Ok, let me back up a bit and explain this latest attack. Let’s start with this video from Dylan Ratigan:
Coordinated Central Bank EU Bailouts
(If you’re pressed for time, jump to the 6-minute mark.)
Here’s a roundup of reports that explain things further and get right to the heart of the matter:
The European Bank Bailout
By Ed Harrison, Credit Writedowns
Three articles I read in the past day get to the problems with these liquidity bailouts.
First comes from the US where Warren Mosler asks why is the Fed lending dollars unsecured to the ECB… again. He says “Congress should not allow the Fed to lend unsecured to foreign central banks without specific Congressional approval” because “It’s like lending your dollars to someone in a far away land who uses his watch for collateral. But he gets to keep wearing the watch, and he’s out of your legal jurisdiction.”
Second is the Anne Sibert article on the damaged ECB legitimacy. She writes that the ECB has been opaque about how it conducts monetary policy as well as how it provides liquidity. It is the second part that worries her most because “In its attempt to maintain financial stability the ECB and Eurosystem have had to walk a fine line between providing just enough liquidity to keep potentially solvent institutions afloat and subsidising the financial sector.” Does that sound familiar? It should because the Fed operated in the same opaque manner during the first crisis.
Finally, there is growing evidence that ECB Chief Economist Juergen Stark quit his job because “he did not want to support the lending of dollars to euro-area banks.” Former Bank of England central banker David Blanchflower told Bloomberg News this in a radio interview yesterday. While Blanchflower says this was much needed and “should have happened a while ago”, it puts the central bank in a quasi-fiscal role that had already caused another high profile German, Axel Weber (widely tipped to have been in line for the top job) to resign from the ECB as well.
The Fed Bails Out Eurobanks Yet Again
By Yves Smith, Naked Capitalism
Watching re-enactments of scenes from the global financial crisis is a very peculiar experience indeed. The opening by the Fed of currency swap lines to allow the ECB and other central banks to extend dollar funding to Eurobanks was seen as an extreme measure the first time around, a sign of how close to the abyss the financial system had come.
… the Eurobanks were under real stress by being frozen out of dollar funding, largely because US money market funds were no longer willing to do repos with them or buy their commercial paper. And US banks were also encouraged to cut back on their exposures to them. So the central banks have stepped into this breach.
But this is just a liquidity fix, and here, that means largely a palliative. The Eurobanks will suffer serious hits when the sovereign debt crisis losses come home to roost; this alone will render many major banks undercapitalized. The ECB has, as the Fed did, allowed banks to pledge dreckly collateral in return for shiny new funds. But the big difference between the ECB and the Fed is the ECB apparently sees itself as constrained by its $5 billion in equity (even though it could simply print, give the proceeds to national governments, and have them give that back to the ECB as an equity contribution) and is loath to bloat its balance sheet too much. The self imposed balance sheet growth limits of the ECB plus the refusal of EU leaders to consider other mechanisms such as Eurobonds means it’s hard to see how the wheels are not going to come off the European financial system in the not too distant future….
The other distressing aspect of this saga is that we have cross border regulatory action without effective cross border/supranational regulation. Responsibility (for cross border bailouts) without authority is not a good combination. Even though the rationale for the Fed helping save the Eurobanks’ hide is that the risk is small and a Eurocrisis would hurt US banks, it’s not good practice to save entities you don’t oversee. And it’s even more troubling to have this done by central banks, who have enormous power yet very little accountability in a nominally democratic system.
So this not-so-little rescue serves as a reminder of what we on some level know all too well: despite the desperate need for reform in the wake of the crisis, too much appears to remain just the same as before.
Why didn’t the Fed release a statement on the dollar liquidity bailout?
By Ed Harrison, Credit Writedowns
I was looking for the Fed statement yesterday and didn’t find it. And that’s when I went to the BoE and saw they linked out to the other CB statements (sans Fed).
I think this is curious messaging because the US Treasury Secretary Timothy Geithner is over in Europe right now banging the table about the need for a Euro TARP. Cullen Roche calls it a Euro TALF. Whatever you call it, its a bailout; the original TALF sure was. Is this why the Fed went all radio silent?
I think that’s it exactly. The last post I wrote on The European Bank Bailout talks a lot about how unpopular these bailouts are; and since this is effectively a backdoor bank bailout, it makes sense that Ben Bernanke would want to keep mum, “to keep his powder dry” for QE3 as one of my friends e-mailed.
Here’s what’s happening:
- European politicians are paralysed and are only doing enough to push off the day of reckoning. Muddling through means deepening crisis for the euro zone. Only when all other options have failed and the euro is about to break apart will the Europeans think about fiscal union and the like. I believe the sovereign debt crisis will deteriorate further for just this reason. And then we will just have to see what the politics of the individual countries in Euroland look like. If austerity brings the economy to a crawl and europopulism is well advanced, the euro will collapse. If not, the Europeans will push forward with greater integration.
