Warm Southern Breeze

"… there is no such thing as nothing."

How Does Trump Prop Up His Failing Coronavirus Economy?

Posted by Warm Southern Breeze on Tuesday, August 11, 2020

He orders the Federal Reserve Chairman to buy stocks, bonds, and Exchange Traded Funds.

Yep… buying stocks and bonds will work just perfectly, because BUSINESS!

How much sense does that make, eh?

Buying stocks in companies that could go belly-up because NO ONE is BUYING their stuff is nonsensical – it’s a non-starter, a non sequitur.

Jerome Powell, Chair, Board of Governors of the Federal Reserve speaks to guests during a conference at the Federal Reserve Bank of Chicago, June 4, 2019.

Then who’s left holding the bag, eh?

You, me, and the taxpayers.

Instead, the Fed should just GIVE MONEY TO PEOPLE… who in turn will SPEND IT.

And THAT is what those firms need – paying customers.

You see?

It’ll end up in the companies’ hands, anyway.

So as long as that’ll happen, might as well let it pass through another set of hands, right?

The Peoples’ hands!

But somehow, the GOP just doesn’t understand that very simple principle.

In their world, businesses reign, rule, and dominate. Nothing else matters. For them, businesses are their “sacred cows.” Protect them at ALL costs – even to the demise of The People.

Because if there are no businesses, those masters can’t give their servants jobs. And goodness knows, worker bees are necessary to the successful operation of any big business – especially manufacturing.

It’s not as if the worker bees have a brain, and can think and do for themselves, eh?

The GOP has got it completely all bass-ackwards.

They’ve put the proverbial cart before the horse, and expect the horse to push it.

“To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

“So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

“In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

“This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.”

–– The Fed’s Cure Risks Being Worse Than the Disease
by Jim Bianco, Bloomberg, March 27, 2020
https://finance.yahoo.com/news/feds-cure-risks-being-worse-110052807.html

 

“If the Federal Reserve owns more than 15% of America’s debt, it can play it safe and exit at any time, but if they owned, let’s say 50%, their decision to keep this bad investment comes into play. Owning half of the largest economy’s debt may force the Federal Reserve to either declare bankruptcy or ask to be bought out. Or, they may be forced to stop playing games with our politics and pull out their paid opposition.”

––The Real Reason Trump Merged The US Treasury With The Federal Reserve
by James Carner, June 9, 2020

 


“The Federal Reserve Board on Monday announced updates to the Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.

“As detailed in a revised term sheet and updated FAQs, the SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria. This indexing approach will complement the facility’s current purchases of exchange-traded funds.

“The Primary Market and Secondary Market Corporate Credit Facilities were established with the approval of the Treasury Secretary and with $75 billion in equity provided by the Treasury Department from the CARES Act.”

Board of Governors of the Federal Reserve System, Press Release June 15, 2020,
“Federal Reserve Board announces updates to Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers”


The Fed is going to buy ETFs. What does it mean?
By Andrea Riquier
Published: May 12, 2020 at 8:39 a.m. ET
The central bank is acting as a buyer of last resort and propping up the bond market in the most efficient manner possible.
https://www.marketwatch.com/story/the-fed-is-going-to-buy-etfs-what-does-it-mean-2020-03-23

A primer on the Fed’s corporate bond-buying program
by Brian Cheung, Reporter
Yahoo Finance, June 29, 2020
https://finance.yahoo.com/news/federal-reserve-fully-operational-on-corporate-bond-buying-program-201806075.html

The Fed begins purchases of up to $250 billion in individual corporate bonds
by Ben Winck
Jun. 15, 2020, 09:51 PM
• The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.
• The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.
• The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release.
• The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.
https://markets.businessinsider.com/news/stocks/federal-reserve-begins-individual-corporate-bond-purchases-secondary-market-relief-2020-6-1029309910


