Guest Post: The Fed’s European “Rescue”: Another Back-Door US Bank / Goldman bailout?

Tyler Durden's picture

Submitted by Nomi Prins, former Goldman Sachs Managing Director

Guest Post: The Fed’s European “Rescue”: Another Back-Door US Bank / Goldman bailout?

In the wake of chopping its Central Bank swap rates, the Fed has been called a bunch of names: a hero for slugging the big bailout bat in the ninth inning, and a villain for printing money to help Europe at the expense of the US. Neither depiction is right.

The Fed is merely continuing its unfettered brand of bailout-economics, promoted with heightened intensity recently by President Obama and Treasury Secretary, Tim Geithner in the wake of Germany not playing bailout-ball.  Recall, a couple years ago, it was a uniquely American brand of BIG bailouts that the Fed adopted in creating $7.7 trillion of bank subsidies that ran the gamut from back-door AIG bailouts (some of which went to US / some to European banks that deal with those same US banks), to the purchasing of mortgage-backed–securities, to near zero-rate loans (for banks).

Similarly, today’s move was also about protecting US banks from losses – self inflicted by dangerous derivatives-chain trades, again with each other, and with European banks.

Before getting into the timing of the Fed’s god-father actions, let’s discuss its two kinds of swaps (jargon alert - a swap is a trade between two parties for some time period – you swap me a sweater for a hat because I’m cold, when I’m warmer, we’ll swap back). The Fed had both of these kinds of swaps set up and ready-to-go in the form of : dollar liquidity swap lines and foreign currency liquidity swap lines. Both are administered through Wall Street's staunchest ally, and Tim Geithner's old stomping ground, the New York Fed.

The dollar swap lines give foreign central banks the ability to borrow dollars against their currency, use them for whatever they want - like to shore up bets made by European banks that went wrong, and at a later date, return them. A ‘temporary dollar liquidity swap arrangement” with 14 foreign central banks was available between December 12, 2007 (several months before Bear Stearn’s collapse and 9 months before the Lehman Brothers’ bankruptcy that scared Goldman Sachs and Morgan Stanley into getting the Fed’s instant permission to become bank holding companies, and thus gain access to any Feds subsidies.)

Those dollar-swap lines ended on February 1, 2010. BUT – three months later, they were back on, but this time the FOMC re-authorized dollar liquidity swap lines with only 5 central banks through January 2011. BUT – on December 21, 2010 – the FOMC extended the lines through August 1, 2011. THEN– on June 29th, 2011, these lines were extended through August 1, 2012.  AND NOW – though already available, they were announced with save-the-day fanfare as if they were just considered.

Then, there are the sneakily-dubbed “foreign currency liquidity swap” lines, which, as per the Fed's own words, provide "foreign currency-denominated liquidity to US banks.” (Italics mine.) In other words, let US banks play with foreign bonds.

These were originally used with 4 foreign banks on April, 2009  and expired on February 1, 2010. Until they were resurrected today, November 30, 2011, with foreign currency swap arrangements between the Fed, Bank of Canada, Bank of England, Bank of Japan. Swiss National Bank and the European Central Bank.

They are to remain in place until February 1, 2013, longer than the original time period for which they were available during phase one of the global bank-led meltdown, the US phase. (For those following my work, we are in phase two of four, the European phase.)

That’s a lot  of jargon, but keep these two things in mind: 1) these lines, by the Fed’s own words, are to provide help to US banks. and 2) they are open ended.

There are other reasons that have been thrown up as to why the Fed acted now – like, a European bank was about to fail. But, that rumor was around in the summer and nothing happened. Also, dozens of European banks have been downgraded, and several failed stress tests. Nothing. The Fed didn’t step in when it was just Greece –or Ireland  - or when there were rampant ‘contagion’ fears, and Italian bonds started trading above 7%, rising unabated despite the trick of former Goldman Sachs International advisor Mario Monti replacing former Prime Minister, Silvio Berlusconi’s with his promises of fiscally conservative actions (read: austerity measures) to come.

