QE Goes Global (not for the 1st time, only more so)

[don]

about half right. should be TBTF raptors circling the increasingly dollar-dependent Euro banks. A further tweaking would have the bonars come from a more intimate source of Ben's than his copy machine . . .

30 November 2011

Currency Wars: Fed Acts To "Increase the Availability of Dollars Outside the United States"

Several people have asked what I think about this.

I wrote about this just yesterday. I could not ask for a better straight man than Ben Bernanke.

"I think the major monetization is already occurring in the Eurodollar markets, and an ongoing stealth bailout of European debt, in order to save the big money center banks at home and broaden the reach of the Dollar.

And this is why the Fed stopped reporting on Eurodollars some years ago, as a component of M3. It was to pave the way for the monetary equivalent of a financial neo-con, to addict European governance to the US dollar and pave the way for a stronger position for the dollar as a one world currency."

Currency Wars: The Anglo-American Century and Why the Financial Engineers Hate Gold and Silver

Here is a primer on the Fed Swaps. Keep in mind that it is written by the Fed.

I had also suggested after the bell that there would be an effort to blow off the downgrade of the big money center banks. I suspected there would be a more singular effort to pump up the SP futures from the Fed's house banks, but it appears the Central Banks, led by the Fed, decided to hit the markets with a major sugar rush of cheap dollars. That is US dollars.

"I will be surprised if they do not try and rally stocks in the face of this to put the brave face on and whistle past the graveyard once again. This is what traders like to do when they have been caught offsides by the news. But they may not be able to sustain it without official help from the strong trading desks of the financial sector."

The Chinese cut reserve requirement ratio on their banks by .5 percentage points. This will help them release more of their huge hoard of US dollars back into the global financial system.

This action, led by the US Fed, has had a marked effect on commodity prices in dollars. So the beneficiaries, or at least those protecting their wealth, are those holding precious metals and positions in dollar sensitive commodities.

Although the Fed will say that there is no potential loss in this to US taxpayers, in fact there is ALWAYS a loss to be realized at some point in the deliberate mispricing of risk. This loss will be taken by all holders of US dollars.

This is not QE3 and does little to help the US economy per se. This is just a big serving of a quick energy drink to ease the short term liquidity problem in Eurodollars. It is also timed to dull the news impact of the bank downgrades.

When the sugar rush wears off, and it will because this is does little to help the average person in the real economy, we will see how the markets react to the ever growing piles of paper dollars covering the landscape of a mismanaged and ruined economy.

But it was extraordinarily kind of the Fed to announce this just in time for the banks and the hedge funds to repair some of the damage from the stock market decline before they close their trading books on November.

The Eurozone problems have not been solved by this. The US domestic economy has not been improved by this, except to weaken the dollar and increase commodity prices.

It has only bought the Western banks some time, and further addicted the world to US dollars. This is government of the one percent, by the one percent, and for the one percent.

NY Times
Central Banks Take Joint Action to Ease Debt Crisis
By Binyamin Appelbaum
November 30, 2011

WASHINGTON — The Federal Reserve moved Wednesday with other major central banks to buttress financial markets by increasing the availability of dollars outside the United States, reflecting growing concern about the fallout of the European debt crisis.

The central banks announced that they would slash by roughly half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans will be available until February 2013, extending a previous endpoint of August 2012.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the banks said in a statement. The participants in addition to the Fed are the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

The move makes clear that regulators increasingly are concerned about the strain that the European debt crisis is placing on financial companies, which are facing increasing difficulty in borrowing through normal channels the money that they need to fund their operations and obligations.

The European Central Bank borrowed $552 million through the existing facility during the week ending Nov. 23 to meet the liquidity needs of European banks. Data for the past week is not yet available.

Under the new terms of the program, the existing interest rate premium of 0.1 percentage points on those loans will be reduced by half, to 0.05 percentage points, effective Dec. 5.

The other central banks said they had also agreed to make similar loans of their own currencies as necessary, but they noted that the only extraordinary demand at present was for dollars.

Stocks surged after the action was announced, with European markets up more than 4 percent in afternoon trading, while United States stock futures were up sharply.

