Munificent Mnuchin:

Makes The Democrats Support Wall Street

& The Media Think Like the onion

Disclaimer: In this article, I will focus a lot of my outrage towards one party. Once again I would like to remind my gentle, few, yet metaphorical many, adrift, and of little hope readers that I dislike both parties equally. This is another example that illustrates how the two parties work to divide Americans.

A few days ago, Steve Mnuchin requested that the Federal Reserve return the unused funds that the Treasury provided the Central Bank for its emergency facilities. The chairman of the board, Jerome Powell, along with every person that occupies the Federal Reserve, wanted to extend most of the facilities. One of his reasons were to backstop the market in case the virus threatens to cause market turmoil and there are liquidity problems. The Federal Reserve would like as many tools as possible because it decreases market risks. Mnuchin says that the unused money can be directed towards another stimulus that would better serve Americans. The funds may also help Congress to finally make a deal as Americans know they are sitting on 450 billion dollars from the Cares Act, which was meant to help the struggling working class.

I was surprised to see Secretary Mnuchin(former employee of Goldman Sachs) decide to not extend Fed facilities, which were mostly benefitting banks and corporations as I will make clear in this article, but also request that all of the unused capital be returned. I went to Twitter once I heard of this request, expecting to see the finance community complaining and exaggerating potential negative outcomes, and politicians, pundits, and others on the left reluctantly admitting Steve Mnuchin did something good and in their interest. Of course, I was right about the finance community, and I made a few remarks about their foolish opinions that have been twisted by their concerns of financial markets. What I did not foresee was a majority of the left relentlessly using this to vilify Mnuchin – is this the same party that pretended to be outraged about the money allotted to Wall Street from the Cares Act, which they supported, as a political tool or talking point? It made no sense.

Paul Krugman, AOC, Maxine Waters, Sherrod Brown, and a majority of the media claimed Mnuchin only did this to cause harm to the economy out of spite and anger from the election. Here were some of the headlines:

This was the first article by the NYT on this story. Then they made multiple variations of it as they changed the headline to draw more attention – six different titles were used within 24 hours of their first story!

Washington Post implies in each excerpt that this is a blow to the economy that is politically motivated.

CNN doing what CNN does.

Wisdom from the Blue Check Marks…

“Trying to create a financial crisis.” “Monstrous.”

The only monstrous behaviors are these wild tweets and articles exaggerating the effects of these facilities and their nefarious claims that this action is bad for the American people; suggesting otherwise is either incompetence or deception.

What are these crucial programs that the media, “economists”, Krugman, Waters, Brown, and a surprisingly large number of Democrats have jumped to defend, despite reasons which contradict their usual, specific, and yet vague talking points?

Here are two snippets of the letter Mnuchin sent to Powell detailing the facilities he’d like to end.

Extended

CPFF

MMLF

PDCF

PPPLF

Expire Dec 31

PMCCF

SMCFF

MLF

MSLP

TALF

Let’s take a look at the facilities Mnuchin tried to destroy the economy with.

PMCCF: Primary Market Corporate Credit Facility

This facility was instrumental for the doings of nothing. The purpose of the PMCCF was to purchase new corporate debt issuance.

It was never used.

Why is it needed?

It’s easy to conclude this one is safe to end.

SMCCF: Secondary Market Corporate Credit Facility

The purpose of this facility was also to prevent illiquidity and borrowing rates from escalating. During shocks, investors often move into “liquid” assets or dollars. A quick market sell-off causes bond prices to move lower and yields(rates) higher. A fall in value can quickly escalate as sellers overwhelm buyers causing all demand to evaporate. Furthermore, a big decline in asset prices puts stress on those that invest or operate with high leverage – it begins a domino effect unless it is contained.

In the secondary market, holders of a bond can sell at any time if they do not want to wait until maturity. The Federal Reserve created the SMCCF to ensure the “domino effect”(contagion) or liquidity problems would not occur during the pandemic.