Perhaps at that point, Goldman thought they had it all under control, but Germany's bailout-resistence was still a thorn, which is why its bonds got hammered in the last auction, proving that big Finance will get what it wants, no matter how dirty it needs to play.  Nothing from the Fed, except a small increase in funding to the IMF.

Rating agency, Moody’s  announced it was looking at possibly downgrading 87 European banks. Still the Fed waited with open lines. And then, S&P downgraded the US banks again, including Goldman ,making their own financing costs more expensive and the funding of their seismic derivatives positions more tenuous. The Fed found the right moment. Bingo.

Now, consider this: the top four US banks (JPM Chase, Citibank, Bank of America and Goldman Sachs) control nearly 95% of the US derivatives market, which has grown by 20% since last year to  $235 trillion. That figure is a third of all global derivatives of $707 trillion (up from $601 trillion in December, 2010 and $583 trillion mid-year 2010. )

Breaking that down:  JPM Chase holds 11% of the world’s derivative exposure, Citibank, Bank of America, and Goldman comprise about 7% each. But, Goldman has something the others don’t – a lot fewer assets beneath its derivatives stockpile. It has 537 times as many (from 440 times last year) derivatives as assets. Think of a 537 story skyscraper on a one story see-saw. Goldman has $88 billon in assets, and $48 trillion in notional derivatives exposure. This is by FAR the highest ratio of derivatives to assets of any so-called bank backed by a government. The next highest ratio belongs to Citibank with $1.2 trillion in assets and $56 trillion in derivative exposure, or 46 to 1. JPM Chase's ratio is 44 to 1. Bank of America’s ratio is 36 to 1.  

Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital  it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure. 

Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.

But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.

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jdelano's picture

Actually no, you're wrong.  It is one hundred percent right to critisize the fed as "a villain for printing money to help Europe at the expense of the US."  One simply needs to make a minor clarification:

"a villain for printing money to help Europe at the expense of the US. taxpayer."  


And btw, Goldie, go f yourself.  

LeBalance's picture

so when "greece" was bailed out, who got the money, greece?

or the banks?


so the point of the article was to make that distinction.

now that the nationalist trigger is closer to home some seem to miss the similarity in Modus Operandi.

ratso's picture

Tyler - there seems to be a recurrent theme over the long perod of time here.

The Fed aka Bernanke is a nefarious machine that is devoted to syphoning off tax payer dollars to prop up criminal bankers and their proxies.  Have I got it right?

I don't think so.  There is true liquidity problem in the EU which has siginifcant impact on our financial system. Adding liquidity to the system is an necessity right now.

redpill's picture

Just like an alcoholic has a true liquidity problem when his glass is empty.

ratso's picture

Your simplistic answer to a complicated problem may by satisfying but not helpful - much like your alcoholic methaphor.

redpill's picture

Denial is a symptom of alcoholism as well.

Often times people attempt to make things complicated when they don't like the simple answer.

ratso's picture

I suspect that you may not a lot more about the usefulness of denial then I do - I applaud you for at least having that.

redpill's picture

I read that several times and it still makes absolutely no sense at all.


My rectum hurts from all these "backdoor bailouts".

CharlieSDT's picture

He left out the work "know".

ratso's picture

It should have read - I suspect that you may know a lot more about denial than I do - I applaud you for at least having that.

It wouldn't have taken much to infer that content.

MsCreant's picture

A bunch of folks are hitting red pill's up counter that they did not understand it either. Instead of admitting you are wrong, or apologizing, you decide to criticize them for their inability to cipher your post. 

You look like the one in denial.

ratso's picture

I do apologize for my assumption. Thanks for bringing it to my attention

However, I don't think that they are hitting red pill for my bad typing. They probably just agree with his position.  And, that's fine too.

redpill's picture

More specifically I think they disagree with yours, and I happen to be the one arguing with you.

