Will The Fed Buy EFSF Bonds?

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

EFSF, We Hardly Knew Ye...

EFSF is supposedly going to have trouble getting even 2:1 leverage!  Yes, that should have been obvious to everyone.  We have tried to explain why non of the leverage ideas would work.  We even took the step of trying to make it work and showing how many problems there were.  Leveraged EFSF has always been a figment of the imagination of some politicians who had just enough finance knowledge to be dangerous.

Eurobonds, another impossible dream, seemed to have finally been shelved by Merkel.  Again, they sounded great, but were totally unworkable.

Europe has consistently waited too long to do anything, and while they were busy trying to figure out how to leverage EFSF (in spite of virtually every non sycophantic structured credit analyst said wouldn't work) the market has deteriorated.  A few weeks ago, investors barely wanted EFSF bonds. Now the market barely wants German and French debt. 

It is time to face facts.  I think there is a solution to the financial war in Europe.  It isn't pleasant, particularly if you are a mediocre bank, but it may work.  In the meantime, Europe needs to do something to calm the markets so they can spend a month preparing for orderly chaos in Europe.

The EFSF should announce bonds sales to the Fed.  The Fed should purchase 200 billion Eur of EFSF bonds today.  They should commit to further purchases of 100 billion in Q1 and Q2 next year.  The Fed has been dying to do some quantitative easing and has been looking for a liquidity crisis in need of some liquidity.  It has also been looking (quietly) for ways to keep the dollar weaker. 

I'm willing to say that EFSF is more of a liquidity problem than a solvency problem.  There is limited capital available, and what is out there is not looking for even relatively safe European bonds.  I don't think France is "AAA" but I also don't see default as anything but a remote possibility for them, so I will view EFSF's inability to raise money (and there is no way they get to even 440 billion Eur) in this market as a liquidity event.  The EFSF should skip dreaming about a trillion.  440 billion Eur doesn't solve anything, but it can buy 3-6 months at a minimum to keep the markets somewhat stable so a real plan can be put in place.

I am not sure the EFSF wants to do something this simple, but they need to look at the facts and accept the reality that they can barely issue, let alone leverage up.  This would give them 200 billion immediately and give the market comfort that they will get their hands on the additional 200 billion as PIIGS bonds mature.  400 billion of fresh new money should be enough to plug some holes while Merkozy and the technocrats finally try and work out some painful, but realistic solutions to the problem.

I am not sure the Fed could buy EFSF bonds, but Ben seems to have fewer restrictions than any other entity on the planet.  One of the guests that I was on with at Bloomberg TV mentioned that "the Fed wants to print if the market has a sleepless night".  US stocks are down about 10% from the "close your eyes and pretend it works" rally of October 27th.  Could the Fed use that as a way to get involved in Europe?  If they buy the EFSF bonds, it should stabilize the US stock market for a bit.  It is less risky than buying stocks or HY bonds, which might have a more direct impact on stocks, but are more of a mandate stretch.  They can buy mortgages, but seriously, what will that do?  I think they could justify buying EFSF bonds (at low yields) in an effort to promote market stability and hence employment, and if they do it in Euro's the combination of "printing" and "buying euros with that newly printed money" should put a lot of pressure on the dollar.  In spite of the inflationary risks associated with that, Ben wants the dollar weak so exports can be helped.

While doing this, the IMF should announce that they will take over all the previously agreed to bailouts of Ireland, Portugal, and Greece.  The IMF should be able to do it - they seem to have enough SDR's and guarantees to do it.  Rather than calling on money from their members, they should issue bonds and have the ECB buy them.  The ECB can buy the IMF bonds.  This shouldn't be too negative for the currency because the Fed actions would more than offset this printing.  The IMF can then take care of all the previously agreed plans to those 3 countries, giving the EFSF more flexibility with its 400 billion of fresh money.

I think this is very simple and can only be used to buy time, but the Fed, ECB, and IMF would all be involved showing co-ordination that everyone seems to like.  It wouldn't put pressure on the secondary bond market since they aren't really issuing and therefore aren't putting more strain on banks' already stretched balance sheets.  It also seems to be less of a mandate stretch than many other solutions I have read.  The IMF saves countries, the Fed does QE, and the ECB does something (ok, the ECB role is less clear, but that has been true from the start of this).

