The rump Dexia now owned by the Belgian government is a structurally loss-making enterprise that will cost the Belgian government 2 billion in deficits every year from 2014. This is what Flemish language Belgian daily De Standaard is reporting based on inside sources. Clearly this will make the Belgian deficit figures harder to reach.
The insider, investment banker Bernhard Ardaen, worked for Dexia for twenty years and sat on its credit committee where each week they decided on the purchase of hundreds of millions of euros of bonds. He also advised the company during the first rescue in 2008. He has written a book about his experience that is very critical of the company, explaining how this small time operator hit the big time and blew itself up. Crucially, he says there were not enough people at the top of the organisation with a deep understanding of today’s banking world. So they ignored internal alarms and took on even more risks even as a full fledged financial crisis had already begun.
I don’t think for one second that Dexia is unique here. The recent hedge fund like activities at JPMorgan Chase’s treasury certainly come to mind.
But Ardaen also warns of the ‘Dexia time bomb’ because the revenue that will accrue from the company’s massive bond portfolios are significantly lower than the costs to refinance the same portfolio in the market.
"The numbers change daily. But according to my calculations Dexia runs structurally today in the red at about 3 billion per year. At that rate, the equity will be used up again in little more than two years – which means that the Belgian government will begin to suffer losses from anywhere in 2014 of 2 to 3 billion euros per year to keep Dexia afloat."
That’s what nationalization means. This is similar to what happens with Fannie Mae and Freddie Mac post nationalization, where the continual losses are supported by the US federal government. And it is something to remember in the context of Spain where the banking problems are large and have not really kicked into high gear.
Source: ‘Dexia is tijdbom onder België’
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