Secondary Market Corporate Credit Facility – Federal Reserve


Page 1 of 2

Secondary Market Corporate Credit Facility

Effective June 15, 20201

Facility: Under the Secondary Market Corporate Credit Facility (“Facility”), the Federal Reserve Bank of New York (“Reserve Bank”) will lend, on a recourse basis, to a special purpose vehicle (“SPV”) that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase in the secondary market (i) eligible individual corporate bonds; (ii) eligible corporate bond portfolios in the form of exchange-traded funds (“ETFs”); and (iii) eligible corporate bond portfolios that track a broad market index. TheReserve Bank will be secured by all the assets of the SPV. The Department of the Treasury will make a $75 billion equity investment in the SPV to support both the Facility and the Primary Market Corporate Credit Facility (“PMCCF”). The initial allocation of the equity will be $50 billion toward the PMCCF and $25 billion toward the Facility. The combined size of the Facility and the PMCCF will be up to $750 billion.

Eligible Assets:

Eligible Individual Corporate Bonds. The Facility may purchase individual corporate bonds that, at the time of purchase by the Facility: (i) were issued by an eligible issuer; (ii) have a remaining maturity of 5 years or less; and (iii) were sold to the Facility by an eligible seller.

Eligible ETFs. The Facility may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.

Eligible Broad Market Index Bonds. The Facility may purchase individual corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. Eligible broad market index bonds are bonds that, at the time of purchase, (i) are issued by an issuer that is created or organized in the United States or under the laws of the United States; (ii) are issued by an issuer that meets the rating requirements for eligible individual corporate bonds; (iii) are issued by an issuer that is not an insured depository institution, depository institution holding company, or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Act; and (iv) have a remaining maturity of 5 years or less.

Eligible Issuers for Individual Corporate Bonds: To qualify as an eligible issuer of an eligible individual corporate bond, the issuer must satisfy the following conditions:

1. The issuer is a business that is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States.

2. The issuer was rated at least BBB-/Baa3 as of March 22, 2020, by a major nationally recognized statistical rating organization (“NRSRO”). If rated by multiple major NRSROs, the issuer must be rated at least BBB-/Baa3 by two or more NRSROs as of March 22, 2020.

a. An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the Facility makes a purchase. If rated by multiple major NRSROs, such an issuer must be rated at least BB-/Ba3 by two or more NRSROs at the time the Facility makes a purchase.

b. In every case, issuer ratings are subject to review by the Federal Reserve.1 The Board of Governors of the Federal Reserve System (“Board”) and Secretary of the Treasury may make adjustments to the terms and conditions described in this term sheet. Any changes will be announced on the Board’s website.

Page 2 of 2

3. The issuer is not an insured depository institution, depository institution holding company, or subsidiary of a depository institution holding company, as such terms are defined in the Dodd-Frank Act.

4. The issuer has not received specific support pursuant to the CARES Act or any subsequent federal legislation.

5. The issuer must satisfy the conflicts of interest requirements of section 4019 of the CARES Act.

Leverage: The Facility will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds of issuers that are investment grade at the time of purchase and when acquiring ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds. The Facility will leverage its equity at 7 to 1 when acquiring corporate bonds of issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.

Eligible Seller: Each institution from which the Facility purchases securities must be a business that is created or organized in the United States or under the laws of the United States with significant U.S. operations and a majority of U.S.-based employees. The institution also must satisfy the conflicts-of -interest requirements of section 4019 of the CARES Act.

Limits per Issuer/ETF: The maximum amount of instruments that the Facility and the PMCCF combined will purchase with respect to any eligible issuer is capped at 1.5 percent of the combined potential size of the Facility and the PMCCF. The maximum amount of bonds that the Facility will purchase from the secondary market of any eligible issuer is also capped at 10 percent of the issuer’s maximum bonds outstanding on any day between March 22, 2019, and March 22, 2020. The Facility will not purchase shares of a particular ETF if after such purchase the Facility would hold more than 20 percent of that ETF’s outstanding shares.

Pricing: The Facility will purchase eligible individual corporate bonds and eligible broad market index bonds at fair market value in the secondary market. The Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

Program Termination: The Facility will cease purchasing eligible individual corporate bonds, eligible broad market index bonds, and eligible ETFs no later than September 30, 2020, unless the Facility is extended by the Board of Governors of the Federal Reserve System and the Treasury Department. The Reserve Bank will continue to fund the Facility after such date until the Facility’s holdings either mature or are sold.

 

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