Tremors! The Fed moves to rescue over-leveraged companies

May 6, 2020

My Dear Reader,

While keeping up with the changing times this morning, I came across an intriguing article in Bloomberg business that peaked my interest.  Written by Lisa Lee, a former banker and self described DC wonk, she reported that the Fed is moving to bil out highly leveraged companies.

“The reversal [in leveraged policy] came in the Fed’s announcement last week to expand its Main Street Lending Program to allow more small and medium-sized businesses to qualify for as much as $600 billion in loans. That was widely applauded. But less noticed was a provision that allows companies that had used the widely-abused accounting techniques in the past to seek the loans. At issue [sic] is the trend among many leveraged companies to “adjust” a key measure of their results — known as earnings before interest, taxes, depreciation and amortization, or Ebitda — to make them appear more creditworthy. After intense lobbying by business groups, the Fed has now said those adjusted earnings can be used for the Main Street lending program, rather than those under generally accepted accounting standards.”

Before the epidemic, I wrote to you that I felt that many companies were over leveraged and that their potential failure could spark an economic downturn. Now that the economy is shut down, I fear that this could be the catalyst for something much larger in terms of meltdown.  I penned a few essays two weeks ago outlining the social implications of an economic meltdown in these political times, but the Fed’s movement here indicates that we were right in worrying about the real consequences of over leveraging.  

Now more than ever, hard assets are going to be essential for personal financial growth.  The market may be calm now, but I believe that some of these indications are like a tremor before the sinkhole collapses.

To your Creation and Potential,

Kevin Prendiville