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The Eurodollar Missing Link: Explaining The QE2-Related Cash Surge In US-Based Foreign Banks

Tyler Durden's picture


Two weeks ago we broke the story that the bulk of the excess reserves, and thus cash, generated as part of QE2 has gone not to US banks, but to foreign banks operating in the US. One of the generic rebuttals of this observation was that it is naive to assume that European banks have been buying up the Treasurys issued by the Fed (and flipping these to their clients) which would also leads to a contemporaneous increase in excess reserves (over $630 billion since the start of QE3). This was a good question and we did not have a ready answer. Luckily, Stone McCarthy has come up with a resolution. In a just released note to clients, SMRA hints at how these banks have loaded up on cash without having to also see domestic assets surge (and instead just have just seen the net liability owed to foreign offices increase). The answer: Eurodollars.

First, a reminder of just how much foreign held cash surged in since QE2:

SMRA's explanation:

How Did the Reserves or Cash Assets Get to Foreign Banks Operating in the US?

The skewing of the distribution of reserves towards foreign banks operating in the US was not because the LSAPs were disproportionately from these banks or from the clients of these banks.

Rather the Eurodollar market provided a vehicle enabling a skewing of reserve balances towards foreign banks operating in the US.

Effectively the affiliated foreign branch of a US bank (whether a domestic or foreign institution) would borrow dollars in the Eurodollar market. A Eurodollar is nothing more than a dollar denominated deposit at a bank outside the US. The bank holding the Eurodollar deposit will ultimately have a dollar denominated claim against a bank domiciled in the US. That US bank in turn holds reserve balances at their local Federal Reserve Banks.

When Eurodollar deposits move from one foreign bank to another, the claim against the original US bank follows the eurodollar deposit.
If a bank domiciled in the US borrows dollars from a bank outside the US, including its own foreign branch, effectively what happens is the reserve balance of the US bank underpinning the Eurodollar account is reduced, and the reserve account of the borrowing bank in the US is increased.

Overall US bank reserves are left unchanged, but the distribution of those reserves is changed from one bank in the US to another, possibility even from the books of one Federal Reserve Bank to another.

In other words, foreign banks operating in the US have an artificially pumped up cash balance creating a false sense of security, with the fungible cash having been borrowed from abroad. This also means, that when and if European banks realize they need the cash "lent out" to US-based subsidiaries, and demand the $600 billion+ in dollars, all they will see is a white flag of surrender, as the US-operating banks disclose they have pledged the cash for one thousands and one uses, and its sudden withdrawal would end up crashing the capital markets. It also means that explanations that this cash was used by European banks to satisfy regulatory capitalization shortfalls are absolute gibberish. And yes, if and when there is a surge in dollar needs out of Europe, the Fed will have two choices: QE(x) and FX liquidity swaps.

Regardless of the dynamics of the capital flow, what is without doubt is that US banks have little to no incremental cash courtesy of the $600 billion expansion in Fed excess reserves. And the other question: what did US banks do with all the money "printed" over the past 8 months, is still as relevant as always.


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Tue, 06/21/2011 - 14:30 | 1389685 qussl3
qussl3's picture

Hilsenrath was babbling about how the FED would likely renew the swap arrangements with the ECB this morning on CNBS.


Tue, 06/21/2011 - 14:49 | 1389739 NotApplicable
NotApplicable's picture

Given those are the only two participants in "the market," that the game will continue goes without saying. Which of course, is why they say it.

CNBS, master of the obvious, for all the wrong reasons.

Tue, 06/21/2011 - 16:54 | 1390201 hedgeless_horseman
hedgeless_horseman's picture

This is indeed a very long rally...Bernanke is like freakin' Agassi back on the baseline.

Wed, 06/22/2011 - 01:48 | 1391057 Problem Is
Problem Is's picture

The Bernank is like Tracy Austin on the baseline...

Bitch in a pink skirt with a weak, two handed backhand...

Tue, 06/21/2011 - 14:58 | 1389782 Bonesetter Brown
Bonesetter Brown's picture

An ECB draw on the FX swap line need not increase the Fed's balance sheet.  This could be qualitative easing (cf Willem Buiter)

Tue, 06/21/2011 - 15:41 | 1389914 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

It will increase M2.

Tue, 06/21/2011 - 15:57 | 1389962 Bonesetter Brown
Bonesetter Brown's picture

Not if Fed sells Treasuries to fund the deal, similar to what it did first time the FX swap line was used heavily.

Not saying it won't increase the balance sheet/M2, just saying the Fed can do the FX swap without increasing its balance sheet/M2.

Tue, 06/21/2011 - 16:23 | 1390081 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You mean to write, 'not if the Fed monetizes Treasuries', which will not decrease, but rather increase M2.

