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Monday, April 15, 2024

DB: Greece is Bear Stearns, (fill in the blank) is Goldman Sachs

DB: Greece is Bear Stearns, (fill in the blank) is Goldman Sachs

Courtesy of Andy Kessler 



NEW YORK - MARCH 26:  A protestor stands outside Bear Stearns headquarters March 26, 2008 in New York.  Hundreds of housing activists stormed the lobby of the Bear Stearns skyscraper in Manhattan, overwhelming security and staging a noisy rally, protesting the government-backed sale and bailout of the investment bank.   (Photo by Chris Hondros/Getty Images)

Even a win in the World Cup soccer tournament won’t save Europe. Nor will the G-20 meeting in Toronto this week. With Grecian urns, Irish eyes, Spanish flies, and Portuguese waterdogs all up to their eyeballs in debt, it’s only a matter of time before the whole venture implodes. Even after an almost trillion dollar bailout across Europe, Moody’s Investors Service last week downgraded Greece’s debt from A3 to Ba1–junk bonds.

We’ve seen this movie before—in 2008, when it was banks, not countries, reeling out of economic control. Once you recognize this pattern—desperate nations behaving just as the desperate banks did—the next 12 months of news will all make sense. Here is a handy guide.

Greece is clearly Bear Stearns. They’ve taken on too much debt, used derivatives created by Goldman Sachs to put off payment well into the future, and aren’t generating enough tax revenue to pay for their bloated expenses. The cost of Greece’s debt financing is skyrocketing, now 8 percent higher than the benchmark German bund. Either Athens defaults, causing more firebombs to be tossed and even larger riots in the streets, or the European Union arranges a takeover by deep-pocketed Germany.

NEW YORK - SEPTEMBER 10:  People walk under a ticker sign announcing Lehman Brothers financial losses September 10, 2008 in New York.  Lehman Brothers plans to sell a majority stake in its investment management business and said a sale of the entire company was possible.  (Photo by Chris Hondros/Getty Images)

 Germany is the JP Morgan of this story. It will provide a lowball 200 billion Euros to Greece and then end up paying 1000 billion, reminiscent of JP Morgan offering $2 and then paying $10 for Bear Stearns. Now wait a second, I can hear you complain, countries can’t merge like companies.

Of course they can, it happens all the time—though usually when tanks roll. Ask Poland. Or Hungary. In this case, Germany won’t legally own Greece, but in reality, it will absolutely be in charge of fixing Greece’s mess. My sense is the Germans will be quite good at tax collection and not so strong at dismantling the welfare state. But Greek debt will be resolved and maybe the Euro will even rally.

But it won’t be over quite yet. That’s because sadly, Spain is Lehman Brothers. With 22 percent unemployment, and loaded with debt and deteriorating real estate prices, who is going to save it? Tongues will wag that defaulting on debts will teach a lesson to countries that live beyond their means. As a huge exporter, the carcass of a bankrupt Spain will be attractive to some country, probably in the Middle East, given Spain’s multicultural history. This country will be to Spain what Barclays was to Lehman, buying the parts of Spain it wants—say Barcelona—and dumping the wine business on France.

France, by the way, is Morgan Stanley; they have so many of their own problems that they can’t truly be part of any solution. Like Morgan Stanley, France will probably take some money from a large Japanese bank and then ignore them.

Italy, which always seems to drag down the rest of Europe, is, of course, Merill Lynch. It is not really good at anything in particular, though it has retail offices in the form of restaurants and pizzerias across the globe. Still, Italy is a net destroyer, not a creator, of wealth. Not wanting to return to the days when it cost 5,000 Italian lira to pay for a cup of espresso, Italy will (again) fall under the ownership and control of the German state, bringing flair and design to Germanic rigidness. A nice match. The Greeks only have islands.

The Euro, by the way, is Fannie Mae and Freddie Mac bonds. Banks around the world owned it because it could never fail. Oops—until it does.

CHICAGO - APRIL 28: Antonio Velez holds a sign while standing among other union workers gathering outside Willis Tower before the start of a march through the financial district on April 28, 2010 in Chicago, Illinois. The workers were calling for job creation and financial reform. The protestors started their march outside the Willis Tower, which houses the offices of Goldman Sachs, then marched past the Federal Reserve Bank of Chicago and the Bank of America building before holding a rally in the Federal Building Plaza. (Photo by Scott Olson/Getty Images)

Okay. I can’t believe I’ve gone this far without answering the real burning question: Who is Goldman Sachs? The United Kingdom, of course. Aloof and not really part of all that mess on the continent, the U.K. will probably make money shorting the rest of Europe and then become nervous that Greece and Spain will drag them down as the mess spreads. The U.K. will eventually come around and do what it can to help calm the markets. But it won’t matter. Everyone will still accuse the U.K. of being a giant squid or leech or mosquito, sucking the blood out of Euro-weenies until they cry uncle. Later, when things are more stable, the U.K. will be accused of fraud and benefiting from Europe problems. The U.K. won’t care because its citizens are all paid so well.

I’d like to say that Warren Buffet is Switzerland, but I think I’ve stretched this analogy much too far.

Just be warned. You can bail out Wall Street banks and recapitalize their balance sheets and someday they can start lending again (we’re still waiting). On the other hand, you can’t really bail out a country without massive structural changes, cuts in entitlements, huge reduction in government as a percent of GDP, and a rewriting of the social contract between government and workers. Often, bankruptcy or the threat of it is the only way these nasty tectonic-shifting changes can be pushed through.

Andy Kessler is a hedge fund manager and author, most recently of Grumby. He has written for the Wall Street Journal, Forbes, Technology Review, The New York Times and elsewhere and has appeared on CNBC, CNN, Fox, NPR and Dateline NBC. He lives in Northern California with his wife and four sons. 

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