How The Fed's Latest QE Is Just Another European Bailout

Tyler Durden's picture

Back in June 2011 Zero Hedge broke a very troubling story: virtually all the reserves that had been created as a result of the Fed's QE2, some $600 billion (which two years ago seemed like a lot of money) which was supposed to force banks to create loans and stimulate the US (not European) economy, ended up becoming cash at what the Fed classifies as "foreign-related institutions in the US" (or "foreign banks" as used in this article) on its weekly update of commercial banks operating in the US, or said simply, European banks.

And while many, primarily the British press, demonstrated how simple it is to confuse cause and effect, and suggested, incorrectly, that the surge in cash was due to arbing the Fed's IOER (it wasn't, as otherwise all excess reserves would have migrated to European banks due to the open-ended arbitrage instead of merely tracking the ebb and flow of the Fed's reserves), what we showed was that there a one to one correlation between the surge in foreign bank cash assets courtesy of the Fed, and the EURUSD exchange rate, a proxy for European stability, not to mention a key signal for virtually every ES correlation algo.

As the chart above shows, there was a clear and definite correlation, if not causation, between the $500 billion that the Fed added as cash to European foreign banks, and the nearly 2000 pip move in the EURUSD, at which point everyone was pronouncing the European crisis over. It also resulted in a wholesale surge in risk assets. Just like now (incidentally, a topic we covered last night).

So with the Fed's open-ended QE in place for over 3 months now, or long enough for the nearly $200 billion in MBS already purchased to begin settling on Bernanke's balance sheet, we decided to check if, just like during QE2, the Fed was merely funding European banks' US-based subsidiaries with massive cash, which would then proceed to use said fungible cash to indicate an "all clear" courtesy of Bernanke's easy money. Just like in 2011.

The answer, to our complete lack of surprise, is a resounding yes.

* * *

First, some basics.

While there is much theoretical confusion over what excess reserves are, which are merely the fungible cash-equivalent liabilities created on the Fed's balance sheet whenever Ben Bernanke has to monetize the US deficit by purchasing Treasurys or MBS, and thus needs to create offsetting money-equivalent liabilities, especially by academics whose only job day and night is to debate endlessly just what constitutes "money" as their value added in any other field is negative, from a practical standpoint the answer is and has always been one and the same. Cash.

And because there is always confusion on this matter, especially by the monetary intelligentsia-cum-philosopshers club, here is the evidence. Excess reserves = bank cash. Bank cash = excess reserves.

In the chart above, the black line is the surge in Fed excess reserves since September 2009 (source: St Louis Fed), while the shaded area chart shows the break down of bank cash between small domestic, large domestic commercial banks and foreign banks (source: H.8). The two are identical.

So that should remove any of the the confusion of where the the Fed's main de novo created liability ends up as an asset on commercial banks operating in the US - both domestically-chartered and foreign ones.

But the focus of this post is the foreign banks. And it is foreign banks that have seen their cash soar by some $207 billion in the past four weeks (and $216 billion using not seasonally adjusted numbers). This is the second highest monthly surge into "foreign-related" institutions since the bailout of AIG, and is even more on a running 4-week basis than the maximum $171 billion posted in the spring of 2011 when the Fed was injecting some $500 billion into foreign banks as well.

Another exhibit showing just how generous the Fed has been to foreign bank is a chart of cash compare to all non-cash assets. After nearly hitting 100% as a result of QE2, the ratio has once again soared from 60% to just over 80% in the span of four weeks, or since the settlement of MBS monetizations started hitting the Fed's balance sheet.

Perhaps all of this soaring cash is merely the result of a massive inflow of deposits (a liability) into foreign banks without a matching increase in loans (the much discussed previously excess deposits over loans topic), which only leaves cash? The answer is no, as excess deposits over loans at foreign banks has kept flat over the past year, at between $200 and $300 billion.

