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Kodak Loan Debacle Puts a New Agency in the Hot Seat

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WASHINGTON — At a virtual conference in September, Adam Boehler, chief executive of the U.S. International Development Finance Corporation, described his nascent agency as a bulwark against China’s “economic colonialism” — with $60 billion in annual lending authority to counter Beijing’s strategy of spreading its global influence with low-interest infrastructure loans.

But in recent months, Mr. Boehler, a former health care executive, has repurposed the international agency into something far from its intended role: a financing arm for projects inside the United States.

Working closely with Jared Kushner, the president’s son-in-law and senior adviser, Mr. Boehler helped draft an executive order over the summer that, for the first time, gave the agency authority to issue loans to U.S. companies for projects on American soil. The move was billed as a way to boost President Trump’s “Buy America” ambitions during a time of economic crisis.

Now, Mr. Boehler’s agency is embroiled in controversy over its first domestic loan — $765 million for Kodak, which was intended to help the once-iconic photography company transform into a pharmaceutical firm that could lessen America’s reliance on foreign countries for generic drugs and coronavirus treatments.

The Securities and Exchange Commission is probing allegations of insider trading by Kodak executives ahead of the deal’s announcement, and the Development Finance Corporation’s inspector general is looking into how Kodak got the loan. The funding has been put on hold and Mr. Trump, who hailed the loan as “momentous,” has distanced himself from the decision.

The questions about the Kodak project highlight the risks inherent in the Trump administration’s strategy to build American manufacturing by embracing the type of industrial policy that other nations have long employed — one that the United States has traditionally avoided in favor of free markets.

Mr. Trump has taken aggressive measures to prop up flagging sectors and companies, including supporting steel and aluminum by imposing global metal tariffs. He has funneled nearly $30 billion in subsidies to prop up struggling farmers who were hurt by his trade war with China. And this summer, Mr. Trump’s Treasury Department gave a $700 million stimulus loan to a struggling trucking company, YRC Worldwide, under the questionable rationale that it was critical to national security.

In May, the Trump administration found a new way to support domestic companies: The Development Finance Corporation. The agency had been created by Congress in 2018 to replace the Overseas Private Investment Corporation, which had encouraged American companies to invest in developing countries. Congress gave the new agency $60 billion to bankroll international infrastructure projects and a mandate to coordinate more closely with the State Department on loans that, ideally, would help to curb Chinese influence and support American foreign policy.

ImageRay Washburne, who ran the Overseas Private Investment Corporation during its transition to the Development Finance Corporation, rebuffed a request by Jared Kushner for money to fund President Trump’s border wall.
Credit…Marcos Brindicci/Reuters

The agency has funded 80 overseas projects totaling $4.8 billion in places like Mozambique, Kenya, Colombia and Costa Rica this year. But top Trump officials had long been eyeing the agency’s pot of money as a potential source of cash for domestic projects. In 2019, as Mr. Trump was seeking more funding for his wall along the Southern border with Mexico, Mr. Kushner approached Ray Washburne, who was then leading the agency as it began transitioning from the O.P.I.C. to the International Development Finance Corporation, to see if financing might be available.

“Can you give me a billion for the wall?” Mr. Kushner asked Mr. Washburne, who left the agency early last year, according to a person with knowledge of the exchange who was not authorized to reveal a private conversation.

Mr. Washburne spurned the request, citing the agency’s international mandate. A spokesperson for Mr. Kushner said he had no recollection of the request.

As the coronavirus pandemic swept through the United States, Mr. Trump signed an executive order on May 14 that allowed the Development Finance Corporation to shift its focus from international to domestic investment.

The move was part of an effort by the White House to use American companies to make supplies like ventilators and hand sanitizer and to transport testing swabs. In many cases, it used the threat of the Defense Production Act to compel companies to ramp up production of personal protective equipment.

Some critics in Congress and development experts panned the move, arguing that the agency lacked the resources to accomplish its original mission overseas, much less rebuild American industry.

But Kodak, which filed for bankruptcy protection in 2012 and had spent years trying to reinvent itself as its core photography business weakened, spied an opportunity. Kodak made the case to administration officials that the company could help with producing generic pharmaceuticals to reduce American reliance on foreign drugmakers and potentially help produce treatments for Covid-19, according to a review of the deal the law firm Akin Gump carried out at Kodak’s request.

Credit…Joshua Rashaad McFadden for The New York Times

The company had been producing some pharmaceutical ingredients for several years and had begun making hand sanitizer and face shields since the pandemic took hold. Kodak officials told the administration that the loan would be part of a larger corporate reinvention that entailed converting vast chemical facilities once dedicated to their print business to produce raw ingredients used in pharmaceuticals.

By July, after a byzantine application process, Kodak had won a “letter of intent” to receive government support.

Administration officials saw the loan to Kodak as dual victory — a way to both help restore America’s factory capacity and lessen its reliance on China and India for critical drugs.

In a White House briefing on July 28, Mr. Trump said the administration had taken “a momentous step toward achieving American pharmaceutical independence” and called it “one of the most important deals in the history of U.S. pharmaceutical industries.”

But critics immediately questioned why Kodak could not secure financing through the capital markets and were dubious the effort would help address the immediate health crisis.

“The Kodak loan didn’t seem directly relevant to the crisis that we’re in,” said Clemence Landers, policy fellow at the Center for Global Development. “This feels like part of the administration’s broader onshoring agenda.”

Scott Lincicome, a senior fellow in economic studies at the Cato Institute, noted that the effort to prop up Kodak “appears to be taking a page out of China’s playbook,” which the administration has criticized for helping “zombie” companies and politically connected firms, causing economic distortions.

A spokesman for the International Development Finance Corporation declined to comment.

Almost immediately after announcing the loan, the project unraveled amid accusations of insider trading.

Credit…Richard Drew/Associated Press

Kodak had issued its chief executive, Jim Continenza, 1.75 million stock options on July 27, the day before Mr. Trump publicly announced the project. The company’s stock rose from $2.62 per share on July 27 to more than $60 on Wednesday, before closing at $33.20. Within days, Mr. Continenza’s new options were worth about $50 million.

Public filings also showed that Mr. Continenza purchased 46,737 additional shares on June 23, while Philippe D. Katz, a board member, purchased 5,000 shares on June 11 and again on June 23.

In a statement, Kodak said Mr. Continenza has purchased shares with his own money at nearly every available window since joining the company in 2013. He has not sold a single share during his time at Kodak, the company said.

The damage was done. The loan was put on hold and, in the following weeks, Mr. Trump and Peter Navarro, a trade adviser who helped coordinate the agreement, distanced themselves from the deal.

“I wasn’t involved in the deal,” Mr. Trump said on Aug. 4. “Kodak has been a great name, but obviously pretty much in a different business.”

Democrats, led by Senator Elizabeth Warren of Massachusetts, have been scrutinizing Mr. Kushner’s medical supply chain projects and his close ties to Mr. Boehler. They have raised suspicion that personal ties, rather than economic considerations, were the main factor in granting the International Development Finance Corporation a prominent new domestic mission. At Ms. Warren’s request, the agency’s inspector general is reviewing the loan process.

Mr. Navarro, in an emailed comment, said that “a key mission of the Trump administration is to bring home our medical supply chains.” He said the White House was “pursuing numerous projects to advance this mission, with Kodak now far in the rearview mirror.”

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The Trump campaign celebrated a growth record that Democrats downplayed.

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The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

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Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

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The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

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Ant Challenged Beijing and Prospered. Now It Toes the Line.

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As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

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