US judge blocks Trump's mass layoffs in blow to government overhaul

A federal judge extended on Thursday a temporary block on a bid by President Donald Trump's administration to lay off hundreds of thousands of federal employees, saying he needed permission from Congress before restructuring the U.S. government.

In her order, U.S. District Judge Susan Illston barred agencies from mass layoffs, a key piece of Trump's plans to downsize or eliminate many federal agencies, pending the outcome of a lawsuit by unions, nonprofits, and municipalities.

On May 9, Illston had blocked about 20 agencies from making mass layoffs for two weeks and ordered the reinstatement of workers who had already lost their jobs.

In Thursday's order, she largely continued the relief provided in the temporary restraining order, with some refinement.

The administration has asked the U.S. Supreme Court to pause Illston's temporary ruling, saying she improperly infringed on Trump's constitutional powers to control the executive branch.

That bid is likely to be moot after Thursday's ruling, which the Trump administration can immediately appeal.

Federal agencies have broad authority to implement large-scale layoffs, government lawyer Andrew Bernie said at Thursday's hearing.

Trump's executive order merely asked agencies to determine what cuts can be made without calling for any concrete actions, such as layoffs or office closures, that plaintiffs could sue over at this point, he added.

"Those decisions will be disclosed when they are made, and when they are made, the plaintiffs can challenge them. Indeed, the plaintiffs have challenged individual decisions,” Bernie said, citing pending lawsuits over cuts at the departments of Education, Health and Human Services, and Homeland Security.

Danielle Leonard, who represented the plaintiffs, said directives from Trump and other White House officials made clear that agencies had little say in whether to gut their workforces.

"They are saying what to cut, when to cut, where to cut, and all they’re asking the agencies to do is come forward with a plan," she said.

The case involves the departments of agriculture, health and human services, treasury, commerce, state, and veterans affairs, among others.

Trump has urged agencies to eliminate duplicative roles, unnecessary management layers, and non-critical jobs while automating routine tasks, closing regional offices, and cutting back on outside contractors.

About 260,000 federal workers, most of whom have taken buyouts, have left or will leave by the end of September. And several agencies have been earmarked for deep cuts, such as more than 80,000 jobs at the Department of Veterans Affairs and 10,000 at the Department of Health and Human Services.

Dozens of lawsuits have challenged the administration's efforts, and Illston's earlier ruling this month was the broadest yet of its kind.

An appeals court has paused another judge's March ruling requiring agencies to reinstate nearly 25,000 probationary employees, who typically have been in their current roles for less than a year or two.

 Economic ructions are lurking just below the surface at U.S. banks. The value of loans that lenders have modified - typically an indicator of borrower stress - has quadrupled in the past two years to $55 billion as of the end of the first quarter. Financiers do have safety nets if IOUs go sour. The pool of money they’ve set aside to cover defaults, though, is shallower than it first appears.

Helping debtors get back on track by adjusting repayment terms can bridge borrowers over temporary rough patches, potentially avoiding losses from unnecessary defaults. If problems prove persistent, though, they can simply delay the inevitable.

Rising stress seems inevitable. President Donald Trump’s chaotic tariff policy has rocked markets, while consumer sentiment is sinking. U.S. bank executives acknowledge perturbations, but largely say there’s little concern in their loan books. Indeed, new delinquencies have slowed. Between the end of the first quarter in 2024 and 2025, loans 90 days or more past due rose by $10 billion. That compares to a $25 billion jump in the 12 months before that, according to Federal Deposit Insurance Corporation, opens new tab data. Nearly all of that improvement appears to be covered by modifications, though, which rose $15 billion.

Even setting this aside, the pools of assets designated to cover default losses are getting shallower. On average, U.S. banks now have just $2.08 in reserves for every dollar of debt past due, down from $2.78 two years ago. Include modifications and the average coverage ratio of all U.S. banks drops to $1.38.

A chart showing the change in banks' reserves held per every dollar of troubled debt

Some 240 U.S. lenders now have less than a dollar in reserves for every dollar of debt for which a borrower is either at least 90 days late or had been before a modification, according to the KBRA Financial Intelligence database. Many of these are smaller community banks, but larger lenders like Bank of America sit around the threshold, too.

This doesn’t guarantee losses. Take commercial real estate loans, a large portion of BofA’s delinquent debts. Defaults here tend to result in higher recoveries, because debt is secured by property, leaving something of value to seize. Other lenders have a relatively larger share of past-due unsecured debt, like credit card borrowings. In that case, some relative difference in reserve levels makes sense.

Yet the mix of loan types making up BofA’s problem loans is roughly the same as it was two years ago, when it had $2.13 reserved to cover losses for every dollar of troubled or modified debt. Granted, the bank has ably weathered a pandemic, rising interest rates, and stock-market tumbles. As tariffs and a broader slowdown loom, though, Wall Street is swimming out more exposed into the economic unknown.