The Mnuchin-Powell Affair on the Fed’s “Special Purpose Vehicles” in Dollars and Items

Why do bondholders and leveraged speculators need to be enriched, instead of providing tax relief to the unemployed and small businesses? This is the question.

Through Wolf richter for WOLF STREET.

Fed Chairman Jerome Powell responded on Friday afternoon with his own “Dear Mr. Secretary” letter to Treasury Secretary Steven Mnuchin’s “Dear President Powell” letter on Thursday. Both letters were full of compliments for each other and for their cooperation and for their success in inflating asset prices. But when it comes to asset prices in credit markets, Mnuchin’s letter gave specific action and said enough is enough. And Powell’s letter said, OK, the treasury can get the taxpayer money they sent us back.

You would think something earth-shattering happened based on the hype that followed.

On Thursday afternoon, Mnuchin informed the Fed of two things: First, he would not further extend the already extended December 31 expiration date of five of the controversial special vehicles (SPVs) online that the Fed had put in place. before. year under the direction of the Treasury to bail out and enrich bondholders, especially junk bond holders and speculators with huge leveraged bets; and second, that he wants the Fed to return the $ 455 billion in taxpayer money that the Treasury sent the Fed to fund these SPVs with equity, and that the Fed did not use.

The Fed’s actual bond purchases under these five SPVs were miniscule by Fed standards, whose balance sheet is measured in the trillions of dollars. These SPVs have mainly been used as a mind-blowing tool to inflate asset prices.

Between the first announcement of these SPVs by the Fed in March and the end of October, the Fed only bought $ 22.6 billion under these five programs, including corporate bonds, corporate bond ETFs, asset-backed securities, municipal bonds and loans. Main Street business banking, a minimal amount considering its $ 7.24 trillion with a T of total assets. Specifically, he bought:

  • $ 13.3 billion under the SPV, the Fed calls the Business Credit Facilities (CCF), which combines the PMCCF and SMCCF under which the Fed purchases corporate bonds, corporate bonds, corporate bond ETFs and unwanted bond ETFs.
  • $ 3.8 billion under the Term Asset-Backed Securities Loan Facility (TALF) under which the Fed lends to speculators to buy asset-backed securities and place those securities as collateral with the Fed, without recourse, which means that there is no risk for the investors, and they get all the payoffs.
  • $ 1.6 billion under the MLF (Municipal Liquidity Facility) under which the Fed lends to municipalities.
  • $ 3.9 billion under the Main Street Lending Program (MSLP), where the Fed helps banks make loans to small businesses.

Total assets on the Fed’s balance sheet as of Wednesday stood at $ 7.24 trillion, slightly higher than June 10, with a drop in the middle. Of that $ 7.24 trillion in assets, the $ 22.6 billion in these expiring SPVs is so small that it can’t even be shown in this chart:

In his letter on Thursday, Mnuchin listed 12 key financial indicators to show that these SPVs have achieved their goal of bailing out and enriching bondholders and leveraged speculators, and in the process, they created wonderful credit markets that are now foaming in your mouth.

And the Fed did it, as Mnuchin acknowledged, almost exclusively through hype and jawboning, instead of actually buying corporate bonds and other instruments. And most of the money the Treasury sent went unused and could now be used for direct Covid-related tax relief by the government instead of enriching bondholders through the Fed.

In an interview on CNBC, Mnuchin, after being accused of playing political games, said all the right things – possibly for the wrong reasons – when explaining why he let these five SPVs expire as planned:

“We’re not trying to hinder anything. We follow the law, ”he said. “I’m being careful and returning the money to Congress like I’m supposed to,” he said. “It is not a political decision.” And he said, “The people who really need the support right now aren’t the rich companies, it’s the small companies.”

Powell himself has been harassing Congress for months to provide more tax support to small businesses and other entities because the Fed was not in a good position to do so, which was why the The Main Street Loan Program (MSLP) never really got off the ground.

OK, what Mnuchin didn’t say is that bondholders and bond speculators have become immensely wealthy through the market reaction to the March announcement of these SPVs and through the hype and jawboning. that accompanied it, as bond prices soared everywhere.

Powell in his “Dear Mr. Secretary” letter Friday afternoon, told Mnuchin – after suffering the same kind of reciprocal slaps Mnuchin had suffered – that the Fed would release those funds public to the treasury. He said:

“You indicated that your authority limits did not allow the CARES Act facilities to make new loans or purchase new assets after December 31, 2020, and you requested that we return excess capital from the Treasury to the installations of the CARES Act. We will make arrangements with you for the return of unused portions of funds allocated to CARES Act facilities at their year-end.

And he added:

“As you noted in your letter, funds not covered by the CARES Act remain in the Exchange Stabilization Fund and are, as always, available, to the extent permitted by law, to capitalize all loan facilities. from the Federal Reserve that are necessary to maintain financial stability and support. the economy. “

But given the small size of the actual amounts of these SPVs and the scale of its QE frenzy – $ 3 trillion in three months – it’s clear that letting these essentially unused facilities expire as planned won’t have any impact. importance to the real economy, although it might have a bit of importance for speculators and investors who got rich off the jawbone, but they’ve had it so well for so long and they shouldn’t be complaining .

But returning $ 455 billion to the treasury and asking Congress to design new tax assistance programs for Covid relief for small businesses and the unemployed would make a huge difference. Why do bondholders and speculators have to be pampered all the time to further increase the wealth disparity, instead of providing minimal tax relief to the unemployed and struggling small businesses? Powell didn’t even attempt to explain this.

These SPVs should never have been concocted in the first place. They are just another subversion of credit markets designed to enrich asset holders.

The Fed should never have been allowed to buy corporate bonds and corporate bond ETFs, which are traded on the stock exchange. But he did it for the very first time anyway. Back in the days of the financial crisis, he should never have been allowed to buy mortgage-backed securities, but it’s the first time in history, and it’s now standard policy – and a line. $ 2 trillion on the Fed’s balance sheet.

What these asset purchases accomplished was to increase the terrible wealth disparity – the “wealth effect,” as Bernanke, when he was still Fed chairman, rationalized it, and a term Yellen used. boasted about when she was president of the San Francisco Fed. But the blame for this horrific wealth disparity via the Fed’s asset purchases lies with Congress, which has authority over the Fed.

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