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Regulators Knew of Dexia's Problems But Were Silenced

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By Wolf Richter   www.testosteronepit.com

When a bank is allowed to collapse, the lies behind its financial statements come out of the woodwork—and Dexia, the French-Belgian mega-bank that was bailed out in 2008 and collapsed in early October, is no exception: a report by the French banking regulator surfaced. It contains the results of an investigation concluded in the summer of 2010. And it threatened to put the bank "under special supervision."

And then? Nothing. The report was buried. Until the French newspaper, Libération, obtained a copy of it.

Dexia is a big deal in Belgium where it employs 10,000 people—of a population of 11 million (in the U.S., that ratio would translate into 290,000 employees). It has over 21 million Belgian bank accounts, and its assets of $715 billion dwarf Belgium's $395 billion economy. This craziness started years ago when the community bank embarked on an acquisition spree that turned it into an outsized, overleveraged hedge fund—that paid out huge bonuses, and as we now know, lied to investors, regulators, and the public. At taxpayer's expense.

But the report shows that the regulators weren't stupid. Inspectors of the Authorité de Contrôle Prudentiel, the French banking regulator, investigated Dexia Crédit Local (DCL), the French part of Dexia, during the summer of 2010. By then, DCL had fallen below the required liquidity levels and had difficulty raising cash to cover its monthly expenses.

The report lists a number of infractions committed by both, DCL's pre-bailout management and post-bailout management. Among them:

- DCL gave false financial information to the public.

- DCL managed its portfolio of derivatives in a manner that violated regulatory provisions.

- DCL omitted or lied about important information concerning the acquisition of a portfolio of bonds and speculative holdings.

- DCL overvalued a portfolio of investments by an estimated €2 billion ($2.7 billion).

- DCL's CEO understated transaction volumes.

And this gem:

"From 2007 to 2008, financial communications of Dexia Crédit Local were evasive about the rising risks, though the CEO and other administrators knew about them. They covered the infractions and the consequent liquidity risks with silence."

The regulators also accused DCL's audit firms, Deloitte and Mazars, of closing their eyes.

The report was sent to DCL, along with a threat that the bank would be put "under special supervision." And then the hatchet was buried for some reason. It remains to be seen if the wrongdoing at the bank will ever lead to legal actions against the perpetrators.

And just how deceitful can bank management get? The Financial Times added another wrinkle: a false recapitalization! Dexia lent €1.5 billion to its two largest institutional shareholders before 2008, so that they would invest it in Dexia common stock. As a result, Dexia showed a capital increase of €1.5 billion. Inexplicably, the practice wasn't illegal at the time, though Belgian regulators noticed it.

After all this, we welcome comforting words.

"Belgian banks don't need to be recapitalized, according to the EBA," said Yves Leterme, the caretaker prime minister of the country that is still without government. The EBA, of course, is the European Banking Authority, the very same entity whose "stress test" Dexia had passed in July with flying colors.

Europe's banking and debt crisis is pitting France against Germany. And now, we finally know the real issue: German taxpayers might have to subsidize a French company. Via Greece.... German-French Fight Breaks Out Over Frigates

Wolf Richter   www.testosteronepit.com

 

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Sat, 10/22/2011 - 23:41 | 1801190 Buck Johnson
Buck Johnson's picture

They can't pay, pure and simple.  They lied, the govt. lied and the EU is lying about everything to protect the bankers and their banks.  Germany is being set up big time to take a very very nasty fall.  They should put a moat around their banks and bail them out.  Then accept the hit to the economy and reintroduce the Mark their currency.  It would be better than continuing to double down because of a theory that they know is flawed.

Sat, 10/22/2011 - 19:28 | 1800663 JustACitizen
JustACitizen's picture

No - it's all about confidence - never about solvency. See...if you just believe - it will all be better. The problems will go away and the money will just roll in.

