Weird Fed purchase of corporate debt puts Apple in the headlines

From the Washington Post’s “Federal Reserve program could buy corporate debt from Apple and subsidiaries of foreign-based firms, prompting questions of whom relief effort should serve” posted Monday.

The Federal Reserve’s disclosure that it could purchase the debt of massive companies such as Apple and Microsoft, as well as U.S. subsidiaries of foreign firms, triggered a fresh debate about the central bank’s norm-shattering response to the economic crisis and whether its efforts are going to the neediest slices of the economy…

[T]he central bank has never bought corporate debt like this before, and it’s unclear what the implications of its actions will be.

William Slaughter, senior portfolio manager at Northwest Passage Capital Advisors, tweeted that “it is exceedingly hard to fathom what public interest the Fed is serving by buying bonds of Apple, Microsoft and Oracle…”

“Who is being bailed out here?” [Brookings’ David] Wessel said. “It’s certainly not the companies — the companies already borrowed the money. The people who are getting help are the people who own those bonds.”

My take: I don’t completely understand this deal. But I can see that Apple is only one of a list of 794 companies from which the Fed buys debt, yet it’s in the headline and half the soundbites.

6 Comments

  1. Bart Yee said:
    Well, having the government purchase Apple debt, or purchasing bonds from bond holders would be an interesting strategy to “support” businesses. At least for Apple, they would realize a reliable return, we may not be able to say that for 5-10% of the other companies since their business models may / will ultimately fail for various reasons good money gone after bad money.

    Too bad the Fed couldn’t invest in AAPL stock, they would get an excellent return on their investment and invest in one of America’s strongest companies.

    2
    June 29, 2020
  2. Fred Stein said:
    Ah so muddled. The fed started to buy bonds from companies like Hertz at risk of bankruptcy back in March 22. The market was in panic then. One can debate the politics of all the financial interventions – way beyond my pay grade. Only recently they started buying the ETFs and that’s how Apple’s name got caught up, even though they’re a tiny part of the rescue package. Apple can borrow at good rates regardless.

    0
    June 29, 2020
  3. Peter Kropf said:
    I’m reading reports and that the Fed with the Treasury (The Plunge Protection Team) are wading into the markets buying stock, oil, and index futures to prevent the market from doing what it’s supposed to do: price in risk and information.

    It’s amazing how our *free* market seems to easily shake off each and every terrible economic report, rumor, or news. We have a BULL market in the midst of a catastrophically unhealthy economy!

    1
    June 29, 2020
  4. David Drinkwater said:
    I’m not gonna follow the link …
    I’m not gonna follow the link …
    I’m not gonna follow the link …

    OK, so the government could purchase debt for some companies. Apple is a company. In that regard, Apple is an example of a company. It is “like” other companies. So the government *could* potentially buy debt from a company like Apple.

    Right! “Noah, build me an Ark.” And flying monkeys and stuff.

    I’m not gonna follow the link …

    This sounds like an example of an article trying to say that the government *could* give money to rich people, because that sounds very alarmist.

    I’m not gonna follow the link … but maybe it’s not as bad as I think.

    0
    June 29, 2020
  5. Kathy Corby said:
    To be clear– to buy a bond is not bailing out the bond issuer. It is investing in the bond issuer. The purchaser of the bond — in this case, the Fed–expects both return of principle and an admittedly small amount of interest on its investment. Apple does not need a bailout, but I for one am perfectly happy with the Fed buying bonds issued by solvent companies, as opposed to bankrupt/soon to be bankrupt ones. Am I mistaken in my understanding of how this works?

    1
    June 30, 2020
    • David Emery said:
      Presumably the Fed is doing this for policy reasons, and not just because buying Apple debt is a good investment of our tax dollars.

      That being said, I don’t understand the policy behind buying debt of highly solvent firms. Could the argument be this frees up private $ to buy debt of more risky companies? Would Fed purchases of ‘good bonds’ keep the overall prices on bond markets down? I’m just speculating here, IANAEconomist…

      0
      June 30, 2020

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