If you could figure out a way for China to play, or China and Russia, the plan would have even more credibility and might buy a few more months.  Maybe China would commit buying EFSF bonds - regular bonds, not the leveraged ones that the EFSF couldn't even bother to do a term sheet for.  On a side note, several EFSF members should be fired, replaced or demoted, for their performance.  Trying to raise money on something so complex without even a pitch-book is just pathetic and would not be condoned at even the worst run investment bank.

Anyways, it is not a "Grand Plan" but I think would buy time to put in a real solution.

It may be a good time for Greece or the ECB to remind banks that even on Euroclear, bond payments can be made to specific holders and don't have to go out to all holders - it would be default, but banks don't hold all the cards.


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knukles's picture

Stop it you guys! 
Don't give them any more bright ideas.

GeneMarchbanks's picture

Ask Peter how this 'plan' helps deal with the solvency issue since this is clearly another liquidity solution? Also, will there be Unintended Consequences? 

GetZeeGold's picture



Sooooooo....basically the US taxpayer should bailout Euroland.


That's full tilt retard there.


Our ancestors crossed an ocean to get away from those guys.....and that was a really long time ago.

living on the edge's picture

The Fed needs to stay the fuck out and better yet needs shut down. There should not be a private entity with access to taxpayer funds that could even contemplate this ridiculous idea of a bailout/fuck the US citizens. The US taxpayer does not need to finance Europe.

The solution for Europe is simple. Default... 

Gief Gold Plox's picture

Default? Like Greece? Sure... will they allow it next time around and will it be a credit event? You know, i'm starting to see a method to this insanity. Hm... does that make me qoo-qoo?

hedgeless_horseman's picture



Ah yes, not suprising to see more synchronized diving.  When these purchases occur, my kinky fantasy is that the Fed books the EFSF purchase as an expense (gifts) rather than as assets, because they will NEVER be paid off.  Rolled, sure.  Paid off, never.  

Rename it the LEFSF (Long Emergency Fake Solvency Fund).

IBelieveInMagic's picture

You folks are operating under the false presumption that the current global financial system is not to the advantage of the US. You are completely wrong on this front!  Net, net it is hugely advantageous to the US (the distribution of the spoils is a different matter).

The US Fed is going to, at the end, do whatever it takes to support the current arrangement. Period!   

Harlequin001's picture

The Fed knows that a euro collapse will undoubtedly send a great deal of this cash money into commodities and if that happens it is the end of the line.

It will buy because it must...

samslaught's picture

The ECB won't print money because they know the FED has to.  The credit event will hit us just as hard as it hits Europe.  To say this is a European crisis is missing the point.  This is a global crisis and worse yet for the US is that the EURO actually has less flaws than the dollar (no mandate for full employment for 1 nation and hasn't defaulted twice on gold) and will most likely replace it as the dominant reserve currency if TSHTF.

The current system has been great for the US, funny that now that the FED is trying to save this advantageous system because of the failure of American politicians, the American people are screaming at them to stop.

DocinPA's picture

Better yet, balance your effing budgets and pay your bills.  Then you won't need the ECB, IMF, Teh Bernank or anybody else.  Morons.

cranky-old-geezer's picture



There should not be a private entity with access to taxpayer funds ...

More accurately, the Fed is a private institution that can tap people's wealth and loan it to whomever they want.

Non-redeemable paper currency like the US dollar is a simple easy way to take people's wealth without permission. Simply by printing more currency the Fed grabs a little of your wealth and my wealth and everybody's wealth and loans it to someone.

Why is the Fed taking a little of your wealth and my wealth and everybody's wealth? Because printing more dollars increases the amount of dollars in circulation (inflation), reducing the value of dollars in your pocket, my pocket, everybody's pocket.

Banks don't create wealth. Banks merely borrow wealth from others and loan it out at interest.

In a gold redeemable currency where banks can't print more currency at will, wealth is borrowed from others and they earn a small amount of interest on it.

In a non-redeemable currency like the US dollar where banks can print more currency at will, they don't have to borrow people's wealth and pay interest on it. They can take it. Without permission, without people even realizing it.

THAT is why central banks hate redeemable currency and insist on non-redeemable currency. It allows them to take people's wealth without asking, without people even realizing it, because they take a tiny about from everybody using that currency. The theft is equally distributed among everybody using that currency.

