This page has been archived and commenting is disabled.
FX Swap Lines, From The Horse's Mouth
A month ago, the New York Fed came out with a paper discussing everything one needs to know about FX swap lines. We did not post it at the time, as we were somewhat confident a much more appropriate time to post would be just around the corner. Sure enough, the time has come. The below paper, written by Fed staffers, should provide the full picture (at least from the Fed's point of view) on what swap lines are, and how the Fed uses them every time the world needs to be bailed out.For our in-depth analysis of the mechanics of a global FX swap line based "bailout" posted previously, see here.
The Federal Reserve's Foreign Exchange Swap Lines
»
- 12264 reads
- Printer-friendly version
- Send to friend
- advertisements -
It's like a mutual double fisted jerk-off. Or a really gay double dick 69. Nuff' said.
lemonparty.org
asshole
...and no comments about my name
Is it a computer? :p
Great for grossing out your friends, although not as shocking as goatse. Lemonparty vet: Hmm...so one of the old guys is Asian...
Lemonparty n00b: OH MY SWEET FUCKING GOD BUDDHA WHO THE HELL WOULD TAKE SUCH A PICTURE AND ORGANIZE SUCH AN ACT?!!?!?!?
oh man. goatse. don't remind me. (shudder)
No I meant Wang. Remember Wang computers? I was talking about the dudes name. Thanks for saving me from clicking on that link though. LOL.
No, silly... It's what keeps an airplane in the air.
Don't be coy, you can't wait till retirement age to get in the middle of that action just like that other Wang lol.
I'm not going to look!
You've been on the ship with ye mates too long. Time for a port call.
just another part of the "Wash, Rinse, Repeat" phenomenon....
Hey Robo, I've been waiting since the close for your report. Is this all we get tonight? :)
did the congress ask big Ben about this during the hearings, and he said absolutely nothing? I think Ron Paul asked about this.
http://www.youtube.com/watch?v=n0NYBTkE1yQ
twas grayson
You mean the currency swaps? I remember that too. I wonder when that was from? Within the last year. Wasn't it the same one when he is grilling him on where the two trillion went?
All this talk of swaps reminds me of the wife swapping parties of the 70' and 80's. Is this the same thing? Who gets stuck with Merkel?
Kagan , of course!
LOL
(sound of palm of hand hitting forehead)
Of course, who else?
oh, that one earned me a junk!
Perfect setup line, BTW
Hi Boys and Girls, This is Mr Rogers speaking from the grave. Can you say, New World Order? Very good Boys and Girls.
A cow says, "Moooooooooo".
Foreign Swap Line Summary: Foreign Central Bank prints foreign currency, US prints $, they swap. Foreign Central Bank will later "buy back" its currency at an initially specified exchange rate, but uses the US $ in the meantime. The US leaves its foreign currency on account at the foreign central bank (e.g., the foreign bank can invest/leverage the US $, but the Fed won't invest/leverage the foreign currency so as to not introduce market distortions/stress for the foreign central bank, which is under stress anyway, as that was the reason the foreign central bank entered into the arrangement.)
Translation: US taxpayer funds foreign leverage of US $. The Fed holds no claims to collateral in the event of foreign default.
So does this mean that the US is going to sell record treasuries again? LOL.
PS I guess this means more dollars enter the system then.
Of course. For a 1x problem, the result is 2x printing (e.g., 1x US$, 1x foreign currency).
Further, foreign central banks have every interest to maximize their swaps with the Fed (borrow everything they can grab). An even greater incentive exists to maximize swap lines, then default (e.g., Greece). The US taxpayer is on the hook for it all.
What is scary about this is that the Fed is not really printing anything. In other words, its not like the Treasury is going to do 500B more in auctions to cover this. The only footprint is that the receiving central bank pays interest to the Fed. It is just an IOU that doesn't really exist unless the Fed can't get the dollars back, or if they lose a significant amount on the exchange, at which time they would become a direct drain on Treasury. They could issue even more swaps, but at that point it would be a death spiral for the Fed.