And in case the big picture is still not obvious, here is the chart that ties it all together: a comparison of the spike in Fed excess reserves and the cash held by foreign banks. Thank you open-ended QE, and Fed Chairman, for injecting over $200 billion in US Dollars into foreign banks operating on US soil.

What is interesting about the chart above is that while cash and small domestic banks has barely budged since 2009 and has been flat at just over $200 billion, and that cash at Large US Domestic banks, or those that hold the bulk of US financial assets, has also been relatively flat in the $500-600 billion area, it is the foreign banks that any new incremental reserves created by the Fed always inevitably end up at ever since QE2.

As shown above, cash held by foreign-related branches operating in the US has surpassed that of domestic banks only for the fourth time in history, the first being the end of QE2 when Europe was again "fixed" (just before it broke), the second was just before the coordinated central bank bailout of Europe in November 2011, the third was May 2012 just before Spanish spreads soared to record highs, and now.

With all of the above, anyone who was wondering where all those hundreds of billions in Fed cash created out of thin air were going now knows the answer: straight into the coffers of mostly European banks operating in the US.

* * *

The only answer that is still missing is precisely what these foreign banks are using said cash for. Because remember that as JPM's CIO showed, a bank can "indicate" it has cash on its books, when in reality it is using said fungible asset for anything: funding one's prop operations, including selling IG9 CDS in a borderline illegal attempt to corner the entire corporate bond market. Or it can perhaps buy the USDJPY, in the process sending the Nikkei soaring and "indicating" that Abe's reflation plan is working. Or it can simply buy the EURUSD as it did in the spring of 2011, crushing the USD and sending the S&P500 soaring, as can be seen on the chart below showing the correlation between the cash on foreign banks and the recent surge in EURUSD.

And while we are confident that the "British press", which is now reliant on Wall Street banks to help it find the highest bidder to which it can sell itself, will promptly come up with contrarian theories all of which will be wrong as they were in 2011, the reality is simple, and can easily be tracked in real time.

We urge readers to check the weekly status of the H.8 when it comes out every Friday night, and specifically line item 25 on page 18, as we have a sinking feeling that as the Fed creates $85 billion in reserves every month to offset its other key task - the ongoing monetization of the US deficit, it will do just one thing: hand the cash right over straight to still hopelessly insolvent European banks to push the EURUSD higher, until, as in the summer of 2011 it goes far too high, crushes German, and any other net European exports, and precipitates yet another wholesale bailout of Europe by the global central bankers. Just as the Fed did in 2011.

Because remember: it is never different this time.

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cossack55's picture

I am not concerned.  Please awaken me when the story breaks that we are bailing out the Crab Nebula.

tsx500's picture

QE 1 , 2, 3,   27,  85 ............... WHAT DIFFERENCE DOES IT MAKE  ?!

CH1's picture

Euro-elite draining the US. What comes after is kinda ugly.

selectricity's picture

Mario Draghi Can't Stop The Bubble In Europe From Bursting

malikai's picture

TD: Spot on, as usual. But you fail to mention who these "Foreign Banks" are and their relationship to the FED.

Which I believe would make the motive quite clear.

Don't you?

SeverinSlade's picture

Interesting how the Federal Reserve (the independent central bank of the United States) works directly for the insolvent European banking system. 

The tin foil hat thinker in me wonders how many of those European banks are owned by the Rothschilds.

francis_sawyer's picture



What I'm to understand is that it's 'improper' to ever ask the question 'WHO'?... For some odd reason, it's taboo to ever put a FACE on anything...

Harlequin001's picture

Apparently not.

This would appear to be the fiat equivalent of 'serving your country'...

GetZeeGold's picture



'serving your country'


The spice must flow.

Cosimo de Medici's picture

You can probably keep the hat off and just look at all the major European banks, and since they are all publicly traded, you can read the list of their major shareholders off the internet. Don't make it more complicated than it is.

ArkansasAngie's picture

It's just a bigger (global) version of Reagan's rolling recession.

