China. But he focused in particular on protecting industrial giants, some in his home state, from Japanese competition. Access to the U.S. market, he recognized, was a big enough carrot to extract concessions from trading partners.

''I try to be friendly in negotiations,'' he told The New York Times in 1984. ''I'm not the theatrical type. The art of persuasion is knowing where the leverage is.''

Ultimately, import quotas on Japanese steel and cars didn't save the Rust Belt — Japanese automakers simply set up shop in the union-free American South, while robots thinned the ranks of workers needed on factory floors.

Lighthizer's divergence from conservative orthodoxy began in the 1990s, when the Republican Party left him, and embraced the orthodoxy that globalization and national specialization were all to the good.

After leaving government, Lighthizer joined Skadden Arps Meagher & Flom, becoming a heavy-hitting tax lobbyist known for his deep expertise and quick wit. As the tax revision wars wound down, he refocused on trade, representing a coalition of American steel companies charging foreign competitors with benefitting from unfair practices like government subsidies. Lighthizer became known as the unofficial king of “the petitioners bar," lawyers who argued cases before the government entities that enforce trade rules. It was hardly a glamorous field. Moving plants to cheaper locales all over the world was rapidly becoming the default setting for American companies, and plenty of attorneys were making good money helping them do it.

“The message Bob had was not one that the big business groups were supportive of," said Terry Stewart, a longtime trade lawyer who worked with Lighthizer. “That led to a failure of the mainstream business community and economists and politicians to recognize the challenges that led to the disenfranchisement of blue collar workers."

Members of the petitioners bar are often true believers, since they've been up close and personal with the crippling wage pressure, intellectual property theft and illegal subsidies that left American factories so vulnerable to imports. Lighthizer fought ferociously before the International Trade Commission, once arguing that suffering anything more than a “spiritual injury" at the hands of foreign steelmakers should entitle his clients to protection. (The Commission didn't buy it.)

Lighthizer became increasingly outspoken after China joined the World Trade Organization in 2000, heralding a steep decline in U.S. manufacturing jobs as companies rushed to the factory boomtowns of Guangzhou and Shenzhen. Testifying before the U.S.-China Commission in 2010, Lighthizer scolded policymakers for “years of passivity and drift" toward China and urged a more aggressive approach. In 2008 and again in 2011, he wrote op-eds making the point that Reagan had been more than willing to throw up trade barriers to defend domestic producers.

For Lighthizer, the issue of the WTO is personal. The multilateral body ruled against the U.S. — and Skadden's clients — in numerous cases involving subsidy calculations. For the petitioners bar, it made the WTO's highest appellate court untenable.

“The fact that the Appellate Body had ruled against the U.S. repeatedly was the primary reason Lighthizer was determined to bring down the WTO," said a former USTR official.

Despite Lighthizer's tangles with chamber of commerce types, he breezed through Senate confirmation hearings in March 2017 by promising vigorous enforcement of existing trade agreements, drawing praise from both arch free-trader Orrin Hatch and fellow Ohioan Sherrod Brown.

The honeymoon would end quickly.

“It Was Like Someone Had Died"

Created by the Trade Expansion Act of 1962, the USTR has a clear if dated mission: To develop “open and non-discriminatory trading in the free world; and to prevent communist economic penetration."

The law reflected a broad consensus in favor of expanded trade. From the staunchly conservative Wall Street Journal editorial pages to top Democratic advisers, most believed that the benefits of open markets far outweighed the costs. Those who disagreed were dismissed as xenophobic and unsophisticated. Decades later, Donald Trump blamed NAFTA for a host of ills — from the rise of automation to the decline of unions — and it helped him win traditionally Democratic states like Michigan and Pennsylvania.

To be fair, conventional wisdom had begun to shift under President Barack Obama, as it became increasingly clear even to free-trade advocates that U.S. efforts to prevent China from flouting international rules and norms weren't working.

Obama spent much of his second term negotiating a trade pact with 12 other Pacific Rim countries, with the idea of creating a U.S.-centered economic bloc to counter China's influence, and tried to sell it to Congress. The Trans Pacific Partnership marked a rare point of agreement with Republican leadership, but an alliance of labor-oriented progressives and tea party conservatives opposed it. As trade emerged as a potent issue in the 2016 campaign, even the Democratric candidate Hillary Clinton — Obama's former secretary of state — was forced to turn against it as well.

