Courtesy of Pam Martens
“The Fed has, effectively, become a hedge fund in drag as a central bank.”
Occupy Wall Street Protesters Outside the New York Federal Reserve, September 17, 2012. The chant was: “Banks got bailed out, we got sold out.”
When the Fed published its weekly H.4.1 data last Thursday, there was no mention of its two, highly controversial, corporate bond buying programs: the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF). We sent an email to the New York Fed to find out if the two programs are operational and if they will be consolidated on the Fed’s balance sheet. A spokesman for the New York Fed replied that “the PMCCF and SMCCF are not yet operational. And, as we note on the websites for each, additional information will be published before the facilities are launched.”
That strikes us as strange. Last fall, the Fed launched a highly questionable repo loan program in as little as 24 hours and flooded Wall Street with hundreds of billions of dollars over the next few weeks. The two corporate bond buying programs were announced more than a month ago. What’s holding up their rollout? Is the Fed getting pushback that it’s not allowed to make direct purchases of corporate bonds, including those with junk ratings?
Yesterday, in a CNBC interview, DoubleLine CEO and bond guru Jeffrey Gundlach said that “the Fed is blatantly violating the Federal Reserve Act” with its corporate bond purchases. Gundlach was doubling down on his statement of two weeks earlier. On April 14, Gundlach excoriated the Fed, stating: “The Federal Reserve is presently acting in blatant non-compliance with the Federal Reserve Act of 1913. An institution violating the rules of its own charter is de facto admitting that said institution has failed and is fundamentally broken.”
Gundlach is now squarely in the camp of Wall Street On Parade, except that we will go one step further. The Federal Reserve Act is more than a charter, it has been codified into law. And there is nothing in that law that indicates that the Fed is allowed to do more than make loans against collateral that is worthy enough to avoid losses to the American taxpayer. There is nothing in the law to suggest that the Fed is allowed to make purchases of anything, let alone junk bonds and junk bond ETFs.
In fact, the current law says this:
“Nothing in this chapter contained shall be construed to prohibit such notes, drafts, and bills of exchange, secured by staple agricultural products, or other goods, wares, or merchandise from being eligible for such discount, and the notes, drafts, and bills of exchange of factors issued as such making advances exclusively to producers of staple agricultural products in their raw state shall be eligible for such discount; but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States. Notes, drafts, and bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than ninety days, exclusive of grace.”
