Exclusive: The Fed's $600 Billion Stealth Bailout Of Foreign Banks Continues At The Expense Of The Domestic Economy, Or Explaining Where All The QE2 Money Went

Tyler Durden's picture

Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank. Having been thus exposed, many speculated that going forward the US central bank would primarily focus its "rescue" efforts on US banks, not US-based (or local branches) of foreign (read European) banks: after all that's what the ECB is for, while the Fed's role is to stimulate US employment and to keep US inflation modest. And furthermore, should the ECB need to bail out its banks, it could simply do what the Fed does, and monetize debt, thus boosting its assets, while concurrently expanding its excess reserves thus generating fungible capital which would go to European banks. Wrong. Below we present that not only has the Fed's bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal. In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

For those who can't wait for the punchline, here it is. Below we chart the total cash holdings of Foreign-related banks in the US using weekly H.8 data.

Note the $630 billion increase in foreign bank cash balances since November 3, which just so happens is the date when the Fed commenced QE2 operations in the form of adding excess reserves to the liability side of its balance sheet. Here is the change in Fed reserves during QE2 (from the Fed's H.4.1 statement, ending with the week of June 1).

Above, note that Fed reserves increased by $610 billion for the duration of QE2 through the week ending June 1 (and by another $70 billion in the week ending June 8, although since we only have bank cash data through June 1, we use the former number, although we are certain that the bulk of this incremental cash once again went to foreign financial institutions).

So how did cash held by US banks fare during QE2? Well, not good. The chart below demonstrates cash balances at small and large US domestic banks, as well as the cash at foreign banks, all of which is compared to total Fed reserves plotted on the same axis. It pretty much explains it all.

The chart above has tremendous implications for everything from US and European monetary policy, to exhange rate and trade policy, to the current account on both sides of the Atlantic, to US fiscal policy, to borrowing and lending activity in the US, and, lastly, to QE 3.

What is the first notable thing about the above chart is that while cash levels in US and US-based foreign-banks correlate almost perfectly with the Fed's reserve balances, as they should, there is a notable divergence beginning around May of 2010, or the first Greek bailout, when Europe was in a state of turmoil, and when cash assets of foreign banks jumped by $200 billion, independent of the Fed and of cash holdings by US banks. About 6 months later, this jump in foreign bank cash balances had plunged to the lowest in years, due to repatriated fungible cash being used to plug undercapitalized local operations, with total cash just $265 billion as of November 17, just as QE2 was commencing. Incidentally, the last time foreign banks had this little cash was April 2009... Just as QE1 was beginning. As to what happens next, the first chart above says it all: cash held by foreign banks jumps from $308 billion on November 3, or the official start of QE2, to $940 billion as of June 1: an almost dollar for dollar increase with the increase in Fed reserve balances. In other words, while the Fed did nothing to rescue foreign banks in the aftermath of the first Greek crisis, aside from opening up FX swap lines, one can argue that the whole point of QE2 was not so much to spike equity markets, or the proverbial "third mandate" of Ben Bernanke, but solely to rescue European banks!

What this observation also means, is that the bulk of risk asset purchasing by dealer desks (if any), has not been performed by US-based primary dealers, as has been widely speculated, but by foreign dealers, which have the designatin of "Primary" with the Federal Reserve. Below is the list of 20 Primary Dealers currently recognized by the New York Fed. The foreign ones, with US-based operations, are bolded:

  • BNP Paribas Securities Corp.
  • Barclays Capital Inc.
  • Cantor Fitzgerald & Co.
  • Citigroup Global Markets Inc.

  • Credit Suisse Securities (USA) LLC

  • Daiwa Capital Markets America Inc.

  • Deutsche Bank Securities Inc.
  • Goldman, Sachs & Co.
  • HSBC Securities (USA) Inc.
  • Jefferies & Company, Inc.
  • J.P. Morgan Securities LLC
  • MF Global Inc.
  • Merrill Lynch, Pierce, Fenner & Smith Incorporated

  • Mizuho Securities USA Inc.
  • Morgan Stanley & Co. LLC

  • Nomura Securities International, Inc.