Trump's surprise triumph in the election sent shock waves through the trade establishment. The day after the vote, a collection jar appeared on a countertop of the Geneva office, with a sign saying “Save America," recalled a former USTR employee. “That really was a moment in time when I knew that something was going to be different about this change," she said.

Obama's trade representative, Michael Froman, held a pep talk soon after the election, recalled Mark Linscott, the former assistant trade representative for Central and South Asian affairs, who left at the end of 2018. Trump will bring on some good people, Froman said, asking staff to give them a chance. Trump had promised to use tariffs as a cudgel, and Linscott thought that the tool, long out of favor among mainstream economists, might actually break some long-standing logjams.

“It did appear that this administration might be offering new approaches to leverage," Linscott said.

Many staffers harbored hopes that Trump would put his own stamp on the TPP agreement and move ahead with it. Instead, Trump pulled out of the deal on the first business day of his administration, stunning USTR officials who had devoted years to hammering out its intricately balanced details.

“It was like someone died," said one former staff member, describing the mood at headquarters on that rainy January Monday.

Negotiations on two other deals — the trade in services agreement and a broad European Union pact — were put on ice. Staff recall a briefing from Stephen Vaughn, a former Lighthizer law firm colleague who came on as acting USTR and then became general counsel, in which he told the legal team that there would be a dramatically scaled back focus on dispute settlement cases before the WTO — a key way in which USTR typically defends its interests.

“People left the room in tears," remembers a former USTR lawyer. “It felt like a bomb-dropping moment."

(Speaking for USTR, Deputy U.S. Trade Representative C.J. Mahoney denied this happened. “We have never turned down a case that the professional staff wanted us to file at the WTO," he said. In response to an inquiry, Vaughn said that was his recollection as well.)

Despite his popularity on Capitol Hill, Lighthizer's nomination had been held up in the Senate as Democrats bartered on another issue. Commerce Secretary Wilbur Ross managed trade policy in Lighthizer's absence, along with the virulently anti-China trade advisor Peter Navarro.

Using a national security trade provision, Ross tried to slow China's steel exports with broad steel and aluminum tariffs. His move antagonized allies like Canada and the European Union, which would make USTR staff's jobs harder for the rest of Trump's term.

Soon after confirmation in May, Lighthizer consolidated control and hired three of his Skadden deputies — Jamieson Greer as chief of staff, Jeff Gerrish as his deputy, and Pam Marcus as the deputy chief of staff. The Lighthizer loyalists formed a tight-knit decision making unit.

“Lighthizer and his team came in not as free traders," said one USTR staff member who served through the transition. “And they intuited, or just knew, that most of the civil service at USTR work there because they believe in free trade. So there was real suspicion of the civil service, that we were not making the kinds of recommendations that Lighthizer would want to hear."

Mahoney said that Lighthizer values career staff, frequently praising them in building-wide emails when deals are concluded. “The career staff has always been welcome in Bob's office," he said.

Nevertheless, in the first year and a half, USTR lost more than 20% of its personnel, with 64 departures and retirements. (Churn continues, but the Office of Personnel Management has not provided updated numbers.) Many who remained felt that Lighthizer represented an old guard, with regressive views of how the economy should work.

He made some efforts to promote women: Three of the six assistant trade representatives he has hired are women. But the organization's top leadership is all male, and some female staff expressed that he is dismissive toward women, which current USTR chief of staff Kevin Garvey strongly denied.

“There's a cadre of 75-year-old white men in the trade realm who just want to turn back the hands of time," said another staffer. “They don't understand that the world has changed."

“Like Asking a Vegan to Sell Meat"

To Trump, relationships with other countries usually come down to who's “winning." In trade, that usually refers to the trade deficit — that is, America's exports to a country minus its imports. Like his boss, Lighthizer focused on the goods deficit, since the U.S. imports far more stuff than it exports, which he sees as a problem. That leaves out services, including everything from the many billions in financial expertise the U.S. provides, to tourists and foreign students who attend college here. On that front, the U.S. actually sells more to the rest of the world than it buys.

The new administration gave trade negotiators new marching orders: Minimize imports and maximize exports. One former negotiator remembers her conversations with India, with which the U.S. services deficit was smaller than its goods deficit.