The SMCCF works like this:

A Special Purpose Vehicle is created – a company created that’s typically dedicated to one purpose.

A Wall Street Firm is hired with no competitive bid process to lower the cost of this SPV – Mr. Powell(Chairman) states there is no time to conduct that process but promises it will be done in the future. The promise was kept… Right at a time the facility came to a close.

The world’s largest asset manager(7.5 trillion), BlackRock, is hired to facilitate the purchases of bond ETFs for the good of the American people.

To their credit, BlackRock appears to have not been paid a cent; many other firms would receive compensation for managing these facilities

— BlackRock was also the manager of three facilities during the Global Financial Crisis: Maiden Lane, ML2, ML3 – no-bid contracts.

The Fed sets out guidelines and rules for BlackRock(as they do for all facilities) to follow, such as which ETFs are eligible for purpose, including Blackrocks’ very own ETF’s(iShares).

Did this process – hiring Wall Street to help Wall Street help Wall Street help Corporations and then help Main Street – work? Like a charm. Not that much for Main Street. The Fed’s program was extremely effective increasing market confidence with much less capital than expected at the time of the announcement. That is the best aspect of this policy. In fact, it worked so well that corporations broke the record of annual debt issuance by September!

High Yield(JUNKie Bonds) debt issuance is the next chart. These are bonds that have a much higher chance of defaulting.

I wonder if Paul Krugman considered the consequences of these policies? As interest rates remain low more investors take risks to increase their return. At the onset of 2020, junk debt yielded 5% and soared up to 12% – A consequence of not just the pandemic but of easy money and other Fed policy. Now the average yield is lower than before the pandemic. Investors lent money to companies of higher risk because the facilities were expected to buy hundreds of billions of bonds. A lot of the demand is not because investors believe that in 5 or 10 years the companies will be able to pay them back but rather it is the intention to buy under the assumption Fed demand will have increased their price and somebody will pay more. Even as the facilities come to a close most investors believe the Fed will eventually protect their investment.

SMCCF was the largest of the facilities not extended by comparison to their current holdings of 13.3 billion.

TALF: Term Asset-Backed Securities Loan Facility

I reviewed their holdings/loans to see which businesses are using this facility to help support credit to consumers. The requirements for this facility:

First, I filtered the results by the borrowers’ loan size.

Alta Fundamental Advisers and Mackay Shields are the two single entities that make up the borrowing of the TALF; Alta Total 1,512,293 billion dollars; Mackay Shields 811,203,889 million dollars. These two Borrowers make up 60% of ALL loans by this facility.

Since Alta was by far the largest borrower it’s certainly worth finding out how they came to be in the hands of half of the entire Fed Facility. According to their ADV:

They’re a firm apparently with only 4 employees of which 3 perform investment advisory services.

Not that this is surprising but their fund originates out of the Cayman Islands.

I also found an article from 2002 about the richest man in the UK and how he avoids taxes.

The location of the material investor of TALF transactions is mostly South Korea.

Are these the types of facilities Maxine Waters and Paul Krugman believes are the best use of tax dollars? Not one article from The NY Times, Washington Post, WSJ, or any mainstream source details how the Fed Facilities worked because they had an agenda, as they always do, besides the truth. So far 13 billion in ETF purchases, all during a period when the market had already recovered, and a few billion to extend credit to consumers and borrowers of which would hardly do anything to help anybody besides hedge funds.

Remember how NY Times headlined their articles implying the need of these facilities? Well earlier in the year they(Jeanna Smialek et al.) also wrote how TALF is benefiting Hedge Funds. She also wrote about how foreigners are able to profit from TALF…

Perhaps she forgot.

Main Street Lending Program

I won’t go into too many details here because this facility is one I could understand members of Congress could defend as helpful. Yet at the same time it was still barely used considering it extended just over 400 loans with a total amount lent under four billion. Florida was by far the biggest beneficiary of the program as City National Bank of Florida was responsible for 25% of all loans.