Sat, 10/22/2011 - 18:28 | 1800541 drand02
drand02's picture

What strikes me as odd now, we know managemen lied, stole vie bonuses and unreported transactions, cheated their depositors, cooked the books thru accounting schemes and we still "bailout" or "nationalized" which everyone now treats as a good thing.  Old management still in place and looks like it's the same old stuff.  This whole bank stinks of manure.

Sat, 10/22/2011 - 18:28 | 1800540 drand02
drand02's picture

What strikes me as odd now, we know managemen lied, stole vie bonuses and unreported transactions, cheated their depositors, cooked the books thru accounting schemes and we still "bailout" or "nationalized" which everyone now treats as a good thing.  Old management still in place and looks like it's the same old stuff.  This whole bank stinks of manure.

Sat, 10/22/2011 - 15:17 | 1800279 tony bonn
tony bonn's picture

lying is taught in all b-schools...b-schools attract vermin and low grade intellects....smarmy little punks who are more ambitious than their iqs...

lying is the tool of losers who can't succeed with honesty. and of course the biggest liar of them all - barack barry soetoro hussein obama is in the white house under the biggest whopper of them all - that he is a natural born us citizen....

www.obamacrimes.com

 

Sat, 10/22/2011 - 13:46 | 1800155 Rastamann
Rastamann's picture

see what LIBERTARIANISM brings? i thought all you self governing idiots weren't lured in by greed and power? looks like i was wrong.

 

but hey ... now that you Ayn Randian (another welfare parasite) peabrains have been disgraced and exposed for the FRAUDS that you are with your allegiance to the Chicago school of economics....you have latched on to and are DESPERATE to pervert the Austrian school.

 

not this time.

Sat, 10/22/2011 - 19:35 | 1800682 Hedge Fund of One
Hedge Fund of One's picture

Dexia was precisely a failure of the state to regulate based on existing laws and to respond to other moral violations that had not been foreseen/legislated.  Subprime collapse in the U.S. was a similar failure.

Sat, 10/22/2011 - 16:02 | 1800334 dlmaniac
dlmaniac's picture

Nah. LIBERTARIANISM would not even bother w/ a stress test. You decide where you put your money. If you are dumb enough to put it in Dexia and get savaged, you deserve it. No bailout for you. Not a penny. But it's not all negative. Your miserable demise would serve as a useful reminder of everyone else to entrust own money to self rather than a third party full of weasel words.

It's however lazy fools believing in central planning that first buying into the delusion that a central bank could mitigate bankers fractional reserve lending risk so they supported FED that has done nothing but enlarging that risk. They then bought into another delusion that a federal deposit insurance agency could also mitigate the FRL risk so they supported FDIC that has done nothing but enlarging that risk. Wanna see where Fannie / Freddie and so on have landed these fools in next? hohoho.

So at the end of the day what do you call this Great Depreflation that started in 2008 and on track to last through this whole decade? It's called "reaping what you sow" big time. I'm sure every fool believing in central planning over self-governing will have a heck of fun.

Sat, 10/22/2011 - 19:20 | 1800641 AldousHuxley
AldousHuxley's picture

Let's welcome libertarianism as an alternative to government subsidy dependent RipoffbliCONs.

At  least libertarians are financially prudent.

Sat, 10/22/2011 - 12:59 | 1800056 ThirdCoastSurfer
ThirdCoastSurfer's picture

Dexia should not detract attention from examination of what is happening in the US.

Yesterday's closure of the trillion + dollar "Community Banks of Colorado", at a cost of about $225 million to the FDIC, was interesting for the details in the acquiring bank, Bank Midwest, which is a subsidiary of NBH Holdings, which was formed in 2009. 

From the NBH website:

"NBH has also signed an agreement to acquire the brand name and 16 branches of Community Banks of Colorado, with an expected closing date by the end of 2011. "   

Sat, 10/22/2011 - 12:28 | 1800000 PulauHantu29
PulauHantu29's picture

"No one saw this coming" ..the Bankers testified to the Committee.

I suspect No One will see any prison time...or even an indictment.

 

Sat, 10/22/2011 - 11:52 | 1799933 RiverRoad
RiverRoad's picture

Hmmmm, looking forward to hearing more from Tyler on that Euro libor scandal coming to light over there.....

