Corruption in the Time of Coronavirus

Now even the fig leaf is gone.

By Karen Parker FeldThe Irreverent Economist at Paladin Advisors.   Cross-posted from WOLF STREET.

On March 23, the Fed announced its largest-ever intervention in the financial markets. Bazooka is too timid a word to describe it. More like a neutron bomb. Our central bank, supposed defender of the currency and the stability of markets, can now purchase an unlimited amount of US Treasury and agency mortgage-backed securities (now running at the unheard-of rate of $625 billion per week). That’s on top of $1 trillion per week in repurchase operations. As amazing as it sounds, that’s not where the real action lies.

As part of Congress’s CARES act (ha, nice try!), the Treasury will create (or resuscitate) a series of special-purpose vehicles (SPVs) to buy all manner of financial assets, backed by $425 billion in collateral conveniently supplied by the US taxpayer via the Exchange Stabilization Fund. The Fed will lend to SPVs against this collateral which, when leveraged, could fund $4-5 trillion in asset purchases.

That includes municipal bonds, non-agency mortgages, corporate bonds, commercial paper, and every variety of asset-backed security. The only things the government can’t (transparently, yet) buy are publicly-traded stocks and high-yield bonds.

You may ask, is this legal? Not exactly.

The Fed’s charter prohibits it from buying securities that lack an explicit government guarantee. Hence the convenience of murky SPVs, to which the Fed is printing lending the majority of the funds. Jim Bianco spells out a slew of new acronyms: CPFF (Commercial Paper Funding Facility); PMCCF (Primary Market Corporate Credit Facility); TALF (Term Asset-Backed Securities Loan Facility); SMCCF (Secondary Market Corporate Credit Facility) and a bone to small business in the form of the MSBLP (Main Street Business Lending Program).

These SPVs involve the Fed in nearly every major US financial market. That’s not all: by providing low/no cost financing to large corporations, asset managers, distressed debt vultures ventures, and private equiteers, our Federal Reserve has fast-tracked the hoovering up consolidation of American business into the hands of the few, the wealthy and the powerful

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One thought on “Corruption in the Time of Coronavirus

  1. I’ve heard (or inferred) that one possible effect of the late March decision is that the US Treasury will begin to take some control back from the Federal Reserve regional banks. Do you know if this is true? Why or why not?
    Thank you!


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