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Robert Reich
NationofChange / Op-Ed
Published: Tuesday 4 October 2011
Wall Street's total exposure to the euro zone totals about $2.7 trillion and its exposure to to France and Germany accounts for nearly half the total.

Follow the Money: Behind Europe’s Debt Crisis Lurks Another Giant Bailout of Wall Street

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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 2008.

Financial chaos.

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 the total.

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 enough.

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 institutions.

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 them. 

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. 

Full circle.

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.

This article was originally posted on Robert Reich's blog.



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ABOUT Robert Reich

 

ROBERT B. REICH, one of the nation’s leading experts on work and the economy, is Chancellor’s Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. Time Magazine has named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including his latest best-seller, “Aftershock: The Next Economy and America’s Future;” “The Work of Nations,” which has been translated into 22 languages; and his newest, an e-book, “Beyond Outrage.” His syndicated columns, television appearances, and public radio commentaries reach millions of people each week. He is also a founding editor of the American Prospect magazine, and Chairman of the citizen’s group Common Cause. His widely-read blog can be found at www.robertreich.org. Robert Reich's new film, "Inequality for All" is available on DVD
and blu-ray, and on Netflix in February.

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26 comments on "Follow the Money: Behind Europe’s Debt Crisis Lurks Another Giant Bailout of Wall Street"

fbuser98

October 06, 2011 7:23am

Dave, you have your eye on the Hole and not the Doughnut! It is Wall St and the Intl Banksters who are the real enemy of America. The others, Fanny and Ginny Mae are mere puppets.Read about the True enemies of America: http://bz9.com/buydemoc and a little historical perspective, Wall St has been after the Middle Class for more than a century!: bttp://bz9.com/BankersExposedWant more proof that Wall St is the enemy? http://bz9.com/3Coup Did you know Wall St supported our enemies? http://bz9.com/AmNazLearn the Truth, it will set you free!

fbuser98

October 05, 2011 11:16pm

Dave, you have your eye on the Hole and not the Doughnut! It is Wall St and the Intl Banksters who are the real enemy of America. The others, Fanny and Ginny Mae are mere puppets.Read about the True enemies of America: http://bz9.com/buydemoc and a little historical perspective, Wall St has been after the Middle Class for more than a century!: bttp://bz9.com/BankersExposedWant more proof that Wall St is the enemy? http://bz9.com/3Coup Did you know Wall St supported our enemies? http://bz9.com/AmNazLearn the Truth, it will set you free!

Byron Lovelace

October 05, 2011 9:48pm

@FBUSER24 - I get your anger and understand, even agree with, your position. It would be much easier to take you seriously if you wrote without the all caps. It is the written equivalent of raving looney on the subway.Byron

oliviaxlarosa's picture
oliviaxlarosa

October 05, 2011 8:46pm

David Brillig, Fannie Mae and Freddie Mac USED to be government owned and controlled institutions up until the 1970's when pieces started to be sold off. To finance the Vietnam War, partly. They are not much under government control; it has lessened dramatically. And their part in the meltdown was ENCOURAGED by the big lenders. The attorneys general of 49 states sued the Bush administration for loosening credit-granting laws until they were nearly meaningless. I hope this clears up some items for you.

American Bolshevik

October 05, 2011 8:16pm

Next, no bailouts! Let the turds of Wall Street go down the crapper of history. Ecrasez l'infame!

And most obscene of all? VIRTUALLY NOTHING HAS CHANGED IN THE WAY ANY OF THE FINANCIAL INSTITUTIONS MENTIONED - FROM FANNIE & FREDDIE TO LEHMAN-AND HOW THEY MANAGED TO HELP THE MELTDOWN-NOTHING HAS CHANGED. WE'RE STILL JUST AS SUSCEPTIBLE-THANKS TO WASHINGTON.OBAMA'S MAGNIFICENT FAILURE TO LEAD AND REPUBLICAN OBSTRUCTIONISM - ALONG WITH SO MANY ELECTED OFFICIALS WHO GOT ELECTED TO GO AFTER A PIECE OF THE PIE FOR THEMSELVES-THE MAJORITY THERE-HAVE LEFT US TOTALLY VULNERABLE TO A REPEAT. They learn nothing. They do nothing. WE NEED FEDERAL TERM LIMITS. Maybe then we can get back to "public service" and representing the people. I see no other end to the current status quo.

