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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zaknick's picture

Always enjoy your insights.

It started in the sixties with that pesky supreme court, civil rights (for the inferiority complex ridden rednecks that was anathema), Great Society programs against poverty like the War on Poverty which the banksters declared in congress (Bush and his Population Task Force) was causing dysgenics ( too many blacks breeding and white women on the pill) and which was also the inspiration fir the KKK Zionista bankster "war on drugs" (in which they are the true drug cartels).

Yes, American freedom and prosperity was a challenge to their power (as it should be; why does somebody need a billion much less a trillion dollars?). The tax brackets and other policies created by the Depression era, real populist Democrats were all dismantled while they gave you funny money credit heroin. Now they're going to privatize what's left of Amerika.

www.scribd.com/zaknick A Brief Comment

eureka's picture

Dear three chord sloth, - you can't have empire AND freedom.

If you want the latter, you must destroy the prior.

(And, fyi, EU is not empire, but community - so, if you can't build community here in the US yourself, based on Libertarian or whatever principles, you should WISH for EU style communities to come to the US, because otherwise what DO you have? Nothing but chaos and disintegration as a result of nothing but provincialism, isolationism and the somehow oddly and oxymoronically attached superiority-complex called empire).

falak pema's picture

Bravo! Eureka, I feel like jumping into your tub!

ISEEIT's picture

I think that is how it will go down too. obomer is just the delivery tool. Fed will buy mortgages. That will be the last gasp.

And then it's lights out (for a while).

Yes, I fucking understand that the Fed has already bought mortgages. The difference this time is that it will be sold politically as an open program, something 'great', 'grand' (unprecidented, historic, heroic): Whatever it takes to complete the game.

They are making the kill shot and we are the target.

Globalization nearly complete.


Ironic that a Black man serves the masters of this scheme of slavery at a level never prior tolerated eh?

Sam Clemons's picture

I think that was the point all along.  Race is a great way to divide people's allegiance.  A divided country is much easier to conquer.

falak pema's picture

They say he was groomed for the part as the chosen one since childhood by CIA and globalist Brez...type players. Orly be my oracle...I state my source of purified legendary water...

Kayman's picture

"Ironic that a Black man serves the masters of this scheme of slavery"

That's the genious of Hank's purchase of Obama. A quick bait and switch- trashcan "hope and change", carry on with more of the same. 

And nearly all black voters support Obama because he is black.

Amazing what a few trinkets will buy ! 

adeptish's picture


of all the words you could have spelt wrong...lol

Kayman's picture


Yesterday I couldn't spell genious; now I are one.

Glad you got a chuckle from my error.

AnAnonymous's picture

And nearly all black voters support Obama because he is black.


Kid me not, black voters did not support Obama because he was the democrat candidate, just as they have been doing for decades now.

eureka's picture

Fanny and Freddy's portfolios will be sold to big, PRIVATE capital, at a discount, sponsored and backed by the Fed, which is the instrument of PRIVATE capital.

The blind spot of populist capitalism is that PRIVATE capital conglomerates into cartels, monopolies, funds and corporations - i.e. effectively elitarian collectives, who COLLECTIVELY usurp all assets and all power from the 97% mass of the population.

PURE capitalism is a wet dream - Disney for "adults".

It is NOT socialism or bureaucracy, which are decimating the US - it is the PRIVATE capital collectives behind government, which orchestrate everything without exclusion.

cossack55's picture

By jove, I think he's got it.

falak pema's picture

Jove must be chuckling in Olympus...land of the original Oligarchs...the true godly ones..not these sham avatars that Prometheus raised...Oh for those godly days...when Hercules roamed from the Caucasian heights to his pillars...

falak pema's picture

aka Greece and mount Olympus...sell off programmed. USA to be no exception.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Dr. Lindsay Williams says that one of the globalists objectives is to own every piece of U. S. residential real estate.  I must admit they "do" think big just like demons should.


Tuco Benedicto Pacifico Juan Maria Ramirez

Al Gorerhythm's picture

And if the peeps swallow that load, then they truly need fucking over.

swanpoint's picture

could you please change your profile image, i can't read your post.

