The Bailout Is Working — for the Rich
The economy is in free fall but Wall Street is thriving, and stocks of big private equity firms are soaring dramatically higher. That tells you who investors think is the real beneficiary of the federal government’s massive rescue efforts.
 
Ten weeks into the worst crisis in 90 years, the US government’s effort to save the economy has been both a spectacular success and a catastrophic failure.
 
The clearest illustration of that came on Friday, when the government reported that 20.5 million people lost their jobs in April. It marked a period of unfathomable pain across the country not seen since the Great Depression. Also on Friday, the stock market rallied.
 
The S&P 500 is now up 30% from its lows in mid-March and back to where it was last October, when the outlook for 2020 corporate earnings looked sunshiny. Companies have sold record amounts of debt in recent weeks for investment-grade companies. Junk bonds, historically dodgy during an economic swoon, have roared back.
 
If you’re looking for investors’ verdict on who has won the bailout, consider these returns: Shares of Apollo Group, the giant private equity firm, have soared 80% from their lows. The stock of Blackstone, another private equity behemoth, has risen 50%.
 
The reason: Asset holders like Apollo and Blackstone — disproportionately the wealthiest and most influential — have been insured by the world’s most powerful central bank. This largess is boundless and without conditions. “Even if a second wave of outbreaks were to occur,” JPMorgan economists wrote in a celebratory note on Friday, “the Fed has explicitly indicated that there is no dollar limit and no danger of running out of ammunition.”
 
Many aspects of the coronavirus bailout that assist individuals or small businesses, meanwhile, are short-term or contingent. Aid to small businesses comes with conditions on what they can do with the money. The sums allocated by the CARES Act for stimulus and expanded unemployment insurance are vast by historical standards. But the relief they provide didn’t prevent tens of millions from losing their jobs. The assistance runs out in weeks, and the jobless live at the mercy of a divided Congress, which will decide whether that help gets extended and, if so, for how long.
 
It’s a bailout of capital. “If the theory is: Let’s make sure companies are solvent and the workers will be OK, that theory could work. But it’s a trickle-down theory,” said Lev Menand, a former New York Fed economist who now teaches at Columbia Law School.
We do know one thing, he said: “It worked for asset holders.”
 
The Fed’s efforts, universally praised for their boldness and speed, have come in two stages. First, in February and March, the central bank shored up capital market “liquidity,” which marks how willing investors are to buy and sell. The central bank role is to be a “lender of last resort,” working through banks so they can get money to companies and people.
 
That expanded in the wake of the 2008 global financial crisis. The Federal Reserve, historically viewed as reserved Brahmins who controlled the money supply, stepped into a new job: “the dealer of last resort,” in the words of economist Perry Mehrling. The Fed bought assets and it bailed out the shadow banking system. “Shadow banking” takes many forms and can mean many things, but generally it describes activities that look like classic banking — taking in deposits and lending out that money — that are undertaken by, for example, a private-equity fund or another institution outside the traditional system of federally insured deposits. Continue Reading...
 
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    Meet the Shadowy Accountants Who Do Trump’s Taxes and Help Him Seem Richer Than He Is
    The Supreme Court fight over Donald Trump’s tax returns has pushed his accounting firm into the limelight. In various episodes over 30 years, partners — including the CEO — have run into trouble for fraud, misconduct or malpractice.
     
    On May 12, after a six-week delay caused by the pandemic, the U.S. Supreme Court will hear arguments in the epic battle by congressional committees and New York prosecutors to pry loose eight years of President Donald Trump’s tax returns.
     
    Much about the case is without precedent. Oral arguments will be publicly broadcast on live audio. The nine justices and opposing lawyers will debate the issues remotely, from their offices and homes. And the central question is extraordinary: Is the president of the United States immune from congressional — and even criminal — investigation?
     
    Next week’s arguments concern whether Trump’s accounting firm, Mazars USA, must hand over his tax returns and other records to a House committee and the Manhattan district attorney, which have separately subpoenaed them. (There will also be arguments on congressional subpoenas to two of Trump’s banks.) Trump, who promised while running for president to make his tax returns public, has sued to block the documents’ release. The questions apply beyond this case. Trump has repeatedly resisted congressional scrutiny, most recently by vowing to ignore oversight requirements included in the trillion-dollar pandemic-bailout legislation. “I’ll be the oversight,” he declared.
     
    The president’s accounting firm has found itself at the center of this high-stakes fight. The American arm of a global firm, Mazars has portrayed itself as an innocent bystander in the war between Trump and his pursuers, dragged into the conflict merely for possessing the trove of subpoenaed records. It’s the firm’s first burst into the media glare apart from an unfortunate moment of tabloid coverage in 2016 after one of its New York partners stabbed his wife to death in the shower of their suburban home. (He pleaded guilty to manslaughter.) Mazars has said it will abide by whatever decision the court makes in the Trump matter.
     
