Changing the rules of massive bilateral agreements to benefit one party over another tends to blow confidence in the system. Investors would start trying to guess which asset class will next be amended, thereby triggering runs across the market. (We see this when governments start expropriation processes in previously-stable economies.)
It also does nothing for e.g. a company with good receivables that can't make payroll or interest payments because its good commercial paper isn't being purchased. It's in a liquidity problem, not a solvency one. But if the liquidity problem persists, the firm will go insolvent.
I suspect "confidence" isn't an accurate word to describe the current aggregate sentiment of people towards the system.
> Investors would start trying to guess which asset class will next be amended, thereby triggering runs across the market. (We see this when governments start expropriation processes in previously-stable economies.)
We are already seeing this today. /r/WallStreetBets has plenty of content along these lines, and for good reason - that the government would be selectively bailing out corporations, once again, was fairly self-evident to anyone with half decent capabilities in logic and memory.
> It also does nothing for e.g. a company with good receivables that can't make payroll or interest payments because its good commercial paper isn't being purchased.
Fair enough, but lets not think in false dichotomies - there is in fact an extremely broad array of ways the fed could go about this. Unfortunately (and coincidentally), they seem to have once again miraculously chosen the way that benefits corporations at the expense of taxpayers.
Most people believe that we live in nations based on ~democracy, in both function and name. I for one would be very interested to know what the public's actual sentiments are on this matter, as opposed to what we are told are their sentiments (comically derived from a single vote, at one point in time). It's self-evidently silly behavior, and yet this seems to be the way the vast majority of people conceptualize the world.
That's...happening? It's the core of each of the stimulus bills.
The company bailouts are, theoretically, for otherwise-good businesses unusually impacted by the pandemic. Restaurants and airlines, for example. Of course, there is the winner-picking that happens when any government spends money.
Instead the Fed and US government have a much simpler and near instant tool: act as the lender of last resort.
A bonus feature of this implementation is it costs not much money. Big corporations have lots of assets and the government is sure to be re-paid.
Says who? The whole point of loans is that there is a possibility that they will not be repaid. Banks thinks it is risky to lend money at the current interest rates so American taxpayers instead have to shoulder the whole burden. The assets owned by corporations is mostly in the form of financial instruments whose value is currently plummeting. The US government is taking on huge risks.
If these loans weren't risky banks themselves would issue them. Since they aren't it stands to reason that they in fact are risky!
I don't see the parallel.
Covenants, ultimately, have to be enacted through the courts. (I mean, presuming debtors' legal departments get the message from the government that they don't have to worry about covenants during this period, whatever their creditors demand. The creditors would ultimately have to take them to court to attempt to get their covenants enforced.)
And, if the covenant enforcement hits the court system, then the government would already be "in place" to suspend traffic—it's "the wire" that court-system messages are flowing through!
(Or, really, it's more like a judge is a router and the legislature controls a WAF module in said router. The judge, as router for motions, is required to deny any motion the law-as-WAF declares as illegitimate.)
You and me and Fed.gov. It fucking sucks.
Does this increase risk? I would think so, but I think people should have an obligation to provide at least some evidence or logical reasoning as to why we must accept the particular flavor of corporate socialism we practice. If an idea is sound, it should be defensible.
Without the flow of money the funds/banks/institutions which own those bonds are in-turn going to default to their creditors.
Hence the internet analogy: you cannot just hack in a pause on your local machine. There is a world of complex interactions which would also need to be paused, so complex just figuring out who owes who would take years/decades.
If you take covenants out, contracts become inherently more negotiable. And that's important, because frequently creditors have less pressure on them to perform, in exactly the same circumstances that cause debtors to face more challenges; and so creditors often find that their best option, EBITDA-wise, is to eat the losses from the challenges that their debtors are facing, rather than destroying their debtors through liquidation in a way that gets them, in the end, less money.
You know how, right now, corporations are more willing to release previously-withheld "bad news", because they can blame their lack-of-performance on a suspension of work due to the virus? Those corporations are creditors, not just debtors (esp. in commercial paper); and the "slack" they earn like this, they can pass on to their debtors (e.g. other corporations)—but only if contracts work the "normal" way, that you see in small-scale non-covenanted contracts.
In such non-covenanted contracts, where when the regular contract isn't working out, frequently the best thing to do isn't to sue for breach, but rather to just sit down and renegotiate the contract. That's what's going on right now all over the place—contracts between e.g. landlords and renters, or between suppliers and retailers, are being renegotiated, just for this temporary period, to the benefit of both parties. (Another good example, more generally, is personal debt forgiveness: debtors are willing to accept a renegotiation of a loan to an individual, over the much-less-likely chance of ever claiming the full original loan amount.)
With a covenant in place, though, one party has no incentive to sit down to renegotiate (and in fact, that's what they wanted to avoid by adding a covenant); and instead can just pressure the other party to do drastic things like liquidation in order to fulfill the secondary contract stipulations under the covenant-breaking clause.
Wouldn't it make sense to—temporarily!—take away the tool by which funds/banks/institutions force their debtors to liquidate, and instead force them to do the thing they'd have done if that tool wasn't there: to renegotiate performance expectations, to get what return they can get; and then, in turn, have those funds/banks/institutions renegotiate their performance expectations with their creditors?
That's completely unfair to one side of the transaction.
Here's an example:
Let's say that in 2010, I bought a million in bonds from various sources.
Let's say that in 2010, you sold me some bonds.
Let's say that your proposal goes through, and the government just declares that contracts will not be enforced.
That would completely punish ME at YOUR benefit.
See https://thehutchreport.com/your-bank-account-who-really-owns...
Or read https://www.amazon.com/Where-Does-Money-Come-Ryan-Collins/dp...
Highly recommended.
Even if the US could allow US companies to default for a year without penalty, the Chinese companies expecting coupon payments wouldn't receive the funds they use to operate. They would then have to default on their Chinese obligations.
If Chinese companies can't pay their debts in China, China faces huge pressure to devalue or inflate. They're unlikely to adopt the forgiveness rule. Emerging markets are at the end of this game of crack the whip.
Q: rather than going into debt, would it be possible for the government to just... suspend the activation of financial covenants generally for a while? Enact a law putting a temporary patch on how contract law works vis-a-vis financial instruments?
Something like... any covenant with triggers written after date X would now be required to be written to include additional language Y; and any covenant triggers written before date X would be implicitly interpreted as if they did contain language Y. Language Y specifies that the activation of the covenant is suspended when the government says a certain named financial-market state "Z" pertains; and, when state "Z" is declared as having ended, only then would the covenant be evaluated for activation, based on the present state of the debtor, rather than its state during the historical period during condition "Z". Effectively, the covenant wouldn't be able to "see into" whatever happened during "Z" to apply its triggering logic to it.
(I'm picturing here how you can, in an RDBMS, create constraints that don't validate until a transaction is complete, such that you can temporarily put a table into a constraint-violating state during the TX, and—as long as you fix things before the end of the TX—everything will be fine, and the trigger won't run.)