Tuesday, October 4, 2011

Rumors Dexia Preparing to Park €180 Billion in "Bad Bank" Send Financials Soaring into Close

Wondering why JP Morgan, Bank of America, Morgan Stanley, Goldman Sachs, and all of the rest of the beloved TBTF's that were looking worse than death mid-day all suddenly rallied (MS by almost 20% off the lows!) into the close?
The WSJ reports that market rumors are indicating that major Belgium/French bank Dexia will park  €180 Billion into a "bad bank"- thereby relieving all future risk of contagion from Dexia's bad debt.
Problem solved, please move along! 

Wait...the report says the bad bank is backed up by the Belgium government (interesting since Belgium doesn't currently HAVE a government!) and the FRENCH government!
So problem is solved, except that as soon as France completes guaranteeing €180 Billion in bad debt from Dexia, we will need a new acronym of PFIIGS. 

Hmm.  What the heck...we could throw in the US and UK for good measure and just make it

From the WSJ:

  • Franco-Belgian lender Dexia is set to park assets worth in excess of EUR180 billion into a so-called bad bank, a vehicle backed by guarantees from the French and Belgian governments, in an effort to disentangle itself from gripping liquidity strains, people familiar with the matter said Tuesday.
  • The bad-bank plan is part of a deeper makeover under which Dexia is considering selling all its core units and which may effectively lead to a dismantling of the lender.
  • Under a plan submitted to Dexia’s board on Monday, the bank would ring fence into a special vehicle all the assets it inherited from an aggressive expansion push early in the past decade as well as units that can’t be sold under current market conditions, the people familiar with the matter said.
  • These assets would include a portfolio of bonds worth EUR95 billion and about EUR30 billion in loans deemed non-strategic, they said. Dexia Crediop and Dexia Sabadell, the bank’s municipal lending units in Italy and Spain, respectively, would also be folded into the bad bank, the people familiar with the matter said. The European sovereign debt crisis has cast a cloud on most financial assets in Southern European countries, making it virtually impossible for Dexia to find buyers for the two units.
  • Over the past year, Dexia had succeeded in reducing short-term financing needs stemming from its large portfolio of long-term bonds. Yet, in recent weeks, the bank was increasingly struggling to raise funding at affordable costs. With little hope that liquidity strains would ease in the short term, management came to conclusion that Dexia could no longer carry the oversized bond portfolio alone, one person familiar with the matter said.
  • In a first step, Dexia may continue to carry the bad-bank vehicle on its books, but France and Belgium will give its guarantee to securities the bank must issue to meet refinancing needs, the people familiar with the matter said. Longer term, Dexia may transfer bad bank ownership to France and Belgium, these people said