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Robert ReichBack to OpinionRobert Reich

Follow the money: Behind Europe’s debt crisis lurks another Wall Street bailout

Protesters clash with policemen during riots at a May Day rally in Athens on May 1, 2010. Photo: Flickr/PIAZZA del POPOLO

On Tuesday, 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.

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.

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 eurozone 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 shows 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.)

Thirty billion dollars 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.

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.

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.

Published by arrangement with

Robert Reich is Chancellor’s Professor 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. He has written 11 books (including his most recent, “Supercapitalism,” which is now out in paperback).


  • Irene K.

    Mr. Reich,
    I heard that nationalizing the “too big to fail” institutions, would at least allow the elected officials,(I hope) to reorganize the institutions.  Break up the deposit side from the investment side and fire the people at the top for poor decisions.  I would also add for them to freeze their stock options and bonuses and no golden parachutes.  There has to be some demonstration that irresponsible behavior with money is accountable.  We have to keep investment banks focusing on creating capital for new companies that are creating jobs in America.  Also raise the interest rate for depositor banks so retirees can save their money whatever is left and not be forced to speculate in the Wall Street “rigged” market.  People who want to be conservative and save need to have at least some interest being earned on this money sitting in the bank.  Accounting rules need to be transparent and honest.  
    We now have “socialism for the capitalist wall street firms and capitalism for the rest of the tax payers” who never signed up for someone gambling their money away that they earn from working two jobs and perhaps getting a few weeks off after a few years of steady employment.  

    Maybe you have written on this already.  Please direct me to that site or just comment on my question.  Thank you, Irene K., a retiree

  • AdamSmith

    This is probably why Buffet is telling bank stock holders not to sell. The banks are insured by tax payers; they can’t lose.

  • Prophet Danieel

    Eurozone debt crisis is over, Mr. Holaund stated. They found the best solution in Cyprus. 15-20% levy (or haircut) on every deposit in Eurozone Banks and the problem is solved. Figure it out. isn’t this the real reason they are trying to remove bank secrecy in Austria and Luxemburg? So be aware, WITHDRAW YOUR DEPOSITS FROM ALL EUROZONE BANKS AS SOON AS POSSIBLE. and believe them, This is not going to happen in any other country than Cyprus… it will happen in the whole Eurozone.