The Anatomy Of A USD-Funding Crisis And The Fed's Global Swap-Line Bailout

Tyler Durden's picture

From Philipp Bagus of,

On Tuesday, March 26, 2012, I was invited by Ron Paul and his staff to assist a meeting of the Domestic Monetary Policy and Technology Subcommittee of the House Committee on Financial Services. The title of the hearing was "Federal Reserve Aid to the Eurozone: Its Impact on the U.S. and the Dollar."

Unfortunately, Ben Bernanke had not come to the hearing, being busy with propaganda lectures in favor of the Fed. Instead, two of his colleagues, Mr. William C. Dudley (president and chief executive officer, Federal Reserve Bank of New York) and Dr. Steven B. Kamin (director, Division of International Finance, Board of Governors of the Federal Reserve System), showed up to answer the committee's questions on currency swaps with other central banks.

The hearing dealt mainly with the Fed's currency swap with the ECB, which amounts to a covert bailout of European banks.

But why did European banks need help from the Fed in the first place? European banks had borrowed dollars short term in international wholesale markets and lent these dollars for the long term to US companies or households. The maturity mismatch is highly risky, because once a bank cannot renew its short-term debts it becomes illiquid.

We approached such a situation last year. European banks had been pressured by their governments to buy their governments' debts. Italian banks are loaded with Italian government bonds, Spanish banks with Spanish bonds and so on. As the sovereign-debt crisis increased once again in the summer of 2011 with governments short of collapsing, European banks had increasing difficulties renewing their short-term dollar loans. As the ECB can only print euros, not dollars, European banks got nervous. While US banks did not want to lend to European banks anymore, in September 2011, the Fed stepped in and bailed out European banks through currency swaps. Through the swaps, the Fed assumed its role as the international lender of last resort.

During the financial crisis between 2007 and 2009, the Fed had bailed out European banks mainly through direct loans to subsidiaries in the United States. In order to conceal the bailouts, the Fed now uses mainly currency swaps. In the swap, the Fed sells dollars to the ECB and buys them back later at the same price, receiving interests. This construction resembles a dollar loan to the ECB at about 0.6 percent (0.5 percent above the federal-funds rate). The ECB can then use these dollars to lend them to troubled European banks.

At the hearing the Fed officials did not deny the obvious: the bailout of European banks by the Fed. Rather, they claimed that the bailout was basically a free lunch for US taxpayers, as they would get an almost-risk-free benefit in the form of the interest on the swap.

Further, the Fed officials maintained that the bailout was necessary because a default of European banks would cause stress in financial markets. Through the interconnectivity of financial markets, US banks would get into problems; lending to US households and companies would be affected negatively.

Lastly, they made assurances that the Fed will end the swap-bailout policy once it becomes imprudent and the costs and risks of such a policy exceed the benefits for the US public.

Let's have a look at these startling arguments.

First, there ain't no such a thing as a free lunch; not even for the Fed, the ultimate money producer. Just remember that US banks did not want to lend to European banks, because they regarded it as too risky. Even the central-bank swap is not risk free. It is true that the Fed has locked in the exchange rate and expects to get back the same amount of dollars plus interest. Yet there remains counterparty risk: what if the ECB, goes bust? Then the creditors, including the Fed, will take over the ECB's assets. Creditors would receive assets such as Greek government bonds, or loans to Portuguese banks. These banks depend on ECB liquidity lines and are collateralized by bonds issued by the Portuguese government, which also depends on the ECB to support it.

In the end, the ECB balance sheet is backed to a large extent by bonds from insolvent governments that are only kept afloat thanks to the ECB's promises to keep printing money and the pledged support of German taxpayers.

While an ECB bankruptcy does not seem imminent, the ECB has increased its capital to make good for potential losses already back in 2010, and the Bundesbank increased its provisions for losses in 2011. In the mean time, the ECB has bought even more Greek government debt. The ECB is probably one of the most highly leveraged banks in history.

Of course, the Fed hopes that eurozone governments will always recapitalize the ECB if it is necessary, so that ultimately taxpayers return the dollars to the Fed. But what if Germany leaves the eurozone? While this is unlikely in the short term, the possibility exists for the long run. Then southern European governments will default on their debts — and take their banks and the ECB down with them. Then who will pay back dollar swaps to the Fed?

