Today Ben Bernanke added his voice to those who are worried about Europe’s debt crisis.
But why exactly should America be so concerned? Yes, we export to
Europe – but those exports aren’t going to dry up. And in any event,
they’re tiny compared to the size of the U.S. economy.
If you want the real reason, follow the money. A Greek (or Irish or
Spanish or Italian or Portugese) default would have roughly the same
effect on our financial system as the implosion of Lehman Brothers in
Investors are already getting the scent. Stocks slumped to 13-month low on Monday as investors dumped Wall Street bank shares.
The Street has lent only about $7 billion to Greece, as of the end of
last year, according to the Bank for International Settlements. That’s
no big deal.
But a default by Greece or any other of Europe’s debt-burdened
nations could easily pummel German and French banks, which have lent
Greece (and the other wobbly European countries) far more.
That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle.
The Street’s total exposure to the euro zone totals about $2.7
trillion. Its exposure to to France and Germany accounts for nearly half
And it’s not just Wall Street’s loans to German and French banks that
are worrisome. Wall Street has also insured or bet on all sorts of
derivatives emanating from Europe – on energy, currency, interest rates,
and foreign exchange swaps. If a German or French bank goes down, the
ripple effects are incalculable.
Get it? Follow the money: If Greece goes down, investors start
fleeing Ireland, Spain, Italy, and Portugal as well. All of this sends
big French and German banks reeling. If one of these banks collapses, or
show signs of major strain, Wall Street is in big trouble. Possibly
even bigger trouble than it was in after Lehman Brothers went down.
That’s why shares of the biggest U.S. banks have been falling for the
past month. Morgan Stanley closed Monday at its lowest since December
2008 – and the cost of insuring Morgan’s debt has jumped to levels not
seen since November 2008.
It’s rumored that Morgan could lose as much as $30 billion if some
French and German banks fail. (That’s from Federal Financial
Institutions Examination Council, which tracks all cross-border exposure
of major banks.)
$30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization.)
But Morgan says its exposure to French banks is zero. Why the
discrepancy? Morgan has probably taken out insurance against its loans
to European banks, as well as collateral from them. So Morgan feels as
if it’s not exposed.
But does anyone remember something spelled AIG? That was the giant
insurance firm that went bust when Wall Street began going under. Wall
Street thought it had insured its bets with AIG. Turned out, AIG
couldn’t pay up.
Haven’t we been here before?
Republicans and Wall Street executives who continue to yell about
Dodd-Frank overkill are dead wrong. The fact no one seems to know
Morgan’s exposure to European banks or derivatives – or that of most
other giant Wall Street banks – shows Dodd-Frank didn’t go nearly far
Regulators still don’t know what’s happening on the Street. They have
no clear picture of the derivatives exposure of giant U.S. financial
Which is why Washington officials are terrified – and why Treasury
Secretary Tim Geithner keeps begging European officials to bail out
Greece and the other deeply-indebted European nations.
Several months ago, when the European debt crisis first became
apparent, Wall Street banks said not to worry. They had little or no
exposure to Europe’s problems. The Federal Reserve said the same. In
July, Ben Bernanke reassured Congress the exposure of U.S. banks to
European nations in trouble was “quite small.”
Now we’re hearing a different tune.
Make no mistake. The United States wants Europe to bail out its
deeply indebted nations so they can repay what they owe big European
banks. Otherwise, those banks could implode — taking Wall Street with
One of the many ironies here is some badly-indebted European nations
(Ireland is the best example) went deeply into debt in the first place
bailing out their banks from the crisis that began on Wall Street.
In other words, Greece isn’t the real problem. Nor is Ireland, Italy,
Portugal, or Spain. The real problem is the financial system — centered
on Wall Street. And we still haven’t solved it.
Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He writes a blog at www.robertreich.org. His most recent book is Aftershock.