“'What's going to help shape our relationship is going to be things that you can do to help mitigate the deficit that we have,'" she recalled telling her counterparts, with whom the U.S. has a thorny relationship. “I had to be honest about it. 'This is what matters to them, so let's find ways to work together to make a dent in that.'"

For a while, some USTR staff hoped that the zero-sum, economic winners-and-losers approach might solve intractable problems, even though they'd been used to considering the broader implications of trading relationships alongside the scorecard of imports and exports.

“I quickly realized that it wasn't going to be effective," said another recently departed official. Relationships between countries are multilayered, this official said, and can involve many kinds of mutual support. “When you see an allyship boiled down to a trade deficit, you know it's not going to work."

USTR personnel faced a strange duality: Their agency had more authority than ever, but to do things that they often didn't agree with.

“It definitely feels like USTR under Lighthizer got its swagger back on some of these things," said a corporate trade lobbyist, “even though it was a swagger gained by any number of lifelong civil servants who'd spent their careers negotiating trade agreements having to go in and un-negotiate them."

USTR's foreign counterparts also felt the whiplash.

“We negotiated TPP with a big brother, and all of a sudden big brother stepped down," said Salvador Behar, a top TPP negotiator for Mexico. (The pact has since been carried forward by the rest of the parties, leaving the U.S. without the deal's preferential access to their markets.)

Some of the same USTR negotiators who handled the TPP also worked on the NAFTA update, but singing a different tune. “It's kind of like asking a vegan person to sell meat," Behar said. “How come the U.S., which has been the promoter of free trade, is asking me to close markets and call it free trade?"

For some USTR employees, the work pace slowed. While Froman had wanted detailed briefing materials, Lighthizer only asked for two-page memos. While Froman traveled tirelessly, sleeping on red-eye flights, Lighthizer conducted many negotiations in Washington, while staying at his Georgetown townhouse or commuting to his Palm Beach oceanside condo.

But the staff never knew what to expect. Trump often gave no notice of his tariff pronouncements, blindsiding careful USTR employees. “When you're getting calls from the private sector asking what's going on, and you have to somewhat jokingly say, 'I haven't checked Twitter,' That can be a challenge," said one former staffer.

The uncertainty hurt negotiations. As Trump pursued a deregulatory agenda on everything from financial services to the environment, trade officials trying to uphold parallel regulations in international trade agreements had domestic policy thrown in their faces.

“Our counterparts felt more free to say, 'you're rolling back things in the U.S., and we're supposed to keep raising our standards?'" said one former staffer.

Not having the backing of the higher-ups decreases a trade negotiator's leverage, explained Wendy Cutler, who worked at USTR for nearly 30 years before leaving in 2015.

“There are times when cabinet officers can't even give an answer to their counterparts, because the president is personally making so many decisions," said Cutler, now vice president at the Asia Society. “It affects your ability to solve problems, if your counterpart doesn't think you can live up to your word."

One example: In 2018, Mahoney, the deputy trade representative, was negotiating with two important trading partners. A career staffer in the room told ProPublica that in the middle of what Mahoney was handling as a give-and-take conversation, the White House sent orders that no, in fact, the deal on the table was final. Mahoney dutifully conveyed the take-it-or-leave-it message to his foreign counterparts, then hung up the phone, distraught, and asked, “How are these people ever going to believe anything I say ever again?" said the witness, who has since departed the agency.

Mahoney said this account was “not accurate," and called the call a “constructive negotiation."

Over time, staff gained respect for Lighthizer's management of his single most important constituent: the president. While USTR's profile heightened, Lighthizer largely avoided the limelight, knowing that upstaging his boss could hasten his exit. He also coped with Trump's more extreme trade impulses, like hiking tariffs without warning and threatening to end various alliances and agreements.

“Bob's calling card as a negotiator is consistency," said one longtime steel lawyer who'd worked with Lighthizer since the 1980s. “Here you have a guy whose calling card is consistency working for a guy whose calling card is inconsistency."

The China Gambit

Lighthizer, 73, could have retired in 2017 with the upwards of $15 million that ethics disclosures show he made over his Washington career. But Trump offered him a shot at a lifelong dream: curing what he saw as America's unhealthy reliance on China.

Previous trade chiefs had unsuccessfully wrestled with the problem. The world's second-biggest economy had become a market system that was fundamentally different from the capitalist model upon which most international trade laws and norms are predicated.