Spartan

October 05, 2011 7:14pm

No president of either party is going to prosecute the men who put him in office. The power is really on Wall Street.

American Muse

October 05, 2011 6:57pm

Good article, Professor Reich.

But you utterly failed to even mention President Obama when you should be indicting our cowardly head of state and his so-called Justice Department headed by Eric Holder for not prosecuting any of these odious scoundrels who perpetrated this monstrous scam and robbed the American people blind!

Angel J. Perea

October 05, 2011 6:11pm

Keeping it honest: Remember the Movie: “Wall Street?” Isn’t Greed supposed to be NOT good?
So many news articles stating that American protesters have “no clear “agenda? It seems crystal clear to the middle class America that they are frustrated by the lack of concern that exists for the people in this country who need jobs and hope to support themselves and families.
Millions of unemployed people looking for work in this country are being ignored and slowly erased by mega-corporations including Big Oil, Banks, Computer Co., Drug Insurance Companies, whose only concern is for their obscene profits far exceed anyone’s understanding!
The beauty and treasured tradition of America allows people the freedom to unite and speak out to draw attention to these huge social injustices. It’s about time that Americans did and said, “we are mad as hell and we are not going take it any longer!”
For the record, “Greed is Not good”; it’s ugly, selfish, obscene and destructive for our society. After all, We are a still a democracy, not aristocracy! Just look around this great county!
" It's no surprise that the Romney campaign and his republicans buddies in the Congress are raising money from Wall Street by saying they want to repeal consumer protections sand allow Wall Street to write its own rules," KEEPING IT HONEST: Wall Street, a key contributor to Obama in 2008, seems to be switching allegiances.
" Hum.. I wonder why? Maybe the gang on Wall Street does not wish to alienate “their” representatives? Mr. Boehner, Cantor, McCarthy and Ryan and Senator McConnell and his 43 obstructionists in the senate that are provided their campaign funds! This is not aBanana Republic! After all, this same Wall Street Gang were the direct recipients of trillion dollar tax payer bailout with no conditions and used it some of it for bonuses!
According to Senator Bernie Sanders, it is now clear that the Republicans /hypocrites made pledges that they are for their “only” plan of continuing its Class War against the middle Class to protect their rich Millionaires on Wall street and Billions like the Gover Norquest, Russ Limbaugh, Rupert Murdock and others like the Koch Brothers that provide them their campaign funds! Their plan was never about creating American jobs for the unemployed middle class! LET'S PUBLICLY LIST THE NAME OF EVERY POLITICIAN AND WALL STREET GIVER SO AMERICAN CAN KNOW WHO IS ON "TAKE" AND SELLING MIDDLE AMERICA OUT!

Let's publicly list each one and how they've benefitted. Then let's start demanding prosecution of every SOB who contributed to our economic collapse-AND THE POLITICIANS TAKING MONEY FROM THEM. Mubarak & the world thought he was untouchable - after all, he'd done nothing "illegal." The Egyptian people disagreed. He's now in prison, forced to return the millions he took while his country starved and struggled under his oppressive regime. Yes, this is the US-but are we so different that we can't demand better from our president and the Republicans who refuse to fund policing agencies like the SEC? They're refusal to provde funding to allow banks and financial institutions comply with what few laws and regulations we have - MAKES THEM ACCESSORIES TO THE VIOLATIONS. They should be indicted next to all the bank presidents, hedge fund managers and others who violate the law. ITS CONSPIRACY TO DEFRAUD TAXPAYERS.

geof01

October 05, 2011 6:11pm

Right to Life, great concept. Banks don't breath, pull the plug.

Jose Antonio Co...

October 05, 2011 5:47pm

Come se dice Theodore Roosevelt?

Dave Brillig

October 05, 2011 5:29pm

Denying that Fannie and Freddie were at fault by not even mentioning their names seems incredible. Evidently protecting Frank and Dodd et al was more important than historical accuracy and intellectual honesty here. Twice he mentions Lehman Bros. and AIG as if they were the biggest calamities, or the cause of the meltdown.

Fannie Mae was a $6 TN failure, Lehman about 10% of that. Fannie owned or guaranteed half the US housing market. Every brokerage house, bank and investment bank on Wall St. owned either Fannie Mortgage securities or Fannie debt, she was the dictionary that fell over and started the dominoes falling.

