Another Conspiracy Theory Becomes Fact: The Fed's "Stealth Bailout" Of Foreign Banks Goes Mainstream

Tyler Durden's picture

Back in June 2011, Zero Hedge first posted:

which we followed up on various occasions, most notably with

With the following key chart:

Of course, the conformist counter-contrarian punditry, for example the FT's Alphaville, promptly said this was a non-issue and was purely due to some completely irrelevant microarbing of a few basis points in FDIC penalty surcharges, which as we explained extensively over the past 3 years, has nothing at all to do with the actual motive of hoarding Fed reserves by offshore (or onshore) banks, and which has everything to do with accumulating billions in "dry powder" reserves to use for risk-purchasing purposes (alas understanding that would require grasping that reserves are perfectly valid collateral to use as margin against purchase of such market moving products as e-mini futures, which in turn explains why traders usually don't end up as journos).

Fast, or rather slow, forward to today when none other than the WSJ's Jon Hilsenrath debunks yet another "conspiracy theory" and reveals it as "unconspiracy fact" with "Fed Rate Policies Aid Foreign Banks: Lenders Pocket a Spread by Borrowing Cheaply, Parking Funds at Central Bank"

Wait... the Wall Street Journal said that? Yup.

Banks based outside the U.S. have been unlikely beneficiaries of the Federal Reserve's interest-rate policies, and they are likely to keep profiting as the Fed changes the way it controls borrowing costs.



Foreign firms have received nearly half of the $9.8 billion in interest the Fed has paid banks since the beginning of last year for the money, called reserves, they deposit at the U.S. central bankaccording to an analysis of Fed data by The Wall Street Journal. Those lenders control only about 17% of all bank assets in the U.S.


Moreover, the Fed's plans for raising interest rates make it likely banks will see those payments grow in coming years.

Hmm, we almost feel like we should bring up the dreaded "P" word considering the bolded sentence is a recap of what we said in February of 2013 in "How The Fed Is Handing Over Billions In "Profits" To Foreign Banks Each Year." That's ok, though: imitation, flattery and all that...

So here is Hilsy "figuring out" what we have been explaining for over 3 years!

Though small in relation to their overall revenues, interest payments from the Fed have been a source of virtually risk-free returns for foreign banks. Large holders of Fed reserves include Deutsche Bank, UBS AG, Bank of China and Bank of Tokyo-Mitsubishi UFJ, according to bank regulatory filings. U.S. banks including J.P. Morgan Chase, Wells Fargo and Bank of America Corp. are also big recipients of Fed interest payments, according to the filings.


"It is a small transfer from U.S. taxpayers to foreign taxpayers," said Joseph Gagnon, a former Fed economist at the Peterson Institute for International Economics. The transfer, he added, was a side effect of Fed policy, not a goal.

Actually it is a goal, but that would lead to a whole lot of embarrassing congressional hearings which the Fed would rather avoid, plus nobody really "gets" it. The reason why? Apparently things are so "complex" that anyone who figured it out years ago was clearly a conspiracy theorist:

Behind the payments is a complex interplay between new government regulatory policies and new methods the Fed has developed to control short-term interest rates.


The Fed has pumped nearly $3 trillion into the banking system since the 2008 financial crisis, increasing banks' reserves, in efforts to stabilize markets and boost economic growth.


Since 2008, it has paid banks interest of 0.25% on those reserves. The Fed affirmed this month that the rate it pays on reserves will be the primary tool it uses to raise short-term borrowing costs from near zero when the time comes, likely next year.


In part because regulatory requirements discourage domestic banks from holding more cash reserves than they need, many of the reserves created by the Fed are held by foreign banks.

In other words, the Fed-funded risk-free carry trade finally goes mainstream. Of course, all those who read ZH in 2011 will know all of this by now:

The interest payments totaled $4.7 billion so far this year and $5.1 billion last year, and will increase over time as the Fed raises rates. The Fed remits most of its profits to the U.S. Treasury, and the rising cost of the interest payments could put downward pressure on the amount the central bank sends to taxpayers each year, the Fed has said.


Some observers say this could become a political challenge for the Fed, especially the payments it makes to foreign banks.


"The fact is that the Fed is going to be paying very large amounts of interest to banks," said William Poole, a senior fellow at the Cato Institute and former president of the Federal Reserve Bank of St. Louis. "It's highly likely that some politicians will notice that and given the proclivity of some politicians anyway to demagogue issues, the Fed is going to have some political explaining to do."


Some Fed officials also have expressed concern about how these payments will look. "I think the optics are very difficult to defend and might get us into trouble," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an August interview with MarketWatch.