“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the Fed said in its statement.

http://jessescrossroadscafe.blogspot...-increase.html

[gwynedd1]

Re: QE Goes Global (not for the 1st time, only more so)

Well of course. This bailout will be for the banks back home. We the people in the US and Europe will pay.


Atlas Ben is hilarious.

[don]

Re: QE Goes Global (not for the 1st time, only more so)

Zerohedge's 2-cents . . .

Need a reason to explain the massive central bank intervention from China, to Japan, Switzerland, the ECB, England and all the way to the US? Forbes may have one explanation: "It appears that a big European bank got close to failure last night. European banks, especially French banks, rely heavily on funding in the wholesale money markets. It appears that a major bank was having difficulty funding its immediate liquidity needs. The cavalry was called in and has come to the successful rescue."

Granted the post is rather weak on factual backing and is mostly speculative, but it would certainly make sense. That said, it harkens back to our original question: just how bad was the situation if the global central banking cabal had to intervene all over again, and just what was not being told to the general public? Lastly, and most important, slapping liquidity bandaids on solvency gangrenes does nothing but buy a few days at most.

Furthermore, we now expect the stigmata associated with borrowing from the Fed to haunt each and every European bank as vigilantes will now use the weekly ECB update on borrowings from the Fed as a signal to hone in on this and that weak Italian and French, pardon, European bank.

[charliebrown]

Re: QE Goes Global (not for the 1st time, only more so)

I need some help in understanding what just happened.

In one of these interventions what is changing hands?

Is it world central banks, selling dollar denominated assets to the fed for electronic FRNs?
Is it world central banks, selling non-dollar denominated assets to the fed for electronic FRNs?
Is it private mega banks selling stuff to the fed?
Is it world central banks, selling their own currency to the fed for dollars?

I assume this means the fed asset sheet grows. What is on the asset sheet. What if this scheme does not work out?
will the fed be able to call back all of the dollars?

[gwynedd1]

Re: QE Goes Global (not for the 1st time, only more so)

I think so. They just swap treasuries for some sort of junk.

[ASH]

Re: QE Goes Global (not for the 1st time, only more so)

I need some help in understanding what just happened.

In one of these interventions what is changing hands?

You can read about the mechanics here. Note that this is not a new facility. Really only two things happened: (1) the rate charged to use an existing facility was reduced, and (2) the period of time during which the facility will remain active was extended.

The swaps involved two transactions. At initiation, when a foreign central bank drew on its swap line, it sold a specified quantity of its currency to the Fed in exchange for dollars at the prevailing market exchange rate. At the same time, the Fed and the foreign central bank entered into an agreement that obligated the foreign central bank to buy back its currency at a future date at the same exchange rate. Because the exchange rate for the second transaction was set at the time of the first, there was no exchange rate risk associated with the swaps.

The foreign central bank lent the borrowed dollars to institutions in its jurisdiction through a variety of methods, including variable rate and fixed-rate auctions. In every case, the arrangement was between the foreign central bank and the institution receiving funds. The foreign central bank determined the eligibility of
institutions and the acceptability of their collateral. And the foreign central bank remained obligated to return the dollars to the Fed and bore the credit risk for the loans it made.

At the conclusion of the swap, the foreign central bank paid the Fed an amount of interest on the dollars borrowed that was equal to the amount the central bank earned on its dollar lending operations. In contrast, the Fed did not pay interest on the foreign currency it acquired in the swap transaction, but committed to holding the currency at the foreign central bank instead of lending it or investing it. This arrangement avoided the reserve-management difficulties that might arise at foreign central banks if the Fed were to invest its foreign currency holdings in the market.

So for instance, the Fed is swapping dollars for euros with the ECB, and the ECB is loaning those dollars to European banks in exchange for interest payments and collateral. The ECB gets to decide what is acceptable collateral, which is an opportunity to post illiquid assets (read PIIGS sovereign bonds) and receive spendable dollars in return. The banks can then use those dollars to pay their own dollar-denominated debts. If the banks that borrow the dollars go bust and the assets they posted as collateral are bad, then theoretically the ECB has to either buy dollars on the open market or commit dollars from national foreign exchange reserves to pay back the Fed.

