The Endgame

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