Name: The Federal Reserve Has Pumped Money Into the Capital Markets. Guess Who’s Gotten It.
Brand: vanityfair.com
SKU: vanityfair-com-108
Availability: OnlineOnly

critic

The Federal Reserve Has Pumped Money Into the Capital Markets. Guess Who’s Gotten It.

preview

When the extraordinary history of the last six weeks in the financial markets gets written, it will have to record any number of minor miracles. And credit for them should go to the Federal Reserve, which on March 23 and again on April 9, essentially declared that it will do almost anything “for now”—a phrase it’s been using a lot lately—to backstop the capital markets to insure money continues to flow, at a price, to the creditworthy.Take, for instance, Boeing’s incredible journey through the markets in recent weeks. Boeing’s problems have been legion for more than a year, ever since two of its 737 Max 8 jets crashed soon after takeoff—one in Indonesia, in October 2018, killing 189 people and one in Ethiopia, in March 2019, killing 157 people. The jets have been grounded since then and new orders for that model aircraft have shriveled up. In January, as a result of the ongoing controversy surrounding the 737 Max 8, Dave Calhoun, a longtime Boeing board member who once ran GE’s jet-engine business (among other GE businesses), Dennis Muilenburg as Boeing’s CEO. Then came the COVID-19 pandemic. People stopped flying. Jet orders of all stripes mostly dried up. Boeing faced an existential crisis, and Calhoun had yet another major problem with which to contend, in many ways one far more serious than how Boeing had messed up the on the 737 Max.But Calhoun is also plenty savvy about the financial markets. In addition to his time at GE, he had also spent five years at the Blackstone Group as a senior managing director and as a member of its management committee. On March 11—the day the world as we knew it came to an end—Calhoun sprung into action. He drew down the balance of a that Boeing had arranged with Wall Street banks a month earlier. He froze hiring, stopped overtime, and banned nonessential travel. He cut Boeing’s dividend. “It’s critical for any company to preserve cash in challenging periods,” he in an internal memo.That may be true, but such a move sent a powerful signal to the equity markets that Boeing executives were more than a little concerned about the company’s liquidity. Boeing’s stock that day, reducing the company’s market value to around $106 billion. Many investors wondered what Calhoun would do next. On March 24, the day after the Fed’s first move to pump liquidity into the financial markets, Calhoun told that Boeing would not accept a government bailout if it meant giving up an equity stake in return. “I don’t have a need for an equity stake,” he said of potentially taking federal money. “I want them to support the credit markets, provide liquidity. Allow us to borrow against our future, which we all believe in very strongly and I think our creditors will too. It’s really that simple.” That seemed like a bold statement at the time, given the company’s twin crises. Many assumed Warren Buffett, the legendary investor, might seek to inject some of his $130 billion cash pile into Boeing, given that Boeing is an iconic American brand facing a major struggle. Buffett’s money is not cheap. It usually comes with both a high coupon and warrants—both of which get expensive. But that’s the price companies are often willing to pay for the Buffett imprimatur.But Calhoun appears not to have Buffett. Instead, on April 30, as one part of the capital markets after another sprung back to life in the wake of the Fed’s actions, Calhoun tapped the market for $25 billion in new debt, “a blowout result,” . It was the largest bond offering of 2020, and the sixth largest of all time and nearly double the amount Boeing hoped to raise. Sure, Boeing had to pay up for the money—at an interest rate of around 5.15%, compared to the nearly 3% rate of interest Boeing paid nine months earlier—but that is downright cheap compared to the cost of giving up equity to either Buffett or to the federal government. (Nevertheless, Calhoun and Boeing aren’t out of the woods yet; Boeing stock is now worth around $70 billion, down a third since March 11, and the company has roughly as much debt——as New Zealand. Boeing has also reportedly decided to 10% of its workforce, some 16,000 people.)None of this would have been possible without the Fed’s moves in March and April. And Boeing is not unique. In April, almost in junk bonds were sold, that is by companies that are in worse financial shape than Boeing. A monthlong draught of new high-yield bond issuance ended on March 30 when Yum Brands—the owner of KFC, Taco Bell, and Pizza Hut—raised in the financial markets. Then came Carnival Corp., the stricken cruise ship operator, and then Ford, Netflix, MGM Grand, AMC