Although this still wasn’t limited to the typical small business the average American may think falls under that definition. Any business with less than 15,000 employees or revenues under 5 billion in 2019 would qualify. BCD Travel USA received the largest loan of 250 million dollars.

This is a much better program relative to the prior three discussed. Although if a major crisis was to break out, one that extended a period much longer than a few months of economic contraction, what role would the Federal Reserve have considering they are responsible for 95% of the losses? More on this at the end. Also, a few billion for the only facility that benefits businesses compared to 450 billion for a stimulus is not a choice.

Municipal Liquidity Facility

I can see why Democrats would support this facility – in my opinion, if you’re a municipality struggling with access to capital you may want to consider the innumerable mistakes one likely had to have made to get into that position. Which is perhaps why this facility made….. two loans.

State of Illinois: 1.2 Billion

Metropolitan Transportation Authority(New York): 450 million.

Two loans were made in two quarters and the funding could’ve happened without this facility.

Also, these two loans managed to cost 2.2 million dollars as the Fed paid legal fees and other costs for the facility.

The total vendor cost of all facilities was 8.6 million.

The one facility that benefits the “Average American” and small businesses only used 4 billion dollars. Include the Municipal facility and the total is just over 5.5 billion. So, in what possible way would it have been better to keep these facilities instead of returning 450 Billion Dollars!?! You could double or triple the activities of each facility and it still wouldn’t make sense unless Congress passes a stimulus for Wall Street.

After the Global Financial Crisis, the Federal Reserve embarked on what was considered to be an unconventional monetary policy at the time. They started Quantitative Easing with the intent they’d stop in a few years. As the years went on they’ve done 4 more rounds and it’s now seen as the new normal. They lowered interest rates to near-zero while projecting they’d raise rates in 2011-16 but never did – that was until the very end of 2016. Once they started, after so many years of cheap money, it was at a slower pace than usual and only to turn right around even before the pandemic. These extreme policies begin to change the market and encourage bad investments.

The people chastising Mnuchin are not only lying about who these facilities benefit but also are encouraging reckless behavior which will have huge consequences. Will they take responsibility when they once again bring economic ruin?

No.

And this is my biggest concern moving forward with market valuations at highs, small business closures occurring at a record pace, and so many economic uncertainties along with a dependence on cheap money and debt. These facilities are for Emergency risks – a stock market near all-time highs, Corporate debt issuance all-time high, housing prices up 16% Year over Year, all signal the Feds job is over and has been for many months. Perhaps they are aware of the future troubles to come in the economy and don’t want to risk relying on Congress. Maybe they’re aware of the underlying problems the Federal Reserve, Wall Street, and Congress have created together since the 80s(1971 really) and gained momentum up until the GFC; then they all pointed fingers at each other and used quick unsustainable methods to fix their mistakes; their “fix” has led us into the biggest wealth transfer in history.

This is ultimately on the people as we continue to elect republicans or democrats under the false belief it’s not your party that has created the problems. You may admit your party has a few bad apples, a few policy blunders, or in general has made mistakes but the comparison of your party to the other justifies your support. As the middle class and poor struggle to get by I’d ask how many on either side of the aisle ever struggle? Why do both sides have so many who go into office with moderate wealth and a few years later come into extreme wealth?

If you are a party member and generally think it’s the other side at fault then stop the comparison. Examine or scrutinize your party by the merits of their actions and/or ideas and never compare. Otherwise the result is a greater divide between Americans constantly being fueled with ridiculous conflict such as this example. Trump’s behavior in office is excused by lies and corruption of the other party, but if there was no left, his behavior would be a larger issue to their party.

Biden or Trump. Left or right. Minority or Majority.

The wealth inequality will continue to increase. You needn’t further question that after Democrats(applies to Republicans) leap to support the very institution that’s responsible for the past 40 years of rapid growth in wealth inequality – The Federal Reserve

Chairman - Big Ben Bernanke