    But Trump’s accountants are far from bystanders in the matters under scrutiny — or in the rise of Trump. Over a span of decades, they have played two critical, but discordant, roles for Trump. One is common for an accounting firm: to help him pay the smallest amount of taxes possible. The second is not common at all: to help him appear to the world to be rich beyond imagining. That sometimes requires creating precisely the opposite impression of what’s in his tax filings.
     
    Time and again, from press interviews in the 1980s to the launch of his 2016 campaign, Trump has trotted out evermore outsized claims of his wealth, frequently brandishing papers prepared by members of his accounting team, who have sometimes been called on to appear in person when they were presented, offering a sort of mute testimony in support of the findings. The accountants’ written disclaimers — that the calculations rely on Trump’s own numbers, rendering them essentially meaningless — are rarely mentioned.
     
    Trump’s accountants have been crucial enablers in his remarkable rise. And like their marquee client, they have a surprisingly colorful and tangled story of their own. It’s dramatically at odds with the image Trump has presented of his accountants as “one of the most highly respected” big firms, solemnly confirming his numbers after months of careful scrutiny. For starters, it’s only technically true to say Trump’s accounting work is handled by a large firm.
     
    In fact, Trump entrusts his taxes and planning to… Continue Reading… 
     
    This story was co-published with WNYC.
     
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    Central Banks' Support of $ 90 Billion Underscores Systemic Risks in Mutual Funds: Fitch
    During the coronavirus (COVID-19) pandemic, mutual funds (MFs) have become much larger relative to the global economy than at the time of the last global crisis. Fitch Ratings estimates that central banks around the world have provided facilities in excess of $90 billion to support MFs amid the coronavirus pandemic. The scale of support shows regulators' sensitivity to the potential systemic risks that MFs pose through potential spill-over effects to financial markets, it added. 
     
    MFs' assets under management (AUM) were $55 trillion (64% of global GDP) at end-2019, compared with $24 trillion (38% of GDP) at end-2008, according to ICI Global.
     
    Fitch says, "Fund stress could lead to increased financial market volatility in regions or countries where central bank facilities are less widespread or comprehensive, or where their effectiveness is constrained. The magnitude of support brought to bear also suggests that the liquidity management tools available to funds may be inadequate for a severe stress scenario."
     
    India is the latest country to implement a MF support facility, providing Rs500 billion (about $6.6 billion) of 90-day repo funding to banks to extend liquidity to funds or purchase commercial paper and debt securities from them. This followed the suspension of redemptions in six schemes with combined AUM of $4.1 billion. 
     
    Fitch says it is sceptical about how effective the support will be as India's banks have low capital headroom and could be reluctant to extend liquidity to funds given the lack of capital relief on the facilities.
     
    The largest facility has been the US money market mutual fund liquidity facility (MMLF). This was launched in March 2020 with an initial term of just over six months, in response to severe illiquidity in the secondary market and large redemptions from money market funds (MMFs). 
     
     
    It had $51 billion of outstanding loans at 14 April 2020. "There is no comparable facility in Europe but stress in European MMFs decreased due to improved secondary market liquidity when the MMLF was activated. A key element of the MMLF's effectiveness is that advances are without recourse to the borrower subject to collateral eligibility requirements, in contrast to the Indian facility," the ratings agency says.
     
    Thailand and Colombia have implemented or expanded central bank repo facilities allowing mutual funds to exchange certain securities for cash to meet redemption requests. No Colombian funds have suspended redemptions but four Thai funds, with combined AUM of $4.6 billion, suspended redemptions in March before Thailand's repo facility was implemented. Thailand's facility covers eligible assets of about THB1 trillion (around $31.2 billion). Colombia's pre-existing facility was increased to COP20 billion (about $5 billion) after being made available to mutual funds.
     
    According to the ratings agency, countries that have implemented support facilities have not experienced additional redemption suspensions. "In Europe, however, where facilities have not been introduced, more than 80 funds with combined AUM of over $40 billion implemented extraordinary liquidity management measures in March. Nevertheless, liquidity in European funds has improved following broader market support initiatives and several funds have re-opened," it added.
     
    Mutual funds are a conduit between investors and financial markets. Most funds exhibit liquidity risk, offering investors the ability to redeem daily but investing only a limited part of their portfolios in highly liquid assets. Liquidity mismatches are most acute in schemes investing in illiquid assets such as properties. 
     
    Fitch says, "Redemption suspensions and the implementation of support facilities during the pandemic suggest that regulation has yet to fully address the liquidity risk that may materialise amid severe stress. This is despite increased regulatory attention to liquidity in recent years."
     
    In 2019, Fitch had highlighted that without extraordinary liquidity measures such as redemption suspensions, runs on funds could have spill-over effects to financial markets, particularly during macroeconomic stress such 
     
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