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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ebworthen's picture

Rapacious theft.

An act of treason.

TimmyM's picture

I hereby nominate ZH for the Pulitzer Prize for Investigative Journalism.

DangerClams's picture

Katie Couric's going to cover this breaking story Real Soon Now, right?

Joebloinvestor's picture

No shit, Ben was making direct secret "loans".

EU bankers don't go to jail either.

rqb1's picture

Anybody who thiinks that the Fed's main focus is US unemployment is mislead

From Germany With Love's picture

Guys, don't be so 20th century. Nationality doesn't mean much within the global banking system. All that matters is that the spice keeps flowing.

Dollar Bill Hiccup's picture

EURUSD and SPX are often in sync, not always magnitude, but direction.

Ah hah. I'm happy to see that its probably just old fashioned collusion / manipulation, rather that machines gone truly amok.

Yen Cross's picture

 e/u >spx    < asia> dax= spx>  ( ME= eur) "syg nok kow" Toilet bowl cleaners.

Banksters's picture

Time for 2+2 = Fuck representative democracy and the rights of the indivdual



The Obama administration has expressed concern at what US officials see as Britain's slide towards the European exit door.                                                                                                                       . +          


EU wants power to sack journalists A European Union report has urged tight press regulation and demanded that Brussels officials are given control of national media supervisors with new powers to enforce fines or the sacking of journalists.



Bernank bails out Europe


=  I don't think they have our best interests in mind.


newengland's picture

Shoot the messenger. That's always the aim of fascists, and the bankrupt.

ekm's picture

As I've said over and over and over:

Money in the sidelines is simply left over cash after the primary dealers and major world banks have bought up everything, S&P, Dow, Dax, Nikkei you name it.


There's nothing left to buy any longer.

Atomizer's picture

The wagon trains are circling the SDR allocation thieves.


Special Drawing Rights (SDRs)|August 24, 2012


SDR Valuation

The table below shows the new currency amounts that will be effective January 1, 2011. To assist users of the SDR in preparing for the changeover to the new SDR valuation, the IMF has provided illustrative projections of the currency amounts every week in December.

Tyler Durden's picture

The world's central banks are scrambling to devalue their currencies on a relative basis yet there are those who are naive enough to suggest that the globalized world, in which to the shock of some trade still matters, will opt for a blanket uniform currency which would make individual currency debasement impossible? Especially if that means taking away China's endgame trump card of the new commodity-backed reserve currency?


Atomizer's picture

Keep up the great work you do..

Aurora Ex Machina's picture

It's not naive, it merely relies upon a different understanding of both economics and geopolitics. The current plays are all about the "buy in" to the new poker game.

Wake me up when you look at the security council (+1 Germany, who has always been a silent enforced partner due to WWII) and then transpose that onto the 21st Century. It's not nukes, it's if your economy can crash the global system. This is why France is probably losing it's seat, but the UK will not, and there will be a few new players soon. (And yes, I junked you for suggesting China is the next reserve currency - that's already been discounted, most forcibly by India).


Put another way: India, Pakistan and Bangladesh and Cricket. A sport was used (and still is) to counter geo-political turmoil and make sure that >1 billion people don't riot in anger all the time. Might want to ask around about how fixed Sports in general are. Not everything is about the benjamins, sometimes it's about making sure the benjamins flow.


p.s. All currencies are currently pegged to the same thing: it's energy; Pretending otherwise is a bit silly. Currencies are merely a fluid wriggle of tadpoles struggling for a share of the energy potential of the planet. Sure, you can dress the potential up into h-cation or futures or d-rivatives, but it's all the same game.

Ghordius's picture

pegged to energy? it's a metapher for which I doubt a correlation can be made

fiat currencies are based on faith (or, if you prefer, goodwill)

this includes expectations, including about energy

tip e. canoe's picture

yes, this is where perception management works wonders, until it doesn't

tip e. canoe's picture

very interesting chart:

check out the number of the level where the shiny ball has been bouncing.

couldn't find a way to map a barrel of Brent priced in XDRs, though curious to see.

p.s. agree with your hypothesis AxM...sometimes you gotta dig just a little bit deeper.


tradewithdave's picture

Divorced currency. Keep the flavor... Lose the fat. Centralize the wealth ... Distribute the convenience.

HoaX's picture

LOL. Owned?

Greetings, Europe.

fonzannoon's picture

(Jim Rickards scratching bald head in confusion)

Tinky's picture

All you whiners need to gain a little perspective...

Sudden Debt's picture

Oh it's just money!
And it's not like you'll need to repay it! NO!!! that one will be reserved for your kids.

BaggerDon's picture

The next bull market might be TAR AND FEATHERS......

yogibear's picture

And the Vampire Squid makes billions skimming the exchange of funds.

Yen Cross's picture

 Oh. what a web we "weave," when we practice to " deceive".

newengland's picture

This is the 'globalist' agenda. Central banks will bail out other central banks as they pursue globalism, whereby there are no borders, no nations, no ethnic people, no differences. All will become hamburger, ground down into one thing:  globalism which has wrought more war, more debt, more woe in its short time of about a decade than any other  'ism' made by its founders: Nazis masquerading as 'capitalists', 'socialists', 'communists'.