"It is just an IOU that doesn't really exist unless the Fed can't get the dollars back, or if they lose a significant amount on the exchange, at which time they would become a direct drain on Treasury. They could issue even more swaps, but at that point it would be a death spiral for the Fed. "
This is the case for ALL non-collateralized debt regardless if it is lent to a central bank, TBTF bank or local corner bank. Think FDIC.
I get the swaps between the Fed and ECB, and this is done because the ECB by law isn't allowed to issue Euros to pay off bad debt? I think??? So the Fed helps them out and allows them to use USD to pay off the PIIGS's debt. Then some point down the road, the Fed gets paid back by the ECB when things have smoothed over.
So what happens when the PIIGS are forced into recession due to the austerity measures of the ECB bailout and none of the economies recover as planned. Both the Fed and the ECB eat it? How are they expecting this to come out OK? I have to be missing something here.
Isn't this identical to our banks and the TARP program? Banks get in trouble w/ too much debt and inflated assets, Fed takes on their troubled assets in hope of allowing the banks to correct themselves. The banks never recover and are now zombie institutions. I can see how banks can stay afloat while they are insolvent but countries are another story. Accounting games can only take you so far. We are so screwed.
Yep, quantitative easing impossible for ECB. They have to lease the facilities of another to perform the trick.
If the swaped cunrrency devaluates what you get?
Instant LOSES!!
Ben you are brilliant, the Euro is devaluating already, thanks giving away our money!!!
Audit the Fed!!
I am so over auditing the Fed, it is time for a scorched earth policy on the building!
"Ceterum censeo Carthaginem esse delendam"
(And therefore I believe that Carthage must be destroyed)
Marcus Porcius Cato 234-149 BC
Salt the earth where once the Fed stood.
"I say we pull back and nuke it from orbit"
nah nuke iceland... better potential fireworks
Yep, but the CDS is USD leveraged on the other side say 80:1. two tuggers on a rope. Ain't over yet because the counterparty is smoke and can't afford to lose.
you can arbitrage the USD-CDS/EUR-CDS spread by exploring the inefficiencies in the FX markets, bond markets and capital allocation parameters. I know its being done, but to what an extent, i have no idea. More often than not sovereigns issue bonds which are not denominated in the same currency, also exploring a better interest rates on the borrowing. Also if you feel brave enough you can sell EDS on a heavy float of companies which are AAA, or single name AAAs, and buy CDS on sovereigns which are BBB or below book the difference as a profit and unwind the trade in CDS when the market mimics past week sometimes into the future by pulling up the old collateral call trick. Of course this can be only done if you are an institution or a big AUM HF.
CB,
If I remember correctly, this is where MS, or maybe one of GS' prop desks, got in trouble, because they tried to finance the CDS bad name purchases with writing an equivalent value of good name CDS'. Unfortunately, that gave them more good name exposure (trying to make up for the reduced premium), and when some of the good names started to turn into bad names, they blew out.
No, no. EDS=Equity Default Swap [hybrid of a CDS and out-of-the-money one touch digital put option(but not quite)*] yields about 250 bips higher even above a CDS for a BBB- bond. Thus if you use the hedging strategy where you sell and EDS on an entire float of lets say, MSFT or P&G and hedge yourself by buying a CDS on lets say B(CDS5y(BBB-)) = MC(Seds)x0.75 you lock in a gain of EDS x 0.03315 in the period of 5 years given that the insured float doesn't fall by 70% [and thus triggers an equity event in which you are a selling counterparty and need to pay out [cash] 50% of notional EDS insured amount]. Its basically risk free as long as the insured float is either a basket of DOW stocks which are highly liquid. Basically you hedge an exposure to an equity event with betting that a credit event will occur if the event triggering EDS occurs. It is best to use EDS on companies which are historically strong and have a dominant market position and which 70%+ fall in market cap could indicate huge problems on a global macroeconomic level and hedge that exposure to buying bond insurance on bonds which will almost certainly pay out if EDS insured basket or single name drops 70% or more. I hope this made it more clearer for you, since my first comment was not articulated well enough (sorry for that). Its pretty nice deal if you are a well known bank or insurance company, but for us small guys, probably impossible to structure since you need to have rating to actually be the seller of the EDS. Fuck.
