The large Belgian Bank, Dexia, went bust over last weekend. It provides a lot of pointers about the role of banking and how it fits into this crisis. Dexia was bailed out before at the height of the financial crisis in 2008. Then the Belgian and French governments put in €6bn of taxpayers money and guaranteed all Dexia’s short-term funding and bonds to the tune of €150bn, a guarantee that lasted until June 2010. Dexia is a bank that mainly provides retail banking accounts in Belgium and insurance and loans to municipal authorities in Belgium and France. A pretty traditional banking role, you might think. But like all the other banks over the last decade, Dexia’s board and executives thought that they could make a lot more money and get much bigger bonuses by buying up loans and securitised assets from the booming US property market or setting up new businesses abroad (Dexia bought a major operation in Turkey). By the time of the crisis in 2008, Dexia was a ‘global ‘ bank with 35,000 employees and, most shocking, assets supposedly worth €650bn, or nearly twice as large as Belgium’s annual GDP! Dexia had become an accident waiting to happen, like the banks of Iceland and Ireland. Although it was partially state-owned, the political leaders ignored or connived in this largesse. Supposedly providing a lending service to Belgian households and local authorities, Dexia got ‘light touch’ regulation and was allowed to speculate in all sorts of risky assets that eventually blew up in its face.
Even after the bailout of 2008, the Belgian and French governments did not assert control over the bank. As of last weekend, various state entities (French and Belgian governments, local authorities and other state banks) owned 49% of the bank, but 51% was still owned by private sector shareholders, including various private equity firms. After 2008, the bank executives realised that Dexia was way too large and out of control. So they desperately tried to shrink it down. By last weekend, they had shrunk the balance sheet from €650bn to €500bn. But there were still two problems. Dexia still had around €100bn of assets that were regarded as ‘troubled’ or ‘toxic’. These included subprime US property bonds and the bonds of supposedly safe states like Greece, Portugal and Ireland, now thrust into a major debt crisis. In other words, much of these assets were worthless. And the total book value of the shareholder capital in Dexia was just €15bn (so ‘leverage was a staggering 33 to 1!) and the market value on the stock market was way lower at just €2bn. The other problem was that the bank financed its loans and investments by short-term borrowing in the banking market. Its deposits from customers were just €40bn, while its short-term loans were €90bn (down hugely from an immense €240bn in 2008). So if other banks refused lend to Dexia, it was paralysed. This was exactly the problem that brought down the UK bank, Northern Rock, at the start of the global financial collpase in mid-2007. And that is what happened to Dexia in the last few weeks. Dexia had borrowed to the hilt from the European Central Bank, but it became clear that it could never get any more money from the private sector. So it had to be bailed out again.
Over the weekend, the French and Belgian governments came up with a new plan. France is involved because Dexia has a French division that lends to French local governments – by the way it even has a small Japanese division that lends to Japanese local governments. That was less worrying than the huge investments it had in what it called ‘financial products’ – the real weapons of financial mass destruction – some €14bn of worthless assets. The two governments decided that the French division would be merged with state-owned operations in France (the French Postal Bank); the huge Turkish operation would be sold off to the highest bidder; and the remaining part of Dexia (the bad bit) would get another injection of taxpayers money, some €4bn (for shares that are worth only half that!) with another government guarantee on its funding. This time, the Dexia bank that is left would be wholly state owned and would now concentrate on lending to local authorities, while selling off as best it can, the rest of its ‘troubled assets’. This new bailout is likely to cost taxpayers more than just €4bn because of the potential losses on these remaining dud assets, probably another €20bn, although Dexia will try to ‘runoff’ these losses over ten years and cover them with any profits it makes in the meantime.
So there we have it. A bank that was even partly state owned was allowed to grow to a size twice that of the output of its own country, speculate in all sorts of rubbish financial investments and open up operations in Turkey and Japan. It went bust in 2008 because it was unable to finance its speculative investments in the US any longer. It went bust last week because it was unable to finance its holdings of Greek and other euro government bonds by borrowing from other banks.
The lessons are clear. Banks should be public service operations providing loans to households for ‘ big ticket’ items and small businesses so they can invest. They should not be engaged in speculation and risk-taking on Wall Street or the City of London to provide big bonuses for their senior managers and higher returns for their private shareholders (usually other banks and financial institutions, like pension funds and insurance companies). The likes of Dexia and RBS in the UK did just that. And not much has changed. RBS is now 57% owned by the UK government. But it is still allowed to act like a privately-owned bank with huge bonuses and salaries for its top executives, and even worse it is refusing to allow full services for its poorest customers by imposing restrictions and charges on them because they don’t make any money for the bank. The government wants to sell its stake in RBS as soon as possible. If it did so now, the taxpayer would lose about £4bn immediately as the RBS share price is only half what the UK government paid for the shares it bought from the greedy shareholders.
The best way to avoid more banking collapses is to bring the banking sector into public ownership, with democratic accountability of the senior managers to the electorate and the bank staff. The bailouts of the banks in 2008 did no such thing. In the US, the Troubled Assets Relief Program (TARP) thought up by the then US treasury secretary Hank Paulson, the former head of Goldman Sachs, was just that – relief for bank shareholders and bond holders in the form of $700bn of taxpayers money handed over to the bank executives. It socialised the risk i.e it was socialism for the rich, while we got capitalism.
Clearly, the banking crisis is not over. The bailout of the banks in 2008 left the state sector around the world with huge budget deficits and debts, which the very same bailed out banks are now refusing to service except at very high interest rates. So the likes of Greece are heading for default. The horrible irony is that if Greece and other Eurozone states are forced to default on their bonds, then the banks will be bust again too. And so the merry-go-round continues. The leaders of the major capitalist economies in Europe are now recognising that they will have to find upwards of another €150-500bn in taxpayers cash and guarantees to recapitalise Europe’s banks. So, far from being able to sell, the UK government could be faced with having to inject more capital into RBS. State ownership of Europe’s banks will reach an average of 40% if that happens. What better proof that banks, supposedly the pinnacle of modern capitalism, cannot function as capitalist entities any more!