Programming note: Money Stuff will be off tomorrow, back on Thursday. ETFsLoosely speaking the way conventional monetary policy works is that the central bank makes money cheaper (or more expensive) generally, and then the economy and the financial system work out what that means specifically if you want money. If the Federal Reserve lowers interest rates by 0.25%, then risk-free short-term interest rates will be lower by about 0.25%, but long-term interest rates and credit spreads might go up or down for different tenors and credit ratings and specific borrowers and, like, your credit card or whatever. The Fed tweaks short-term risk-free interest rates, which are a basic input in the algorithm of the economy, but the algorithm works on its own to translate that input into millions of specific outputs. Loosely speaking the way modern unconventional monetary policy works is that, when short-term rates are super low anyway, the central bank can target long-term risk-free rates too. The Fed can tweak short-term rates or long-term rates or the shape of the interest-rate curve; it can adjust more of the inputs to the algorithm. That gives it more ways to bring down the cost of credit. But it is still not buying credit directly. A company's cost of borrowing consists of (1) the risk-free rate (which the Fed targets) plus (2) its credit spread (which the Fed doesn't target). In a world where risk-free rates are very low, because central banks have been doing unconventional monetary policy for a decade and/or expectations of future economic growth are low, but credit spreads are very high, because, you know, a pandemic has shut down all the businesses, unconventional monetary policy can only do so much to reduce the cost of credit. So the next thing you could do is target credit directly: Instead of buying risk-free assets (Treasury and agency bonds), the Fed could buy assets with credit risk (corporate bonds). But this is a really big expansion and change in the Fed's operations. The Fed knows how to buy Treasury bonds; its traders have long experience in trading those bonds, and they know the market well. Also they know the issuer—the U.S. Treasury—well, or perhaps, they don't need to. If you are a central banker buying your own government's bonds issued in your own currency, I mean, those are called "risk-free" bonds for a reason. The reason is not exactly that they are free of risk, but it is at least that the Fed doesn't have to do a detailed inquiry into the balance sheet and cash flows of the U.S. Treasury before buying Treasury bonds. It can just assume that those bonds will pay the amounts they're supposed to pay on schedule, and it can feel confident that the market price for those bonds—in a deep liquid market in which the Fed is a large and expert player—will be the right price. But if the Fed is going to go buy bonds of a bunch of different companies … what? Is it going to hire tons of credit research analysts to evaluate the companies' credit and spot relative value? Is relative value even what you want, when your goal is not to make a profit but to stimulate the economy and prop up credit during a pandemic? There are thousands of corporate bonds; how will the Fed decide which ones to buy? People worry about bond market liquidity, and the Fed has an absolutely enormous mandate to buy bonds, with a facility of up to $750 billion; how can you deploy that efficiently by buying the bonds that are for sale without pushing up prices? The Fed is not a frequent or facile buyer of corporate bonds, and those bonds do not trade constantly and liquidly on transparent electronic trading systems at tight bid/ask spreads; how can it know it's getting a good price? There are plausible answers to those questions, with the main one being that the Fed is hiring BlackRock Inc.—which is a big frequent trader of corporate bonds—to do much of the work for it. "How does the Fed know which bonds are good" is a hard question, but if you transform it into "how does BlackRock know which bonds are good" it at least becomes an answered question. BlackRock is in the business of knowing which bonds are good and how much to pay for them, etc.; it has been doing this for a while. Still you might want a cleaner, simpler, more mechanical answer. You might say, well, look, the Fed is in the business of pushing down the price of credit by buying credit assets. It is not in the business of picking which credit assets are good or well-priced or whatever; it is in the business of buying credit product generically—as, in monetary policy, it is in the business of buying rate product. If there were a way to buy credit assets without picking, a way to buy "generic credit spreads" rather than "the 6.125% senior unsecured bonds of XYZ Corp. due 2023" or whatever, the sensible place for the Fed to start would be by buying that. Especially if that traded electronically, on an exchange, with transparent prices and tight bid/ask spreads so the Fed could be pretty sure it was paying the right price. (I am not sure that that's right, by the way; you could imagine the most helpful use of the Fed's $750 billion might be, like, picking the companies hardest-hit by the pandemic and buying their bonds at above-market prices. I am not sure that "buy generic credit spreads" is the most socially useful thing for the Fed to do; I just mean that it's a nice and Fed-like way to support credit, a sensible expansion of the Fed's traditional operations rather than a complete departure.) Anyway: The Federal Reserve said a facility designed to purchase eligible corporate debt from investors will launch on May 12, bringing a key part of the U.S. central bank's emergency coronavirus lending program online following weeks of anticipation. The so-called Secondary Market Corporate Credit Facility will begin purchases of eligible exchange-traded funds invested in corporate debt on Tuesday, the New York Fed said Monday on its website. It was first announced in March and has played an important role in keeping financial markets relatively calm since then. Another facility designed to buy debt directly from issuers -- the Primary Market Corporate Credit Facility -- will launch "in the near future," according to the announcement.