And yes it is theft. Because the wealth is never given back.

Giving the wealth back requires the Fed to bring those dollars back in and take them out of circulation, reducing the amount of dollars in circulation (deflation), increasing the value of dollars in your pocket, my pocket, everybody's pocket.

When has the Fed ever reduced the amount of dollars in circulation, increasing their value?

Actually it has happened occasionally. Decades ago.

But over the 98 years of the Fed's existence the amount of dollars in circulation has grown steadily, and in the past three years has grown rapidly. It's why the US dollar has lost 1/3 of its value since '08.

samslaught's picture

you can redeem your dollars for gold any time you want.  The FED isn't stealing your wealth.  They are debasing a medium of exchange.  You are only losing wealth if you are using that medium of exchange as a store of value.  A historically foolish thing to do.  In fact they have gone one further for you.  They have maintained an artificially high value for our dollars allowing you to purchase vast quantities of other people's stuff, including gold, for a big discount.

i-dog's picture

Just to show you that they harbour no bad feelings for your ancestors running away from them (and beating them in a revolutionary war), they are now willing to forgive you and let you send them some money ... errr, LOTS of money.

LawsofPhysics's picture

Fair enough, but you forgot the bit about this "all being orchestrated by the banking families/class".  Follow the interest on the debt and who ultimately holds the debt, it all leads to the same few.  They have burnt Europe to the ground before, and they will be all too happy to do it again (along with every single other indebted country that has any sort of valuable physical assets or resources.  The real masters of the world, who are sitting on the other side of all this debt (collecting interest - money for nothing), are very much aware of the laws of Nature and physics and just what the growth limitations are.  They will give humanity a choice, lower your standard of living or kill each other until our growth model starts working again.  The only question that really remains is will history repeat itself or will the world wake up to collectively realize that no agency or institution can guaranty anything regarding your quality of life (especially if you make stupid choices) and work together to throw off the chains of debt?

As optimistic as I would like to be, 6000+ years of human history would suggest otherwise. 

oogs66's picture

yeah, but we sent our young there to die to save them from themselves in 1944

SheepDog-One's picture

Peter figured it out...US bail out Euro...

Man, everyones minds are snapping. 

ISEEIT's picture

So I admit that I read his article at 'stupid' speed and maybe didn't comprehend it, but the impression I have is that he is speculating on a POSSIBLE move? Not ADVOCATING for the move?

I don't really see his move taking place. It does seem that fear is desired right now and cooperation between the western and eastern axis is not so likely. China & Russia stepping in to participate in the can kicking exercise that would allow Europe more rope while supporting obaumma's reelection?

If it does happen we are quite truly fucked.

The Limerick King's picture



The FED has no choice but to buy

The Euro contagion is nigh

The will buy with both fists

Using QE and Twists

These Elites are unwilling to die

GetZeeGold's picture



Let the elites die......they're not really elite to begin with.

Stop bailing them out.

Let the fail ensue.

i-dog's picture

They are a bunch of religious zealots and should be exterminated to prevent them [in]breeding further!

GetZeeGold's picture


Never bring up extermination where Europe is involved.....that's just poor form there.

The Limerick King's picture

I must apologize for broaching this topic.....I was a little too quick on the rhyme.  I don't advocate violence in any form. I meant it as a metaphor for the "system" that allows for the misappropriation of wealth through deep regulatory and political capture. In a just society, both the rich and the poor get richer together....this has not been the case for the past 30 years.

Normally I would edit this type of faux pas, but the replies won't allow me to do this....perhaps Tyler could have some new code written to enable this?

Hulk's picture

I agree entirely LK, that is, with your Limerick. OFF WITH THEIR FUCKING HEADS !!!

GetZeeGold's picture



Yup....right after we note that you are one of them.

APC's picture

Apology accepted!  Dang, well said your highness.

ISEEIT's picture

Perhaps you could pay for that?

Just 1/2 kidding.

Good comments.


JungleJim's picture

Of course not, it's much better to slowly strangle the honest working population.

knukles's picture

Gene!  I was gonna ask exactly that, but we must restrain ourselves, for MDB as arisen to bless us with wit and wisdon.  I shall defer accordingly.
(But of course it is all merely monetization wrapped in the guise of sophisticated financial engineering salving the hubris of evil.)

donsluck's picture

I think you missed the point. It's a prediction of a possible response to the Euro crises which, I think, could happen. It's not an attempt at offering a true solution.

