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Unsanitized: The COVID-19 Report for Sept. 16, 2020

The Fed Is Overpaying Banks and Hedge Funds
for Corporate Bonds
Plus, the Problem Solvers step up with a dead-on-arrival bill

 

Wall Street executives have been fattened by Federal Reserve
overpayments. (STRF/STAR MAX/IPx)

First Response

You know the old joke about the guy who gets asked in a job interview
about his greatest weakness, and he says, "I'm a perfectionist?"
That was essentially Neil Irwin's column

about the Federal Reserve and the pandemic. The Fed did too good a job
inflating financial markets and asset prices, you see, and now Congress
has no urgency to engage in further relief for the public because
everyone like them-wealthy people with stocks-is doing well.

There's some truth in this, but only if you see the Fed as perfectly
virtuous and perfectly hamstrung, only able to prop up the investor
class. Congress gave it tools to engage in small business and municipal
lending that it's barely used. The Main Street Lending Program for
smaller businesses has left 99.8 percent of its funding untapped
.
There are numerous creative ways for the Fed to prevent state and local
austerity

through long-dated, rolled-over lending, but they've made a grand
total of two shorter-term loans. The choice has been not to do so, and
yet to buy corporate bonds steadily because the Fed must "keep its
promise" to the market. Asset inflation, in other words, was a choice.
The K-shaped recovery was a choice.

Part of this, as my colleague Bob Kuttner

points out, is that the Treasury Department is a silent partner in the
Congressionally approved programs, and Treasury has fashioned onerous
terms for smaller businesses and government bonds. (I should note here
that the Fed has the power to use Section 14 loan terms for muni lending
that would have nothing to do with Treasury.) In addition, the Main
Street program is run through banks that must take on a sliver of the
risk, which they're reluctant to do.

Bob's right that we need a Reconstruction Finance Corporation-type
setup that could inject direct funds into failing companies, as well as
grants to the states. But letting the Fed off the hook for its
favoritism to financial elites would be a mistake. In fact, the Fed's
own data proves that it does engage in direct cash infusions, by
overpaying for corporate bonds.

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Americans for Financial Reform ferreted this out
in a
criminally under-discussed revelation. The Fed reports
its
corporate bond purchases and loans under the CARES Act to Congress; the
most recent one came out September 8. If you go to the trade-level data
for bond purchases, you see this very clearly. There's a par value, a
market rate for the bond purchases the Fed is making. It's paying more
than par with virtually every purchase. It bought Altria (the Marlboro
and Juul people) bonds at 109.9 percent. It bought Columbia Pipeline
group at 116.7 percent. It bought Principal Financial Group at 112
percent. All but a very few of hundreds of purchases totaling tens of
billions of dollars are made above par. On average, the price is 107
percent.

Critically, the Fed isn't buying these bonds directly, but on the
secondary market. So when they overpay, they're lining the pockets not
of the investors in corporate bonds-like hedge funds and institutional
investors like Pimco. Big banks, who handle transactions as the primary
dealers in corporate bonds, also make out. BlackRock, the asset manager
giant that manages these purchases on the Fed's behalf, is likely also
getting a taste. Essentially everyone on Wall Street is getting rich
from the Fed overpaying for bonds.

Don't take my word for it, check out the words of the head of credit
trading at
a large Wall Street bank: "We like it when the Fed asks for a
price-they tell you exactly what they need [ie size and direction].
Never a problem."

Of course it's not a problem. The Fed has more power than any other
market participant to set a price; that's what the money printer is
for. They cannot be outbid; there is no "market price" when it comes
to the Fed. Their policy decisions set the price, and the data tells you
they've decided to stuff money into the hands of some of the richest
people on Earth, in the middle of a pandemic that is swelling the
Medicaid rolls

and causing mass food insecurity. It's abominable.

The Fed's steady, practically automated bond purchases tell everyone
in the purchasing chain that they will get bought off above par
eventually. Of course the markets are up! Of course Wall Street is
happy! It's just a mass payday.   

If you want to say that the Fed's actions are limited, and we need a
fiscal deal

to forestall economic catastrophe, then OK. But even the apologists
would agree that there are areas where the Fed has unquestioned power.
And here's what they're doing with it: giving bad terms to smaller
businesses and municipalities to make their assistance effectively
useless, while inflating asset prices and giving hedge funds and banks a
giant tip for their efforts. That's the ugly choice the central bank
is making.

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Problem Solvers, Solving Problems

The bipartisan group of House moderates known as the Problem Solvers has
weighed in with a compromise proposal
for a relief package
that appears to take everything House Democrats put on the table and cut
it in half. Did this negotiation take five minutes or ten? Democratic
leaders immediately rejected it and Republican leaders didn't really
have to.

Speaker Pelosi is keeping the House in session

through the election, which will delight members in difficult races, who
will probably ignore the request and campaign anyway. I don't know
that there's a lot more to say here.

It's been 142 days since Pelosi told everyone to "just calm down"
about the lack of state and local government support. New York City is
breaking 100 years of precedent

and not guaranteeing schooling five days a week due to budget cuts.
I'm not calm.

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Days Without a Bailout Oversight Chair

17
4.

We Can't Do This Without You

Today I Learned

* Here I am with Krystal and Saagar on Rising
talking
about the terrifying post-election interregnum. (YouTube)

* Coronavirus deaths proliferate in polluted areas
.
(ProPublica)

* Infection rates double

when bars reopen. (Washington Post)

* Vaccine politics play out in a Senate debate in North Carolina
,
where the Democrat is denounced for suggesting that a rush to approve is
underway. (Charlotte Observer)

* The pressure to bail out commercial real estate is intense
.
(New York Times)

* More evidence that immunity could be short-term
. (Nature)

* Big Ten football is back with daily rapid testing
,
meanwhile quarantined students at the University of Michigan are getting
potato chips for dinner
.
(Michigan Radio)

* Certified young person Paul Rudd

would like you to wear a mask. (Boing Boing)

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