Federal Reserve pledges asset purchases with no limit to support markets
Lots of voices missing the mark: the fed is acting to keep the corporate bond market from seizing up.<p>Corporations finance part of their borrowings through bonds. These bonds need to be paid in full + the interest when the bond matures. Corporations and banks typically repay some of these from cash, and some by issuing new bonds.<p>Right now no one is getting to issue new bonds at all. Banks cannot lend because the risk rating on these bonds has gone up, meaning they in-fact need to sell said bonds to reduce their risk exposure.<p>Thus the FED is acting as a lender of last resort directly to major corporations. Without this last resort said corporations would need to either fire-sale off assets to pay the principle on these bonds or face a technical default.<p>Covenants on their other bonds mean that if the corporation defaults on any of their bonds, all of the bonds become callable. It is 110% not good to have any major corporation go into a technical default. We are talking about companies which have plenty of assets and strong businesses.<p>Thus the Fed and US Government are&#x2F;should be acting to avoid any such rapid deleverage. It took Japan 2 decades to reduce leverage in the corporations. Without intervention the US could undergo this same deleveraging in a matter of months. It would throw the American people into such a deep poverty the likes of which we&#x27;ve not seen since the great depression.<p>Which is to say: these bailouts are going to happen. No one who understands what is at stack would choose to &quot;let the house fall&quot;.