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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BobPaulson's picture

I'd say 99% of those people not paying are NOT doing it as a political statement.

francis_sawyer's picture

While I admire the 'spirit' of your observation, I'd be inclined to color your conclusions a shade differently...

4 million Americans not paying their mortgages ISN'T as much an act of rebellion (though there may be isolated instances where that is the case)... In aggregate, it's probably just an issue of...

"I'm so stupid, I just don't what to do... Let's try NOT PAYING and see what happens... If it lasts, whoopee for me... If it doesn't, I'll figure it out then... Maybe in the process, some political candidate will promise me a cookie..." 



RockyRacoon's picture

While I hope this might move pols to act against Ben Bernanke, I have yet to see anyone challenge him so far.

Say, what?  Oh, you mean other than the ususal group of crackpots like Ron Paul, etc.   And the hearings that were attended by a couple of snoozing street bums -- and no media.

Maybe they could use our encouragement instead of our contempt.

Hansel's picture

Ron Paul talks a good game.  I become less impressed with his actions by the day.

I am a Man I am Forty's picture

well, he's still done a 1000 times more than just about anyone else i can think of and does a great job getting common sense out there when it comes to foreign policy

francis_sawyer's picture

I admire the effort Ron Paul has put out as well... Kudos for that...

Sadly, in reality... He'll never get within a square kilometer of the Oval Office... Or if DOES, he'd better be either riding in a "popemobile", and/or steer clear of book depositories...

Stay out of helicopters & don't cross the street RP... Francis_Sawyer's sound words of wisdom...

RockyRacoon's picture

Have you ever listened to his ass-reaming of Bernanke at EVERY opportunity, especially during any Congressional hearings where he has been a member?   Come on, man.   Listen up.   Have you heard his stinging criticism of the Federal Reserve in any televised interview?  The man has never been given the tools to do anything, and the piddly hearings he was holding were a sop to try to placate him.    He is serious.   Therefore, he has no chance at power.   I fear for his life should he gain any political foothold.

Moe Howard's picture

Although I don't follow it closely, I saw a FEDREP in Congressional testimony recently state it is their mission to hand out the cash to foreign banks, in fact, the dude quoted chapter and verse. The Congressperson [sorry don't remember which one] did not have a follow up question. The key point is that I am sure they have it written in some regulation that they can do it. He was not afraid of the question, in fact, he was ready for the question.

When dealing with lawyers [and banksters], the best bet is to burn all the law books except the Constitution and start there. Everything that has accumulated is to their benefit. The US Code is one giant 'fuck you' to the American People.

Sean7k's picture

Ask the Native Americans how well the Constitution protected them. The Constitution has been a doo rag since 1789. The law was clear, George Washington was clear, Marshall was clear, but their land was stolen anyway.

Anyone depending on Constitutional law to protect them is laughably naive. Heck, we just lost the 4th Amendment completely. Wake up people!

JW n FL's picture

It is time for "We the People" to Arm ourselves and defend our Rights! The Constitution is under attack (again, some more, as usual) thusly we should prepare to defend the Constitution thru any and all means!


Who is with me? LOL!! dont everyone break a leg lining up to fight Washington DC now.. LOL

cossack55's picture

The constitution is a tool to be used against the populace.  Burn the damn thing and revert to Articles of Confederation, and pay very close attention to state elections.  The first state to secede will be gaining a new resident 1 day later.

CompassionateFascist's picture

Native "Americans"? You stupid dweeb...there was no "America" until White Anglo-Saxons created it by defeating 400 tribes of stone-age savages. Who now run casinos....

MrPalladium's picture

You're a hero!!

It's been a while since I sent in $100. Do you still need donations, or does advertising revenue suffice?

slow_roast's picture

I'm glad you said something...I immediately went and donated $100 to the site after reading your post.  How could I not?


Best site on the internet hands down.

topcallingtroll's picture

This is not a moneymaker and tyler durden has too much pride to ask for donations in the posts.

Yes more donations are helpful. It is not a moneymaker yet, and zero hedge doesnt line up at the government trough like NPR and PBS. They need more money to survive and get the word out.

Any size donation is appreciated. Tyler of all people knows the hard times many of you face.

Milestones's picture

Agreed Tyler; unless 10-15 % of Mercans grasp what happened during Q2, then this country could go off the tracks. These elites keep bring up things that eventually the people will understand and take to heart.      Milestones.

Quixotic_Not's picture

Surely you jest?

'MerKans will continue to vote for duopoly; and the banksters will continue to issue marching orders to politeers; and the politeers will continue issue marching orders to generals; and the .gov thugopoly will violently continue crowd control, ad infinitum...

Welcome to the new boss, same as the old boss - Same shit, different century.

The huddled mongrels have spoken, and they love tyranny....

Bringin It's picture

Funny.  You could be right.

Concentrated power has always been the enemy of liberty.'s picture

Thank you Tyler.  I have sent this to my address book, various news outlets, my senator, etc.  I think the ship has sailed and rome will burn, but I'm glad the word is getting out. 

Truly, thank you.

JW n FL's picture
by Tyler Durden
on Sun, 06/12/2011 - 00:50


This story will be headlined until well into next week.



holdbuysell's picture

So, if we already know that the US government is controlled by corporations (e.g. financials, oil, etc.), where does this road go?

JW n FL's picture

how do you feel about live fire situations?

holdbuysell's picture

Yea, it seems it will come to that.

Threeggg's picture

When the can is "kicked" the road follows !