Entertainment, the Gap, and US Foods Holding Corp., among others. These companies and more were able to raise money from investors, thanks to the Fed’s decision to effectively backstop the markets.Most PopularOn the surface, of course, this must be a good thing, right? As Warren Buffett has famously said, “Only when the tide goes out do you discover who’s been swimming naked.” But, thanks to the Fed, the prurient opportunities have been few and far between this cycle. Companies that might have had to go bankrupt or might have had to get government bailouts, or high-priced equity injections from cash-rich opportunistic investors, were able to tap the public markets at far cheaper rates. That was probably the Fed’s plan. But each new Fed intervention—this is the second round of rescue financing from the Fed in 12 years—raises important questions about just how free our markets really are, and whether once again, America’s rich and powerful and the corporations they control get the windfalls while regular Americans are left to suffer—a fact underscored by the news that some have filed for unemployment benefits since mid-March. In a world-historic crisis, the Fed’s efforts have arguably given the most help to those least in need of it.Despite the success of Boeing and the rest, the capital markets are hardly open to everyone. Companies such as Neiman Marcus, J. Crew, Gold’s Gym, Cosi, Frontier Communications, and OneWeb, a satellite operator in which SoftBank invested (and lost) $2 billion, have all filed for bankruptcy in recent weeks. Others—such as and —may not be far behind. Obviously, the capital markets have been slammed shut for these companies. And then there are the hundreds of thousands of smaller companies, most of which aren’t traded publicly and that few have heard of, for which the capital markets—either with or without the Fed—offer no hope.That’s why, in theory anyway, Congress passed the Paycheck Protection Program, or PPP, two bailout funds—totally nearly $660 billion —to help those companies struggling to survive. Unfortunately, that process has been a mess. Some companies—one that makes lasers for cosmetic surgery; another that makes in vitro diagnostics with $100 million in cash—successfully tapped the bailout money, while other devastated companies, such as Ruth’s Chris Steak House, which once employed 5,700 people, was shamed into returning the it received. According to a new by the Federal Reserve Bank of New York small businesses in some of the states hardest hit by COVID-19—New York, New Jersey, Michigan, and Pennsylvania—received fewer PPP loans per small business than a variety of Midwestern states. According to the study, more than 55% of the small businesses in Nebraska, for instance, are getting PPP loans, while fewer than 20% of small businesses in New York, “the epicenter of the coronavirus in the United States,” according to the New York Fed, have been approved to receive funding from the PPP.As a result, many small businesses and 20% of the workforce are left reeling for yet another day in Donald Trump’s divided America.More Great Stories From Vanity Fair— In Blistering Whistleblower Complaint, Rick Bright — Involves 3,000 People Dying a Day by June 1— Inside Donald Trump and Jared Kushner’s — How Became the Coronavirus Trump Antidote— What Do Your Genetics Have to Do With From Coronavirus?— How to , According to Neuroscience— From the Archive: The Untold Story of Dallas’s Looking for more? for our daily Hive newsletter and never miss a story.The freshest-and most essential-updates from Washington, Wall Street, and Silicon Valley.

When the extraordinary history of the last six weeks in the financial markets gets written, it will have to record any number of minor miracles. And credit for them should go to the Federal Reserve, which on March 23 and again on April 9, essentially declared that it will do almost anything “for now”—a phrase it’s been using a lot lately—to backstop the capital markets to insure money continues to flow, at a price, to the creditworthy.Take, for instance, Boeing’s incredible journey through the markets in recent weeks. Boeing’s problems have been legion for more than a year, ever since two...

public

Husband. Father. Best-selling author of six books. Seventh: November 2022. Founding partner, @Pucknews. Air Mail writer-at-large. Occasional NYT Op-Ed Writer.

William D. Cohan

Vanity Fair is a monthly magazine of popular culture, fashion, and current affairs published by Condé Nast in the United States.  The first version of Vanity Fair was published from 1913 to 1936. The imprint was revived in 1983 and currently includes five international editions of the magazine. As of 2018, the Editor-in-Chief is Radhika Jones.

The Federal Reserve Has Pumped Money Into the Capital Markets. Guess Who’s Gotten It.

No article scores yet.

CRITIC REVIEWS

PUBLIC REVIEWS