Americans Have Been Bailing Out Foreign Banks for Years ... And We're Getting Ready To Do It Again
As the Wall Street Journal points out, the Federal Reserve might open up its "swap lines" again to bail out the Europeans:
Fed is considering whether to reopen a lending program put in place
during the financial crisis in which it shipped dollars overseas
through foreign central banks like the European Central Bank, Swiss National Bank and Bank of England.
The central banks, in turn, lent the dollars out to banks in their home
countries in need of dollar funding. It was aimed at preventing further
The Fed has felt that it is premature to
reopen this program — which was shut down in February as the financial
crisis appeared to wane — because it wasn’t clear that foreign banks
were in need of dollar funds. Still, trading floors on Wall Street are
abuzz with anticipation today that the Fed might use the program again
as Europe’s problems take on a more global dimension.
The international lending lines are known among central bankers as swaps.
officials believe the swap program was one of its most successful
interventions aimed at stemming a global crisis, when many banks
overseas became strained for dollar funding. In their normal course of
business, they borrowed dollars in short-term lending markets and used
those dollars to finance holdings of long-term U.S. dollar assets, like
Treasury or mortgage bonds. When those markets dried up, the swap lines
helped to prevent overseas bank funding crises in 2008.
officials see the swaps as a low-risk program, because its
counterparties in these loans are foreign central banks, and not
private banks. At a crescendo in the crisis in December 2008, the Fed
had shipped $583 billion overseas in the form of these swaps.
As the BBC's Robert Peston writes:
is talk of the ECB providing some kind of one year repo facility (where
government bonds are swapped for 12-month loans) in collaboration with
the US Federal Reserve.
See this for more information on swap lines.
Indeed, the Federal Reserve has been helping to bail out foreign central banks and private banks for years.
For example, $40 billion in bailout money given to AIG went to foreign banks. Indeed, even AIG's former chief said that the government used AIG "to funnel money to other Institutions, including foreign banks".
As the Telegraph wrote in September 2008:
The Fed has also just offered another $125bn of liquidity to banks outside the US that are desperate for dollars and can't access America's frozen credit markets.
Congressman Grayson said that the Fed secretly "stuffed" half a trillion dollars in foreign pockets.
(Of course, the Fed won't tell Congress or the TARP overseer - let alone the American people - who got the cash).
And as I pointed out the same month:
A Fact Sheet from the U.S. Treasury says:
financial institutions must have significant operations in the U.S.,
unless the Secretary makes a determination, in consultation with the
Chairman of the Federal Reserve, that broader eligibility is necessary
to effectively stabilize financial markets.
An article from today in Politico explains
a change from the original proposal sent to Capitol Hill, foreign-based
banks with big U.S. operations could qualify for the Treasury
Department’s mortgage bailout, according to the fine print of an
administration statement Saturday night."
Of course, even much of the bailout money which went to American banks ended up being shuttled abroad. As I wrote in March 2009:
And the government is in the process of providing billions more - along with trillions more in guarantees of worthless assets - to sovereign wealth funds and hedge funds.
So not only are Americans bailing out our own too big to fail banks, but we're bailing out foreign mega-banks as well.
Even though bailing out Europe might make sense if America was flush
with cash, things are different now. As Congressmen Kucinich and Filner
wrote last June:
Our country and this body cannot afford to spend American tax payer dollars to bail out private European banks.
In addition, the U.S. is - of course - also contributing tens of billions of dollars towards the Greek bailout through its contributions to the International Monetary Fund. Some allege that the U.S. will secretly help bailout of all of Europe. See this and this.
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