The Federal Reserve's Covert Bailout of Europe

When is a loan between central banks not a loan? When it is a Dollars-for-Euros Currency Swap.

http://online.wsj.com/article/SB10001424052970204464404577118682763082876.html?mod=googlenews_wsj

-DECEMBER 28, 2011-

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Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps

http://www.zerohedge.com/news/former-fed-vp-accuses-bernanke-bailing-out-europe-currency-swaps

-12/28/2011-

(TylerDurden) First it was Zero Hedge... http://www.zerohedge.com/news/foreign-currency-liquidity-swaps-aka-global-bail-out-plan-b-faqs ...Then Ron Paul joined in... http://www.zerohedge.com/news/ron-paul-statement-feds-bailout-europe ...Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again.

Incidentally, O'Driscoll says,

"America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here."

One thing we can say proudly - it has been noticed loud and clear here (MD: below)

The Federal Reserve's Covert Bailout of Europe

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.

From the WallStreetJournal: http://online.wsj.com/article/SB10001424052970204464404577118682763082876.html?_nocache=1325091067684&user=welcome&mg=id-wsj

-DECEMBER 28, 2011-

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.

This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.

The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)

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(Bloomberg News sued the Federal Reserve to obtain information on its emergency programs during the 2007 to 2009 financial crisis, after all, the Federal Reserve is known for, and has a reputation for secrecy. Bloomberg, however, excluded foreign-currency liquidity swaps because names of commercial banks that borrowed under the program were disclosed to the public.)

Fed Once-Secret Loan Crisis Data Compiled by Bloomberg Released to Public

http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-data-compiled-by-bloomberg-released-to-public.html

By Phil Kuntz and Bob Ivry - Dec 23, 2011

Bloomberg News today released spreadsheets showing daily borrowing totals for 407 banks and companies that tapped Federal Reserve emergency programs during the 2007 to 2009 financial crisis. It’s the first time such data have been publicly available in this form.

To download a zip file of the spreadsheets, go to http://bit.ly/Bloomberg-Fed-Data. For an explanation of the files, see the one labeled “1a Fed Data Roadmap.”

The day-by-day, bank-by-bank numbers, culled from about 50,000 transactions the U.S. central bank made through seven facilities... http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf ...formed the basis of a series of Bloomberg News articles this year about the largest financial bailout in history.

“Scholars can now examine the data and continue the analysis of the Fed’s crisis management,” said Allan H. Meltzer, a professor of political economy at Carnegie Mellon University... http://topics.bloomberg.com/carnegie-mellon-university/ ...in Pittsburgh and the author of three books on the history of the U.S. central bank.

The data reflect lending from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility... http://www.bloomberg.com/quote/FARWOLAB:IND ...the Commercial Paper Funding Facility: http://www.bloomberg.com/quote/FARBCPFF:IND ....the Primary Dealer Credit Facility: http://www.bloomberg.com/quote/FARBCPFF:IND ....the Term Auction Facility, the Term Securities Lending Facility... http://federalreserve.gov/newsevents/press/monetary/20080311a.htm ...the discount window and single-tranche open market operations, or ST OMO.

Bloomberg News obtained information about the discount window and ST OMO through the Freedom of Information Act. While the Fed initially rejected a request for discount-window information, Bloomberg LP, the parent company of Bloomberg News, filed a federal lawsuit to force disclosure and won in the lower courts. In March, the U.S. Supreme Court decided not to intervene in the case, and the Fed released more than 29,000 pages of transaction data.....

(((Continue Reading this article Here))) http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-data-compiled-by-bloomberg-released-to-public.html

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Yes, We -ARE- Bailing Out Europe

http://www.washingtonsblog.com/2011/12/former-high-level-federal-reserve-official-fed-secretly-bailing-out-europe.html

-December 29, 2011-

Federal Reserve chair Ben Bernanke told Congress... http://blogs.wsj.com/economics/2011/12/14/bernanke-tells-senators-fed-wont-bail-out-europe/ ...that the Fed would not bail out Europe.

But he might have been less than forthcoming.

Former Vice President of the Federal Reserve bank of Dallas, Gerald ODriscoll, says that the Fed is secretly bailing out Europe:

(((CNBCVideo))) http://www.youtube.com/watch?feature=player_embedded&v=_u8tFqOIarc

A former Fed official says in the Wall Street Journal that the Federal Reserve is covertly bailing out Europe. Insight with Gerald O'Driscoll, Cato Institute senior fellow, who says the Fed operated a "temporary U.S. dollar liquidity swap arrangement."

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.