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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slow_roast's picture

What would QE3 have to entail to have the "right" impact?  The Fed will have to sell it so they can't simply continue monetizing the debt via flipped bonds.  Surely mortgages, Weiners, and muni-bonds might be on the plate right?  Not only that, but size-wise it would have to be in excess of $1T and last longer than 12 months to carry through to elections; so are we looking at a 15 months, $1.5T program due to start once silver hits $20, the S&P hits 1,000, oil touches $85, and the entire commodity complex is nearly dead from dysentary? 

Bay of Pigs's picture

Sounds bullish for gold and silver TD.

Where are the experts like Bob D and Spalding weighing in on this?

Quixotic_Not's picture

The trend is in place, the continued devaluation of fiat usury will move forward unabated...

Until big .gov kills the host, <s>money</s> fiat usury will be <s>printed</s> digitized & spent, and the (D) & (R) Free Shit Empire™ will continue to export inflation to lower IQ developing countries.

¿Tienes plata gringo?

Note to admin:  Why the hell doesn't the strikethrough command work?

boiltherich's picture

Used to work, but the underline command does not work either.

RockyRacoon's picture

I'm surprised that bold works.   Our liberties are slowly being taken away from us!

Bold and italics next!

Stand up for your HTML rights!   Burn your computer.

First they came for the strike-through...

Is it getting warm in here?  What are these little bubbles in the water?

Bolweevil's picture

What do we want?
When do we want it?

MsCreant's picture

Adorable, as always Rocks!

RockyRacoon's picture

See?  I'm a chick magnet.  Cute pays.

Sudden Debt's picture



Whenever a chich says to me "you're so rude", I just know I can score in the next 2 hours.

I actually met my wife in a discotec and insulted her like for a hour and when she started yelling to me, I empied a champagne bucket over her head with the water and the ice.

I had her in my bed the same night and couldn't get rid of her after that so I married her.

The only time she calles me "cute" is if I fall from the stairs and if I need ambulance to get me to the hospital. Which actually happened.



falak pema's picture

I'm just debating if its your rocks she finds adorable or if its your words she finds magnetic...anyways don't fall down the stairs...cos being cut up is not being cute.

falak pema's picture

"Diamonds...diamonds...are a girls best friend...wow, diamonds! 

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

To quote Charles Manson from his prison cell:  "Is it hot in here or am I crazy?!"



Spalding_Smailes's picture

Dollar denominated debt ......


Big deal, I have been talking about this for 7-8 months. They made loans denominated in dollars and now need more dollars so they can do a rollover ( A can " kick " per se' )


So what was driving stocks then .... ? Could it be .... improvement in the economy ?


WASHINGTON, D.C. – June 9, 2011 – The Association of American Railroads (AAR) today reported steady results in weekly rail traffic with U.S. railroads originating 273,584 carloads for the week ending June 4, 2011, up 1.1 percent compared with the same week last year.  Intermodal volume for the week totaled 205,565 trailers and containers, up 7.2 percent compared with the same week in 2010.

Fifteen of the 20 carload commodity groups posted increases from the comparable week in 2010. Commodity groups posting solid increases included: iron and steel scrap, up 18.7 percent; coke, up 18.1 percent, and grain, up 17.4 percent. Groups posting a notable decrease included: primary forest products, down 15.2 percent, and nonmetallic minerals, down 10.5 percent.


“U.S. big-truck sales soared in May, up 61.9% vs. a year-ago and far surpassing April’s 31.2% increase, previously 2011’s best monthly performance. Class 8 sales made the biggest leap, up 82.4% thanks to triple-digit percentage increases at Volvo Truck and PACCAR, up 175.4% and 145.4%, respectively. Through May, sales of medium- and heavy-duty trucks in the U.S. were tracking 30.9% ahead of like-2010.




boiltherich's picture

May 20, 2008 Baltic Dry Index=11,790

06/10/2011 Baltic Dry Index = 1,418

Nuff said.

francis_sawyer's picture

"They made loans denominated in dollars and now need more dollars so they can do a rollover"

Ha! Railroads & Trucks... Must be why the $TRAN is so "on fire" since May 1st... Right? I guess they need those huge containers to move around all the FRN's (It's the NEW 'multiplier' on money velocity)...

So... smarty pants... Since the economy is so obviously improving, and you're such a wizard at 7-8 month forecasting windows, enlighten us all as to your calls for the SPX & DXY, for, say, the Jan '12 opex...


Footnote: $50 bucks says the 'Smailes' kid eats it...



Spalding_Smailes's picture

No forecast ... Just the facts.

Study dollar denominated debt in the securitization market, forex,global finance,letters of credit, central banks, sovereign wealth funds, commodities ect ....

Then get back with us

Tell us about the money velocity QE2 created via treasuries .... or was it the bric's driving commodities ?


tmosley's picture

If it's not predictive, then it is worthless.

But we already knew that about you.

Quixotic_Not's picture

When the light comes on the cock-a-roaches scatter.

francis_sawyer's picture


Here... Here are a few 'FACTS' I was looking at... It was YOU who decided to post truck and railroad pieces for May & June...


Bay of Pigs's picture

Just the facts? Yeah, right. 7-8 months ago you were bad mouthing gold and silver when gold was around $1330-1340 and silver was $23-25.

All you bring to the table is disinformation and propaganda when it comes to PM's.


RockyRacoon's picture

I call bullshit on your railroad diversionary tactic:

Baseline Rail Traffic in Contraction: Oil Consumption vs. Production Revisited

...baseline traffic is now in contraction with intermodal and cyclical traffic soon to follow if the current trend holds.

Intermodal traffic, containers and piggyback service, actually has stronger cyclical tendencies than so-called cyclical traffic. Compared to the same month a year ago, intermodal is right where it was in 2006, 2007, and 2008.

