Dexia bank gets multi-nation $9.2B bailout

Dexia became the second Belgian bank this week to get a government and shareholder bailout Tuesday when Belgium, France and Luxembourg said they would inject almost $9.2 billion to keep it afloat.

Dexia's CEO Axel Miller - who immediately stepped down - said the bank had no real option to asking for state help because "our feeling was clearly that this week is going to be very tense on the market and we might be ... one of the banks that might be put under pressure."

Dexia, a French-Belgian specialist in lending to local governments that ran up huge losses in its U.S. operations, closed nearly 30 percent lower Monday - triggering emergency talks with government officials.

This came barely two days after Belgium, the Netherlands and Luxembourg moved to save Fortis bank on Sunday, pumping 11.2 billion euros ($16.4 billion) after its shares shrank by a fifth Friday. Traders saw the bank as overleveraged.

Markets clearly welcomed the bailout, with Dexia's share price rallying nearly 8 percent in Paris trading and Fortis rising 9 percent in Amsterdam on Tuesday afternoon.

Dexia said the extra money would allow it remain "one of the better capitalized banks in Europe" even if market volatility further devalues securities, equities and other products it holds. Ratings agency Standard & Poor's agreed, upgrading the company's outlook to "stable" from "negative."

Belgian authorities and Belgian shareholders said in a statement that they would invest 3 billion euros in the bank, while the French government and its investment arm CDC - which holds just over 10 percent of Dexia - will invest another 3 billion euros. Luxembourg will add 376 million euros.

For Dexia, the Belgian and French investments come as a capital increase that will issue new shares at $9.90 each, while the Luxembourg government will get newly issued convertible bonds.

In return, the bank promised to improve the way it is run - with Miller and chairman Pierre Richard saying they would resign and governments demanding "significantly" better corporate governance.

Miller said the company had been hit by "very nervous markets" and was partly a victim of Fortis' troubles.

"I don't know of many instances recently where investors have been found willing to put additional equity in banks," he told reporters.

"We couldn't have foreseen just a week before last weekend that a major Belgian bank would be bailed out or that you'd have over the course of one single weekend signals that three, four, five banks across Europe were starting to have problems," he said.

He said banks needed an urgent response from U.S. authorities debating how to proceed after the U.S. House rejected a $700 billion plan to buy up bad debt to unfreeze lending.

"The management of the crisis has at times been a little chaotic and the markets just don't accept that," he said. "It's time for regulators globally to get together to find some kind of global solutions to a situation where banks essentially are not lending to each other anymore."

Belgium is splitting its share of the bailout between the federal and regional governments, with 1 billion euros ($1.43 billion) each from the federal state, the three Belgian regions combined and shareholders Gemeentelijke Holding NV, Arcofin CV and Ethias.

The French government will invest 1 billion euros, with its state investment arm Caisse des Depots et Consignations injecting 2 billion euros. This will give France a 28-percent stake in Dexia which is the main lender to French local governments.

French Finance Minister Christine Lagarde said the recapitalization was essential "to guarantee the stability of the financial system."

Dexia ran into trouble with its U.S. bond insurance unit FSA, which was hit hard by the subprime housing crisis, which saw loans made to people with poor credit drop sharply in value on worries that borrowers could not make costly repayments. Holders of bonds based on those mortgages suffered heavy losses.

FSA quit asset-backed investments last month after setting aside $936 million in the second quarter and securing a $5 billion unsecured line of credit from Dexia to cover potential losses that will now be converted into a lower-risk credit facility.

Dexia will also inject up to $500 million to cover any extra losses at FSA exceeding the $316 million recognized at the end of June. That caps Dexia's liability for the unit and prevents it selling off investments cheaply.

Dexia was also hurt by the collapse of U.S. investment bank Lehman Brothers, saying it expects that to cause it 350 million euros ($512 million) in losses.

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Associated Press Writer Emma Vandore in Paris contributed to this story.