Dexia

The Franco-Belgian bank Dexia started collapsing Oct. 4, ushering the latest chapter of the nearly 2-year-old European financial crisis. Considering that Dexia is on the list of the top 50 globalfinancial institutions, it is worth examining what happens during a bank bailout and shutdown process and applying that to the Dexia situation.

In minor cases, a cash infusion from a government isusually sufficient to hold the bank over until such time that normal economic growth can help the bank regenerate its finances. Growth has been middling in Belgium since 2008, and Dexia simply hasn’tbeen able to get out from under the problems caused by its non-performing assets.
In moderate cases, governments come in and take a percentage share of ownership of the bank, putting their ownrepresentatives on the bank’s board and forcibly restructuring it. This has already been done for Dexia, too. In the aftermath of that 2008 bailout, Dexia became majority-owned by various governments in Franceand Belgium.

But the restructuring procedures have not followed what we would consider to be a standard course. Normally, there are major changes at the top and policies are adjusted allthroughout to make sure that the sort of indiscretions that led to the bank problems in the first place don’t happen again. Dexia, however, is not a normal consumer or business bank. Instead, much of itsbusiness comes from supplying credit to various parts of the Belgian state apparatus.

So when these entities took greater control of Dexia back in 2008, instead of encouraging Dexia to engage in morelending to private enterprise, which might actually regenerate its loan book, they instead encouraged Dexia to invest more in their dead issuances, allowing them to run larger deficits than theywould’ve been able to otherwise. Somewhat ironically, the last bailout actually only reinforced the bad policies that had gotten Dexia into trouble the first place.

The final option is some sort of...