The Mnuchin-Powell Affair over the Fed’s “Special Purpose Vehicles” in Dollars & Effects

The Mnuchin-Powell Affair over the Fed’s “Special Purpose Vehicles” in Dollars & Effects

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Why do bondholders and leveraged speculators have to be enriched, instead of providing fiscal relief to the unemployed and small businesses? That’s the question.

By Wolf Richter for WOLF STREET.

Fed Chair Jerome Powell replied on Friday afternoon with his own “Dear Mr. Secretary” letter to Treasury Secretary Steven Mnuchin’s “Dear Chair Powell” letter on Thursday. Both letters were full of compliments for the other and for their cooperation and for their success in inflating asset prices. But with regards to asset prices in the credit markets, Mnuchin’s letter gave specific metrics and said enough is enough. And Powell’s letter said, OK, the Treasury can have the taxpayer money back that it sent us.

You’d think something earth-shattering happened based on the media hullabaloo that ensued.

On Thursday afternoon, Mnuchin informed the Fed of two things: One that he would not extend again the already extended expiration date of December 31 of five of the controversial over-the-line Special Purpose Vehicles (SPVs) the Fed had set up earlier this year under the direction of the Treasury to bail out and enrich bondholders, particularly junk-bond holders and speculators with huge leveraged bets; and two, that he wants the Fed to return the $455 billion in taxpayer money the Treasury had sent to the Fed to fund these SPVs with equity capital, and that the Fed has not used.

The actual bond purchases the Fed did under these five SPVs were minuscule by Fed standards, whose balance sheet is measured in trillions of dollars. Those SPVs were mostly used as a jawboning tool to inflate asset prices.

Between the Fed’s first announcement of these SPVs in March and the end of October, the Fed bought just $22.6 billion under these five programs, including corporate bonds, corporate bond ETFs, asset-backed securities, municipal bonds, and bank loans to main-street businesses, a minuscule amount considering its $7.24 trillion with a T in total assets. Specifically, it bought:

  • $13.3 billion under the SPV the Fed calls Corporate Credit Facilities (CCF), which combines the PMCCF and the SMCCF under which the Fed buys corporate bonds, corporate junk bonds, corporate bond ETFs, and junk-bond ETFs.
  • $3.8 billion under TALF (Term Asset-Backed Securities Loan Facility) under which the Fed lends to speculators for them to buy asset-backed securities and place those securities as collateral at the Fed, on a nonrecourse basis, meaning there’s zero risk for investors, and they get all the gains.
  • $1.6 billion under MLF (Municipal Liquidity Facility) under which the Fed lends to municipalities.
  • $3.9 billion under MSLP (Main Street Lending Program), where the Fed supports banks to make loans to small businesses.

The total assets on the Fed’s balance sheet as of Wednesday amounted to $7.24 trillion, a tad higher than on June 10, with a dip in the middle. Of that $7.24 trillion in assets, the $22.6 billion in these to be expiring SPVs is so small that it cannot even be marked into this chart:

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.