If you’re thinking, “Wow, too bad what’s going on in Europe, with Greece about to blow the EU sky high, but at least we’re over here and not going to get hurt” — well, think again. 

U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.

Those countries are the notorious PIIGS — those most likely to default. If one or more of these countries goes bankrupt, and the big banks have to make good on insurance claims, well…:

“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.”

You’ll remember that the US government had to bail out AIG to keep the economy from collapse. As William Greider explains:

The government’s $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG’s collapse and subsequent rescue involved nearly all the critical elements, including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand—moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public.

More Greider:

Bailing out AIG effectively meant rescuing Goldman Sachs, Morgan Stanley, Bank of America and Merrill Lynch (as well as a dozens of European banks) from huge losses. Those financial institutions played the derivatives game with AIG, the esoteric practice of placing financial bets on future events. AIG lost its bets, which led to its collapse. But other gamblers—the counterparties in AIG’s derivative deals—were made whole on their bets, paid off 100 cents on the dollar. Taxpayers got stuck with the bill.

“The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America’s largest financial institutions,” the COP report said. This could have been avoided, the report argues, if the Fed had listened to disinterested advisers with a less parochial understanding of the public interest.

But that was two years ago. We have learned since then, right? Gosh, no. The big Wall Street banks are hoping that European governments still believe in Too Big To Fail, Bloomberg reports. But if not, what? Well, there’s always the good old US taxpayer to stick it to one more time.

And who will be doing the sticking in the event of a Euro bailout? Bloomberg:

Five banks — JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America Corp. (BAC) and Citigroup Inc. (C) — write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency.

In 2010, Democratic US Sen. Byron Dorgan tried to get the Senate to ban these things. He failed. The Financial Times reported at the time:

Byron Dorgan, the Democratic senator from North Dakota, squabbled with his own party’s leadership over whether he could offer an amendment to ban “naked” credit default swaps, where an investor holds insurance against the default of a particular bond without holding the underlying debt.

“Can’t buy fire insurance against somebody else’s house. Can’t buy life insurance against somebody else’s life,” said Mr Dorgan. “My amendment would shut this down but I’m being blocked by people who don’t want us to get tough on Wall Street.”

Let’s see who voted against Dorgan’s proposed ban. Details here. Summary: Every Republican except Bunning and Ensign (Voinovich didn’t vote) [none of the trio are still in the Senate, by the way] — and 18 Democrats, plus Joe Lieberman.

So now you know who to blame if and when European default(s) cause any of our Big Five banks to go belly up, or compel another massive Too Big To Fail bailout. More privatizing profits and socializing losses. The Senate could have put a stop to this dangerous practice, or at least limited the damage. But the Republican Party, and many in the Democratic Party, thought it more important to protect Wall Street than the American taxpayer.

Remember that.

UPDATE: Commentator ScurvyOaks makes a very good corrective point. Dorgan’s amendment would only have banned “naked” credit default swaps. It would appear that the credit-default swaps at issue in the Bloomberg story do not appear to be of the “naked” variety. So even if the Dorgan amendment had passed, we’d still probably be in this fix. Still, it’s telling that the Senate couldn’t even bring itself to ban the most reckless version of the CDS. Even this more responsible kind could sink us. Says the Bloomberg story:

“Risk isn’t going to evaporate through these trades,” Cannon said. “The big problem with all these gross exposures is counterparty risk. When the CDS is triggered due to default, will those counterparties be standing? If everybody is buying from each other, who’s ultimately going to pay for the losses?”

The taxpayer will — or the economy goes kaboom.