Support to Covid hit companies by way of Equity infusion

International Monetary Fund Chief Economist Gita Gopinath urged governments to shift to "equity-like" support from one focused on loans as the coronavirus pandemic inflicts prolonged damage on companies. She said that the massive scale of the shock meant more firms would become insolvent as they suffer lower revenues for many months. Government support in the form of loans would saddle such companies with huge debt which would make it difficult for them to recover post the pandemic. She says that if the lending takes form more like equity, it will make it easier for firms to recover from the crisis.

 

A similar effort at equity infusion is the Fannie Mae and Freddie Mac bailout that occurred September 6, 2008. The U.S. Treasury Department was authorized to purchase up to $100 billion in preferred stock of the organizations and buy mortgage-backed securities. As a result, the Federal Housing Finance Agency (FHFA) put Fannie and Freddie into conservatorship. Keeping the two agencies afloat cost taxpayers US$187 billion over time as the Treasury paid $116 billion for Fannie and $71 billion for Freddie. The Treasury decided to send all Fannie and Freddie profits into the general fund. Since then, the bailout has been paid back with an additional $58 billion in profit. Fannie remitted $147 billion, and Freddie paid $98 billion.

 

The bailout kept Fannie, Freddie, and the American housing market functioning. It was supposed to be a temporary situation, but the government did not get around to selling the shares it owned and return Fannie and Freddie to private ownership.