I've been watching this for a few years now.  "they've" been cycling to EURDOR back and forth. If it cycles back up to 145 +/- then Europe gets killed.  I presume their theory is/was that Europe was supposed to recover in 2012 as the dollar got stronger.  The trouble is it didn't.  So what happens when they do it again and push the Euro up again in 2013? 

Ben beats Detroit in terms of channel stuffing any and every day.

fockewulf190's picture

This article, is yet another, in an ever increasing line of "disclosure" stories broken by ZH, which is allowing the world to see just how truly FUBAR and corrupt the "Big Club" (grateful thanks to the great George Carlin for that description) actually is. 

It seems to me, that the true financial situation the world is currently in, is in such a precarious state, that the detonation of the six to seven hundred trillion dollars in derivatives time bomb is not far off and every trick, deception, manipulation, con, or what not, is being used to try to prevent the inevitable from happening.  They may be buying some time, but the methods being used to buy that time are just adding more destructive yield.

socalbeach's picture

According to John Hussman, it was the European bank bondholders who were bailed out, not the stock owners,

The Right Kind of Hope

"That said, it is important to remember that the attempt to rescue distressed European debt by imposing heavy austerity on European people is largely driven by the desire to rescue bank bondholders from losses."


The Reality of the Situation

"Spain has now committed 23.5 billion euros of public funds to rescue its third-largest bank, Bankia, amid last week's revelation of fresh deterioration in real estate loans and other assets (which again makes us wonder what the losses would look like on the $100 billion-plus of European mortgage debt that JP Morgan has amassed, if JPM was actually required to mark these securities to market). Worse, Spain is providing these funds not as part of any restructuring, but by purchasing newly issued stock of the unrestructured, insolvent bank. While this will give Spain nearly 90% ownership of Bankia, the bailout effectively gives the people of Spain nearly worthless stock in an insolvent entity, putting them behind Bankia's bondholders. "

Same with US banks, although the following quote doesn't exclude the possibllity stockholders were bailed out also.

An Open Letter to the U.S. Congress Regarding the Current Financial Crisis

"As an economist and investment manager, I am concerned that the plan advocated by Treasury is essentially a plan to bail out the bondholders of financial institutions that made bad lending decisions,"

steve from virginia's picture



Bailing out the bondholders (the '1%ers') is the only strategy of the west ... and the BRICs, too.


There is nothing else to bail out! The world is saturated with 'consumer goods' that are really bads. None of these goods earn anything, they are simply costs/waste. Among the costs are the permanent erosion of capital/resources. What is the point of bailing out this sort of nonsense? Bailing makes things worse! Our problems are not our business failures but our business products' success.


By default, the richie-richs are bailed out because they can produce paper claims that the rest of us cannot. Our claims would have be be invented which would subvert the entire process that includes the bailouts. Whichever way we turn we are stranded ... to bail, to not bail, to bail one group and not another. The bailing is nothing 'real' only the substitution of one set of worthless claims for other (equally worthless) sets of claims.


What difference does it make if the US Federal Reserve is floating loans to the Europeans? One set of bad loans replaces another set. Nothing real is changed! Regardless of the loans Europe is still bankrupt. It is so because it cannot gain a return on the waste of its irreplaceable capital ... not because of central bank loans.


Meanwhile, the European citizenry has no money, it did not have any money before the central bank loans, it has no money now. Instead, it has less ... and so do the 1%ers ... every single day. Over the course of days the public is less able to afford its share of diminishing capital to destroy. This is our crisis.  We are 'out of gas'.


The central banks cannot produce capital on demand. The capital was here before central banks, before industrialization, before waste-based economies, before the rise and conquest of financialization ... the capital is gone now, it has been spewed out the tailpipe leaving nothing behind that is worth anything. The loans are intended to increase the numbers of tailpipes ... which is counterproductive on its face.