Tue, 06/21/2011 - 16:35 | 1390147 Bonesetter Brown
Bonesetter Brown's picture

Monetizes? Sorry, I'm dense.

I see Fed sells Treasuries, collects dollars (reducing M2), turns around and hands those dollars to the ECB in exchange for Euros (M2 increases)

Net-net: no change in size of balance sheet, but Treasuries are replaced by Euros on the balance sheet.

Something like this happened in 2H08. Fed sold Treasuries and their holdings of Treasuries decreased, while FX swaps, MBS, and Maiden Lane were added. Or like QE1.0', where cash generated from MBS pay off was re-invested in Treasuries without increasing the balance sheet.

Tue, 06/21/2011 - 18:18 | 1390582 DutchZeroPrinter
DutchZeroPrinter's picture

In 2008 people were stupid enough to buy treasuries. 

Now the Fed is the only buyer. They can't sell that crap

Tue, 06/21/2011 - 18:42 | 1390621 Bonesetter Brown
Bonesetter Brown's picture

When the 10yr breaks its 30 year trend I'll agree with you wholeheartedly!

Tue, 06/21/2011 - 20:59 | 1390827 XPolemic
XPolemic's picture

I see Fed sells Treasuries

Wouldn't that cause the yield curve to invert?

Tue, 06/21/2011 - 14:34 | 1389686 Long-John-Silver
Long-John-Silver's picture

Beans, Bullets, and Bullion, stock up now.

Tue, 06/21/2011 - 14:58 | 1389716 Michael Victory
Michael Victory's picture


B, B, B.. check.

Use temporary price declines to steadily accumulate the best PM stocks and your preferred form of bullion.

If not yet read: Are we running out of Silver? 


Tue, 06/21/2011 - 15:33 | 1389906 Fed_Printstone
Fed_Printstone's picture

I much prefer:

Bernie's Bunk Buddy Bubba Bonk Bearded Bastard's Bunghole

Tue, 06/21/2011 - 14:54 | 1389691 Bam_Man
Bam_Man's picture

It appears that finally someone understands why trillions of excess bank reserves continue to sit patiently in accounts at the Fed.

They were never intended to be "lent out" to "Main Street borrowers".

They sit there, waiting to be deployed in the event of a bank run.

If the bank run materializes in Europe, these reserves will find their way into the European banking system. And they are doing just that.

Tue, 06/21/2011 - 16:06 | 1390016 Charles Wilson
Charles Wilson's picture


In another thread, I stated that this is Bernanke acknowledging that Friedman and Scwartz were right in their analysis of Great Depression 1.  The money IS sitting there, waiting for a Bank Run.  It was not intended for lending.  It's to lessen the downward slope of the Collapse, sorta' like a Slow Rollover mechanism in Guth's Inflationary Cosmology.

A Slow Rolling Depression.


Tue, 06/21/2011 - 17:10 | 1390295 davepowers
davepowers's picture

It was not intended for lending...


not for lending into real economy perhaps, but the reserves were intended for interbank lending.. that's how the reserves flowed to one group of banks, in this case apparently the domestic affiliates of foreign banks. As this article finally agrees, this sort of interbank lending polishes the balance sheet of the borrowing banks, who appear to have hefty cash reserves. As Tyler pointed out in an earlier related post, no one even focuses on the liability side of the BS, where the debt for the apparent cash asset lies.

IN addition to balance sheet polishing, reserve lending back and forth is also likely a component of various securities lending/repo agreement transactions that support/fuel stock and commodity speculation. If true, then the apparently idle/just sitting there reserves are not only lent, but the lending has financial asset impacts, extending even to prices of 'stuff.' 

It might not be lending of the old sort that fueled real economy activities (one borrowed money to build houses), but it is a replacement lending/credit system, probably the best that can be cobbled up. Like a makeshift cooling system engineered to lessen the damage from the earlier destruction of our old complex and fully functioning lending/credit system. The Fed types the reserves into existence, the reserves support stock/commodity speculation but not real world economic growth.


Tue, 06/21/2011 - 17:14 | 1390313 Charles Wilson
Charles Wilson's picture

Zackly.  Well said.



Tue, 06/21/2011 - 21:14 | 1390840 XPolemic
XPolemic's picture

is also likely a component of various securities lending/repo agreement transactions that support/fuel stock and commodity speculation

Speaking of which, it would be great to see a story on ZH on equity repos. I'm sure there plenty of shenanigans there hiding illiquidity and pumping and dumping by wall street banks.

Wed, 06/22/2011 - 11:41 | 1391938 davepowers
davepowers's picture

he should focus on the securities lending business, of which repos are a part (roughtly 20% I'd guess).

Securities lending, sponsored by major banks like State Street, has the potential to to be a future scandal/catastrophe of immense impact, because not only are pension funds caught up in this, but state investment pools as well.

