Remember credit default swaps? AIG? Hopelessly entangled exotic financial instruments tied to esoteric asset valuations that caused cascading defaults in 2008 and threatened to tank the global financial system unless taxpayers ate all the losses? Remember how we reformed Wall St. to make sure that never repeated itself? Someone tell Goldman Sachs, JPMorgan, and Morgan Stanley, because they've teed the whole damn thing up again, this time in Europe.

Bloomberg's Yalman Onaran has an excellent and terrifying account of how American banks have spent the last three years replaying precisely the same malevolent game that led to the '08 crisis. But instead of playing with shitty real estate, they're playing with European bonds. Either way, the endgame is the same: As soon as someone can't pay their bills, we'll be talking about "systemic risk" again.

American lenders have sold a half a trillion dollars worth of insurance on European debt, mostly in the form of credit default swaps, Onaran reports. That means that if European bond issuers default, these American banks—Goldman Sachs, JPMorgan, Citbank, Morgan Stanley, and Bank of America chief among them—are on the hook to pay up. And the amount of insurance issued by U.S. firms actually ticked up by $80 billion in the first half of 2011—a time, you will recall, when half of Europe seemed to be teetering on default.

"We could have an AIG moment in Europe," said Peter Tchir, founder of TF Market Advisors, a New York-based research firm that focuses on European credit markets. "Let's say Greece defaults, causing runs on other periphery debt that would trigger collateral requirements from the sellers of CDS, and one or more cannot meet the margin calls. There might be AIGs hiding out there."

The banks all claim they've managed to spread the risk around—so that if, say, the recently reached voluntary deal with Greece's debtors goes south and the country defaults, they will be able to pay the resulting bills. Yes, Morgan Stanley, for instance, has sold a lot of credit default swaps on Spanish debt—but it's hedged that risk through an arcane financial process called "netting," and we all know how successful arcane financial processes are when subjected to massive stress.

Morgan Stanley said last month that its net exposure in the third quarter to the debt of Spain's government, banks and companies was $499 million. The Federal Financial Institutions Examination Council, an interagency body that collects data for U.S. bank regulators and disallows some of the netting, said the New York-based firm's exposure in Spain was $25 billion in the second quarter.

The net figure for Italy was $1.8 billion, Morgan Stanley said, compared with $11 billion reported by the federal data- collection body.

That's right—Morgan Stanley's estimate of its Spanish risk is only off by a factor of 50. Its market capitalization is $31 billion. Anyway, I'm sure it's all fine and the banks have it under control and Bloomberg is just doomsaying. Why would a bank lie about something like this?

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