US economy

Fed’s $2.3tn bailout: fielding falling angels


Maybe Jay Powell should be asking for two and twenty? Mr Powell’s stint as chairman of the Federal Reserve feels less like dry macroeconomic central banking and more like the wheeling and dealing of a credit hedge fund manager.

On Thursday, the Fed boss, who once worked in private equity, announced another $2.3tn worth of support for capital markets. The US central bank will offer to buy or backstop securities that would have seemed wildly inappropriate a month ago. The package includes so-called “fallen angel” junk bonds, junk bond ETFs, municipal debt and an array of asset-backed securities. The Fed will also support a “Main Street” lending facility for companies with revenues under $2.5bn and 10,000 employees.

The ostensible purpose of these programmes is to keep capital flowing even as the Covid-19 outbreak prompts a massive, indefinite economic shutdown. Conditions in capital markets have eased anyway in recent weeks. Now the Fed is officially the buyer of last resort — or maybe first resort — of genuine risk assets. This will prop up the fortunes of private investors, including hedge funds and private equity firms.

The S&P 500 jumped a modest 2 per cent. Speciality finance companies — the shadow banking sector that has emerged in the past decade — rallied sharply. That showed who are the real the beneficiaries of the Fed’s latest largesse. The Wells Fargo index of business development companies was up 12 per cent. Shares of CIT Group, a middle market asset-backed lender jumped more than 10 per cent. Listed US private equity firms climbed more than 5 per cent.

Many of these businesses have thrived in an era when non-banks face less scrutiny, and benign conditions have rewarded risk-taking. Now that risk of credit losses has arrived, taxpayers are supporting a safety net. These are bailouts for private capital. At the very least, Americans should demand that taxes on capital gains are adjusted upwards.

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