BNP Paribas SA came so very close to completing a heroic year.

For 10 months France's largest bank appeared to be one of the few European lenders to have escaped the worst of the fallout from the subprime crisis. Better still, it seemed likely to benefit from the damage wrought by the subsequent credit freeze, emerging as one of the few institutions with the financial muscle to buy cheap banking assets.

That image collapsed in just three mid-December days.

On Dec. 15, the Paris-based lender said it could lose as much as €350 million ($460 million) as a result of exposure to the alleged $50 billion Ponzi scheme operated by Bernard Madoff. Two days later, it announced that its corporate and investment banking unit had lost €1.6 billion in the preceding two months, plunging the unit's annual return into the red and sparking a cost-cutting exercise that could eliminate as many as 800 jobs. Finally, a day later, BNP indefinitely postponed a €14.5 billion purchase of the Belgian and Luxembourg assets of Fortis SA/NV, after a Belgian court ruled that the deal requires the approval of the target's shareholders.

Any of the three events, taken separately, would have dealt a blow to a bank that had lifted itself above its European rivals by its shrewd ability to avoid calamity. Taken together, they have forced many investors to completely reassess their view of the bank's prospects.

"We are cautious about BNP given (1) the uncertainty surrounding the Fortis transaction; (2) market concerns about the too tight solvency of BNP ahead of a difficult environment in 2009; (3) questions will be raised about the CIB business model following the losses incurred in October-November," wrote Keefe, Bruyette & Woods Ltd. analysts Jean-Pierre Lambert and John Holmes in a note published in late December.

On Dec. 16 Keefe, Bruyette & Woods slashed its outlook for BNP shares from a Nov. 5 target of €94 to €60.80.

That decline has been more than matched by the bank's performance on the Paris bourse. Its shares tumbled 28% in the week after it announced the investment banking losses. For the whole of 2008, BNP's stock lost 59.2%. That was only marginally better than its closest French rivals, Société Générale, whose shares lost 61.1% over 2008, and Crédit Agricole SA, down 62.4%. And it is certainly not the bar that BNP Paribas CEO Baudouin Prot would have set even as recently as a few months ago.

Crédit Agricole and SocGen both booked billions in losses as a result of subprime exposure earlier in the year, losses that BNP Paribas managed to avoid. In May, Crédit Agricole waved the white flag on its investment banking ambitions and went to the market to raise €5.9 billion to shore up its balance sheet. SocGen, meanwhile, started the year with €4.9 billion of trading losses it blames on the rogue actions of former index futures trader Jérôme Kerviel, losses that forced the lender to raise €5.5 billion through share sales in March.

BNP had no such woes and has repeatedly said that it has no need to raise new funds to boost its capital position. As such it might have reasonably expected to have exited the year in a stronger position than its peers.

Yet, having chosen not to raise new funds, BNP Paribas now finds itself with a weaker core Tier 1 ratio than many of its European peers. That, analysts argue, means BNP may now have to go to the market to raise those new funds.

Jaap Meijer, a London-based banking analyst at Dresdner Kleinwort, estimates that BNP's core Tier 1 ratio stands at about 5.8%. To arrive at the figure, he stripped out what he claims is double counting of some capital among many European banks.

By Meijer's calculation, BNP's capital position is stronger than that of either French rivals SocGen or Crédit Agricole, whose "true" Tier 1 ratios are, respectively, just over and just under 4%. Yet it is significantly weaker than Benelux lenders KBC Bank NV and ING Groep NV, whose Tier 1 ratios are close to 7%, according to Meijer's figures.

Standard & Poor's Equity Research estimated in September that BNP's Tier 1 ratio stood at about 5.6%, noting that it was significantly less than the European average of 7.4%.

That BNP's capital reserves were lower than many of its peers has been common knowledge. Investors had been willing to give the bank leeway because of a perception that its business was low risk and because it had an ace up its sleeve in the form of its Fortis acquisition.

The announcements in mid-December placed big question marks over both those assumptions.

BNP's investment banking division, which had until October made a respectable €550 million profit over the course of 2008, will likely struggle to quickly bounce back to profitability and will take some time to win back the confidence of BNP investors.

The €1.6 billion of losses accrued over October and November more than drained the €879 million profit recorded by the unit over the first three quarters of the year and ensure that BNP's CIB banking unit will post its first-ever annual loss in 2008. Last year the corporate and investment bank accounted for some 27% of BNP's revenue and 32% of its pretax profit.

The loss included the €350 million of exposure that BNP had to the spreading Madoff affair. But even taking that into account, the change in the fortunes at the unit is stark.

BNP blamed the bulk of the losses on "extreme volatility, aggravated by Lehman's bankruptcy and its violent market repercussions, which have continued since the end of September."

BNP said it would respond by reducing its market risk and bond inventories. It also announced plans to develop new products, change the mix and amount of assets allocated to its fixed-income credit business and consider firing about 5% of its CIB workforce.

Despite these measures, the French bank faces growing pressure to increase its capital base to provide a cushion against possible future losses. Standard & Poor's in December put BNP's AA+ long-term credit rating on watch for a possible downgrade.

A Paris-based analyst who asked not to be named asserted that all things remaining as they are, BNP would probably have to raise about €4 billion to €5 billion in new funds to boost its Tier 1 capital level.

Certainly BNP could go a long way to papering over the cracks created by its CIB losses should it tie up the acquisition of the Fortis assets.

"The possible acquisition of Fortis by BNP would appear to have all the characteristics of a dream deal," says Meijer. "EPS accretion from day one (5%), virtually no price paid (€14.5 billion paid, but [BNP] would receive a €12.8 billion injection, [because Fortis] is heavily overcapitalized at core capital ratio of 9.9%)."

The acquisition would boost BNP's capital ratios by 35 basis points. Unfortunately for Prot and his bank, the deal, in which BNP would buy the bulk of Fortis' Belgian and Luxembourg assets from the Belgian government, is stuck in limbo.

BNP in early October agreed to acquire a 54% stake in Fortis Bank Belgium from the state for 88 million BNP shares and 100% of Fortis Insurance Belgium paid for with cash. It then planned to hold a shareholder meeting to approve the issue of 45 million new shares that would be used to purchase an additional 21% of Fortis Bank Belgium and 16% of Fortis Bank Luxembourg.

Those plans were thrown into disarray in mid-December, when a Brussels court upheld a claim by 2,200 disgruntled Fortis shareholders that they should have been given the right to vote on a deal that effectively valued Fortis at about €1 per share. The stock had been valued at €5.42 per share before the deal was agreed to.

The court ruled that the Belgian government, which nationalized Fortis earlier this year, should put the sale to a vote by Feb. 12. Failure to do so would leave Fortis facing a €5 billion penalty.

Further complicating the deal's closing was the resignation of Belgian Prime Minister Yves Leterme and his government after his country's top court found evidence that his ministers had pressured judges to dismiss the shareholder complaints. A new government, headed by Herman Van Rompuy and including many of Leterme's ministers, was voted into power on Jan. 2 on the promise of continuing the policies of its predecessor. Whether it proves more circumspect in its support of the sale of the Fortis assets remains to be seen.

Prot, for his part, has insisted in recent weeks that even if the purchase of the Fortis assets does not go ahead, his bank would not have to raise new funds. He has also repeated a warning that his bank is not immune to the financial crisis. For now he has proven to be at least half right.