Caviar Emptor's picture

UNderstand one thing: all the banks mentioned are part of the brotherhood of banksters. They and their US brethren built a huge pyramid of derivatives for the sole purpose of looking like they were transacting business, thereby charging fees and receiving bonuses. It's just like if trans Atlantic insurance companies kept selling each other insurance to insure the previous insurance against loss from the prior insurance which insures 1000X over the same transaction. No different than a chain letter. Take down one, you expose the whole corrupt mess. 

MrPalladium's picture

+1000!! That is the essence of the bankster ponzi. Nothing more need be said!

CJLopez21's picture

yeah can we just get the pitchforks already....

falak pema's picture

No, from their Oligarchic world order perspective they are building UNIVERSAL LOVE AND WORLD PEACE...Just like the Catholic church did in the middle ages. "Believe that ONLY through US will you reach the promised land...only through us and his VICAR on earth...." Wow, it worked well until they lost Jerusalem and then the whole Ponzi came crashing down on their heads. They started fighting amongst themselves and the kings and Popes were at loggerheads as to who was top dog; until Martin Luther and Machiavelli came along and said "game over"...Then it was time for the Renaissance and the Reform!...Game changer! Poor Popes who pooped alone in the Vatican from then on!.. That's how the Oligarchy vs People game goes...written in blood and guts!

Oracle of Kypseli's picture

I am repeating a story that I posted in March 2010

Six of my high school classmates and I went on a long weekend retreat up in the mountains. With not much to do and plenty of time, we decided to play friendly poker game with about two hundred dollars total.

Soon enough two of us have broken the other four. In order to keep the game going, we started issuing little sheets of paper with our signatures and various denominations. $10, $20, $50 and $100

Two days later, the two of us who had won all the actual dollars, put them away and continued playing with these IOU's and the IOU's had grown to thousands of dollars. Mind you that the risk taking had exploded, as you knew that you can create more IOU's.

Now the weekend came to an end and trying to get paid on the IOU's was of course out of the question.

Is this telling or what? You learn fast in real examples in life.

Bernanke's weekend is coming to an end.

chumbawamba's picture

So the moral of the story is that you and your friends are all gambling addicts?

I am Chumbawamba.

MolotovCockhead's picture

Not gambling addicts...... aspiring Bankers!

Kayman's picture


No Chumba, the moral of the story is that they discovered fractional reserve banking.

The lower the reserves, returns run to infinity. Of course, as we have now discovered, this games runs perfectly, in the absence of risk.

BobPaulson's picture

I've seen that scenario before in "friendly poker games". The bad players get cleaned out then get loser's remorse when they start imagining the wives finding out they lost a hundred bucks to their friends, so they double down into virtual money, then double down again, etc.. I've often wondered if it is subconcious or intentional. Either way, the debt gets too big to pay back and the winners are suckers for letting them play with empty promises. 

Kayman's picture


Kind of like the TBTF bankers in the slice and dice, churn and skim derivatives market.

Too bad for your buddies that Hank or Ben wouldn't cover their bets.

tired1's picture

Were they interest bearing IOU's?

Reptil's picture

Please Greece, default. Now!

shortus cynicus's picture

But if Greace defaults and then the worldwide banking ponzi scheme collapses, then anyone will say that THEY HAVE CAUSED IT !!!

Greece is a messanger bringing bad news.

TPTB try to kill the messanger and get some more months of prosperity.

cbaba's picture




razorthin's picture

can't be done with a coxxukking fiat fractional reserve scam.

Threeggg's picture
Government of the Banks, by the Banks, for the Banks, shall not perish from the Earth.



Quixotic_Not's picture

Here's a bit of history on that (and how the sheeple roll over to tyranny):

The New Deal and the New "Emergency"

Franklin D. Roosevelt was inaugurated as President on March 4, 1933. Throughout the country, banks were slamming their doors on depositors clamoring to withdraw their own money, preferably in gold.

For people who were seeking to exchange soft paper currency for the more stable metal-as existing law allowed, and as the Government had solemnly pledged-the new President had other ideas.

