Submitted by Taps Coogan on the 26th of March 2020 to The Sounding Line.

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For now, the Federal Reserve does not have the legal authority to purchase corporate bonds on its own balance sheet. While that is likely to change whenever Congress passes the pending $2 trillion stimulus bill, the Fed is busy buying corporate bonds anyways.

On the morning of March 23rd, shortly after we published an article arguing against the Fed buying corporate bonds, the Fed announced the creation of two special purpose vehicles (SPVs) aimed at circumventing the prohibition on corporate bond purchases. Those SPVs, the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF), are externally managed facilities, funded by the Fed and backstopped by the Treasury (in case of defaults) that will buy corporate bonds in the primary and secondary markets.

In other words, the Fed will print money and ‘lend’ it to the PMCCF and SMCCF. Those two groups will then buy corporate bonds that meet the Fed’s eligibility criterion. The eligibility criterion are that the bonds be at least BBB- or Baa3 rated and issued by US based companies that are not directly receiving federal bailout money (excluding this bailout money of course). The SPVs will also be able to buy investment grade bond ETFs. Those ETFs will almost certainly not include the provision that the underlying companies not receive bailout money (again excluding this bailout money), because no such bond ETF currently exists.

Who will be managing the PMCCF and SMCCF, you might ask? BlackRock. That’s right, the Fed will be paying the company that issues, runs, and earns more on ETFs than anyone in the world to decide, among other things, which bond ETFs the Fed should be buying. Yes, if you were wondering, BlackRock will have the right to buy eligible BlackRock bond ETFs so long at the Fed isn’t buying over 20% of the issuance. Do you think that BlackRock will direct the Fed to buy a lot of bond ETFs from its competitors like Vanguard or Barclays? I don’t. Do you think BlackRock will direct the Fed to buy a lot of bonds from companies that are represented in their ETFs? I do.

The US is in the midst of the largest Wall Street bailout in history and BlackRock will be deciding who gets a good portion of the money. Apparently, the Fed couldn’t find a single institution in the US that can figure out how to buy corporate bonds and ETFs that isn’t simultaneously the issuer of those ETFs.

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