When we first talked about these Fed facilities, back when they were announced in March, my headline was "Companies Can Borrow From the Fed Now," but it turns out that the more accurate way to characterize things would have been "The Fed Will Buy Bond ETFs Now." And lend directly to companies, sure, yes, "in the near future." But first the ETFs: The move will be a historic milestone for the Fed, which hasn't bought ETFs previously. The central bank, recognizing it would take longer to buy bonds, saw ETFs as a fast way to direct money rapidly into credit markets, said people familiar with the matter. The Fed will buy corporate bonds through the facility in the near future.
And here is the fascinating Investment Management Agreement that the Fed signed with BlackRock, which includes (in Exhibit A-1) the "Investment Strategy" for the program. The program is supposed to "provide broad support for secondary credit markets to facilitate orderly repositioning and pricing of risk," to "support primary issuance for issuers
at funding costs that reflect more normalized liquidity and market functioning," and to be "focused on reducing the broad-based deterioration of liquidity seen in March 2020 to levels that correspond more closely to prevailing economic conditions." That is, the Fed's goal is to improve credit conditions generically rather than pick bonds, and buying ETFs—broad index-y baskets of corporate bonds that trade like stocks on electronic exchanges—is the most straightforward way to do that. Actually the most straightforward way to do it might be to just say that you'll do it. My Bloomberg Opinion colleague Brian Chappatta points out that credit conditions have improved a lot since these programs were announced, in large part because the programs were announced; the Fed has already managed to reduce credit spreads without buying any credit product. That avoids a lot of problems of security selection. Meanwhile part of the reason that the Fed is not yet buying individual bonds is that, as a footnote in the Investment Strategy points out, "corporate bonds cannot be purchased in the Facility until Eligible Issuers have completed a certification process." The term sheet for the program lists the certification requirements, which are annoying. Bond issuers have to certify that they have significant U.S. operations and investment-grade-ish ratings, but also that they have "not received specific support pursuant to the CARES Act or any subsequent federal legislation" and that they "satisfy the conflicts of interest requirements of section 4019 of the CARES Act." The Fed's specific bond purchases have political strings attached; the Fed can only buy bonds of companies that certify they are politically acceptable under the pandemic bailout programs. Or it can buy ETFs, which are just generic piles of bonds and cut out the political questions. Not that long ago, people did a lot of worrying about bond ETFs. They create a "liquidity illusion," they made the trading of real corporate bonds more difficult and less liquid, that sort of thing. Since the Covid-19 crisis those worries seem sort of quaint. The evolving view is almost that corporate bond ETFs are the real thing, the credit product, the liquid useful instrument that you'd use if you want to buy credit product. Actual bonds are the weird gross inputs to the smooth good useful product that is the ETF. It does seem like the Fed is accelerating that process, when it announces "we will buy bonds" and then adds, under its breath, "really bond ETFs." You can still buy specific bonds, but increasingly buying ETFs is becoming the normal trade. Private exchangesA lot of private companies want, basically, this: - For their stock to trade on a stock exchange so anyone can buy or sell it easily, but
- Not to be a public company.
Exactly what #2 means, when you have #1, is a little unclear, though it at least means not having to file public quarterly financial statements with the Securities and Exchange Commission. Probably other things too. Not having short sellers? Not having high-frequency traders buying and selling your stock? No activist investors? Those all conflict a little with #1, but maybe you don't want #1 in a literal way. Maybe you want something more like, anyone you want to buy your stock can buy your stock (not activists), and anyone you want to sell your stock can sell your stock (not short sellers), but in any case they get to do it quickly and in a liquid market. Maybe it is all a little self-contradictory, maybe the way to have a deep liquid fast-moving market is to open it up and give up some control, but maybe not, maybe it's fine. The other thing that #2 means is that regular investors, mom-and-pop small investors who are not "accredited" (moderately rich), can't buy your stock. Being a private company, in the U.S., mostly means that only accredited investors can buy your stock. That is mostly fine, though, for the company; most of the people who buy public stocks are actually institutions and mutual funds and hedge funds and otherwise accredited investors anyway, so you are not missing much by not having retail investors. Anyway a super obvious business proposition is to give all those private companies what they want: Build an electronic exchange that brings all the institutions and mutual funds and hedge funds together to buy and sell private company stock, so that those companies' stocks can trade without going public. Maybe build a little interface for the companies where they can set parameters like "no activist hedge funds" or "no short selling" or "don't let my employees sell without my permission" or whatever, why not. This proposition is so obvious that people come up with it all the time. We talked last month about ClearList, "a new online marketplace where investors can buy and sell shares of private companies" planned by high-frequency-trading firm GTS, and I pointed out that there are now so many of these platforms in existence or in planning that you run the risk of illiquidity: If there are 100 private-company exchanges, no one will know which one to trade on. So here's another one: The Silicon Valley start-up Carta is planning to launch a private share trading platform that it hopes will be a credible alternative to leading stock exchanges as fast-growing tech companies increasingly decide against initial public offerings. Henry Ward, Carta's chief executive, said he aimed to debut the CartaX exchange in the summer with an offering of his own company's shares before expanding to other customers.