On March 5, 1933, one day after taking office, Roosevelt issued a Proclamation convening Congress in Extra Session at noon on March 9, 1933, a decision allegedly necessitated by what the Chief Executive referred to vaguely as "public interests.

 But March 9 was still four days away, and Roosevelt apparently was impatient to stop bank depositors from withdrawing their paper money or converting it to gold.

Accordingly, the next day, March 6,1933, he took an unprecedented step. For the first time in United States history, an American president closed the nation's banks.

By Proclamation, he stated the following: the recent gold and currency withdrawals had been "unwarranted" and for the purpose of "hoarding"; speculation abroad had caused "severe drains" on the "Nation's" gold stocks; the result was to create a national "emergency"; further "hoarding"; and "speculation" must be prevented and "appropriate measures" taken "to protect the interests of our people"; the Trading with the Enemy Act, as amended, had given the President certain powers over private gold; and therefore, "to prevent the export, hoarding, or earmarking of gold," the banks would take a "holiday" from Monday, March 6, 1933, to and including Thursday, March 9, 1933, and that during the holiday no bank would "pay out, export, earmark, or permit the withdrawal or transfer in any manner or by any device whatsoever of any gold . . . or take any other action which might facilitate . . . hoarding".

Roosevelt's action was devoid of even arguable legal justification. Nowhere in the Constitution is any branch of government, let alone the Executive, given the power to close privately owned banking institutions.

Nor did the Proclamation even purport to invoke constitutional authority. And despite the Proclamation's passing reference to an alleged "national emergency," no war conditions were present which could have enabled Roosevelt to argue that, under the Commander-in-Chief's "war powers," he had the authority to place in suspended animation a huge, crucially important part of America's commercial establishment. The Proclamation's reference to the World War I Trading with the Enemy Act, which had long since expired, was a strained attempt to find some semblance of legal support for Roosevelt's unprecedented assumption of complete control over America's banking system.

It is no wonder that Roosevelt immediately sent to a docile and compliant 73d Congress, a hastily drawn but comprehensive bill to amend the moribund Trading with the Enemy Act and to attempt to secure a legal basis for the unilateral action he had already taken.


You see, this is not the first time that the USofA has been looted by the District of Criminals, nor will it be the last.

chumbawamba's picture

Nope, this is basically the last time.  There won't be anything to loot after this.

Now or never, take a stand...

I am Chumbawamba.

falak pema's picture

Its what Elvis sang! ..."It's now or never..."

mediahuset's picture


Another very solid tutorial. Thank you. Not something I can use right now but I bookmarked for the future.

Quixotic_Not's picture

Chumbawamba, there's still plenty to loot...

Personally, I'm tired of trying to educate the sheeple, they seem to be more than happy getting bent over, again and again and again!

Time to live a bit, all this stupidity is getting old.

Good luck with the huddled mongrels,

QN out!

mediahuset's picture

high pr backlinks

I don’t suppose I have read anything like this before. So nice to find somebody with some original thoughts on this subject

rufusbird's picture

Yes, but FDR's actions were taken during a time in world history when dictators running countries was a common occurance! I, ahh, ... um,... err,,,, well,,... I...ahh,....(quietly withdraws...)

Quixotic_Not's picture

FDR's family was a minority owner of the Federal Reserve, and FDR received an allowance from his mother until the day he died.

Can you say self-dealing, I knew you could  ;-)

Manthong's picture

Just following orders and spreading the wealth around.

Never said specifically from who and to whom or where.

Caviar Emptor's picture

What's at stake now?  A grand collapse. The stakes are higher than 2008. Make no mistake. And let me be clear. 

lizzy36's picture

Much higher.

Everything in 2008 was papered over. All the debt still exists. It hasn't been cleared, only moved around.

The only thing that is different is there is 1000x more moral hazard in the system. Courtesy of endless bailouts

When confidence turns this time, it will be on a penny, and it will be damn near impossible to reverse.

Tyler Durden's picture

And the only solution, at least to Bernanke, is to dilute fiat exponentially more.