Fannie went into receivership on Sept. 7 2008. One week later Lehman Bros fell, then Merrill Lynch, AIG, WAMU, Wachovia, etc etc. all the other big names fell within three weeks after Fannie. This was one month after Barney Frank announced that Fannie was "solid with no problems going forward". (Barney reportedly issued this statement one day after Hank Paulson told Barney that Fannie was about to fold.)

Over the years her "affordable housing" goals had increased from 20% and in 2005 were increased to an astounding 55% of the mortgages she issued, that were required to be issued to low income borrowers. If you were in the mortgage business, this was your gov't subsidized competition. Can there be any doubt how the economy got filled with toxic waste? Thanks to the Fed, interest rates had remained at or near zero since 2000, encouraging bad decision making by all.

Frank and Dodd, the same two who clamored so loudly each year to raise her low income "affordable housing" goals, took charge of writing new regulations to protect us, and according to B.F.'s Wikipedia page, were the people originally responsible for issuing the statement to the media that lack of regulation was the cause of the crisis.

Most the info above came from the Wikipedia page "subprime crisis impact timeline".

fbuser98

October 05, 2011 11:18pm

Dave, you have your eye on the Hole and not the Doughnut! Blaming the Users instead of the Pushers is missing the point. It is Wall St and the Intl Banksters who are the real enemy of America. The others, Fanny and Ginny Mae are mere puppets.Read about the True enemies of America: http://bz9.com/buydemoc and a little historical perspective, Wall St has been after the Middle Class for more than a century!: bttp://bz9.com/BankersExposed
Want more proof that Wall St is the enemy? http://bz9.com/3Coup Did you know Wall St supported our enemies? http://bz9.com/AmNaz

Learn the Truth, it will set you free!

fbuser24

October 05, 2011 4:38pm

. . The government of the United States is selling everyone out -.- and I include the President in it. . .
..the foreclosures of the banks - no prosecutions - the liar loans they approved -.- the mortgage brokers - no prosecution
WRITE A LOAN - NO MATTER HOW BAD IT IS OR HOW HARD IT WOULD BE TO ACTUIALLY RE-PAY -.- COMISSION $ $ $ $
..Wall Street -, no prosecutions -.- RECEIVED BONUSES PAID WITH BAILOUT MONEY
. . THE first wheat deal with R.U.S.S.I.A. - - - famine?? drought?? cause and effect THE PRICE OF BREAD DOUBLED IN THE UNITED STATES. . .
JAPAN UNCONDITIONALLY SURRENDERED -.- HOW MANY YEARS DID WE RUN THEIR COUNTRY BEFORE THEIR RICE DEAL ??? DOUBLED THE PRICE OF RICE IN THE UNITED STATES. . .
. . . OBAMA ANNOUNCES FREE TRADE AGREMENT WITH KOREA -.- WILL INCREASE AGRICULTURE TRADE -.- WATCH AGRICULTURIAL PRICES DOUBLE. . .
NO PROSECUTIONS ??? MAY COST BILLIONS TO BAIL OUT GREECE ????
BAIL OUT EUROPE???? NO PROSECUTIONS. . . DIVERATIVES - - BUNDLED MORTGAGES. . . CREDIT DEFAULT SWAPS . . HEDGE FUNDS
. . .
. . . . BENEDICT ARNOLD STOOD ON THE GALLOWS AND SAID HOW WHAT HE WAS DOING WHAT WAS BEST FOR THE COUNTRY. . . .
-.- FREE TRADE -.- IN NOT GOOD BUSINESS . . N.A.F.T.A. - - -WAS NOT AND IS NOT GOOD FOR JOBS TRADE WITH CHINA AS THEY STEAL OUR INTELLECTUAL PROPERTY . .BAD BUSINEE -.- UNLESS YOU WANT TO SELL THE UNITED STATES CITIZENS SHORT
. . .
.. YOU WANT HEALTHCARE BENEFITS ?? YOU WANT SOCIAL SECURITY ?? YOU WANT TO BE ABLE TO BUY A HOME ???
WHERE IS YOUR JOB -.- YOU WANT FREE TRADE -.- CHEAP IMPORTS
BULLSHIT - THAT IT HAS GONE TOO FAR TO STOP IT - - - - -
TOO BIG TO FAIL

FProctor

October 05, 2011 4:07pm

John, I completely agree, but wouldn't the rules have to be implemented globally to work?

FProctor

October 05, 2011 3:38pm

John I agree completely, but wouldn't the rules have to be instituted globally for them to work?

