“Warren Buffett, don’t worry, the Fed will back it up,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a note to clients on Monday. “Monetary policy has reached a new low in the United States.”
Of course, Berkshire, along with many other companies whose bonds were purchased, already benefits from extremely cheap borrowing costs. Berkshire’s extremely strong balance sheet means it has no trouble finding buyers for its bonds.
“This is really embarrassing,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence. “Warren Buffett does not need a backup from the Federal Reserve.”
2008 steroid response
But the fact that the Federal Reserve provided the backing anyway shows how the central bank’s response to the pandemic is even more dramatic than its bold rescue during the Great Recession. A dozen years ago, the central bank lowered rates to zero, bought mountains of Treasuries and US mortgage bonds, and financed the bailout of insurance giant AIG.
The simple announcement that the Fed would be collecting corporate bonds was enough to unlock that market when it froze in March.
The Fed has emphasized that its emergency interventions in financial markets have a real benefit for ordinary Americans.
“We want to support the functioning of the market because when markets work, companies can borrow, people can borrow,” Fed chief Jerome Powell told lawmakers June 17.
Powell added that when companies have access to credit, “they are less likely to take cost-cutting measures,” such as laying off workers.
However, unlike the Paycheck Protection Program that made forgivable loans to small businesses, the Federal Reserve’s corporate bond purchase program does not have conditions that require them to retain employees. In other words, there’s nothing stopping a company whose bonds are now owned by the Fed’s vehicle from laying off thousands of workers.
Apple, Amazon and Google could be the following
Winners and losers
The objective of the program is not to rescue specific companies, but to ensure that solvent companies have access to capital. Without it, a wave of bankruptcies would happen all at once, which could drive the economy into depression.
“This is a very smart tool,” David Kotok, president and chief investment officer at Cumberland Advisors, told CNN Business. “The Fed wants to give incentives and incentives to Berkshire, Verizon, Apple and the rest to make them more economically active.”
Still, Kotok fears that this intervention will distort the functioning of capital markets.
“The Fed is now in the business of picking corporate winners and, by definition, losers as well,” Kotok told CNN Business. “Corporate winners have the market perception that the wind is behind them, otherwise why would the Fed buy our bonds?”
That market insight, Kotok said, will give winners additional financial power in the form of cheaper loan costs. And conversely, companies that didn’t make the cut on the Fed’s list will find it relatively harder to borrow.
“The divide between winners and losers has now widened,” said Kotok.
Editor’s Note: This story has been updated to clarify what actions Berkshire Hathaway shares with Warren Buffett.
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