Moral Hazard
With highly questionable legality on top of a 100% certain moral hazard, here are the details of the Fed’s new Secondary Market Corporate Credit Facility
Credit Facility Terms
- The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized
statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020. - An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, such an issuer must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility makes a purchase.
- The issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation and must satisfy the conflicts of interest requirements of section 4019 of the CARES Act.
Leverage
- The Facility will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds of issuers
that are investment grade at the time of purchase. - The Facility will leverage its equity at 7 to 1 when acquiring corporate bonds of issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.
Unknown Duration
- The Facility will cease purchasing eligible individual corporate bonds, eligible broad
market index bonds, and eligible ETFs no later than September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System and the Treasury Department. - The Reserve Bank will continue to fund the Facility after such date until the Facility’s holdings either mature or are sold.
Legal Questions
Not Even Pretending Anymore
Understanding the Risk
“If the Fed and the Treasury create another SPV to buy equities, and Biden wins, nothing is to stop the Biden Treasury from appointing AOC to vote the proxies and use this clout to demand/force the Green New Deal.”
Leveraged Asset Support System
I think we need a new name to properly explain what it really is: an asset price support mechanism.
Not only is the facility a legally questionable moral hazard, it is also nothing but an asset prices support system that keeps zombie corporations alive.
Simply put, it’s a Leveraged ASS Deal with an unknown duration.
Mish
Absolutely – 232 Democrats in the House, and without fail, AOC’s name comes up time and again. Please stop with the histrionics and let’s get serious about governing this nation.
Why are you throwing in an AOC reference? I notice that Republicans live to elevate her as if she ran the Democratic Party. She is a Junior House member among 435 members and she has no position of important authority and her positions are well outside of the party platform. Would you like Democrats to ONLY talk about the most extreme and disconnected Republican House members like Steve King – the supreme racist- as if he ran the party. I find that this is the method used by Fox News and all conservatives really. I know that you are using this reference as an absurdity here but it just adds to the completely false narrative that AOC is anything more than a junior House member from one of 435 districts. She is only well known because Fox News and Republicans work so hard to continually lie about her influence in the party. I have nothing against her but she is not a VIP. The Republicans desperately want to make her one. The Democrats never put her out front to talk about anything – she’s just another house member that serves her district like the hundreds that we have.
Economist, Avery Largenumber, explains how QE works…
“With highly questionable legality on top of a 100% certain moral hazard…”
None of that really matters. Not a single banker was prosecuted for financial crimes committed during the housing bubble. No one is going to hold Powell responsible for violating the Fed’s legal limitations.
Kick the can is the ongoing game, so moral hazard is ignored, as today is all that counts. The future is always off there somewhere.
This is to bankrupt the fed. Trust the plan. Trump isn’t losing in November.
“Toto, I’ve a feeling we’re not in Capitalism anymore.”
So true, the central planners of the Fed have removed trillions of dollars of assets from the market and created a mockery of risk management. Market signals are distorted.
Bianco is right.
This is not a rogue operation by the Federal Reserve.
Federal Reserve operating in conjunction with Treasury Department (Executive Branch) with seed money $75 billion provided by CARES Act (passed by Congress … ie. Legislative Branch with POTUS signing into law).
Mish, we live in a world that has walls, and those walls have to be guarded by men with a printing press. Who’s gonna do it? You? You, President Trump? I have a greater responsibility than you can possibly fathom. You weep for the taxpayers and you curse the FED. You have that luxury. You have the luxury of not knowing what I know: that taxpayers death, while tragic, probably saved the billionaires lives. And my existence, while grotesque and incomprehensible to you, saved billionaires lives! You don’t want the truth, because deep down in places you don’t talk about at parties, you want me on that printing press. You need me on that printing press. We use words like “quantitative easing”, “negative interest rates”, and “special purchase vehicle”. We use these words as the backbone of a life spent defending something. You use them as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very economy that I provide, and then questions the manner in which I provide it! I would rather you just said “thank you”, and went on your way. Otherwise, I suggest you pick up a printing press, and and load some ink. Either way, I don’t give a damn what you think you are entitled to!
