Tuesday, December 4, 2012

Dexia Bank Failure and Global Interconnectedness (Naked Capitalism)


Paying Dexia’s Debts: The Risks of Globalized Finance

American readers may tell themselves that the failures and stresses of European banks are Europe’s problem. That’s a simplistic view. Major European banks are significant lenders in the US, particularly to corporations. And European banks also fed heavily at the trough of US rescue facilities, as did the bank in case study, Dexia.

Dexia is a classic example of a not very sophisticated bank deciding to get into the big leagues and coming to ruin. While Dexia foundered on rapid expansion into foreign markets, other large banks have come a cropper via rapid deregulation. Here the poster children were the Japanese banks, which had been highly regulated as of the early 1980s. The Ministry of Finance acceded to US pressure and liberalized the industry, with the result that the country blew a monster real estate-stock market bubble in an astonishingly short period of time. And the big international banks press for a lax regulatory regime to stay in place, arguing that their customers want sprawling international banks. But CFOs are leery of being hostage to one or two institutions; they recognize banks have different strength; they like using major French banks in France, German banks in Germany, because they understand they’ll get better local intelligence. The officialdom is not willing to point out that reason that bank management keep pumping to preserve these mega-institutions is that bank CEO pay is a function of bank size and complexity. So top management will keep trying to build more Dexias unless the regulators make it hard or costly to do so.
By Francois Chesnais, Emeritus Professor at Paris-Nord University and the Author of La finance mondialisée, La Découverte, Paris, 2004; La finance capitaliste (with de Brunhoff, Duménil, Lévy and Husson), PUF, Paris, 2006; and Les dettes illégitimes, Raisons d’Agir, Paris, 2011. Cross posted from Triple Crisis
The story of Dexia Group or Dexia S.A. is that of the rise and fall in less than twenty years of a diversified financial services corporation, small by global standards but which tried to play in the first league. It is the story also of taxpayer money spent uselessly trying to salvage the bank by two governments at the very time they were axing socially important expenditures. This is why the political demand for true nationalization under citizen control put forward since 2010 by the Left and those in the no-global movement, notably Attac, has focused in particular on Dexia.

This story began in the 1990s, at the time financial euphoria was rampant on both sides of the Atlantic, with the privatization of Belgian and French financial institutions. In Belgium, privatization primarily concerned the Gemeentekrediet van België / Crédit Communal de Belgique, which had been set up in the 19th century and was still owned in part by municipalities. The bank became a retail bank and took the path of international acquisitions and mergers, notably in neighboring Luxemburg. In France, an entity named CAECL (Caisse d’aide à l’équipement des collectivités locales) established in the post-World War II period, converted into a new public corporation named Crédit Local de France, with a mandate and status permitting it to expand through acquisitions. A US subsidiary, the CLF New York Agency was set up in 1990. In 1991 a proper initial public offering took place on the Paris Stock Exchange, with a distribution of shares between the French State (25.5%), the Caisse des Dépôts (25%) and individual investors from France and abroad (49.5%).

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