Sat, 10/22/2011 - 11:17 | 1799899 Mr. Lucky
Mr. Lucky's picture

Wha-yougotta problem?

Sat, 10/22/2011 - 09:52 | 1799826 mind_imminst
mind_imminst's picture

DO NOT FORGET THIS PIECE OF THE PUZZLE: Dexia got the most money from the FED discount window in 2008!!

Did the FED know they were lying about their assets/solvency? In 2008? Someone should ask.

Sat, 10/22/2011 - 11:11 | 1799891 markar
markar's picture

It was hush money for all the toxic shit Wall St. sold the European banks. Don't you find it curious no major lawsuits came out of Europe for this?

Sat, 10/22/2011 - 19:24 | 1800653 AldousHuxley
AldousHuxley's picture

it was money for the police and military so in case of bailout protests like OWS, Belgian government can get a cheap loan to beat the shit out of 99% of their citizens. Apparently Belgians learned a lot from Hitler days.

Sat, 10/22/2011 - 06:54 | 1799712 ptolemy_newit
ptolemy_newit's picture

who went to jail?

Sat, 10/22/2011 - 10:17 | 1799823 Widowmaker
Widowmaker's picture

Jail? What the fuck is that?

That would imply criminal culpability, of which record bonuses from children's futures is a matter of national security, not criminal intent dripping with lies, cheating and stealing.

The banks exist as justice-abortions only. Corporate sluts in pinstripes fucking the fags and sluts in the congressional fuck shop, while all blaming the victims.

This is gods work requiring no morals and only loose vaginas.

The real crime is your lack of confidence in bernankes clinic.

Sat, 10/22/2011 - 10:52 | 1799870 disabledvet
disabledvet's picture

To literally quote the media "just because you blow up the government doesn't mean it's illegal." where's King Leopold when you need him.

Sat, 10/22/2011 - 08:38 | 1799764 MarketTruth
MarketTruth's picture

Exactly, who went to jail over this fradulent activity?

Sat, 10/22/2011 - 05:22 | 1799682 falak pema
falak pema's picture

the banking scam is the heart, the kernel of the Oligarchical construct. Now the Oligarchs have no other issue, given the size of the hole in their own financial construct to fight with each other. When thieves fall out...

We are now in Sarajevo 1914 moment on the financial front. Next week we'll know if they lit the match to the powder keg in Eurozone. Then the contagion.

Sat, 10/22/2011 - 03:27 | 1799638 jbc77
jbc77's picture

Always enjoy your write ups Wolf, thanks. Very informative. I wonder how much bull shit the upper management of BAC, colluding with regulators, are hiding. For the most part, we have a global banking shit show on our hands.

 

Sat, 10/22/2011 - 03:11 | 1799632 StavropolJames
StavropolJames's picture

So what I understand from this, is that when regulators or people we trust tell us some "facts", we would be foolish to rely on them no matter how they are dressed up. 

It's long past the time to turn off the news (lies).

Sat, 10/22/2011 - 02:21 | 1799619 upWising
upWising's picture

I'm going Long on the following, which will increasingly be needed as things become even more surreal:

•Duct tape and bailing wire to hold the whole financial contraption together;

•Yellow police line tape to keep the crowds away from the ultimate total collapse, or away from the pieces of the system incrementally breaking off and smashing on the ground;

•Police batons, pepper spray, and plastic handcuffs for those who don't get the hint from the yellow tape;

•Sheep food for the masses who are disinterested in anything going on around them (can be VIRTUAL food, as in Dancing With the Stars, Lindsay Lohan dolls, Michael Jackson trial coverage, etc.).  

ALCOHOL, TELEVISION, ALL-YOU-CAN-EAT-BUFFETS,and RECLINER COUCHES,
BUT ABOVE ALL...
FAITH AND CONFIDENCE IN THE SYSTEM! 

Sat, 10/22/2011 - 10:55 | 1799877 disabledvet
disabledvet's picture

I'm staying long girlfriends. Getting the best money can buy will always be different from being with...or more importantly without...that which you love.

