Wolf Richter: CEO of Dexia – ‘Not A Bank But A Hedge Fund’

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Dexia SA, the Franco-Belgian mega-bank that collapsed and was bailed out in 2008 and that re-collapsed in early October, is a big deal in Belgium where it employs 10,000 people and has over 21 million bank accounts. Its assets of $715 billion dwarf Belgium’s $395 billion economy.

The three countries involved in the bailout agreed in October to guarantee €90 billion in loans, of which Belgium will be responsible for 60.5%, France for 36.5%, Luxembourg for 3%. Belgium’s portion, €54.5 billion, represents nearly 14% of its GDP. The process is moving forward. On December 21, the European Commission approved on a temporary basis €45 billion of those guarantees though they violate EU rules on government subsidies for private companies.

Taxpayers are paying a heavy price for Dexia’s bailout. Belgium nationalized the Belgian entities of Dexia, including untold amounts of toxic assets. The French entity, which was involved in an enormous subprime scandal à la française, was taken over by the Caisse des Dépôts and the Banque Postale—both owned by the French government. Precision Capital, a Luxembourg company controlled by Qatari investors, bought 90% of Dexia Bank International Luxembourg, valuing the firm at €730 million, a steep discount from the expected €1 billion. Luxembourg acquired the remaining 10%. Other entities remain on the block.

In trying to bail out its financial sector, Belgium has guaranteed a total of €138.1 billion in debt (35% of its GDP) and has injected €15.7 billion in capital and €8.6 billion in loans, according to Belgium’s Cour des Comptes (Audit Court), which released the results of its annual audit on December 20 (PDF of the 412-page 168th Cahier) . The largest recipients: Dexia Banque Belgique, Dexia SA, BNP Paribas, and Fortis Banque.

The ultimate costs to Belgian taxpayers will be huge and long-term, given how small the country is. Yet there have been no legal consequences for those responsible. Until now….

Lynx Capital, a Belgian investment firm, has sued Dexia SA and former CEO Pierre Mariani for “spreading false and misleading information” and “market manipulation.” The amount in the case is small—and irrelevant. Lynx purchased 5,350 shares on September 5, 2011, for €1.46 per share and lost 82% of its investment over the next few months. But in a potentially significant development for Belgium, where class-action law doesn’t exist, Bernard Delhez, CEO of Lynx, is now trying to encourage other shareholders to join the cause.

The complaint alleges that Mariani and Jean-Luc Dehaene, Dexia’s former president, issued reassuring statements about the financial condition of the bank from the time they took over, following its bailout in 2008, until September 2011. Because the bank was in a precarious situation throughout and engaged in high-risk activities, the information in those reassuring statements was false and misleading and was intended to artificially inflate Dexia’s share price. Hence, Dexia and Mariani engaged in market manipulation.

Moreover, Mariani must have known that the information was false and misleading. For example, Mariani confided in Dehaene in 2008 that Dexia was “not a bank but a hedge fund” (L’Expansion). Dehaene spilled the beans on this conversation last October during the presentation of the breakup plan. Among the others reasons why Mariani must have known about the true condition of Dexia was a note that Luc Coene, Governor of the National Bank of Belgium, had sent to Dexia last August, in which he recommended that Dexia be dismantled.

For Robert Witterwulghe, Lynx’s lawyer, the facts demonstrate that Mariani knew as early as October, 2008, that Dexia was in a precarious situation, and that the reassuring communications since then were willfully false and misleading.

The court action is based on the law of August 2, 2002, concerning insider trading and market manipulation. But: “Why impose a system for everyone when it is not applied in certain cases?” Delhez said (L’Echo), perhaps to justify in part why he is pushing the case though his investment is small and his legal expenses will pile up quickly.

When a bank collapses, the lies behind its financial statements come out of the woodwork—and Dexia is no exception: a report surfaced with the damning results of an earlier investigation by French regulators. And what happened then? Nothing…. Regulators Knew of Dexia’s Problems But Were Silenced.

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  1. Usha Meghani Abramovitz

    I just don’t get it! They say that we in the US have a problem with our campaign finance system; politicians dependent on corporate moneys to fund their elections, allow the corporations to subvert all checks and balances intended to regulate their activities so as to provide for and protect the common good. So what is Belgium’s excuse?

    1. Roger Van Zant

      Here in Belgium, we should “never attribute to malice that which is adequately explained by stupidity.”

      In this case, the deed had been done before Dehaene and Mariani took over. Who knows, they might even have pulled it through, had the sovereign crisis not taken a turn for the worse while they were (feebly) trying to deleverage.

  2. Richard Kline

    Yves: “In trying to bail out its financial sector, Belgium has guaranteed a total of €138.1 billion in debt (35% of its GDP . . .” That is just soooo insane. Guaranteeing the bank debt is absolutely stupid, deleterious, and certain to turn a financial crisis into long-term economic suffocation. One might as well rush into a nuke plant losing containment, stuff ones pockets full of uranium, and jump in the ocean to cool off. Any sane person would run to the hills and send copters with concrete to bury the burnin’ crud.

    It has been absolutely determined by the 1% that the 99% WILL pay off _ALL_ prior bank committments so that the plutocrats stay plutocratic rather than descending to the status of the mearly rich which their crimes and imcompetence have more realistically earned them. We are all Japanese now . . . .

  3. scraping_by

    Did Belgium or the EU ever have a version of Glass-Steagal? Or has it always been feudal finance, with the divine right of bankers and peasants as cheap as grass and as plentiful?

  4. Susan the other

    Isn’t the fatal flaw of capitalism that if information is true and timely there never will be a profit? There will never be any capital?

    1. F. Beard

      Isn’t the fatal flaw of capitalism that if information is true and timely there never will be a profit? Susan the other

      Not necessarily. Even without patent protection, innovators have at least a temporary edge. And if they are not greedy, it might not be worth anyone’s while to compete with them.

  5. patrick

    Apparently senior bankers globally, as a class, are predisposed to minimize their business losses whilst maximizing their bonuses. Be they in Wall St, City of London, Dublin, and now little Belgium they all know how to concoct a good fairy tale. The Germans will be the next to be found out , along with their fairy godmother Cindamerkel. The cradle of Grimm’s tales should provide some interesting reading in the New Year.

  6. Anon

    Belgian banking: The re-collapse. Hard to stop laughing at that one.

    This is descending into something akin to a Buster Keaton, a Charles Chaplin. No wonder the 1920s were a laugh riot. When power forfeits all claim to be taken seriously, well, we know what happens next.

    Power jackboots up, and uses big sticks and guns to remind us who’s in charge. Laugh the incompetent fools out of office, and organize a tax strike until the re-re-collapse.

    Shouldn’t take long. Put the money in funds for schools, hospitals, and pay it to the tax office once Dexia is no more.

    Your mission, people of Belgium, should you choose to accept it. After all, 35% GDP is an absolute joke. They are having you on. Don’t fall for it.

  7. falun bong

    When does the tipping point come? Where is Madame DeFarge and the crowd with the torches and pitchforks? When bread is unaffordable, like in Tunisia? Is that the moment? Seems we still have a long way to go. The stranglehold of the world economy by the central banking elite seems to me the only relevant issue, everything else pales. I say Ron Paul, warts and all. The only one who even understands the issue.

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