“It’s what happens in a market which is, I would say, artificially supported by Fed buying,” Marks said.

‘Potemkin Market’
In the 1980s, Marks became one of the first investors to specialize in beaten-down bonds. Oaktree, the Los Angeles-based firm he co-founded with Bruce Karsh, is now trying to raise $15 billion for what would be the biggest-ever fund to invest in distressed debt.

Oaktree was a “very active buyer” when credit markets were swooning in mid-March, but has pulled back since the Fed announced it would intervene, Marks said. While the central bank has committed to buying investment-grade bonds and debt recently downgraded to junk, it hasn’t extended that support to less-creditworthy issuers.

“They could do that,” Marks said. “And in theory, if they bought aggressively, they could make all the markets rise. Now everyone would know that that’s a Potemkin market, a fake, and the minute they stopped things would collapse.”

In one of his recent memos to clients, Marks quoted a saying: “Capitalism without bankruptcy is like Catholicism without hell.” In the interview, he said he worries that Fed support for the credit market will result in moral hazard -- the likelihood that those who escape the consequences for reckless behavior will be reckless again.

That’s not to say he objects to Fed support for the economy.

“Thank God that it did what it did,” he said. “Just because something has unforeseeable negative consequences, that doesn’t mean it was a mistake.”

This article was provided by Bloomberg News.

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