State investment pools are where state agencies, local/city governments and school districts park their cash. 

Imagine the impact if, say, 10% of the tax collections and cash holdings of all the school districts in a state got erased because the state investment pool got caught holding the bag in a securities lending venture that almost nobody knew about and even fewer (including the state officials charged with monitoring the program) understood.

Stay tuned, because it could very easily happen in the next liquidity crisis.

Thu, 06/23/2011 - 21:18 | 1397204 XPolemic
XPolemic's picture

Thanks for replying with the (horrifying) details. From your description I guess that the state investment funds are lending cash, holding equities. My experience is that equity repos have about a 3 day time horizon. Is that true of all securities lending, or is it much longer?

If there were a sudden and massive drop in equity prices, I can guess which party will be left holding the bag.


Tue, 06/21/2011 - 14:34 | 1389699 tallen
tallen's picture

Cramer's proclaiming Greece is fine. Such a deja-vu moment:


Anyone remember Cramer and Bear Stearns:

Tue, 06/21/2011 - 14:39 | 1389700 apberusdisvet
apberusdisvet's picture

It's funny how criminality feeds on itself; just when you think that your shit really doesn't stink, the fan gets turned on.  A lesson from Capone.

Tue, 06/21/2011 - 15:23 | 1389870 The Fonz
The Fonz's picture

I too find farting into fans rather humorous :)

Tue, 06/21/2011 - 14:39 | 1389704 swissaustrian
swissaustrian's picture

This system is so damn fucked, now they even have ponzi schemes in reserves


Tyler, the pictures don´t show up for me...

Anyone else have the same problems?

Tue, 06/21/2011 - 15:17 | 1389832 gmj
gmj's picture

I don't see the pictures either.

Tue, 06/21/2011 - 14:41 | 1389722 baby_BLYTHE
baby_BLYTHE's picture

the banks are already flush with cash, the American people are the ones that are broke!

QE(s) have done absolutely nothing to create jobs in this country, it was a totally worthless endeavor.

in all honesty, as much as I despise the theory of printing money, wouldn't we have been better off if the FED printed up a trillion and divided it up to hand out to every American citizen to pay down debt, invest and/or spend in the economy?

I guess I can answer my own question as the FED really doesn't give a hoot about J6P nor the American economy at large

Tue, 06/21/2011 - 14:50 | 1389742 wombats
wombats's picture

Bush did that in '07 (maybe  '08).  I think he gave everybody a few hundred $.  It felt good at the time, but in the long run was not really worth it....kind of like drugs.

Tue, 06/21/2011 - 14:56 | 1389756 disabledvet
disabledvet's picture

not a very good drug apparently as "the kick" lasted but a minute.  how do you like this "drug of choice"?  hmmmm.  "Choice theory"...interesting concept

Tue, 06/21/2011 - 15:06 | 1389789 baby_BLYTHE
baby_BLYTHE's picture

yeah, I remember that. Marc Faber, at that time:

"The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I've been doing my part."

Tue, 06/21/2011 - 15:25 | 1389864 RobD
RobD's picture

My $600 went to Austria, I bought a Glock model 20 with it.

Tue, 06/21/2011 - 15:25 | 1389877 baby_BLYTHE
baby_BLYTHE's picture

perhaps nothing more American than what you did there. Nice!

Tue, 06/21/2011 - 14:48 | 1389750 SheepDog-One
SheepDog-One's picture

And theyre completely stuck, no way to unwind what has only served to stuff banks full of worthless FRN's.

Tue, 06/21/2011 - 15:00 | 1389775 Shell Game
Shell Game's picture

Looks like they're primed and ready for the coming, all out tangible asset buying spree..

Tue, 06/21/2011 - 15:06 | 1389791 LongBalls
LongBalls's picture

They are getting EXACTLY what they want. They are sitting on a crap pile of cash with no worries as all the hard assets of the world default back to their balance sheets. Cash means nothing to the money-changers. The markets are fixed and they can get cash when ever they want or ask the Fed for it. What they want is what YOU can produce, with what they want to pay you, with what medicine they want to give you, with what food they want you to eat. Anything left over the IRS will take care of that.

Tue, 06/21/2011 - 15:06 | 1389793 baby_BLYTHE
Tue, 06/21/2011 - 15:37 | 1389905 gmrpeabody
gmrpeabody's picture

Are those guys hockey players?

Tue, 06/21/2011 - 15:04 | 1389802 falak pema
falak pema's picture

If you were a banker you would be money-flush but your fingers would be Dutch like  pure bred puritans on rampage, like those of  Scrooge Mcduck...stingy, a mad vacuum cleaner, running wild. We are there now and it will take us all down. Suction gone mad. These guys don't believe in creating jobs for free willed persons.

