Apollo Co-Founder Sees Economy in ‘Shambles’ Without Key Fed Relief

(Bloomberg) -- Apollo Global Management Inc. co-founder Marc Rowan warned in an email to clients, policy makers and government officials that liquidity is evaporating from markets so quickly that the economy will unravel without more support from the Federal Reserve.

“Jobs and payroll will not be preserved or able to restart quickly once the virus subsides,” Rowan wrote last weekend in the email, a copy of which was provided to Bloomberg. “The status quo will be upended and the economy in a shambles rather than being preserved for a restart.”

Investment-grade and otherwise credit-worthy companies are so starved for access to cash that many are considering bankruptcy, Rowan wrote. With financing also drying up, pension funds, endowments and investment managers have become forced sellers of securities.

Markets seized up because banks no longer provide nearly as much credit as they did prior to the financial crisis, Rowan explained. Instead, debt capital now comes through a complex food chain of investors and fund managers, with short-term financing supplied by banks against portfolios of collateral.

Still, some of the stresses Rowan described in the letter are already showing signs of easing. U.S. investment-grade borrowers priced $117 billion of bonds this week, topping last week’s record $109 billion, while companies in the Americas have raised almost a quarter-trillion dollars in the loan market since March 9. Even businesses hard hit by Covid-19, including cruise operator Carnival Corp. and planemaker Airbus SE, have been able to access capital markets.

‘Fed’s Duty’

In a statement, Apollo spokeswoman Joanna Rose said Rowan is one of many business leaders trying to propose “best solutions” for reviving the economy. The firm is “particularly concerned” about the breakdown in essential parts of the financial system and the consequences for consumer, student, auto and corporate loans, as well as for mortgages and credit-card receivable sales.

Rowan sees a solution to the liquidity crisis in programs the Fed and Treasury Department have already rolled out to relieve stress in markets. Specifically, he proposed expanding the Term Asset-Backed Securities Loan Facility, or TALF, so the central bank can lend against a broad range of investment-grade collateral and not just AAA-rated securities.

He said the Fed should operate like a bank, levering the Treasury’s $450 billion of “equity capital” in the stimulus act 10 times to achieve $4.5 trillion of firepower.

“Picking industries rifle shot is a waste of time,” Rowan wrote. “The Fed’s duty is to preserve the economy, not to avoid all credit risk.”

Many of the borrowers that tapped the bond market in recent weeks, among them Oracle Corp., Exxon Mobil Corp. and Toyota Motor Corp., carry some of the highest investment-grade ratings and don’t fall into the more-desperate category Rowan described. In non-agency mortgage-backed securities, a market shut out of Fed assistance, margin calls and collateral liquidations have wiped out tens of billions of dollars in equity value at real estate investment trusts.

An eight-page memo Rowan attached to his email calls the pervasiveness, scale and ramifications of the pandemic “significantly more grave and far less predictable” than the financial crisis. Never have entire industries faced the prospect of zero revenue for an indefinite period, he wrote.

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