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How Fed Bailout Greased A Top Treasury Official’s Family Financial Firm

Reprinted with permission from ProPublica.

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin have become the public faces of the $3 trillion federal coronavirus bailout. Behind the scenes, however, the Treasury's responsibilities have fallen largely to the 42-year-old deputy secretary, Justin Muzinich.

A major beneficiary of that bailout so far: Muzinich & Co., the asset manager founded by his father where Justin served as president before joining the administration. He reported owning a stake worth at least $60 million when he entered government in 2017.

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Hundreds Of Federal Coronavirus Contractors Were Hired Without Bids — Or Qualifications

Reprinted with permission from ProPublica.

A firm set up by a former telemarketer who once settled federal fraud charges for $2.7 million. A vodka distributor accused in a pending lawsuit of overstating its projected sales. An aspiring weapons dealer operating out of a single-family home.

These three privately held companies are part of the new medical supply chain, offered a total of almost $74 million by the federal government to find and rapidly deliver vital protective equipment and COVID-19 testing supplies across the U.S. While there's no evidence that they obtained their deals through political connections, none of the three had to bid against competing firms. One has already lost its contract for lack of performance; it's unclear if the other two can fulfill their orders on time, or at all.

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Desperate States Pay Huge Markups In Competition For Medical Supplies

Reprinted with permission from ProPublica.

With the coronavirus outbreak creating an unprecedented demand for medical supplies and equipment, New York state has paid 20 cents for gloves that normally cost less than a nickel and as much as $7.50 each for masks, about 15 times the usual price. It's paid up to $2,795 for infusion pumps, more than twice the regular rate. And $248,841 for a portable X-ray machine that typically sells for $30,000 to $80,000.

This payment data, provided by state officials, shows just how much the shortage of key medical equipment is driving up prices. Forced to venture outside their usual vendors and contracts, states and cities are paying exorbitant sums on a spot market ruled by supply and demand. Although New York's attorney general has denounced excessive prices, and ordered merchants to stop overcharging people for hand sanitizers and disinfectant sprays, state laws against price gouging generally don't apply to government purchases.

With little guidance from the Trump administration, competition among states, cities, hospitals and federal agencies is contributing to the staggering bill for fighting the pandemic, which New York has estimated will cost it $15 billion in spending and lost revenue. The bidding wars are also raising concerns that facilities with shallow pockets, like rural health clinics, won't be able to obtain vital supplies.

As the epicenter of the pandemic, with about 40 percent of the nation's coronavirus cases, New York state is especially desperate for medical equipment, no matter what the tab. "We know that New York and other states are in the market at the same time, along with the rest of the world, bidding on these same items, which is clearly driving the fluctuation in costs," budget office spokesman Freeman Klopott said in an email.

The Office of General Services, New York's main procurement agency, declined to say which sellers were inflating prices for essential medical gear. "At this moment in time the New York State team is focused on procuring goods and services based on current market conditions," OGS spokeswoman Heather Groll wrote in an email. "There will be time to look back and pull together info on all this, that time will be when the pandemic is over."

New York isn't the only government paying whatever it takes — and keeping quiet about who's overcharging. Houston Mayor Sylvester Turner told reporters last week that he authorized paying $4 per N95 mask and still lost the bid. Turner's spokeswoman Mary Benton said that price was commonplace but declined to provide further details.

"What Mayor Turner mentioned was not an isolated incident but rather the norm for today's extreme demand on masks," Benton told ProPublica. "Given the urgency of the city's COVID-19 response and the focus on doing the work, the need for masks and other supplies, at this time we see no value in publicly calling out other cities or companies by name."

That same price was apparently too much for the U.S. Coast Guard. It ordered 1 million N95 face masks for $5 apiece on March 17, then downgraded the order to 200,000 masks, before canceling altogether, according to federal procurement databases and interviews with the contractor, Clean Harbors.

Chuck Geer, the company's senior vice president of field services, said Clean Harbors doesn't manufacture masks. It simply offered to pass along the supplies from a vendor with access to 200,000 masks, Geer said. The Coast Guard didn't return requests for comment.

