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It would perhaps be more tolerable if anyone other than the rich shared in the gains of this corporate rescue. But the Fed’s bond-buying program, unlike the Paycheck Protection Program, has no requirements on companies to retain workers. The Fed changed the term sheets between March 23 and April 9, eliminating any such requirements. Apple’s recent debt issuance, which could later be purchased directly or indirectly by the Fed, explicitly states that it will be used for, among other things, “share buybacks and dividends” — forms of leaking money to investors rather than keeping workers on payroll....
....But to properly assess the virtues of the rescue, you have to set it in context. The unemployment rate is 14.7 percent and rising. Car lines for food banks stretch for miles. As Americans continue to struggle and lose ground, the nation’s investment elite have been thus far saved from any downside of the coronavirus crisis. Beneficiaries are largely confined to stockholders, bondholders, and corporate executives (who are often major stockholders). Workers are not only not protected, they’re paying for the rescue, with taxpayer money propping up the Fed actions.
“This is a massive wealth transfer to owners of financial assets,” said Lev Menand, a former Treasury official who now teaches at Columbia University. “The rules of the game are supposed to be that equities take the loss, high-yield debt holders take the loss.” Allowing them to instead bear no burden is a form of socialism for capitalists.....
....Another good example is Boeing, the basket-case aircraft maker with a sketchy record of keeping plans in the sky. The firm “rejected” a federal bailout after issuing $25 billion in bonds. But that bond issuance was entirely made possible by the Fed’s implicit guarantee of corporate bond markets. Boeing’s Chief Financial Officer Greg Smith admitted on March 24, a day after the Fed announcement, that credit markets were “essentially closed.” A month later, it made the sixth-largest bond issuance in U.S. history that left investors clamoring for more; over 600 investors were willing to take up to $70 billion in Boeing debt at the auction.
So Boeing didn’t avoid a bailout; it got one through the side door from the Fed. And the company knows it: Smith thanked the Trump administration after securing the loan, “for the actions they have taken to support our economy and the credit markets.”
Boeing’s bond rescue had a secondary benefit. The CARES Act set aside $17 billion in a Treasury-led bailout for firms “critical to national security,” which everyone recognized as code for Boeing. That money would have come with significant strings attached, like equity stakes for the government. By the Fed reopening credit markets to Boeing, the company sidestepped that condition and kept its investors whole. “Without the Fed action, Boeing would be significantly owned by the U.S. taxpayer,” said Dennis Kelleher of the Wall Street watchdog Better Markets. That’s an implicit subsidy to Boeing and its shareholders.
The lack of conditions had a human cost. Aviation-related grants that the Treasury supplied came with a requirement to keep workers on the payroll for six months. Freed from any restrictions, Boeing almost immediately announced that it would cut 16,000 jobs. Similarly, General Electric, another company that spurned a direct bailout and floated $6 billion in bonds, cut 13,000 jobs in its aviation unit shortly thereafter.
Within weeks of the March 23 announcement, many large companies had wandered over to the corporate bond trough and taken a sip. Issuance of corporate bonds in April alone jumped to three times as much as the year before. The three largest weeks in the history of corporate debt offerings were two weeks in April and the first week of May.....
.....In all, The American Prospect and The Intercept found published reports of bond sales for 49 companies, a total of at least $190.3 billion. Some bond amounts were undisclosed, like for General Mills, CVS, and Kroger, so the number is likely higher. The interest savings on those bond issuances due to Fed intervention is hard to calculate, but using Credit Flow Research’s post-announcement bond issuance estimate of $575 billion, and the changes in spreads after March 23, it’s clearly tens of billions of dollars.
And, given that one part of the credit hierarchy gives the rest a boost, the market uplift to investors in the $10 trillion corporate debt market would be calculated in the hundreds of billions. Combined with ETF and stock market uplift, the trillions in relief absolutely dwarfs what regular Americans got to tide them over during the crisis.
© 2015 Mutual Fund Observer. All rights reserved.
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