The U.S. had hoped China would converge with the free-market mainstream when it joined the World Trade Organization in 2000, setting low tariffs and allowing foreign corporations equal access to its consumers. But the Chinese executed an about-face around the time of the great financial crisis, when capitalist systems neared collapse. Returning to a managed economy, they subsidized exports, required outside companies to enter joint ventures with Chinese ones, and encouraged widespread piracy of intellectual property.

China's WTO entry should have prevented backsliding, but that required someone to take complaints to the institution's dispute settlement mechanism. As time passed, smaller countries didn't want to go up against the regional hegemon and American companies had become too globalized to care, so China was never held to account.

“I'm faulting the whole world for not trying to hold China's feet to the fire," said Jennifer Hillman, a former WTO appellate body judge.

In the TPP, the Obama administration negotiated a trade agreement with Pacific Rim nations that would theoretically be so attractive to China, it would meet the pact's requirements for fair competition so that it could join. Meanwhile, talks continued on long-standing issues like access to the Chinese market for American financial services companies.

“There was a recognition that we had to get tougher on China," said Jeff Moon, an independent consultant who was USTR's top China official just before Trump took office. “That was going to happen under Hillary. But the huge difference was, that Trump wants to do it with America alone."

The Trump administration's thinking: Assembling a coalition of nations to pressure China would never have worked. “If our standard for doing something is to wait for all the allies to be on board, we're going to waste a lot of time and suffer a lot in the interim," Mahoney said.

Instead of picking up where Obama left off, Lighthizer ordered up a report on China's intellectual property infringement that could be used to justify unilateral tariffs under Section 301 of the 1974 Trade Act, which previous administrations had threatened but never imposed.

“The 301 is a blunt instrument that can be used to achieve what in this instance likely could not have been achieved through the WTO — significant and quick impact," said Kathleen Claussen, a former USTR lawyer who worked on China's intellectual property issues.

The strategy kicked off the month before Trump and Lighthizer visited Chinese President Xi Jinping in November 2017.

James Green, then a senior USTR officer in Beijing and one of the few China experts on staff, advised sealing the deal on previously negotiated issues before Trump's arrival, allowing Xi to claim a domestic victory. The Trump administration wanted China to “feel the pain," Green said.

“What I tried to argue internally was that the best opportunity we have to get concessions is before a presidential visit," said Green, now a senior research fellow at Georgetown University. “That was completely dismissed."

In June 2018, Lighthizer announced tariffs on about $50 billion worth of Chinese exports. China retaliated with steep duties on American agricultural goods. USTR hurled an even bigger tariff volley — and so it went until the end of 2019, when the administration delayed a new round of consumer goods tariffs set to go into effect right before Christmas.

Farmers, an important Trump political constituency, were compensated for the lost Chinese market with tens of billions of dollars in subsidies — more than the auto companies received during the last recession — and no obligation to repay them. But manufacturers, faced with higher prices for imported parts, got nothing. That helped drive the sector into a recession — a December 2019 study estimated that the tariffs depressed manufacturing employment in sectors on which they fell most heavily.

Meanwhile, talks proceeded. In January, China agreed to respect intellectual property, open its market to agricultural goods, and license American financial services providers, while committing to purchase $200 billion worth of U.S. goods. Although China had been pledging some of those commitments for years, Mahoney argued that the deal wouldn't have happened without applying tariffs.

“There were 10 rounds of negotiations with the Chinese on these issues before this administration," he said. “The strategy of talking to these people had been tried across two administrations and basically led to nothing."

Companies were relieved that the “Phase 1 Agreement" might herald a cessation of hostilities. But only 19% of companies surveyed by the American Chamber of Commerce in China thought the deal was worth years of tariff-driven disruption.

The pain has continued on both sides. Agricultural exports to China started rebounding in 2020, but are nowhere near their pre-trade war highs, as China has fallen short of its purchase commitments. Neither side dropped its tariffs significantly, while introducing complicated exemption processes. The tougher issues, regarding the tight control China's government exerts over its economy, were deferred to a second phase of talks.

Derek Scissors, a China scholar at the conservative American Enterprise Institute, advised Lighthizer, Treasury Secretary Steven Mnuchin, and the rest of Trump's economic team to use financial sanctions and bans on specific bad actors — state-owned enterprises and those that violate intellectual property protections — to attack China's practices directly. That would work better than bargaining for specific concessions like requiring China to buy large amounts of soybeans.