*basically a one touch digital put is a contract binary in nature [party-conterparty, buyer-seller] but the difference between out-of-the-money one touch digital put option and equity default swap is that the terms of EDS are contractually defined and the terms include non-fluid definitions of premium, premium paying periods, cash payouts, triggering levels whereas out-of-the-money one touch digital put option is fluid on all those terms and is based upon the contract between a buyer and a seller of one touch digital put and does not succumb to market accepted non-negotiable norms as does EDS.
I found this section to be particularly interesting:
At the conclusion of the swap, the foreign central bank paid the Fed an amount of interest on the dollars borrowed that was equal to the amount the central bank earned on its dollar lending operations. In contrast, the Fed did not pay interest on the foreign currency it acquired in the swap transaction, but committed to holding the currency at the foreign central bank instead of lending it or investing it. This arrangement avoided the reserve-management difficulties that might arise at foreign central banks if the Fed were to invest its foreign currency holdings in the market.
Sounds like the term "swap" is a bit misleading. It's more like something for nothing; a discount window interest-level loan to the foreign central bank with an equal amount of the other currency as collateral, which the Fed will never actually have possession of, and which in fact is very much needed by the foreign central banks to maintain their needed reserve capital levels. Very interesting indeed. Thanks for this info TD.
Very interesting indeed...
Sounds like the Fed gets a multi-billion dollar check from the "bailee" and promises not to deposit it... am I missing something here?
....sooo,if the check is'nt deposited,the money is still in my account ,right?And the fed hold's dry ice @ room temp.
Yup... and don't forget the mirrors!
These bastards put any "ordinary" criminal organization to shame. We should all be humbled the breath and depth of this Ponzi. But then again, they're been working on the techniques for 97 years.
It's surreal... and 'hidden' in plain view in front of our very eyes... they are indeed brilliant.
It only appears that way I think because most people have no idea wtf they are talking about and the ones that do can't believe the shit coming out of their mouth.
They ARE ordinary criminal's,given extraordinary key's
+1000
It looks like a lot of things, the most obvious would be channel stuffing, but that'd be too pedestrian for the intellectual giants to come out of our weapons-grade Ivy League Douchebag Factories. With Madoff setting the new standard in financial creativity (close second to David Croft for doing a line of coke seated next to the POTUS), these guys dug deep and gave it all the markings of a good old fashioned payday loan. Got a job? Need cash fast? Got no credit? Baby mama need her child support and you just dented the shit out of your 26" Lexani's? Just bring your pay stub down to us, and we won't tell your stripper girlfriend what a broke-ass you are.
Seriously, you know these assholes were on hold with JG Wentworth when Bernanke buzzed in on call waiting. Forget Goldman Sachs on the phone records, look for 877-CASHNOW at 12:43am.
Question: Why does the foreign central bank "bailee" charge interest on the loans to its local banks? They just pay the profits to the Fed when the swap is settled... but they could provide zero interest financing at their discretion... for the greater (cheaper) benefit of their own banks... to the detriment of our Fed.
Think this one through. The foreign CB is only an intermediary. The only party with skin in this game is the borrowing (micro) banking institution who's in danger of insovency. Any default would mean systemic shock, so the interest charge on the dollar lines is almost of no consequence. There's no marginal benefit for the foreign CB to charge interest to its borrowing constituents.
Looks like the foreign CB will be playing Santa to his best friends then... the wording is in fact shocking when you consider the potential consequences of all the apparent loopholes...
My money says by design... not accident.
Follow the money trail... oh sorry... we can't!
Paging Alan Grayson... Alan Grayson please...
Don't be an asshole, seriously. Have you ever seen a title pawn operation in full-swing? Do you think reverse mortgages and structured-settlement buyouts are for the benefit of those in need? These banks are lucky the Fed didn't take a child as sacrifice and bang their wives while fist-fucking 50% interest compounded weekly like real, legitimate loansharks instead of short-selling their souls for the ability to save face.