LynRobison's picture

Discussions of potential "solutions" are completely irrelevant. No one who reads ZH gets to decide any of this. The powers that be, the cabal, the power elite, they are the ones who are deciding what will happen. Now that everyone and every institution is deeply in debt, and now that the cabal owns that debt, they are going to intentionally crash the financial and monetary system to destroy everyone's ability to pay those debts. Then the cabal will own everything. In the wake of the destruction of the Euro and the Dollar, the cabal will come out with a world currency, and they will be the Lords of the entire world. We will have a feudal system with the cabal at the top.

MillionDollarBonus_'s picture

Give them bright ideas? As if doomer redneck day traders could give economic advice to top Ivy League economics grads at the Federal Reserve? I have long been an advocate of this policy, and i am confident that Dr Bernanke will come around because the EFSF needs help. Many of our financial institutions have exposure to EU sovereign debt, including some of our PRIMARY DEALERS. These institutions must be protected AT ALL COSTS because they are vital to American prosperity and freedom.

Gief Gold Plox's picture

Wouldn't be funny if it wasn't true.

Oh wait! But, I'd really really like to see what ISDA manages to pull out of it's ass when the next EU country defaults. "Voluntary under threat of nuclear fallout" comes to mind.

dcb's picture

you have it so right except for one word:

Many of our financial institutions have exposure to EU sovereign debt, including some of our PRIMARY DEALERS. These institutions must be protected  destroyed AT ALL COSTS because they are it is vital to American prosperity and freedom.

imaginalis's picture

Top Ivy League economics grads are well trained to follow instructions in herd like fashion. 

GetZeeGold's picture


Paul Krugman......former Enron economic advisor. Should definitely listen to him......Google it if you don't believe me.

paint it red call it hell's picture

i remind everyone, ivy leaguers brought us this mess.

thank you sir, may i have another??????

itstippy's picture

Precisely, Mr. Million Dollar Bonus. Our Primary Dealers are the bulwarks of Truth, Justice, and the American Way; they must be protected at all costs. American economic health and growth is entirely dependant on the health and growth of our Primary Dealers.  They MUST remain robust and firmly in exponential growth mode.

I would, however, argue that it is outside of the Federal Reserve's mandate to purchase EFSF bonds.  It is clearly the U.S. Defense Department's domain, being a matter of National Security.

MillionDollarBonus_'s picture

"I would, however, argue that it is outside of the Federal Reserve's mandate to purchase EFSF bonds.  It is clearly the U.S. Defense Department's domain, being a matter of National Security."

I appreciate your perspective, and I agree that it is certainly a matter of national security. But the MF Global incident shows that a Primary Dealer bankruptcy can have a significant influence on price stability and hence I believe this issue is firmly within our Federal reserve's dual mandate.

i-dog's picture

"MF Global incident ...... influence on price stability"

That's just conjecture. One bad apple. Won't happen again. Next time will be different.

itstippy's picture

Your point about the unfortunate MF Global incident's impact on price stability is well taken; I had overlooked that important aspect.  My bad, and I see why you earn 7-figure bonuses.

The MF Global issue is not yet resolved, but it's in good hands and an equitable ending is not in doubt.  Since the price stability concerns are domestic in natuie, clearly intervention by the Federal Reserve and/or Department Of Homeland Security would be both desirable and fully justified.  

i-dog's picture

Good point. Maybe some TSA groping through Corzine's pockets may turn up a few hundred billion of the "mislaid" funds?

JungleJim's picture

Then by your own reasoning and the Patriot Act, they are Terrorists and can be prosecuted. maybe even executed !

donsluck's picture

I noticed your use of the word "incident" when you actually meant "heist".

XitSam's picture

"I would, however, argue that it is outside of the Federal Reserve's mandate to purchase EFSF bonds."

And when has the Fed actually concerned itself with its Congressional mandate?

TuborgGold's picture

At ALL COSTS includes the bankruptcy of the nation while the ivy league geniuses get tens of millions in compensation for running the whole system into the ground.  there is no more american prosperity and freedom.   we are slaves to this system and  the sooner the whole thing burns down the better.