MARY LOUISE KELLY, HOST:
Speaking of the Supreme Court, even before the Supreme Court struck down many of President Trump's tariffs last week, Wall Street was already taking bets on tariff refunds. Investors have been speculating that the tariffs levied under the International Emergency Economic Powers Act of 1977 - IEEPA - that they would eventually be overturned. Mary Childs takes us inside the market for these prerefunds.
MARY CHILDS, BYLINE: Ever since President Trump announced tariffs last year, companies have been paying these IEEPA tariffs, all while knowing they might get this big pile of money back should the tariffs be ruled illegal, which meant companies had this annoying uncertainty of maybe getting refunds in the future. But maybe money in the future is worth a lot less than for-sure money now. And some companies didn't want to deal with this uncertainty. They wanted to sell their claim to maybe future refund money in exchange for some for-sure money right away.
WES HARRELL: Certainly, it's a call to action for us.
CHILDS: Us - Wall Street. That's Wes Harrell. He's the head of a trading group at Seaport Global. His job is to take a request from someone with something to sell and find someone who wants to buy that thing and match them together. Harrell says this new market was born around November when companies started filing lawsuits challenging the tariffs. Suddenly, Harrell and his colleagues started getting calls.
HARRELL: We start to get phone calls from importers, and we are also making outgoings to importers and basically anyone that we believe has paid a tariff since Liberation Day.
CHILDS: These importers, these companies, are like, OK, we have these potential tariff refund claims. Does anyone want to basically buy this potential refund or part of it? Meaning, give me, the company, a fraction of the refund I might get. And then the buyer can get the full refund if it ever comes. They take the uncertainty. And Harrell knew just who to ask - his clients, hedge funds, who are always looking for ways to make bets on anything weird or risky in an odd way or overly complicated that might make money.
HARRELL: We are, you know, actively trying to source opportunities for them to invest in.
CHILDS: So Harrell calls hedge funds and says, hi, I have this weird, risky-in-an-odd-way, overly complicated thing that might make money. At what price would you be interested in buying? Before the Supreme Court decision, this is how it worked - a company with a potential tariff refund, let's say it's a dress company, called Harrell and said, hey, I've paid, you know, $20,000 in tariffs from importing dresses. That's potentially $20,000 I might get refunded. I don't want to deal with this thing. I don't need the full $20,000 back. I just want something, like 20% of my potential refund, just $4,000.
And Harrell picks up his other phone and calls hedge funds, who were like, actually, yes, I am interested in buying a potential future money, but I don't want to pay a lot for it because this might not work out. If the Supreme Court ruled these tariffs legal, any tariff refund claim would be worthless. The hedge funds would get nothing. So they told Harrell they would be in at just 20% of the potential refund.
HARRELL: The market was oddly well defined from a very early stage in this.
CHILDS: Harrell says this market has already seen hundreds of millions of dollars of deals done. Now, after Friday's Supreme Court ruling, the probability of refunds has gone way up, and these claims are more valuable. Prices have jumped. Now it's about 40 cents on the dollar. Still a big discount because of the difficulty and risk involved in trying to get any refund. The hedge funds are buying all that complexity and uncertainty.
HARRELL: There really is no modern parallel for the magnitude of this unwind, and I just don't see the administration turning around in short order and immediately issuing refunds.
CHILDS: As Supreme Court Justice Brett Kavanaugh put it in his dissent, this is going to be a, quote, "mess." Mary Childs, NPR News.
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