The Bailout Bonanza is Back! (Pt 1: The Commercial Paper Crisis)
I’ll lead off with a brazen display of SHAMELESS bankster greed. Banks absolutely MUST HAVE all bailouts go to them. When the government said it would send $1,000 checks to every tax payer as a personal bailout, one banker implored the government to give it to the banks instead.
His rationale? The banks can serve the little people better than they can serve themselves, so don’t give the money directly to the little people where it will be wasted:
Memo to Congress
From: Jim Glassman, JPMorgan economist and labor-market expert.
Subject: Don’t send checks to workers. It is inefficient.
What to do instead? Use the banking system to channel funds to the business community….
Banks will tell their business clients that they will be compensated for any loss of revenue caused by the cessation of activity….
Banks would tell the businesses that the only way they would get the money is if they continue to pay their existing workforce. No layoffs…. That way workers don’t have to go on unemployment insurance.
Under this plan, U.S. Treasury Secretary Steven Mnuchin will tell the banks “we’ve got your back” and will funnel stimulus money to the firms.…MarketWatch
God forbid the money ever just goes to the little people as quickly as possible. It’s more important the government has the backs of the banks. (Because that’s where the bacon is, I guess.) It must ALWAYS go to the rich first and then trickle down! Greedy pigs!
Workers weren’t going to have to go to unemployment insurance to get those checks anway. My understanding is that the checks were going to be mailed directly from the treasury — just as they were under the Bush administration — to people’s homes. What a ruse just to glom onto the checks! Greedy economic terrorists with piggy-bank bombs strapped around their pork bellies!
The only lens banksters are ever capable of seeing through is the one that sees into their own fat pockets. So, let the banks burn on a spit roasted over the heat that is coming from their own ravenous greed.
Glassman said sending $1,000 to workers at restaurants and gyms won’t help the workers or the business.
No, of course not! They’ll just squander it on things like food. It’s inconceivable that it would help workers if it didn’t age in a bank cellar for few weeks first! How could anything help workers that didn’t first quench a bank’s thirst for endless funds and then get passed through with the bank’s final blessings after they’ve had their wine tasting?
Banks know their customers, and his idea would get money to the front of the line.
Oh, my gosh, what baloney. The government can’t just mail it straight to the front lines to get it there as quickly as possible! Banks know us so personally they know what’s best for us. Geeze, these people make me nauseous. Somehow, I know what will be passed down won’t be the wine, but the vinegar.
Glassman said that in his travels across the country over the last few weeks, he has discovered “no one is confident that anyone is going to help them.”
Thank goodness we have the banks to look out for us! I’ll be so much more confident if I know the money gets laundered by a bank before it comes to me. After all, it might have COVID-19 germs on it. So, money laundering may help. Even the Fed has said money isn’t fit for touching! Better quarantine our COVID-cash in the bank for a bit just to be safe. Those checks are carriers. Best to give the germs a chance to die while the money rests for awhile in a locked-down vault.
One problem is the program would not cover gig employees.
Ah well, who cares about them? So long as the banks get to hold the money and savor it a little while until it ferments into fine wine or maybe roll it up and smoke it, why should we care about the gigs more than the pigs?
I cannot even begin to say how hatable these people are.
So, the bailouts are back in town.
Does anybody remember me saying at any point along the Fed’s Great Recovery that all of the Fed next bailouts would happen through banks? Never money directly into the hands of the people because that is inconceivable to them, but nothing is off limits when it comes to saving a fat, greedy banks? If not, you haven’t been reading here long enough. Well, that’s what you’re going to see in this article.
We’ve already hit the “rinse and repeat” button on the Great Recession washer that I said we would as soon as we went back into recession. And the banksters are already shoving their fat bellies up against the table and elbowing the common person out of the way to make sure they’re first and everything goes through their digestive system before the little guy gets to eat what comes out from behind.
