I noticed a tweet about how the Federal Reserve (FRB) is now buying Investment Grade (IG) corporate bonds on the secondary market. WTF?! So I went on the FRB's website and reviewed all of the "Funding, Credit, Liquidity, and Loan Facilities" that are now in place. Wow, there are quite a few -- eleven to be exact.
Flashback to 2008 when the first facilities were created in response to the seizures going on in the credit markets following the collapse of Lehman Brothers. The Federal Reserve somewhat surprisingly "allowed" Lehman Brothers to fail. When Lehman Brothers filed for bankruptcy, suddenly banks were afraid to lend to other banks, even overnight. The London Interbank Offered Rate, or LIBOR, which usually followed the Fed Funds rate suddenly and dramatically climbed to 8% when the Fed Funds rate was around 2% if memory serves. This divergence reflected extreme fears in banking at the time.
The chaos did not settle and soon after the FRB started throwing everything at the wall to see what would stick. The FRB created new tools to provide liquidity to the commercial paper markets (short-term debt instrument) and money markets. The programs started off slow if memory serves. Eligible commercial paper had to be backed by specific assets -- i.e., Asset-Backed Commercial Paper. However, soon after the programs expanded. Sort of Indiana Jones style, the creation of these facilities more than offset the reduction of more tradition activities, resulting in an even bigger FRB balance sheet. The credit markets eventually settled down, but not before the bottom fell out of the equity markets.
In addition to establishing these new facilities, the FRB also facilitated the mergers of several banks. Merrill Lynch was merged into Bank of America. Wachovia Bank was merged into Wells Fargo. Chase Manhattan Bank was merged into JP Morgan. Depending on one's perspective, the FRB successfully cleaned up its own mess. By another perspective, the FRB should have done absolutely nothing, and simply continued on the course of allowing banks to fail. The phrase "too big to fail" should not be in our vocabulary.
So take a look at these eleven lending facilities at the FRB that are now in place. I am not sure why the webpage says that all of these facilities were started in March 2020. Some of these facilities have been in place for over a decade. In any event, what could possibly go wrong with all of these bogus signals that the FRB is hoisting upon the free markets for capital?
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https://www.federalreserve.gov/newsevents/funding-credit-liquidity-and-loan-facilities.htm