“I think that's his view," Scissors said of Lighthizer. “It's not the president's view. So he's got to negotiate with the Chinese, he's got to negotiate with the president, and to add to all that, he's got Steve Mnuchin going 'everything's fine, settled, sign here, deal's done.'"

In July, as Trump sought to refocus blame for the coronavirus on China, he acknowledged that a Phase 2 deal was unlikely.

Now, by Lighthizer's own metrics, the U.S. isn't winning the trade war. The trade deficit with China has barely budged, and it's widened with other countries like Vietnam as American companies responded to tariffs by moving operations elsewhere in the region.

Another factor undermining Lighthizer's approach is currency markets, which Treasury influences, not USTR. Asian countries have been holding their currencies artificially low relative to the dollar, which makes the goods the U.S. tries to sell overseas more expensive and decreases the potency of tariffs.

In September, a WTO panel ruled that the tariffs imposed under the 1974 Trade Act were illegal. Because Lighthizer's efforts to hobble the WTO included blocking the appointment of new judges, the high court that could overturn the decision on appeal no longer functions. The ruling stands, which would mean the WTO could authorize China to retaliate. China had already done so without authorization, another sign that the once-strict rules of international trade are being supplanted by a free-for-all in which each country does what it wants.

Business Flummoxed

Lighthizer brought another abrupt change to USTR: Making it clear that American business wasn't his only client.

The divergence came to a head quickly, during the overhaul of NAFTA, which Lighthizer conducted at warp speed for a trade agreement. In order to win over Democrats, he'd proposed getting rid of investor-state dispute settlement, which allows companies to sue governments in special courts over laws they perceive as discriminatory.

That and other issues had outraged trade groups, which complained that they needed a provision for settling disputes to protect their overseas investments from abroad. In early October 2017, heading into the fourth round of negotiations, National Association of Manufacturers vice president for government affairs Linda Dempsey requested an “urgent" meeting to discuss “increasing concerns throughout all the major US economic sectors," according to emails obtained under the Freedom of Information Act by the watchdog group American Oversight.

USTR's chief of staff Jamieson Greer declined, suggesting that companies engage through already-scheduled staff briefings and the Industrial Trade Advisory Committees, a formal channel for stakeholders to weigh in on trade policies. (Under Lighthizer, some committee members say, that input has been ignored.)

At the conclusion of that round of talks, Lighthizer held a press conference at the stately white Winder Building, in a conference room packed with reporters. One asked about the business groups' objections, prompting an exasperated reply. Corporations purport to love free markets, Lighthizer snapped, waving his arms for emphasis. But instead of incorporating political risk into their international business decisions, now they want trade rules to protect them from anything that might go wrong?

“Why is it a good policy of the U.S. government to encourage investment in Mexico?" Lighthizer asked. In the end, he got what he wanted; the dispute settlement provision was mostly scrapped.

NAFTA wasn't the only matter on which business lobbies felt they had lost control. An ad hoc business group coalition held sometimes daily conference calls around Trump edicts, including his tweeted order that all U.S. companies move supply chains out of China. The coalition prepared a lawsuit should Trump actually invoke the 1977 law on which it was ostensibly based.

Trump didn't follow through. But the larger problem for businesses was that, even when USTR did want to act on their behalf, it didn't always ask their opinion. In the China negotiations, for example, nobody lobbied for specific purchase targets, which became the deal's largest selling point.

Although they're not usually cast as such, tariffs aren't so much a weapon against other countries as they are a signal to domestic business: Lighthizer was telling American companies that investing overseas wouldn't be the obvious choice it had been in the past.

“If that's your goal, I think that tariffs have worked their magic," said James Green, the former USTR staff member in Beijing. “He's made corporate America think about whether they want to invest their next dollar in China."

The biggest beneficiary of USTR's actions so far, on the other hand, may be tech companies: Google, Amazon and Facebook have hired at least a dozen USTR staffers since early in the administration, including high-level intellectual property specialists, and secured broad legal immunity concerning third-party content posted on internet platforms. Lighthizer's calendar shows 15 phone calls and meetings with Apple CEO Tim Cook in 2018 and 2019, more than any other corporate executive, as the iPhone maker lobbied for tariff exemptions. Some meetings were scheduled on less than a day's notice, correspondence shows.

