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Swaps, Banks, and Litigation Arbitrage

CalibratedConfidence's picture


The Bernank is beginning to wind down his "non-bailout" of Europe.  On 12/14/2011 the Chairsatan himself reportedly told Senator Corker that he had no intentions of furthering the US's involvement in the European Crisis. Coincidently a few weeks later CNBC interviewed Gerald O'Driscoll, who is a previous Dallas Fed Vice President, after he released an Op-ed in the WSJ calling out the FED's European bailout.  O'Driscoll is dead on with his claims about Bernanke bailing out Europe and his suspicions about Bernanke's reasoning behind going through the FED market arm to lend USD to the ECB.


One thing O'Driscoll touches upon is Bernanke's "legal" reasoning.  I covered this previously and will readdress it here because its critical to understand.  Months ago Zerohedge identified three key terms that would be discussed among "fringe financial blogs":



Bernanke's "legal" reasons lie within the legal pages of sovereign nation courts and what Zerohedge pointed out before everyone else, the critically important "litigation arbitrage".  Within this phrase are disputes between nations about the standing of the relationship of their governments and the nation's central bank also stated as whether a central bank is its own private entity or an "alter ego" of its sovereign nation (I've already covered this in detail here).  That's where profit on this level is made.  If a central bank interacts with the FRBNY FX Liquidity Swap Operations and it is for activities deemed to be public actions, not private profit actions, then the central bank is immune from default laws in the United States.  Consider a previous FRBNY legal case involving two hedge funds and the Argentine central bank.

An IMF paper (embedded below the post) identifies "litagation arbitrage":


And that's just the tip of the primary reason why this facility is so important. 

According to the FRBNY:

  • these swap facilities (to) respond to the re-emergence of strains in short term funding markets in Europe“. 
  • designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdiction“.


A breakdown of all the participants:


Couple the following the chart with the action we've seen in the previous two.  The ECB Deposit Facility has dwindled after Europe was able to suppress the original front of this crisis by injection EUR1 trillion of three-year loans in 2011 and early 2012.  Levels of overnight deposits at this standing facility have fallen over the past 4 months.


Clearly Bernanke bailout Europe and either 1) lied to Senator Corker or 2) Corker lied to the American people.  I'd bet on number two.

IMF Working Paper_Sovereign Chapt 11 Default Working Paper

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Sat, 12/01/2012 - 15:27 | 3026612 kaiserhoff
kaiserhoff's picture

Vital subject, but this piece is in desperate need of some proof-reading and coherence.

Sat, 12/01/2012 - 15:22 | 3026606 newworldorder
newworldorder's picture

The perpetual sunshine and dont worry be happy crowd has won the day. Nothing can go wrong as long as the FED, IMF, BIS and the one world government are in charge.

Swaps, loans, direvatives,  etc., are for the banksters to worry about. All the rest of us have to do is go to work, spend, spend, spend and do as we are told. (sarc)

Sat, 12/01/2012 - 13:27 | 3026472 Joebloinvestor
Joebloinvestor's picture

Bernanke should have been arrested for embezzelment of US funds when he secretly bailed out the EU.


Cocksucker didn't even tell anybody who mattered.

Sat, 12/01/2012 - 14:39 | 3026551 Savyindallas
Savyindallas's picture

The banksters own the Congress, all the relevant government enforcement agencies, the president and the Judiciary, the media. They also control a majority of flouride brain rotted mindless idiots in this country. We're pretty much screwed. I think the mayans were right  -if the world doesn't end on December 21st. it probably will soon descend into chaos and end shortly thereafter- maybe another war, depression, nuclear meltdowns, before this insane human race ends itself with a major nuclear war. I'm going to go back and watch the complete Terminator series  -including the Sarah Connor Chronicles-- and also The Postman, Waterworld, all my Zombie Apocalypse movies, and perhaps even season 7 of Buffy the Vampire Slayer. It doesn't hurt to be prepared.  

Sat, 12/01/2012 - 12:15 | 3026393 max2205
max2205's picture

He lies, they all lie

Sat, 12/01/2012 - 12:14 | 3026389 Sandy15
Sandy15's picture

Can I just print my own money to pay my debts?  The Bernack does it, why can't I?

Sat, 12/01/2012 - 12:15 | 3026392 Sandy15
Sandy15's picture

In fact, Let's all just print our own money, pay our debts with it, then make more debts, then print more money........

It would be the same as congress, the White House and the Fed Reserve.

Sat, 12/01/2012 - 10:42 | 3026290 Bicycle Repairman
Bicycle Repairman's picture

Europe is part of a whole that includes the USA.  Clearly "saving" Europe is necessary to "save" the whole and the USA.  So whenever Europe needs "savings", the Bernank will be involved.  I don't need any comments from the peanut gallery (Corker) to know this.

Let's say it one more time: on the job description for central banker or congressman is this little nugget: "must be able to lie convincingly."

Sat, 12/01/2012 - 10:37 | 3026285 hustler etiquette
hustler etiquette's picture

Don't file or pay taxes. It's the reasonable thing to do given the context.

Sat, 12/01/2012 - 10:53 | 3026299 Offthebeach
Offthebeach's picture

I agree. As much as possible, don't pay income tax, fines, fees, permits, licenses at any level.
I believe the system is unreformible. I also think we'll have a EBT/GovWorker/Crony Capitalist dictator with a rump Roman Senate .

Sat, 12/01/2012 - 10:10 | 3026241 shovelhead
shovelhead's picture

I'm suprised that US citizens aren't thrilled to add more debt from bankrupt Euro-banks to their tax liabilities. This is an opportunity of a lifetime.

Some of us may never get to visit Greece but we can have the pleasure of owning a bit of their debt when the inevitable defaults begin.

They love us for our immunity and we get the pleasure of taking our love for banksters international.

No banksters shall suffer while the US (taxpayer) is on the scene.

Sort of brings a tear to the eye, doesn't it?

Excellent work Tyler(s) getting the word out that few others will touch.

Sat, 12/01/2012 - 09:54 | 3026220 Widowmaker
Widowmaker's picture

Excellent post!

Sat, 12/01/2012 - 09:26 | 3026205 Daily Bail
Sat, 12/01/2012 - 10:03 | 3026234 DavidC
DavidC's picture

Daily Bail,
I remember well seeing that at the time. A classic moment, along with Bernanke's response to Ron Paul's question about Gold and why Central Banks hold it.Bernanke's totally bemused look was unbelievable.



Sat, 12/01/2012 - 12:18 | 3026366 Daily Bail
Daily Bail's picture

Great clip, David.  Thanks for the reminder.  Here's that full exchange.  Good questions from Dr. Paul.

Ron Paul Asks Bernanke: "When You Wake Up In The Morning Do You Care About The Price Of Gold? -- Why Doesn't The Fed Just Hold Diamonds Instead?"
Sat, 12/01/2012 - 09:22 | 3026204 Eugend66
Eugend66's picture

Smoke and ... and so on. Bankrupt entities cannot bailout crap. Rather think the old geezer is a patsy. Bailing out the ECB when the ECB only holds USD and Gold as reserves and the creditor nations shun the USD.

Sat, 12/01/2012 - 08:58 | 3026196 northerngirl
northerngirl's picture

I agree, it is #2, will Americans ever wake up?  When did it become PC to lie to people? 

Sat, 12/01/2012 - 06:38 | 3026132 French Frog
French Frog's picture

"Clearly Bernanke bailout Europe and either 1) lied to Senator Corker or 2) Corker lied to the American people. I'd bet on number two."

Same here (2). Both are in the same boat and both follow their paymasters' orders.

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