Does the Eurozone Have Its Own Lehman Bros?

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Does the Eurozone have its own American International Group Inc. (NYSE: AIG), or worse, its own Lehman Bros. when it comes to Greece?

I believe it does.

Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business – no offense to Montanans or Montana!

More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?

The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world – that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.

In all, more than 50 European banks have a combined 92 billion euros ($129 billion) tied up in Greek sovereign debt. Worse, there are 14 banks whose Greek exposure is more than 10%, which suggests that they may not have reserves strong enough to handle a debt default.

Admittedly, 10% doesn't sound like an especially large number – but if bad debt starts a run on a bank's deposits, 10% can very quickly grow to 20%, 30%, or more as increasingly fearful depositors scramble to pull out their money.

The other thing to bear in mind is that the 10% figure may not completely account for bad mortgage debt, credit default swaps, currency arbitrage or other "exotic" financial instruments (and we have no way of knowing because these instruments are almost completely unregulated).

When countries are ranked by total exposure to the euro, the concentration becomes even more apparent – as do the reasons for the intense negotiations being undertaken by the Germans and the French. The former has everything to lose while the latter, with its dysfunctional economy, has everything to gain.

Incidentally, when ranked by the number of banks at risk, the reasons why I repeatedly warned that credit-default-swap raiders are going to go after Spain, Italy, and France when they're done with Greece, Ireland, and Portugal becomes abundantly clear: The concentration of risk is a target-rich environment for major trading houses that have grown so powerful they can attack entire countries, much the way the bond vigilantes attacked debt in the 1990s as a means of raising rates.


What's ironic is that the very bailout policies everybody thinks are helping are, in fact, providing the incentive to attack because the traders know they can't lose if they apply enough leverage.

What the ECB President Knows that You Don't

Now let's chat for a minute about what else I think Trichet has figured out – namely that the risks to U.S. financial institutions are significant and that these same risks may actually outweigh the costs of the last global bailout should Greece fail.

I believe that Trichet has very quietly communicated this information to U.S. Federal Reserve Chairman Ben S. Bernanke, who looks and sounds defeated and who appears to be telegraphing one or more black swans on the horizon – even as he publicly downplays the possibility.

At the same time, regulators who have probably not been explicitly told what's at stake are wising up, which is why they've been "probing" U.S. financial institutions with regard to direct and indirect Greek exposure – especially when it comes to details on the credit default swaps they may have written on Greece, Greek debt, and European banks.

Good!

There are two particular areas of concern as I see them: The Fed's dollar swap lines and money market funds.

Dollar swap lines are specific credit lines extended by the Fed as a means of ensuring that stressed foreign banks have easy, quick access to short-term U.S. dollar-denominated funds when they need to take "risk off" or as part of the well-documented "flight to safety."

First, I want to know what the Fed's dollar swap lines are with European central banks, and which U.S. banks have engaged in similar arrangements and are using their swaps to daisy chain the capital into other "investments" that directly or indirectly involve Greek exposure.


And secondly, I want to know which banks have money market exposure to Greek debt. Not many investors realize this, but money market funds have long invested in foreign debt instruments as a means of maintaining their value and their stability. This is not an inconsequential matter, either.

According to a report from Fitch Ratings Inc., the 10 largest U.S. prime money market funds represent more than $755 billion of assets – over half of which are directly exposed to European banks and presumably to the Greek debt crisis. That's another $377.5 billion in exposure our system may not be able to handle.

Throw in private liquidity pools, the rest of the U.S. money market universe, and European money market funds denominated in dollars, and you could easily hit another $2 trillion to $5 trillion in risks that are not yet factored into the financial system — probably more.

But you know what?

As problematic as that sounds, I am actually more worried about something we've heard with increasing frequency over the past few weeks – that the Fed and Wall Street are both optimistic that they understand the risks involved.

Anybody besides me want to call BS?

I think we should, because the mere fact that they think they "understand" the risks involved practically guarantees that they don't. And really, we have the right to know if there's another Lehman Bros. lurking somewhere in the Eurozone.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Dante Mena | July 13, 2011

    Our global interrelationships are not what they were twenty years ago. With increasingly rapid pace, all nations (And many corporations and especially banks and trading houses) everywhere have been climbing aboard the debt wagon … and funding within the same concentrated circles, in a happy ride that ends when short sighted logic pushes the barrier of our mutual long term welfare. Unfortunately, everyone is on the "take" so much that we have abandoned the "common sense" of our global interrelationships … wherein "profit" trumps "common sense" … and we have thrown ourselves back in the jungle. I am sitting back observing, and wondering where the downward slide will end … because for sure, with billions on the low end of the scale, and not enough to go around, who will push the first trigger? What will be the first trigger? Where will it lead? Food … minerals … or finance? Perhaps Greece is the trigger? But, we now have so many choices … it is impossible to tell. The chaos factor is alive and well, and it appears that it is soon ready to come out of the cave.

  2. DDearborn | July 13, 2011

    Hmmm

    This article is misleading. It is intended to convey to the reader that failure is not an option because so many banks have significant exposure. Isn't it true however that it is in fact only a handful of banks that are holding over 75% of the debt? An in reality if there was a complete default it is only these 2-3 banks that would in fact face potentially bankruptcy. So in essence an entire society of people are being turned into debt slaves. Much of the public wealth is being sold off to carpet bagger's and their entire economic system being put under the thumb of a small group of unelected foreign regulators. All this misery for so many so that the handful of owners of these 3 banks can get even richer? Without a doubt the pain felt by the stockholders of the banks in the event of default would be miniscule compared to what has already happened to the citizens of entire countries.

