[Edward64]

Originally Posted by RainMaker

I posted what the Fed is doing which describes precisely what they are doing and why. You can access the Fed balance sheet and watch as the yields drop precipitously as the Fed pumps money into the corporate bond market.

To put it as simply as I can, when the Fed purchases corporate debt, it allows more debt to be offered. It also lowers the yield. So all these companies that stupidly took on debt so they could buyback stocks over the years got a massive bailout because now they could get more debt at cheaper rates.

For example, before the Fed stepped in, Carnival Cruise could only get a loan at 15%. This is a terribly run company that was massively in debt and that's what the market rate should be. But now they were able to get loans at 11.5% and 5.75% because loans are cheaper now that the Fed is backstopping everything. The Fed just saved them over $300 million.

On top of that, this mean they didn't have to sell as big a portion of the company to the Saudis. That was estimated to be $1.25 billion but instead now only needed to be $500 million. A much smaller stake which is another $750 million subsidy.

What this has led to is the company seeing it's market cap jump from $9 billion to $12.5 billion in a few short weeks. A bailout of $3.5 billion by the Feds for a company that isn't even incorporated in the United States. Mind you that this is a company that is not operating at all right now that just saw its value jump by $3.5 billion. Impressive stuff.

You can read up about it here if you'd like.

https://mattstoller.substack.com/p/t...ils-out-boeing

As for interest-free capital, the Fed has gotten the rates down to minuscule amounts. AAA rates at like 1.71%. When you factor in inflation, the real interest rate is likely going to be negative over the course of the debt. So there is a decent chance that they are actually borrowing at a negative rate when all is said and done. That's insane for companies who were poorly run like Boeing.

Thanks for providing your links. I've read through them and I've broken my commentary into 2 separate posts.

Before proceeding, let's level set.

• My point of questioning is your statement "Why is there only a special class that has access to interest free capital?" and more specifically "interest free capital". I've asked you to provide a link and highlight the relevant passages.

Your first link https://mattstoller.substack.com/p/t...ils-out-boeing focuses on Carnival as a case study doesn't say interest free capital at all. The parts that stuck out to me are:

Unlike with the small business lending program, the Fed announcement, not the initial program implementation, is what matters; just the prospect of the Fed intervening has huge impacts on borrowing costs for corporations, as well as on the prices of stocks and bonds.

I’ll walk you through how we can tell. The original loan offer from the Apollo/Elliott vulture funds was hugely expensive, a high interest rate (15%), likely high upfront fees, likely an ownership stake and first dibs on all the ships and property of the company should the loan go bad, as well as the first-born child of the CFO. (Just kidding. But not really, it is Apollo and Elliott.) Once the Fed got involved, Carnival got a much cheaper if still expensive loan of 11.5% on $4 billion, plus a $1.75 billion loan that could convert into an ownership stake. That’s a significantly lower cost loan, and the cost differential between the first offer of the vulture funds and the second offer after the Fed got involved is a subsidy.

And one reason I like links is because their comments provide additional context. Here's one:

Like I said, in a sense you are correct when you say the Fed gives subsidies. But the Fed is not giving handouts. Carnival still borrowed the money and has to pay it back, they just did so at a lower value of money than the crisis levels- but still a HIGHER value than the pre-crisis levels.

I honestly don't see where the Carnival traditional loans are "interest free" as your article clearly points out it wasn't. Therefore, I guess your contention is because the Fed jumped in allowed Carnival to get a loan % that was substantially less and (1) therefore saved Carnival $300M and (2) market cap (stock price) increasing $3.5B is somehow an "interest free capital"? IMO that is a stretch.