Is Dexia a Foretelling Catastrophy?

Bad news keep piling up in the Dexia affair... We already knew the existence of « bad banking » of close to 100Billion euros, with heavy potential losses, that won’t be liquidated before... 2099.

But this impressive amount is already understated. The bank’s board of directors just published a document asking the shareholders (the governments of France, Belgium and Luxembourg) to subscribe to an increase in capital of 5.5Billion euros, next December 21 (L’Express.be). The bank explains that, without this fresh money, it would default on the totality of its debt, 386.5Billion euros, and on its derivatives portfolio, 605Billion euros, a shocking « hole » of almost a Trillion euros ! « Such a bankruptcy would jeopardize the whole european financial system », says the document. Now, that’s an understatement, because this amount is greater than Greece’s !

Is this risk being taken into account by the regulation agencies ? No, on the contrary, the G20-mandated Financial Stability Council, just took Dexia off the systemic banks list ! This is pure folly. Of course, derivatives are accounted for outside the regular books, so they are not subjected to the normal prudent norms, and the bank is backed by States, so everything is honky-dory, right ?

This tells us a lot about the state of affairs of the european and american banks. Most of them show positive results, but they’re sitting on dynamite kegs. How many banks are close to Dexia’s situation, or would be quickly close to it, should another financial crisis happen ? The only reason Dexia is making public its derivatives exposure is because it is about to fail. The other banks, of course, are just as much exposed as Dexia, but we’ll only find out just before they default. And let’s not hold our breath waiting for the regulators to enlighten us.

Dexia’s is not an isolated case; it is just in a worst situation than the average. How many spanish banks (which just got 37Billion euros from Europe) or greek banks are in as bad a situation ? The large american banks, like JP Morgan or Goldman Sachs, have books with gigantic notional value in derivatives... Maybe Dexia is only the precursor of things to come...