My apologies if I sound condescending. There are only two other organizations that do that sort of thing: the Salvation Army and the Mafia. Sorry, I don't see Bernanke and Geitner standing in line with the USMC at Christmas so mommy and daddy don't have to tell their kids if Santa's sled were made by an 'Merican instead of that piece of shit ferriner it wouldn't have broken down and missed their house.
For a persistent part of April, Greek bailout talks had interest charged on emergency funds "pegged at about 5%, well below the market rates which Greece is being offered of more than 7%. That makes the facility, which Greek politicians have stressed they do not expect to use, much cheaper than the country raising its own cash in public markets which have become increasingly jittery about the possibility of Greece defaulting on its debts."
That's a far more public exchange than these Fed swap lines, which with Fed opacity can entail any type of kickback. It's called a circle-jerk, nopat, so I'm not being an asshole, I just think you're being gratuitously acute. Title pawn operations charge usuory interest because they'll break your legs, scare you out of town, and keep the house/car/dog/kids you left behind, because they don't give a $hit. Unfortunately, if Greece and the EU leave town, it won't matter much to the US if we get their dog.
Last I checked, the US gave "grants" to the ERP in the wake of WWII, and much of Germany's loans were forgiven. Sounds to me like when there's a risk of collateral damage (i.e. Greece:US 2009; ERP:US or Germany:US 1950s) the whole loan shark metaphor kinda sucks... well, asshole.
Sounds like German "trade" policy under the Nazis. As I understand it:
When Germany sold stuff to other countries, they got the money.
When other countries sold stuff to Germany, the money stayed in Germany and the other countries could spend it...in Germany.
If anyone complained..."[sound of respirator] Perhaps you feel you're being treated unfairly..."
True. It is something for nothing, and it gives a broad meaning to what may be considered reserve currency. It allows the ECB to use the same euros it used to exchange for USDs for leverered loans while using the USDs for other loans.
These swaps are like playing Russian roulette with swaps going back and forth with different maturity dates.
This is absurdly risky in slowing world economies,with high unemploymnet and wage deteriation. The assets are sure not to be worth the loans that were borrowed against them, and the wages will not support the repayments.
I think I am more worried if they are going to remove liquidity from the system.
The system is fantastically liquid. There's money sloshing everywhere.
The problem is insolvency, and now, cash-flow (nobody's income is sufficient to pay their monthly minimums on their credit cards).
Liquidity does nothing to address insolvency, and cashflow. In fact, it makes it worse (e.g., it's another ponzi "lever-up").
I'm sorry I phrased that wrong. I meant what happens when they remove the liquidity. I know now they added more today with the swaps back on.
I second that.
At some point in time there will be an end game to get out of soon to be worthless dollars and into tangible assets however impaired. A sudden liquidity crisis must once again be engineered to justify pumping the usual suspects with potentially trillions of dollars to inject into the asset markets to support prices and devalue public and private debt. There is just no other way to do this quickly is there?
Meanwhile you will only be able to watch this rape event happen since your cash will be frozen remember? ... Remember?
(Of course I've been wrong before... )
So printing more money and hiding it overseas isn't inflationary how?
Oh that's right, hiding the sausauge is cool in their minds. Ben has to be one sick twisted puppy.
This is what you get when you appoint freaking college professors and have NO ONE with real world experience.
So you would rather have someone that has gamed the system to know where to stick the band aid VS using some sort of thesis in a real time economic experiment? That seems like lose, and lose again.
I'd like to see a white board with all 28 trillion drawn up and where it comes from. I bet it is something like Enron's off book companies chart from "The Smartest Guys In The Room". LOL.
It's not inflationary because the dollars are just going to pay debts. They're being shoveled into the deflationary black hole. When the end of the down cycle comes, the currency collapses. Then comes the inflation. Of course they say when that part of the cycle comes about, they'll willingly soak up dollars, but we all know they'll blink then too.
