Washington and Wall Street chose to delay paying their bills - and to put them on your tab

By Charlie Garcia

A diesel tax pushed past Election Day, a fund that pays you back 5% at a time and a Fed that books a $233 billion loss as an asset

The polite word for what the government and Wall Street are doing is deferring payment, like opening a tab at a bar that somebody else will pay later.

In the space of one week, Washington, Wall Street and the Federal Reserve each handled bills they received the same way. Nobody paid them. They moved them - and they moved them toward you.

The White House pushed a diesel tax past Election Day. Blue Owl Capital (OWL), one of Wall Street's biggest private lenders, told investors who want their money back that the exit stays 5% wide. And the Fed is carrying $233 billion in losses on its books as an asset.

The polite word is "deferred." At a bar, it's called a tab. Somebody drinks now and somebody else pays later - and the somebody else is holding your grocery receipt, your 401(k) statement and your mortgage bill.

A cut makes a cost smaller. A deferral makes it later. Everybody chose later.

The great red-dyed diesel amnesty

On Oct. 5, at a campaign rally in Nebraska, President Trump signed an executive order that lets tax-free red-dyed farm diesel onto the highway. The 24.4-cent federal tax normally owed when that fuel hits the road is deferred through Dec. 31, and the IRS is to stop writing penalties.

Red dye exists for one reason: It lets a man with a flashlight tell whether you paid the tax. Now Washington has sent the man home.

The order gives the Treasury five days to decide whether a qualifying event has occurred. Diesel topped $6 a gallon in September for the first time ever. Take your time.

It also has the Treasury working in consultation with the U.S. defense secretary. On a fuel tax. It is the most honest sentence ever written about one.

The deferred tax still comes due, on a date the Treasury will set later. The same order asks the Treasury to find a way, including legislation, to never collect it. It's a deferral that hopes to grow up to be a pardon.

The president of the American Farm Bureau Federation says "every cent per gallon matters" when you run a fleet of grain trucks. He's right, and farmers sitting on their own tanks of red diesel will feel it.

Long-haul truckers mostly won't. Dyed diesel isn't sold at most truck stops. Their own trade group calls the order "minimal relief."

Goldman Sachs expects diesel to stay high through 2027 because refineries can't keep up. When the refinery is the bottleneck, a tax break goes to whoever owns the bottleneck. Watch the gap between red diesel and the taxed kind. If it shrinks, you'll know who drank the 24 cents.

And the diesel tax is one of the taxes that fills the Highway Trust Fund. Tax-free fuel, burned on roads paid for by the tax.

Many are called, few are redeemed

Wall Street's tab had already arrived, and Washington was holding the door. The Securities and Exchange Commission issued two rule proposals on Sept. 30 that could open private-market funds to more ordinary investors. The White House told the Labor Department last year to make room for private assets in 401(k)s.

One proposal would scrap the rule that an interval fund - the kind built to put hard-to-sell assets in front of ordinary investors - keep 100% of a promised buyback in liquid assets while the offer is open. In its place would go a principles-based standard. A principles-based standard is what you have when you no longer have the cash.

Two days later, Blue Owl told investors in two of its private-credit funds that withdrawals stay capped at 5% a quarter. Requests to leave were still running well above that.

The industry calls this a tender cap. There is nothing tender about it. They took your coat at the door and are handing it back one sleeve a quarter.

These funds have no stock-market price. They have a valuation, set by their managers and their appraisers, updated on a schedule. When loans go bad, the official price is the last to find out.

The investors who leave first get out at yesterday's price. Whoever is still inside covers the difference.

The Fed has noticed. Its staff are asking big banks how they value the private-credit loans on their books. Apollo (APO) just extended daily pricing to all of its credit assets. Nobody publishes a daily price because the customers are relaxed.

Washington is widening the entrance in the same week the people inside learned the exit is 5% wide. Main Street is being invited in last - and the last one in pays for everyone who left first.

An IOU of One's Own

The Fed, which sets the price of every drink in the house, had a week, too.

On Sept. 16, the Fed raised interest rates for the first time in three years and said the move would support a "timelier return" to its 2% inflation goal.

Two weeks later, the Fed's inspector general reported on the central bank's headquarters renovation. The board approved the project at $1.317 billion in 2020.

By December 2024, the approved cost was $2.381 billion, and the finish date had slipped from 2024 to the end of 2027. Even the building is on the tab. The Fed awarded more than $2 billion in construction work without a guaranteed maximum price.

The Fed's inflation target is 2%. Its renovation ran 81% over its original budget.

The overruns piled up under Jerome Powell, and the inspector general found mistakes, not misconduct. Chairman Kevin Warsh has handed the job to the General Services Administration and says the Fed will set a guaranteed maximum price. The Federal Reserve has finally imposed price controls. On itself.

The renovation is the cheap part.

The Fed pays banks interest on the reserves they park with it. When rates jumped in 2022 and 2023, those payments outran its income, and a central bank that used to mail the Treasury a check every week found it had nothing left to mail. In 2021, the checks added up to $107.4 billion. In September 2022, most of its regional banks stopped sending anything and began recording the shortfall as a "deferred asset."

A deferred asset is a loss in a better suit. It is an IOU the Fed writes to itself, to be paid out of profits it must earn before the Treasury sees another dime. As of Sept. 30, the IOU stood at $233 billion, enough to pay for the renovation 98 times.

The Fed says the deferred asset has "no implications" for its ability to meet its financial obligations. Try that line on your mortgage servicer.

Every rate hike raises what the Fed pays the banks, which is how it lost the money in the first place. The hike fights inflation. It also runs up the tab.

President Trump's review: "I don't blame Kevin Warsh. I probably would have voted against the board if I were him." Kevin Warsh chairs the board. The vote was unanimous.

The 30-year mortgage rate climbed to 7.55%. Nobody deferred that one.

Three Tabs Walk Into a Bar

Put the three tabs side by side, and they turn out to be the same bet.

The diesel deferral needs fuel prices to fall before the bill comes due, or Congress to forgive it. The private-credit gate needs loan values to hold until the exit widens. The Fed's deferred asset shrinks only when the Fed earns more than it pays the banks, and that takes lower rates. All three are betting that 2027 will be cheaper than 2026.

And one round leads to the next. Diesel feeds inflation, inflation keeps rates up, and high rates squeeze private-credit borrowers while the Fed's IOU grows. If diesel stays high, the bill for all three lands where you shop, save and borrow.

The two parties who price diesel and money for a living are betting the other way.

Goldman Sachs says diesel stays high through 2027. The Fed raised rates in September - against its own IOU.

If diesel is back under $5 and the Fed has cut rates by Dec. 31, the deferrals were smart. If not, later turns out to be closing time.

At closing time, the bartender doesn't ask who ordered. He slides the check to whoever is still sitting there.

Charlie Garcia is founder and a managing partner of R360, a peer-to-peer organization for individuals and families with a net worth of $100 million or more. His Capital Mischief Substack covers financial markets and geopolitics. Follow him on X here.

-Charlie Garcia

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