Guest Post: The Fed, ZIRP And The French Boomerang

Tyler Durden's picture

Submitted by Alex Gloy of Lighthouse Investment Management

The Fed, ZIRP and the French Boomerang

Ben Bernanke promised to sit, like an elephant, on short-term interest rates for another two years  - at least.

What were US Money Market Funds (MMF) going to do? US Treasury yields are 0.09% for 12 months, 0.02% for 6 and negative 0.01% for 3 months:

Source: Bloomberg 9/23/2011

You can’t deliver negative yields to investors (that would empty the fund pretty quickly) and you still want to charge some management fees.

Enter funding-hungry European banks.

You might be surprised to learn the following: the world’s largest bank (by assets) is – French:

Source: Global Finance, 9/7/2011

These huge collections of assets (compare to French GDP of ca. $2.1 trillion) have a bad habit: they want to be financed.

According to FitchRatings, French banks were the single largest recipient of funds from US MMF:

Source: FitchRatings, US Money Funds and European Banks, 9/23/2011

So far so good. A match made in heaven.

Then the European debt crisis intensified. Once Spanish and Italian bond yields started to peel off, a nagging thought crept onto the scene: Germany and France might have to carry the load of (yet unborn) EFSF (European Financial Stability Facility).

Credit default swaps on French government debt started to rise. This, in turn, would make French bank bailouts more difficult. French bank stocks tanked, and talk of possible nationalization added to further stress on the sovereign. A vicious cycle.

US MMF, of course, smelled the rat and began to withdraw their funding (by more than a third since the end of May):


Adding to funding worries, loans left in place are getting more and more short-term (a week or shorter):

 And this is where ZIRP (zero interest rate policy) goes full circle back to US institutions:

Source: Morgan Stanley 10-k

I am not sure what possessed MS to increase their exposure to French banks by 300% within a year (I suspect same dearth of lending opportunities given trillions of excess reserves parked at the Fed). The French engagement ($39bn) exceeds MS’s market capitalization ($26bn) by far.

Morgan Stanley’s share price has been cut in half since the beginning of the year and is now trading at less than 50% of book value. In other words: the market does not trust it’s books, or believes MS will destroy value going forward (or both).

I am not suggesting ZIRP is the only reason for problems; however, it is likely to have been an important trigger for a USD funding crisis at French banks.

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GeneMarchbanks's picture

Big banks, huh? The bigger they are...

'I am not sure what possessed MS to increase their exposure to French banks by 300% within a year (I suspect same dearth of lending opportunities given trillions of excess reserves parked at the Fed). The French engagement ($39bn) exceeds MS’s market capitalization ($26bn) by far.'

Surely you can guess, no?

Mercury's picture

Uh.....the French paper paid higher rates and as US MM rates tanked fund assets shifted more toward Europe?

falak pema's picture

loose free money, looser spending...anything goes, as too much liquidity looking for quick in-outs...

covert's picture

french bankers have always been a big part of the problem.


Irish66's picture

but MS says they hedged

BarryG's picture

Things are getting scary in Germany.

The state sponsored media is pushing a new book called "Dare Less Democracy", which explains that democracy and democratic process is a threat to Germany!

Oh regional Indian's picture

The tinder-box in Europe is Islam Vs. White. When that blows, watch out below. They are keepignit dry for some reason/time.

The rollign Burkha bans are the sparks. Riligious intolerance in Europe? In France? Sacre Bleau! In a public bus in Paris I thought I was in North Africa. Rather exotic actually. All that perfume too.

Anyways, i digress.... and there you go. Islam Vs. White.


An Upper a Downer or Three

trav7777's picture

feel free to live there instead of in the tourist magazine depiction thereof

DrunkenMonkey's picture

Dude, making generalisations based on a cursory visit is not very clever.

Oh regional Indian's picture

dude, making a statement about a cursory visit does not mean a) it was the only visit b) not imply that I may somehow be under-informed about situations.

It was a statement. is all.

But then, you are a drunken monkey.


Young Buckethead's picture

If democracy is a threat to Germany, which over 60 million people died for to achieve, and as Germany is the de facto economic head of the EU, then democracy is a threat to everyone within the EU. By extension, I must assume the arguments would apply to everyone on the planet.

This is dangerous stuff. What would the reaction be in the US if the New York Times pushed the same agenda here?

The Europeans accuse us of being soft while they are rioting in the streets over austerity cuts. They don't have a clue what would happen here if this crap was ever let loose.

This is a very serious development at a critical point in history, and cannot be ignored. Thank you very much for this post, BarryG.

LawsofPhysics's picture

A very legitimate question.  Does anyone know how many countries in Europe have anything like the second amendment?  I know Italy has a fairly high percentage of gun ownership, i mean, heck they killed off all the game in their part of the Alps a long time ago, but I don't know about the rest of europe.

I just see another wave of creditor countries worrying about being paid back.  At the end of the day, isn't this what has always lead the world into war?

