Corporate Bond Purchases by Central Banks: A Risky Gamble on Tax Avoiders and Miscreants

The unprecedented corporate bond-buying programs launched by the Federal Reserve (Fed) and the Bank of England (BoE) since 2020 have been hailed as lifelines for businesses during the pandemic. But beneath the surface lies a troubling reality: taxpayer funds are propping up firms with egregious tax avoidance, environmental violations, and reliance on subsidies—often at the expense of market integrity and long-term economic stability. This article exposes the systemic flaws in central bank bond-purchase programs and argues that investors must exercise extreme caution toward companies benefiting from these policies, while advocating for urgent reforms to align stimulus with accountability.

The Fed's Flawed Lifeline: Tax Avoiders and Miscreants Get a Free Pass

The Fed's Secondary Market Corporate Credit Facility (SMCCF), which purchased over $5.1 billion in corporate bonds from 2020 onward, lacked basic safeguards to exclude firms with poor ethics or fiscal responsibility. An investigation by the Project On Government Oversight (POGO) revealed that 44 Fortune 500 companies that paid zero federal income taxes in 2018 received $585.9 million in Fed bond purchases. Notable offenders include:

• Amazon: With a -1.2% effective tax rate in 2018, it received $20 million in Fed funds. Despite its $1 billion in state/local subsidies since 2018, Amazon has faced scrutiny for labor violations and antitrust issues.
• IBM: A -68.4% tax rate in 2018, it received $50.3 million in Fed bond purchases while collecting $64.4 million in federal subsidies.
• Chevron: A recipient of $23.8 million in Fed funds, it has racked up $152.9 million in environmental fines since 2018 for refinery accidents and pollution.

Environmental and Safety Misconduct: The Hidden Costs of Central Bank Support

The POGO report identified 32 companies among the tax avoiders linked to 190 instances of environmental or safety violations over three years. Examples include:
- FedEx, which received $16.5 million in Fed bond purchases despite 23 violations, including illegal cigarette shipments and workplace safety lapses.
- McKesson, a pharmaceutical distributor accused of opioid distribution misconduct, which received $7.7 million in Fed funds despite ongoing negotiations to pay a $21 billion penalty.

The Fed's failure to exclude such firms created perverse incentives: $432.1 million in bond purchases flowed to oil and gas companies, enabling them to raise $193 billion in new debt during the pandemic—a stark contrast to climate-conscious investors' push for green finance.

Subsidy Dependence and Moral Hazard

Central bank bond purchases disproportionately aided firms already reliant on public support. Seven tax-avoiding companies analyzed were federal contractors, securing $619.3 million in pandemic relief contracts in 2020 alone. Four were “tax inverters” (e.g., Medtronic PLC), using loopholes to shift operations offshore and avoid U.S. taxes.

This creates a vicious cycle of subsidy dependence: firms with poor governance or ethics receive cheap capital to delay restructuring, while investors in their bonds face rising risks of regulatory penalties, ESG-driven outflows, or reputational damage.

The Investor's Dilemma: Avoid, Short, or Reform?

For investors, the message is clear: proceed with extreme caution toward firms benefiting from central bank bond purchases without ethical rigor. Consider the following strategies:

1. Avoid sectors dominated by miscreants:
2. Energy: Firms like Chevron face mounting climate litigation and regulatory fines.
3. Tech: Tax-avoidant giants like Amazon may face higher tax rates or consumer backlash.

4. Pharma: Companies with opioid liabilities (e.g., McKesson) face prolonged legal and financial strain.

5. Short stocks with poor compliance records:

6. Use to identify disconnects between fiscal responsibility and valuation.

7. Target companies with high subsidy reliance and low ESG scores.

8. Advocate for policy reforms:

9. Demand central banks adopt ESG screens to exclude firms with tax fraud, environmental violations, or reliance on public subsidies.
10. Push for transparency in bond-purchase criteria to align stimulus with long-term sustainability goals.

Conclusion: A Call for Accountability

Central banks' bond-buying programs have become a vehicle for corporate welfare, enabling firms with unethical practices to thrive at public expense. Investors ignoring these risks may face losses as ESG-conscious capital flows shift and regulators crack down on misconduct. The solution lies in systemic reform: policymakers must mandate that future stimulus excludes miscreants, while investors prioritize ethical firms and hold central banks accountable for their choices.

In short, central banks' gamble with taxpayer money is a risk investors can't afford to ignore. Proceed with eyes wide open—or risk being left holding the bag.