The swap is also no free lunch as opportunity costs are involved. By abstaining from producing dollars and lending them to the ECB, the US-dollar money supply would be smaller and backed by better-quality assets (not indirectly by Greek government bonds). The dollar production also implies a redistribution toward the first receivers of the new dollars, the ECB, European banks, and their borrowers (mainly irresponsible and insolvent governments) to the detriments of the last receivers, mainly US citizens, who are confronted with a debased dollar.

There are other opportunity costs. The Fed could have produced the same amount of dollars and not invested in the central-bank swaps. These swaps earn very low interest. Instead of the swaps, the Fed could have purchased other assets, like stocks of Apple or gold, which may rise more in value.

One cost of the swap operation acknowledged by the officials in the hearing is the moral hazard created. Banks and governments worldwide may expect that the Fed will come to save them, too, especially if they are well connected with the US financial system. So why be prudent?

The highest cost of the swaps, though, may be something else. Through the swaps, the Fed is helping the ECB to bail out European banks that finance insolvent and irresponsible governments. The Fed is indirectly bailing out countries like Greece, Portugal, and Spain, debasing the dollar. Thanks to the bailouts, the political project of the euro continues. Without the swaps, some European banks might have failed, and with them their sovereigns. Thanks to the swaps, the eurozone stays intact.

The project of the euro leads to an ever-increasing rescue fund, and gradually toward a fiscal union and more centralization. A European financial government and the European super state, which would most likely abolish tax competition in Europe, are on the horizon. The highest cost of the Fed policy, therefore, may be liberty in Europe.

The Fed officials also made clear that they think the swap arrangement benefits the US public by keeping stress away from US banks and financial markets. The Fed does not want stock markets to fall or interest rates to increase. For them, low interest rates are the panacea for all economic ills. However, having artificially low interest rates climb back to more normal levels is no disaster. Sustainable investments are always restricted by real savings. Lowering interest rates does not increase the amount of real savings at all. Moreover, an important feature of a market economy is that people take responsibility for their actions. If US banks have granted loans to European banks and governments, they should assume the losses from their risky behavior.

Finally, the Fed claims to be prudent. But how can the Fed know the point at which it is no longer prudent to bail out foreign banks? How can it know when the costs of the bailouts start to exceed the benefits to the US public? How can they know what is best for the United States? Interpersonal-utility comparisons are arbitrary. Thanks to the bailouts, some banks may win, some stock owners may win, but at the cost of liberty in Europe and to the detriment of dollar users. Moreover, bailouts produce moral hazards, crises, and losses for individuals in the future. Yet the Fed claims to know what to do: social engineering at its best — or, as Hayek would put it, a fatal conceit on the part of central (banking) planners.

In sum, the Fed has assumed the task of bailing out the financial industry and governments worldwide by debasing the dollar. Fed officials claim to know that the bailout-swaps are basically a free lunch for US taxpayers and a prudent thing to do. Thank God the world is in such good hands.

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SheepDog-One's picture

US taxpayers are being treated to a free lunch somewhere? Seems more like regular old prison yard raping to me.

TruthInSunshine's picture



1)  The Non-Federal Reserveless Non-Bank wanders into even deeper activist waters than before, essentially autonomously expanding its charter beyond the alleged dual mandate (that's now seemingly become a global, hundred-fold mandate, but I digress - for now)  of:

a) zeee price stability, and b)  full employment  (they've been wandering so far afield from those two 'conventional' mandates since 2008, that one would think that nothing the Fed would do would surprise anymore; yet here they are with their latest mission - bailing out the European Union - something that even the European Central Bank itself can't and/or won't do!!!).


So, the Non-Fed Reserveless Non-Bank is ratcheting up what was thought to be their full retard magnum opus of conjuring from thin air roughly 5 trillion USD, injecting said fiat into the coffers of the most favored friends and associates of the FRBNY network/syndicate, and backstopping (with U.S. taxpayers as collateral) another 12 trillion in loans/debts of these fine institutions.


