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The Short View
Last updated: October 4, 2011 8:16 pmDexia déjà vu: parallels with Bear Stearns
News that Franco-Belgian bank Dexia is being supported by the state should prompt déjà vu. We have indeed seen it before: Dexia was one of the first banks rescued after Lehman’s collapse. Perhaps, though, Dexia – this time getting loan guarantees and state support for a “bad bank” – matters more than it seems. Like Bear Stearns in 2008, it is a warning of bigger troubles ahead.
Consider some parallels with the collapse of Bear.
Bear, reliant on wholesale funding, ran into trouble after losing access to funding. Money market measures of willingness to lend to eurozone banks have in the past three months risen exactly as much as their US equivalents in early 2008.
Bear’s failure ushered in the first bear market in the S&P 500, with the index of US equities down 20 per cent for the first time during the credit crunch. It eventually lost a further 47 per cent.
On Tuesday the S&P 500 briefly entered a new bear market, down 20 per cent from its peak in May.
Surely Dexia, mainly a municipal lender, is not that important? After all, as a French official told Reuters on Tuesday, it has a liquidity problem, not a solvency problem. Exactly the same was said about Bear.
Whether or not the problem is solvency is not really relevant. Bear became an ex-canary on the dirty coalface of Wall Street because of investor (and client) fear. The fear that destroyed Bear, based on its unsellable toxic subprime loans and structured credits, was the same fear that later took down Lehman.
In the case of Dexia, fear is based on unsellable toxic subprime sovereign debt, particularly from Greece. Forget whether the fear is justified; investors are rightly wondering who plays Lehman this time. French banks are in the frame, as is Greece itself.
There is a more important question. Are any governments strong enough, financially and politically, to bail out the banking system again?
Follow James on Twitter at @jmackin2
Consider some parallels with the collapse of Bear.
More
On this story
- Lex Dexia’s multiple woes
- Business blog Dexia’s Belgian bulldozer
- Banking podcast Dexia, living wills and UBS
- Editorial Curing Europe’s banking ills
- Inside Finance Investor fears about banks
Bear’s failure ushered in the first bear market in the S&P 500, with the index of US equities down 20 per cent for the first time during the credit crunch. It eventually lost a further 47 per cent.
On Tuesday the S&P 500 briefly entered a new bear market, down 20 per cent from its peak in May.
Surely Dexia, mainly a municipal lender, is not that important? After all, as a French official told Reuters on Tuesday, it has a liquidity problem, not a solvency problem. Exactly the same was said about Bear.
Whether or not the problem is solvency is not really relevant. Bear became an ex-canary on the dirty coalface of Wall Street because of investor (and client) fear. The fear that destroyed Bear, based on its unsellable toxic subprime loans and structured credits, was the same fear that later took down Lehman.
In the case of Dexia, fear is based on unsellable toxic subprime sovereign debt, particularly from Greece. Forget whether the fear is justified; investors are rightly wondering who plays Lehman this time. French banks are in the frame, as is Greece itself.
There is a more important question. Are any governments strong enough, financially and politically, to bail out the banking system again?
Follow James on Twitter at @jmackin2
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Whether the govt;s of the deficit countries are strong enough to provide themselves with *solvency* is a different question. I don't see how they can under the current EZ <strike> structure </strike> straightjacket .
@ A Greek
Good post. However, hard as it might be to realise from your standpoint, the EZ elite were (are?) in denial over the failure of their "great project". The entire euro crisis was manufactured in Brussels. Rather than blame their shoddily-constructed currency union it was/is a lot easier to blame Greece.
Great post, really enjoyed that.
What's happened to your beard?
How about a moustache?
Just to say, I really enjoy your analysis, it's first class.
:-)
How battles are won and lost on seemingly small decisions.
today of course the paralleles are stunning....no one can see the trees for teh forest either!
You Euro sceptics are getting your knickers in a twist. Europe will not fail. The Euro will not fail. All your Anglo Saxon fears that the Dollar will be replaced as the worlds reserve currency can rest assured that there is room for two reserve currencies.
So please relax. Dexia is not Bear stearns. far from it. BS was an important part of the US clearing banking cartel. Dexia is not even close. It would have to eb much bigger than Dexia to compete with the systemic failure taht BS's demise caused.
Honestly, grow up FT. This is rubbish reporting.
It is said, "Surely Dexia, mainly a municipal lender, is not that important? " Maybe the question should be just what kind of insurance, derivatives and other kinds of hidden leverage are in the process of unwinding. After all, that is what the public has learned - banks are not our father's type of bank anymore - they are loaded with all kinds of hedge book paper of unknown risk until an unwind is necessitated. Then we learn.
Why must it be assumed that Dexia's problem is lending to risky sovereign borrowers? After all, 2007/8 showed us that Dexia does just this. WHY IS IT THAT JOURNALISTS CAN'T DIG DEEPER - find out what is really on and off the balance sheet before telling us Dexia is mainly a muni lender or subprime sovereign lender. ASK THE HARD QUESTIONS - before delivering opinions as facts.
It is loaded with derivative and insurance exposure. And opaque exposure it is. French bankers, like all bankers, love opaque coziness in the good times. In bad times, well - its not their problem.
In the last 2 weeks, the US Federal Reserve increased swaps with Europe. Anyone want to guess if Dexia is availing itself of American largesse once again?
