“Warren Buffett, don’t worry, the Fed’s got your back,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients Monday. “Monetary policy has now reached a new low in the US.”
Of course, Berkshire, along with many other companies whose bonds were purchased, already benefits from extremely cheap borrowing costs. Berkshire’s extremely strong balance sheet means it has no problems finding buyers for its bonds.
“This is really embarrassing,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence. “Warren Buffett doesn’t need a backstop from the Fed.”
2008 response on steroids
But the fact that the Fed provided the backstop anyway shows how the central bank’s response to the pandemic is even more dramatic than its daring rescue during the Great Recession. A dozen years ago, the central bank dropped rates to zero, purchased mountains of US Treasuries and mortgage bonds and funded the bailout of insurance giant AIG.
The mere announcement that the Fed would be scooping up corporate bonds was enough to unlock that market when it froze in March.
The Fed has stressed that its emergency interventions in financial markets have a real-world benefit to everyday Americans.
“We want to support market functioning because when markets are working, companies can borrow, people can borrow,” Fed chief Jerome Powell told lawmakers June 17.
Powell added that when companies have access to credit, “they’re less likely to take cost-cutting measures” such as laying off workers.
However, unlike the Paycheck Protection Program that provided forgivable loans to small businesses, the Fed’s corporate bond-buying program does not have strings attached requiring them to hold onto employees. In other words, there is nothing stopping a company whose bonds are now owned by the Fed vehicle from laying off thousands of workers.
Apple, Amazon and Google could be next
Winners and losers
The goal of the program is not to bail out specific companies but to make sure creditworthy firms have access to capital. Without it, a tidal wave of bankruptcies would happen all at once, potentially crashing the economy into a depression.
“This is a very clever tool,” David Kotok, chairman and chief investment officer at Cumberland Advisors, told CNN Business. “The Fed wants to give incentives and inducements to Berkshire, Verizon, Apple and the rest to become more economically active.”
Still, Kotok fears this intervention will distort the functioning of the capital markets.
“The Fed is now in the business of picking corporate winners and therefore by definition also losers,” Kotok told CNN Business. “The corporate winners have the market perception that the wind is at their back, otherwise why would the Fed buy our bonds?”
That perception in the marketplace, Kotok said, will give the winners additional financial firepower in the form of cheaper borrowing costs. And by contrast, companies that didn’t make the cut for the Fed’s list will find it relatively harder to borrow.
“The divide between the winners and losers has now widened,” Kotok said.
Editor’s note: This story has been updated to clarify which Berkshire Hathaway shares Warren Buffett owns