2) Instead of trying to outright conceal the bailout of the EU (which the Fed has learned would only provoke more interest and questions, based on recent history), the Federal Reserve sends out their Goebbels to tell the few who bother to monitor this development thus far that, and I paraphrase, that;

a) currency swaps with the ECB aren't really tantamount to any 'bailout;'  b) even if one does believe (i.e. concludes from reality) that currency swaps with the ECB are bailouts of the EU, there's  no risk to the U.S. citizenry from such bailouts/currency swaps; c) that not only is there no risk to the U.S. citizenry from such currency swap bailouts of the EU, but there's only upside benefits to be reaped by the U.S. citizenry, and finally, d)  given the Non-Fed Reserveless Non-Bank's fine track record of success in managing all matters financial, monetary and economic, given its brilliant forecasting at times past, and given its loyalty and allegiance to that which lay in the best interest of Americans, don't worry or fret, because the Non-Fed Reserveless Non-Bank has, just at times past, in order to ensure stability and order, planned ahead and implemented programs that will kick in to mitigate and then nullify any risks that do develop (even though they won't, as the Non-Fed Reserveless Non-Bank has already assured).


Good stuff.

/biggest sarc in my history of sarcs

ZerOhead's picture

If you stuff enough currency 'swaps' into the European banking system either directly or through the ECB... and it holds together... eventually, as the bankers say, you will own it all.

Benjamin Shalom Bernanke... fool or genius?

LowProfile's picture


The highest cost of the Fed policy, therefore, may be liberty in Europe.

Can someone explain this to me how this is a result?

ZerOhead's picture

Bankers & Co. end up running the show. As in 'Who elected Draghi?'

LowProfile's picture

Ah, I get it.  The LOSS of liberty. (smacks self).  thanks

Thomas's picture

You lived the American dream, saved maybe $10 million, and then get $10K annual revenue spun off from your whopping hunk of savings. Thanks, Ben.

prains's picture

broke  broker  brokerest  we've been clanging around the bottom for so long it's time to light the fuse and get some light in here

MunX's picture

A free lunch that costs $50!

Sudden Debt's picture

With a 300$ service fee

Joebloinvestor's picture

You guys think I was kidding about that statue Ben wants of himself erected in Europe.

El Oregonian's picture

It'd sure be nice to encase 'ol benny boy in that statue over there in Europe.

SwimmininNawlins's picture

Fed could have purchased other assets, like stocks of Apple  


I would prefer that they buy actual apples.

Sudden Debt's picture

Washington is sueing Apple right now for it's Ebooks

Hedgetard55's picture

An orange jump suit for life for every FED president and Chairman still living.

Sudden Debt's picture

NO jumpsuit and a little push from a hercules at 2000 feet hight.

vmromk's picture

FUCK YOU Bernanke......FUCK YOU Bernanke......FUCK YOU Bernanke !!!


Until Bernanke is hung up by his balls, the Ponzi will only end when it implodes on itself.

yabyum's picture

They had to shut down the printing press, change the oil fro 30Wt to 90WT going to be working hard.

Paul Atreides's picture

Just keep pulling physical off the market people and we will prevail.

Remember to enjoy the little things like a nice single malt from Islay or a cuban cigar or a fine piece of prime rib. Keep it classy and kick fear to the curb along with Bernanke and his Circe de Ponzi.





YesWeKahn's picture

All these guys are Goldman buddies. Do you really think that they are saving the freedom? the people?

They would laugh hard at you.

q99x2's picture

The clear logical picture that is upon us is that the FED and Banksters have no intention of ever getting paid back anything. They are printing to buy up the world at this time. Since they have the right to print as much money as needed to buy up the world. That is what they are doing. Wouldn't you?

Further anyone that buys bonds or lends to banks or keeps assets in control of banks is not being responsible.

NotApplicable's picture

It's truly laughable to hear people talk about the Fed reducing it's balance sheet, because "By God, that's what they've always done!"

Of course, back then, there were still productive environments to further expand the ponzi into. Today?