On NAFTA, Lighthizer's willingness to tell business groups to pound sand was made possible by his skillful navigation of Congress, which has to sign off on comprehensive trade deals. The kumbaya moment, however, hasn't extended to the rest of Trump's narrower bilateral agreements, for which Lighthizer skipped lawmakers entirely.

“We need to be able to have Congress being full participants if we're going to make meaningful progress," said Rep. Earl Blumenauer, an Oregon Democrat who chairs the House Ways and Means trade subcommittee, voicing irritation about the mini-deals and tariff measures for which Lighthizer hasn't sought congressional approval.

Yet for all their grumbling, lawmakers have balked at reining in Trump's authority. The Senate Finance Committee has floated legislation that would constrain using national security to justify tariffs, but the bill hasn't moved forward — in part because lawmakers recognize that Trump likely wouldn't sign it.

Of course, Lighthizer knows that.

“With a lot of what he's done, there's a pretty brutally practical calculus," said a House aide on trade. “If I don't exactly jump through these hoops, is the U.S. Congress going to stand up and prevent us from doing this?"

A Fight to the Finish

The pandemic thwarted some of Lighthizer's plans for 2020, but he hasn't stopped fighting for higher tariffs.

In early March, it became apparent that many China-made supplies and equipment needed to control and treat infections were subject to tariffs, giving rise to attacks on protectionism as a public health threat. USTR exempted some of those goods, but Lighthizer has since opposed broader relief for medical products. At a June Senate Finance Committee hearing, he said he would consider pulling out of a pharmaceutical agreement that committed the U.S. to zero tariffs.

“I would be far more in favor of increasing tariffs on the things that we need as a part of an overall plan to make sure that the next time we have domestic manufacturing capability in these areas," Lighthizer said.

Lighthizer also announced that he would pursue a broad WTO tariff “reset." Over many years of negotiation, WTO members have varying maximum tariff rates, with less-developed nations usually imposing higher duties to protect growing industries. The average U.S. tariff is among the lowest in the world, and the plan proposes raising the U.S. tariff ceiling much higher, giving USTR negotiators more leverage as they ask other countries to lower their barriers. If they refuse, as expected, the Trump administration could then jack up America's tariffs to match the world's most protectionist countries.

The reset proposal sent ripples of alarm through Geneva and trade-war-weary Washington. “The business community's concern is that an effort to reset tariffs risks ending up with higher tariffs everywhere," said John Murphy, U.S. Chamber of Commerce vice president for international policy.

Meanwhile, Lighthizer's agency has started to destabilize. Stephen Vaughn, who was seen as a steadying influence, returned to his law firm last year. He had Lighthizer's trust and was seen as a conduit to the front office, making career staffers believe their advice was at least presented, if not heeded.

Lighthizer's original Skadden team returned to private practice earlier this year. In July, Lighthizer faced a staff revolt as he attempted to bring employees working at home during the pandemic back to the office. (Mahoney said this was optional.) Lighthizer then ordered that vacancies could no longer be filled from outside the agency, which Mahoney attributed to difficulties in interviewing candidates during the pandemic, and a rethinking of staffing levels.

If Joe Biden succeeds Trump, most experts expect a return to a less confrontational trade policy. But they recognize that Lighthizer's legacy can't be unwound quickly or neatly.

“I think Biden would come into office with a bank of goodwill," said Sam duPont, who worked at the agency's digital trade office until joining the German Marshall Fund earlier this year. “But the trade relationship with Europe, for example, is really strained. And a lot of things have been put in place that would have to be undone for that good will to be maintained."

Craig Allen, president of the U.S. China Business Council, served as Obama's ambassador to Brunei, a founding member of the TPP back in 2003. He keeps a framed replica of its Treaty of Peace, Friendship, Commerce and Navigation — a document that dates back to 1850 — in his office near Washington's Dupont Circle.

He remembered having to tell his diplomatic counterparts that the U.S. was withdrawing from the TPP, and worries that the relationship will never fully heal.

“It was painful, that we withdrew with nothing so much as a 'thank you very much." Allen continued. “All of our negotiating partners worked hard to meet our demands. It was very difficult for them to do so, and we walk away. But we are a democracy, and an ambassador must follow instructions."

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