The Federal Reserve has bought corporate bonds issued by companies that have laid off more than a million workers and doled out dividends to shareholders, the Select Subcommittee on the Coronavirus Crisis found in an analysis released Wednesday.
“Fed Chair Jerome Powell testified in June that ‘the intended beneficiaries of all of our programs are workers,’” the committee staff said in the analysis. “However, the Select Subcommittee’s analysis indicates that many large layoffs have occurred among the companies whose bonds were purchased by the Fed, suggesting that the primary beneficiaries of the program have been corporate executives and investors, not workers.”
The report found that 383 companies whose bonds were bought by the Fed paid dividends to their shareholders, including 95 that also conducted layoffs, and 227 companies had been accused of illegal conduct sometime in the past three years.
“While I recognize that during severe economic crises, federal government assistance for large corporations can be necessary to support the wider economy, public support must always be undertaken to achieve maximum public benefit,” subcommittee Chairman Jim Clyburn said in his opening statement. “I believe the terms of the Fed’s purchases of corporate bonds could have been improved so that benefits were more equitably shared by workers as well as investors.”
Powell in response said the central bank intended to make sure companies were able to borrow money, adding that the Fed helped encourage roughly $1 trillion in lending in corporate and municipal bond markets just by establishing emergency programs to help both those segments of the economy.
The Fed is buying the bonds of roughly 800 companies, and there’s no estimate of how many jobs have been saved by the central bank’s efforts.
The Fed announced in March that it would buy corporate debt in a bid to calm the bond markets, which had begun freezing up at the beginning of the coronavirus pandemic. The central bank said it had to move quickly in the face of massive state-by-state lockdowns that threatened to bankrupt many companies and result in the loss of millions of jobs.
The Fed followed that announcement a couple of months later by buying up exchange traded funds invested in underlying corporate bonds. And in June, it began purchasing the debt of individual large corporations on the open market, an approach that spared companies from having to seek aid directly from the central bank. The Fed’s efforts helped keep interest rates low and whetted investor appetite for still more corporate debt.
Powell was asked about the corporate credit program on Tuesday at a House Financial Services Committee hearing.
Rep. Joyce Beatty (D-Ohio) pointed out that the Fed is also buying bonds of companies in good financial condition and asked Powell how that plays into the Fed’s mandate.
Powell emphasized that none of the bond purchases “extend any new credit to anybody,” adding that the Fed’s presence was intended to keep those markets working so those companies will continue to be able to borrow if stress in markets spikes again, to allow them to “keep workers on staff.”
The coronavirus subcommittee also dinged the Fed for buying a disproportionate amount of bonds from fossil fuel companies.
“Investing in oil, gas, and coal companies not only fuels climate change, but it is also a risky investment given longer term declines in the sector,” according to the document. Those companies made up 10 percent of the Fed’s bond purchases while employing 2 percent of workers at larger companies, it said.