John Nacion/STAR MAX
Unsanitized-052720
Surprise, here's who got bailed out.
First Response
Today we’ve done a crossover feature in association with The Intercept, where I worked for several years before this. The idea came from the disconnect between Wall Street and the real economy. 38 million people have lost their job since the pandemic and yet investors are fine. And I saw a bunch of headlines about how Boeing “snubbed” a federal bailout by borrowing $25 billion in the capital markets. How could a company that was functionally dead before the crisis snap up $25 billion from investors? It turned out they could have gotten $70 billion; that’s how much demand there were for Boeing’s bonds. The rest of us are in a depression, but large companies, regardless of circumstance, could fill up their money vaults the way we fill up our gas tanks.
There’s one reason and one reason only for this: the Federal Reserve. And not the money they have spent, but the signals they have given. The story is called How the Fed Bailed Out the Investor Class Without Spending a Cent. And I really wanted to quantify just how much the Fed’s announcements, the key ones being on March 23 and April 9, meant to owners of capital.
On March 23 the Fed essentially said it would do “whatever it takes” to support corporations, including buying their debt, an unprecedented step. Eventually this would include so-called “high yield” debt, otherwise known as junk bonds, many from companies like Boeing that were already sick prior to the coronavirus.
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Since that moment the stock market has been up over 30 percent, creating over $7 trillion in wealth. Corporate bond funds have almost completely recovered; charts of them look like a panoramic view of the Grand Canyon, hitting a low point on March 23, before shooting back up. Corporate bond spreads, a way to show the cost of a corporation borrowing money, peaked on March 23 and have now reduced by more than half in many cases.
All of this ranges into the trillions of dollars in support, and companies are taking advantage. We identified 49 large firms, including blue-chippers like Apple and Disney and Coca-Cola who have taken over $190 billion in debt since March 23. The three largest weeks in the history of corporate debt offerings were two weeks in April and the first week of May. Over $1 trillion in investment-grade bonds have been issued this year, nearly as much as all of 2019. Here’s Macy’s today offering $1 billion in bonds to pay down a credit line it previously borrowed from.
This wasn’t addressed much in the story, but I should mention here that many policymakers have been concerned about rising corporate debt levels for some time. I always saw it as not something that could cause a crisis but certainly accelerate one. Last October, Sen. Tammy Baldwin (D-WI) wrote to Treasury Secretary Steve Mnuchin, in his capacity as chair of the Financial Stability Oversight Council (FSOC), asking whether they would address the corporate debt bubble, and how it was being used to “fund corporate payouts to investors” (in other words, to finance dividends and stock buybacks instead of capital investment or worker salaries). With downgrades on the rise, would FSOC step in to address a “threat to the stability of the financial system”?
Mnuchin replied that FSOC has been looking at it, and… that was it. “The Council and its member agencies will continue to monitor the corporate debt market and related risks and will take action as appropriate.” Flash forward to today, and Mnuchin along with Fed chair Jerome Powell is the architect of a strategy to pump up the corporate debt market, creating the financial instability he once paid lip service to being concerned about.
But in the end, this is a failure of Congress. The Fed supports banks and large firms with access to capital markets. Everyone knows that. Congress empowered them with specific funds to build a $4.5 trillion money cannon. It failed to offer proportional support to the rest of the real economy. We’re living with the results. Unemployment is skyrocketing and food lines stretch for miles, and the supposed “risk-takers” who earn high returns because they put their money on the line have been saved from any downside.
This will hopefully be the first of many critical looks at the bailouts, and I appreciate the work of The Intercept’s research and graphics team. Now playing on both sites. Check it out!
Odds and Sods
Also at the Prospect today, we have Paul Starr explaining how religious services, by their very nature, are vectors for the spread of the virus, and how this brings up significant Constitutional and 1st-Amendment issues.
And from our May-June issue, we have Gabrielle Gurley discussing the disastrous FEMA program to move PPE, and how the states have grown in power during the crisis.
All of our coronavirus coverage can be found at prospect.org/coronavirus. And email me with tips, comments, and experiences.
Where’s the Beef
Yesterday I wrote about potential price-fixing in the meat industry, with high prices for consumers and low-priced sales for farmers. The meatpackers in the middle are taking all the profits. You might look at that and say it’s just a COVID-induced market phenomenon. “There’s too much livestock for the remaining open plants to handle, driving down prices for cattle and hogs,” as I wrote yesterday. “But with less meat on store shelves, prices paid by consumers are higher than ever.”
But Food and Water Watch has done a short analysis of the industry that suggests that market dynamics aren’t driving this at all. Last week, the U.S. Department of Agriculture issued a report showing that cold storage lockers had more meat in them now than a year ago. That’s 2.455 billion pounds of beef, pork, chicken and turkey. Why in a time of alleged shortages, when consumers are paying through the nose for these products because it’s in scarce supply, is so much meat sitting in storage? Because it’s headed out of the country.
In mid-May, “the U.S. exported 109,588,500 pounds of pork,” writes Food and Water Watch. Meat exports for that week were “up 36 percent from the prior 4-week average.” You can say that these may be filling prior orders, and the increase could be a bounce from lows caused by snarled cross-border trade routes. But the dichotomy of reduced supply in U.S. stores and more supply in cold storage doesn’t make the meatpackers’ claims of “market dynamics” look very good. It looks like they’re holding back supply to boost prices, in fact.
Meanwhile, USDA has purchased over $18 million in meat from leading packer JBS (a Brazilian company) since March, including another $10.7 million on Tuesday. This is part of the “Trade Mitigation Program,” where the Trump administration bails out Big Ag for the trade war it created.
The investigation into the meatpacking industry just got more interesting. But with this administration, you’d have to investigate the investigators, too.
Today I Learned
- Now McConnell is talking about doing another relief bill. (The Hill)
- An amazing study tracks the level of COVID-19 in sewer systems with the rise of cases, and it lines up perfectly with a week lag. (Yale working paper)
- Local news stations have no money and are desperate for content so they’ll run pre-packaged segments from Amazon on their “great” worker safety measures without blinking an eye. (Courier Newsroom)
- Here’s a great tracker on what brand-name stores have not committed to paying suppliers. (Workers Rights Consortium)
- Authors of the bill to allow corporate lobbyists to access PPP funds are getting nervous about activist pressure. (The Hill)
- Meanwhile small businesses don’t want to use the PPP because it doesn’t do much to help them. (Reuters)
- Another Republican member of Congress made suspiciously timed stock trades before the temporary crash. He should have waited for the Fed to save him! (Tennessean)
