Euro Zone Crisis Not Fun -- More Pain Left

The great euro zone had been bumbling and stumbling. It had known of the sovereign debt issues of Greece, Italy, Ireland and Spain for more than two years and still hadn’t come up with a plan to bring confidence back to the markets.

That’s pretty much still the competency for the region. It wouldn’t matter to us except that Europe still devours 27% of U.S. exports. So, yes, the great nations of Europe can still throw the U.S. economy into the tank.

They also could save themselves and the world too. Europe, like the United States in 2008, is at a crossroads. Crises are no fun, but they do present politicians and regulators an opportunity to do more than just rescue and repair. Everything is on the table whether they acknowledge it or not.

So what’s the magic bullet? Break up the banks.

If you understand anything at all about the euro zone crisis, you should know that the real conflict is not between have and have-not nations. It’s not about pensions. It’s not about taxes or spending. It’s about banks and shadow banks that allowed all of those players to run up massive debt during the last decade.

It’s about Deutsche Bank AG DB +8.78% the world’s No. 2 bank by assets with $2.5 trillion. It’s about BNP ParibasBNPQY +11.40% , the No. 1 bank by assets. It’s about Credit AgricoleCRARY +7.14% , No. 7 in the world. It’s about UBS AG UBS -0.53% , No. 20, UniCredit UNCFF +13.33% , No. 24, and Societe Generale SCGLF +9.18% , No. 19.

Why are they grouped among the biggest banks in the world? No one can say for sure, but it may be because they value those assets at something above the market price.

These are the buy-side banks that underwrote, bought and sold all of the debt and derivatives. They’re the ones with the counterparty exposure and lack of reserves. If they don’t hold, say, Italian debt, then they have a lending relationship with a pension fund or another bank that does. You see the problem: it was garbage in, garbage out. Now everything stinks.

The banks are the ones that need the bailout. They’re going to need it from taxpayers. The ultimate package will be bigger than TARP, bigger than any bailout the world has seen.

Yes, we are going down that road, ese camino, quella strada, diese strasse again.

So, how would breaking up the banks help? First it would limit the damage. Not every bank would make the mistakes of the giants that roam the continent today.