‘Vectors for the Worst Waste, Fraud, and Abuse’

A scathing Congressional report blames fintech companies for misdirecting billions in Covid-related support intended for small businesses.

Dec 2, 2022

Good morning!

Here are today’s highlights:

This is one weird recession.
Why are middle-aged men dropping out of the workforce?
Elon Musk isn’t the only one annoyed with Apple’s 30-percent App Store fee.
There’s a big new trend in the wedding business.

FINANCE

A Congressional report finds that little known fintech companies fueled rampant PPP fraud: “The trouble began under the Trump administration, after Congress first authorized the Paycheck Protection Program in 2020. The roughly $800 billion initiative saw the government disburse more than 11 million loans to companies at risk of shutting their doors for good, helping keep them afloat until the health emergency eased. But the money became a tempting target for malicious actors, who took advantage of lax rules — and inadequate oversight — to bilk the government for staggering sums. Fintech companies including Blueacorn, Womply and Kabbage were supposed to serve as middlemen — helping applicants complete paperwork and processing their requests for aid on behalf of banks and other large financial institutions. In some cases, though, the digital firms instead became vectors for the worst waste, fraud, and abuse, according to congressional investigators led by Rep. James E. Clyburn (D-S.C.), the panel’s chair.”

“The endeavor would prove profitable for Womply, which over the life of the program earned more than $2 billion in fees, lawmakers found. But officials at one lender that worked with Womply — in conversations with congressional investigators, detailed in the report — said it had earned that money even as it ignored ‘rampant fraud.’”
“The report alleges that Womply itself may have received federal funds improperly. Congressional investigators said the company in 2020 and 2021 obtained about $7 million in PPP aid. This September, however, the SBA determined Womply was ineligible to receive the aid — after the company requested to have its loans forgiven.”
“Womply’s chief executive, Toby Scammell, signed key loan documents seeking the government’s permission to waive its outstanding debts, according to the panel. Scammell, who previously pleaded guilty in 2014 to federal insider trading charges, ran his business’s stimulus fraud prevention efforts, investigators alleged.”
“The lawmakers’ report contends that Scammell later resisted providing key documents to the SBA and its inspector general in the course of their fraud investigations. Congressional aides also alleged that Womply transferred millions of PPP applicants’ tax and banking information to a new company, Solo Global, for unclear purposes.” READ MORE
By the way, before this story broke yesterday, Ami Kassar published his latest 21 Hats column, which happened to be about why fintechs should not be allowed to make regular SBA loans.

THE ECONOMY

Once again last month, the economy added more jobs than economists expected: “America’s jobs engine kept churning in November, the Labor Department reported Friday, a show of continued demand for workers despite the Federal Reserve’s push to curb inflation by tamping down hiring. Employers created 263,000 jobs, even as a wave of layoffs in the tech industry made headlines. The unemployment rate was steady at 3.7 percent. The labor market has been surprisingly resilient in the face of successive interest rate increases by the Fed over the past year. Even sectors normally sensitive to borrowing costs, like construction and manufacturing, have been slow to back off the brisk pace of growth they posted coming out of the pandemic. Businesses, while treading cautiously, have generally still found reason to expand.”

“‘It feels to me like we’re not in a decline, just in a consolidation, kind of a flattening,’ said Jon Guidi, the chief executive of HealthCare Recruiters International. ‘I don’t get a strong negative indication on anything. It’s, Hey, Jon, we still need to hire, but maybe not in as much of a rush as we were a few months ago. Maybe we’ll be a little pickier.’”

“Other indicators have signaled that a more serious contraction is underway. The purchasing managers’ index for manufacturing, which measures how many manufacturers are expanding, turned negative for the first time since the pandemic.”
“And the outplacement firm Challenger, Gray & Christmas measured a quadrupling of layoffs last month from a year earlier, led by 53,000 pink slips at technology companies, the highest Challenger has measured since beginning to collect the data in 2000.” READ MORE

HUMAN RESOURCES

Where did the middle-aged men go? “For the past five months Paul Rizzo, 38, has been delivering food and groceries through the DoorDash app. But he spent the first half of 2022 earning no paycheck at all — reflecting a surprising trend among middle-aged men. After learning last Christmas that his job as an analyst at a hospital company was being automated, Mr. Rizzo chose to stay at home to care for his two young sons. His wife wanted to go back to work, and he was discouraged in his own career after more than a decade of corporate tumult and repeated disappointment.”

“Hundreds of thousands of men in their late 30s and early 40s stopped working during the pandemic and have lingered on the labor market’s sidelines since. While Mr. Rizzo has recently returned to earning money, many men his age seem to be staying out of the work force altogether. They are an anomaly, as employment rates have rebounded more fully for women of the same age and for both younger and older men.”
“Economists have not determined any single factor that is keeping men from returning to work. Instead, they attribute the trend to a cocktail of changing social norms around parenthood and marriage, shifting opportunities, and lingering scars of the 2008 to 2009 downturn, which cost many people in that age group jobs just as they were starting their careers.”
“‘Now, all of a sudden, you’re kind of getting your life together, and if you’re in the wrong industry …’ Mr. Rizzo said, trailing off as he discussed his recent labor market experience. ‘I wasn’t the only one who dropped out. I can tell you that.’” READ MORE

In case you, too, are wondering why the railroads refuse to give their employees any sick days or paid time off: “Unlike nearly 80 percent of U.S. laborers, railroad employees are not currently guaranteed a single paid sick day. Rather, if such workers wish to recuperate from an illness or make time to see a doctor about a nagging complaint, they need to use vacation time, which must be requested days in advance. In other words, if a worker wants to take time off to recover from the flu, they need to notify their employer of this days before actually catching the virus.”

