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Fed Was Buying Debt Issued by McDonald's and the Republic of Korea -- Why?


The long-awaited Fed bailout data was released today and details from the Commercial Paper Funding Facility are particularly interesting.

Today the long-awaited Fed bailout data was released. For those interested in perusing it, you can find it here in all of its .xls- and .csv-formatted glory.

Data geeks will find it a fascinating study, as it provides a lot of granularity and insight into the workings of the Fed during the wild times of late 2007 through 2009. I was particularly interested in the Commercial Paper Funding Facility (CPFF) data, as I suspected it would contain some of the most questionable actions of the Fed. I was not disappointed. Below are the parent/sponsors that saw their commercial paper bought the most. Note that because commercial paper rolls quite frequently, this doesn't mean the Fed had, say, $74 billion of UBS (UBS) commercial paper on its books (the CPFF peaked in size at around $350 billion).

Note that foreign institutions are highlighted in blue. On this list alone you've got more than $300 billion in purchases of commercial paper issued by foreign institutions (granted, I assume all have US subsidiaries, as mandated by the CPFF). Now, some like UBS and Royal Bank of Scotland (RBS) are primary dealers, and in those cases it's easier to make a case for why they should have been treated the same as US banks. But WestLB, for instance, is a European bank partially owned by a German state. Other parent entities of issuers not big enough to make the top 20 include the Free State of Bavaria, the Republic of Korea, and everyone's favorite stress-tested Irish bank, Allied Irish (AIB).

But it doesn't stop there. The Fed bought $203 million of McDonald's (MCD) commercial paper. $1.48 billion of Verizon's (VZ). And $2.3 billion of Harley-Davidson's (HOG). Perhaps McDonald's and Verizon, both with hundreds of thousands of employees, were deemed systemically important, but Harley-Davidson and its 7,300 employees?

I'm sure at a high level the Fed would say that it was simply doing its duty of providing liquidity to systemically important parts of the economy at a time of dire stress, but the act of purchasing debt owed by entities owned by foreign governments and debt owed by US institutions that have nothing to do with financial services, let alone banking, demands a little more scrutiny that it's gotten.

The Fed's ownership and accountability has long been a bit of a paradox. It was created by Congress, and is subject to congressional oversight, yet demands to be politically independent. It is a privately owned entity, yet its board is entirely appointed by the president of the United States and confirmed by Congress. The current Secretary of the Treasury was most recently the head of the NY Fed, and the most recent Chairperson of the President's Council of Economic Advisors is thought to seek the head of the SF Fed. For some time now the Fed has sought the near limitless power and authority of a president in a time of war with none of the electoral or Congressional accountability, and as the Great Recession unfolds into potentially a sovereign and muni crisis it remains to be seen if Congress or the American people will do anything to change that.

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