The Fed’s European “Rescue”: Another back-door US Bank / Goldman bailout?
Wednesday, November 30, 2011 at 7:53PM In the wake of chopping its Central Bank swap rates today, 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 $56 trillion in derivative exposure, or 46 to 1. JPM Chase's ratio is 44 to 1. Bank of America’s ratio is 36 to 1.
Separately Goldman happened to have lost a lot of money in Foreign Exchange derivative positions last quarter. (See Table 7.) Goldman’s loss was about equal to the total gains of the other banks, indicative of some very contrarian trade going on. In addition, Goldman has the most credit risk with respect to the capital it holds, by a factor of 3 or 4 to 1 relative to the other big banks. So did the Fed's timing have something to do with its star bank? We don't really know for sure.
Sadly, until there’s another FED audit, or FOIA request, we’re not going to know which banks are the beneficiaries of the Fed’s most recent international largesse either, nor will we know what their specific exposures are to each other, or to various European banks, or which trades are going super-badly.
But we do know from the US bailouts in phase one of the global meltdown, that providing ‘liquidity' or ‘greasing the wheels of ‘ banks in times of ‘emergency’ does absolute nothing for the Main Street Economy. Not in the US. And not in Europe. It also doesn’t fix anything, it just funds bad trades with impunity.
Reader Comments (26)
i think i love you
Nomi,
I've read much of your work and I love you more than "me" above.
That said, can you provide a link to anything explaining the 4 phases of the meltdown? Maybe it's because it's late, and I'm tired, but I can't seem to find it. Thanks.
Will you be doing a FOIA request?
Great stuff, Nomi! Please keep it coming!
Aloha Ms. Nomi: Catbird's have been following your excellent overview for Broken Trust Goldman Sack$ from off-shore Hawaii. Maybe the Government de-regulatory agencies should force testimonials from: Jon Corzine, Rham Emanuel, Robert Rubin, Larry Summers, Hank Paulson, John Paulson, Joshua Bolton, and Lloyd Blankfein and all of "The Smartest Guys [& Gals: i.e. Wendy Gramm] In The Room" colluded with the Slumlords from Harvard, Yale, and the Ivy League....In Retrospect! Mahalo....
www.kycbs.net www.vuft.org www.MarchForward.org www.ussliberty.org www.bowstring.net
Aloha Ms. Nomi: Catbird's have been following your excellent overview for Broken Trust Goldman Sack$ from off-shore Hawaii. Maybe the Government de-regulatory agencies should force testimonials from: Jon Corzine, Rham Emanuel, Robert Rubin, Larry Summers, Hank Paulson, John Paulson, Joshua Bolton, and Lloyd Blankfein and all of "The Smartest Guys [& Gals: i.e. Wendy Gramm] In The Room" colluded with the Slumlords from Harvard, Yale, and the Ivy League....In Retrospect! Mahalo....
www.kycbs.net www.vuft.org www.MarchForward.org www.ussliberty.org www.bowstring.net
Exceptionally excellent work.
Ninja - I agree - it'd be great if the government forced testimonials and delved into real investigations of all the folks involved in the wreckage, the main problem being - that in many cases, they are the government.
Mark - four phases - kind of a theme I'm developing for a book, so just mentioned here and there in pieces, like my As the World Crumbles piece for now - but Phase 1: US subprime, 2: European 3. Asian. 4. Latin America / back to US.....for similar reasons, the hunt of big Finance speculative capital and massive derivatives and other transactions looking for the hottest deal at the moment, burning it, and moving on.
Wall St.and Congress are corrupt . Greed will bring the entire system down. You have been given this voice for the sake of the people. You are doing a great job. You are an excellent messenger.
Wall St.and Congress are corrupt . Greed will bring the entire system down. You have been given this voice for the sake of the people. You are doing a great job. You are an excellent messenger.
I have stopped the TV and radio. they are cartoons at best. just propaganda. You bring the light. thank you.
Great piece . Thanks for breaking down the numbers .
It does fix something Nomi It fixes the banks so they can stay in business without which we could not stay in business. Would you prefer another depression? Everyone out of work?