  • RBC Capital Markets, LLC

  • RBS Securities Inc.

  • SG Americas Securities, LLC

  • UBS Securities LLC.

That's right, out of 20 Primary Dealers, 12 are.... foreign. And incidentally, the reason why we added the (if any) above, is that since this cash is fungible between on and off-shore operations, what happened is that the $600 billion in cash was promptly repatriated and used by domestic branches of foreign banks to fill undercapitalization voids left by exposure to insolvent European PIIGS and for all other bankruptcy-related capital needs. And one wonders why suddenly German banks are so willing to take haircuts on Greek bonds: it is simply because courtesy of their US based branches which have been getting the bulk of the Fed's dollars in 1 and 0 format, they suddenly find themselves willing and ready to face the mark to market on Greek debt from par to 50 cents on the dollar. And not only Greek, but all other PIIGS, which will inevitably happen once Greece goes bankrupt, either volutnarily or otherwise. In fact, the $600 billion in cash that was repatriated to Europe will mean that European banks likely are fully covered to face the capitalization shortfall that will occur once Portugal, Ireland, Greece, Spain and possibly Italy are forced to face the inevitable Event of Default that will see their bonds marked down anywhere between 20% and 60%. Of course, this will also expose the ECB as an insolvent central bank, but that largely explains why Germany has been so willing to allow Mario Draghi to take the helm at an institution that will soon be left insolvent, and also explains the recent shocking animosity between Angela Merkel and Jean Claude Trichet: the German are preparing for the end of the ECB, and thanks to Ben Bernanke they are certainly capitalized well enough to handle the end of Europe's lender of first and last resort. But don't take our word for this: here is Stone McCarthy's explanation of what massive reserve sequestering by foreign banks means: "Foreign banks operating in the US often lend reserves to home offices or other banks operating outside the US. These loans do not change the volume of excess reserves in the system, but do support the funding of dollar denominated assets outside the US....Foreign banks operating in the US do not present a large source of C&I, Consumer, or Real Estate Loans. These banks represent about 16% of commercial bank assets, but only about 9% of bank credit. Thus, the concern that excess reserves will quickly fuel lending activities and money growth is probably diminished by the skewing of excess reserve balances towards foreign banks."

Which brings us to point #2: prepare for the Bernanke hearings and possible impeachment. For if it becomes popular knowledge that the Chairman of the Fed, despite explicit instructions to enforce the trickle down of "printed" dollars to US banks, was only concerned about rescuing foreign banks with the $600 billion in excess cash created out of QE2, then all political hell is about to break loose, and not even Democrats will be able to defend Bernanke's actions to a public furious with the complete inability to procure a loan. Any loan. Furthermore the data above proves beyond a reasonable doubt why there has been no excess lending by US banks to US borrowers: none of the cash ever even made it to US banks! This also resolves the mystery of the broken money multiplier and why the velocity of money has imploded.

Implication #3 explains why the US dollar has been as week as it has since the start of QE 2. Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD. If this data does not send European (read German) exporters into a blind rage, after the realization that the Fed (most certainly with the complicity of the G7) was willing to sacrifice European economic output in order to plug European bank undercapitalization, then nothing will.

But implication #4 is by far the most important. Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasurys.


The above data destroys this thesis completely: since the bulk of the reserve induced bank cash has long since departed US shores and is now being used to ratably fill European bank balance sheet voids, and since US banks have benefited precisely not at all from any of the reserves generated by QE 2, there is exactly zero dry powder for the US Primary Dealers to purchase Treasurys starting July 1.

This observation may well be the missing link that justifies the Gross argument, as it puts to rest any speculation that there is any buyer remaining for Treasurys. Alas: the digital cash generated by the Fed's computers has long since been spent... a few thousand miles east of the US.

