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.
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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.