I really like that they're starting by listing themselves. Ideally there will be 100 private-company stock exchanges, each run by a private company, each one listed on its own exchange. Then I will start a private-company exchange of all private-company exchanges that do not list themselves; where will I list my exchange? Also: "If CartaX wins, in 10 years there won't be a NYSE or a Nasdaq," Mr Ward said, adding that his exchange would be a more convenient way for early investors and company employees to cash out their shares. Companies on CartaX will need to be worth more than $1bn, report key financial metrics and float at least $50m worth of shares. Mr Ward said 15 companies and 40 investors had applied for access to the exchange, but declined to give further details. "In the current world, you can either be private and illiquid or you can be public and liquid. CartaX is going to help companies be private and liquid," said Mr Ward, who estimated the exchange could represent four-fifths of Carta's value in the next five to 10 years.
What does "in 10 years there won't be a NYSE or a Nasdaq" mean? It means, roughly: - Individual investors will not be able to buy stocks directly, only mutual funds.
- The securities laws that apply to public companies—laws about disclosure and proxy voting and so forth, laws that have existed in some form since the Great Depression—will no longer apply to any companies. (The laws against securities fraud will still apply, though.)
I dunno, that could be interesting. I am not exactly betting on it, but it is a thing you could imagine, even a thing you could hope for. An unusual thing to hope for, maybe—"get rid of securities laws and individual investors"—but a coherent one. Everything is securities fraudIf you are trying to launch an invasion to overthrow the government of a Latin American country, you will need money. You might want to buy, uh, I have a list right here, "several aircraft, armored vehicles, hundreds of M4 carbines, PVS-14 night vision goggles, ballistic plates and helmets, several hydraulic breaching tools, ketamine and morphine," and I am sure those things are not cheap. Where can you get the money? There is a traditional answer, and I am sorry to say that it is "the CIA." There is a well-known history of the U.S. Central Intelligence Agency sponsoring Latin American coups. More broadly, though, in the modern world, the normal way to finance an invasion of a country is from the government funds of another country. Like, just, invasions tend to be military or quasi-military projects, militaries tend to belong to governments, and governments tend to fund them out of taxpayer money. Or if you are mounting a military coup from the inside you are probably a military officer and you know where they keep the night vision goggles. Obviously the postmodern Money Stuff answer would be something like: "You could raise money for the invasion by selling securities and promising a share of the profits to investors." On the blockchain, ideally, but let's not get carried away. In any case here's a story about how a failed plan to overthrow the government of Venezuela was allegedly pitched to investors: Documents pitching the plan — obtained by Military Times — included letterhead from a Washington consultant firm, as well as the names and credentials of President Donald Trump's longtime bodyguard and another billionaire financier, all of whom have denied involvement in the ill-fated adventure. The Green Beret veteran at the center of the plot, former Sgt. 1st Class Jordan Goudreau, appeared to be shopping around for investors to back the paramilitary mission using a patchwork of documents, which included a wish list of military gear, including several aircraft, armored vehicles, hundreds of M4 carbines, PVS-14 night vision goggles, ballistic plates and helmets, several hydraulic breaching tools, ketamine and morphine. … Goudreau "came out here with paperwork" to pitch the plot, White recalled. Goudreau was seeking $750 million for an operation to secure the Venezuelan oil fields after the overthrow of Venezuela's government, White said. The operation, as described, was designed to turn a profit from the proceeds of oil sales once the new government was installed, White said.
