At the end of March, the Federal Reserve Bank made a stunning announcement: It would be the buyer of last resort of exchange-traded funds (ETFs) on the corporate bond market. This move, which is not hard to understand, and will be explained in this post, was completely new. "A first for the U.S. central bank," according to MarketWatch. The implications of this innovation became clear when Boeing, a corporation bankrupted by a series of bad decisions made by its executives, issued and sold $25 billion in bonds at the end of April.
Here are two headlines to consider. One, from Yahoo Finance: "Boeing Raises $25 Billion in Bond Sale, No Longer Needs Government Aid; Shares Slip". Two, from the Chicago Tribune: "How Boeing was rescued by the Fed, without a bailout". You can easily guess which headline is closer to the truth. A reader of the Chicago Tribune article will also understand exactly the role the new Fed policy played in what Seattle Times described as Boeing's "'monster' debt offering." This bit of important information, the Fed's role, is, not surprisingly, excluded from the Yahoo Finance article, and also Seattle Times'.
“Boeing’s mountain of debt could prove to be a structural impediment to progress,” says one analyst after the planemaker raised $25 billion in a massive debt sale. https://t.co/s7or0qkP5G #boeing #aerospace
— The Seattle Times (@seattletimes) May 2, 2020
Yahoo Finance reported that Boeing found a way out of a direct government bailout that would have imposed politically motivated restrictions, such as keeping workers employed and ending buybacks, a program that transfers a company's fictitious "free cash" to the shareholders. The latter, Seattle Times, which is presently doing a lot of back-patting, saw the bond sale as a good thing but was not happy about the increased possession of the company's debt by banks (“Boeing is now arguably owned by the banks, with ~$54bn of gross debt”). This was the "double-edged sword" of the $25 billion bond offering.
But now we must ask the question that will never occur to Seattle Times' business reporters, but is immediately apparent to those familiar with the literature of heterodox economists: What made these Boeing bonds so attractive? Why would banks and bondholders buy paper from a corporation that may not recover from the 737 Max crisis and the pandemic for the next 3 or so years?
Yahoo Finance, as Seattle Times often does, dishes Boeing's press release as is and without analysis:
“The robust demand for the offering reflects strong support for the long-term strength of Boeing and the aviation industry,” Boeing said in a statement. “As a result of the response, and pending the closure of this transaction expected May 4, we do not plan to seek additional funding through the capital markets or the U.S. government options at this time.”Capitalism saved the day? Not at all.
Less than two months ago the Boeing Co. went to Washington, hat in hand, asking for a $60 billion bailout for itself and its suppliers. The Chicago-based company, which had spent heavily on stock buybacks and was still reeling from the 737 Max disaster, was an unlikely candidate for government support.What this means is that those bonds sold by Boeing are backed by the public. If they go belly up, which will eventually happen, the public must buy them. This promise by the Fed is efficacious in two ways. One, it keeps Boeing's bailout off the Fed's books (not a penny spent, for now) and, two, it liberates Boeing from political demands such as not directing government money at executive bonuses or shareholders but at constant (equipment, machines, buildings) and variable capital (workers).
Yet by urging the Federal Reserve to take unprecedented steps to bolster credit markets, the Trump administration ended up helping the plane-maker more than any government handout could.
The Fed’s decision to use its near-limitless balance sheet to purchase corporate bonds eased liquidity so much that it was a game-changer for the company...
Boeing is cutting about 10% of its work force and slowing production of planes to deal with a downturn in business that started with the grounding of its best-selling jet and has accelerated because of the coronavirus pandemic. https://t.co/0N8Cms3X2d
— The Seattle Times (@seattletimes) April 30, 2020
What all of this amounts to is a transformation of the bailout unit from public/corporation to corporation/public. They can now bail themselves out. But that's not all, sadly.
On May 4, Reuters reported that Apple is using this new bailout mechanism to buy back its own stock.
Apple Inc on Monday capitalized on the Federal Reserve’s emergency measures in response to the coronavirus outbreak to issue its cheapest bonds in years, making it the latest blue-chip company to do so to fund stock buybacks and dividends.... The Fed slashed interest rates to almost zero in March and said it would act as buyer of last resort in the investment-grade corporate bond market, in a bid to help cash-strapped companies access capital markets roiled by the economic fallout from the pandemic.Now here is the satanic element in this maneuver: Apple is not broke like Boeing. It has $40 billion in cash. But it is using the public's bond promise to buy its own stock back, raise the value of its market value, and thereby transfer wealth from the corporation to its shareholders. Not a dime in its coffer touched.
For sometime now, it has been known by heterodox economists that money is mostly created by banks (not the state). The public is only now catching up to this understanding. But just as democracy arrives, the masters of the universe have departed once again. Now, corporations and financial institutions can create their own bailouts. How long will it take the public to grasp the awfulness of this innovation?