So translated, when the Euro crashes into oblivion, and is dismantled, the American taxpayers are yet once again fleeced and out of $1 trillion again. How does the FED have all this authority to do whatever the hell they want? There is no way this much authority is given to these scumbags in the constitution. Congress needs to reel this shit in fast, or Americans are going to be ready to chop off some heads when this blows up in Bernanke's face.
congress will do nothing or last thursday will look like a afternoon tea with the Housewives of New York
I'm definitely not smart enought to digest all of this. So I have a question. So while the FED promises to sit on the all the Euro's and doesn't put them out on the market, (therefore taking the losses on the Euro Devaluation), did I miss the part where it says the foreign bank doesn't invest the USD? Isn't the whole point for said foreign bank to be arm twisted into taking the $USD and plowing them back into UST?
As I understand things, the primary objective of the Fed is to offer USD to foreign CBs so they don't have to sell USD denominated assets in order to raise USDs (thus averting massive downward price pressure and a vicious cycle of forced selling). So the foreign CBs aren't buying USD denominated assets, but the recipients of those newly received USDs *are*, thus proving upward price support for USD denominated assets. Thus, the foreign CBs get the USD liquidity they need for member banks without forced selling of their USD assets while the Fed gets global USD asset price support via QE (that is, QE that isn't formal QE as far as the Fed lawyers are concerned).
Before this over, the Fed will attempt to purchase every asset on Earth that anyone willing to accept FRN's is willing to sell.
It is inevitable.
Bank on it.
Last week I joked about doing my part by sending them a bag of cat shit to monetize.
I thought I was joking, anyway.
So the wrong people got caught short the dollar and so basically they get a do-over because Bernanke sucks ass?
Someone correct me if i'm wrong, but here's what i gathered from this article:
1) Opening FX Swap Lines for the Fed seems to be a big deal in reality. Trying to assuage a funding crisis due to debt contagion in Europe by lending them 500 billion dollars in swaps (is this a correct number? Tyler, did you estimate this number using what the high was in the december week the last go-around or this was mentioned somewhere, i don't recall) means the European banks, as expected, are in deep trouble as they are the primary holders of sovereign continent debt and have been seeing their capital levels start declining with rising yields on these securities.
2) Concerning the direction of the Euro. I read this a couple of times at the relevant paragraphs. It seems that the Fed holds the equivalent of 500 billion dollar worth of Euros in escrow almost, doing nothing with it, while Europe lends the dollars from the swap line. In essence, if i remember by macro economic theory, this means supply of dollars ^ by 500 b and supply of euros down by 500 b, which fundamentally should be a euro positive, causing it to rally, i believe this is the point being made by zh. It seems to me that the effect of the larger circulation of dollars will be potentially mitigated by the flight to safety and out of the euro and euro denominated assets due to the sovereign debt concerns. I see this as a currency fundamentals vs fear trade for the euro.
To continue with the Lehman - Greek analogy, swap lines were open and pumping during 3Q of 2008 after bear stearns collapsed but pre Lehman. Once Lehman collapsed, a giant flight to safety risk off trade occurred, with the Euro among others plunging from 1.475 to 1.25 in 6 weeks. After the late year rally it stayed at the lows, only to begin its upward journey to 1.5 when the Fed announced Quantitative Easing.
In this case, if the market and the rest of the world don't buy this god-forsaken european bailout fund and put pressure on it, you can see the continuance of contagion, with a dramatic flight to safety a la last week regardless of fx swap lines open. Add in the fact that European countries have already started meddling in secondary debt markets for sovereign debt securities (QE euro style) and you potentially have 2 huge negative catalysts for the Euro.
This is an all in. If the markets and its players don't buy this, the euro is going straight down to parity, and not in an orderly manner. Please comment if i have made a fundamental or analytical mistake in my thoughts. Thanks!
I think you have it about right. It's called "Hell in a Hand-Basket" for all fiat currency seemingly very soon. Thanks for the analysis.
As I understand it the Fed is the market now. They'll buy as many Euros as they need to keep it propped. $1T? When was the last time a bailout actually stopped at the number that was originally named?