Additional Clarification: My understanding is that the central banks involved are exchanging reserve deposits rather than assets such as debt instruments, but the commercial banks who ultimately borrow the dollar liquidity are posting debt instruments as collateral. However, insofar as the Fed is creating dollar reserves to swap for euro reserves created by the ECB, the net effect is to "print" money -- at least until the swap is unwound and the money is "un-printed". The collateral posted by the commercial European banks isn't being purchased by the ECB, so it might not be technically correct to say that those bonds are being monetized, but in some sense (the transitive property of money printing?), the Fed is effectively printing dollars to buy illiquid European assets. That said, at this point in time, these swap lines aren't in the same ballpark as serious QE. For instance, the Fed has like $2.6T of assets on its books, and only $2.4B associated with the existing central bank liquidity swap program. (But back in 2008 the swaps totaled as much as $600B.) The idea that this is stealth monetization is appealing, but given the (so far) modest size of the program relative to the Fed's balance sheet, it is (so far) defensible as a liquidity operation. Only if it grows to the hundreds of $B would it constitute significant QE. To my mind, it may help with the dollar liquidity problems in Europe, but as presently constituted, it isn't going to help with solvency problems. And it's well to remember that some European banks are running low on plausible collateral, so a lot hinges upon how lax the ECB is willing to get, knowing that (a) the ECB and not the Fed is accepting the credit risk, and (b) the ECB isn't backed by a single national treasury in case it needs to be recapitalized.

[charliebrown]

Re: QE Goes Global (not for the 1st time, only more so)

So for instance, the Fed is swapping dollars for euros with the ECB, and the ECB is loaning those dollars to European banks in exchange for interest payments and collateral. The ECB gets to decide what is acceptable collateral, which is an opportunity to post illiquid assets (read PIIGS sovereign bonds) and receive spendable dollars in return. The banks can then use those dollars to pay their own dollar-denominated debts. If the banks that borrow the dollars go bust and the assets they posted as collateral are bad, then theoretically the ECB has to either buy dollars on the open market or commit dollars from national foreign exchange reserves to pay back the Fed.

Thanks Ash, this is very helpful.

[ASH]

Re: QE Goes Global (not for the 1st time, only more so)

I have a few more thoughts about yesterday's announcement:

1. The existing program will be extended to February 2013.

Now, the existing program was hardly being used -- last week it amounted to $2.4B versus a peak size of ~$600B back in 2008. Given the dollar funding stress in the European banking system, the fact that these swap lines were already in place, and the fact that as of last week they were hardly being used, it seems pretty clear that extending the facility is a necessary -- but insufficient -- condition for European banks to get adequate dollar funding.

2. The interest rate charged by the Fed to foreign central banks for dollar liquidity swaps has been reduced by a 0.5% increment.

I have a hard time believing that a European bank facing insolvency because it has been completely cut off from dollar funding would be deterred from using the existing dollar swap line by a 0.5% rate increment. In fact, the ECB is the gate-keeper, because the ECB is the institution that accepts credit risk in passing dollar swaps on to European banks. Therefore, it's unlikely that the interest rate for the swap is the issue. More likely, the problem is that the ECB will be left holding the bag if borrowers default, the ECB doesn't have a lot of capital to risk, and the ECB isn't backed by a unified national treasury that would recapitalize it. So, most likely, the distressed European banks are nearly out of good assets to post as collateral for the dollar swap loans, and the ECB isn't being all that lax about providing weak banks with funding.

3. American banks will once more be able to borrow foreign currency through the Fed's swap lines with foreign central banks.

This is something that no one wants or needs to do. Just window dressing to give the appearance of symmetry. This provision was previously set up in 2009, ran through February 2010, and was never used.

So, all in all, yesterday's headlines don't mean anything substantive unless there's a corresponding change in policy at the ECB as regards to passing on the dollar funding.

[thriftyandboringinohio]

Re: QE Goes Global (not for the 1st time, only more so)

..The collateral posted by the commercial European banks isn't being purchased by the ECB, so it might not be technically correct to say that those bonds are being monetized, but in some sense (the transitive property of money printing?), the Fed is effectively printing dollars to buy illiquid European assets.,.