Which leads us to implication #5. QE 3 is a certainty. The one thing people focus on during every episode of monetary easing is the change in Fed assets, which courtesy of LSAP means a jump in Treasurys, MBS, Agency paper, or (for the tin foil brigade) ES: the truth is all these are a distraction. The one thing people always forget is the change in Fed liabilities, all of them: currency in circulation, which has barely budged in the past 3 years, and far more importantly- excess reserves, which as this article demonstrates, is the electronic "cash" that goes to needy banks the world over in order to fund this need or that. In fact, it is the need to expand the Fed's liabilities that is and has always been a driver of monetary stimulus, not the need to boost Fed assets. The latter is, counterintuitively, merely a mathematical aftereffect of matching an asset-for-liability expansion. This means that as banks are about to face yet another risk flaring episode in the next several months, the Fed will need to release another $500-$1000 billion in excess reserves. As to what asset will be used to match this balance sheet expansion, why take your picK; the Fed could buy MBS, Muni bonds, Treasurys, or go Japanese, and purchase ETFs, REITs, or just go ahead and outright buy up every underwater mortgage in the US. This side of the ledger is largely irrelevant, and will serve only two functions: to send the S&P surging, and to send the precious metal complex surging2 as it becomes clear that the dollar is now entirely worthless.

That said, of all of the above, the one we are most looking forward to is the impeachment of Ben Bernanke: because if there is one definitive proof of the Fed abdicating any and all of its mandates, and merely playing the role of globofunder explicitly at the expense of US consumers and borrowers, not to mention lackey for the banking syndicate, this is it.


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trav7777's picture

Shocking, bitchez

markmotive's picture

The banking system is on life support. If they started realizing all the crap loans on their books, do you think they'd be solvent?

How can they stop the QE if this is the case?


Conrad Murray's picture

"Only after disaster can we be resurrected."
"I say never be complete, I say stop being perfect, I say let... lets evolve, let the chips fall where they may."
- Fight Club



Shocker's picture

The idea is not really shocking. Its just funny NOW they come out and say yeah Foreign Banks got most of the bailout money. The foreigners were about to pull the plug on the US economy and we couldn't have that.

Now all they feed us is, Recovery, Jobs bad but not bad, Manufacturing is coming back.... Its the same song and dance.

While we fund the foreign banks, in the US we are losing everything this country was built on. The mess continues everyday and really no way out.




Kayman's picture

Perhaps this was the quid pro quo for all the shit MBS paper our domestic criminal Wall Street "bankers" defrauded foreigners of.

cranky-old-geezer's picture

Good point. 

Maybe foreign banks, particularly EU banks, are feeling the 1 - 2 punch of collapsing MBS foolishly purchased from the squid and collapsing bonds foolishly purchased from PIIGS.

Thet'ye close to insolvecy now, maybe already insolvent, something's gotta be done, can't go back against PIIGS without collapsing the Euro, so they threaten Bernanke they'll all dump their MBS at the same time (they're worthless anyway), taking the Fed, Fannie, and Freddie down with them.

So Bernanke folds, handing mountains of digital cash to them ...which of course debases the dollar further.

There's simply not enough wealth in the world to keep feeding hundreds of TBTF banks around the world to make up for hundreds of trillions of collapsing bond values.

There's just too damn much debt paper around the world, and it's all collapsing now.

Sure, they can print currency till it fills the oceans and bail out everybody's collapsing balance sheet.

But they can't print wealth, and those oceans of currency chasing limited wealth dilutes those oceans of currency to worthless toilet paper.

And yes those damn bankers will keep printing currency and bailing each other out till every damn currency around the world is worthless and the whole damn worldwide financial system collapses, then every damn government around the world collapses, then every damn nation around the world collapses. 


Libertarians for Prosperity's picture

The sharp increase of foreign bank reserves has been well known since February, shortly after the first bit of data began to surface after the commencement of QE2. The real question is: are we about to see a massive unwind of the short US dollar, long commodity carry trade, as global capital flows get jammed into reverse, while forex and commodity traders are suddenly reacquainted with Mandelbrot and the forgotten lessons of Amaranth?  Is silver set to implode? 

