Paying Dexia’s Debts: The Risks of Globalized Finance

American readers may tell themselves that the failures and stresses of European banks are Europe’s problem. That’s a simplistic view. Major European banks are significant lenders in the US, particularly to corporations. And European banks also fed heavily at the trough of US rescue facilities, as did the bank in case study, Dexia.

Dexia is a classic example of a not very sophisticated bank deciding to get into the big leagues and coming to ruin. While Dexia foundered on rapid expansion into foreign markets, other large banks have come a cropper via rapid deregulation. Here the poster children were the Japanese banks, which had been highly regulated as of the early 1980s. The Ministry of Finance acceded to US pressure and liberalized the industry, with the result that the country blew a monster real estate-stock market bubble in an astonishingly short period of time. And the big international banks press for a lax regulatory regime to stay in place, arguing that their customers want sprawling international banks. But CFOs are leery of being hostage to one or two institutions; they recognize banks have different strength; they like using major French banks in France, German banks in Germany, because they understand they’ll get better local intelligence. The officialdom is not willing to point out that reason that bank management keep pumping to preserve these mega-institutions is that bank CEO pay is a function of bank size and complexity. So top management will keep trying to build more Dexias unless the regulators make it hard or costly to do so.

By Francois Chesnais, Emeritus Professor at Paris-Nord University and the Author of La finance mondialisée, La Découverte, Paris, 2004; La finance capitaliste (with de Brunhoff, Duménil, Lévy and Husson), PUF, Paris, 2006; and Les dettes illégitimes, Raisons d’Agir, Paris, 2011. Cross posted from Triple Crisis

The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

The merger of the Gemeentekrediet / Credit Communal de Belgium and the Crédit Local de France and the formation of Dexia took place in 1996. Under joint leadership, the race to globalize became more and more reckless. A stake of 40% and then 60% was taken in Crediop, the biggest privately owned Italian bank specializing in financing local administrations. The group started diversifying into insurance in France, Belgium and Germany. Next came the acquisition of Financial Security Assurance (FSA), a US monoline insurance company also offering credit to municipalities. Smaller acquisitions, including a small Dutch private investment bank, specialized in wealth management. The final move prior to crisis was the setting up in Canada in 2006 of an institutional investment 50/50 joint venture with Royal Bank of Canada: RBC-Dexia Investor Services.

At its zenith Dexia claimed to be the world’s number one in financial services for public sector entities. In reality, it was a highly vulnerable corporation heavily engaged in activities in which assets were fairly if not very illiquid, and hence strongly dependent on refinancing and inter-bank credit. It was the archetype of a bank bound to fail in a mortgage-led crisis. In the turmoil following the Lehman Brothers failure on September 15, 2008, Dexia held out until September 29, when banks and financial institutions which had previously refinanced the group refused to do so because of predictable losses by the US affiliate FSA. It’s a testament to the imbroglios of financial globalization is that Dedfa was under Irish jurisdiction at the time. In the late 1990s, Dedfa had moved its headquarters to Dublin to enjoy the very lax supervision and very generous tax treatment offered by the Irish government. On September 30, Moody’s downgraded Dexia’s long term debt and deposits ratings sharply (Aa1 to Aa3) and the individual affiliates’ strengths to C–. The Chairman of the board and the CEO both resigned.

The new team in charge at Dexia wasted no time in applying for a government bailout. In the context of the Gordon Brown/Angela Merkel/Nicolas Sarkozy rush to save the European banking system, support was immediately assured. It took two forms. First, a capital injection of €6.4 billion, €3 billion from the Belgian State and regional governments, €3 billion from the French government and the Caisse des Dépôts et Consignations and €376 million from the Luxembourg government. Second, a State guarantee covering Dexia’s liabilities up to €150 billion. Belgium provided 60.5%, France 36.5% and Luxemburg 3%. Since Dexia had a US affiliate and a New York banking office, it was also eligible for support from the Fed and immediately borrowed $58.5 billion.

Before the year 2008 was out, Dexia had sold FSA. But downgrading by Moody’s continued, and job destruction began in the very countries whose governments had rushed to Dexia’s support. In early March 2009 a total of 1,500 job cuts were announced, of which more than half were in Belgium and 260 in France. The corporation struggled along the rest of 2009 without new damage, in part due to the Fed’s open discount window. In the spring of 2010, along with the start of the Greek debt crisis and the European banking crisis, job slashing at Dexia began again. Affiliates in Italy (Crediop), in Spain (Dexia Sabadell) and in Slovenia (Dexia Banka Slovensko) were sold, but the group managed to hold on to its activities in Turkey. Most of its profits came from DenizBank and an increasing fraction of total Dexia staff was located in Turkey. The group then enjoyed a year of respite. But the descent began again when the Eurozone crisis worsened brutally in the early summer of 2011.