Turns out the ink was taxpayers’ blood.
Is it possible that the Fed actually is using public funds to buy up ownership of productive capacity and is gaining a lien on the entire nation? Wasn’t that the idea all along?
What could possibly go wrong??
About 20 years ago I remember reading an article that said Japan was the canary in the coal mine, I guess they were right. Boy does time fly…because here we are.
Can we expect a depression type situation followed by a “new deal” type set of programs? It worked once.
Anyone think the banking system isnt defacto nationalized yet ?
OK. So this is now getting really scary when the Federal Reserve announces a new facility to buy junk bonds with 7 to 1 leverage. Suggests that the Fed believes our economic future is destined for disaster without either massive intervention or are hoping that the promise alone will save our future a la Draghi.
Anything to prop up that stock market. trump thinks he can still win the election, and will do anything at all to ensure it.
Sad thing is, the economy will be wrecked for a decade from this, and he’ll still lose.
Mish
It is often stated that the FED is focused upon protecting the wealthy. Is it more likely that their actions are focused upon maintaining social order by preservation of asset prices for 401k and public sector union pension funds? How many subscribers are there to 401k and public pension funds? How much money is tied up in these things? I would expect that collapse of such would usher in profound political upheaval that could not be easily contained by government action.
The whole point of 401K was that govt doesn’t have to pay pensions but people save for their own pension. If the govt props up the system then it just paying pensions indirectly so the whole system of 401k is pointless when you also consider the tax breaks govt gives. i guess this is typical of alot of govt programs. -)
Yes I understood from one of their recent statements their aim was to preserve an orderly market rather than target particular price levels. Although the markets perceive the opposite.
However their actions to date have supported prices which has indeed preserved some of the value of existing pensions. What it has also done is make it much more expensive for new and recent entrants to the workforce by reducing yields. Those entrants have to either contribute much more to have a chance of generating enough income at retirement or rely on the stock market casino to continue generating capital gains via ever increasing PE ratios. Their pensions are now more susceptible to a downward revaluation at some point over their lifetime and an end to rising PE ratios. At which point they won’t have enough capital to live on. To some degree this is happening now which is why the Fed is trying to kick the can down the road. It’s a pension time bomb.
$750 billion lol,that’s pocket change,what’s the tally now? Got to be over $20 tril pumped into the “markets” since November’s repo disaster!
Does it matter anymore the USA is self destructing and there is nothing that will save it. Oh….maybe a rational mind with logical foresight……no that was America. The new America will be much starker and bleaker and desperate….. especially after the election.
I have beheld the future of America: https://www.youtube.com/watch?v=PTtBN34AXl0
Looks nice! At least compared to where we are now and heading….
Joe: For the last time, I’m pretty sure what’s killing the crops is this Brawndo stuff.
Secretary of State: But Brawndo’s got what plants crave. It’s got electrolytes.
Attorney General: So wait a minute. What you’re saying is that you want us to put water on the crops.
Joe: Yes.
Attorney General: Water. Like out the toilet?
If it’s illegal could someone issue a legal challenge against them?
Someone would have to prove they were directly “injured” by the action in order to have standing to sue.
I have NO idea how any one person could do that.
Also IIRC, simply losing money isn’t considered an “injury”… A fact that would definitely complicate matters.
Many thanks, I just wondered. So are the laws governing Fed actions just meaningless and unenforceable or should law enforcement agencies investigate?
Imagine for one second an FBI agent trying to get approval to open an investigation…just an investigation. That’s not going to happen. No one in that approval chain is going to risk their career by approving it. And if they won’t approve that, an arrest warrant is definitely DOA.
Now imagine that you have a particularly determined go-getter at the FBI who reads the law, sees the actions the Fed is taking, decides that a crime is being committed right in front of them. Based on this, they decide that they’re going to go down to the Federal Reserve and arrest Powell without a warrant – which they can do as an FBI agent.