I’m going to lay out all the major balloon bailouts already flying out the bazookas or being seriously discussed. Because there are so many, however, I’m going to break this down into installments. My last article was so long because so much info kept pouring in as I was composing it. I usually prefer to give the comprehensive picture, but Mercy! There is too much happening too fast, so just know this is only a third of the case to be made (or less):
Commercial paper ripped to shreds
As I noted in my last article, “How Dead is the Fed?,” the Fed is resurrecting a giant shredding machine (figuratively speaking) that failing banks (and maybe other corporations) can throw all their commercial paper trash into.
As a reminder, the Fed describes commercial paper as follows:
Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies. By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy.Federal Reserve
That’s the pretty-as-pink description of the toxic-waste shredder that you can (if you’re a wailing and flailing bank) throw all your commercial paper trash into, from which the Fed will suck it down into its basement digesters and turn it into garden fertilizer. The Fed will, in other words, create more new money to buy your risky paper off you at face value. Yay!
The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market.Federal Reserve
The primary problem, which the Fed’s lovely language avoids bringing up, is that money-market mutual funds are experiencing runs, so they need to issue their own commercial papers to raise quick funds, but no one wants to buy their CP at interest rates that can save those funds. The interest spreads are doing as shown below because no one wants to fund a short-term loan to a fund with huge outflows to help it meet its fleeing customer’s demands:
At least, we’re avoiding the moral hazard route in this rinse cycle of the money laundering machine. Not! The plan is to just give these entities (dealer banks, clearing houses, hedge funds and money-market funds) whatever they need, and then they will stop creating those needs. Sure they will! Just like they quit doing this stuff after the Great Recession bailouts.
The Feds new approach appears to be “Just send us your defaulting existing commercial paper that you’ve acquired from others, and we’ll create new money to buy it from you, or issue your own tissue of new high-risk commercial paper, and we’ll buy that from you. Just give us a piece of paper and write on it how much money its worth, and we’ll give you money for it. OK?”
Yeah, no moral hazard there. The alternative to the Fed sucking up all the swill that no other banker pigs will eat is that all those moms and pops holed up in their home quarantines for the next month might start to get a little nervous about everything that is going on and decide they want to put their money under the mattresses where they can actually get to it? So we need a fast facility to digest the stuff no one wants into pulp and press it out into new paper money (or computer money). IT’S JUST PAPER RECYCLING!
Redesign of the old shredding/recycling machine is being done under the “unusual and exigent circumstances” clause 13(3) of the Federal Reserve Act. Why would you think there is is anything urgent or particularly at risk here since it its being done under the “demanding circumstances” clause? That “unusual” section was last used during the Global Financial Crisis in 2008; so I don’t think we are talking about any particularly pressing problems. Probably just the kind of pretty standard stuff that fits within seven standard deviations of a normal problem. Go back to sleep.
Has no one been regulating all this garbage throughout the entire decade elapsed since the last great financial crisis? But, hey, “the economy is strong, very strong.” Yeah, well, the garbage it’s made is a little weak.
And the federal government is crippled in helping with this because …
The massive 2017 tax cuts, which primarily helped wealthy taxpayers and big corporations, provided a small, temporary boost to economic growth, but they and the subsequent feeding frenzy of spending increases approved by the Republican Congress have left us with a $1-trillion federal deficit even before the economic effects of the coronavirus epidemic ripple through the economy.MarketWatch
The Fed will suck it down into its digesters and turn it into a nice garden spread or new printable paper. In exchange for the trash paper, the machine will print out more money.
This smelly beast is called the CPFF or “Commercial Paper Funding Facility.” It’s not a new thing. The Fed had one of these digester machines back in 2008, too. Does anybody remember me saying at any point along the Fed’s Great Recovery that the whole recovery would end right back in the belly of the Great Recession … only it would be deeper by the time we got back down there? (If you didn’t, you should have been reading here longer.)
The resurrected machine — once the Fed and their developing partner, the US Treasury, get all the dust knocked off and a few new parts installed — is going to be specifically tuned to digest bad CP held by the Fed’s dealer banks. You know, that standard stuff that was taken as collateral on repo-like loans. Stuff that turned out not to be worth the loan it was collateralizing. That kind of trash paper/toilet paper, hence “CP/TP.”
