How The Fed Rescues Wall Street's "Fallen Angels"

In front of the Fed, in New York, March 18.
In front of the Fed, in New York, March 18. Lucas Jackson / REUTERS

For novices, the Fed, the American central bank, is a bit of the holiest of financial saints. Inaccessible, distant, which fixes the rates of the American economy and mysteriously buys securities on the financial markets, to the point that its balance sheet increased by 2,300 billion dollars since the beginning of the crisis.

In reality, the Federal Reserve became, during the Covid-19 crisis, Crédit Agricole: "Common sense near you", as the 1980s ad said, one by one saving American companies from bankruptcy. The Wall street journal recently gave an uplifting example of the adventures of Carnival cruises. The cruise lines of the tourism company (27 ships of 2,000 to 4,000 passengers), which sail from Venice to Miami, have turned into formidable sanitary traps. At the beginning of March, the situation was catastrophic for the company, deprived of passengers, which employs 150,000 people.

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The company burns a billion dollars in cash a month and suddenly sees its lenders take off. The price of its bonds collapsed by 30%, the markets predicting a bankruptcy of the company. Carnival, which borrowed at the ultra-competitive rate of 1%, leaves to beg for capital. The crisis is so severe that only the "private", unlisted financial institutions and other hedge funds can help it.

Redeem debt

Its bank, JPMorgan, is looking for investors and on March 20, a consortium including Apollo, Centerbridge, Elliott, GSO and Oaktree are offering a loan at a rate of more than 15%, likely to give them an equity stake. Then, on March 23, Jerome Powell, head of the Fed, announces that he will buy the debt of risky companies, the famous "junk bonds", whose rating is lower than BBB -.

Suddenly, the dynamics change sides: lending to Carnival is not so risky, since the Fed will buy the securities. The company raises its head, goes to the markets and manages to raise $ 4 billion in bonds (demand has even reached 17 billion), guaranteed by liners, at the much more reasonable rate of 11.5%. Mission accomplished, according to the Fed. "We have made good progress", said Boston Fed boss Eric Rosengren today, quoted by the Wall street journal. Businesses "Continue to enter the market by paying a premium, but they have access to the market."

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