Backstory On FED Lending to ECB Kept Secret. May 30, 2011
A COMMENT from ANON:
“Here’s a guess. I’m relying on a couple of papers that analyzed BIS data after the fact and a key fact, that the Fed made an emergency loan to the ECB of something like $630B when the crisis hit. The mechanism described – which I first heard about through Brad Setser’s old blog – is that Lehman was a huge US money market issuer but that no one – literally – knew that European banks were very heavily invested in the US money markets for short-term funding. The reasons are somewhat obscure but they invested through London because there were basically no reporting rules on the capital flows. The process then goes: Lehman collapses, the European banks need dollars because they otherwise have no short-term money, so they grab what they can, causing a complete absence of dollars in the system, then the system completely locks up with credit indicators going skyward – which makes sense because now you can see why banks didn’t want to lend to each other, because if you needed to borrow you were in danger of short-term collapse – the Fed pumps dollars to the ECB and now it looks like they also kept some of the major European banks afloat. Maybe there was a side deal with the ECB. Maybe they were asked to step in because these defaults would have had crushing consequences to the system. Sounds like it.” – ANON
Bottom line: lack of reporting, particularly of capital flows, can have really, really bad consequences.
And what were the low interest 11-figure sum loans backed by… not that the taxpayers need to know such trivial details…
It was secret because no one needs to know they were reinforcing the house of cards.