Value Added


Blame Reckless U.S. Banks for Our Trouble with Greece

Steven Goldberg

With more oversight from Washington, we wouldn’t need to care so much about the euro-zone crisis.



Lately, I’ve been watching my stocks and stock funds -- as well as those of my clients -- fall because of an arcane political and economic crisis in far-away Greece, a country that hasn’t much mattered in world affairs since its golden age ended around 300 BC.

SEE ALSO: U.S. Can Survive a European Recession

I know Greece as a small, island-flecked Mediterranean country where people like to sit around and drink coffee. Greeks have a reputation for not working very hard and rarely paying taxes. I took a wonderful vacation there ten years ago.

Why does Greece matter to U.S. investors? The standard answer is because the world is now so interconnected. If Greece experiences a “hard default” on its bonds (it has already reneged on a large portion of its debt in a deal blessed by euro-zone officials), or, worse still, if it leaves the euro zone, fears could well spiral out of control in Spain and Italy.

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Then the selloff in Spanish and Italian bonds would almost certainly accelerate. Depositors of Spanish and Italian banks would likely increase their withdrawals, in what could well become a panic over whether those countries, too, might exit the euro zone. What’s more, much of the euro zone is already mired in deep recession.

But the usual explanation for why Greece matters to the U.S. misses the mark. Countries like Greece had financial meltdowns, and Europe experienced recessions, for many decades without such events having much effect on the U.S. economy. And vice versa. In 2001, the U.S. fell into recession after the tech-stock bubble burst, but Europe remained healthy. In 1991, the U.S. had a recession, but Europe didn’t. U.S. exports to Europe amount to a mere 1.7% of our gross domestic product.

Trade between the U.S. and Europe has increased. But even, say, a 25% plunge in our exports to Europe would nibble less than one-half of one percentage point from our GDP. Economically speaking, that’s a gnat bite.

No, when we talk about global interconnectedness -- as far as the economy and markets are concerned -- we’re talking about the interconnectedness of big banks. If Spain’s Banco Santander collapses, the immediate question here will be: What connections do our too-big-to-fail Wall Street financial institutions have with Santander? And the next question will be: What connections do these big banks have with other European banks that have connections with Santander?

At this point, surely Wall Street bankers know better than to invest in the financial houses and government bonds of the weak countries in Europe, right? Surely they know better than to invest in complex securities guaranteed by those banks? Surely they know to avoid counterparty risk with these banks?

Apparently not. In their infinite wisdom, JPMorgan traders took huge positions in complex derivatives that plummeted in value as Europe’s economy showed increasing signs of weakness. Chairman and CEO Jamie Dimon correctly calls those trades “stupid” and “egregious mistakes” -- although he also insists he didn’t know about them earlier, even though the Wall Street Journal had been writing about them since early April.

We know only too well how stupid some banks can be. Four years ago, the taxpayers had to bail out the industry to the tune of $700 billion for huge bets with one another using highly leveraged, exotic mortgage derivatives. After Lehman Brothers failed, the remaining banks lost faith in the financial stability of one another, imperiling the entire financial system and triggering the worst recession since the Great Depression.

Let’s face it: These huge banks have risk in their DNA. It’s how they make money. But no one seems to be able to check it. As Sheila Bair, a Republican and former head of the Federal Deposit Insurance Corp., told Fox News: “I think Jamie Dimon is a very talented manager, and I think JPMorgan is the best managed of the mega-banks. But can even a talented manager manage a $2 trillion institution that is trying to be a commercial bank and derivatives dealer and fixed-income market maker, with international operations and investment bankers?”

The only way to stop this insanity is for the government to write tough regulations to keep banks from making reckless bets. As Bair said in another interview: “I just want all this garbage out of insured banks. A bank with insured deposits should be making loans. If they have excess, they should put the money in safe government securities.”

Bank lobbyists don’t want that to happen. But if it did, we could stop worrying about Greece and the euro zone. Indeed, we could look forward to the return of the drachma and of Greece as a cheap -- as well as beautiful -- travel destination.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area.


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