How to Profit From Europe’s Debt Crisis

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tdp2664 InvestorPlace Back in July, I warned you that Europe probably had its own Lehman Bros. — an unstable financial institution on the brink of a collapse. At the time, I didn’t know exactly which institutions were most at risk. Now, I have a pretty good idea and want to share that with you. One big firm, the Brussels-based Dexia SA, is already set to be dismantled. And based on an analysis of 50 European banks with a combined $129 billion (92 billion euros) tied up in Greek sovereign debt, I’ve identified two other suspect institutions: BNP Paribas SA and Societe Generale SA (PINK: SCGLY ). These banks have a high level of exposure to Greek sovereign debt and, once they’re forced to acknowledge the precariousness of their situation, investors will stampede for the exits. That will have negative effects for both European and U.S. banks, as well as the overall markets. But there is a way to not only protect yourself, but turn a serious profit. I will explain that to you shortly, but first, let me give you an idea of what it is we’re dealing with. Europe’s Lehman Bros. Basically, there are two ways to judge which banks are most at risk. You can: Look at how expensive the credit default swaps on these banks are compared to their peer group. Look at how quickly those credit default swaps have climbed. Credit default swaps, in case you are not familiar with them, originally were created as insurance that protected the lender in case of a default. When they are purchased, the loan is turned into an asset and then is “swappable” for cash if the borrower defaults. Generally speaking, the more expensive a credit default swap is and the faster its price has increased, the greater the risk there is associated with it.