Before the demise of Lehman Brothers plunged the global financial system into a temporary state of anarchy in the Fall of 2008, the collapse of Bear Stearns fired a warning shot across the bow of the world. If past is prelude, the troubles of Franco-Belgian bank Dexia is set to whistle over the heads of the European economy as I type. At least that's the take of Jim Bianco, eponymous President of Bianco Research.
Shares of Dexia have been under pressure --down over 40% in the last three months and now suspended for trading until at least October 10th-- due to concerns about its large exposure to weaker Eurozone nation debt, mainly Italy and Spain. Earlier this Moody's put Dexia on review, warning of a possible downgrade due to short-term liquidity concerns. Standard & Poor's followed the lead and actually cut the financial group's core banks to A-/A-2 earlier today. So why should Americans care about a failing European bank that they've never heard of?
Dexia plays a significant role in the $2.9 trillion global municipal debt market. The bank backstops debt on the state and local government level across the world and across America, including New York City issued bonds. Noting that just 3 years ago the Federal Reserve was spending more money propping up Dexia than any other bank in the world, Bianco says current efforts to keep it on life support aren't exactly comforting. Bianco says Dexia is so laden with toxic loans and derivatives and has such a stunning lack of transparency that the "market has lost complete faith." If the meltdown of '08 taught us anything it's that faith is what banks can least afford to lose in a crisis.
Bianco says a Dexia rescue plan would eat 20 - 25% of the European Financial Stability Fund (EFSF) bailout plan just approved by Germany, an illustration of just how insufficient that fund may be. As far as he's concerned the EFSF shouldn't exist at all. Like many, he sees the idea as a repeat not of the TARP days but, perhaps even more chillingly, the creation of Japanese "zombie banks" that some blame for keeping Japan in a condition somewhere between alive and dead for 20 years and counting. It's just another effort to "prop up financial institutions that should no longer exist," he says.
Bianco's "let them eat cake" stance is popular among the free-market types. But isn't the refusal to do anything tantamount to inflicting suffering on the masses when a more gentle alternative is available? Bianco doesn't dismiss the basic idea but does say we're at yet another crossroad where the financial governing bodies of the world can try something other than replicating the relatively benign failures of the past.
"Either you let these financial institutions fail, and it could get ugly, or you prop them up and don't complain [about then ensuing decades of economic stagnation]."
If this seems cynical, I'm all ears as to a better plan. Please offer them in the below comment section.