“The balloon could burst”: intervention by Fed companies arouses anxiety
Toomey, in an interview, said the Fed’s bond purchases are quite small “That it’s not really disturbing”, although he is still not convinced that they are necessary. The Fed held about $ 9.4 billion in corporate bonds and exchange-traded funds as of June 30, a drop in a multibillion-dollar market.
The Fed and its supporters say the central bank had to act quickly in the face of massive state-by-state lockdowns that threatened millions of jobs.
But complaints about his approach predate the pandemic: Toomey and others have warned for years that the central bank’s easy, low-rate monetary policies – which have helped unemployment drop to its lowest level in 1950. years before the virus hit – protected investors from losses and pushed corporate debt to record levels.
There is a danger of supporting so-called zombie companies – those that can only sustain their business operations by borrowing cheaply – with ultra-low long-term interest rates, said Toomey, who is at the head office. to the congressional committee overseeing the Fed’s emergency efforts.
The number of companies likely to have difficulty paying interest on their debt has grown as a share of the corporate sector over the past decade and is now around 20%, according to data compiled by Deutsche Bank Securities.
There is clear evidence that the Fed’s measures have avoided disastrous results for some companies. According to an analysis by the Swiss bank UBS, the markets expected at the end of March that companies would default on up to 35% of debts classified as undesirable; that number had fallen to about 12 percent last week.
“The reality is they saved a lot of these companies,” said Matt Mish, head of credit strategy at UBS.
There is also a benefit to otherwise healthy businesses that were only threatened with failure due to the pandemic, given the specter of gargantuan job losses.
“What else could they do? Said William Spriggs, professor of economics at Howard University and chief economist of the AFL-CIO.
“I am very angry with people on the left who are yelling at the Fed and blaming them: ‘Look! All they do is pump up the stock market. Uh, so you want them to let all the companies go bankrupt? And then, according to you, what jobs will be left?
In addition, generalized corporate bankruptcies would enrich another type of investor: private equity firms specializing in the restructuring of troubled companies and often criticized for having encumbered them with debt.
“I don’t understand why we should be pushing more companies like Carnival closer to bankruptcy – and threatening to cut even more jobs than have already been destroyed – just to allow hedge fund vultures to reap the benefits. to have their predatory loans be Carnival’s only option. », Josh Bivens of the Institute for Left Economic Policy written last month.
Many experts, however, fear a wave of bankruptcies will happen anyway, saying the Fed can only delay the inevitable if indebted companies don’t generate enough revenue to pay off their loans. Already, some highly publicized restructurings of JCPenney, Brooks Brothers, Sur La Table and Hertz have demonstrated the limitation of central bank intervention.
“As long as you can borrow the money to make the minimum payment on the next card, you can continue this game for a while, but it’s not sustainable,” said Thomas Salerno, partner at the law firm. Stinson specializes in bankruptcy. “Eventually, he will collapse under his own weight. “