Julien Garran of UBS:

Emerging market authorities tend to print domestic currency to buy dollars, to prevent excessive currency appreciation. This then raises deposits at banks, inducing a lending boom, which in turn is very commodities intense – bullish for commodities, with knock on effects on commodity currencies and speculative flows

[The end of QE2] forces emerging market central banks to retire domestic currency as the dollars exit, leading to stalling bank deposit growth and stalling loan growth. And this in turn triggers a reversal of speculative flows. It also tends to precipitate credit stress among weak credits – who, like in a game of musical chairs, are left standing when cheap credit runs out.

If you are interested in the truth, perhaps you could take a look at:





cranky-old-geezer's picture

The real question is: are we about to see a massive unwind of the short US dollar, long commodity carry trade, as global capital flows get jammed into reverse, while forex and commodity traders are suddenly reacquainted with Mandelbrot and the forgotten lessons of Amaranth?  Is silver set to implode? 

Dream on bucko.

The only things imploding are those FRNs and Euros and all that paper money banker bullshit.

Hremas's picture

There's only one system now..

probably most who read ZH are aware of this. i think the significance of this fine work by Tyler is that it has the potential to be just the thing to wake americans up to this fact, and further, that it would shock them and be considered a betrayal of their interests.

the potential, mind you. i'm not expecting much. goldbet

wanklord's picture

The sooner the US economy collapses the better, so the brute and ignorant American populace will finally learn NOT to live beyond their means.


eureka's picture

Spot On! And relearn to exercise a spirit of active community building.

cossack55's picture

Sure you right, ol' Wanky.  Monday would not be too soon. 

I see a couple of status quo-type-swine junked ya. Buffoons.

dracos_ghost's picture

Hmm, you wouldn't perchance be European with their US bailed out banks would ye?

In other words, did you read the post at all. Europe seems to be spending way beyond their means just like the brutish and ignorant American. Except they don't have the integrity to take are of it themselves. They need the brutish and ignorant American to bail their asses out and then have the audacity to disrespect them.


macholatte's picture

The sooner the US economy collapses the better, so the brute and ignorant American populace will finally learn NOT to live beyond their means.


That is one of the most assinine statements I have read in a long time.  You are indeed an ignoramous.

Quixotic_Not's picture

I guess that kinda rained on your whole skittle shitting rainbow unicorn fantasy, eh?

dcb's picture

I disagree the only thing I have learned from this crisis is that the only thing that will change the system is collapse, because those with interests in it for their wealth and power will do anything and everything to make sure they never loose it. the actions by the fed propping up these foreign banks proves that.

equity_momo's picture

Totally agree Mr lord of the wank.

everycentometal's picture

look, we can write til we are blue in the face. the explanation is simple, the central and international banks know that all the nations that they give money to will never be able to pay it back. they don't give a shit about the money, they want to force all the nations to privatize state assets so that the bankers can take them when the countries default. why do you think the tbtf cant produce the actual titles? they were transferred to the international bankers as collateral so we could ask for more loans. the federal reserve knows we will never make good on our debt, but they will call in the collateral when needed and they along with the imf, world bank etc. will own all the property, state and federal land etc.. so that is the end game for them. trade worthless paper for the worlds assets. so don't delude yourself they will bail out everyone who will take the money and then they will swoop in when they cant pay it back. the powerful dont need money, they want our assets, and so they shall.

Bringin It's picture

Interesting.  The world is one big naked short to these guys. 

I saw Lindberg's father, a congressman from Minnesota describing this gambit in his argument against the Fed.  Eventually, his grandson vanished.

Own the printing press in a market that allows naked shorts and you own the market.

Fancy Bear's picture

This is the most coherent model of an end game I've seen.

