During the early months of the COVID-19 pandemic, the Federal Reserve used an emergency bond-buying program to purchase over half a billion dollars’ worth of corporate bonds issued by dozens of Fortune 500 companies that paid nothing in federal income taxes in 2018. Many of these companies have also received hundreds of millions in federal and state government subsidies since 2018, and most have paid penalties for corporate misconduct within the past three years, according to a Project On Government Oversight (POGO) review of Fed data.
Congress ended this program, called the Secondary Market Corporate Credit Facility, along with a suite of other Federal Reserve emergency lending programs late last year. While the primary purpose of these programs was to quickly provide stability and liquidity to financial markets during a crisis, POGO’s findings raise questions about the Fed’s decision not to look more closely at the companies included in the corporate bond-buying program. Additional safeguards could have required program administrators to simply exclude companies that take advantage of tax loopholes or receive massive government subsidies, as well as companies that have been fined for misconduct, while still protecting the economy from the risks posed by the coronavirus pandemic.
For the public good to be wholly served, any future lending facilities should be modified to better support these additional goals of fiscal responsibility and corporate accountability.
The Federal Reserve and the Stock Market
The Fed’s Secondary Market Corporate Credit Facility—backed by funds appropriated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act—purchased corporate bonds held by other investors, rather than directly from the firms that issued these bonds. Stocks, bonds, and other securities are traded on the “secondary” market, one step removed from the transaction that created these securities.
The purpose of this credit facility was to maintain investor confidence in the secondary market so that businesses had continued access to capital during the pandemic. The concern from the Fed was that if banks and other lenders feared that no investors would buy newly issued corporate debt, they would stop lending to businesses. But if the government shored up the secondary market by purchasing corporate debt, banks and other lenders would be more likely to continue lending to businesses.
To fund the purchases, the Treasury Department invested $25 billion into a special Federal Reserve subsidiary that could buy up to $250 billion in corporate debt from bondholders in the secondary market. When the program was announced, bond markets surged, hitting record issuances of corporate debt.
Program administrators selected bonds for purchase based on an index designed to ensure the facility’s portfolio was diverse and reflected the relative weight or contribution of each sector of the economy to the secondary market as a whole. As of early November—about a month before the program ended—the Federal Reserve had purchased over $5.1 billion in corporate debt through this credit facility.
Corporate bonds were eligible for purchase if the issuer met five criteria. First, the issuer had to be a business created in the U.S., or with significant operations and a majority of employees based in the U.S. Second, the issuer had to have a credit rating above a threshold that indicated their ability to pay a bond’s principal and interest on time. Third, the issuer could not be a holding company, meaning a company that simply owns shares in other companies rather than producing goods or services. Fourth, the issuer could not have received “specific support” under the CARES Act. (“Specific support” does not appear to have been further defined, but likely includes direct payments such as grants, and possibly loans and other forms of government assistance.) Fifth, the issuer had to satisfy the conflicts of interest requirements in the CARES Act.
Beyond these basic criteria, however, lending facility administrators appear to have selected companies without regard for the firms’ track records or social impacts. To be sure, the facility aimed to take quick action and buy bonds representative of the market. But by excluding other factors from its calculus, the Fed missed an opportunity to provide more careful stewardship over the funds entrusted to it, supporting businesses that were already thoroughly subsidized by taxpayers, as well as businesses with poor labor and environmental track records.
In essence, the public was asked to accept that rapid action to stabilize the economy required setting aside other priorities like fiscal responsibility and corporate accountability. There are thousands of publicly traded companies whose bonds the Fed could have purchased through this program; it seems likely that with some minimal effort, program administrators could have found companies that met their criteria for inclusion that were less heavily subsidized, and with fewer health and safety violations.
Additionally, a staff report from the House Select Subcommittee on the Coronavirus Crisis notes that this lending facility lacked several taxpayer protections included in other CARES Act programs: “In particular, the facility imposes no conditions requiring companies to save jobs or limit payments to executives or shareholders.”
Did the Fed Look Carefully Enough at Firms Before Buying Their Debt?
POGO examined Federal Reserve data on corporate bonds purchased through the Secondary Market Corporate Credit Facility from March 23 until November 24, 2020. We identified $585.9 million in corporate bonds issued by 44 Fortune 500 companies that paid nothing in federal income taxes in 2018, according to the nonprofit Institute for Taxation and Economic Policy (ITEP).
For example, Amazon—the online shopping behemoth valued at over $1 trillion in 2020—paid an effective income tax rate of negative 1.2% in 2018, according to ITEP. The company has posted record sales and profits during the pandemic. The Fed purchased nearly $20 million in Amazon-issued bonds on the secondary market. Similarly, the multinational technologies and consulting firm IBM paid an effective tax rate of negative 68.4% in 2018, according to ITEP.
The company was valued at over $112 billion in 2020, when the Fed purchased over $50.3 million in IBM bonds.
Purchases of bonds issued by Fortune 500 companies that paid nothing in federal income tax in 2018 accounted for over 11% of purchases through the Secondary Market Corporate Credit Facility.
More than half of these companies have also received some form of government subsidy since 2018. Twenty-eight companies received a total of $342.5 million in federal subsidies and $1.4 billion in state and local subsidies since 2018. The bulk of these subsidies went to just three companies. According to Good Jobs First’s Subsidy Tracker, Amazon has received over $1 billion in state and local subsidies, General Motors has received
over $206.3 million in federal subsidies and $385.1 million in state and local subsidies since 2018, and IBM has received
$64.4 million in federal subsidies.