In his daily press conferences, New York Gov. Andrew Cuomo has often complained about having to compete with states and the Federal Emergency Management Agency for personal protective equipment, and ventilators for patients in respiratory failure. "It's like being on eBay with 50 other states bidding on a ventilator," Cuomo told reporters on Tuesday. "And then, FEMA gets involved and FEMA starts bidding! And now FEMA is bidding on top of the 50! So FEMA is driving up the price. What sense does this make?"

A FEMA spokesperson said that "if a bidding conflict does arise, we will work closely with the state to resolve it in a way that best serves the needs of their citizens." FEMA has not disclosed the prices it has paid for supplies and equipment during the pandemic.

Typically, New York state buys a wide range of medical supplies from a list of approved distributors, which agree to provide those goods at a set price. Contracts are negotiated in bulk and over the long term, with public solicitations that generate multiple competitive bids.

That changed with the coronavirus outbreak. New York state invited anyone with needed supplies to sell them to the state, which means that prospective vendors can ask whatever prices the market will bear. Now, after running through their inventory, vendors are passing on higher costs from their own suppliers.

Hackensack, New Jersey-based Shield Line LLC, a recently approved New York state vendor, has a price list that includes 3.5 cents per glove and 3 cents for a simple surgical mask. But its CEO, Joe Kastner, says he has mostly sold out. If New York, which hasn't bought from him yet, was to order medical gear now, he might have to raise his prices, he said. He gets some of his products from Chinese companies, which reduced exports at the height of the epidemic there and are now resuming sending supplies to the U.S. — but at a higher price. "In some cases the cost is 15 to 20 times higher," Kastner said.

Neither federal nor state law accounts for a situation in which government agencies at all levels are vying with each other for the same goods. "The government has in normal times a lot of things to protect it, including lengthy contracts and oversight," said Justin Oberman, a former Transportation Security Administration official who now consults with businesses trying to navigate the federal procurement process. "In this case, raised voices may end up carrying the day."

Normally, there's no such crime as price gouging. In most states, it's only illegal during a declared state of emergency. During the current crisis, New York and other states have activated their price gouging statutes. However, most of these laws only apply to the sale of consumer goods and services, not to purchases by states or by private or nonprofit businesses, said Gretchen Jankowski, a commercial litigation attorney with Buchanan Ingersoll & Rooney. In order to go after a company for price gouging the state in Michigan, for instance, prosecutors would have to prove price fixing or fraud — a much higher bar.

Price gouging laws in New York state and New York City do not apply to state and city purchases, such as the $248,881 X-ray machine. While X-rays aren't recommended to diagnose COVID-19 patients, they are often used to assess how much damage the disease has done to a patient's lungs. Portable machines are more desirable than fixed machines because they help reduce the spread of infection. Caregivers don't have to bring patients to an X-ray room; the machine comes to them.

New York is paying bloated prices for another reason: Large national distributors are reluctant to steer more equipment to states with the most coronavirus cases. For fear of being accused of favoritism or even collusion, and in order to prevent stockpiling, they've put all of their customers on the same "allocation," or what a customer purchased in the past. Distributors say the federal government should step in to help them adjust those allocations based on need.

"Only the federal government has the data and the authority to provide this strategic direction to the supply chain and the healthcare system," Health Industry Distributors Association President Matthew Rowan wrote to FEMA administrator Peter Gaynor last weekend.

Dozens of cities have signed on to a letter coordinated by the nonprofit Public Interest Research Group asking the federal government to designate a "medical equipment czar" who would buy all the supply and fulfill requests from local jurisdictions. A bill sponsored by Sen. Chris Murphy, a Connecticut Democrat, would do the same.

WIthout federal intervention, states and hospitals may only become more vulnerable to the demands of brokers and speculators outside the normal supply chain, said Chaun Powell, vice president for strategic supplier engagement at the national health care consultant Premier Inc., which helps negotiate contracts for hospitals and health systems.

"The more COVID patients they get, the more masks they're going to burn," Powell said. "They're getting desperate because they're running out faster, so they're willing to pay."