From Bloomberg: Jan 2009, Dexia borrowed $37B at the US Fed discount window. That was the most any bank borrowed - and it was a European bank at that!
Oh... and Dexia's: "...total borrowings from the [U.S. Fed's] Commercial Paper Funding Facility ranked third among users of the emergency program created to support the market for short-term debt issued by banks and corporations. Dexia used the program 42 times for a total of $53.5 billion, according to data the Fed released in December. "
And...
"Dexia also tapped the Term Auction Facility, the lending mechanism the Fed established in December 2007 to augment the discount window. Dexia received 24 TAF loans totaling $105.2 billion, the largest of which was $16.7 billion on Jan. 17, 2008, Fed data show. "
It looks to me that Dexia is a key component in blowing hot air into the ill conceived, unstable, international banking system that at its root needs funding from the US. We don't know if this is a liquidity problem or a solvency one. But it is wrong for journalists to ignore the full picture at a bank and just jump to a conclusion that it is "Greece". It's too convenient, too wrong to do so without considerable homework first.
"The sovereign debt used to just be the banks' debt. It should have stayed that way."
Bravo!
Belgium, join the PIIGS!
What about the rest of Europe? For two years now every crackpot in the neighborhood is storming windmills, airing his/her anal depressive psychosis on moralistic preaching about the need to punish Greece, to flagellate every Greek on sight, to send the Greek Nation to the fire of hell.
They spent valuable time and considerable political capital whipping up the basest racist instincts of their mobs. Greeks are all lying drunk on the beaches, they keep dancing the syrtaki all day long ( How Greeks manage all this at the same time, baffles me, but what the hell !!) .
They played a very dirty game on the peoples of Europe. At the time when the zenith of solidarity was needed they fanned the flames of nationalism, racism and hatred. They did it on solid purpose. They set up their propaganda machines like Marshal Koniev set up his artillery regiments on the East bank of the Vistula ready to jump on to the heart of Europe. And they got what they wanted.
They raised a Mud Curtain between South and North in Europe. At the time when everybody had to circle the wagons, they made sure that no electorate would accept any decision, desperately needed, to prop up Europe.
Now the loaded gun is expertly primed. The only question is if someone will pull the trigger, or some minor uncontrollable event will start the mountain sliding.
Today it is DEXIA, tomorrow who is next? And on the other side of the Atlantic Morgan Stanley's stock takes a dive also, soon to be joined bu other bright and shiny!
The most vulgar obscenity committed in cold blood for the last 24 months is the concerted effort to lull the people's of Europe with the spin that this is a Greek Problem, which would go away if Greeks were not the scum of the Earth they are. It is surprising that the European masses have not started rolling down the Alpes ready to wipe out the 'pollutant', the one threatening the snow whites of Europe with 'contagion'. As if being broke is some catching disease which you can avoid if you steer clear of the bad areas of the city.
The European economy is being strangled by a credit crunch that just started, gingerly. Wait until it develops into a severe convulsion.
European leaders knew what is coming. Either that, or they are total idiots and their famous state machines are manned by total idiots. Yet for two years now, they play with fire, misleading their people, hiding the real problem and pointing to tiny Greece as if Greece is the only villain.
Greece is finished. At least for a generation. But that will be very small consolation to the European electorates when they realize what is in store for them. The only perverse satisfaction Greece can have now is to watch those who assaulted the land with not a shred of solidarity and common decency join the country to the bottom of the pit.
Greeks never took their bubble bonanza for granted. That is why the people do not react violently so far. In the back of their collective subconscious they knew that the spree was too good to be real. They knew that this was not going to last. And having just come out of abject poverty, they have the memories, even the social structure to survive some-how. Let's now see how the well oiled societies of the North and the West, where the tiniest speck of dust on the endless gears of 'developed' societies creates severe upheavals, how they are going to adjust to their bleak future when the spanners starting flying uncontrollably into the delicate machinery!
one more total bailout of all bad assets?
whether a good bailout w haircuts and restructure
or total bailout,
lets name the worst biggest banks and get on w it
frozen banks and mkt slip sliding being the other choice
have we found the deep pockets for france and Belgium anyway?
However much political hand-wringing there will be, the resolve to save Dexia is much greater than it could have been for Bear. Bear was a for-profit organisation from the word go. Dexia is a public service hidden under a for-profit cloak.
Sovereign debt needs to be bundled into a huge CLO, with Germany and China taking the equity tranche; and sold off as senior tranches. The hair of the dog, thats the answer.
The thing with which is struggles is the 50bn in Italian debt. The big difference is that the assets that were difficult to sell where accumulating big - real - losses (which continued as you say when those assets where sold to the NYFed as Maiden Lane I and II).
Those Italian bonds carry some - though not massive - paper losses (yields are at 5,5% while they were about 4,5% before the crisis), but Italy is nowhere near defaulting. It has had much higher debt/gdp with much higher interest rates than it is currently paying - without defaulting.
None, the ECB seems to me the only institution able to guarantee sovereign debt at face value and thus to put a floor on sovereign debt.
I seem to remember the thing that really killed Bear was that Jimmy Cayne had "annoyed" enough people, especially during LTCM's wobble, that he had no friends left, and thus had to turn the Fed. Of course that could just revisionist history, and faulty memory on my part :)