It looks like Dexia Bank will be the first large European bank to fall to speculation about losses on its loans to Greece, and as David Dayen notes, this may be a sign of things to come. Dexia is partly owned by the Belgian Government and partly by the French Government, the result of a 2008 bailout. Private investors own the rest of the shares.
The two governments issued a statement saying they “… will take all necessary measures to ensure the safety of depositors and creditors. To this end, they undertake to guarantee to bring their financing raised by Dexia.”
The current plan is that the Belgian government will take on the retail bank, which is largely in Belgium, perhaps with a view to selling it. The French Government will fold the French bank into La Banque Postale and the Caisse des Depots et Consignations, both of which are owned by the French government. There will be nothing for shareholders, according to one analyst.
The current price for the stock values the equity at about €1.96 billion, compared to the stated net worth of €6.9 billion. The worrisome part is that the bank wrote off 20 percent of its Greek debt, but still has about €3.4 billion on its books, and the expected losses now look like 60 percent instead of the 20 percent that Dexia took, implying another €2.55 billion loss. That should leave an large equity cushion of €4.35 billion, but at least one analyst thinks that there is no money for shareholders. A note from Nomura Securities, quoted extensively by Zerohedge, says that while the senior debt may be paid in full, lower-ranking debt may not.
If there is no money for minority shareholders or lower-ranking creditors, the current balance sheet is really wrong. That has a strong flavor of Lehman Brothers, which showed an enormous net worth immediately before filing bankruptcy. This is another sign that no one trusts reports from accountants any more. It is also a sign that the European stress tests were weak. Dexia passed in the most recent round of tests. [cont'd]
Weaknesses in financial regulation were not repaired, either here or in Europe. We continue to rely on the accounting profession and its interpretation of a set of rules created by a mish-mash of legislative intrusion and captured regulators. Those rules are not working, and investors don’t have any reason to trust them. That is a particular problem for small investors, the ones Fed Chair Ben Bernanke is trying to force into the stock market, because they really don’t have any way to guess just how wrong financial statements are.
Of course, like lawyers, accountants long ago sold off their professional independence for a pot of gold, and are now part of the crowd of people ready to say anything that won’t hurt them personally. They have no liability for false statements, and they depend on the kindness of corporations for their income. The SEC doesn’t regulate, and no one is willing to use criminal prosecution for anything. CPAs are just another failed institution, haunting us with their personal greed, their sneering at social responsibility, and their intellectual dishonesty.
It’s also a bad sign for the European Stress Tests, which appear to have been run on the Timothy Geithner plan: Pass/Fail, and no one fails. That means there isn’t any reason to assume that any other bank, here or in Europe, is both solvent and liquid, opening the door to more speculator attacks.
Finally, it’s a bad sign for taxpayers in Europe. Belgium and France are part of the Eurozone, so they aren’t sovereign in their own currencies. If they want to guarantee the short-term indebtedness of a restructured Dexia, it shows up on their balance sheets as a contingent liability. People adjust their expectations of the financial situation of the government by guessing at the probability that the government will have to perform on its guarantee.
That explains why the press is fixated on whether this will affect France’s AAA rating. Remember, if France has to make good on a guarantee, it has to borrow the money in Euros, and pay interest. That is a burden on French taxpayers. French bonds are falling against German bonds already.
There are no painless solutions. The only question is who will bear the pain. The US government is dominated by a financial oligarchy, (see Thirteen Bankers, by Simon Johnson and James Kwak) so we can assume it will be taxpayers who get slashed. At least in Europe, it looks like equity investors and maybe even some bondholders will take losses.