Since 2009, foreign banks have earned roughly $5 billion by borrowing dollars cheaply, often at less than 0.10%, in short-term funding markets and depositing those funds at the Fed for 0.25%, according to the Journal analysis. That estimate doesn't take into account the costs of raising money through other means, overhead and taxes, which affect net income.

But don't blame the banks - they are merely doing what the Fed is encouraging them to do. And after all who wouldn't collect billions in risk free cash?

A spokeswoman for one bank engaged in the trade, Bank of Tokyo Mitsubishi, said that the growth of excess reserves parked at the central banks is a natural consequence of the Fed's policy. "The share of excess reserve balances held by BTMU has been in alignment with its business footprint in the U.S.," she said.


Deutsche Bank, which had one of the largest reserve balances at the Fed as of June 30, declined to comment. UBS didn't respond to requests for comment. A Chinese official close to Bank of China said it has been parking funds at the Fed in order to help it comply with liquidity requirements in its home market.


The foreign banks' activity is "entirely legitimate because they are providing a financial service and they are taking a spread," said Lou Crandall, chief economist at research firm Wrightson ICAP.

Sadly, the WSJ ends just before it gets good. So without further ado, here is what happens if and when one extrapolates a rising rate environment in terms of Fed handouts to foreign banks, from what we said in February of 2013:

We show the surge in the foreign bank cash level, as well as the cumulative cash interest paid to these banks assuming a weekly cash interest payment. What the chart shows is that from December 2008 through the last week of January, the Fed has paid out some $6 billion in cash (red line) to European banks simply as interest on excess reserves.



But that's just the beginning. If we are correct in assuming that QE3 will be a replica of QE2 when all the new reserves created ended up as cash on foreign bank balance sheets, it means that we can quite accurately forecast what the total foreign bank cash position will be on December 31, 2013 (as the Fed will certainly not end its open ended monetization of the US deficit before then, or likely, ever). The result: just under $2 trillion in cash held be foreign banks operating in the US, which also means that in calendar 2013, the Fed will fund and subsidize foreign banks a blended interest payment of $3.5 billion! This is entirely separate from the $2 trillion liquidity subsidy that Bernanke will also have handed out to keep these banks afloat, and is $3.5 billion that will flow right through the P&L and end up in the pockets of offshore shareholders who otherwise would very likely be wiped out had it not been for the Fed's relentless efforts to bailout foreign banks.



And since it is improbable that excess reserves held by any banks will decline at all in the coming years, one can also assume that the annualized interest paid to foreign banks, which would amount to at least $5 billion pear year, every year, will continue indefinitely as a direct Fed subsidy to the bottom line of Foreign banks.


All of this, of course, ignores what happens should the Fed hike interest rates across the board, which will also mean rising the rates on IOER, once inflation finally strikes: simple math means a 1% IOER means some $20 billion in interest paid to foreign banks, 2% - $40 billion, 5% - $100 billion paid to foreign banks, and so on. Putting these numbers in perspective, let's recall that Italy's third largest bank just got a €3.9 billion bailout (its third), and has a market cap of some €2.9 billion.


We can only hope someone in Congress asks Ben Bernanke in two weeks just under which Fed charter it is that the Fed is more focused on generating profits (not just trillions in excess liquidity) for European banks, than on opening up consumer lending which has been stuck in "petrified" mode for the past 4 years, with the total amount of loans outstanding currently at all US banks - foreign and domestic - at levels last seen the week Lehman filed for bankruptcy.

Obviously, nobody asked Bernanke and nobody has asked Yellen this simple question, because until last night apparently nobody aside from the Zero Hedge community had any grasp of what is going on.

That said, we doubt that anyone in control will ask any related questions in the near of not so near future even with Hilsenrath's "How The Fed Is Bailing Out Foreign Banks For Dummies" primer, because let's not forget - the same banks that control the Fed are also the same banks that purchase politicians at every possible opportunity (see for example: With Cantor Down, Which Other Politicians Has Goldman Invested In?).

In fact, the only good news from Hilsenrath's report is that yet another conspiracy theory has been documented as unconspiracy fact. Then again, Zero Hedge readers knew all of this over three years ago, for free.

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the not so mighty maximiza's picture

Well,  I guess allies don't come cheap

ShorTed's picture

and que the Reverse Repo freak out in 3, 2, 1....

Latina Lover's picture

Banksters helping Banksters...

SoilMyselfRotten's picture

Old news(except to the media induced sheep)

GetZeeGold's picture



Cause we love getting raped?

Arius's picture

no pun intended but the term "foreign bank" is misleading ... there is no such a thing. 

banks are international corporations owned by who knows where .... all of them.


it could be based in london, switzerland, luxenburg etc... do you think JPM is owned only by american citizens? i doubt it ...