Sat, 10/22/2011 - 23:36 | 1801185 Ahmeexnal
Ahmeexnal's picture

Love is the ultimate racket.

Sat, 10/22/2011 - 09:43 | 1799818 wombats
wombats's picture

What about bullets?  Don't you need them too as a last line of defense?

Sat, 10/22/2011 - 02:12 | 1799610 AnAnonymous
AnAnonymous's picture

So now, the revelation on retained information is news.

In this US driven world, it is all about censorship and the power to censor.

US citizens are duplicitous. Of course, they knew, but denial was more profitable.

In the US world order, denial has always to be put face to face with admission. Is it more profitable to deny or admit?

If more profitable to deny, then the denial course is selected.

Sat, 10/22/2011 - 00:54 | 1799570 markar
markar's picture

I wonder what percent of the population needs to be aware these TBTF banks are the scourge of the earth for this madness to end?

Sat, 10/22/2011 - 03:52 | 1799647 css1971
css1971's picture

This has been going on for 400 years. What makes you think it will ever end?

Sat, 10/22/2011 - 14:10 | 1800201 unununium
unununium's picture

bitcoin

Sat, 10/22/2011 - 04:55 | 1799669 Mamzer Ben Zonah
Mamzer Ben Zonah's picture

Things that can't continue, don't continue.

Sat, 10/22/2011 - 01:57 | 1799600 philipat
philipat's picture

Bill Blacks use of SDI (Systemically dangerous institutions) instead of TBTF to describe these institutions helps paint a spade as a spade and is a useful part of the process.

Sat, 10/22/2011 - 16:00 | 1800336 Schmuck Raker
Schmuck Raker's picture

" Systemically dangerous institutions " - better

" Systematically dangerous institutions " - Best

Sat, 10/22/2011 - 13:30 | 1800130 DavidC
DavidC's picture

Agreed.

Only the TBTFs should be rechristened TBTCs - Too Big To Continue.

DavidC

Sat, 10/22/2011 - 00:12 | 1799539 DoChenRollingBearing
DoChenRollingBearing's picture

Every day something new bubbles up from Europe.  What's next?  It does seem that things are slightly worse and slightly more advanced over there.  Whatever happens in Europe will likely happen here after.

Nice piece Wolf.

Sat, 10/22/2011 - 05:16 | 1799681 Sudden Debt
Sudden Debt's picture

Luckely, we europeans don't give a shit about it :)

Fri, 10/21/2011 - 23:55 | 1799524 legal eagle
legal eagle's picture

Following that platform, why doesn't the Chinese lend the US $ so can buy Chinese goods? Hmmmm

Sat, 10/22/2011 - 09:45 | 1799822 wombats
wombats's picture

I think they already do.  Don't they have > $1T in US Treasuries?

Fri, 10/21/2011 - 23:11 | 1799457 max2205
max2205's picture

It's all good....

Fri, 10/21/2011 - 23:33 | 1799496 Manthong
Manthong's picture

Can anyone say "Brooksley Born"?

Sat, 10/22/2011 - 08:12 | 1799748 Lord Welligton
Lord Welligton's picture

Yes.

The entire Western World turned into one giant casino of "light touch" regulation.

20 years of uninterrupted looting.

Sat, 10/22/2011 - 09:53 | 1799828 wombats
wombats's picture

20 years?

No, I think the roots trace back far earlier;  > 1000 years.  Wasn't that about the time that scriveners started practices that evolved into fractional reserve lending?

Didn't the Rothschields really get things going @ 300 years ago?  How many wars in Europe can be directly traced to financing from their banks that were enablers and proffiteers from the death of millions over time?

Sat, 10/22/2011 - 10:41 | 1799863 Widowmaker
Widowmaker's picture

How many?

All of them, but they used different tyrants and dictators on the sell side.

Sat, 10/22/2011 - 10:20 | 1799848 LeonardoFibonacci
LeonardoFibonacci's picture

The regulators are dirtbags

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