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What Fed's Ben Bernanke REALLY Said

Bernanke to financial institutions: we've got your back. I keep getting asked what Mr. Bernanke meant when he said the Fed was prepared to provide a "broad-based lending program."

One thing's for sure: he's not talking about lending to small businesses. He's talking about backstopping the financial system in the event of another liquidity crisis, possibly brought on by a freeze-up in Europe.

But wait — he can't do that, right? He can't bail out financial institutions by giving them money in exchange for warrants and preferred stock, as was done in 2008. Dodd-Frank will not allow that.

True, but he didn't say that. He talked about a "broad-based lending program." A loan is not a bailout.

He seems to be saying to financial institutions, "We've got your back." Financial shares did rise modestly.

Elsewhere:

Dexia is a strange duck to be the poster child for European banks.

I mentioned yesterday that investors were aggressively attacking the weakest stocks in many sectors. Overnight, Belgian-French bank Dexia acknowledged it was essentially the weakest bank in Europe by saying that it had so many toxic assets it was crippling any chances of recovery and implying it was technically insolvent.

This has raised the spector of a costly (perhaps impossible) bailout of it and other European banks. The Belgian and French Finance Ministers issued a joint statement: "the French and Belgian states, in co-ordination with the central banks, will take all the necessary measures to safeguard the bank's depositors and creditors."

I wish it was a different bank, because in most ways Dexia is a strange duck. It does very little "traditional" bank lending. It is mostly a lender to municipalities and governments.

And — here's the odd part — the people they lend to are also the people who own them. Belgium, France and Luxembourg own about 50 percent of its shares.

In other words, the people it is lending to are also its creditors. It's almost like a mutual insurance company.

It also has a very small depositor base. Instead, it funds itself by borrowing in the short term markets to finance municipal obligations.

Of course, that source of funding has dried up, so there is a "liquidity" crisis. They have long-term assets and short-term funding. Sound familiar?

Their biggest problem: a mountain of bad debt. According to Standard and Poor's, they have 4.3 billion euros worth of Greek sovereign debt exposure, on a 10 billion euro equity base. Of course, they have taken some haircuts, but they are going to have to take more.

They were a poster child for all the problems leading up to the 2008 debt crisis. They invested heavily in subprime mortgages, Iceland, and other risky assets. Dexia got a huge (6 billion euro) bailout by Europeans in September 2008.

What is being done? The company could be broken up and sold piecemeal, but that seems unlikely. The bank will likely split into a "good bank, bad bank." The bad bank would hold Dexia's toxic assets and will likely be guaranteed by at least the governments of France and Belgium. There will also be asset sales: there is talk about rolling up the municipal finance business into France's sovereign wealth fund.

Does this sound familiar? Sounds like Maiden Lane...remember that? Created by the New York Fed to house the toxic assets of AIG and Bear Stearns, and which is supposedly being unwound...over a time period. A very long time period.

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