Trump’s Trade War Hits Sporting Goods

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Since 1983, Kim Karsh has helped baseball teams deal with an inconvenient fact of the modern economy: Almost everything you need to play America’s homegrown sport is now made in China, from cleats to batting helmets.

Lately, supplying the game’s amateurs and fans has gotten more difficult. Karsh owns California Pro Sports in Harbor City, California, where invoices for big customers now include a caveat: Prices are up due to the Trump administration’s tariffs on Chinese imports, and they could rise further on short notice.

“We have to explain to our customers that the trade war affects them as it does us,” Karsh said. “We can pass on pretty much everything to the consumer. The problem is, now they will shop lower-quality items. Some understand, and other people don’t.”

Although duties set to kick in soon will affect all manner of sports equipment that hasn’t been made in America for decades, baseball enthusiasts are perhaps affected most because so many items are needed to play the game.

Baseball caps were hit first by the third round of China tariffs that went into effect at 10 percent last September and rose to 25 percent in January, on top of the 7.5 percent base tariff. Those added about a dollar to the cost of a hat, Karsh said. Trump’s tariff will rise to 30 percent in October, bringing the total to 37.5, and possibly causing another price increase.

Retail prices for metal bats have already risen $5 to $10 each, Karsh said, even though a 10 percent hike on bats and other sporting goods was put off until Dec. 15 as the Trump administration made a concession to the Christmas shopping season. On Aug. 23, President Donald Trump said he would jack up the levy to 15 percent.

Baseballs themselves faced tariffs starting Sept. 1, and although Karsh said prices haven’t increased yet, he’s expecting to add between $3 and $5 per dozen. “If you can buy now that would be a plus,” Karsh told customers in August, figuring the only direction the tariffs will go is up.

Since the sporting goods industry has become so dominated by Chinese imports, teams have little ability to shop around. Meanwhile, equipment is not the only mounting cost, with rising fees at municipal fields and less volunteer labor from parents. That raises the barrier to entry for a game that’s supposed to be accessible to everyone.

“Baseball is struggling. The expense of playing the game has gone up sky high,” said Charles Blackburn, executive director of the National Amateur Baseball Federation, a 105-year-old volunteer group that organizes teams and tournaments. “It’s a tax on top of a tax. They’re discouraging people from playing the game of baseball.”

The story of how baseball gear became a product of China is the tale of globalization, writ small.

In the 1800s, when baseball consisted of loosely organized leagues with few uniform standards, balls were made in a factory in Natick, Massachusetts, and sewn together by women who worked out of their homes. The manufacturer, Harwood, developed the iconic figure-eight seam design involving 108 stitches and horsehide tanned on the outskirts of town.

As baseball developed, the major leagues standardized their balls and cut exclusive sourcing deals, first with Spalding and then with St. Louis-based Rawlings. Partly owned by Major League Baseball, Rawlings is now the nation’s largest supplier of baseball gear, and also a heavy importer from China.

Even slight alterations in baseball materials and construction can lead to heated debates, fueled most recently by a rise in home runs that some have theorized may have to do with the 5-ounce spheres having less drag. But the physical ball hasn’t changed much since 1977, when Rawlings officially started producing them for both the National and American Leagues. A cork center is coated with rubber, wound with hundreds of yards of wool and cotton yarn, and finished with hand-sewn leather. Since it remains a labor-intensive process — with no machine yet able to navigate those 108 stitches — manufacturers have moved around the world in search of lower wages and higher-volume suppliers of raw materials with less toxic production processes.

“We had the facilities and the know-how,” said Bill Sells, senior vice president for government affairs at the Sports and Fitness Industry Association. “And as the market developed, others became proficient at making balls, and it went overseas.”

While the major leagues won’t be affected much by tariffs on Chinese imports, everyone from Double A players down through the office softball team will be.

Rawlings made its balls in Puerto Rico until the 1960s, when it moved to Haiti — along with other ball manufacturers, like Wilson — in search of lower labor costs. As workers in Haiti agitated for higher pay and the political situation destabilized, Rawlings then moved production to Costa Rica, where balls are still produced for the major leagues and Triple A teams.