I'd bet that once the idea of GDP is dead, we will measure economies by the percentage of sovereign wealth held by their respective CBs.

theTribster's picture

I agree, especially based on the foreclosures expected this year and next (and forever basically) as well as what has already happened in places like Florida, Arizona and others (Detroit). I expect several things to happen:

1. They foreclose on people But allow them to stay on and rent the house at a lower cost, this is likely to increase as the banks become more insolvent

2. They force ALL pension funds, 401ks, 403bs, IRAs to be converted to Treasury Bills, we'll be doing our part to save the country and fight the wars against evil and terrorism (and, maybe, the Chinese).

3. Vital businesses are consolidated and nationalized where they are otherwise are not controlled

4. Local boroughs, cities, counties and all other public entities including states that have debts will be 'foreclosed on'

5. Wars will expand globally to engulf every region of the planet -- a World at War

At what point does it end? I suspect only after billions of people have died. The wealthiest entities in the world have been preparing for this and it is pretty clear we are now in the endgame. The western regimes have no choice but to act now while they still can, they know the BRICS are gaining power while the west is losing it. The military has and is expanding its presense in Asia-Pacific region - from Australia to the Phillipines.



jcaz's picture

Fuck you, Ben- even my 9 yr old understands what's really going on.....

Mr Lennon Hendrix's picture

Bernanke envoked rule 13-3 in the Fed's Charter the other day when asked if he can buy sovereign debt no matter how the Congress reads the Volker Rule to stipulate he can buy sovereign debt if need be.

narnia's picture

Even the dumbest of folks should understand that default risk applies to sovereign countries & central banks.

NotApplicable's picture

"Default" is a legal term. The legal system is owned by the CBs and the sovereigns. Laws are legal.

What exactly, is this risk of which you speak?


narnia's picture

There's form & there's substance. Some day we'll be holding a bag of shit, even if it's legally defined as roses.

NotApplicable's picture


Just think how lucky we are to have such dedicated sophists to protect us from the truth.

Koffieshop's picture

No it doesn't. Not to the Fed and ECB in the classical sense.
These kind of institutions are either abolished or make themselves redundant with hyperinflation. they NEVER go bust.
This article is bullshit.

Sudden Debt's picture

And yet, no banker got sued for this mess....

Quinvarius's picture

They did it because that was all they could do at that moment. Tbere is no plan here. This is your fat aunt jaunita falling down the stairs during a community bbq. She is just randomly grabbing stuff on the way and screaming for Jesus.

insanelysane's picture

How exactly does the FED making money help the US tax payer?  I don't remember ever getting a check from the FED. 

Also, if the FED is making money (but not printing it), doesn't that remove money from the global economy or is the FED just printing money, giving it to the ECB, and then the ECB prints money, and gives it to the FED as profit?

Things that go bump's picture

I think they call that check kiting if you do it.

Carl Spackler's picture

Supposedly, any "profit" the Fed makes from interest on T-bills used for open market operations goes back to the US Treasury.

The real question is why is the legality of this loan to the ECB (all "currency swaps" + rental payments are loans) not challenged by Congress, or is is allowed by the Federal Resere Act?

Clearly, the ECB loan poses a risk to the future value of the USD and, therefore, all Americans.

kellirose's picture

Seems like the whole monetary policy is more of a social & moral hazard issue .. I don't really think the FED or ECB really care about their citizens  ...  as y notice our freedoms are being more governed by technocarcts and bankers and y can throw in a lot of politicans which try to impose their ideology on the masses. Sorry, something has to give .. hope its not our freedom! 

yogibear's picture

Bernanke and the Federal Reserve will keep QEing/printing/devaluing to drive the value of the US dollar into the ground. Bernanke has succeeded in creating ever-esculating inflation and there are too many USDs chasing too few stocks and commodities.

Expect Benanke and the Fed to keep pumping until inflation becomes unstable and out of control. Because of deficits the Fed can't raise rates.

TruthInSunshine's picture

<- The Federal Reserve has your back

<- When did the Federal Reserve get a global 297 point mandate?

NotApplicable's picture

BTW, Tyler, it's (not .com). The link is correct though.

Edit: Wow, I just tried and ended up on a "google partner page" which is basically another front-end for content. I wonder, did the institute sign up for this service or did Google capture the 404 error and redirect?

