As Washington prepares to vote on its massive bailout plan, the European Central Bank gave the green light to a rapid nationalization of the Benelux financial group Fortis in a bid to save one of Europe's top 20 banks.
Experts predicted Fortis faced collapse unless a radical rescue package was found
After emergency discussions with ECB President Jean-Claude Trichet on Sunday, Sept. 28, the Belgian, Dutch and Luxembourg governments agreed to inject 11.2 billion euros ($16.4 billion) into the banking and insurance company Fortis after a weekend of high drama.
The presence of Trichet, who as ECB head is responsible for safeguarding financial stability in the euro zone, was unprecedented in a commercial bank rescue and underlined the seriousness of concern for the integrity of the euro zone's financial system.
In the first major bank crisis to hit the euro zone in 13 months of global financial turmoil that began in the United States, Fortis looked to be in severe danger with some experts concerned that the tri-nation group could go under by Monday if nothing was done to save it.
Fortis saw its shares drop by a third last week on investor concerns about its liquidity and funding which stem from last year's 70 billion euro purchase of Dutch bank ABN AMRO with partners Royal Bank of Scotland and Spain's Santander.
Fortis' troubles can be traced to the purchase of ABN
Shares dived more than 20 percent to 15-year lows on Friday despite a statement that the group's position was solid and a pledge to expand asset sales to as much as 10 billion euros. The group's market capitalization also slumped from 50 billion euros after the ABN purchase to just 12 billion euros on Friday.
Fortis Group too large not to be saved
Fortis, with 85,000 staff worldwide, is the biggest private sector employer in Belgium and more than 1.5 million households, roughly half the country, bank with the group.
"We could have not intervened, but the question was whether Fortis would have survived on Monday," Dutch Finance Minister Wouter Bos told reporters.
The Benelux governments chose a partial state buyout after two private bidders made paltry offers for the group last week.
The Fortis nationalization dwarfs that on Northen Rock
Each government will take a 49 percent stake in Fortis banks in their respective countries. Belgium will put in 4.7 billion euros, the Netherlands 4 billion and Luxembourg 2.5 billion, the latter in the form of a convertible loan.
The group's nationalization dwarfs Britain's state takeover of fallen mortgage lender Northern Rock last year.
France's BNP Paribas allegedly pulled out of a deal last week after offering just 1.60 euros per share for Fortis, compared to Friday's closing price of 5.20, and demanding state guarantees against possible future losses, a source said. The Dutch ING Group was alleged to have bid just 1.5 euros per share. "There was no serious bidder for the intrinsic value of the whole group," the source told Reuters news agency.
BNP Paribas and ING declined comment on reports that they had bid for all or part of Fortis.
Nationalization comes as all eyes turn to US
The US Federal Reserve's Ben Bernanke feels the pressure
Fortis said in a statement it expected total negative value adjustments of about 5 billion euros after tax in the third quarter. It added its core equity would be around 30 billion euros, resulting in a 9.5 billion euro excess core equity.
The group also said that it will sell the parts of ABN that it bought last year.
Fortis Chairman Maurice Lippens, accused by shareholders of concealing the bank's troubles for too long, resigned after the news of the nationalization broke. Fortis also named Filip Dierckx as chief executive on Friday evening, hastily replacing caretaker Herman Verwilst.
The Fortis nationalization came as financial groups around the world watch for any movement from US lawmakers who are still debating whether to sign off on a deal to create a $700 billion government fund to buy bad debt from ailing US banks in a bid to stem a credit crisis threatening the global economy.