Warren Buffett does not need the help of the Federal Reserve. But he's getting it anyway


Is not that Berkshire (BRKA) Needs or requested assistance from the Fed, nor that relatively small bond purchases will move the needle for Buffett's massive company. Other first-class names, including Walmart (WMT), Boeing (licensed in letters), ExxonMobil (XOM) and Coca Cola (KO)It also had its bonds purchased by the Fed facility, which launched this month. CNN Owner AT&T (T) It is also on the list.

"Warren Buffett, don't worry, the Fed will back it up," wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a note to clients on Monday. "Monetary policy has reached a new low in the United States."

Buffett, whose Forbes real-time net worth is set at $ 69.8 billion, is the fourth-richest person in the world. It owns 37% of Berkshire Hathaway, a holding company with interests in Apple (AAPL), Bank of America (BAC), Wells Fargo (WFC) and other large corporations.

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 trouble finding buyers for its bonds.

"This is really embarrassing," said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence. "Warren Buffett does not need a backup from the Federal Reserve."

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But the fact that the Federal Reserve provided the backing anyway shows how the central bank's response to the pandemic is even more dramatic than its bold rescue during the Great Recession. A dozen years ago, the central bank lowered rates to zero, bought mountains of Treasuries and US mortgage bonds, and financed the bailout of insurance giant AIG.

Now, the Fed is directing the purchase of corporate bonds, including risky junk bonds, for the first time through its Secondary Market Corporate Line of Credit. Established a special-purpose vehicle, administered by Black Rock (BLK) and financed with $ 25 billion from the United States Treasury Department to make the purchase.
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The simple announcement that the Fed would be collecting corporate bonds was enough to unlock that market when it froze in March.

Carnival (CCL), Ford (F) and other companies that had been excluded from the loan markets suddenly had access to affordable capital. And the Fed's announcement on March 23 helped put a floor below the US stock market, which bottomed that day and has since risen.

The Fed has emphasized that its emergency interventions in the financial markets have a real benefit for ordinary Americans.

"We want to support the functioning of the market because when markets work, companies can borrow, people can borrow," Fed chief Jerome Powell told lawmakers June 17.

Powell added that when companies have access to credit, "they are less likely to take cost-cutting measures," such as laying off workers.

However, unlike the Paycheck Protection Program that made forgivable loans to small businesses, the Federal Reserve's corporate bond purchase program does not have conditions that require them to retain employees. In other words, there's nothing stopping a company whose bonds are now owned by the Fed's vehicle from laying off thousands of workers.

Apple, Amazon and Google could be the following

The Fed facility, overseen by the New York Fed, revealed on Sunday which bonds were purchased through June 16, including those issued by Caterpillar (CAT)Ford General dollar (DG), House deposit (HD)and Marriott (SEA).
This is not a new debt issued by those companies: the bonds were already trading on the markets. (The New York Federal Reserve announced on Monday the launch of a separate program that will actually buy newly issued bonds.)
The Fed facility also bought $ 5.7 million in bonds issued by Berkshire Hathaway Energy, a division of the Buffett conglomerate that owns utilities like PacifiCorp, MidAmerican Energy and Nevada & # 39; s NV Energy.
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The New York Fed also released an index of 794 companies that meet the criteria for their bonds to be collected by the emergency facility in the future. The New York Fed has indicated it intends to track that index, which includes tech titans. Amazon (AMZN), Apple and Google, as well as media giants Comcast (CMCSA), Walt disney (DIS) and the father of CNN WarnerMedia.
The US subsidiaries of various foreign corporations also made the cut, including Toyota (TM), Volkswagen (VLKAF) and father Mercedes-Benz Daimler (DDAIF). These automakers are all major employers of American workers, particularly in the Southeast.

Winners and losers

The objective of the program is not to rescue specific companies, but to ensure that solvent companies have access to capital. Without it, a wave of bankruptcies would happen all at once, which could drive the economy into depression.

"This is a very smart tool," David Kotok, president and chief investment officer at Cumberland Advisors, told CNN Business. "The Fed wants to give incentives and incentives to Berkshire, Verizon, Apple and the rest to make them more economically active."

Still, Kotok fears that this intervention will distort the functioning of capital markets.

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"The Fed is now in the business of picking corporate winners and, by definition, losers as well," Kotok told CNN Business. "Corporate winners have the market perception that the wind is behind them, otherwise why would the Fed buy our bonds?"

That market insight, Kotok said, will give winners additional financial power in the form of cheaper loan costs. And conversely, companies that didn't make the cut on the Fed's list will find it relatively harder to borrow.

"The divide between winners and losers has now widened," said Kotok.


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