The Fed hasn’t even started buying corporate bonds. Yet the mere perception of Fed backing helps risky firms borrow anew. Please consider How Fed’s Bailout Changed Everything.
This was no secret on Wall Street. Surgery Partners’s majority owner, the buyout firm Bain Capital, had loaded so much debt onto the company’s books that when it went to the market last year to refinance maturing bonds, investors demanded a 10% interest rate to compensate them for the risk. The debt was rated CCC -- eight levels below investment grade.
So by late March, with the economic effects of the outbreak in full force, frantic investors braced for default, pushing the price of those bonds below 55 cents on the dollar.
But then the Federal Reserve did something it had never done before. It pledged to buy risky corporate debt as part of its emergency financing package for the economy. The move was so aggressive and sparked a rally that was so powerful and broad-based that today those bonds are all the way back up near par value, and Surgery Partners was able to raise another $120 million from loan investors earlier this month.
This is yet another example of Fed-sponsored moral hazards.
The Fed encourages extremely risky behavior then bails out the risk takers.
Carnival Deemed Too Big to Fail, Rescued by the Fed
As noted in Carnival Deemed Too Big to Fail, Rescued by the Fed, What constitutes "too big to fail" keeps getting smaller and smaller.
Third Major Transfer From the Middle Class to the Wealthy
Meanwhile, this moral hazard bailout is the Third Major Transfer From the Middle Class to the Wealthy in 20 years.
50% of the US Says Their Financial Situation is Getting Worse
That 50% of the US Says Their Financial Situation is Getting Worse is shocking in only one sense. Why is the number so low?
Millennials finally caught an upswing. And for the second time in 12 years had the rug yanked from under them.
The boomers, those with assets and not in the poor house, get bailed out by the Fed again.
Thank You Fed.