Tue, 06/21/2011 - 15:13 | 1389831 THE DORK OF CORK
THE DORK OF CORK's picture

If people stated driving to work again and buying useless crap with their income inflation would skyrocket.

The global trade engine is broke - they have tried to artifcally keep it alive by reducing real capital investments over the years but now that all redundancy and logic has been extracted it cannot function efficiently when so much $s go up in smoke from some cargo vessel in the Middle of the Pacific - that energy is used by nobody.

The economic fabric is simply stretched too thinly.

Tue, 06/21/2011 - 15:45 | 1389937 Crab Cake
Crab Cake's picture

It's called a jubilee, and it is a concept the modern money masters hope that nobody remembers. Why? Simply put a jubilee would fix everything, but it would absolutely wipe out the power the banking elites have hoarded and built over generations in one fell swoop. So you ask would it be better? That's relative. For you, me, Main St, and the real economy; yes of course. For the Fed, Wall St, bankster families, the ultra wealthy, and the military/industrial/financial complex aka the American superpower empire... not so much; which is why the word jubilee is anathema.

The sooner the people of the US, and Western civilization in general, rise up to reclaim their governments and declare jubilee the better off those same people will be.

Tue, 06/21/2011 - 14:41 | 1389724 Cult_of_Reason
Cult_of_Reason's picture

The market is acting today as if Bernank will announce continuation/extension of QE2 tomorrow.

Tue, 06/21/2011 - 14:45 | 1389740 qussl3
qussl3's picture

Also read as the sharks are squeezing the shorts on a low volume session in front of a potential 1-2 punch event risk parade.

Tue, 06/21/2011 - 15:00 | 1389773 Cult_of_Reason
Cult_of_Reason's picture

You’re probably correct -- it is nothing more then algo assisted artificially engineered short squeeze and distribution into this artificially created forced short covering (violent mark-up and maintaining a price floor to keep a constant "squeezing" pressure on the shorts to force them to cover).

Tue, 06/21/2011 - 14:53 | 1389752 SheepDog-One
SheepDog-One's picture

Not really, just a POMO ramp of ES back over 150dma. Let anything go wrong tonite and the Euro falls, dollar shoots up, theyll lose all of this fake ramp plus a ton.

Tue, 06/21/2011 - 15:23 | 1389843 Cult_of_Reason
Cult_of_Reason's picture

Nothing will go "wrong" tonight, the vote has already been predetermined, a theatrical farce to make it appear as if there is still democracy in Greece (EU banksters are running the show in Greece -- Papa... is their puppet)

Tue, 06/21/2011 - 15:31 | 1389892 The Fonz
The Fonz's picture

I for one am counting on the Greek people to riot. If they stay in the streets it WILL escalate. After 3 weeks out there when the politicios spit in their peoples face there will be violence and suddenly all of those disparate Greek viewpoints amongst protesters will have the focus they need to team up.  If they fail at this, then the latinos can be counted on for a proper sence of rebelliousness in a few months.

Tue, 06/21/2011 - 14:56 | 1389760 Bam_Man
Bam_Man's picture

Up 40 points on the SPX in less than three and a half trading days. On no news.

Just the big boys running the stops on the shorts. This market is their plaything.

Tue, 06/21/2011 - 15:08 | 1389813 Cult_of_Reason
Cult_of_Reason's picture

Yes, they know where all the stops are (like shooting fish in a barrel). It does not take much of capital for PDs to use free POMO cash from Bernank to mark up ES and to activate the stops resulting in a short covering chain reaction.

Tue, 06/21/2011 - 15:23 | 1389855 alexanderstollznow
alexanderstollznow's picture

Yes, they know where all the stops are

really? perhaps you would like to say where "all the stops are", seeing as how it is so well known?

Tue, 06/21/2011 - 15:26 | 1389872 Cult_of_Reason
Cult_of_Reason's picture

You are probably a novice trader/investor.
You cannot see the stops (you are only allowed to see a fake bid and ask), but the MMs (PDs) and your broker see all the stops and block order ranges -- the game is rigged so you are constantly at a disadvantage.

Tue, 06/21/2011 - 15:38 | 1389916 MsCreant
MsCreant's picture

Friend, if you own the computers, why couldn't you have a back door way to know where the stops are? Peek and frontrun...

Tue, 06/21/2011 - 14:49 | 1389737 plocequ1
plocequ1's picture

Well, There it is.

Tue, 06/21/2011 - 14:56 | 1389761 ivana
ivana's picture

what did US banks do with all the money "printed" over the past 8 months, is still as relevant as always....


Either buy US bonds or keep cash to survive next greece induced collapse. Which was carefully planned by the way. We can see that now knowing that only "chosen" banks (bankster puppets) got the cash.