Raymond Reason's picture

Gun ownership of some form is allowed in every country in Europe to my knowledge, but for instance, % of pop with guns in GB is very low.  Even Russia allows gun ownership (no handguns or full-auto), with a license, which is easy to obtain. 

Bicycle Repairman's picture

"What would the reaction be in the US if the New York Times pushed the same agenda here?"

Didn't Newsweek ask if the constitution still mattered?  The reaction in the USA was nil.

yabs's picture

strange how in most industie4s there are limits to how big you can get with anti monopoly laws but in the worlkd of finance big is ok particulalry if your faliure could bring the entire system down, all the better

Dingleberry's picture

ZIRP has caused all us to become maverick gamblers. This leverage into bullshit like France, Greece, pig bellies etc. is a consequence of that. Not the cause.

trav7777's picture

hey, feel free to go out and DO something with 0% money and earn a nice 5% ROI and be rich.

Don't you think EVERYONE wants to do that?

Where the fuck do you think your expected little coupon COMES FROM?  Do all you savings account idiots think you're ENTITLED to 6%?  Someone has to earn MORE than that to pay you your stupid coupon.

I love how everyone is a freakin jew now, DEMANDING that their money MAKE more money by virtue of existing.  The bank can't find any borrowers at the rate you think you deserve.

Soul Train's picture

makes sense. And that explains more about the contagion - gangrene - global effect, right on TD.

US MM are between a rock and a hard place.

RobotTrader's picture

Today they are buying the worst crap imaginable like MS and BAC

Al Huxley's picture

...on a dead cat bounce anticipating some kind of relief rally in the coming days. BAC could move up to 7.90 and still look like garbage.

SheepDog-One's picture

Who is this mysterious 'they' you keep reporting about Robo?

Did 'they' also go all-in long at DOW 12,800 like you did?

mendigo's picture

they long term trend seems to be set

we are due for some rebound inducing disinformation shortly (seems like a 5-7 day news cycle at this point) - someone must be trying to play the bounces on the way down

the beast is not dead - prepare to be amazed


Dick Darlington's picture

Run a news search on BBG terminal with "Christian Noyer". He's the frenchie in ECB. Go through the list and see how many times this muppet has been screaming "french banks DON'T need capital" or "it's absurd to say french banks need fresh capital".

Ladies and gents, France is "poof, it's gone". If u have anything in french banks or, well, anything that even smells like France i recommend u pull out fast.

L G Butz PhD's picture

Oh no, I bought a French gun (never fired and only dropped once). Are you saying I should drop it for the second time?

trav7777's picture

the French spearheaded the Libyan invasion...they are not pacifists like you think they are.

Bicycle Repairman's picture

If the French are so hard, then perhaps they could fight in their own weight class against say ....... Germany?

Flounder's picture

French financial problems must have been solved - The CAC40 just rallied nearly 4% in 3 hours.

buzzsaw99's picture

the bernank hoisted by his own petard. HA!

SheepDog-One's picture

'We'll give you 0% for your money....for a fee of course'.

WOW its got to be REAL bad when people are willing to PAY someone else to hold their money for a guaranteed LOSS! 


lolmao500's picture

In other news on CNBC they had a guy saying Germany was hidding 1 trillion in losses.

nope-1004's picture

Trillion here, trillion there.... no big deal.


SheepDog-One's picture

STILL at DUH 10,800 after the baked-in QE trillions were not delivered, which should put the DUH at around 9,800 at least just going by the point QE3 started pricing in every bit of bad news.

Nothing but fraud everywhere.

I am a Man I am Forty's picture

if banks aren't going to pay any interest fractional reserve banking should be shut down

LawsofPhysics's picture

Exactly what I was thinking.  The fuckers want to have the cake and eat it too.  All the smart money is junping onto the other side of the "usury" trade and the banks don't like it.  Fuck them, sounds like it is time for folks with sound money who perform their due diligence to be the "banks" for a while.

trav7777's picture

Sigh...the banks have no takers at the rates they can profitably lend.

Do you people GET THAT?  There is no MAGIC fking LAW that says you get 6% interest on your stupid savings.  You're lending the money to the bank at 6% so they can hope to aggregate and lend it to someone else at higher.  Slight problem:  THERE ARE NO TAKERS at those rates.

There is NOTHING TO DO to earn a positive ROI anymore.  This is what CONTRACTION means.  Debt growth WILL NOT occur, i.e., nobody will borrow additional dollars at a rate sufficient for you to get a stupid coupon on your goddamned savings account, in a climate of aggregate contraction.

Peak oil has shut this whole goddamned machine of compounding growth down.

yabs's picture

its Zirp that made it worse you cannot have capitlaism without capital

sudzee's picture

European TARP. Europe closes green:

Dick Darlington's picture

When listening to Salgado one would think that all is golden in Spain. Instead they have 21%+ official unemployment, almost 50% ue-rate for people under 25 yrs, massive housing bubble deflating, massive budget deficit, hidden debt, u name it they got it. And all we get is continuous DENIAL of all and every problem. Spain is toast folks. Take your money and run.

Hunch Trader's picture

Are BNP's assets MTM or MTF?