But in 1994, Rawlings started sourcing lower-end balls for mass consumption in China. Now, America imports $69.5 million worth of baseballs and softballs from China annually, compared with $18.5 million from the next-largest supplier, Costa Rica.

Only one company still produces baseball gloves in America — Texas-based Nokona, which sells mitts for hundreds of dollars each. Wooden bats are still produced in the U.S., which is rich in lumber. But metal and composite bats are largely made in China, and those are the ones used by club and school leagues with the tightest budgets.

Although U.S.-based sporting goods companies now produce almost none of their own gear, increasing the cost of imports from China could still jeopardize thousands of U.S. white collar jobs in design, product development, and sales and marketing.

Rawlings, which declined to comment, argued against tariffs in a June letter to the Office of the U.S. Trade Representative. It said that if tariffs were imposed, “entire product lines” could be eliminated, and job losses within its 670-person domestic workforce would be “inevitable.”

So far, no major manufacturers have responded to Trump’s tariffs by saying they will move their supply chains out of China. Baden Sports, a family-owned sporting goods manufacturer based in Renton, Washington, tried to rush its orders to get inventory through customs before new duties take effect. After that, CEO Michael Schindler says they’ll try to distribute increased costs.

“We’re working hard with our suppliers to help alleviate the hit,” Schindler said. “The Chinese government changes the currency to account for about 2 percent. Then you pass a couple percent on to your customers, and you might eat a percent or two. Everybody participates in the pain. It’s in everybody’s best interest to keep the thing going.”

But Schindler acknowledged China may not be his company’s last stop. As China moves on to higher-tech products like electric cars, Schindler said, the painstaking work of ball manufacturing may migrate to nations earlier on in their industrial evolution, like Bangladesh and Malaysia — just as his company shifted from Taiwan and South Korea in the 1980s to Japan and on to China. For his next move, Schindler is thinking about someplace closer to his customers, like Mexico or the Dominican Republic.

The problem is, other countries don’t have the labor force or the port capacity yet to handle a total exodus from China. Also, relationships with suppliers are hard to build: Baden has worked with the same Taiwanese-owned company since 1979, as it moved with him from country to country. It’s easier to relocate within Asia than to move halfway across the world — especially when the tariff situation seems to change from week to week.

“If you’re not thinking about it, you’re nuts,” Schindler said. “It’s almost impossible to do anything about it quickly. And partially because when the tariffs were first talked about, you never really knew. It’s really hard to make hard and fast decisions when you really don’t know.”

Uncertainty also faces most baseball teams and leagues as they plan next season’s purchases.

The Fort Wayne TinCaps, a Class A team, has braced for a cost increase. The team bought 8,160 balls last year at $53 a dozen, which comes to $36,040. Rawlings has an exclusive contract to supply the TinCaps with Chinese-made baseballs, so there’s no way to bargain down the price. Although the TinCaps share the cost of bats and balls with their major league affiliate, the San Diego Padres, collectively the tariffs could mean a significant cost increase by next year.

And that could also affect the fan experience, from Double A teams on down, said team President Michael Nutter. One of the traditions of these games is tossing balls out to eager fans, which can get expensive if prices rise.

“I know some teams and operators are really strict with the baseballs and discourage players from throwing them to fans and trying to protect every single baseball,” Nutter said, while noting that he’ll continue to encourage fielders to be generous. “Really, to us, this is a cost of doing business.”

Youth sports have even less wiggle room. Tariffs have been on the minds of school baseball team managers across the country, many of whom operate on fixed budgets from local governments, dues paid by parents and ticket sales.

“Anytime there’s an increase in equipment cost, it gets passed on to the gate, or you have another fundraiser,” said Shelton Crews, executive director of the Florida Athletic Coaches Association. “I know up here in Tallahassee, parents have to raise so much money or make up the difference in cash.”

At a certain point, increased prices will translate into lower sales, especially for the mom-and-pop shops like Karsh’s that already operate on razor-thin margins.

“We can survive, but it’s very unfortunate what they’re doing,” Karsh said. “The manufacturers have put all their eggs in one basket. But there’s not much I can do about it. Not much anybody can do about it.”