They will survive EU disaster and than eat other banks in collapsed EU countries.

Anyway, I foresaw USD much higher at some point of this process but since everyone's talking EUR collapse makes me say hmmmmmmmm (sceptic now)

Tue, 06/21/2011 - 14:57 | 1389765 orca
orca's picture

The magic 2 words are...TED spread. Has to stay down, h.a.s. t.o., in order for Libor and Euribor to stay down and project a warm glow of happiness in the banking sector. If TED blows Libor/Euribor blows and this charade collapses unto itself. TED is one eyed king in a land of blind people.

Tue, 06/21/2011 - 15:01 | 1389770 dxj
dxj's picture

ECB needs to buy a bunch of crappy debt from EU sovereigns who are in danger of default. How do they sterilize that injection of euros? A debt swap. They exchange eurodollars bonds for crappy debt. Where did they get the eurodollars? From eurobanks domiciled in the U.S. Where did those banks get the money? They borrowed it from the Fed. A backdoor bailout of Greece. FX exposure if the dollar/euro shifts dramatically, but not a problem if they both depreciate at similar rates. Defaulting on crappy debt may sink the ECB. Rising rates in U.S will screw this up.

Tue, 06/21/2011 - 15:03 | 1389796 Bonesetter Brown
Bonesetter Brown's picture

But when the dominos fall, USD and the 10yr rally.

There are probably a few more iterations of USD-flight-to-safety before it stops working.

At least that is the bet!

Tue, 06/21/2011 - 15:42 | 1389898 narnia
narnia's picture

If what dxj said is true, the Fed has indirectly exchanged US treasuries or MBS for Greek debt.  Exchanging crap for stinkier crap does not help the case for the USD.

I personally don't think the US central planners want any EU exposure.  I believe this phenomenon is being done for more simple reasons- like avoiding Dodd-Frank by shifting their gambling to a different casino.

Tue, 06/21/2011 - 16:15 | 1390037 Bonesetter Brown
Bonesetter Brown's picture

The Fed has not made the exchange yet.  That's the key point.

European dominos fall -> USD/10yr surges -> FX swap lines used (Fed picks up Euros on the cheap) -> things normalize and/or QE3 is announced -> swap lines paid back (Euros sold at a price higher than what was paid)

That is the way it unfolded the last time the FX swap lines were used.

I don't see the Dodd-Frank connection.

Tue, 06/21/2011 - 16:29 | 1390109 narnia
narnia's picture

This is more of a "thinking out loud" opinion.  One fact will always be true: the banks will always be ahead of the regulators.


Tue, 06/21/2011 - 14:55 | 1389772 disabledvet
disabledvet's picture

the question you want to answer is so simple only a gangster like me seems to understand:  "is the euro the kiss of death or not?"  it is rallying today--

Tue, 06/21/2011 - 15:00 | 1389785 SDRII
SDRII's picture

neighborhood correct


on Sun, 06/12/2011 - 15:22


Is there way to peer through Eurodollar (FX forwards) to see impact from repatriation attempting...

Tue, 06/21/2011 - 15:06 | 1389790 Stuck on Zero
Stuck on Zero's picture

Likely the European Banks are expecting a great fall in the Euro when Greece Defaults.  They can then repatriate at a handsome profit.

Tue, 06/21/2011 - 15:09 | 1389819 falak pema
falak pema's picture

The guys selling Airbus planes are praying for that to happen...

Tue, 06/21/2011 - 15:14 | 1389821 Bonesetter Brown
Bonesetter Brown's picture

More likely the Fed makes a handsome profit on the FX swaps like it did in 08-09.  Buy low sell high.

Tue, 06/21/2011 - 15:16 | 1389829 alexanderstollznow
alexanderstollznow's picture

QUESTION: how does the argument that ALL of the QE related liquidity increase has gone to european banks, reconcile with the consistent claim that it has also been responsible for the rallies in stock market rally and commodity market rally, at the hands of US banks?  ZH has now claimed both.

Tue, 06/21/2011 - 15:26 | 1389867 There is No Spoon
There is No Spoon's picture

qe keeps interest rates artificially low resulting in excess liquidity, which ends up in risk assets such as stocks and high yield bonds.

Tue, 06/21/2011 - 15:53 | 1389949 The Fonz
The Fonz's picture

Add to that the value of the BELIEF that the markets were recieving cash. It was a simple decption, and with low volume and HFT algos and the PPT team, it worked. After all the economy rolling over takes time, and during the time of QEII it was not easy to be certain that it was. That is changing however.

Tue, 06/21/2011 - 16:00 | 1389985 narnia
narnia's picture

I believe the primary goals of the QE2 gaming of the yield curve were (1) to resurrect the real estate market & (2) to resurrect consumer spending.  The secondary wished for side-effect goal was to weaken the $ to improve exports.  