Because the central banks cannot produce capital they are as useless as teats on a bull. There is too much obsession with central banks, what they 'do'. Little is said about what they cannot do. The banks try and try but always and inevitably fail, they try until their efforts convince the public that the entire finance system is beyond saving and is indeed insolvent.


Like now.


The implications of capital destruction are profound. Here is a topic rarely seen on Zero Hedge because it is too frightening. Better to blame the central bankers and the governments instead of tycoons: the loss of capital means the enterprises that are dependent upon wasting it will fail or are willfully done away with. This means the end of an economy that monetizes waste. There are no more cars no more conveniences, no more 'modernity', no toys, no recreation, only war or starvation or hard physical labor for a lot fewer human survivors ... no more loans because there is nothing to repay them with.


People over here better get on the stick. This is no drill, there is no recovery in anyone's future or slick evasions, no preening Austrian can gesture his way out ... nobody can trade their way out of this future, only the possibility that your grandchildren murder you in your beds. Why? The counterparty is Mr Entropy and he doesn't give a fuck.


Get rid of the goddamned cars. All of them ... now. That way you have a fighting chance.


Otherwise (finger cutting gesture across throat).



SeverinSlade's picture

Except for the fact that the largest shareholders are almost never individual investors, but rather, HFs, holding companies, banks, etc.  Best part of the banking oligarchy is that they know how to hide who truly owns what.

Marco's picture

QE doesn't magically transfer money to European banks, it strengthens the Euro but it does fuck all about the dollar holdings of European banks. Other mechanisms can provide dollars to European banks, but not QE ... some of that might be deemed nefarious, but most of that is simply the US's massive trade deficit.

Foreign banks had massive amounts of US bonds, now they are chosing to hold a little more of those bonds in cash because the Fed is driving down the interest rates ... big whoop.

Ghordius's picture

I'm a bit - actually a lot - confused by the article's view on this shift in the FED's and the bank's acconts, both domestic and foreign-based

does this all not start with monetization? the FED is buying US Treasury Bonds, mainly from the banks, roughly as much from foreign-based ones as from domestic ones, if I read it correctly. the banks give the bonds, the FED gives/creates a credit entry in it's "excess reserves" liabilities book

did I miss something in it? the question about what those banks do with that electronic cash is a different thing - they had bonds, now they have cash, both denominated in USD. leaving it in the FED's accounts is though not the same as playing it on the EURUSD trade

Tyler Durden's picture

The cash is accounted for at being at the Fed, or specifically the cash collateral. What happens with it is a different story entirely, one that is mediated by the $30+ trillion repo pool and the security custodians, who provide ledger asset indentity for accounting purposes, allowing banks to fungibly transfer cash for whatever purposes they need on a day to day basis.

A simplistic and very much incomplete perspective of what happens (and there is much more, but for that you would actually need to read some more, in this case Matt King's "Are The Brokers Broken?") in the real world is shown below.

In plain English terms, excess reserves at member banks can be used to fund virtually any risk-taking activity that does not explicitly lead to an expansion in the money supply. That it does so implicitly, via Shadow Banking, is what is lost on 99.999% of the "experts"

Ghordius's picture

Thanks, Tyler. I also forget often the shadow banks - hope does not make me one of the "experts"

unununium's picture

+ 18,000,000,000,000 THANK YOU Tyler

Marco's picture

How is cash collateral any more or less useful for shadow banking than treasury bond collateral?

Ghordius's picture

fucking good question, Marco +1 - can't answer in a few sentences and I'd appreciate if someone answers to you better than I would

it hinges on this "In plain English terms, excess reserves at member banks can be used to fund virtually any risk-taking activity that does not explicitly lead to an expansion in the money supply. That it does so implicitly, via Shadow Banking, is ..."

which is exactly the other way I still understand it in this case, with the Shadow Banking system selling UST, winding down the hedges they used, and accepting only a small part of the cash, because in theory the cash is the bank's

except that banks have this nasty habit of loaning those FED excess reserves back and forth - including with the shadow banks, and so making any domestic/foreign discussion sensesless, since it could well be that a hyperleveraged US entities is actually behind cash deemed as "foreign because handled by a foreign bank"

