Belgian waffle

In October 2008, the Belgian government took control of Dutch-Belgian lender Fortis SA/NV. In December, Prime Minister Yves Leterme resigned after he was accused of illegally interfering with the judicial process regarding the disposal of Fortis assets. Earlier this month, shareholders rejected the government-engineered carve-up of Fortis, Belgium's largest financial group, leaving its future in question.

The Fortis saga is one big mess -- though just one part of a still more tangled tale, the unraveling of the €72 billion ($93 billion) acquisition of Dutch bank ABN Amro by a consortium of Royal Bank of Scotland Group plc, Spain's Banco Santander SA as well as Fortis, in the summer of 2007. After the deal closed and credit tightened, the consortium remained in a state of denial about its own troubles, including the considerable debt it had assumed to finance the takeover.

Investors didn't appreciate the depth of Fortis' problems until June 2008, when they were caught off guard by Fortis' plans to raise up to €8 billion in capital by canceling a €1.3 billion interim cash dividend and selling non-core assets. That month, Standard & Poor's placed Fortis' debt on credit watch with negative implications, citing risks associated with integrating ABN. Then Lehman Brothers Holdings Inc. went under and the financial crisis exploded. Fortis was left hanging by a thread.

On Sept. 29, the lender received an €11.2 billion lifeline from Belgium, Luxembourg and the Netherlands in what was hailed as a model of cross-border cooperation. Fortis also said it would dismantle its purchase of ABN assets.Two days later, Fortis canceled the €2.15 billion sale of half its management arm to Ping An Insurance (Group) Co. of China Ltd., which had been agreed to six months earlier. It also revoked the €702 million sale of some ABN Amro operations to Deutsche Bank AG, which had been struck in July.

The cross-border cooperation didn't last long. On Oct. 3, the Netherlands nationalized Fortis' Dutch assets, summarily undoing the three-government bailout. Three days later, it signed a surprise agreement to sell Fortis' Belgian operations to French bank BNP Paribas SA for €4.5 billion in cash and stock.

Fortis shareholders, who had not been consulted, were irate. They quickly won a court challenge and froze the deal. The ruling prompted the resignation of Leterme, who had been accused of illegally interfering with court procedures. His government then fell.

Leterme's successor, Herman Van Rompuy, renegotiated the terms of the Fortis deal, In January BNP agreed to buy 10% of Fortis' Belgian insurance business for €550 million rather than 75% as originally planned. It also agreed to acquire 75% of Fortis Bank Belgium, leaving the rest in state hands, in an all-stock transaction worth an estimated €3.58 billion. Finally, BNP agreed to take a 12% stake in a toxic-asset portfolio backed by a €5 billion guarantee from the Belgian government.

Nothing doing, said Fortis stockholders, who voted down the BNP sale. Among the most outspoken critics was Fortis' leading minority shareholder, Ping An. It was the first notable display of activism by a Chinese investor.

"If you say no, there will be a period of huge paralysis and uncertainty and nobody knows what it will lead to," acting Fortis chairman Jan-Michiel Hessels told about 5,000 investors representing just more than 20% of Fortis' share capital. During the five-hour gathering, investors demanded more information about Fortis' finances and compared Hessels to Pinocchio.

"The mistake from the start was not to let Fortis go into bankruptcy and become a government-owned-bank," says Paul De Grauwe, a professor at the Catholic University of Leuven. "We took a company that accounted for one-third of the Belgian bank market and sold it for free to the French. No other government would have done that."

What's next? Fortis would seem to be legally bound by its agreements with the Dutch and Belgian governments, but that question will be pursued in court. BNP lawyers could fight to close the deal. Or the French bank could just walk away. In short -- still a big mess.