What they did was provide yet another case study of how central planning doesn't work & often has unintended consequences causing worse problems (commodity gambling, equities gambling, interest rate subsidies for big companies on the backs of the middle class). 

Tue, 06/21/2011 - 15:39 | 1389920 Burnt Reynolds
Burnt Reynolds's picture

My understanding was that there wasn't a direct injection of QE capital into the markets, but rather it was a matter of QE activity keeping rates artificially depressed, thus incentivizing savers to speculate in riskier assets like equities vs. settling for negative real returns in short-term treasuries.  Thats how the stock market is manipulated into appreciation.  If I'm correct then it doesn't really matter which bank got cash

Tue, 06/21/2011 - 17:53 | 1390499 css1971
css1971's picture

Money is fungible.

You put a brand new 1.5 trillion in here, it means that there is less requirement for 1.5 trillion there.


Tue, 06/21/2011 - 15:22 | 1389852 roymunnson
roymunnson's picture

If anybody wants a good laugh that whole ZH joke of George Papaconstantinou being Goldman Sachs employee of the year is currently being displayed via a greek protestor on the Frontpage of Marketwach

Tue, 06/21/2011 - 15:22 | 1389854 ThirdCoastSurfer
ThirdCoastSurfer's picture

Three foreign banks deposit $100b each with the Fed through the ECB to adhere to the reserve requirements of both the FED and the ECB for a total of $300b. The Fed lowers the requirement and returns $50b to the ECB. The ECB, in turn, lowers their requirement and returns $10b to each of the 3 banks and keeps the remaining $20b.

Now, the banks have $90b each on deposit, the ECB has $20, but that totals only $290b.

Where did the missing $10b go?

Tue, 06/21/2011 - 15:29 | 1389888 Robslob
Robslob's picture

Where did the missing $10b go?

Hello Market!

Tue, 06/21/2011 - 15:41 | 1389929 AladdinSaneGirl
AladdinSaneGirl's picture

Surely the money was put in stocks, hence the big bull market over the last couple years. A whole lot has been taken out in the last few weeks ... as my portfolio sadly shows. IMO most of that money is sitting in the big investors books ... maybe not even audited yet. I am therefore expecting another bull market to start up by summer's end/autumn, even without another QE.

Tue, 06/21/2011 - 20:33 | 1390190 topcallingtroll
topcallingtroll's picture


Tue, 06/21/2011 - 19:21 | 1390713 RecoveringDebtJunkie
RecoveringDebtJunkie's picture

I've heard this before in the form of "three people go to a store to buy a soccer ball. They have $10 each and the ball costs $25, so they put in $30 and get $5 in change. To be fair, they split the change $1 each and then give the remaining $2 to a homeless person. So if each of three people put in $10 and got $1 back, that's $9 x 3 = $27, plus $2 to the homeless person = $29. Where's the missing dollar?"

So yeah, it was already accounted for in the $27, since that's the total amount the 3 people put towards buying the soccer ball and giving charity to the homeless person. They then ended up with $3 back total, so $27+$3=$30.

Of course, that homeless person is none other than the ECB.

Tue, 06/21/2011 - 22:16 | 1390872 Orly
Orly's picture

Bonus pool.

Tue, 06/21/2011 - 15:33 | 1389882 carbonmutant
carbonmutant's picture

Considering the fragile nature of the EU economy it's not likely that they would attempt to crash US banks. A reciprocal demand would crash the EU a lot faster.

Frankly such a demand would be an act of war.

Tue, 06/21/2011 - 15:49 | 1389939 There is No Spoon
There is No Spoon's picture

So does this mean that there's no link between qe2 and foreign banks' increase in cash? Did they just borrow from their European branches?

Tue, 06/21/2011 - 15:48 | 1389943 RockyRacoon
RockyRacoon's picture

Does that mean this article (as posted here on ZH) by TD at Business Insider is now wrong?

I'm just not that smart.   That would be a red-face event!

Tue, 06/21/2011 - 15:54 | 1389964 The Fonz
The Fonz's picture

Smart is only the starting point for this crap. Understanding the flow of markets is going to take a proper education obviously. I am going to seek one myself but I am a bit put off by the idea of learning through our normal education institutions as I think I might come out more confused than I went in. Hang in there man, there are a lot of us here just trying to comprend what we are reading, we'll help each other out.

Wed, 06/22/2011 - 01:07 | 1391015 RockyRacoon
RockyRacoon's picture

I've been at this educational endeavor for years, but I hesitate to inundate myself in the minutiae.   The fear is that I'll become inured to the whole thing and start sipping the Nobel Laureate kool-aid.   That's why I subscribe to stuff like The Privateer for basic understandings and over-views.

