Fed Quietly Using "Swap" Contracts to Bail Out Europe

Ben Bernanke

According to a report in the Wall Street Journal, America's central bank, the Federal Reserve, is engaged in a bailout of European banks. The arrangement is getting no play in the media in the U.S. The Fed has engaged in a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). In this type of arrangement, WITHOUT ANY CONGRESSIONAL OVERSIGHT or regulatory approval the Federal Reserve "swaps" dollars for euros with the ECB. The Fed receives an interest rate of one-half of 1% above the overnight index swap rate. For its part the ECB, guarantees to return the dollars at an exchange rate fixed at the time the original swap is made. This frees the ECB up to lend the dollars to European banks.

Why are the Fed and the ECB doing this? Both central banks appear to be attempting to fly under the radar. The Fed does not want the debt of foreign banks on its books and a currency swap with the ECB is not technically a loan.

The ECB has even bigger political problems. The heads of many European governments want the ECB to do a bail out. However, most European governments hold the positon that the ECB cannot legally do so.

How big is this deal? As recently as October the amount under a swap renewal agreement from last summer was only $2.4 billion. And for the week ending Dec. 21, the total was $62 billion. These figures leave no doubt that the United States Federal Reserve Board is bailing out European banks and, indirectly, reckless undisciplined European governments. Will Fed Chairman Ben Bernanke, Treasury Secretary Tim Geithner, and President Obama ever get around to offering honest accounting to Congress and the American taxpayers of what they are doing? Don’t hold your breath.

Fed Quietly Using "Swap" Contracts to Bail Out Europe