The transitive property of money printing.
I like that.

[don]

Re: QE Goes Global (not for the 1st time, only more so)

from Nomi Prins . . .

The Fed’s European “Rescue”: Another back-door US Bank / Goldman bailout?

Wednesday, November 30, 2011 at 7:53PM

In the wake of chopping its Central Bank swap rates today, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right.

The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball. Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks).

Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks.

Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert - a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street's staunchest ally, and Tim Geithner's old stomping ground, the New York Fed.

The dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want - like to shore up bets made by European banks that went wrong, and at a later date, return them. A ‘temporary dollar liquidity swap arrangement” with 14 foreign central banks was available between December 12, 2007 (several months before Bear Stearn’s collapse and 9 months before the Lehman Brothers’ bankruptcy that scared Goldman Sachs and Morgan Stanley into getting the Fed’s instant permission to become bank holding companies, and thus gain access to any Feds subsidies.)

Those dollar-swap lines ended on February 1, 2010. BUT – three months later, they were back on, but this time the FOMC re-authorized dollar liquidity swap lines with only 5 central banks through January 2011. BUT – on December 21, 2010 – the FOMC extended the lines through August 1, 2011. THEN– on June 29^th, 2011, these lines were extended through August 1, 2012. AND NOW – though already available, they were announced with save-the-day fanfare as if they were just considered.

Then, there are the sneakily-dubbed “foreign currency liquidity swap” lines, which, as per the Fed's own words, provide "foreign currency-denominated liquidity to US banks.” (Italics mine.) In other words, let US banks play with foreign bonds.

These were originally used with 4 foreign banks on April, 2009 and expired on February 1, 2010. Until they were resurrected today, November 30, 2011, with foreign currency swap arrangements between the Fed, Bank of Canada, Bank of England, Bank of Japan. Swiss National Bank and the European Central Bank.

They are to remain in place until February 1, 2013, longer than the original time period for which they were available during phase one of the global bank-led meltdown, the US phase. (For those following my work, we are in phase two of four, the European phase.)

That’s a lot of jargon, but keep these two things in mind: 1) these lines, by the Fed’s own words, are to provide help to US banks. and 2) they are open ended.

There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing. The Fed didn’t step in when it was just Greece –or Ireland - or when there were rampant ‘contagion’ fears, and Italian bonds started trading above 7%, rising unabated despite the trick of former Goldman Sachs International advisor Mario Monti replacing former Prime Minister, Silvio Berlusconi’s with his promises of fiscally conservative actions (read: austerity measures) to come.

Perhaps at that point, Goldman thought they had it all under control, but Germany's bailout-resistence was still a thorn, which is why its bonds got hammered in the last auction, proving that big Finance will get what it wants, no matter how dirty it needs to play. Nothing from the Fed, except a small increase in funding to the IMF.

Rating agency, Moody’s announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman ,making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.

Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )

Breaking that down: JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government. The next highest ratio belongs to Citibank with $1.2 trillion in assets and $56 trillion in derivative exposure, or 46 to 1. JPM Chase's ratio is 44 to 1. Bank of America’s ratio is 36 to 1.

Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure.

Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.

But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.

http://www.nomiprins.com/thoughts/20...goldman-b.html

[Slimprofits]

Re: QE Goes Global (not for the 1st time, only more so)

The TED spread and the 3 MO LIBOR - OIS spread continue to rise... Is this evidence the latest move by the Central Bankers is not working?

[ASH]

Re: QE Goes Global (not for the 1st time, only more so)

The TED spread and the 3 MO LIBOR - OIS spread continue to rise... Is this evidence the latest move by the Central Bankers is not working?

