Will April corporate loan showers bring July flowers?

The stimulus package is here! Well, almost here—the House of Representatives still has to pass it. In concert with the package, the Fed this week embarked on unlimited Quantitative Easing, taking their balance sheet to $5 trillion for the first time with massive purchases of Treasury notes and Agency MBS. The Fed has bought $50 billion Agency MBS per day since Monday. At times this represents ten times the real daily production of new Agency MBS! They will also soon expand their asset class purchasing powers to buy high-grade corporate bonds (and ETFs) as well as municipal bonds. They have indeed done what we wrote two weeks ago, they have “Flipped the Script.” Additionally, the Fed has restarted some 2008 favorite facilities like Term Asset Backed Securities Lending Facility (“TALF”), as well as money market fund and commercial paper back-stops.

We wanted to focus on perhaps the most controversial component of the stimulus package, the $454 billion large corporation lending program, where the Treasury Department becomes a hedge fund and the Federal Reserve becomes their prime broker.

The program that the Fed and Treasury look to embark upon seems to draw inspiration from the Citibank and Bank of America 2008-2009 bailouts. With those deals, the Treasury Department took a combined $424 billion “toxic assets” off the bank’s books, by putting the banks in first loss positions on $10 billion, and then a 90%/10% (Treasury/Bank) loss sharing scheme for the rest.


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