White is Drew White, a U.S. Army veteran who served with Goudreau and attended a pitch meeting, which apparently went great: White said the meeting, which lasted about 30 minutes, took place in a Colorado Springs office with investors he would not name. The investment group, however, was not interested in proceeding based on the limited information Goudreau provided. Despite the price tag on the documents coming in at a little over $5 million, White said Goudreau verbally pitched the $750 million figure to the potential investors. About 20 minutes into the meeting, the investors looked at each other befuddled, said White. The pitch, White recalled, seemed preposterous. The documents presented, he added, did not seem to be legitimate. "They were full of typos and not aligned properly. They didn't seem real," White said.
And here is the, uh, prospectus or offering memorandum or whatever. It does not give one much confidence in the operation as a military, financial or legal matter, but here's this: Finance: Capital will be organized by the SPE, priced as appropriate with capital placed at full exposure. The capital package will consist of funds needed to establish resources required to support a transition to Interim administration followed by additional resources to support continued efforts for a period of one year, allowing time for the Interim Administration to hold free and fair elections in Venezuela confirmed by international third party observers.
(Yes "SPE" there just has its usual financial meaning of "special purpose entity.") There are no audited financial statements or capitalization table, but there is a budget. The first line item is "poncho (woodland)." It is not clear if they raised any money, but they did launch an unsuccessful invasion; the invaders were killed or captured. Goudreau remained in the U.S., where he "is now under federal investigation for arms trafficking." Perhaps they'll throw in securities fraud too. Oh Elon"'It would be a sad day if the Fremont police walked into Tesla and arrested Elon Musk,' said Scott Haggerty, the county supervisor for the district in Alameda where Tesla's Fremont plant is located," incorrectly. Obviously it would be a hilarious day if the Fremont police walked into Tesla Inc.'s car factory and arrested Elon Musk for reopening it in violation of county health orders during a pandemic. "I will be on the line with everyone else," Musk tweeted yesterday. "If anyone is arrested, I ask that it only be me." Honestly someone should run for president, or at least district attorney, on that platform. Not about the Tesla factory reopening, just in general. "When I am in charge, nobody will be arrested, except Elon Musk, who will be arrested a lot." Who could object to that? A running feature of this column has been, basically, "How Close Is Elon Musk To Being Arrested?" It probably peaked last February, when Musk was at risk of being held in contempt of court for sending tweets that violated a settlement with the Securities and Exchange Commission, and of course if you had to guess what will ultimately send Musk to prison the best guess will always be "bad tweets." Also though he was illegally distributing flamethrowers for a while, that seems like the sort of thing that could land a non-billionaire in jail. Now this factory reopening. Sure. My general approach to Elon Musk's legal adventures involves a heavy dose of legal realism: The way to think about law is not to engage in a sterile examination of the words of statutes and rules, but to think about what actors in the legal system might actually do. (Here, arresting Musk would give him what he wants—publicity, grievance, targets for abuse—and not actually achieve anything public officials want, so I'd say the odds of it are low.) I once imagined a dialogue between Musk and his lawyer: Musk: Well are they going to put me in jail for sending these tweets? [Lawyer]: I mean, probably not, no. Musk: I have a big drill you know. [Lawyer]: I know. Musk: That's a kind of legal realism too.
It is! He does! He's got a big drill! If you put Elon Musk in jail, he will tunnel his way out and escape on a rocket ship to Mars! That is the whole premise of Elon Musk, not just a generic comic-book supervillain vibe but the specific comic-book supervillain tools he'd need to escape from prison for violating plague quarantine orders or sending bad tweets or both. He's been preparing for this his whole life; the Alameda County health authorities will have a hard time catching up. By the way Elon Musk has an 8-day-old baby. Things happenU.S. Core Consumer-Price Index Fell by Most on Record in April. BlackRock Stake Sale Frees PNC to Hunt for Another Acquisition. Why the coming emerging markets debt crisis will be messy. Public Pension-Fund Losses Set Record in First Quarter. Deutsche Bank Seeks to Bolster Capital Structure. Expect a 'Record-Breaking' Russell Reconstitution, BofA Says. Saudi Aramco earnings slide 25% after oil price collapse. WeWork paid 80% of its rent obligations and collected 70% from clients, CEO says. Wall Street Bets Virus Meltdown Gives Landlords a Chance to Grow. If Landlords Get Wiped Out, Wall Street Wins, Not Renters. US dollar funding markets during the Covid-19 crisis - the international dimension. Your virtual banking internship could be better than a real one. Super-Rich Stranded by Lockdowns Face Higher Tax Bills. "'You're filling a swimming pool with crude oil and you're going to put a cover on top,' says Dan Dwight, Cooley Group's chief executive. 'I'm not sure I want to take a dip in it.'" If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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