Unsanitized: The Federal Reserve Loads the Cannon

Plus, the value of unions. This is The COVID-19 Daily Report for March 27, 2020.

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First Response

As we’ve discussed, the bailout package scheduled for a vote in the House today includes $454 billion for the Treasury Department to hand over to the Federal Reserve. (This was initially $425 billion but they topped it up in the final bill.) That money could then be placed into a “credit facility” and levered up 10-1, creating a $4.5 trillion money cannon aimed at the largest corporations in America.

You’re right to ask, “Why does the Federal Reserve need any money from the Treasury?” The Fed has a printing press (a computer really) and can conjure up whatever cash it needs. Nathan Tankus calls this an accounting gimmick, and if one-quarter of the total package is unnecessary, that should be news.

Pam and Russ Martens say this enables the Fed to hide the credit facility off its balance sheet. Making it a “special purpose vehicle” could shield the money cannon from Freedom of Information Act requests. Bloomberg famously used FOIA to discover the terrible collateral the Fed allowed banks and other companies to use for lending in the 2008 bailout. In addition, the coronavirus bailout law repeals public meeting and recordkeeping requirements for Fed-related programs. And the oversight built into the bill comes after the money is out the door. So secrecy, long a Fed staple, could be the answer.

The Fed announced another whole bailout program on Monday, which is a year ago in coronavirus time. Again supported by Treasury Department cash, this credit facility supports the corporate bond market, which has been seizing up. Here’s the situation: lots of companies feasted on highly leveraged loans in the past decade. This was particularly true in the energy sector, and the current crash in commodities is likely to create a lot of defaults. Other debt, like commercial real estate, could collapse as well. Think of this Fed program as like a bank; Treasury makes a deposit, and that’s the capital for lending and trading. By buying up corporate debt, the Fed would keep corporate bond interest rates from spiraling.

The debt could be rated pretty low by credit rating agencies, meaning they think there’s a likelihood of default. Since the rating agencies are reassessing these bonds, the Fed can scoop in before the downgrades to junk status. So many of these loans were overrated; Moody’s highly rated a debt instrument on two large Las Vegas casinos on March 5, when the effects of COVID-19 on the travel sector were already well-known. That deal has already disintegrated.

This is a bailout, then, of a highly irresponsible bonanza of corporate lending. All of this debt was run up well before any coronavirus crisis; what is the rationale that the Fed has to backstop this market? Plus, the Fed already has the $4.5 trillion bazooka, why do they also need a program to buy up increasingly worthless corporate debt?  

Incredibly, the Fed put BlackRock, the world’s largest asset manager, in charge of this and two other bond-buying programs. One of the programs involves buying up exchange-traded funds, and nobody has issued more of those than BlackRock. The firm can theoretically direct itself to buy up its own troubled funds and take fees on it! Whatever the purchases, BlackRock unquestionably stands to make hundreds of billions of dollars.

BlackRock managed a lot of financial crisis-era programs too; this kind of financial industry backscratching is par for the course. So is the hide-the-ball manner in which the government conceals its bailout by hooking Congress into passing a law, when the real action takes place at the Fed. What Senator has the standing to cry foul? They all just voted for part of the same bailout.

Vital Stats

New York Times: As of this morning, 85,381 U.S. cases (68,534 yesterday), 1,271 deaths (990). Johns Hopkins University: 86,012 cases (69,197), 1,301 deaths (869). The U.S. now has more cases than any country in the world, and doctors believe the deaths are being undercounted.

The COVID-19 Tracker shows 82,234 cases (65,512) and 1,197 deaths (936), with 540,252 tests completed (484,286). The key is going to be to increase testing significantly enough in areas that haven’t exploded with an outbreak to actually do the contact tracing and isolation strategy that allowed South Korea to avoid the worst. But I don’t see that coming together yet.

There is Power in a Union

Treasury Secretary Steven Mnuchin announced that the government would take equity stakes in the airlines in exchange for $25 billion in grants. The airline and aviation bailouts operate separately from the Federal Reserve money cannon, and have different terms. So taxpayers getting something for their investment here is unique.

The airline bailouts also restrict stock buybacks and dividends—the Fed cannon just has a temporary bar on buybacks—and some (fairly weak) limits on executive compensation. Moreover the $25 billion in grants must go to maintain payroll, something not present in the other corporate bailouts. It’s not perfect; airline travelers didn’t get any relief and there doesn’t appear to be any environmental curbs. But it’s better than the base case.

That’s a testament to the work of strong airline unions. Sara Nelson of the Association of Flight Attendants was out strongly in public calling for better terms, and she got some of them. Similarly, as Steven Greenhouse writes today at the Prospect, airport workers (the contract employees like baggage handlers and skycaps) got $3 billion in aid, thanks to a longstanding effort from SEIU.

Not every sector with a strong union was necessarily rewarded in the congressional package. But at least for aviation, it gave workers a place at the table, a chance to assert their priorities. And for one brief moment, Congress listened.

Over at The Prospect

Here’s some of our coronavirus coverage this week:

Richard (RJ) Eskow on how health benefit plans make the situation worse.

Alexander Sammon on the tax-avoiding strategies of the newly bailed out.

Marcia Brown discusses the risks of coronavirus to vulnerable communities with a physician.

Reuven Avi-Yonah says we should revive the excess profits tax.

Brittany Gibson asks grassroots candidates how they are campaigning amid COVID-19.

Also, I can’t find video, but here’s a transcript of my appearance on All in with Chris Hayes on Wednesday. And I was on KPFK radio with Jon Wiener, here’s audio of that.

Today I Learned

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