Freebird's picture

Gold sterilisation - come on girls

newworldorder's picture

The fact is that as lender of last resort to the the whole world, the FED has assumed the mantle of Central Bank to the world. Does anyone think that other major economies such as China, India or Russia may not be bailed out when their time comes? Dream on - Our elected officials know this. The only segment that is still clueless is the American population at large.

Just keep the bread and circuses coming and all is well.

pslater's picture

The basic problem is that ALL the developed country banks are owned by the same cartel.  Benny got his instructions and did what he was told to do.  Regulatory capture is complete.  The corporations own the gov't and, at least in the financial sector, the regulators all want to work for the companies the supposedly regulate.  This, most assuredly, is not capitalism.

Clowns on Acid's picture

So "Free Lunch" means that the Dow has been artificially been kept up? That borrowing costs have been artificially been kept down?

When biflation hits (stagflation for wages, but high inflation for food and energy) there will be No Lunch.

The central planners are playing with fire. Fire will come.

tony bonn's picture

the bail out is treasonous.....americans are now on the hook to unelected financial terrorists....

not only is fed throwing good money after bad, but it is starving future economic growth through the grotesque misallocation of capital to failed banks, banksters, and governments


slewie the pi-rat's picture

this is political

the Treasury/FED blew up the global financial system

not iceland, not ireland, not greece, not italy;  we sold so much worthless, soon-t0-be-worthless, and somewhat ambiguously worthless paper financing shit to the EZ, that we just buried them in losses, too!

you know, freddie and fanny and everything else:  this shit was securitized and sold AAA

it's NW0 communism, i think, mrBagus;  just like ole johnD dreamed!  theCity = top dawggies?  the "sovereigns" just seem to be selling theirPeoples out, one after another, almost like...dominoes?

imo, we damned near took europe down w/ our frauds;  maybe that's what daBoyz wanted?

investigations were launced, but prosecutions?  then some temp or somebody over at the FBI "inadvertantly" deleted the investigatory files [but they weren't gonna prosecute, anyhow, so...]

since you were "invited" by rPaul et al one would think you understood the level of conspiratorial criminality involved in the frauds, the debts, the collections, and the ponzi schemes

the global banking cabal is now operating in the open, under the chairsatan;  all the colored fiats are fungible;  every person in the world is using paper money based on debt;  free lunches everywhere!  i can practically hear them saying:  EAT ME!

Confundido's picture

These swaps are nothing else but vendor financing to Goldman/JPM/MS/BAC, so that their counterparties don't go broke and leave them out naked.

youngandhealthy's picture

A complete bull-shit quadroupled article. 

Philip Bagus should change his family name to Bogus. 

Nonsens from the first sentence.

Danielvr's picture

Ditto. It's total and utter nonsense, as usual when Americans discuss international finance.

A swapline is just that: a swap, i.e. a *mutual* loan in different currencies. The same moment that the FED sends $500 billion to the ECB, it receives the same value in euros from the ECB. There is no counterparty risk; if the ECB should go belly up before the swap is reversed (which isn't more likely than the FED itself going off the cliff), the FED still has those hundreds of billions of euros in its possession. It might use those, for instance, to make a small downpayment on the $14 trillion that the US is still indebted to the rest of the world..

slewie the pi-rat's picture

L0L!!!  those nonsensical yanks!

yeah it is "mutual":  like when a kid needs money and promises to pay back his nanny

we carry our debt!  with fiat!  same as you   L0L!!!

you wanna cash us out?  you wanna liquidate us?  go ahead and try, but be careful, son;  your household chattel may not be worth quite what you think  Hahaha!

but perhaps we should not squabble stridently, since we're all in this NW0 wet dream of liquidity together;  comrade

p.s.:  the checks are in the mail

New World Chaos's picture

Europe will blow up and the Euro collateral will become worthless before the dollar dies, so the swaps will turn out to be money pissed down yet another bailout rathole.  This is a key part of the European banking families' plot to loot America.  This has been the plan ever since the families created their Fed puppet.  Even if the swap was dollar for dollar, a low-interest loan might as well be a gift if the central bank is debauching the currency by making exponentially increasing amounts of such loans.