The Collapse of Dexia

Dexia referred to as the Dexia Group, is a Belgian-French financial institution active in public finance, providing retail and commercial banking services to individuals and SMEs, asset management, and insurance. The company has about 35,200 members of staff and core shareholders' equity of 19.2 billion as at 31 December 2010, and provides governments and local public finance operators with banking and other financial services. Asset Management and Services provides asset management, investor and insurance services, in particular to clients of the two other business lines. In 2008, the bank received bailouts for 6 billion, and it has become the first casualty of the 2011 European sovereign debt crisis. Negotiations are taking place for its breakup. Its headquarters are in Saint-Josse-ten-Noode, Brussels.

Profile
In the 2010 Fortune Global 500 (which lists companies by total income. Dexia was ranked 49th, the top-ranked Belgian company. The company was founded in 1996 through the merger of Crdit Communal de Belgique/Gemeentekrediet van Belgi (founded in 1860) and Crdit Local de France (founded in 1987). The Dexia Group was founded as a dual-listed company, but in 1999 the Belgian entity took over the French entity to form one company. The company is headquartered in Brussels, Belgium.

History
Belgium: Gemeentekrediet Communal de Belgique

van

Belgi

Crdit

1860 Foundation of the Gemeentekrediet van Belgi / Crdit Communal de Belgique, specifically aimed at financing the investments of the local administrations. The communities were shareholders, for a value of at least 5% of the amounts drawn. 1947 Development of a network of retail branches that allow drawing funds from the general public through savings accounts. From 1960 on the branches were run by independent agents, allowing a broader range of services and products to be offered and a lasting relationship with clients to be developed. 1990 Start of the international expansion of the bank with the creation of the Cregem International Bank in the Grand Duchy of Luxembourg, specialising in the management of large sums of money. 1991 The Gemeentekrediet builds on its international expansion by taking a stake of 25% in the Banque Internationale Luxembourg (BIL), the biggest bank in Luxembourg. In early 1992 the firm increased its stake in BIL to 51%.

France: Crdit Local de France

1987 Foundation of the Crdit Local de France as a successor to the CAECL (Caisse d'aide l'quipement des collectivits locales); it was a public administrative institution, managed by the Caisse des dpts. The Crdit Local de France was a specialised financial institution responding to the needs of local administrations, that have become important economic agents in their own, and make as much use of products and services of the financial markets as businesses.

1990 The Crdit Local de France begins an international expansion with the opening of an American subsidiary, the CLF New York Agency. Aiming at a similar development in Europe, the CLF mainly operated in Great Britain, Spain, Germany and Italy; additional activities were later added in Austria, Scandinavia, and Portugal. 1991 Crdit Local de France underwent an initial public offering on the Paris Stock Exchange. The shareholders at the time were the French State (25.5%), the Caisse des dpts (25%), and individual investors from France and abroad (49.5%).

Dexia: the group

1996: Merger of the Gemeentekrediet / Credit Communal de Belgium and the Crdit Local de France to form Dexia. 1997: Dexia takes a stake of 40% in the Italian firm Crediop, the biggest privately owned bank specialising in finance for Italian local administrations. 1998: Dexia increases its shareholding in Crediop to 60%. 1999: First listing of Dexia Group as a dual-listed company on the Brussels and Paris stock exchanges in November, at a price of 6.86 per share. In Belgium the stock became part of the BEL20 index, and in France of the CAC 40. The group broadens its insurance activities in France, Belgium and Germany. 2000: Acquisition of Financial Security Assurance (FSA) in the United States, a major player in credit enhancement for municipalities, making Dexia the world leader in the market of financial services to the public sector. Dexia is active in nearly all European countries in this market as well. Start of an annual reserved capital injection to which only Dexia members of staff can inscribe. 2001: Acquisition of Artesia Banking Corporation, a banking group with activities as retail bank (BACOB), insurance (DVV) and asset management (Cordius). The

stake in Crediop grows to 70%, and Dexia gains control over Otzar Hashilton Hamekomi, an Israeli credit provider for local authorities.

2002: Integration of the Artesia branches in Belgium. 2006: Acquisition of 99.8% of the Turkish firm Denizbank. 2006: Royal Bank of Canada created Institutional Investment Joint Venture with Dexia. It is a 50/50 Partnership called RBC Dexia Investor Services.

Crisis 2008/2009
On 29 September 2008 Dexia came under pressure during the crisis in the banking sector. Other banks and financial institutions refused to provide further credit to Dexia because of potential losses at its U.S. subsidiary FSA and from a multibillion loan to troubled German bank Depfa. The price of the Dexia share, having peaked above 20 in the previous years, but gradually fallen to around 10, dropped in one day to 6.62. The next day the rating agency Moody's downgraded Dexia's long term debt and deposits ratings from Aa1 to Aa3, and downgraded the individual banks' strengths to C- ("adequate intrinsic financial strength") with a negative outlook. Dexia was quickly forced to apply for a bailout by the State. This support was assured within days, taking two forms:

a capital injection of 6.4 billion, consisting of 3 billion from the Belgian State and regional governments, 3 billion from the French State and Caisse des Dpts et Consignations and 376 million from the government of Luxembourg. a state guarantee (effective from 31 October 2008) covering Dexia's liabilities towards credit institutions and institutional counterparties, as well as bonds and other debt securities issued for the same counterparties, for a total maximum amount of 150 billion. Belgium provided

60.5% of the guarantee, with a 36.5% contribution from the French state and 3% from Luxembourg. The three states have the potential to make a profit from their intervention:

the new capital buys Dexia shares at a price of 9.90 per asset for the state guarantee Dexia has to pay a monthly fee, from which the three states benefit proportionally to their share in the guarantee. The guaranteed amount varies continually as a function of Dexia's loans on the financial markets. It peaked mid-2009 at around 100 billion, but after Dexia managed to start selling non guaranteed commercial paper and bonds again, fell to half this size by the end of 2009. In 2009 Dexia paid a fee of 0.5% on the guaranteed credits with a term of less than one year, and 0.865% on the credits longer than one year. The guarantee is currently planned to end in November 2010.

