Despite assertions from Federal Reserve officials that the United States would not play a role in bailing out European banks, that is exactly what has happened — again.
Earlier in the month, Federal Reserve Chairman Ben Bernanke (left) told the U.S. Senate that the Fed had no intention of bailing out the European banks, indicating that he “doesn’t have the intention or the authority” to do so.
Senator Bob Corker (R-Tenn.) said Bernanke made it “very clear” in closed door comments that the central bank would not be rescuing European financial institutions. “People walk away knowing he has no intentions whatsoever of furthering U.S. involvement in the crisis,” Corker said.
As it turns out, however, the Fed is in fact doing just that. The Wall Street Journal reports:
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
The Journal outlines the reason for such secrecy:
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.