Tuesday, October 4, 2011

Dexia Bites the Dust

The governments of Belgium and France today came out announced that they were going to stand behind Dexia Bank, and there was talk that Dexia would be split into two entities.. the "Good Dexia" Bank and the "Bad Dexia" Bank, where all of the bad debt will be offloaded to. Nobody's sure at this point how much Dexia's losses will cost; the total might not be known for some time as a lot of their loans were to Greece and other insolvent countries. Belgium and France also said they would be covering most of the losses. Over enough time, these losses could be substantial, possibly as high as $100 billion. There was talk that the bondholders and other creditors would have to take at least a 21% haircut.

Problem is, it's a tad more complicated that this, as we ourselves found out when Lehman Brothers collapsed. Many of these bondholders bought insurance on these bonds, called Credit Default Swaps. Companies who wrote these insurance policies will take an ugly torpedo to the stern.. this is how AIG went under-- writing these insurance policies. Worse, the Belgian and French government debts might be downgraded due to the amount of bad debts they just insured. Many of Dexia's debts were outright loans-- and it's an open question if any of these will be paid, thus damaging those who foolishly loaned to this floating hulk of steamy compost.

Equally important, this will damage confidence in other European banks. Remember, Dexia passed the EU's "stress test" with flying colors. Other major banks in Europe, such as France's Societe Generale and Italy's UniCredit, have already had a couple of near death experiences. This will not help.

At the closing bell on Wall Street approached today, the Financial Times newspaper came out with a rumor that a Europe-wide plan was being developed at the European Commission meeting going on in Luxembourg. There were no details; only a vaguely worded statement from the group. It was enough to send stocks soaring at the close. The markets are getting used to such pronouncements-- most of which are little more than hot air-- and with Italy's downgrade in the after hours, I fully expect the markets to head south again at the opening bell. The upcoming Belgian and possibly French downgrades will only make it worse.

Meanwhile here in the US, here's how things are going with Bank of America, where their website has been down all week long, their stock is crashing, and finally this-- not sure if it's true, but this is a video of a SWAT team in front of a BofA branch in St.Louis..  http://www.youtube.com/watch?v=Db_P0wHsSz0&feature=player_embedded