"Eerie Echo" of Pre-Lehman: Is Contagion from Europe Coming to the U.S.?

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"Eerie Echo" of Pre-Lehman: Is Contagion from Europe Coming to the U.S.?
If Greece exits the eurozone the fallout could be "Lehman on steroids."

By Bob Stokes
Tue, 12 Jun 2012 16:45:00 ET

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The Lehman Brothers collapse in September 2008 was the largest bankruptcy in history.

Banks, hedge funds, insurers, mortgage companies and individuals across the globe had ties to Lehman. Its implosion created a massive financial shock wave.

Within 24 hours, the stock market crashed, and credit markets around the world froze. "We're no longer talking about mortgages," says economist Gertler. "We're talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading."

pbs.org, Feb. 2009

PBS also quoted Federal Deposit Insurance Corporation Chair Sheila Bair:

With the failure, we saw a lot of decreased confidence in all financial institutions, including banks, and we saw a lot of volatility in deposits.

With this recent history in mind, consider a comment from the President of the World Bank (emphasis added):

The summer of 2012 is looking like an “eerie” echo of 2008 but euro zone sovereign debt has replaced mortgages as the risky asset class that markets are anxious about, said Robert Zoellick, President of the World Bank.

“If Greece leaves the eurozone, the contagion is impossible to predict, just as Lehman [Brothers’ collapse] had unexpected consequences,” Zoellick said.

cnbc.com, May 31, 2012

Greeks go to the polls June 17 to elect a new government. The outcome could determine if Greece stays in the eurozone. Our June 11 Short Term Update noted

Spain received its bailout this weekend, making it the fourth European nation to get international aid in order to avoid collapse, for now (Ireland, Greece and Portugal are the others). Next up will likely be Italy, and then France and then...the world does not have enough cash to service the existing mountain of debts that have been piled up over the past 75+ years. The "unwinding" of these debts is the essence of deflation. Next up are the Greek elections on Sunday.

On June 12, "Spanish bond yields hit a euro-era high...The turmoil spread to Italy, the euro zone's third largest economy, where bond yields leapt." (wsj.com)

As credit risk increases in Europe, the outcome may dwarf the Lehman shock wave.

How can you protect your portfolio in a downward spiral of deflation? Every investor needs to know the answer to this question.

The second half of 2012 will likely be a time to financially fasten your seatbelt. Learn our specific forecasts via a 30-day risk-free trial>>

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Tags: banks, conquer the crash, credit default swaps, debt crisis, deflation, economic depression, economic indicators, Elliott wave, European debt crisis, eurozone, Lehman Brothers, soverign debt crisis, subprime lending, world central banks

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