Of course, given that the Euro has already puked up most of its 1-day spike, we might be about to witness another 2008-style moment of the implosion momentarily outracing the torrent of fiat trying to keep it inflated.
Just throwing these thoughts out to be perforated at the leisure of the better-informed, that I might learn something.
I would just add that the banks in europe not only get the USDs to loan but do not have to show a decrease in reserve currencies that they swap, because they don't really make the swap. The US allows them to hold the "supposedly" swapped euros in their banks to use as reserves.
"Nothingman" pointed ot this qoutation from the article. The fed "committed to holding the currency at the foreign central bank instead of lending it or investing it. This arrangement avoided the reserve-management difficulties that might arise at foreign central banks if the Fed were to invest its foreign currency holdings in the market."
Its just a matter of time before the defaults continue, but they will be larger. The world economies can't support the GDPs that are necessary to
make this game of russian swapoulette last.
Thanks Tyler for a most comprehensive explanation of what these uh, persons are up to. This is a great help in understanding the “mechanism” that I did not understand and was going to go on the hunt to find just the document you presented. Great time saver and education. appreciate it
The one saving grace of the Fed is that it has good educational material on its sites.
Currency topics tend to leave me scratching my head, but this primer was quite useful in helping me understand swaps.
http://macroblog.typepad.com/macroblog/2008/09/thursdays-post.html
----Brett in Manhattan----
Great, thanks. Enjoyed the head scratching statement. You in NY and me on a farm in Tx. I guess one can be confused regardless of where.
Umm...guys, EUR @ 0% for USD @ the rate of my choosing sounds pretty good to me. Any idiot could make that trade and clear enough to make the US taxpayer a nice profit, themselves enough to retire on, and ZH more than a few bars of yellow metal...or the bandwidth to function during down days on the stock market, you decide.
Here is another group of F**king idiots, the AP. Here is there top headline story for tonight/Tuesday in Asia. Its like the whole world has gone Forrest Gump on us.
http://news.yahoo.com/s/ap/20100511/ap_on_bi_ge/world_markets
Now look at the indices:
Nikkei 225 10,469.31 -61.39 -0.58% Hang Seng 20,140.39 -286.25 -1.40An interesting DOW chart:
http://www.zerohedge.com/forum/latest-market-outlook-0
http://stockmarket618.wordpress.com
Regarding the future of the euro, this swap and the last swap are different in that this time the ECB is engaging in QE, so I suspect the end result of the swap will be that there's less downward pressure on the dollar. Recall that the last downward spike in the dollar came after the combination of the FX swap and the original Bernanke QE. Now it's the Euro's who are out there bidding up flotsam and jetsam.
Question: if the ECB shovels some cash to Greece, and Greece subsequently stiffs them, who eats it, the ECB or the Fed (taxpayer)? I'm guessing the US taxpayer.
I am not so sure. The way I see it the fed is using the swap line to reduce LIBOR rates which can only happen at 0% loans for the swaps. In effect I think the FED will be monetizing European debt by creating inflation for us and simply holding their receipts. This would allow foreigners to continue to buy government debt, the ultimate goal imho.
Its like paying them to borrow our money because ultimately we will be debassing our currency so they can pay of their debt with it while their currency doesn't reach the market. And I am assuming the Fed is doing this so that those countries will take enough money to buy treasury debt as well.
Does that sound plausible?
Look at the bottom chart, I think that is a pretty telling sign myself. http://www.wsjprimerate.us/libor/libor_rates_history-chart-graph.htm
There is a tiger in the bathroom...
Maturity transformation is an intrinsic part of global banking. The whole process started way before the "first" FED swap 2007. Someone (non-Cbs and non-banks) were happily buying ABCP, deposited, and entering into FX swaps with many global banks in return for money. Those were fueling USD assets as well as other denominated Assets. It takes two to Tango.
Either one need to give up the global reserve status of its currency and face no risk-reward or one makes business out of it with all the benefits, liabilities and risks.
Excellent article.