Since Dexia had a New York banking office they were eligible for various bailouts from the US Federal Reserve. At its peak Dexia had borrowed $58.5 billion. On 30 September 2008 the company's chairman Pierre Richard and CEO Axel Miller were sacked, and were replaced on 7 October 2008 by former Belgian prime minister Jean-Luc Dehaene and Pierre Mariani respectively. At the end of 2008 Dexia sold the healthy parts of FSA, ceased its trading activities in Paris and trading on its own account in the financial markets. Further losses are still possible on the remaining FSA portfolio. On 19 January 2009 Moody's lowered the credit rating for Dexia's long term obligations and saving accounts of the three banking parts of Dexia (Dexia Credit Local, Dexia Bank Belgium and Dexia Banque Internationale in Luxembourg) from Aa3 to A1. The rating agency also downgraded the Bank Financial Strength Rating for the three banks from C to D+. On 5 March 2009 Dexia's share price fell to an all-time low of 1.21, a loss of over 90% in a year. A further restructuring plan

was announced, with the firm aiming to concentrate on its primary activities, and to avoid risks on the financial markets. A total of 1,500 job cuts were announced, of which more than half were in Belgium, 260 in France, and the rest worldwide. Dexia's share price subsequently increased over the rest of 2009, largely varying between 4 to 7.50. On 31 March 2010 Bloomberg reported that Dexia was one of the largest borrowers from the discount window of the United States Federal Reserve, having outstanding loans of over $30 billion.

Losses
In February 2009 the bank announced net losses of 3.3 billion euros (approximately 4.2 billion US dollars) for 2008. The Dexia 2008 annual report mentions among others losses of 1.6 billion from selling FSA, 600 million on portfolios and 800 million on counterparties (including Lehman Brothers, Icelandic banks, and Washington Mutual) According to the financial services provider Bloomberg Dexia lost 78 million through the Ponzi scheme of Bernard Madoff.

2010: Downsizing and reorganizing

On 6 February 2010 Dexia could announce that the European Commission had, under certain conditions, approved of the restructuring plan that was necessary to justify the government support for Dexia and to prevent unfair competition:

some acquisitions had to be undone (Dexia Crediop, Dexia Sabadell and Dexia Banka Slovensko) but banking activities in Turkey, highly promising to Dexia, could continue. by the middle of 2010 the State Guarantee had to be abandoned in total Dexia had to downsize by one third by 2014.

Vintage retail activities represented a bigger share in profits again in 2010; apart from Belgium and France, Turkey became

very promising in this area. So much so that predictions were that Turkish staff would account for half of the Dexia employees by 2014. At the same time, outgoing cashflows were diminished by reducing the bonds portfolio; even selling bonds at a loss, if necessary, which explained to a large extent the lesser profits in 2010. More incoming funds from private saving accounts and less outgoing capital through bonds and loans to public institutions meant that Dexia could already worry a bit less about finding sufficient short term funding. The greater international trust in the company also showed when it announed an early retirement from the State Guarantee in 2010.

2011
Dexia and La Banque postale, the bank subsidiary of the French postal services, reached an agreement in January 2011 about a cash transaction involving covered bonds worth 3 billion. This was presented for La Banque Postale as an investment at market conditions, and as a extra source of liquidity for Dexia. Alleged differences of opinion were reported at the top of Dexia. More specifically about tensions between Belgian directors and the French CEO, Pierre Mariani, concerning on the one hand the deficitary investments that had been mostly done in the French division of Dexia, and the liquid funds that were above all present in Belgium. On July 15 the European Banking Authority, as part of its European bank stress tests, gave Dexia a clean bill of health, reporting that its tier 1 capital was 12.1 percent, and would fall to 10.4 percent in 2012 under its "adverse scenario". This would make it one of Europe's safest banks. Dexia posted a 4 billion loss for the second quarter, the biggest in its history, after writing down the value of its Greek debt. On 4 October its shares fell 22% to 1.01 in Brussels, cutting its market value to 1.96 billion. Discussions were taking place about a possible breakup, with a plan to place its "legacy" division into a bad bank with government guarantees.

On 10 October, it was announced that the Belgian banking arm will be purchased for 4 billion by the Belgian federal government. Some units such as DenizBank and the Luxembourg retail bank will be put up for sale. Part of its French operations are likely to be purchased by Caisse des dpts et consignations and La Banque Postale. The remaining troubled assets, including a 95 billion bond portfolio would remain in a "bad bank" that would receive funding guarantees of up to 90 billion provided by the governments of Belgium (60.5%), France (36.5%) and Luxembourg (3%).

Dexia shares
Dexia is a member of the BEL20, CAC Next 20, and LuxX indices. Dexia is also one of the components of the Euro STOXX and Euro STOXX Banks indices. Year 200 1 200 2 200 3 200 4 200 5 200 6 200 7 200 8 200 9 201 0 Share value in euros on Dec.31 15.80 11.90 13.70 16.90 19.50 20.80 17.00 3.20 4.50 2.60

Results
Revenu Net income/ e (loss) 5,976 2,038 million million 7,012 2,750 million million 6,896 2,533 million million 3,556 ( 3,326 million million) 6,163 1,010 million million 5,310 723 million million

year 200 5 200 6 200 7 200 8 200 9 201 0