The Article was great! A follow up might be, if possible, An estimate as to how many Credit Default Swaps on Sovereigns are being held by the Banks and whether that position specifically was the primary reason for the Fed actions.
It may be the FED is directly insuring for a period of time long enough to reach finished dates of the CDS positions negatively affected, if the Sovereign CDS positions default. It would be tampering with an Exchange if an Echange existed. Perhaps that why no Exchange was created.
Don Bennett, if we keep exponentially increasing the debt to pay off the exponentially increasing derivative liabilities, we're going to all be out of work and plunged into a Great Depression anyway.
Rewarding the banking class for engaging in bad business decisions and generating red ink in exponentially rising levels, will keep making the problem worse until it explodes.
Obviously the political and banking classes will do everything they can to keep the pressure building so that the final explosion is as destructive as possible.
Then we'll openly bail the bankers out again, by draining our economies and producing more unemployment. and the bankers will keep digging the hole deeper, because we reward them for maximizing their losses.
I greatly appreciate your tremendously brilliant and cogent articles and points, but ....
"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..."
Why does everybody keep leaving out Morgan Stanley??? (It must be because they are extra-sneaky???)
And for my particular thoughts on the matter:
Private banking, through their investment firms, hedge funds and various financial services, sold hundreds of trillions of dollars worth of debt, making billions and billions in profit, then when that fact became widely recognized and the LIBOR and EURIBOR froze (inter-bank lending --- not a 4% mortgage default rate as the propaganda specialists would have us believe), public monies are used to bail them out repeatedly, then they want global austerity programs to continue to fund their criminality.
Meanwhile, the Greek shipping industry pays no taxes, likewise the majority of American-based multinationals and corporations, exemplified by the major jobs offshorer, GE, whose CEO the latest Wall Street sock puppet in the White House, President Obama, appointed as his “jobs czar.”
Presently, the public is accosted by brainless twits on NPR and Fox and The Economist, the kind who are far more familiar with their stinky rectums than any actual economics or global finance --- who falsely claim the unemployment rate is falling, principally because in November 150,000 full-time jobs disappeared, while 120,000, mostly part-time and several days only-temp jobs, were “created” in November.
Now, let us really demand true change!
First, we require freedom of the press today in America. We have witnessed criminal propaganda spewing forth from the corporate media, best demonstrated by planted stories by Dick Cheney in the New York Times, dutifully written by Judy Miller (who would later go on to a high-paying position with the neocon Manhattan Institute), while Chris Hedges had to quit the very same New York Times as they refused to allow Hedges to write critically about the Iraq War perpetrated by the Bush Administration.
Next, immediately nationalize the Federal Reserve, along with the top ten banks in America, and reinstitute the financial transaction tax (which previously existed from 1914 to 1966).
And most certainly, initiate full tax recovery on the over 70% of American corporations who refuse to pay federal taxes, while repatriating that estimated $12 trillion in untaxed capital parked offshore.
Following the same pro-American worker sentiment as the US Congress once did in the 1800s with the passage of the Alien Contract Labor Law, institute laws against the chronic offshoring of American jobs and the creation of jobs offshore, instead of in America.
In other words, an end to labor arbitrage and labor deflation. (The only jobs which should be offshored are those 40,000 lobbyist jobs.)
Now every president, from the present bozo in the White House, back to Reagan, has repeated the same, exact mantra:
“Those jobs are gone and they’re never coming back.”
If their only talent is to repeat the same drivel over and over again, it’s time to offshore their useless asses as well!
Hey SD: Morgan Stanley is definitely a player, just frustratingly the OCC only breaks down details for the top 5 banks (HSBC is 5th) so it's hard to get specifics on them....
As for MSM, it's tough, even doing segments on those shows, to bring up complex points - there's a black and white that is pre-set, and most guests fit one or the other...I happen to believe people are smarter than that, given the right information with which to make their own conclusions...