Al Gorerhythm's picture

A more apt person (pseudonym wise) to forward the position is yet to be found. Keep at it, redpill. Remember, Ratso's position is the same one we were all hoodwinked into thinking was fair to all players, the "normal" or "sane" path. Ratso, open your eyes. That maze you are following may lead you to to a food reward, but that chunk of cheese that they used to attract you ........ is not resting on a dinner plate.

jeff montanye's picture

and also remember, unlike ratso's claim, it isn't a matter of lack of liquidity, it is a lack of solvency.  like japan for decades.  for more detail, please see and associated articles.

WhiteNight123129's picture

You happen to be both correct in fact. On one hand we can not afford to have the checks stop clearing or the whole economy suffers immediately (ratso point), while on the other hand printing money and/or providing liquidity endlessly ensures of a catastrophe later. So that is a classical short-termist versus long-termism dilemma. Well shall not have a catastrophe now (ratso is right), but on the other we we are sure to have a catastrophe later (redpill is right). What do we do? Fuck it let´s spend, drink and smoke like there is no tomorrow (the consumers´s spending binge on Thanksgiving is a lot wiser than it seems...)


Al Gorerhythm's picture

@ Ratso.

RP calls you out as being in denial and you counter that he is in greater denial. Scintillating.

No prizes for coming second in a two horse race, ratso.

Dr. Richard Head's picture

I think the liquidity problem is that the banks have drained the well of the Globe's savings/pensions/investments/homes/wages.  Well is dry bitchez......

catacl1sm's picture

C'mon, just ONE more glass and then I'll quite. I SWEAR!

adr's picture

Ratso it's very simple. The banks have a liquidity problem because they have been plowing trillions of dollars into the world markets expecting to unload the stocks to the citizen patsy who will be left holding the bag. Citizen patsy holds a worthless stock certificate, bank gets citizen's money which goes into the bank coffer, voila profit.

The banks don't realize that citizen patsy can't buy stocks this time around because they are all broke and those who aren't just ain't falling for it this time.

Because the banksters only know the ponzi game they think the more they pump up stocks the more the citizen pansy will want to join the game allowing them their exit point. Because the money given to the banks is all tied up in securities, stocks, commodity contracts, derivative swaps, etc that they can't unload there is a liquidity problem even though unprecedented amounts of liquidity have been pumped into the system.

Again its not a liquidity problem its a solvency problem. There is nowhere to unload the garbage on the balance sheet because nobody can actually afford to buy it. Get it now?

whstlblwr's picture

Why do you guys respond to idiot? He's fake.

MFL8240's picture

Send them your money if you are concerned with their liquidity.

Kickaha's picture

Oh, I agree that the EU has a "liquidity problem".  But I think you and I would disagree as to the definition of "liquidity problem".

Somebody has a "liquidity problem" when they are hopelessly in debt and cannot find anybody so fucking, hopelessly, stupidly retarded enough to loan them more money.

Of course, nowadays, TBTF banks and sovereigns with liquidity problems just go and get some freshly printed dollars from the Bernank.

11b40's picture

You want to know what is really required right now, and is, in fact, about 3 years past due?  Nationalizing these too big to fail monsters and breaking them up into little pieces, that's what.  Let's see just how those new Dodd-Frank rules work.

And at the same time, dig the fangs of these vampires out of the neck of the US Treasury by bringing back a stricter version of Glass-Stegall and repealing Gramm Leech Bliley - "Financial Services Modernization Act" my ass.

Cadavre's picture

The fear is that the Euro falls against the USD and the finality that will render US Equity Indexes back to the reality of absolute worthlessness.

The FED is engaged in market manipulation - wanna call it "back dooring" - go ahead - but it nothing more than market manipulation - pure and simple. The more the USD print, the higher the US equity print. And less the likelihood a big fat righteous collateral call will force the Gypsies running the 3 card monte kiosks to take the "last flight" from the roofs of them overly compensatory tinsel power towers (hate mushy meat - prefer it firm on the spit with bones intact).

It's a backdoor bailout - for sure - but it's purpose is to inflate US equity indexes - and datz all it intended to do.

