Fed's New Facility Will Buy Junk Bonds With 7-1 Leverage

Mish

Today, the Fed announced the terms of its new bond facility. In reality it's nothing but an asset price support mechanism.

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

Comments (45)
No. 1-21
magoomba
magoomba

UTTERLY CRAVEN.

Herkie
Herkie

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.

tokidoki
tokidoki

This is what the People's Republic of America looks like. The PRA, the PRC, what's the difference?

Scooot
Scooot

If it’s illegal could someone issue a legal challenge against them?

PT109
PT109

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.

channelstuffing
channelstuffing

$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!

Naphtali
Naphtali

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.

Zardoz
Zardoz

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.

ToInfinityandBeyond
ToInfinityandBeyond

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.

Cocoa
Cocoa

All of this us highly illegal, but the FED is buying time. months, another year before it all mathematically cannot be accounted for. The fraudulent accounting is near a dead end too. In the end, all of this was money laundering operation

Casual_Observer
Casual_Observer

Anyone think the banking system isnt defacto nationalized yet ?

Russell J
Russell J

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.

flubber
flubber

What could possibly go wrong??

aqualech
aqualech

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?

flubber
flubber

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!

Tony Bennett
Tony Bennett

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).

Bam_Man
Bam_Man

"Toto, I've a feeling we're not in Capitalism anymore."

WuhanFluMan
WuhanFluMan

This is to bankrupt the fed. Trust the plan. Trump isn't losing in November.

RonJ
RonJ

"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.

JFDIagain
JFDIagain

Economist, Avery Largenumber, explains how QE works...

Montana33
Montana33

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.


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