Frank Monasterio

October 05, 2011 2:40pm

The incisiveness of Dr. Reich's commentaries make me wonder why he spent so much of the 1990's as a servant of the ridiculously pro-business Clinton Administration, whose actions helped prepare the groundwork for the impoverishment of ordinary Americans.

Bill tremblay

October 05, 2011 1:52pm

Isn't it possible that there is nothing securing the value of the paper money [dollar, euro, &c.] and that it's all just hot air? The only thing that's real is that people are being and have been forced out of their homes because of the banks and that people are being and have been thrown out of their jobs. And that means the relationship between property and the law-enforcement establishment as for example NYPD arresting hundreds of Occupy Wall Streeters. Wall St is a fiction, an inflated balloon. It's the government that gives it its power, that's why they bang away every day trying to build hatred of the government. Government is the people's only hope.

Cayuga3

October 05, 2011 1:14pm

Play the game of Monopoly to see how this plays out in real life. The game ends when those at the top get all the property. Even getting a salary when passing GO doesn’t help..

bionicknight

October 05, 2011 1:11pm

Thank you Robert! Greatly appreciate your work.

Another bail-out? The New American Pirates have struck again !

THE NEW AMERICAN PIRATES, ARE KILLING AMERICANS.

This story is not about glamorized or fictional piracy. This is, “real piracy.”

Hundreds of our wealthiest leaders and most powerful corporations know that in the next few years, they will be able to siphon, skim, and steal, so much “NEW CASH,” that they and their progeny will be ultra-rich for generations to come.

No, this is not funny, or fiction, or a conspiracy, it is just simple greed and simple theft.
The new pirates of America have launched an all-out siege on us in order to capture, amass, and hold trillions of dollars for themselves.

All of the recent political power grabs and nonsensical debating is purely a slight-of-hand deflection. President Obama, Democrats, Republicans, the International Press, and even the Tea Party, are watching the tiny pea in the shell game…while the rich and powerful “Piratical Right” is stealing America right out from under us.

Consider that their combined total plunder from corporate flipping, downsizing, offshore labor, speculation, price fixing of oil and energy plus, corruption in defense, health care, banking, student loans, foreclosures, etc., etc., is a trillion dollar treasure for these pirates.
Go ahead, put your own calculator to it.

Are they smarter than we are? Yes, and they are laughing at us. I, we, you, and all of us, have not been able see the big picture of what is happening to our own country and to our own people. The rape and theft of America, has been cleverly packaged, promoted, and sold under the guise of “cost-cutting,” “deregulation,” and “free enterprise.”

The “Piratical Right” is directly responsible for millions of people dying, getting sick, losing their jobs and homes, losing their ability to fight, their spirit, and even losing their will to live. The sick smell of this carnage now permeates the air across America.

To us, this is all unimaginable, because we look for some sense or the morality of things. These modern-day American pirates however, have no moral compass. They are devoid of any conscience, humanity or soul, and are feeding on the flesh of the American people.

Don’t look to the President, the Senate, Congress, the press, or any political party to help. Sadly, they just don’t see it, don’t care, or are part of it. “We the people” are on our own. Start asking questions. Demand answers. If we don’t fight back America…who will?

History has taught us how to stop piracy.

By Mr. S. Pimpernel 10/01/2011

Robinhoodtax.org must be a good place to start.

jussmartenuf's picture
jussmartenuf

October 05, 2011 12:50pm

Whoa! I hadn't heard it explained that way. Does this mean the time for the "too big to fail" are not bailed out and allowed to fail? No bailout and a forced restructuring of the financial/economic system? A shift of wealth back to the people who created it, the workers? When inflated stock prices that are trading for 30 & 40 times their earnings are revalued to what they are really worth? Full Circle? What?

Are you kidding

John Tarter

October 05, 2011 12:27pm

One thing that still needs to be done: abolish derivatives and credit default swaps. Reinstitute them only after strict controls on how such financials can be manipulated, so that transparency exists, so that we know the true value of the nations corporations. Also, rules need to be developed and criminal penalties attached for all traders (traitors?) who seek to conceal financial instruments that are faulty, have questionable value, or value levels difficult or impossible to determine.

PipeUp

October 05, 2011 2:05pm

John,

You are so, so, so right! Too many people have forgotten how these devilish instruments have tortured the economies of the world while lining the pockets of the "traitors" who write them.