As I understand it, the weekly H4.1 release by the Fed is where we can directly track whether the latest move is working or not. The line item called "central bank liquidity swaps" gives the outstanding value of the dollar liquidity loans extended to foreign banks, through foreign central banks. The fact that these swap lines were already available, and that there's a widely-reported dollar funding squeeze in Europe, yet only $2.4B was outstanding last week, tells you immediately that the problem must lie with the quality of collateral that the European banks can post to the ECB in exchange for the dollar funding. In other words, unless the ECB changes its policy about access to the dollar funding offered by the Fed, this isn't going to work. (As I mentioned above, it doesn't make a lot of sense that a 0.5% increment in the cost of the funding will make the difference between $2.4B in demand for these loans, versus hundreds of $B in demand. Or maybe mmr will correct me here.) But I'd say watch the value of this line item to assess whether the new policy has had any effect. Unless is leaps in the coming weeks, European banks aren't actually getting access to dollars through these swap lines.

See 2008/2009? That's what effective use of this facility looks like. That right there is ~$600B of temporary QE, deployed and unwound in the span of about a year.

[Slimprofits]

Re: QE Goes Global (not for the 1st time, only more so)

Hi Ash, thank you for the further explanation. Was the ECB policy eased in 2008/2009 or is it that what's left on the books of the banks is complete crap and the ECB won't touch it with a 10 foot pole made of solid gold?

[ASH]

Re: QE Goes Global (not for the 1st time, only more so)

Hi Ash, thank you for the further explanation. Was the ECB policy eased in 2008/2009 or is it that what's left on the books of the banks is complete crap and the ECB won't touch it with a 10 foot pole made of solid gold?

I don't know. I think maybe the latter. [BEGIN WILD, UN-INFORMED SPECULATION] My pet theory is that in 2008/2009, the European banks could still post the sovereign bonds of most European nations as risk-free collateral without any trouble from the ECB, and if I recall correctly, no one was forcing them to build up their capital. As I understand it, European bank capitalization rules allowed European banks to treat all euro-zone sovereign debt as "riskless", and lend at a higher ratio against sovereign debt held as capital, versus other types of assets. This encouraged the European banks to accumulate lots of European sovereign bonds as capital, and since one EU member's debt was as good as another's for the purposes of meeting capital requirements, they probably went for more of the stuff with the higher yields than they normally would... i.e. the same stuff that is presently blowing up. Perhaps the current problem is that the banks which are having trouble getting dollar funding are the same ones who are heavily exposed to peripheral European sovereign debt, were weakly capitalized to begin with, and were relying upon a lot of the supposedly "riskless" bonds for their capital. I assume that the ECB is accepting collateral at market valuations, plus maybe a safety margin to protect the ECB from losses. If that's the case, then possibly the European banks that are in trouble can't pony up enough good collateral to get the dollar loans without eroding their capital base: Insolvent if you do; insolvent if you don't? [/END WILD, UN-INFORMED SPECULATION]

The thing about European capital requirements is buried in this:

"In the European Union, the Capital Requirements Directive (CRD) provides the legal framework for the weighting of risks by banks. It is based on the so-called 'Basel II' framework. The structure of its predecessor, 'Basel I', stipulated that the minimum level of capital was determined according to the riskiness of the assets which the bank held. ... Thus, within pillar 1, Basel II leaves banks a possibility to choose between different approaches:

1. The standardised approach:

As in Basel I, it groups exposures into a series of risk categories. However, while previously each risk category carried a fixed risk weighting, under Basel II three of the categories (loans to sovereigns, corporates and banks) have risk weights determined by the external credit ratings assigned to the borrower.

...

Nevertheless, this Capital Requirements Directive annex also stipulates that exposures to the European Central Bank and to Member States' sovereign debt in domestic currency shall have a risk weight of 0% - i.e. not taking into account other risk determining factors. Thus, banks using the standardised approach currently have no incentive via the regulatory set-up to differentiate between the sovereign debts (in local currency) of different EU Member States."

[Slimprofits]

Re: QE Goes Global (not for the 1st time, only more so)

http://www.china.org.cn/business/201...t_24056060.htm

Masaaki Shirakawa, head of Japan's central bank, said the move was aimed at giving markets "a sense of relief."

"The European debt problem can't be solved by liquidity provisions alone," he said. "The step is meant to buy time for European countries to proceed with their fiscal and economic reform.

That sounds like a very honest statement. This move was meant as a distraction. "Hey look over here for a couple of weeks, PLEASE!!!!"