“Last year, the seven dominant North American railways had a combined net income of $27 billion, nearly twice their margin a decade ago. In the interim, the railways have collectively doled out $146 billion in dividends and stock buybacks while investing only $116 billion into their businesses.”
“Why would a company have no problem handing out 24 percent raises, $1,000 bonuses, and caps on health-care premiums but draw the line on providing a benefit as standard and ubiquitous throughout modern industry as paid sick days?”
“The freight carriers can afford to make concessions on pay. It isn’t that painful to increase wages by a sizable amount when you’ve recently slashed your head count by 30 percent (and hope to continue innovating your way to a smaller payroll in the years to come).”
“But providing rail workers with ordinary time-off benefits would threaten the industry’s core business strategy, an operating procedure that has helped to nearly double its profits over the past decade.” READ MORE

ECOMMERCE

Elon Musk may not be the right spokesperson, but there’s a good argument to be made against Apple’s 30-percent App Store fee: “Hidden beneath Musk’s tantrum is an important critique of Apple’s chokehold on mobile software developers—one it shares with Google, even though the latter company has (for now) evaded Musk’s ire. Vendors have often grumbled that Apple and Google’s 30-percent fees are exorbitant, and that the monopolistic payment policies, which bar them from giving customers alternative ways to pay, are anticompetitive. In some cases, the policies give the store owners too much power in other online markets, such as with music: Spotify argues that it has to compete with Apple Music, but Apple Music doesn’t have to pay 30-percent margins.”

“It’s no simple feat turning a mobile app into a successful business. If you’re a developer charging users a one-time fee or a recurring subscription fee, you’re likely subject to Apple and Google’s 30-percent takes.”
“Developers are also forced to use Apple and Google’s built-in payment processors and cannot instruct users to pay outside of the app. Since 2020, Apple and Google slashed their fees to 15 percent for qualifying small businesses, but multimillion dollar companies—and certainly billion-dollar companies such as Twitter—are still subject to the full 30 percent.”
“The U.S. Department of Justice is reportedly preparing an antitrust lawsuit against Apple for abusing its market power to stifle competition.” READ MORE

OFFICE SPACE

Zoom thinks it has created a watercooler for remote workers: “Zoom Spots, coming in early 2023, will be a virtual-office watercooler of sorts, helping to re-create those casual conversations and quick pop-ins that fell victim to remote work. ‘People, especially the ones who are working from home, they don’t feel they’re part of the group,’ Chief Product Officer Oded Gal told Zoom investors. ‘We’re missing all of these conversations that used to happen where you could talk about your personal life. And a lot of actual business decisions are made in the corridors.’”

“Earlier digital-office ventures resembled video games or focused on hosting one-off online events; some have had to retrench or pivot.”
“The latest crop—created by a cadre of startups including Roam, Kosy and Teemyco for thousands of organizations around the globe—are for everyday work and have a more professional look and feel.”
“What they don’t have is Zoom’s entrenched position, with the technology being used by almost 210,000 large employers in its most recent quarter, up 14 percent from the same period last year.” READ MORE

CANNABUSINESS

Weed weddings are a thing: “When the cannabis lifestyle brand House of Puff started in 2018, its founder and chief executive, Kristina Lopez Adduci, 36, noticed an increase in the bridal cannabis market. ‘Little by little, we started getting inquiries from brides specifically,’ Ms. Lopez Adduci said. Whether they were having a bridal shower or a bachelorette party, these customers were seeking to bridge the gap between their big day and their penchant for marijuana. Ms. Lopez Adduci said brides were requesting gift boxes that could be customized with various House of Puff products, like its pastel-hued pipes and rolling trays.”

“‘That was four years ago,’ Ms. Lopez Adduci said. ‘And then now, all these states are legalizing adult use. Finally, after many conversations and emails, we had to invest in gift boxes because we’ve gotten so many inquiries from brides saying, Hey, I want to get this.’”
“With their wedding date set for April 20, 2024 — a date picked in part because it’s 4/20 — two cannabis entrepreneurs, Maggie Wilson, 37, and Brandon Dorsky, 38, are already planning their cannabis-themed affair.”
“The couple, based in Los Angeles, owns Fruit Slabs, which makes cannabis-infused fruit treats, so edibles will naturally be present at their wedding. Other ideas they’re considering? Cannabis beverages and two chocolate fountains, one infused with cannabis and one without.” READ MORE

THE 21 HATS PODCAST

This week, in episode 134, Shawn Busse, Jay Goltz, and Laura Zander talk about buying and selling businesses: Laura thinks her recent purchase of a small distribution business could change the trajectory of her whole company, helping her finesse the challenge of selling wholesale products to retail competitors. Jay, meanwhile, has been trying to help an aging business owner sell the kind of business that too often just fades away. Underlying both discussions is an intriguing question: While it’s common practice for owners trying to sell a business to keep the potential sale a secret, is that really the best approach? Or is it actually a betrayal? Plus: We answer a listener's question about finding the right balance between being a kind boss and being a pushover. And we play a quick game of Who Said It: Elon Musk or Mr. Burns?

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Thanks for reading, everyone. — Loren

The 21 Hats Morning Report