A high profile expose in the mainstream media would be helpful, for interests of sovereignty and those not liquid enough to catch the gold rocket. I'd call it "Big Enough To Repossess".

cranky-old-geezer's picture

... they want our assets, and so they shall.

The American Revolutionary War and French Revolution were big "Hell No, Fuck Off" messages to international bankers.

If Greece collapses into civil war, revolution, whatever, it'll be another big "Hell No, Fuck Off" message to international bankers.

If people get fed up and stop playing their paper money games, telling bankers take their debt and shove it, the ponzi collapses, bankers are busted.

Bankers rely on voluntary compliance.

Where have we heard that phrase before?

If voluntary compliance vaporizes on a wide revolutionary scale, that's it, game over, bankers walk away empty-handed.

blunderdog's picture

Not exactly empty-handed--they pick up everything they possibly can that doesn't involve counterparty risk before the collapse. 

Many of them probably fail, but a few would succeed.  There are a few families that have maintained their wealth for more than a few hundred years.  Seems like this is one of those recurring themes, no?

everycentometal's picture

George Washington signed the first 20 year bank charter in 1791. when the charter expired and we decided not to renew it the British invaded and burnt down our capitol (war of 1812).guess what, we agreed to renew the charter. we did not win, we compromised. the British got what they wanted and went home. oh, I'm sure your school text book painted a glorious picture of how we crushed the invaders. try digging a little deeper, or have you learned all you can learn.

FeralSerf's picture

The ones that own history control the future.

Carl's picture

It's even worse than that, they'll take it all without printing a single note; it will be done via credited/debt....

Tulli's picture

Unbelievably shocking.

chumbawamba's picture

Oh, fucking believe it, because the numbers are right there for you to see.

If you're a US Citizen, not that it means much anymore, but fucking do something already.  Stop paying your fucking taxes for fuck's sake.  Stop going along with this shit.  Call your fucking so-called representative on Monday and tell them it's their fault and that you are holding them personally responsible for their cowardice and dereliction of duty in allowing this shit to continue.  Withdraw your money from ANY bank or credit union in the Federal Reserve system (i.e. all of them) and put it into gold and silver.

Time is just about up.  If you don't start taking a stand now then you are inviting your own personal destruction.


Now or never, fuck wits.

I am Chumbawamba.

pazmaker's picture

Good Post Chumba,  by the way,  did you close out your paypal account yet?

chumbawamba's picture

Not yet.  Your mother will only accept PayPal.

I am Chumbawamba.

DarkAgeAhead's picture

Funny, his mom pays me.

(can't resist a mom joke)

Everyman's picture

Just did Chumba!  I sent the following to the Federal Reserve Board "Contact Us" page.  I recommend that EVERYBODY on this site and as many sites as we can muster send in a very critical comment on it and like I did, make the point they ALL NEED TO RESIGN!


I just found where the $600 billion of the last POMO went via the FOIA request.  I have seen the excel spreadsheet of the so called "Primary Dealers" of which 12 of the 20 are all Foreign Banking institutions that the ECB should be "bailing out" not the Federal Reserve.  I have seen how much money these Foreign Banks have received in comparison to the United States Banks.  YOU WORK FOR US you assholes.  Why did you send money to the EU and not use it to capitalize AMERICAN banks????


The Jig is up, and the word is out.  It is crossing BB, listserv's, MB's, and forwarded to congressional people( for all the good that will do with those corrupt assholes), and news organizations (but the MSM does not do investigative reporting anymore), but THE PEOPLE NOW KNOW!!!  When the STHTF this time people will want your heads collectively, and you ALL deserve to have your heads separated from your body for your actions, and corruption.  You are quite obviously, not looking out for this country or the people of it.  Ben you asshole, RESIGN and the rest of you should quit as well.  I hope somebody is REALLY, REALLY pissed at you enough to do serious harm to YOU!  I will applaud it when and if it happens.  I am not that angry person though, prison does not look good, and I would not threaten a federal official (peons), but your futures do not look good now.  This is the biggest  FINANCIAL SCANDAL EVER!!!  AND YOU HAVE BEEN CAUGHT AND OUTED!!!!

