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.
Moral Hazard
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.
Mish
I guess I’m one of those boomers whether I like the moral hazard or not. Just looked at a “stable value fund” that we have a bunch of money in. Treasuries, MBS, airline bonds….you name it, debt from all kinds of places that are probably struggling about now. Without the Fed fu@king around or at least jawboning everything, that thing would probably blow up and the whole insurance thing they have to protect the principle is probably not worth a wooden nickel in a real crisis. I really ought to bail on that but there are no really safe options in that plan.
The FED is not bailing out anybody and never has.
The tax payer has and will in the future.
Google reported lower EPS, and poor March ad numbers. Stocks surge after hours.
Thank you Powell!!!!
The show must go on.
“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…”
Sounds like the recent debt leveraged stock buy back craze.
“Yet the mere perception of Fed backing helps risky firms borrow anew.”
Touche!
Which is why the sycophants and profiteers benefiting from Fed dislocations, or who are simply to dumb to know they are patsies, have exactly zero legs to stnd on when they try to prove their case by reference to how “little” The Fed has actually bailed out.
In reality, The Fed has bailed out everything. Noone who claims to have “paid in” to neither pensions nor 401Ks, have “paid in” anything. All they have done, is handed money to banksters and other hucksters. While The Fed, and nothing but The Fed, have sustained the illusion that the $200K they have handed over, are now somehow worth more than $200K, despite the FIRE racketeers having taken $300K of it out in stolen commissions and earnings. End The Fed and bailouts, and none of them is worth anything. Which, to those with sufficient aptitude for numbers to figure out what $200K – $300K comes out to, isn’t really all that hard to comprehend.
While there is no way to reverse the damage in any detailed fashion, at least in aggregate, $20/ounze Gold and Gold the only legal tender, is the only way to get even remotely close. Then taxes on property rather than activity, and no restriction on anyone building nor making anything anytime, will help undo the damage over time.
“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”
…
Wrong.
I would expect better from Bloomberg.
AGAIN. Corporate bonds were purchased in CONJUNCTION with US Treasury via a SPV (special purpose vehicle).
US Treasury (ie: taxpayer) with the equity (ie: first loss) position and Federal Reserve (wholly owned by big banks) as the banker with financing up 10x equity.
This is not Federal Reserve going solo on a rogue operation. Could not happen without Mnuchin’s full blessing + cooperation.
I wonder, does the US Treasury get a margin call if the SPV loses 10% on its junk bonds? What would that look like?
Powell: Hey Mnuchin, you have to put up more collateral on your position.
Mnuchin: No problem. I will issue more treasuries and put up the money. You need to buy the treasuries though, so we can get 0.1% interest.
Powell: No problem. We will put the word out with the primary dealers telling them what we want. We will buy them in the secondary market a couple days after they pick up what we need at auction.
Mnuchin: Sounds good. Think I will let Blackrock know they should add some more junk to their own portfolio right now so they can make a few bucks and so we have a convenient place to purchase more junk in the near future.
Left hand giving right hand money which then promptly gives it back.
Awesome there.
It is a lot like money laundering.
Federal Reserve can not by law take a loss.
Federal Reserve president Rosengren a few months ago was agreeable to Federal Reserve buying equities IF US Treasury would indemnify any potential loss.
The SPV buying bonds with minor haircuts. Any sort of substantial loss would force taxpayer to bail out via Treasury … while wholly owned by the big banks Federal Reserve stands idly by.
So the banks bailout LTCM in the late ’90s. The FED does a bailout for the banks about a decade later. Another decade later we are in a situation where if the FED has losses on these junk bonds, the Treasury will bail it out. Who bails out the Treasury in another decade?
“So the banks bailout LTCM in the late ’90s. The FED does a bailout for the banks about a decade later.”
…
Quiz time
Name the ONE bank who failed to participate in the orchestrated LTCM bailout?
Lehman Brothers.
Karma Happens … and, uh, next time we ask one of you guys to help …
“while…Federal Reserve stands idly by.”
I would not say they are being idle. They are extending the Treasury credit at artificially low rates and taking a senior position against the US Taxpayer while the Treasury uses that credit to buy junk. Every time we go through one of these cycles the financial mess gets spread further and deeper. This time, we are putting the US Taxpayer on the hook for supporting junk corporate credit.
Zero interest rates + no price discovery in financial “markets” means there will be no capital formation to speak of. Just more speculation and asset stripping by connected insiders.
Productivity and average living standards for everyone else will continue to decline, and ultimately collapse.
Thank you, Federal Reserve.
I recall Larry Summers, as Clinton’s assistant secretary of treasury, giving a speech condemning Japan for zombifying its economy to protect its banks.
My my … look what happens when shoe on other foot …
Speaking of the odious Summers, he’s now advising the Biden campaign on how to steer the economy to “recovery”.
I say this knowing that most of you here have already heard the news, but hopefully somebody tells Joe soon!
The Fed has never purchased Junk Bonds, never, they jawboned but did not do it. They would need Congressional authorization to do it, and that is not going to happen.
This is really disgusting. Ron Paul tried to audit the Fed, and could never manage to get a law passed to do so, despite having hundreds of co-sponsors, from both parties.
Mish said the gold’s all there. So nothing to get worried about ………….