"explicitly lead to an expansion in the money supply" would be lending it, instead of "playing with it"

Ghordius's picture

as from the article "excess reserves are ... cash" "...created on the Fed's balance sheet whenever Ben Bernanke has to monetize the US deficit by purchasing Treasurys or MBS...

if you really want to make that great difference between the US and the "foreign", than be reminded that Ben Bernankes is "buying" back US Liabilities from foreign banks, in exchange with a different kind of US liability, the "zero-perpetual bond" called the USD

now those foreign-based banks don't even touch this cash whenever they leave it as "excess reserve" on the FED's books

and yet yes, perhaps they are using part of it in "repatriation", i.e. selling the dollars and buying other currencies, or lending in other currencies, or buying up assets in other currency zones

but of course we are talking about smelly foreigners, don't forget that

Tyler Durden's picture

There is a reason why the article above linked to this piece: A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed, which in turn is the basis for "Dear Steve Liesman: Here Is How The US Financial System Really Works" - it is to explain how most people's (and certainly that of "smelly foreigners") understanding of what excess reserves are is completely wrong.

Of course, to actually understand what is said in the pieces above you would need to catch up on some 3 years of writings on shadow banking. Feel free to start, unless of course reading is against the primary tenets of chauvinism.

Ghordius's picture

I think I have only one and half years worth's to catch up
reading and chauvinism can be good friends, btw

seriously, great work. Though since we are talking about chauvinism, you did read how it can be understood, and you knew it beforehand

To put it more simply, the FED can't gift monopoly chits for nothing to foreign banks, not even PDs. Someone had to have USTs, before

The biggest heist and theft of history yet was committed when shadow banking was re-allowed, through re-allowing of previously forbidden derivatives, imho

all based on US laws, as you know, so I still resent the "you know, thei'r foreign" part

my impression is that it's all about not looking too hard if this might not mean a permanent shift out of USD

Anyway, you are a magnificent SOB, if I may make a compliment. thanks

socalbeach's picture

If John Hussman is correct (see above comment), perhaps the title of the article should be,

"How The Fed's Latest QE Is Just Another European Bank Bondholder Bailout"

I suspect the major bondholders of the European banks are the same cast of characters as the bondholders of the major US banks. If so, the title could be simplified to,

"How The Fed's Latest QE Is Just Another Bank Bondholder Bailout"

Tyler Durden's picture

If equityholders are bailed out then by implication all security classes above them are also bailed out.

What Hussman may have failed to mention is that bank equity and bondholders are explicitly one and the same ultra-levered class, for whom any impairment, anywhere is terminal.

unununium's picture

The Fed's Latest QE Is Just Another Bank Bond Derivative Seller Bailout

sunaJ's picture

Congress and Placeholder will get right on that just as soon as they make it clear what guns are and are not for.  Shipping to Mexico to protect our drug and energy interests there?: Yes.  But in Amerika, guns are never used to stop an active gunman (but if you chance upon some scissors, you may go to your grave with the satisfying thought that your killer enjoys his one-eyed victory). 

In Soviet Russia,  gun shoot you!

max2205's picture

This is to try to get you back in bonds which can crash any day now

TheFourthStooge-ing's picture


Euro-elite draining the US. What comes after is kinda ugly.

Yes, it will be ugly, before it gets worse.

I can't help but wonder, though, just based on the name of the report (Weekly Hate Status), if some at the Fed are just doing it for the lulz.

Curiously_Crazy's picture

Exactly. Same ol shit.

When TARP was rammed down the yanks throats without them even wanting it I said at the time it was only the beginning. The sheeple at my workplace were all "oh no this is going to solve the problems the US is having, do you know how much money that is" et al.

