November 17, 2011

American banks' involvement in the Eurozone crisis

Last week in a post on the Greek crisis, I said that the extent of US banks' liability for risky debt (either in the form of loans that may go bad or credit default swaps that may turn out to be bad bets) was not clear. Recall that banks give out loans to governments and then take 'insurance' on those loans in the form of credit default swaps (CDS) in case the governments cannot pay back the loans. But if the loans go bad and the banks that issued the CDS cannot pay up on the insurance claims, these banks could face huge losses.

Now a news report says that Goldman Sachs and JP Morgan Chase have involvements totaling more than $5 trillion of debt globally but they are not divulging how much if that is in the troubled PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). Bank of America, Citigroup, and Morgan Stanley also have taken similar risks.


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Its disappointing to see that this lack of transparency continues following the global economic crises. The investment banks have been reckless in trading CDS's with each other on the same basis as trading a commodity such as Gold.

Such practices need to be controlled rather than manipulated by those in the know. I find it deeply frustrating that the large investment banks were able to dress up risk as a safe bet and then trade that risk at a profit as you would with a tangible asset. To top it off the investment banks today declare that they are unable to diclose the true risk or exposure to the riskier governments when this affects us all!

Posted by mike on November 18, 2011 07:04 PM

It is quite sad how often we hear the word Trillion thrown around these days. It's hard to put into perspective just how much a single trillion is. With this new report, it broadens the size of the storm we're currently going through.

Posted by Delaware Captive on November 21, 2011 11:12 AM

I think those banks you have mentioned, especially JP Morgan Chase will surely face huge losses in the very near future. Looks like new crisis is coming!

Posted by Belize Offshore on November 28, 2011 04:00 AM

Chinese banks and companies also have role to play in resolving the sovereign debt crisis which has swept across Europe. iorel Isticioaia Budura, managing director for Asia-Pacific said that he would like to see the Chinese companies and banks as partners in attempts to address the problems Euro zone are immediately facing. Euro-area finance ministers of the 17 nations agreed to seek a greater role for the International Monetary Fund and the European Central Bank in fighting the sovereign debt crisis after conceding the effort to expand their bailout fund missed its target. As a series of stop-gap accords failed to protect Italy and Spain from surging bond yields and in pressure to find ways to boost the EFSF’s effectiveness, The finance chiefs agreed on a plan to guarantee up to 30 percent of bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.



Posted by real etsate in Spain on November 30, 2011 07:15 AM