The news today: Dexia (described as in a state of “gripping liquidity strains”; otherwise “insolvent” might be the appropriate adjective), has a plan to sell to the French and Belgian taxpayers $238.9 billion of bad assets “that can’t be sold under current market conditions.” It is said that during the last 15 years Dexia “over-expanded its book of speculative assets and is exposed to Greece…”
We have come a long way from the spring of 2008 when the American Administration declared $30 billion would bail out the entire U.S. banking system. America reached out generously and temporarily “saved” the banking system with a commitment of more than $12 trillion. The American banking system is once again knocking on the door of the disabled. If the major banks were required to mark their bad assets to market and account for their legal liabilities it is unlikely any of them would stand.
Today, the European banking system is in worse condition than America’s banks were in 2008 or are now. Dexia is ONE BANK, needing a $238.9 billion infusion. There are at least twenty more European banks who will need similar or greater infusions and many more who may survive on less.
The American taxpayer was duped and mulct to little avail. The nominal derivatives positions of the “saved” banks are larger than ever before. Morgan Stanley and Bank of America seem to be the obvious early candidates for difficulty. Both are leaders in size of derivatives ownership. We not only have the risk of European banking and Sovereign counterparts but also that of our “saved” American banks.
We doubt the Euro zone governments and taxpayers, especially the strong member states, will acquiesce to donations to the banks as happened here. It is also unlikely that the Tea Party, Democratic Party or the administration will fully step in to save the American banking shareholder and bondholder again.
We think this time the “saving” will be concentrated on the depositor and on the system rather than on the owners and the management. This is hopeful as a system could evolve that provides real banking again, the gathering of funds and responsibly lending out those funds. The hedge fund behavior of the banks would re-emerge where it belongs – in the hands and risk of hedge fund investors, not depositors nor taxpayers.
That it will take another banking crisis, this time worldwide, to bring the system in line and functioning within proper constraints is sad; but there could be light at the end of the tunnel if, this time, the crisis is handled with fairness and caution.
Even our paralyzed government will not use taxpayer money to buy a third crisis.
Dexia (ONE BANK): $238.9 billion.