Baseline traffic is below and cyclical traffic is well below levels in the same month in 2006, 2007, and 2008. Thus total traffic is below levels in the same month in 2006, 2007, and 2008.



CompassionateFascist's picture

Never mind corporate/gov't "statistics". A half-dozen loaded freight trains used to go thru the local station every day. Now there are none, for weeks at a time. Did see a few empties being shuttled back and forth today, tho...

knowless's picture

yeah dude, iron and steel scrap shipments up 18%! what a recovery.

could the vehicle sales increases have to do with a certain asain nations demise? isn't a 60% drop quite near a 150% gain?

bigwavedave's picture

Tyler. think about it. All that is needed to keep the printer going is the 'full faith and credit of the people of the united states" which means the housing stock. enter Fanny and Freddie. Friday the 13th - The Porn Version.

longorshort's picture

Is data available of how much each bank has gotten? Think this turd floats back to Jim Rogers short on a bank that has not went down as much as the others? My guess on that was JPM or Wells Fargo or GS, although Wells Fargo and GS would be more shock factor beings Buffet has been so smoochie smoochie with Them. I am not sure how you eliminated those two in your article.

minsky4ever's picture

As Minsky pointed out, large bailouts are followed by larger bailouts until, in the end, the institutions become too big to fail and moral hazard is out the window.

Nothing was done to change the system after the treasury was looted, not a fucking thing. Dodd-Frank was like drawing a picture on a Winkie Dink screen, it made no sense and does nothing to curtail the abuses that brought about the most recent collapse.

boooyaaaah's picture

Glen Beck's carrying you link to this article

Are you really Glen Beck

Or If not are you going to appear on his new web tv


I think you guys are on the same wave length

Caviar Emptor's picture

And political risks. Euro governments are on shaky ground because of the unfolding debt crisis. And MENA instability is a direct offshoot. Here in the US there's rising disaffection with both parties and rising chance for turmoil

Bringin It's picture

Re. Turmoil?  In the valium nation? 

johnnynaps's picture

ahhhh valium! I haven't seen you in years! Me thinks it's time to head to the good Doctor and schedule a reunion with you, on my wife's government bennies of course!

Dollar Bill Hiccup's picture

Grantham called it as he saw it in 2007, a slow motion train wreck. And now? The Dinner Roll or the last jump of the Federal Reserve ...


JW n FL's picture

This is not a 1am Saturday Night Story.. unless you are trying to bury it! LOL!! take it out with the trash on the weekend!!

Tyler Durden's picture

This story will be headlined until well into next week.

JW n FL's picture

I was kidding! I would have pushed in on Face Book and twitter any way! You can NOT Stop me or the truth Tyler!!!


Happy Saturday evening to You Bro and I would hope Yours as well given the hour!


Keep up the GRANDE' Work Product! You are Wonderful! Human Being!

JW n FL's picture

ya! but!! have you seen his ab's? they are to die for! you sexxy Beast!

Hansel's picture

Nice work TD.  While I hope this might move pols to act against Ben Bernanke, I have yet to see anyone challenge him so far.  I have been disappointed that Bernanke has not been confronted about loaning money to Libya, or about the majority of bailout cash going to foreign firms, or the complete ineffectiveness of QE on employment, or for loaning to banks at 0% so they can loan back to the gov't at 3+%.  Still the congressmen fellate Bernanke because they know who butters their bread.  The proles won't push for action against Bernanke because they largely don't understand, and even with action against Bernanke, the damage has been done.  /dejected

Conrad Murray's picture

or about the majority of bailout cash going to foreign firms

While he was a douche, Alan Grayson dug in on The Bernank - http://www.youtube.com/watch?v=n0NYBTkE1yQ

And there's always Ron Paul - http://www.youtube.com/watch?v=cxBNR0qBKVU and http://www.youtube.com/watch?v=fc4DDBvsYPg


Hansel's picture

Theater is for entertainment.  Where is the action?

Conrad Murray's picture

Just pointing out that he has been confronted. The action will come when 1,000,000 people surround the Federal Reserve Corporation, Capitol, and White House. As long as the people remain at home, placated by SNAP, Medicare, american Idle, the internet, and everything else that makes life acceptable, we will be slaves.


Bringin It's picture

I used to be amazed at how complacent/docile people have been, but ... you learn something new all the time.

Now, it's too late to do anything about the train wreck except make plans for the after effects.

I hope people find community to defend common interests, but I'm amazed it hasn't happened so far.  People are so deep into the Kool-Aide. 


TD - Thanks.  The Thomas Paine of our times. 

[PbagWan - is how the local equivalent of kiss-ass BTW] 


Neoisolationist's picture

could be that the us is just waiting for the next election. I know lots and lots of people who are disgusted, who all say the same thing: Nov 2012 can't get here quickly enough. There's also an understanding that the PTB woudl benefit from imposing martial law, so the idea of acting in such a way as to risk martial law is out of the question.

 And meanwhile of course, the sheeple quietly arm themselves, buy PM's, and food storage and other survival-based items.


Bringin It's picture

I predict elections won't fix this.

CompassionateFascist's picture

Rick Perry will fix "this". He'll either liquidate Zero and his bankster regime in 2012, or his state Texas will secede before/after and take 20 others with it. Then we will get the Civil War we so desperately need. It's the only way...in the meantime, by all means, gather 'round and attempt to levitate the Fed.

forexskin's picture

kinda going out on a limb there, huh?

mick_richfield's picture

I think that Americans are more active than they appear to be, and Greeks less.  What is more effective: thirty thousand people shouting at riot cops in Syntagma Square, or 4 million Americans not paying their mortgages?