So, this, too, was predictable. And it sounds so straight.
The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies.Federal Reserve
A “backstop” — a bailout if things fail.
The A1/P1 limit is because money market mutual funds can’t hold any quantity of stuff rated lower than top tier anyway, so this is still all about saving money-market funds from runs. (You might want to know the Fed has put up a backstop if you have anything in a money-market mutual fund.)
Regulations of MMFs limit their holdings of commercial paper rated less than A1-P1… Dealers and clearing agencies, also generally require issuers to maintain a certain quality….Federal Reserve Bank of Richmond
Apparently not on that last bit, or they wouldn’t be in such trouble. In my recent posts, I wrote an exposè on the Repo Crisis and how certain named “clearing agencies” were in deep trouble at the core of the crisis. So, this is also about that! (I try to focus those articles the things that I THINK will become the basis of our next major problems or become part of the solution that will be tried for those problems.)
Backup Liquidity Commercial paper issuers [like clearing houses and hedge funds] maintain access to funds that can be used to pay off all or some of their maturing commercial paper and other short-term debt. These funds are either in the form of their own cash reserves or bank lines of credit [which the banks are not wanting to provide to these clearing houses and hedge funds right now because they’re a shaky mess]…. SEC regulations became effective that limited MMFs to investing no more than 1 percent of their assets in any single A2-P2 issuer
In other words, there isn’t enough that was originally issued below an A1-P1 rating to be worth bothering with. However, you might want to throw anything questionable in the Fed’s digester before it gets downgraded.
It is said that, for safety, the machine will have double operator keys (so to speak) — one for the Treasury to use and one for the Fed to use — kind of like some thermonuclear missiles in submarines require two keys to launch. It requires both Fed Chair Powell and Treasurer Mnuchin because you don’t want a commercial-shredder/manure-spreader like this to be something either the Fed or Treasury can use to just grind up stuff they don’t want anyone else to see. Its solely for grinding up and digesting the stuff we really, really need to get rid of. (Two “reallies” means it’s toxic waste, and nobody else will touch it.)
This two-party failsafe mechanism in the machine’s new operational guidelines is intended to assure us that the “procedural bar” for using the Fed’s new lending-and-laundering facility will not be abused. That means both Fed and Treasury have to agree something big is in danger of failing before they start composting bad debt and turning it into new economic fertilizer (aka new money to regrow the economy by saving banks).
The Fed cannot just use this to help out an ailing buddy … well, not unless (as in the days of Hank Paulsen, former Treasury Secretary) it is an institution that a is also an ailing buddy of Steven Mnuchin. It has to be an entity both Jerome Powell and the Munchkin feel sorry for and want to save. (God forbid your name is anything thrifty like “Washington Mutual.”)
That both Fed and Treasury have now rebuilt the machine tells you some really nasty stuff is happening that you’re not specifically hearing about because we haven’t needed this beast for ten years. The beauty is that, once the bad stuff has been digested into the deep bowels of the Federal Reserve, it will remain there indefinitely and nameless, so the institution that had bad digestion can operate without looking sickly green to the public (and I don’t mean green with cash because that kind of green it will look again after having recently gone pale). It’ll be full of new greens.
For additional safety, this is also a bulk-only shredder-digester-composter-rinse-and-repeat washer. It has to involve commercial papers of several institutions equally under duress according to the original act before the Treasurer and Lead Bankster are allowed to load the hopper for use. That just tells you there is a lot of nearly failing institutions right now that need the Big Green Meany in the basement of the Fed.
It’s also only allowed to be used on institutions that are not yet about to go insolvent (as in already late on payments) because, for those, I guess we can just throw the bad paper away via bankruptcy or something. No need to waste energy recycling it into the bowels of the Fed.