Here, from Page 2 of the latest issue:

On The “Markets” - The Future Is No Longer Uncertain:
There are two absolutely irrefutable tenets at the heart of any sane approach to economics and finance.  One is that people prefer present goods to future goods. The other is that the future is uncertain. The  second tenet explains the first. To any human being, there is only one circumstance in which the future is  no longer “uncertain”. That circumstance is when that particular human being is no longer alive. As long  as there is life, there is a future. As long as there is a future, it cannot be known in the present.  That is why people prefer goods held today to the same goods held a day or a year or a decade from now.  That is why future goods are ALWAYS at a discount to present goods. And that, in its turn, is why  interest rates exist. Interest rates reflect the discount (as arrived at on the market) that market participants demand in return for giving up the control of wealth (real or financial) for a specific period of time. As a rule - the longer the period of time, the bigger the discount demanded.
The secondary market for US government debt paper has now turned this tenet on its head. For a specific  (three-month) period into the (uncertain and unknowable) future, there is NO discount demanded. We  know this for the very simple reason that three-month Treasury yields have hit 0.00 percent.  Here we have the ultimate destination of an economic and financial system which is global in scope and  totally controlled by government edict. For more than half a century - since the last genuine budget  surplus in 1960 - the US government has literally been living on borrowed time. Despite that record, the  “markets” would have us believe that over the next three months, there is absolutely no doubt whatsoever
about the future. There cannot be, the discount of future goods to present goods has been eliminated.
This puts The Great Blondin’s feats totally in the shade. It could only happen in the realm of makebelieve  which is literally what the financial powers that be are now attempting to put over.
The Realm Of Make Believe:
The whole thing starts with the present level of interest rates - especially in the “big three” of the  “developed world” - Japan, the US, and Germany - the core nation of the European Union (EU). China is  now the second biggest single nation economy in the world but it doesn’t count in this regard because the  Yuan is not internationally convertible. Japan is of peripheral importance too, since its government bonds  are not a significant portion of the “reserves” of other nations.
That leaves the US (with its sidekick the UK) and Germany (with its sidekick France) as the relevant  nations. Official US central bank rates are 0.00 - 0.25, a level which has been unchanged for 2.5 years.  Official EU rates were raised to 1.25 percent in mid April 2011 after just under two years at 1.00 percent.  On June 6, US Treasury three-month debt yields were 0.00 percent. The yield on equivalent German debt  was 1.04 percent. On the respective ten-year government debt which is not so susceptible to financial  make believe, US and German rates were almost identical at 3.00 and 3.02 percent respectively.
In both Germany and the US, the entire yield curve from three months right out to ten years is under  official annual CPI rates and WELL under the real rate at which prices are increasing. This means that  real rates right along the yield curve in both German and the US are negative. The US Dollar and the Euro are seen by most as the two most viable global reserve currencies. China cannot offer its currency as a “reserve” unless and until it is freely convertible - into other currencies. The UK Pound is a living example of the adage that once a reserve currency loses that status, it does NOT regain it. The Japanese Yen is a non starter because the Japanese government is the most indebted in the world.
The big problem is that the only government debts which have yields reflecting the fiscal state of the nation are those of peripheral Europe - notably Greece. Neither the US nor Germany could support these rates. Instead, rates in both nations, but especially in the US, are absurdly low. It is all make believe.

Tue, 06/21/2011 - 17:31 | 1390172 swissinv
swissinv's picture

aha, this starts to make sense compared to the previous two stories...

Tue, 06/21/2011 - 17:00 | 1390246 6_7_42
6_7_42's picture

If the g-sak club led the way, that fresh dosh went into warehouses of aluminium, iron ore, cocaine and tranny hookers in Bangkok.

Tue, 06/21/2011 - 17:05 | 1390254 6_7_42
6_7_42's picture

If the g-sak club led the way, that fresh dosh went into warehouses of aluminium, iron ore, cocaine and tranny hookers in Bangkok.

Tue, 06/21/2011 - 17:07 | 1390266 dexter_morgan
dexter_morgan's picture

"(over $630 billion since the start of QE3)"

Whoa.....slow done there.......

Tue, 06/21/2011 - 17:19 | 1390315 tom
tom's picture

This sort of explains part of the technical how, but doesn't at all explain the why.

This much is right: while the foreign bank's US branch is holding dollars in its reserve account at the Fed, it is at the same time holding an equal debt liability to its parent foreign bank, which is holding a Eurodollar deposit.

But that is just technical procedure that a foreign bank with Eurodollar deposits uses to get its dollars in reserves form, in order to earn the 0.25% interest the Fed pays on them. It is not a market operation, it is a foreign banking group conducting offsetting operations between its foreign and US branches.