My guess would be that within minutes of arrival, and in all likelihood before the agent ever even got to see Powell, they would be intercepted and driven to the nearest airfield where they would be placed on a plane that would fly them to a field office in some god-forsaken shithole of the world where they would serve the rest of their career – should they choose to remain an agent. Of they would simply shoot them in the head and dump the body.
That is how stacked the deck is against us. Literally EVERYONE knows that they are breaking the law, but we are all powerless to stop them. They continue to act with impunity because they KNOW that it DOES NOT MATTER that we know. There is literally NOTHING we can do about it short of an actual armed uprising.
The fact that they are so confident that they can act like this should have alarm bells going off in people’s heads all over the nation – but instead, we are embroiled in never-ending media-fed red/blue fights over whose lives matter, some stupid virus, and a whole host of other things that at the end of the day are essentially meaningless.
Good times, noodle salad.
Thanks again, I understand that. If they are acting illegally in such a way, this is the sort of thing the free press should begin to get their teeth into. Once that happens and the general public begin to understand the long term damage they’re causing, the calls to bring them to account get easier. There shouldn’t be one law for them and another law for everyone else.
The only “free” press remaining in the US are blogs like this one. And as you can see Mish – and places like ZeroHedge, Federalist, and (sometimes) Marginal Revolution, among others – are furiously sounding the alarm and waving flags.
Unfortunately, sites like these are fitted with labels like “alt-right” or “alt-left” or any number of disparaging monikers meant to denigrate them and push them to the margins. This, in turn, means to the general public, they are full of kooks, conspiracy theorists, and either white supremacists or ANTIFA – depending.
For many, if not most, of the general public, digging into all this and trying to separate the small pile of wheat from the metric tons of chaff, and then having to pan the results in hopes that you will uncover one single golden nugget of truth is work they just don’t have time to perform. They are busy trying to work real jobs to pay their bills and taxes and what little time they have leftover they want to use to relax.
It is easier for them to watch their news network of choice (all of which – including local TV/radio operations – are owned by one of three or four major corporations), or use social media to keep themselves “informed.”
Everything you see around you is pretty much a direct result of this sad reality.
Yes all true but I’m sure a good investigative journalist could stir it up a bit if he/she wanted to. I tend to agree it doesn’t look likely at the moment.
We had a good example over here against our Post Office, a bastion of supposed integrity. Due to an IT glitch in a new piece of software 100’s if not 1000’s of honest sub postmasters & mistresses were prosecuted and had their lives destroyed by an institutional cover up & bullying that’s been going on for over a decade. If it wasn’t for the tenacity and perseverance of Nick Wallis, a journalist, it would probably still be going on. So occasionally, authority can be challenged and defeated.
There’s a series on BBC sounds about it that’s very interesting. https://www.bbc.co.uk/sounds/series/m000jf7j
To paraphrase Nixon: “It’s not illegal if the Government does it”.
And at this point the Fed is the de facto fiscal agent of the US Treasury and Congress.
“If it’s illegal could someone issue a legal challenge against them?”
Not when both the writing of laws, AND the interpretation of them; is done, entirely arbitrarily and at their complete discretion, by those who benefit from them being illegitimate and purely extractive.
This is what the People’s Republic of America looks like. The PRA, the PRC, what’s the difference?
THIS is what welfare for the rich looks like, it is also the very last time they can deny that they are reinforcing structural class war, and lack of social mobility. The US is finished.
The assets of the U.S. pension funds amounted to 22.4 trillion U.S. dollars in 2018. Doubt that all of those pensioners are what most would consider “rich”
But the privileged halfwits who sit around and do makework supposedly “managing” them, are. And that’s what matters.
Pensioners themselves have no savings, and don’t matter. The only purpose they serve in our financialized dystopia; are as fodder for endless, silly, childish and economically illiterate excuses, aimed at somehow justifying the welfare for the rich rackets which is all that’s left of once-was America.
The 22.4 trillion in pension funds are defined benefit. Any asset gains accrue to the sponsor, not the pensioner. So company shareholders are the ones who gain if private; the local government if public.
UTTERLY CRAVEN.