Stackers's picture

Bernie S.: Tell us who you lent $2.2 trillion dollars to

Benny B.: No

SafelyGraze's picture

transfer payments

the whole machine just collects rent, then transfer-pays it to absentee landlords

but boy, are they in for a big surprise when nobody can pay the rent any more! that will teach them a lesson!

Citxmech's picture

If the EuroZone couldn't just print more money itself, I guess somebody else had to do it for them.  This just shows you how integrated this global clusterfuck actually is. 

sleigher's picture

I thought it was already well known the fed did this.  At least a year or so ago.  

Richard Chesler's picture

I'm sure Obongo's teleprompter has a good explanation on how this helps the middle class.


Pinto Currency's picture



The interest paid on deposits is one thing.

What about the hundreds of billions of garbage that the Fed bought from these foreign banks at par to create these deposits?

Yeah the stuff that sent Bill Gross running down the street screaming.

Paveway IV's picture

Time to fire up the bankster oligarch woodchipper - it's the only rational solution.

Please feed bankers in feet-first so their final sight in life will be their fat asses (and wallets) going into the rotating blades. 

And no cheering. We're not barbarians. Much.

Manthong's picture

QE, Shmooie..

Where do you think half the initial TARP, TALP, TARC, FART, SCHARK digits went?

I think I am up for a Belgium Waffle.


donsluck's picture

As the world's reserve currency, the Fed was obligated to re-capitalize foreign banks for their dollar denominated trash paper.

Ying-Yang's picture

"was a side effect of Fed policy, not a goal."

and YES, the FED is a bunch of DICKS

Yellen from the rooftops!

Unknown User's picture

We were lucky so far that they only made us pay for their interest.  They will be asking more soon.  And please remember that "War is Peace, Freedom is Slavery, Ignorance is Strength".  

Son of Loki's picture

It's no wonder all those Merikans are outraged and protesting in Times Square ......


... mmmm ... wait, a sec ....

insanelysane's picture

Only well known to the ZH-ers aka bearish, doomsdayer, conspiracy, crazies.

Stupidity is knowledge.

Less is more.

Government is good.

Arius's picture

there you go my man ... good for you.


love the federalies ...

Wait What's picture

It feels like I stumbled into ZH at just the time.

It was about a year ago... when conspiracy theories suddenly started becoming conspiracy facts.

Next thing I expect to hear is that Santa really doesn't slide down the chimney on christmas! oh noes!

or that bond market collateral shortages are preventing the Fed from more QE! double oh noes!!

somehow the latter case seems like it would result in far more chaos than the former.

good job, ZH.

Shaznardickleze the Doon's picture

S.A.N.T.A. (Sanctioned Anti National Terrorist Agents) kick in the front door and take your shit. Opposite of kiddo Santa. 

Arius's picture

@ safelygraze "in for a big suprise"


with all due respect i doubt it suprise for this crew ...


now the circus is playing in your town ... my guess is that this show has been playing many times in other places before ...

Thought Processor's picture






Will not end well.


(as in- dear american people- you know that money we borrowed on your behalf which your descendants will be paying back in taxes for....ever-   ya that-  well we took it and gave it to our sister banks in other countries across the atlantic who are even more corrupt than we are.  your welcome).

messymerry's picture

I don't know why everybody is getting their panties in a wad.  The United States has plenty of money to throw some pocket change to our less fortunate neighbors and friends...  

   /sarc. ;-/

Marco's picture

This is not a bail out or helping neighbours ... this is purely about supporting the dollar.

If all those dollars go into non bubble investments then that just snowballs the current account deficit. They'll cut the fund rate at the height of mania, get all those dollars into the bubble and pop it ... that's how the US has repatriated dollars and kept it's trade deficit somewhat sustainable for half a century now.

messymerry's picture

Thanks Marco,

I've looked at the global socio-economic situation six ways from Sunday and for the life of me, I cannot see a graceful way out.  Humanity has painted itself into a corner and only time will tell the whole tale. 

In the near future we will have to re-evaluate all (and I mean ALL) the paradigms that we have treated as absolute.  It should be clear to everyone that reads ZH on a regular basis that >>> man cannot rule himself <<<  We cannot and should not expect our leaders in .gov, .biz, and .effingmedia to get us out of this mess we have created with the runaway technology train.  Technologically, we are like little children with a loaded gun and we have no idea just what destruction it can wreak.  It looks for all intents and purposes that we will collectively have to learn the "hard way". 

Mankind stands on a razor's edge.  On one side is oblivion and on the other is the stars.  The decisions we make over the next twenty years will decide our ultimate fate as a species.  If we are lucky we will have a massive catharsis and the ones remaining alive will understand the importance of setting limits on our behavior.  If we do not corral fear and greed, we will not survive. 