As for the why, it's really a question of why foreign banks are sitting on increasing amounts of cash dollars. And it boils down to the dollars that are exported as a result of the US current account deficit no longer being spent on Treasuries, because the Fed has been buying all of those.

The interesting angle still to be explained is how the dollars exported to support the current account deficit get from foreign central banks to (which) foreign private banks.

Tue, 06/21/2011 - 17:28 | 1390354 gwar5
gwar5's picture

It's all just origami games now. What could go wrong....

Tue, 06/21/2011 - 17:39 | 1390378 SwingForce
SwingForce's picture

OUCH! I just got fucked up the ASS!

Tue, 06/21/2011 - 18:34 | 1390606 topcallingtroll
topcallingtroll's picture

Comes with the territory.

Tue, 06/21/2011 - 18:31 | 1390598 topcallingtroll
topcallingtroll's picture

So are all you hedgies really a bunch of retards?

Someone take a stab at third coast surfer's question below.

The correct answer gets a date with the troll.

It is a fascinating question. The first time i have seen it in this form!

Tue, 06/21/2011 - 20:24 | 1390796 socalbeach
socalbeach's picture

Three foreign banks deposit $100b each with the Fed through the ECB to adhere to the reserve requirements of both the FED and the ECB for a total of $300b. The Fed lowers the requirement and returns $50b to the ECB. The ECB, in turn, lowers their requirement and returns $10b to each of the 3 banks and keeps the remaining $20b.

Now, the banks have $90b each on deposit, the ECB has $20, but that totals only $290b.

Where did the missing $10b go?

There is no missing $10b.


3 banks $300b


Fed $250b

ECB $20b

3 banks $30B

300b = 250b+20b+30b

Tue, 06/21/2011 - 20:32 | 1390805 topcallingtroll
topcallingtroll's picture

You are right.

I am the retard!

I read the question wrong.

I should never drive and hedge again.

Tue, 06/21/2011 - 21:29 | 1390848 blindman
blindman's picture

a farmer decides he needs a mule so he goes
to market and finds and buys a fucking mule.
no disrespect to mules. however, he has no way
to transport said mule and says as much to the seller.
the seller says "no problem, tomorrow morning i will
deliver the mule to your farm, provideed you pay me $100 today."
the farmer says "fine" pays and goes home.
the next morning the mule seller arrives at the farmers
place with no mule. the farmer asks "where is the mule".
the seller says "there is a problem, the mule died."
"no problem, says the farmer, just give me my $100 dollars
" there's the problem." says the seller, " last night
i went down town and got drunk and spent it."
" no problem " says the farmer, "just deliver me the dead
mule. i'll auction it off."
so the seller delivers the mule ...
a few weeks later the two meet up in a bar and the seller asks..
" so how did the auction go ? "
the farmer says " it went great, i made $898 on that mule."
" wow, how did you do that? "
" well, i sold 500 tickets for $2 each, that's a thousand and
less the $100 to you that's $900."
the seller asks " so why you made only $898 ?"
the faarmer says " well, the winning ticket at auction wasn't
satisfied with a dead mule so i had to give him his $2 back."

Tue, 06/21/2011 - 23:09 | 1390906 Mediocritas
Mediocritas's picture

Why did SMRA have to explain this? The original post on ZH already did an ample job of it as it explained how QE2 was an artificial prop, enabling a build of eurodollar reserves without having to go via forex markets hence bypassing downward pressure on the EUR/USD.

It was obvious what was going on, as explained in ZH's post, when we saw a build of pre-eurodollar reserves as Greece hit the wires in early-mid 2010. Unsurprisingly, withdrawal of cash to build reserves associated with the flash crash. QE2 was the 'fix' to buffer against it happening again.

ZH's post explained all of this. A very important post that was, I feel, overlooked. A logical conclusion from it is that we can expect to see the Euro head downwards in between QE2 and QE3 as it has lost the prop of QE2.

Wed, 06/22/2011 - 04:50 | 1391126 Tjemme
Tjemme's picture
I don't understand your / SMRAs analysis: (*) Non-US banks hold Fed assets as a hedge against eurodollar deposits .. OK .. but why then would the amount of eurodolllar deposits have increased exactly in parallel with QE2? (*) It makes sense for a bank to hedge eurodollar deposits with actual dollars held in the US (from a liquidity management and from a currency hedge perspective), but it need not do that. Indeed, if the ECB can lend USD under the swap arrangement, this reduces the need for banks to hold USD itself. (*) The reserves held by US banks at the Fed are only a small part of the amount of dollars they borrow. It still makes more sense to me that non-US banks have been the sellers of Treasuries. They may not need as many Treasuries (for liquidity management purposes). They have less alternative USD lending possibilities. Or upcoming Basel III regulations make USD maturity mismatches less attractive.
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