(Written By Rebecca Lipman. Data sourced from Finviz.)
Connectivity comes at a high cost for Wall Street bankers who have lent out more money to European banks than they care to admit, with consequences they don’t fully understand.
It’s very difficult to quantify the damage a collapse of a single European bank can have on the United States economy. That’s because money is always moving between banks and hasn’t been properly monitored.
And while US banks can claim relatively insignificant 1st degree exposure to more questionable European markets, following the money trail leads to some disturbing realisations…
Robert Reich (pictured above), former Secretary of labour, writes on Business Insider, “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… Wall Street has also insured or bet on all sorts of derivatives emanating from Europe – on energy, currency, interest rates, and foreign exchange swaps.”
Therefore, if any default candidates fail (Greece, Ireland, Spain, Italy, Portugal), investors will start fleeing from the banks, which in turn sends French and German banks into tailspin, directly affecting American lenders. “If one of these banks collapses, or show signs of major strain, Wall Street is in big trouble. Possibly even bigger trouble than it was in after Lehman Brothers went down.”
Total exposure to European markets has been placed around $2.7 trillion – a towering number that’s leaving some investors in a bit of a panic. According to data pulled by the Federal Financial Institutions Examination Council, Morgan Stanley has as much as $30 billion in exposure to French and German banks (“roughly $2 billion more than the assets Morgan owns”). However Morgan Stanley says their exposure to French banks is zero, which given the above, can hardly be true.
That alone says there are some serious issues with banks’ transparency. That the banks seem unaware or unable to share their levels of exposure to foreign banks is a failure of both the banks and regulators.
Without a clear picture of the risks, the ripple effects on U.S financial markets remain largely incalculable.
Curious about which US banks are at risk for the biggest losses? The banks in questions, those considered “too big to fail,” include Bank of America (BAC), Wells Fargo & Co. (WFC), Citigroup, (C) Goldman Sachs (GS), Morgan Stanley (MS) and JP Morgan Chase (JPM) – 6 institutions that together have assets equal to 60% of the nation’s GDP.
Will their “too big to fail” labels protect them from the risks?
We detail them below. Click on the links for more information:
analyse These Ideas (Tools Will Open In A New Window)
1. Bank of America Corporation (BAC): Market cap of $63.75B. Provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally. Price as of 10/07 at $6.03. This is a risky stock that is significantly more volatile than the overall market (beta = 2.25). The stock is currently stuck in a downtrend, trading -7.47% below its SMA20, -17.17% below its SMA50, and -46.77% below its SMA200. The stock has performed poorly over the last month, losing 16.04%.
2. Citigroup, Inc. (C): Market cap of $75.93B. Provides consumers, corporations, governments, and institutions with a range of financial products and services. Price as of 10/07 at $25.17. This is a risky stock that is significantly more volatile than the overall market (beta = 2.56). The stock has performed poorly over the last month, losing 10.21%.
3. The Goldman Sachs Group, Inc. (GS): Market cap of $49.53B. Provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. Price as of 10/07 at $94.71. The stock has lost 34.55% over the last year.
4. JPMorgan Chase & Co. (JPM): Market cap of $126.25B. Provides various financial services worldwide. Price as of 10/07 at $31.54. The stock has lost 16.29% over the last year.
5. Morgan Stanley (MS): Market cap of $29.36B. Provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide. Price as of 10/07 at $14.51. The stock has lost 38.96% over the last year.
6. Wells Fargo & Company (WFC): Market cap of $133.95B. Provides retail, commercial, and corporate banking services primarily in the United States. Price as of 10/07 at $25.1. Might be undervalued at current levels, with a PEG ratio at 0.88, and P/FCF ratio at 4.8. The stock has lost 1.25% over the last year.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.