No Junk Debt Is Too Risky: Thank You Fed

Mish

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

Half of American Say Finances 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

Comments (18)
No. 1-8
Quatloo
Quatloo

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.

Jdog1
Jdog1

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.

Bam_Man
Bam_Man

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.

Tony Bennett
Tony Bennett

"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.

Stuki
Stuki

"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.

RonJ
RonJ

"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.

tokidoki
tokidoki

Google reported lower EPS, and poor March ad numbers. Stocks surge after hours.

Thank you Powell!!!!

aqualech
aqualech

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.


Global Economics

FEATURED
COMMUNITY