By Robert B. Reich

It's impossible to know whether Occupy Wall Street will coalesce into a political movement, but there's little question Wall Street is still up to its old tricks.

Right now the Street is dedicating all its lobbying power to water down regulations designed to implement financial-reform legislation. Its spokespeople, including congressional Republicans and GOP candidates, charge that Dodd-Frank (as the law is known) is overkill.

Yet take a close look at Europe's debt crisis and you see quite the opposite. Dodd-Frank may be too weak.

The European debt crisis isn't a problem for America's real economy. Whatever happens to Greece or other deeply indebted European governments, Americas' exports to Europe aren't going to dry up. And in any event, they're tiny compared to the size of the U.S. economy.

If you want the real reason for concern in the United States about what's happening in Europe, follow the money. A Greek (or Irish or Spanish or Italian or Portuguese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008.

That is, financial chaos.

Investors are already getting the scent. Stocks have slumped as investors dump Wall Street bank shares.

The Street has lent only about $7 billion to Greece, according to the Bank for International Settlements. That's no big deal.

But a default by Greece or any other of Europe's debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more.

That's where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle. The Street's total exposure to the euro zone is about $2.7 trillion. Its exposure to France and Germany accounts for nearly half the total.

And it's not just Wall Street's loans to German and French banks that are worrisome. Wall Street has also insured or bet on all sorts of derivatives emanating from Europe -- on energy, currency, interest rates and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable.

Follow the money: If Greece goes down, investors will start fleeing Ireland, Spain, Italy and Portugal as well. All of this will send big French and German banks reeling. If one of these banks collapses or show signs of major strain, Wall Street will be in big trouble. Possibly even bigger trouble than it was in after Lehman Brothers went down.

That's why shares of the biggest U.S. banks have been falling for the past month. Last week, Morgan Stanley closed at its lowest since December 2008, and the cost of insuring Morgan's debt has jumped to levels not seen since the end of 2008.

The rumor mill says Morgan could lose as much as $30 billion if some French and German banks fail -- $30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization).

Morgan says its exposure to French banks is zero. Why the discrepancy? Morgan has taken out insurance against its loans to European banks, as well as collateral from them. So technically it's possible for Morgan to say it's not exposed.

But does anyone remember something spelled AIG? That was the giant insurance firm that went bust when Wall Street began going under. Wall Street thought it had insured its bets with AIG. Turned out, AIG couldn't pay up.

Haven't we been here before?

The mere fact that Morgan and other big Wall Street banks are susceptible to the rumor mill is evidence enough that no one knows Morgan's or any other bank's exposure to European banks or derivatives. It shows Dodd-Frank didn't go nearly far enough.

Which is why Washington officials are terrified -- and why Treasury Secretary Tim Geithner keeps begging European officials to bail out Greece and the other deeply indebted European nations.

Make no mistake: The United States wants Europe to bail out its deeply indebted nations so they can repay what they owe big European banks. Otherwise, those banks could implode -- taking Wall Street with them.

One of the many ironies here is that some badly indebted European nations (Ireland is the best example) went deeply into debt in the first place bailing out their banks from the crisis that began on Wall Street.

Full circle.

In other words, Greece isn't the real problem. Nor is Ireland, Italy, Portugal or Spain.

The real problem is the financial system -- centered on Wall Street.


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