As we know, European banks have been in the spotlight of the financial markets. Liquidity stress has caused BNP Paribas and Societe Generale to deny rumors of liquidity issues and we have watched the EURUSD LIBOR basis widen which has increased a perception of funding risk. Today, we get notice that good ole uncle ben has been kind enough to lend dollars to the European Central Bank (ECB) so that the ECB can fund the private European banks. From Morgan Stanley:
While details are not set in stone, assuming the Fed charges the same 100bps spread over OIS for the three-month tenders as they do for the one-week tenders currently in place, the rate will remain quite punitive. This is because, in addition to a 100bps spread, eligible counterparties will also have to post collateral, face standard haircuts, and for this operation, post a 20% initial margin. Taking this all in, USD funds via this operation will therefore cost another spread over 100bps, depending on assumptions of collateral and cost of funding (as an example,collateral with a 5% haircut, funded at EURIBOR-flat would add an additional cost of roughly 40bps). Nonetheless, these actions should cap the 3M EURUSD basis, though at levels we haven’t seen since the 2008 crisis.
It is an interesting story. The Federal Reserve of the United States is acting as the liquidity backstop for Europe. What a friendly neighbor.
My belief is that the Federal Reserve did not provide these lending lines just to calm global markets. My belief is that every lender of last resort is making a killing on that lending facility, and I doubt it is for a measly 1% extra in interest. Goldman Sachs was the lender of last resort for CIT Group, JP Morgan was the lender of last resort for Bear Stearns, Warren Buffett has acted as the lender of last resort for Bank of America. All of these actions were for the benefit of the lender because of the peril faced by the borrower.
My conspiracy theory here is that the US Government is getting something out of this “arrangement” that goes beyond interest margins. Mr Bernanke might not be the actual puppet master, but he is at least acting as the economic hit man:
“Economic hit men (EHMs) are highly paid professionals who cheat countries around the globe out of trillions of dollars”
Anyway, if you have not read the book I highly recommend it.
Confessions of an Economic Hit Man reveals a game that, according to John Perkins, is “as old as Empire” but has taken on new and terrifying dimensions in an era of globalization. And Perkins should know. For many years he worked for an international consulting firm where his main job was to convince LDCs (less developed countries) around the world to accept multibillion-dollar loans for infrastructure projects and to see to it that most of this money ended up at Halliburton, Bechtel, Brown and Root, and other United States engineering and construction companies. This book, which many people warned Perkins not to write, is a blistering attack on a little-known phenomenon that has had dire consequences on both the victimized countries and the U.S.John Perkins started and stopped writing Confessions of an Economic Hit Man four times over 20 years. He says he was threatened and bribed in an effort to kill the project, but after 9/11 he finally decided to go through with this expose of his former professional life. Perkins, a former chief economist at Boston strategic-consulting firm Chas. T. Main, says he was an “economic hit man” for 10 years, helping U.S. intelligence agencies and multinationals cajole and blackmail foreign leaders into serving U.S. foreign policy and awarding lucrative contracts to American business. “Economic hit men (EHMs) are highly paid professionals who cheat countries around the globe out of trillions of dollars,” Perkins writes. Confessions of an Economic Hit Man is an extraordinary and gripping tale of intrigue and dark machinations. Think John Le Carré, except it’s a true story.
Perkins writes that his economic projections cooked the books Enron-style to convince foreign governments to accept billions of dollars of loans from the World Bank and other institutions to build dams, airports, electric grids, and other infrastructure he knew they couldn’t afford. The loans were given on condition that construction and engineering contracts went to U.S. companies. Often, the money would simply be transferred from one bank account in Washington, D.C., to another one in New York or San Francisco. The deals were smoothed over with bribes for foreign officials, but it was the taxpayers in the foreign countries who had to pay back the loans. When their governments couldn’t do so, as was often the case, the U.S. or its henchmen at the World Bank or International Monetary Fund would step in and essentially place the country in trusteeship, dictating everything from its spending budget to security agreements and even its United Nations votes. It was, Perkins writes, a clever way for the U.S. to expand its “empire” at the expense of Third World citizens. While at times he seems a little overly focused on conspiracies, perhaps that’s not surprising considering the life he’s led. –Alex Roslin