In September Dexia had to write down the value of its Greek debt and announce a €4 billion loss for the second quarter. On October 4, 2011, its shares fell 22% to €1.01 in Brussels. A run on the bank began, with €300 million withdrawn in one day. On October 10, the Belgian government announced the nationalization of Dexia’s Belgian subsidiary, Dexia Bank Belgium, at a cost of €3.73 billion. A new capital injection by Belgium, France and Luxemburg of €55 billion was announced while discussions started about further divestments and a possible breakup. Painful divestments have taken place since: the sale in Canada of the 50% share in RBC Dexia Investor Services in July 2012, and still worse on September 28: of the prize jewel DenizBank, to the Russian banking group Sberkank. To complete the picture, Dexia is being sued by municipal councils in France and Belgium for the bad loans it made them. The next step is the sale of the Luxemburg affiliate. The board is still Belgo-French, but Dexia is now almost entirely is a French concern.

Things are basically back to the situation before the 1996 merger, after two capital injections and with huge debts still outstanding. A general assembly is convened for December 21 to approve the merger of Dexia Crédit Local with Banque Postale and Caisse des dépôts et consignations (CDC). A third injection of public money is needed. This time it will be done with the entry of the French and Belgium governments as shareholders, but the ideology of liberalization carefully safeguarded by the European Commission and the European Court of Justice make it unlikely that they will manage the new entity. The political demand for true nationalization under citizen control will be more than ever on the agenda of the Left and the no-global movement.

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  1. Fíréan

    “The Chairman of the Board and the Ceo both resigned”.

    Why, may I ask, are these two persons who are responsible for the bail outs and banks demise, Chairman Pierre Richard and CEO Axel Miller, nameless within this article. Who are they, what other positions in the banking world do they, or did they hold and where did they go after their resignations ?
    Considering the magnitude of the situation which they created their personnal relevance seems to be greatly inderstated.

    A quote from elsewhere : “Belgian parlemential commission concluded after a deep investigation that the former CEO of Dexia failed to do his job and was responsible for the bailout”.

    You’d be surprised what positons they hold now, after responsibility for such bail outs.

    1. fajensen

      I am sure both apologised, were immediately forgiven and then handsomely rewarded for their 30 minutes display of integrity, honesty and humility.

  2. Olivier

    “It’s a testament to the imbroglios of financial globalization is that Dedfa was under Irish jurisdiction at the time. In the late 1990s, Dedfa had moved its headquarters to Dublin to enjoy the very lax supervision and very generous tax treatment offered by the Irish government”

    Why is this relevant in the article. Is Debfa a typo for Depfa? Depfa was linked to Hypo Real Estate AG (which had problems of its own), and was also involved in public financing but as far as i know is not related to Dexia.

    Not sure i understand this, and feel this kind of unrelated quotes undermine the credibility of the whole article and its author.

  3. bmeisen

    Not quite sure after reading how its decision to “get into the big leagues” brought it to ruin – am of course entirely prepared to believe it. Does it have something to do with Dedfa/Depfa and Hypo Real Estate, which the German taxpayer bailed out handsomely? Like Olivier I haven’t connected Daxia to Depfa though Depfa’s CEO seems to have been using a similar playbook as Richard and Miller.

  4. Susan the other

    The banking industry became irrational in the 90s. The confluence with the fall of the USSR comes to mind. It is as if the Soviets kept western financial tendencies in check. (Even tho’ it was because of the Cold War that the financial industry joined forces with the military in the first place.) One of the purposes of fascism is to create sufficient economic benefits by military spending that prosperity keeps down civil discontent. Makes me think the capitalist world was too clever by half when they chose to expand rather than contract post 1989. If western banking had downsized, beginning in the 90s, they could have weathered the change better. Instead they went from ponzi to turbo ponzi. And now neoliberals want global banking – and they want us to believe they can manage it… right. It just doesn’t work in a logical world that global banking using a neoliberal charter free from national laws is allowed to come crawling back to national governments for tax bailouts when they fail by their own deregulation. No thanks.

  5. t. allgood

    They always want a free, devoid of government intervention, market until the risk is realized and the rewards are depleated – then government intervention is spectacular.

    Assuming they have some sort of nationalized deposit insurance, nationalize the bank, pay the depositors, sell the credit and when that’s all complete, sell any and all remaining assets.

    Welcome to free market economics, boys – it doesn’t just work on the gravy train.

  6. jake chase

    Meanwhile, we are told that the economic problem is “entitlements”.

    Banking is three card monte, socialism for the rich. The complexity makes your eyes glaze over. The idea is pump up the assets, reward yourself as the bubble inflates, leave taxpayers holding the bag, loot the bailout money, crow about free enterprise, overpaid labor, welfare free riders, fiscal cliffs, sail off to a private island, live happily ever after. No pirate ever had it this good. You don’t even need a gun. Why does this work? Because you can buy any Congressman for $50,000. Perhaps less. Senators? Probably more. Presidents you get just for vague promises about future book deals, directorships, foundations, consultancies, club memberships…..

  7. Soutexte

    Zoltan Pozsar “A Macro View of Shadow
    Banking” in here


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