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Europe Update: Dexia Bailed Out, Dismantled, and Nationalized--Are Others Next?
10/31/2011 10:07:00 PM
(Written by Alexander Crawford. Shares shorted data sourced from Yahoo! Finance, all other data sourced from Finviz.)
About three months ago, the European Banking Authority released results from their stress tests on the largest European banks, and one of the banks that passed with flying colors was Franco-Belgian Bank Dexia SA. Just 86 days later, the bank was bailed out to avoid collapse and is now in the process of dismantling and nationalizing its Belgian unit.
This is especially frightening considering how solvent Dexia looked just three months ago – in its latest annual report, the company said it had 17 billion euros in Tier 1 capital, showing a capital ratio of 12.1 percent during the stress test.
But columnist at Bloomberg Jonathan Weil says Dexia’s downfall should not have been surprising: “Dexia got that ratio mainly by excluding the bulk of its assets — a process speciously referred to as risk-weighting — along with billions of euros of pent-up losses on soured holdings such as Greek government bonds. The denominator in the ratio got smaller, the numerator got bigger, and Dexia wound up looking like one of Europe’s safest banks.”
Weil says that according to Dexia’s balance sheet as of Dec. 31, tangible common shareholder equity was 6.7 billion euros compared with 564.5 billion euros in tangible assets, giving Dexia a 1.18% capital ratio – hardly a cushion to absorb future losses.
President of Hussman Investment Trust John Hussman thinks this exemplifies the “central problem facing the global economy,” i.e. leverage. In Hussman’s latest weekly commentary, he agrees with Weil’s suggestion that “Dexia’s demise is only the start.”
Weil cites that as of Dec. 31, there were four other European banks that passed the latest stress tests with Tier 1 capital ratios above 10% and tangible common equity ratios below 2%: France’s Credit Agricole SA, Germany’s Commerzbank AG, Landesbank Berlin AG, and Deutsche Bank AG (DB).
Do you think other banks are soon to share Dexia’s fate? For a look at the banking sector, we ran a screen on US-traded financial stocks that have seen the most attention from short sellers lately.
These 6 banking stocks are seeing high float shorts above 10%, as well as significant increases in shares shorted month-over-month.
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