Also, there is no rush for this, so long as it is ready, as Fed and Treasurer said it would be, by Sunday night in order to meet a looming outflows in prime money-market funds that need to raise crash cash through the sale of CP/TP in order to, according to Bank of America, avoid a potential “large-scale run” on said funds.
That was supposed to happen last Sunday … and it didn’t. Well, that now explains that trillion dollars in extra repo offerings the Fed came up with in a hurry on Monday … and Tuesday! It was an effort to settle the indigestion back down. Don’t worry. They have this under control. The Fed CP/TP machinations will be running like a top by …. oh, say, this coming Sunday … probably about as soon as those coronavirus test kits get fixed.
Doesn’t sound like a problem to me. Nothing the ol’ CP crash-n-cash ATM can’t fix. Certainly makes me feel comfortable about that 401K money I moved from bond funds going illiquid due to treasury bonds that have been leveraged 2-4 times as collateral where no one knows who really owns the bonds anymore. Glad I moved it into money-market funds about to experience runs since stocks are no longer being safe.
Ah well, such is the way Everything Bubbles blow. There’s no safety anywhere. And just as I’ve always said would happen when banks are trying to stop runs, gold started mysteriously pricing downhill to discourage people from buying it (because using it as ballast to throw off in a crisis is, in my opinion, the leading unstated reason central banksters hold so much of the bank-hated stuff).
Is it any wonder interest is rising even though the Fed just slashed it?
Let’s just hope the pull cord on that fancy commercial paper shredder doesn’t break on this next Sunday night.
As Zero Hedge summarized the Fed’s new move to intervene in the flailing commercial paper mâché market:
The Fed would effectively backstop the most urgent and short-term form of corporate funds. one which many companies in the past have used to repurchase their own stock, and as such any such corporate bailout will spark a huge political debate as Americans – rightfully – demand to know why the Fed is now in the business of bailing out companies that spent like drunken sailors on buybacks, only to demand a rescue now that they have no cash left….
At the same time corporates have been seeking to tap CP markets to fund short-term funding gaps, money market mutual funds (MMF) have been trying to raise cash in the secondary CP market … ahead of an expected increase in investor outflows….Zero Hedge
Oh, gee, this is also the kind of credit that was used to buy back stocks! Whoever saw THAT corporate credit was going to become a leaning tower of troubles? No one could have seen this coming.
One hopes Americans will demand to know why this is happening, why it was allowed to build up like (and even demand it be stopped and lop off some top heads). However, the Everything Balloon bailouts happened so fast, Americans didn’t even see them coming. It looks to me like America is going to sleep walk through all of this and only debate it after trillions of bailouts are a done deal by the end of week … all over again!
We are (in mass anyway) used to blindly trusting that everything being done by our leaders to control our every move is for our safety. Just look at our response to the Coronacrisis right now, which looks a lot like martial law with all the streets cleared … only without the need of any armed marshal to enforce it. Is it really necessary for our safety? Maybe, but I’m surprised at how readily everyone in the nation went along with it. Maybe that’s a good thing … except when it’s not. The masses will assume the bailouts are necessarily in their best interest, too, and surrender control of their lives.
We did the same thing after 9/11. We allowed the government with hardly so much as a voiced concern to tap our phones and computers every second of every day with the flimsy promise that they will get a FISA warrant (a new thing created just for that purpose) before they actually listen to what they’ve recorded or put it to use; but apparently the FISA warrant process, as I always suspected, isn’t even strong enough to safeguard someone running for president of the United States. God help the rest of us who have no power to find out how something like that was improperly used against us.
So, the bailouts are back, and I don’t hear much outcry! Once again the masses are just hoping they save the banksters before the banksters fall on them and crush their struggling bank accounts. In Fed We Trust.
I really hope and pray I’m wrong! But I’m not praying to the Fed who preys on me. Instead, I’m fighting the battle, and I hope you do, too, whether it is with support here and/or an immediate letter of outrage to your politicians or whatever creative way comes to your mind. If we don’t break out of the inertia now, we’re going to get to repeat the whole Great Recession Recovery all over again.