- In the interim that means bailouts, not just for sovereigns but for banks as well. You remember the dust-up over ECB Target2 liquidity? Well that was the beginning of the German revolt against the ECB’s quasi-fiscal policies. These moves, while absolutely necessary to prevent a Lehman-style crisis because of Euro politicians’ dithering, are politically charged. We now have seen two major ECB defections from Axel Weber and Juergen Stark. I think that there is even more discord behind the scenes.
- Even so, the ECB has now been forced because of the wholesale market bank run now ongoing in Europe to go further. In order to deflect criticism, the ECB’s bailout of the Euro banks has been coordinated with four other central banks.
- But the Fed’s lack of commentary demonstrates that the other banks are just a cover. First, the Fed feels politically constrained due to its own machinations in the past and the likelihood it will engage in a muscular easing policy if and when the US economy double dips. It does not want to come under attack for this Euro bank activity. Second, dollar swap lines are already in place and have been extended. This policy didn’t have to be announced this way. It was only to calm markets and buy time.
- Meanwhile Tim Geithner thinks the Euro-TALF bazooka is the right way to buy significantly more time. He is over urging the Europeans to take out the bazooka by leveraging up the EFSF ten to one in order to buy the Europeans $2 trillion euros of fire power. Now, that’s a bazooka.
Liquidity fix not enough for Europe: investors
Steven C. Johnson, Reuters
Troubled euro zone banks probably need more aggressive capital injections to get through turmoil caused by Europe’s worsening debt crisis, top investors said at a Bloomberg Markets 50 Summit on Thursday. The European Central Bank said on Thursday it, alongside other major central banks, would hold three separate dollar liquidity operations between October and December to help see banks through the year-end. Some European banks have had trouble accessing short-term loans to fund operations because investors fear they are too heavily exposed to government debt from troubled euro zone countries such as Greece. John Taylor, founder and chairman of FX Concepts, the largest currency hedge fund with $8 billion in assets, said temporary measures are not enough to help euro zone banks.
Bring on the Drachma TARP
Barry Ritholtz, The Big Picture
Here is what Jefferies chief market strategist David Zervos had to say:
The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way.
The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks – even though it is probably a more cost effective solution for both the German banks and taxpayers.
Where the losses WILL occur is at the ECB, where the Germans are on the hook for the largest percentage of the damage. And these will not just be SMP losses and portfolio losses. It will also be repo losses associated with failed NON-GERMAN banks. Of course in the PIG nations, the ability to create a TARP is a non-starter – they cannot raise any euro funding. The most likely scenario for these countries is full bank nationalization followed by exit and currency reintroduction.
US banks privately lending billions to support European lenders
By Gareth Gore, Reuters
US banks have become the unlikely saviours of their ailing European counterparts, signing private agreements to lend them billions of dollars in recent weeks after an exodus of nervous money market funds left many without ready access to short-term funding. Agreements worth tens of billions of dollars have been signed in the last month alone, according to bankers directly involved, who added that senior management of firms on both sides of the transactions have been closely involved with hammering out deals.
Shadow Banking Contagion Approaches As European Banks Sign Private Repo Agreements With US Counterparts
By Tyler Durden, Zero Hedge
In what is probably the riskiest escalation of the second credit crisis to date, IFR has released information that was until now speculated, but not confirmed, namely that European banks not only continue to make a mockery out of LiEbor by posting whatever rates they deem appropriate (for the simple reason they don’t use interbank funding), while in the meantime going directly to US banks, using shadow, and hence completely unregulated conduits, in the form of private repo arrangements with “at least three of the five biggest US banks.”
Now where this is interesting is that as Zero Hedge disclosed three months ago, the bulk of the cash generated for the pendancy of QE2 went not to US banks, but to US-based branches of foreign banks. Which probably means that there is a roadblock to repatriating the US held cash (even in exchange for perfectly legitimate receivable debits). Because one would think that this is where the first source of cash for troubled banks would come from. Assuming it hasn’t been repatriated already, or is not stuck in some IOER-GC carry trade that generates virtually no return (and when the Fed lowers IOER even more, absolutely no return).
Alas this means that the 3M USD Libor which we update every day is substantially under-representing the true funding squeeze in Europe. Even worse, it means that US banks have lent us tens, if not hundreds of billions of cash, in exchange for collateral that could be virtually anything, and which collateral bypasses traditional Fed supervision. As a result, US banks can and will go hog wild in lending repo dollars (at big collateral haircuts but still) to European banks until everyone suddenly runs out of money, and the Fed realizes it has to not only fill traditional liquidity holes, but a massive shadow banking shortfall, precisely the stuff that none other than the Fed has been warning about over and over. Just like in 2008 when the big hit to the system came not from traditional sources of risk but perfectly innocuous and thus ignored money markets, so the same will happen this time, as the biggest crunch will come completely out of left field. It always does….
Alas, when the moment ends, and said banks can no longer afford to lend out cash, and in fact need it, may we ask: who will provide this source of global bailout capital? Oh yes: Ben Bernanke of course, and who will be facing trillions of dollars in full loss exposure should central planning not be successful in patching up the second Great Financial Crisis?
Why you, dear reader.
The bottom line, as George Bush said in 2008, “This sucker’s going down.”