Our best prospect for survival is to create an AI to be master over us so that we can proceed into the future.  What we need is a good Gort.



ATM's picture

When you have a system built on debt you will reach an end game when the growth of debt is no longer sustainable. We are near that point currently.

Technology has been feared as doomsday since the dawn of machines. It has always been thought to destroy livelihoods and impoverish large swaths of th epopulation but it has always done the opposite.

What you shoud really fear is what I think you are trying to advance - centralization of control. Humans have shown one thing over time, centralized power ultimately leads to death, destruction and poverty. 

Wizard of Ozman's picture

We already have a Gort, problem is he ain't so good.  The Re-evaluation will be provided with the paint. Good luck with the Fear a Greed Corral.  6.06

messymerry's picture

Thanks you guys,

You can superimpose the technology curve right on top of the population curve.  We're on the vertical part of both.  I will stand by my assertion that the real danger to humanity is our control over technology.

We have had endless cycles of elites appear and disgrace themselves.  That's what our Gort will take care of...



OBTW:  If we ever do come up with some super smart and capable robot to lord over us, we should definitely name it Gort... 

messymerry's picture

Artificial Intelligence and there is a link to the Gort article above...  ;-)

KnuckleDragger-X's picture

There is no graceful way out. Go read Mary Shelley's "Frankenstein". The story isn't about the monster but Frankstein's incredible hubris. The FED has created its own insatiable monster and the ending will be no better.

messymerry's picture

Thanks for the reply.

Actually, I do see a way out. What we need to develop is a benevolent and incorruptible AI to enforce the law. Judge Dredd meets Gort... We have at the outside 50 years to solve this problem. If not, I'm guessing we're toast as a species...

Charming Anarchist's picture

<<What we need to develop is a benevolent and incorruptible AI to enforce the law. >>

I have a better idea:  you go develop that technology and publish it on the internet. 

messymerry's picture


I'm not a coder, but the heuristics are doable... ;-)


Here's a bit more:  We have a problem with laws and we have a problem with the enforcement of same. Adding Gort to the equation takes out one variable...and what I expect we will eventually find out is that when the laws are properly enforced, we will become much much more careful about what kinds of laws we write... As an aside, this will utterly destroy elitism...

donsluck's picture

I had a high school teacher who had the opinion that strict law enforcement was what allowed the Nazis to attempt to exterminate the Jews. What you describe is a nightmare, the ultimate culmination of minimum sentencing laws. As Ghandi said, just as there are unjust people, there are unjust laws.

messymerry's picture

This is nothig more than a thought experiment.  I was clear that man cannot rule himself.  With the system I describe, the Nazis would not have been able to perpetrate the holocaust.  The unjustness occurs because man does not have the will to equitably enforce the laws.

messymerry's picture

DUDE!  That was one of the cheesiest and most MCV (Male Chauvenist Pig) movies I have ever seen.  It's so bad it's funny...  ;-)

KnuckleDragger-X's picture

yep but it had a point and the book is worth reading....

messymerry's picture

Yeah, I agree with you.  The path to our solution is narrow and full of pitfalls.  Using ZH's own motto:  On a long enough timeline, the survival rate for everyone drops to zero. 

Most thought experiments end up with advanced civilizations being rare in the universe.   Most wink out at just about this point in their historys. 

messymerry's picture

Here's another thing: TPTB are shackled by three chains. Wealth, Power, and Fame. Wealth is a golden chain, Power is a steel chain, and Fame is a silk chain. Dragging those chains, they can run, but they cannot hide... Make of this what you will. ;-D

my_nym's picture

banks are international corporations owned by who knows where .... all of them.


Mostly Jewish networks with a few shabat goyim willing to lie thrown in the mix?   Exactly which owners get bailed out and is there any ethnic tribalism in it?


I don't know.  I'm just asking, who exactly is it that formed "cabals" of insider traders or begun acting like some sort of financial Wizard of Ponzi this time? 


Beam Me Up Scotty's picture

Yes, raped is correct.  They print money of out thin air, to hand to foreigners, meanwhile that DEVALUES all of OUR hard earned dollars.  Then, gas and groceries cost MORE.  Cause and Effect.  Joe 6 Pack takes it up the ass again!!  And yet most J6P's clamor for MORE government control!!

GetZeeGold's picture



I'm blowing my whistle.....but nothing seems to be happening.

StackShinyStuff's picture

Has to be a reason Hilsy, I mean the Fed, is telling us this

SWRichmond's picture

Want the world to continue using dollars? flood the world with dollars. simple and direct.

espirit's picture

This is just a plug for the PetroDollah.

<a reminder that the world revolves around the USSA- /sarc>


Oh, and keep stacking - Beans, Boolits, Bullion.