The so called 'new world order' is the old world order: fascist families hiring salesmen to put a pretty mask on their ugly ways.

The salesmen are bought politicians, and their little helpers in law, academia, accountancy: the bureaucrats.

These fascist families always exist in all times and all places. In 1776, they were overthrown. In 1913, they reconquered the USA with the founding of the un-Federal no-Reserve Board of money changers, the gold and silver thieves; the ruin of nations.

PS All central banks and central governments lauded the Nazis...until Hitler failed. No honor among thieves, then and now. Our modern problem is that this Nazi idea, now called globalis, is on the march again.

Yen Cross's picture

 N/E You have "not" the slightest inclination  of global banking policy.

 The fucktards in England are 8 hours ahead of me. That explains the junks!  2:00 am London on my GMT clock

  I like YOU! Always have.

newengland's picture

True, Yen. I dislike this 'globalist' experiment, the ruin of the world, as per usual.

And I never 'junk' you, friend.

I see there's a new cartoon character on ZH, someone called the 'Red Arrow' :-) A mysterious cowardly agent for ...?

Ricky Bobby's picture

I junk you (yen) quite often because your comments are obscure and never to the point. Your condescending attitude is annoying.

Orly's picture

Does he talk in riddles so he never has to really say anything?

Totentänzerlied's picture

"In 1776, they were overthrown."

Don't be so sure...

newengland's picture


'They' are always with us: the fascists. Resist, we must. In every place and every time. 1776: a very good year ;-)

q99x2's picture

Nailed them for treason.

samsara's picture

Treason ? exactly on what charges?


NOT a Federal Agency. 

They are carrying out the orders of their STOCK HOLDERS.

Their STOCK HOLDERS happen (up the chain) to be Rothchilds, Walburgs, Rockefellers, et al...

newengland's picture

'Crush the bourgeoisie between the millstones of inflation and taxation,' said Lenin, funded by the same people who funded the Nazis. Those who now fund the Trilateral Commission, Bilderberg Group and endless bureaucracy: the Rothschilds, Walburgs, Oppenheimers, Rockefellers, the House of Saxe-Coburg (now named House of Windsor) et al.

The un-Federal no-Reserve Board will bail out its kin in Britain and Europe with the tax and labor of the USA, and anyone else it can domineer.

tradewithdave's picture

Corporations are people too.  Lock 'em up. 

Optimusprime's picture

Do you mean "Warburgs"?  Don't forget the Schiffs!

devo's picture

Hate to pat my back, but I called this.

smart girl's picture

Looking Serious... Springtime cometh, when Trillions will be needed for Bailouts. In my humble opinion, the markets will crash, the dollar will rise (other debt denominated in U.S. dollars is larger than what the Fed has going on) and the U.S. Govt. will attempt to herd the masses into Gov Bonds.

Please do not comment on my current pathetic social life. Zerohedge on a Saturday Night.. Thanks Guys...Better than sniffing glue.

RockyRacoon's picture

The Saturday Night crowd is small but vociferous!

smart girl's picture

Love that word vociferous! Thanks. Reminds me of obstreperous. Now there is a Wordament word for you.

Skateboarder's picture

Skateboarder has been around the mainstream club and bar scene - it sucks ass. Better to sit at home, read ZH, educate self, and perhaps share comments with rational folk from around the continent and beyond. That or a dive bar with nice microbrews on tap.

The illusion of fun is a fucking nasty one.

smart girl's picture

Oh my yes, I forgot about that; trying to have fun really is not fun... I like skateboarding though. My real challenge with zerohedge is all the poopy language. At least Tyler does not use it. Thank you Tyler.????


Skateboarder's picture

Well, I won't apologize for my potty mouth because it chooses words accurately for the context. The vulgarity, stress, and often times digsust that comes along with my favorite profanity hits the spot for conveying the right emotion, mefeels. And that's what honest communication without boundaries is more or less about. If I feel at home with what I have to say, and you feel at home with receiving it, we've constructed a good communications channel. Words are just that... words... it's the intention behind them that makes all the difference. All my sentences might contain 'fuck,' but I'll stand up for you. The oodles of laws your country makes has not a single profane word but their consequences put profanity to shame.

smart girl's picture

Thank you Skateboarder, you are cool.  Almost saw Judas Priest in my teens; had tickets but my girfriend bailed out (no pun intended big banks) and I did not go want to go alone. What a tight band they are/were? More of a guy thing.. I shifted to other genres because I can identify and relate too much, it seems this type of music inspires my hate for those who have destroyed the natural world and I'm vunerable to drinking/drug use. This band and others pinpoint the lies and untruth with amazing acoustics, yet that is what you get focused on; the lies and untruth rather than focusing on what you do want. Love, Peace, and Understanding. A New Way; an Evolved Way.