Quixotic_Not's picture

And the tail wagged the dog....

SilverDosed's picture

The same circles, different paths, just keep that shit moving and everything will be alright.

Idiocracy's picture

Ok then, the ulimate question is, how many separate countries does the 50 state union become?  2? 3? 4?  

Once the Monopoly money disapears completely, there is no way the Volvo drivers from MA and CT can remain part of the same country as the slack jawed, gun worshipers from TX and AR.  You can't paper over these profound differences forever.

I would love to get more thoughts on this from the ZH group (smartest group on the net that I've found).  I have been wondering about this for some time now.

silvertrain's picture

I would tend to side with the people that own the guns I guess..

JW n FL's picture

you should own a bunch of large caliber weapons and side with yourself, your nieghbor or your loved ones! fuck them that do the bidding of the Banker Terrorists!

darkpool2's picture

Family.... First and last. Fuck any and all notion of "country", that's a "contract" that needs to be buried in the garbage can of history( to steal an expression) Until we all wake up and understand that it's artificial tribal and geographic boundaries that enslave us, we will continue to be repressed, lied to and exploited. Are you a "sovereign individual" or not?

I am a Man I am Forty's picture

i would hope that there would be closer to 40 separate countries, let the socialist states combine together in the northeast, but most states will probably fly solo, those with big debt burdens won't want to like ca and il, waiting for tx to be the first to give the us the finger

dbTX's picture

Gunslingers always out do volvo drivers

Optimusprime's picture

Thanks for the graphics--the first was not very plausible (I had seen it before), and the second did not even try to be plausible--but cracked me up!  LOL


A couple decades ago someone wrote a book "The Nine Nations of America" that made a reasoned argument for the devolution of the US into smaller blocs.  Can't recall the author now, but it made a few reasonable points.

knowless's picture

here's a half assed visual attempt: http://i.imgur.com/Mo01X.jpg

incredibly simplistic drawing/thinking, I would estimate maybe near 20-30 countries, many quite small.

the central plains east of the rockies i think would be a pretty contested region..

nebraska kansas iowa missouri maybe meriting their own state, i think there will be less countries than there currently are states, but more than just 3 or 4.

geography is generally the boundary of states because of defensible positions in war. so all the square states would fragment and have their borders drastically redrawn.

the boundaries will look nothing like what people conventionally think the state lines are, and patriotism towards the concept of the USA will quickly fade once the gun is in their face.

Idiocracy's picture

Hard to imagine any states throwing it in with Mexico (or Russia) but I could see two or three maybe tying the knot with Canada (Maine?, MN?).  China in a lot of ways seems just as brittle as we are.  So I have a hard time seeing them as a hegemony over the long term.

I also doubt all the current political state boundaries would remain unbroken.  Border lines like the 4 corners out West would seem pointless in a reshuffle under duress. I suspect that geography would become the driving factor

eureka's picture

Dear ideocracy, - VERY interesting question, indeed:

"how many separate countries does the 50 state union become?" 

How about 5?

NW, SW, Middle, SE and NE - each region/new-country led by their largest state.

Rusty Shorts's picture

"how many separate countries does the 50 state union become?" 


How about 3141?

knowless's picture

i only disagree with you because your assessment is based on current arbitrarilly defined regions. in a true collapse and restructuring, tensions that were kept in place by the federal governement will become acceptable political issues, for example race, religeoun, and class.

I dont think it's so clean cut, and a much more likely scenario is based on strategically definsible geography with a coherant national identity, any currently "diverse" region will fall to the more cohesive monocultures as the diversity will be a cause for extreme tension and violence. my above post is overly simplistic, but tell me the truth, do you think that a homogonously mormon SLC with their current predominant values would not have the disipline to maintain itself as switzerland has in the past? think of the geography and mindset, utah has already passed PM's as legal tender.

Fancy Bear's picture

The American stock markets won't surge if American consumers keep getting squeezed by inflation in gasoline and food prices. Some equities will do well, but P/Es are too high and the outlook is abysmal.

Gold should uncouple from the US indices before long. Clearly global inflation should drive gold, while depression spanks US equities.

JW n FL's picture

I dont know how else to say this..


there is not enough energy to go around.. we are burning thru all the go go juice!


there can not be any kind of real recovery becuase there is not enough energy in the supply chain!


once you figure that out, everything will make perfect sense.. it is fire control, putting out fires.. trying to maintain control over the crowds while the world goes no where..

eureka's picture

Yes, Fancy Bear. I agree.

AND - all zerohedgers should, as part of their patriotic duty the original, Libertarian US ideals, dump all US/globalist stocks - AND - withdraw all funds from all TBTF US/globalist banks - AND - buy PMs - AND build self-sufficient local communities - AND - educate their fellow citizens on the facts represented here on zerohedge and on Max Keiser etc etc

If we don't do ALL of these things, we are no better than the sheeple or the elite.


JW n FL's picture

we better leave the U.S. becuase the F.D.A. will want to come shut down our farm for not buying corporate foods!

Subprime JD's picture

The only mistake that Bernanke made was that he didn't print enough. The reasoning behind the "limited" easing is that the proles would get too scared of inflation which is absolute nonsense. As everyone knows, inflation is a good thing. I'm confident that Bernanke will soon do the right thing and monetize up to $5 trillion in government bonds, corporate debt and student loans. As everyone surely understands, more money in the hands of the government, Fortune 500 and the people makes us all wealthier.