“Everyone knows that Amazon.com has plenty of access to cheap capital,” said Greg LeRoy, the executive director of Good Jobs First. “How else could it finance its massive, multi-year acquisitions spree? This is just one more way Uncle Sam is tilting the playing field against small businesses and in favor of the Big Tech monopolists.”
The Fed also purchased over $44 million in bonds issued by four companies that were profiled on Bloomberg’s list of recent “tax inverters,” or companies that took advantage of tax code loopholes and moved their business operations abroad without changing majority ownership, headquarters, or management leaders: Medtronic PLC, Aon Corp., Eaton Corp., and Mylan N.V. In order to stabilize markets and ensure access to capital, the Fed could have invested in any company that met its criteria. But by failing to exclude tax inverters from participation in this program, the Fed also ended up investing U.S. taxpayer dollars in companies that had recently reduced their own investment in the United States.
Finally, POGO found that 32 of the companies that paid no federal income tax in 2018 and whose bonds were purchased by the Federal Reserve have also paid penalties resulting from over 190 instances of corporate misconduct within the past three fiscal years. According to Good Jobs First’s Violation Tracker, which tracks federal and state cases involving banking, consumer protection, false claims, environmental, labor, safety, discrimination, and price-fixing, just three companies within this group—FedEx, Chevron, and Amazon—had a combined total of 60 violations and paid over $239.4 million in damages since 2018.
What’s more, seven of these Fortune 500 companies—Chevron, General Motors, Halliburton, IBM, FedEx, Honeywell International, and McKesson—are federal contractors. Five of the seven have received federal COVID-19 relief contracts worth over $619.3 million just this past year.
The Fed chair stated publicly that the bank decided not to vet firms before purchasing their debt through the secondary market beyond the five basic criteria laid out above. In September 2020, lawmakers questioned Federal Reserve Chair Jerome Powell about the bank’s bond-buying practices during a House Select Subcommittee on the Coronavirus Crisis hearing. A subcommittee staff report released the day of the hearing found that the Fed had purchased corporate bonds issued by at least 227 companies (out of around 800 total, according to Powell), that had been accused of illegal conduct since 2017. Powell defended the Fed’s approach, stating, “the reason we bought from 800 [companies] was we didn’t want to be deciding which companies to buy from and which not.”
Nevertheless, these companies’ records of violations call into question whether the Fed should buy corporate bonds without first evaluating corporate social responsibility, climate impact, and other factors that affect the public’s wellbeing. Not only did this program indirectly provide support to companies that put U.S. workers and the environment at risk, but it also contradicted efforts by regulatory enforcement agencies throughout the federal government that sought to impose consequences for misconduct.
For example, McKesson Corporation, the largest drug distributor in the U.S., has paid millions of dollars in settlements for failing to pay wages to employees working on a contract with the Centers for Disease Control and Prevention, and for flooding communities with opioid prescriptions while failing to adequately warn residents of the risks of addiction, according to POGO’s Federal Contractor Misconduct Database. McKesson and two other pharmaceutical companies are also currently in talks to pay an estimated $21 billion in penalties to resolve several state lawsuits alleging gross misconduct for their involvement in the opioid crisis. Yet the Fed leveraged taxpayer funds to purchase over $7.7 million in McKesson bonds on the stock market.
FedEx has been investigated for 23 offenses since 2018, according to Good Jobs First. These cases include over a dozen federal workplace health and safety violations, as well as a $35 million penalty levied by the New York attorney general in 2019 for illegally shipping hundreds of thousands of untaxed cigarettes. Despite the company’s record of violations, the Fed purchased over $16.5 million in FedEx corporate bonds through the secondary market.
Oil giant Chevron provides a particularly telling example. Since 2018, Chevron has been fined for 22 offenses, including numerous environmental and workplace safety offenses assessed by multiple federal agencies, according to Good Jobs First. The company paid its costliest penalty in 2018 following an investigation into a 2012 fire at a refinery in Richmond, California, that resulted in a shelter-in-place order for Contra Costa County, California; a 2013 explosion at a Mississippi refinery that resulted in the death of an employee; and a 2013 rupture at a refinery in El Segundo, California. The company was fined over $152.9 million. Despite the firm’s egregious safety and environmental record, the Fed purchased $23.8 million in Chevron bonds.
Chevron is also emblematic of a broader concern over whether major contributors to climate change should ever be eligible to receive taxpayer-supported bailouts. Public Citizen, Friends of the Earth, and BailoutWatch found that the Fed purchased $432.1 million in oil and gas company bonds through the secondary market from March to November of last year, fueling a borrowing binge that saw these firms issue $193 billion in new debt—a valuable lifeline.
The Federal Reserve failed to consider several important factors before purchasing corporate debt through the secondary market, including whether a firm had paid any federal income taxes, whether it had received other government subsidies, and whether it had recently been fined for corporate misconduct.
The Fed undoubtedly needs to move quickly to provide stability in any economic emergency. Yet placing speed above other priorities can lead to undesirable outcomes. First, leveraging public funds to buy bonds in companies that have paid no income tax, that have already been granted massive subsidies, or in many cases both, looks suspiciously like corporate welfare when examined in the aggregate—regardless of whether the Fed was attempting to avoid picking winners and losers. Second, investing taxpayer dollars in firms that have repeatedly put the public’s health and safety at risk undermines efforts by other parts of the government to establish meaningful consequences for bad actors.
While the Fed may find that it occasionally needs to make exceptions to otherwise well-established standards for fiscal responsibility and corporate accountability in times of crisis, that should not mean that no such standards should be put into place. Any future bond-buying programs must include additional provisions requiring that program administrators exclude companies that take advantage of tax loopholes and subsidies, as well as companies recently fined for serious misconduct. The Fed need not require companies to be perfect before buying their debt, but the bank could probably find some less bad ones.