US Banks and the Euro Crisis

In a post a short just over two weeks ago, I suggested that the response to the European sovereign debt crisis was in part being influenced by the 'too big to fail' banks, including the large US banks exposed to European debt. As the European crisis lurches forwards, the exposure of the too big to fail banks is starting to see the light of day. For example, the following is a graphic from EconMatters on Business Insider, originally from the New York Times:

From NYT, Oct 23, 2011

It's  great visual illustration of the linkages between the different debtors, though the colour scheme is extremely questionable. The concern has now become concrete, with the following from Reuters:

The U.S. Federal Reserve plans to stress test six large U.S. banks against a hypothetical market shock, including a deterioration of the European debt crisis, as part of an annual review of bank health.
The Fed said it will publish next year the results of the tests for six banks that have large trading operations: Bank of America (BAC.N), Citigroup (C.N), Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N).

"They are clearly worried about the issue of Europe," said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. "In a time of risk aversion and concern, you need transparency."
The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "potential sharp market price movements in European sovereign and financial sectors."

Meanwhile, as the Independent newspaper points out, the 'technocrats' and leaders of Europe are being recruited from the alumni of the too big to fail banks:

The ascension of Mario Monti to the Italian prime ministership is remarkable for more reasons than it is possible to count. By replacing the scandal-surfing Silvio Berlusconi, Italy has dislodged the undislodgeable. By imposing rule by unelected technocrats, it has suspended the normal rules of democracy, and maybe democracy itself. And by putting a senior adviser at Goldman Sachs in charge of a Western nation, it has taken to new heights the political power of an investment bank that you might have thought was prohibitively politically toxic.

This is the most remarkable thing of all: a giant leap forward for, or perhaps even the successful culmination of, the Goldman Sachs Project.
It is not just Mr Monti. The European Central Bank, another crucial player in the sovereign debt drama, is under ex-Goldman management, and the investment bank's alumni hold sway in the corridors of power in almost every European nation, as they have done in the US throughout the financial crisis. Until Wednesday, the International Monetary Fund's European division was also run by a Goldman man, Antonio Borges, who just resigned for personal reasons.
Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as "the Vampire Squid", and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman's interests are intricately tied up with the answer to that question.

I suggest reading the complete article. As for the stress tests of the too big to fail, the one point of confidence that we might have about such tests is that they will seek to reassure, rather than really test.  The pressure being laid on the Eurozone by both the US and UK are no doubt at least partially driven by the impact of both the direct and indirect exposures of the major banks in these countries. As I pointed out in the earlier post, it seemed odd that the bailout of Greece was being arranged to avoid triggering Credit Default Swaps, which would risk spreading the pain of default into the too big to fail banks. This is my conclusion to the previous post on default exposure:

It is a certainty that central banks and the regulators in the US and Europe have a good idea about the concentrations of risk in the system, and they are no doubt briefing and driving the policy of politicians. This is all so opaque, and one can only suspect that the avoidance of triggering CDSs is yet again about 'too big to fail'. In other words, the world is being moved again by policy to protect large financial institutions and the 'investment-grade global banks' are investment grade only because they are backstopped by governments and central banks.Is this not shabby? 

It is all looking ever more shabby.