This week we are going to talk about the massive corporate bailout that is going on right now in America. This information came out a few weeks ago, and I have been holding off on making this video, because I was so shocked and angry at what was happening. I kept waiting for someone to make a correction or change what was going on. But there has been nothing. So today I will be walking through all the numbers telling the full story about what has been going on with the financial markets. WATCH NOW!
- Blackrock report on BBB debt https://www.blackrock.com/institutions/en-us/insights/investment-actions/assessing-risks-in-bbb-corporate-bonds
- Federal Reserve Financial Stability Report https://www.federalreserve.gov/publications/2019-november-financial-stability-report-borrowing.htm
- Goldman Sachs statement on Corporate Stock Buyback Programs https://www.marketwatch.com/story/buybacks-are-the-dominant-source-of-stock-market-demand-and-they-are-fading-fast-goldman-sachs-2019-11-06
- Federal Reserve Balance Sheet https://fred.stlouisfed.org/series/WALCL
- Federal Reserve Report to Congress https://www.federalreserve.gov/publications/reports-to-congress-in-response-to-covid-19.htm
- Fed Funds rate https://fred.stlouisfed.org/series/FEDFUNDS
Let me start with a statement you might find shocking. The real problem plaguing the economy is not the pandemic. The real problem is too much corporate debt. At the end of the 2019 calendar year, corporate debt in America had reached enormous levels. Corporations had almost $10T in debt, which is roughly half the GDP of America. More than 50% of this debt is known as highly risky junk bonds. That is significant because junk bonds were only 17.5% of the market in 2001. [chart] This is important, because what typically happens during a recession is that junk bonds all default, because corporations receive less revenue and cannot make debt payments.
This situation was a barrel of dynamite ready to explode. Everyone knew about this problem. People in the financial world have been talking about this for years. Last November, the Federal Reserve released their Financial Stability Report and stated “balance sheet leverage of businesses is near its highest level over the past two decades.” All businesses across the United States in all sectors were doing this. They all had too much debt.
It is important to understand what caused all this debt. The Federal Reserve has kept interest rates really low for the last decade. This created a banking environment of easy credit that businesses have taken advantage of. This chart shows the Fed Funds rate going back to the 1950s. You can see a typical pattern of a recession occurring, followed by a decrease in lending rates to spur economic growth. Then over time, the rate increases until the next recession. Only since the last recession, rates have remained very low. Corporations have used this environment to increase debt.
So what have companies been doing with all this debt? Companies have been funding corporate stock buyback programs. Here is a chart from Bloomberg showing the impact of corporate buyback programs on the S&P 500. What you see is that companies buying back their own stock is a huge driver of demand in the stock market. Goldman Sachs released a statement in November that Corporate buyback programs was the DOMINANT source of stock market demand. Just to emphasize this point, here is the S&P 500 market performance over the same period of time. You can see the huge increase in stock prices driven by Corporate buyback programs.
Here is the game that corporations have been playing.
- Increase the amount of cheap debt
- Use the money to fund stock buyback programs
- Increase the company’s stock price
Companies are carrying too much debt. And this is not debt they are using to build factories, develop new technology, or create jobs. They are using it to adjust their capital structure to increase their own stock price. And there is nothing wrong with that, except that it is very risky. Because if the economy takes a downturn, you will not be able to make your debt payments. This cuts across all sectors of the US economy. Companies have been incentivized to act this way, and in fact, if companies do not take out more debt, they will be outperformed by their competition.
Then the pandemic hit, the recession started, and the credit markets froze up. This caused the Federal Reserve to take unprecedented action and start massive new lending programs. But we have to talk about why the credit markets froze up in the first place. They froze up for a very good reason. Companies were holding too much debt, and it was too risky for banks to continue lending money during a recession. What would normally happen in that situation is that companies would deleverage and adjust their capital structure accordingly. But instead of holding these companies accountable for risky behavior, we bailed them all out.
Now a lot of people blame the Federal Reserve for this. I don’t, and I am sure I am going to get some angry comments for saying this. I think the good people at the Federal Reserve are just doing their job. They see the economy collapsing, and are doing what they can to help. It is not going to do anyone any good if the whole economy falls apart at the same time. Who I do blame in this situation is the corporations, because they know better. They know they have bad balance sheets, and corporations have lots of options to change their capital structure. But instead of doing that, they are looking to the government for a bailout.
So a few weeks ago, the Federal Reserve starting releasing information on who has been given special government loans due to the credit markets freezing up. The names on this list are shocking. I pulled the data from the report to Congress that was uploaded on Friday, July 10, 2020. There are 332 companies on this list with direct loans from the Federal Reserve. These are some of the biggest corporations in the world. I have pulled out eight names here just to give you an idea with the dollar amounts of the loan (in millions of dollars).
I find this shocking. 332 companies with massive loans, when the problem is they all have too much debt. When an ordinary American loses income and has too much debt, do you know what they do? They downsize to a smaller home, or get rid of a credit card. You do not take out more debt. This is a bailout, because this will be paid for somehow down the road by higher taxes on poor Americans. I think the Federal Reserve did the right thing by keeping the economy from collapsing, but that assumes a second step. The second step is that Corporations should do the right thing and deleverage their balance sheets. These companies do not need this debt. Microsoft does not need 19M of government debt. Berkshire Hathaway does not need 17M of government debt. These companies need to restructure and give the money back.
Let me show you something that is really going to make you mad. I have expanded this table and I have pulled the cash balances from each company’s last annual report. This does not include investments or receivables. This is cold hard cash that is just sitting in the bank. Each one of these companies could have funded these loans with their own cash. The most shocking is Amazon with 32B in cash. They did not need a 4M government loan. This was a money grab. All of these companies made a conscious decision to take a cheap government loan, when they did not need it. Shame on you Amazon. Shame on all these companies. Shame on you Berkshire Hathaway. Shame on you Microsoft. Shame on you Walmart. You companies know better. Give this money back.
|Debt (M)||Cash Available (M)|
Do you want to see something that will make you even more mad? The Federal Reserve balance sheet has increased by $3T. The stimulus checks that went out to all Americans was authorized to reach $300B. So this chart shows the difference of stimulus money that went to ordinary American’s versus stimulus that went other places. Direct loans to companies is only part of this. The Federal Reserve is also buying mortgage backed securities. They are buying ETFs to prop up financial markets. This money is not going to ordinary Americans.
If you know your business history, 100 years ago, this country really struggled with something called Graft. Graft is political corruption that results in someone’s personal gain. How is our current situation not graft? The US Government should not be funding loans to corporations so they can prop up their stock price. These companies know better, and they need to give the money back. How can these companies take this money when there are so many poor American’s starving in this country today? Corporations have options. Starving American’s don’t.
There was a famous movie made in 1939 called Mr. Smith Goes To Washington. And this was a movie about the problem of graft. And in this movie, the main character says “I wouldn’t give you two cents for all your fancy rules if, behind them, they didn’t have a little bit of plain, ordinary, everyday kindness and a little looking out for the other fella, too.” There is a lot of truth in these words. This is a very simple situation. There is too much debt. These companies took it when they did not need it. Shame on you. Give the money back.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.