    In short this bank "crisis" is nothing more than a shake down. It is a fraud on such a large scale, aided by the likes of the US FED and the Bank of England that the average citizen cannot see the truth. It is a simple con. The citizens of the World need to follow Iceland and tell the bankers NO!
    And instead of bowing to being raped by these banks the world at large should start arresting the bank officers and the politicians that aided and abetted them. They should be on trial for fraud, racketeering, and crimes against humanity. People must stand up and just say NO!

  3. Werner | July 13, 2011

    Greece is the tip of the Iceberg.
    What will happen when the other PIIGS will blow up? Not to speak of Belgium and France, and above all of the US government.
    If any one really understood what CDS could possibly cost, they would never have indulged issuing or trading them. But greed overwhelmed any realistic perspective.
    Add to that that most ETF godl funds probably dont own an ounce of the gold they are supposed to deliver.
    It looks like this financial house of cards will collapse any day and it wont be pretty.

  4. Deke | July 13, 2011

    I think it is time to identify the people, fund managers etc who are behind the attacks on the PIIGS countries! Why will the credit-default-swap raiders be allowed to go after Spain, Italy, and France when they're done with Greece, Ireland, and Portugal? That these major trading houses have grown so powerful they can attack entire countries, much the way the bond vigilantes attacked debt in the 1990s as a means of raising rates is insane. The best way, in my opinion, to put a halt to this insanity is to expose the culprits and allow public opinion and scorn put a stop to these vultures.

  5. Ron Joseph | July 13, 2011

    It still is, not if, just when…………….

  6. Steve | July 13, 2011

    DDearborn:

    I just stood up and shouted "No!"……. Nothing happened.

  7. Gordan Finch | July 13, 2011

    I agree, its time the crooks in suits, wearing Armani, who’s stolen wealth and Million Dollar Barristers protect them from being thrown in jail were brought to justice.

    We have accountants, solicitors, politicians, bankers, insurers, ministers, police, clergy, companies, directors, executives, media, magistrates, financiers, All committing serious crime, offences that the ordinary public would receive 10 year jail sentences. Recent IMF allegations and Phone tapping by some of the Media spring to mind.

    Bank debt unfortunately is not just the few, but the majority owned by the few Ultimate Holding Companies. The hidden deception is in the Euro zone it does, have its own American International Group Inc. (NYSE: AIG), and worse, its own Lehman Bros in the Ultimate Holding Group of Zurich the insurer.

    This company has deceived Governments, Courts, Banks, Markets, Investors, everyone with its myriad of different company names, thousands of them. It is time the public called for action, to force fraudulent companies like Zurich Financial Services to disclose all its companies holdings and interests not just the significant subsidiaries, this should be made clear in bold in every transaction and in public.

    This would stop them passing off as – ABCD Insurance Ltd- etc a competitor, when it is the same company you are already insured with. Make them tell the public who they are; this will stop a worldwide Banking and Insurance deception.

    Then force the company and all holdings to pay tax on all income earned in the country of receipt this will stop the cross border Holding Group tax dodging.

    It is time that Governments all over the World look in detail at Zurich the Country and its Banks and Zurich the Insurer and its banks and affiliations and investments and holdings offshore and tax avoided assets. This one company has caused misery and distress to millions all over the world, stop them is my message.

  8. Steve_in_Australia | July 13, 2011

    I like Keith and his articles are usually very good. But this one sadly lacks some basic research. I love, for example, the comment about the "dysfunctional” French economy. This is from the Wall Street Journal May 13, 2011:
    PARIS—French economic growth surged beyond expectations in the first quarter of 2011, reaching a rate not seen for almost five years, official statistics agency Insee said Friday. Gross domestic product in the euro zone's second-largest economy rose 1% in the first three months of the year, after a 0.3% expansion in the fourth quarter of 2010, Insee said. Economists were expecting a 0.6% expansion. The first quarter growth figure also out-stripped the 0.7% forecast of the Bank of France and Insee's own forecast of 0.6%.

    PLEASE look at the exposure of the European countries: on the top is France with $9B Greek debt. Let’s see what Bloomberg said on May 4, 2011 about just ONE French bank:
    BNP Paribas SA, Europe’s largest bank, said first-quarter profit rose 15 percent, helped by its French and U.S. consumer-banking businesses. Net income advanced to 2.62 billion euros ($3.9 billion) from 2.28 billion euros a year earlier, the Paris-based company said in an e-mailed statement today. That beat the 2.22 billion- euro average estimate of 10 analysts surveyed by Bloomberg.
    So just one French bank can cover the entire French exposure in Greece from one year’s profits!
    .

  9. Leone Anna Larissa | July 19, 2011

    If it would be possible to make the bastards of Lehman Brothers paying their debts to
    people whom purposely they cheated, through many Foreign Banks it would be a miracle.

    ow it's possible to ruine people?

    For me personally was a very desperate thing, because in 20 years I putted on my account
    at the Dresdner Bank in Constance Germany 100.000.-EURO and one day they became 46.500.
    Where Mrs. Merkel is looking? Of course the joke with me was easy the director of the Bank(actually
    Commerzbank) called me in Moscow Russia where I'm leaving and told me there was a unique phantastic opportunity to put all my money inLehman Brother Netherlans, without mentioning U.S.A. At the end
    of the day I told him yes and this I'll regret for long long time. Who permitted Lehman Brother to go bankrupt?? I don't know. precisely, but surely somebody whose account is with 9 zero.

    kind regards
    Leone Loginov Anna Larissa
    Moscow – Russian Federation

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