Why even give the money printing and the manipulation through operation twist names? The system is fucked and has been fucked for a long time - re QE - as far as I'm concerned we are still on QE 1 because as soon as one finished it's onto the next, then the next. Like one golf shot after another you might be on the fourth stroke but your still playing the same game; Guess they finally realised it's just been one long stream of printing so figured fuck it we'll leave it open ended.

What will they call the next QE infinity when the monthly amount needs to be increased? QE infinitiy revision 2 or version 2?


physsilverbankruptsmorgan's picture

Look everyone  knows this path and what it leads to...... Pick your poison ,now or later, I prefer now as my offspring are very young 18 months of hell won't affect them as bad as if they were young adults and If I was old..... fact being I don't want the lazy Baby boomer kids running things now, I prefer the Gen x kids running things later.

ATM's picture

Thank you Hillary.

LongSoupLine's picture

A full fucking audit of the Feds actions, followed by the procecution and high treason execution of the fucking shit eating fuckers involved.  This will wipe a large portion of the criminal fuckers in Treasury, Congress, Fed, COMEX all exchanges and all regulators.  Fucking dicks.

RockyRacoon's picture

The dicks are the folks who keep voting the same retards into office.  My policy is to vote for non-incumbents -- no matter what the circumstances.  I'd hate to have to see forced term limits:  If you ain't above ground, you can't run again.  Oh, JFC, did I just invent the Congressional Zombie brigade?  I think that's what has already happened...

CH1's picture

Party A and Party B all dance to the same tune, amigo.

Walk away from the game. You'll feel better.

gadzooks's picture

These "Weimar" arrangements will result in major disasters, it can only bring bad results for the majority of people ,and considering the euro cultural status quo,there would never be enough changes to "change it". I think we are seriously fucked within 5 to 10 years,hope the emerging markets have 

good slaves....

RebelDevil's picture

5-10 years!? i'm looking towards the end of 2013 man!

gadzooks's picture

Thats possible also,but it would probably be a sign of worse things to come....

RockyRacoon's picture

It's like Ground Hog Day... and I'm getting tired of Sonny & Cher.

ATM's picture

Never underestimate the power of money printing to hide problems. They can do it until they cannot. End of 2013? Perhaps but you are setting yourself up to be majorly disappointed and even to begin second guessing yourself. 

It's coming and it will probably be further off than most expect. It will create complacency then BANG. It's over.

All Risk No Reward's picture

How do you reconcile the mega banks doling out 3% 30 year loans ahead of a Weimar they have to initiate?

You do know that Little Ben is a puppet of the mostly foreign owned mega banks, right?

A debtor's society (almost all the debt is fraudulent Debt Money Tyranny ) will wish for a hyperinflation bailout.

The criminals that fraudulently indebted you will see a hyperinflation bailout to keep you calm as the debt noose is strapped the national, state, county, city, community "neck."

They want everyone betting "hyperinflation" right into the time they pull the plug and rip off Muppet face so violently that that Hannibal Lector would cringe in disgust.

The OWNERS ofd the mega banks hold TRILLIONS IN CASH.  They hold TRILLIONS in debt instruments.

Hyperinflation will wipe them out, not to mention cause a run on banks.

I will assure you... mega banks wiping out their wealth IS NOT in the plan.

This is Economics 101 cost / benefit analysis.

Now, busting the economy and turning trillion in debt into "hard goods" (yours and your community's) and spending trillions in looted cashola (debt money receipts) buying up the rest for pennies on the dollar just might be.

Oh, don't worry, you'll likely get your hyperinflation...  it is just that you likely won't own anything by then.  Hyperinflation will almost assuredly be a "book balancing" program for the MAJORITY FOREIGN OWNED TBTF Torjan Horse institutions (along with the Federal Reserve).

These people are both wicked smart and just plain wicked beyond belief.

garypaul's picture

I've learned to run from anyone who uses the term "Economics 101"

GetZeeGold's picture



That....and the term "Critical Thinking"

Ghordius's picture

+1 a friend always repeated: "critical thinking does not get you laid"