Banking on Banks

So was it a structural problem, or just a liquidity problem?

Around the world big banks are paying back the government aid that they received during the height of the financial crisis of 2008. The latest bank to formulate an exit plan is Dexia Bank, Belgium’s largest financial conglomerate. In 2008 the financial giant received billions in support from the European Central Bank.

Late last week the bank announced that it would be selling a number of business lines and investment assets in a strategy designed to raise capital and allow it to pay back the ECB ahead of schedule. They want to get off the government dole and begin to pay out dividends like the big regional banks over here. It’s hard to justify paying dividends to shareholders when you still haven’t paid taxpayers back—hence the accelerated plan.

Ironically, this arrangement will result in a short-term loss, but the shares traded up anyway, perhaps because of the prospect for increased payouts to shareholders in the not-so-distant future. Dexia is big in Europe; it’s every bit as significant as Wells Fargo or Bank of America.

I’ve argued before that most of the banks in the US were fine, and only a few major institutions like Fannie or AIG needed the government’s extraordinary help during the crisis. With Europe’s biggest recipient exiting the program early, that thesis just got stronger.

Douglas R. Tengdin, CFA
Chief Investment Officer
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