Here is a sim­ple descrip­tion of what is dri­ving the mar­kets. It is basi­cally a counter party risk sit­u­a­tion involv­ing the biggest banks in the West­ern finan­cial sys­tem. If you keep this in mind most of the things that are hap­pen­ing will be more clear, even though the mind of the sta­tus quo rebels against it. Peo­ple will believe what is in their best inter­ests, long per­haps after it is beyond repair.

I think the endgame is well under­way, and the out­come is not sav­ing the pub­lic, but man­ag­ing the tran­si­tion to a new sys­tem, while hope­fully keep­ing the same rul­ing class. That will not be dis­closed while ‘the play­ers’ jockey for advan­tage and posi­tion, ‘turf’ and the priv­i­lege of rents, if you will, well ahead of the crowd. –Jesse “Cur­rency Wars: Euro­pean Debt Cri­sis and the Next Phase of Global Finance

In the game of chess, the endgame is the stage of the game when few pieces remain on the board, when the end is in sight but its imple­men­ta­tion is still unknown. Qui­etly, it seems we have entered the endgame of the cur­rent finan­cial dis­as­ter we have been unknow­ingly involved in over the past few years. We can­not know exactly how it will play out but the best odds seem to be a mar­ket col­lapse in Europe which, because of Wall Street’s expo­sure to French and Ger­man banks, will roar across the Atlantic to the US. The rul­ing class is likely doing every­thing it can now to pro­tect and ensure its con­tin­ued sur­vival in the com­ing years. The gen­eral pub­lic will be left to fend for itself.

Most of that same pub­lic has no idea how tightly we are tied to the ongo­ing dis­as­ter in Europe. Most Amer­i­cans would prob­a­bly say to let Greece default and be pun­ished for their appar­ent finan­cial sins. Unfor­tu­nately, because we stood by in 2008 and did noth­ing of mean­ing­ful reform to the finan­cial indus­tries in the US, we are prac­ti­cally tied to the hip of the Euro­pean cri­sis. How is that pos­si­ble? In the same way that we were nearly destroyed by the Lehman and AIG crises of 2008, the lowly derivative.

Cur­rently, accord­ing to the BIS, Wall Street banks have lent Greece a mere $7 bil­lion. In the grand scheme of things, that’s chump change. As recently as Sep­tem­ber 6th of this year, Ben Bernanke has said that the US expo­sure to Greek banks is small. Unfor­tu­nately, none of that is exactly true. Or more cor­rectly, while that is true, it tells only a frac­tion of the story. The real issue is that while Wall Street banks haven’t lent much money to Greece directly, they have lent enor­mous sums to Ger­man and French banks. Guess who stands to lose the most if Greece defaults? If you guessed Ger­man and French banks, you win the $64 prize. Wall Street has total expo­sure to the euro­zone at around $2.7 tril­lion and more than half of that is owed by Ger­man and French banks.

To make mat­ters much worse, most or all of that total is likely insured in the same way that the mort­gage backed secu­ri­ties were largely insured, e.g. through the use of deriv­a­tives. Because of this, Wall Street can say they have min­i­mal expo­sure but as you likely recall, when the bill comes due at the insur­ance agency, if the bill can’t be paid, chaos hap­pens. This is exactly what we had in the 2008 cri­sis and unfor­tu­nately, noth­ing has changed because we allowed almost all the play­ers to escape scot-free at the expense of the tax­pay­ers in America.

The French and Ger­man banks are scram­bling to free up assets as the mar­ket starts to real­ize the Greek bonds they own are likely worth 50 cents on the dol­lar. If Wall Street has lent large sums to these banks that is insured through deriv­a­tive con­tracts and if one or more of those banks goes under or starts to crack, the effects on our econ­omy will be huge. This is why the US Admin­is­tra­tion is plead­ing with the Euro­peans to bailout their own banks.

All of this is pos­si­ble because noth­ing was done to deal with the moral haz­ard of banks being let off the hook dur­ing 2008. Hardly any­one went to jail. Prac­ti­cally no banks failed. We didn’t take the oppor­tu­nity to either bet­ter reg­u­late or flat out nation­al­ize the banks. So now, we have a sit­u­a­tion where the banks right­fully think that noth­ing they do can hurt them since it comes with the implicit guar­an­tee from the US tax­payer that we’ll bail them out. We have kicked the can down the road until we entered a dead end alley. The can can’t get kicked any far­ther and unless the Euro­peans sud­denly find a way out of a par­tic­u­larly tricky mess, we’re going to have more chaos on our hands, pos­si­bly much worse than 2008. We have fewer tools at our dis­posal this time around and the effects could be much greater. Pre­dict­ing how this will end is almost impos­si­ble but the chance for an orderly and fair solu­tion is rapidly shrinking.

Fur­ther read­ing:
Robert Reich: Fol­low The Money
New York Times: Euro­pean Banks Face Huge Losses