POMO is no longer needed as is QE.  They were both stupid ideas that only serve the elite that is politically collected, and has NOTHING to do with SOUND ECONOMIC PRINCIPALS!!! It has been an exercise in futility and bad judgements from mental midgets like YOU PRICKS, and are unmitigated financial and economic disasters.  You think you are so damn smart and you have just shattered the economy, blew it up, and now you are out of bullets and TOTALLY IMPOTENT!!!

ALL of you should resign immediately.  You need to go and the Federal Reserve needs to close it's corrupt and decrepit doors.  It is an anachronism and no longer needed, especially if the actions over the last two years is any indication of you capability with "economic tools" and the proper judgement to use them.  If POMO and QE are any indication of "level of knowledge and judgement" at the Federal Reserve, then we no longer need the institution or the idiots like you pricks that run the show.  You are corrupted, arrogant, and isolated.  Again, YOU MUST GO!

I only hope REALLY BAD things happen to you via Karma, YOU ALL DESERVE IT.  You all suck as people, economists, financial wizards, and all around in general you ALL SUCK!

BTW why would the "Federal Reserve Bank of the United States need a reporting page with ALL THE COUNTRIES LISTED?  You idiots are supposed to be looking out for us instead of raping us.


NEW:  BTW, Credit Suisse and Deutshe Bank together own at least 2,000,000 shares of FAZ!

Reptil's picture

nice, but historically Anthrax works better as persuasive argument.

edit: too bitter? oh well..

chumbawamba's picture

Good job.  Men in business suits and dark sunglasses will be at your door early Monday morning to axe you some questions.


I am Chumbawamba.

sabra1's picture

just do what i did,i reversed the numbers in front of my house!  

WaterWings's picture

The GPS points stay the same.

Blankman's picture

You are now on the terrorist watch list.  Thank you for your inquiry.

Crab Cake's picture

Grow a pair already. If you are going to stand for your country, peaceably or no, then the federal government will label you a "terrorist". Fuck most of us here are "terrorists" just for knowing and disseminating the truth. Fuck them, I am not scared of a label. I am not ashamed of standing for the freedom and protection of my family and countrymen. If this shit keeps up I'll be a terrorist in truth, also known as a free man...

cossack55's picture

Too bad you held back.  I wish you would have told the scum how you really felt.

Everyman's picture

Actually I did hold back quite a lot.  There is actually so much more, but that starts when the rebellion/civil war/revolution starts.

cossack55's picture

I rather enjoyed your first gambit.  I can hardly wait for the next installment (since it will be under much better conditions).

Bringin It's picture

Cathartic.  But this is off - it is an anachronism.  I think anachronism means something that has out lived it's usefulness.  The Fed was a scam from the 1913 beginning.

Everyman's picture

True.  But those that think "they are doing God's work", are the problem.

cranky-old-geezer's picture

I recommend that EVERYBODY on this site and as many sites as we can muster send in a very critical comment on it and like I did, make the point they ALL NEED TO RESIGN!

What fucking worthless bullshit waste of time.

They don't fucking CARE what you nor anyone else thinks. 

I'll guarantee they deleted your worthless tripe way faster than you typed it.

ExploitTheMarket's picture


"In this new video release, "as a first step," Anonymous has called for public protests beginning on June 14th, continuing "until Federal Reserve Chairman Ben Bernanke steps down." To make their case, they have presented a list of recent scandalous Federal Reserve actions."

chumbawamba's picture

Oh shit, 3 autonomous "members" of a self-forming anonymous collective have been caught.  The whole movement is destroyed!

Oh woe is us!

I am Chumbawamba.

cosmictrainwreck's picture

their spokespeople are pretty eloquent, aren't they? wonder what constitutes a "very major" breach as opposed to only a "major" one....

UGrev's picture

Maybe they meant "super ultra mega major".. lol