Is there [like?] some little magical Arc these neutered queens believe will deliver them to an imagined "Never Never Land" promised by indoctrinated dominion heresies momma used to whisper in their ears at night so they wouldn't wet the bed (again)?

Better to jump and accept being memorialized as a pilgrimage urinal, Avoids a whole bunch of other really nassity metaphors fate has historically dealt victims of acute gangster genetic syndrome (aka: the old "i am divinely ordained" sickness).


riley martini's picture

 The liqudity problem is from bad bets made by greedy fascist banksters . Bens solution is to transfer the loss onto backs of the American people and pretend they did something brilliant . Bonuses for banksters bribes for fascist politicians and the bill to the proles .

LeBalance's picture

Europe / US.

Them / US

Divide and Conquer.

old game.

GeneMarchbanks's picture

Nice stuff by Nomi.

hedgeless_horseman's picture



Outstanding, Nomi.  Nice to read something that makes sense.  Thank you.

GeneMarchbanks's picture

'But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.'

Great closing paragraph. This is all about 'psychology'. The half-life of these actions is debatable but I see no reason why this should change anything in Europe at least.

Smiddywesson's picture

All of their actions are to stall while they ready the lifeboats (gold)

whstlblwr's picture

"does noting for Main Street Economy."

This is problem with Fed, it rewards bad behavior and then it hurts public. It does do something to Main Street, it makes them out to thinking everything okay. Does it reward prudent savers who avoid bubbles? No, these fuckers need to go to jail.

DaveyJones's picture

this is all about forensic psychology.

It doesn't fix main street because it doesn't serve main street.  

We should get on the FOIA

MolotovCockhead's picture

What the point of bailing out the Banksters when all they do are to raise there stakes at the gambling table! No way you can help solve the problem of a compulsive gambler who do not admit that has a gambling problem.

Don Birnam's picture

"[F]und[ing] bad trades with impunity."

...Yet another mandate which ought be incorporated into the Fed's charter, "By Act of Congress."

A thoughtful piece, Nomi.

Ted K's picture

Nomi Prins rocks.  ZH would be fortunate to have her as a regular post if that's what she wants.  Very few females have a mind that sharp on financial matters. Plus she has a rockin' body.

Smiddywesson's picture

Indeed, Nomi just made the A list.

Smiddywesson's picture

Doubly so because of the picture.  :-)

Dr. Richard Head's picture

I have such a crush on Nomi.  Intelligence, beautiful, and using her knowledge from the inside to help break us all out of this debt peonage, fiat enslavement circle jerk.

I'd give up a good pile of my gold and silver to spend a night with her....talking of course.

Deadpool's picture

this is just an update and recap of what Reggie has been saying for years. Goldman over leveraged and gonna die taking us (system) with it.

CharlieSDT's picture

And she's quite hot as well as brilliant.

redpill's picture

The only reason "Europe matters" is because of US bank exposure to European debt.

Ralph Spoilsport's picture

The big question is why do they keep increasing the exposure to European debt? We're missing something here.

redpill's picture

The international banking interests/globalists/madmen would love nothing more than to further combine and intermingle the debt liabilities of all countries.  This ensures the debt service continues indefinitely for all areas as it becomes an all-or-nothing proposition and they figure the majority of the sheeple will elect to continue the status quo (which they will).  If exposure remained compartmentalized, then there is the temptation to think that default of some compartments is an answer (which it is) because its impacts would be limited, unpayable debt could be discharged, and a new beginning would be possible.  But that's the last thing they want.  Iceland is the nightmare situation for them and they don't want to see it again.  They want to ensure the entire western world is successfully transformed into a tightly fenced milking cow that does nothing but eat, shit, and pay interest.  Complete control.


DaveyJones's picture

Iceland is giving them nightmares because the people aren't asleep. We must wake up and realize that we can't remove the bankers without removing their elected servants. Both parties must be destoyed.

GeneMarchbanks's picture

Empires usually collapse first at the periphery. What else are they going to do? Invest in Brazil? This is a confidence game. Double down to keep the dream alive. Only now we've got a nightmare.