Former Fed VP Accuses Bernanke Of Bailing Out Europe Via Currency Swaps

Tyler Durden's picture

First it was Zero Hedge. Then Ron Paul joined in. Now it is the turn of a former Dallas Fed Vice President, Gerald ODriscoll, to outright accuse the Fed of bailing out Europe courtesy of "incomprehensible" currency swaps, and implicitly accusing Bernanke of lying that he would not bail out Europe even as he has done precisely that. And not only that: by cutting the USD swap spread from OIS+100 to OIS+50, the Fed has made sure it gets paid less than ever for extended Europe the courtesy of bailing it out all over again. Incidentally, O'Driscoll says, "America's central bank, the Federal Reserve, is engaged in a bailout of
European banks. Surprisingly, its operation is largely unnoticed here.
" One thing we can say proudly - it has been noticed loud and clear here...

From the WSJ:

The Federal Reserve's Covert Bailout of Europe 

When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.

This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.

The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)

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SwingForce's picture

It won't technically be a bailout until the ECB defaults on repayment...

Hard1's picture

Would it be a bailout if the ECB defaulted had it not received the loans?

vast-dom's picture

Yet another ILLEGAL action by Bernank et. al. The only question that matters is WHEN WILL ANYONE BE CALLED OUT AND PROSECUTED? But alas, we all know the unfortunate answer to that.....outrageous really. 

BaBaBouy's picture

"Save The Beast... SAVE THE EURO"


Yes, Im sure thats The Top Priority on EVERY Americans Mind right now...

gmrpeabody's picture

"It won't technically be a bailout until the ECB defaults on repayment..."

And with the FED agreeing the a 20% haircut, it can't actually be declared a default.

vast-dom's picture

And SILVER is getting raped today!!!!!!!!





alchemystic's picture

I'm asking is this just about people shredding their paper?

ebworthen's picture

No, it is the FED sending U.S. Taxpayer $'s to European banks using sleight of hand and terminology.

Let's say I give you $100 for 130 Euros and that is an even deal or fair exchange rate. 

Then, I say I'll give you $200 for 130 Euros ad infinitum. 

Well, I'm either lending you money or giving you money outright. 

You are "giving me money" or swapping it, but you make $70 everytime we do it. 

I tell my Wife I am doing a "currency swap to provide liquidity" and not losing money.  "Yeah right" she says.

Badabing's picture

I'm asking is this just about people shredding their paper?

when you say people who do you imply?

"America's central bank, the Federal Reserve, is engaged in a bailout of
European banks.

when the WSJ spins a story the Federal Reserve implys the people or the US tax payer.

How hard will we have to work untill its easier to fight!

theMAXILOPEZpsycho's picture

Chill out, the bottom's not far away now

SheepDog-One's picture

'When will anyone be prosecuted'.

Likely never. this will end up with people hanging from street lamps.

CapitalistRock's picture

Unfortunately, it is not illegal. Depending on the judicial branch of government to protect the value of our fiat paper will ensure it all becomes toilet paper. People have no idea how much power congress gave to the federal reserve when it was created.

News flash: the fed can create all the money it wants and do with it as it pleases. Seriously. That's not a joke or exaggeration. There are no laws that protect the value of the dollars in your wallet.

Papasmurf's picture

Like any other corporation, their obligation is to the shareholders.  The will manufacture the optimum amount of money to profit in the markets.  That is just shy of what will cause them to be legislated out of existance.

FinHits's picture

SwingForce has a a good point. It does not sound very risky to Fed.

If I understand this correctly, Fed is doing secured lending: it giving $1 to ECB, receives as collateral €1 and then after 3 months or whatever, the $1 goes back to Fed and €1 back to ECB. What both do with their €1 and $1 is up to them.

ECB is easier: there is a line of banks wanting to borrow the $1 from ECB.

Fed is a bit harder, but I guess Fed could park its €1 to ECB account and earn a swanky 0.25% rate for it! ;-)

I am sure there is some sort of subsidy and possibly even open risk there, so that worry in the post is correct. What I don't understand is this: "The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made". Is this guarantee an option or forward trade fixed between ECB and FED utilising their marginal lending rates (which ones?).'

What happens with the currency movement risk if EUR-USD moves violently (sounds like Fed is covered but the other CB is not)? USD has since the arrangement strenghtened, so there could be a loss for ECB built in the trade? How will ECB cover this loss? 

blindfaith's picture

gosh...remember just a few short months ago how the euro and yuan were going to bury the dollar in trade settlements?  Where are the communist red Chinese big shots now and their talk-talk?  Let them buy the damn euro from the FED...after all they want out of our "lousy dollar" anyway.

Lets hope the FED has the inteligence to not exchange at par...that would cost us 30% plus.

IBelieveInMagic's picture

How will ECB cover this loss?

The same way, by borrowing some more. 

Iam_Silverman's picture

"How will ECB cover this loss?

The same way, by borrowing some more."


Or by printing to devalue their currency to the point the swap is a wash.

