A Lump of Coal for the Fed

 A blogger at Wall Street Rant called attention to a full release of the Federal Reserve's Emergency Lending Program 2007-2009.  The charts he shows were from a Bloomberg analysis of a half trillion dollars in currency liquidity swaps which did not identify the borrowers who used this facility. Soon after this, the Wall Street Journal carried both a video and and article by Dr. Gerald O'Driscoll, formerly a VP of the Federal Reserve Bank of Dallas, in which he triangulates about $100 billion in currency swaps which most probably went from the Fed via the ECB to reeling European banks in the period from early December to about December 21, 2011.  Joyeux Noel to our European brothers and sisters from our Federal Reserve!

After all the monetary Three Card Monte which the Fed has played to keep interest rates low, make bank bondholders whole, pad the compensation of global bank executives, reward the risk trade, penalize savers and force them to risky assets in search of return, I say " a lump of coal, Bob Cratchett!"  It is heartening to know that the Fed promises to be more transparent, which is just as valuable as the Federal Government promising to be more fiscally prudent. 

Dr. O' Driscoll says in his video interview that we probably don't know which European banks are the most vulnerable, and that's true.  However, we can make some educated guesses.

The V-Lab Group at Stern School of Business runs their global risk list in two ways: (1) simulating the effects on the global financial sector of a a 40% semi-annual market decline, and (2) without the cataclysmic simulation, measuring  the change in risk profiles assuming a 2% daily market decline.  Without the simulated cataclysm, the biggest risk banks are European banks: Deutsche Bank, BNP Paribas, Credit Agricole, Barclays, followed by Bank of America to break the European streak, and then HSBC, ING, and Societe Generale.  None of these names are too surprising.

With the cataclysmic simulation of a market meltdown, the ultra high risk banks are the US, global TBTF ("too big to fail") banks: Bank of America, JP Morgan Chase, and CitiGroup.  Nothing much is too surprising here either.

So after all the meetings, the trans-Atlantic shuttle bank diplomacy, and all the posturing among European leaders and the IMF, it seems that the global system is just as risky, if not more so, than we were at mid-year 2011.  Our markets had a Santa rally, and finished with a hangover.  "God bless us all, every one!"