The whole notion of the Fed should be that it's not the banks' bank, yet that was the notion under which it was created and still exists - it's really dangerous. I'd be uncomfortable nationalizing banks without first massively deleveraging their risks, so first do a Glass-Steagall...
Definitely on taxes..
Can you quickly explain how you got the figure of Goldman's holding 537 times as much in derivatives as it has assets? By my math its ratio of assets to derivatives is 54.5 to 1, which is still huge, but not as big as nearly 10 times that amount ...
I used the data from Table 7 of the OCC report (link in piece): the ratio of Assets to Notional Derivs in the fourth column below, the first column is the assets, the second, the Derivs notional.
But, which figures are you using?
jpm 1791060 78113753 0.022928869 43.61314138
citi 1216291 56096970 0.021681938 46.12133938
bofa 1454051 53157271 0.027353756 36.55805127
gs 88832 47736747 0.001860873 537.3823284
Those highly erroneous comments by don Bennett:
"It does fix something Nomi It fixes the banks so they can stay in business without which we could not stay in business. Would you prefer another depression? "
First, don Bennet should read my comments above, then re-read Ms. Prins' blogs on thoughts going back aways, but to summarize: the banksters peddled securitized debt to the tune of hundreds of trillions of dollars, essentially ONLY based upon billions, then when that blew up, they were given, or stole, public monies to replenish themselves, then used and continue to use public funds for their own profit --- proprietary trading, massive speculation (thus further driving up prices artificially and screwing the rest of us), and various other perfidious activities, but NOT lending it out, to bolster and increase industry of all sorts.
Everything they do today is anti-progress, anti-worker, anti-society, anti-economy; in fact, simply furthering the dismantling of what is left of the American, and various other, economies.
Don Bennett's comments are the typical specious Fox-CNN-NPR-ABC-CBS-AP propaganda bilge; self-serving for the banksters, but detrimental to the rest of us.
Ah, I see my mistake now — math was never my strong suit. Thanks for responding to such a dumb question ...
Not a dumb question at all -I tell you, when I first saw those numbers, I had to recheck them several times because I thought I was either wrong, or seeing things..
How To Trade Forex is the first question which comes to mind while talking about foreign exchange..
Nomi,
"I happen to believe people are smarter than that, given the right information with which to make their own conclusions..."
I agree, but even some of my close friends (who are certainly in the top ten percent of IQ and achievements) have said, more than once, 'David, just sit down and have a cocktail and don't be so depressing, there's nothing you or we can do' (literally!). My response is that if we KNOW what is going on, we can prepare for it (a couple of them are now in physical silver). Meanwhile, large numbers of people are more interested in X-Factor/Pop Idol/ Dancing on Ice (or whatever!) than the rape that is being perpetrated by the TBTF banks.
When I first started seeing your TV appearances I was impressed with your knowledge and integrity. Along with ZeroHedge, Chris Martenson, Joe Saluzzi (the only Twitter I follow!) and one or two others, I look forward to your updates, this article being another example of your detailed, yet very readable work.
Thank you!
DavidC
They moved the shoulder to the center of the road because multiculturali$m, and all manner of monolithic-media encouraged lefty victim-Roles are profitable to lenders who need governments in debt. It's only 'legal' for private parties to print a nation's public currency if as loans, to then loan back to the nation, for it to be owed then back to the private lender. So they need governments that "need" to do a lot of things which exceed their budgets. Governments can't print their own money. All the pleasure boats (i.e. govts.) gave away their own currencies and nation's wealth regardless of the 'forms' or other details of their 'democracies'. Thus the shoulder at the center of the road, because these are publically financed, privately owned/loaned democracies, on the u.s. model since 1913...And gone into overdrive to bring the people to their knees since 2007. (Right?)
Nice definition of Ponzi "A". For Ponzi "B" go to http://zerohedge.com/news/why-uk-trail-mf-global-collapse-may-have-apocalyptic-consequences-eurozone-canadian-banks-jeffe. I'm sure there are many others. Ponziworld. Nomi, during your tenure at the Squid...what did U know, and when did U know it?
Yes Goldman shows how risky the foreign exchange can be but price action trading can help solve this problem.