NooooB's picture

Would this not also equate to printing Eurodollars. Soaking up those extra Euros and thinning out the dollar at the same time? An effort to stabilize the EUR/USD perhaps? Markets aside, the inflationary effect would not be felt in the us right away I think?..

What happens when they raise the debt ceiling though I wonder....

RockyRacoon's picture

One must wonder where the Euros came from to "swap" to the Feds for dollars.   Could they be printing them?  Ya figger?   Where did the dollars come from to "swap" for the Euros.   Wonder what will happen when these "swaps" are settled?  Where will those Euros and Dollars end up?  Oh... so many questions.

FinHits's picture

Good questions. 

I guess as of today, €1 would be given by ECB to FED in exchange for $1.295. Three months from now, ECB would simply return those $1.295 plus that +50 bps (?) interest to Fed, and Fed would return the €1. If the exchange rate were $1.100 instead, that might not matter to them, but Fed would "win" and ECB would "lose"? Would it matter? I am not sure.

I guess at that 3 month point, they could cancel these amounts? Return it to their shareholders (US Governemnt and National Central Banks of Eurozone, Japanese Government, UK Government, Canadian Government)? Keep them and invest them somewhere?

optimator's picture

Not "From", but "Too" would answer your question.

AngryGerman's picture

Vielen Dank für das Geld, meine Amerikanischen Freunde!

GOSPLAN HERO's picture

Being cussed-out in German is worse.

BaBaBouy's picture

IMO the ENTIRE Financial System has been Hyjacked and Corrupted.


Nothing can be believed anymore.

All the purported "Money" out there is mostlly 1's and 0's in some select Banks' Hard-drives.

(IE. it's not even physical Paper Money)


So its a Banksters' Giant Computer game, played by the worlds elites.


We are headed into a Giant Financial SHIT STORM!

BalanceOrBust's picture

You are right.  It has been hijacked by those who have access to unlimited capital.  It is like playing roulette and continuously doubling down on winning bets.  This is a losing strategy for mortals.  But for banks that have unlimited access to bailouts and fresh money, it is a strategy that can win.


Corruption -- through and through.

BaBaBouy's picture



And this is how they are controlling GOLD.

Imagine, unlimmited Electronic Dollars to short Paper GOLD.


IMO the Real Value of GOLD right now is probably North of $25K.

The current CORRUPTION will not last forever...

economics1996's picture

The politicians and bankers believed their own Keynesian crap.  When you believe in fairy tales bad shit happens.

Momauguin Joe's picture

This clown Bernanke only answers to his bosses, his REAL bosses: The eight families that OWN the Federal Reserve:

"  They are the Goldman Sachs, Rockefellers, Lehmans and Kuhn Loebs of New York; the Rothschilds of Paris and London; the Warburgs of Hamburg; the Lazards of Paris; and the Israel Moses Seifs of Rome. "

Their interests in Europe and elsewhere must be protected at all costs. They pull the stings on all things financial. They are the squid.


Ying-Yang's picture

Thanks for the names. Zh needs to put the family members on its no fly list!

Ying-Yang's picture

ZHA can patdown a Rothschilds or two. Even nude scans of Rockefellers... (uuuuugly)

JPM Hater001's picture

Pretty sure these families avoid commercial airlines...I mean they own some but it's only so you won't travel with them.

YesWeKahn's picture

Don't talk about those, they would silence you for good.

wandstrasse's picture

Seien Sie beruhigt, wir können Bens Geld genauso gut verbrennen wie Ihr Amerikaner!

Irelevant's picture

Arbeit macht frei ... They just need to translate it into greek and italian.

Yikes's picture

Your welcome.  You will pay us back, won't you?

optimator's picture

In your language:  beschissen

jdelano's picture

It's worth repeating though I'm sure most everyone here knows it--the FED did bail out Year Up.  Those swaps, when implemented create new dollars (debt) at absurdly low rates.  What merits consideration at this point is Gold.  Everyone knows it should be continuing to skyrocket.  The fact that it is not means that CBS/TPTB are very adept at manipulating gold prices.  That means there really is nowhere to hide.  I'll keep my gold, but the evidence tells me it won't matter in the least.  It will not be allowed to appreciate wildly--or that is, appropriately, and if it does, it will be confiscated like it was last time around.  I think ZH, aka the Tylers, should spend a little more time thinking about the proability that gold will never be allowed to act as a true store of value.  Personally, I'm doing some hard thinking about oil and arable land.  


Who will Bernanke accuse of f'ing this whole thing up after he becomes the former chairman?

GeneMarchbanks's picture

I believe you're looking for the person who'll be in charge then. Probably Ron Paul.

Snakeeyes's picture

I testified in the House of Representatives a couple of weeks ago saying the same thing.



JPM Hater001's picture

Good man.  Press on soldier the war is only just starting.

Mercury's picture

If we don't bail out Europe the terrorists will have already won. Duh.

hedgeless_horseman's picture



So it is a win-win for, "terrorists."

GeneMarchbanks's picture


If you can, please fix that.

Pladizow's picture

America is the frog in an increasingly warm pot of water, with Bernake at the dial!