A Timeline of Banking Transaction Velocity and Complexity

By Kevin Depew  OCT 04, 2011 10:40 AM

The history of Dexia illustrates how we arrived at this point.


This morning's top news from Europe is that Dexia SA (DXBGF.PK), BNP Paribas SA (BNP.PA) and Societe Generale SA (GLE.PA) are pushing back against European regulatory demands that they accept more losses on the Greek government debt they are holding.

Of those three banks, Dexia is the most interesting for U.S. market. The Wall Street Journal published a good piece this morning outlining why a bank that few in this country have ever heard of could be important. It's a good read but the gist is that Dexia is a major player in the U.S. municipal bond market, acting as a backstop to approximately $10 billion in variable-rate muni funding for cities and towns here in the U.S. Yes, variable-rate. I won't steal the reporters' thunder by rehashing their explanation, but you probably get the picture. If not, read the article.

So Dexia is interesting. This morning while going through some Dexia-issued prospectuses I came across what at first looks like a routine business history and timeline for Dexia Group. In a word, it is stunning. For it illustrates in one place where banking and financial markets truly began to go off the rails, the point in time where complexity began to go hyperbolic and the velocity of transactions had to increase in order for everyone to remain upright on the treadmill.

Dexia has four core business lines. Perhaps the most important for U.S. markets is the Public/Project Finance and Credit Enhancement, which was created in 1996. The North American subsidiary of this line is Financial Security Assurance, which provides credit enhancement of U.S. municipal bonds. This business line is the largest contributor to Dexia Group results. The other three lines are Retail Financial Services, Investment Management Services, and Treasury and Financial Markets.

History of the Group

October 12, 1996
This is a financial entity that came into being more than 150 years ago. What is fascinating is that, according to this timeline, nothing much really happened between 1860 and 1996. After 1996, however, once Dexia Group was formally founded through the business alliance between Crédit Communal de Belgique and Crédit Local de France, the transactions began to increase in velocity and complexity, mirroring almost exactly what occurred in global finance.

As we now know, what at first looked like a boom in financial engineering and banking profitability, a new era in risk management and purported risk reduction, was instead little more than a veil of calculus draped over a street corner shell game. This is not overstating things. With the veil now torn, the calculus broken, we can see quite clearly that we were only fooling ourselves. Risk was never reduced, only disguised.

Twitter: @kevindepew

No positions in stocks mentioned.

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