Fortis: Halt the scandal!


The events of the weekend confirmed - alas – that my worst fears, mentioned as early as last October, were unravelling.


There remains less than 48 hours before the General Assembly whose result will be crucial, not only for the Fortis shareholders, but also for the shareholders of Belgium S.A., i.e. the taxpayer.


Whatever the errors made by the actors in the Fortis “rescue” one should recall:


a)   That the rescue was aimed primarily at safeguarding depositors, creditors, the bank’s personnel, the Belgian economy in general and the international banking  system in particular. Had there been no danger of a systemic and/or social crisis, one could have let Fortis go bankrupt eliminating in passing 100% of shareholder’s value.

b)    The arrogance with which the so-called defenders of the “small shareholders” are attacking the State on the basis of the “deep pocket” theory, demanding that the “small taxpayer” compensate the shareholders, is simply shocking.

c)     At least, these “defenders” should have brought, simultaneously, proceedings against the management of Fortis for the faults made before the rout at the end of September. If they prevail, the insurance policies covering the responsibility of Directors could have been triggered unless – clearly – if it was Fortis Insurance that had covered the risk!

d)     If, as it is likely, the legal structure of the rescue operation can be subject to criticism, it should nevertheless have respected a fundamental principle: in the event of State intervention, in whatever form it takes, the taxpayer, should be fully indemnified before any residual value accrues to shareholders.

e)   “Having nationalized” Fortis Bank (allaying fears of depositors, personnel as well as of systemic risk), the Belgian and Dutch Governments did nothing more than exercise their sovereign rights. Shareholders have the perfect right to demand “compensation” if they can demonstrate that they have been unfairly treated, but they should not be able to contest the nationalization itself, nor subsequent operations (good or bad) that the States, as owners, may consider appropriate to limit the risks which confront the “taxpayers”.

f)    If one considers the current situation objectively, it is rather the taxpayer who should be the plaintiff for the excessive generosity shown by the State to Fortis shareholders.


Under these conditions, on the eve of the Fortis EGM, I expect from the Government a clear declaration outlining the consequences of a favourable or unfavourable vote:


In the first instance, the (revised) agreements entered into with BNP should be executed, without further amendments.


In the second case, the State will indicate that new agreements will have to be negotiated which, as a matter of course, cancel “all current provisions”. Any new agreement will have to conform to the following provisions (which should be applicable to any State intervention in favour of financial establishments or other companies): 


-       Before any distribution to shareholders, the recipient of “State Aid”, whatever form it takes (recapitalisation, guarantees, purchase of toxic assets, etc.), will have to remunerate in priority the State intervention in line with the risk assumed and also refund/discharge the State from all its obligations subscribed within the framework of the agreements. This clause is in line with European legislation which prohibits State aid” in conditions which distort competition.

-        In the event of capital transactions affecting the beneficiary, the State will have to give its prior authorization as long as its assistance remains “effective”.

-        During this period, the State will have an oversight right on the remuneration of the executives and corporate officers. The AGM of shareholders will have to authorize specifically the attribution of remunerations beyond of a minimum figure.


It seems fairly obvious that, in the context of the current financial crisis, and after a withdrawal of BNP, Fortis, as a “stand alone” bank, could not survive without, at least, the temporary support, of the State. A pure and simple withdrawal of the State (except for its legal obligations for compensation for €100.000 per account in the event of bankruptcy), would involve, in all likelihood, a flight of the customers, whose confidence it would be difficult to preserve. Such a situation would quickly throw Fortis, once again, in the arms of the State which, this time around, would be much better prepared and thus significantly more demanding than was the case last autumn.


In the event of the cancellation of the BNP operation, it is essential that the State negotiate its support for the maintaining Fortis Bank as an independent entity within Fortis holding, by demanding the full subordination of shareholder rights to those of the taxpayers.


The recent pronouncements, which report an improvement of the economic and financial climate, underpinning the ability of Fortis to dispense with external support for the foreseeable future, is pure wishful thinking and does not rest on any serious rational  analysis.


Shareholders still have the opportunity to benefit from the urgency under which the Government negotiated the rescue last autumn. Being too greedy could leave them with nothing.


Paul N. Goldschmidt

Director, European Commission (ret.); Member of the Advisory Committee of the Thomas More Institute.