Tuesday, May 10, 2011

As Predicted, Without Asset Level Data Investors Not Interested in Investing in Spain's Cajas

The Wall Street Journal published an article that confirms this blog's prediction that in the absence of asset level data, investors would not be interested in recapitalizing Spain's Cajas [savings banks].

The article focused on Spanish regulators' fondness for the good bank/bad bank model for attracting capital.  Under the good bank/bad bank model, all the dud assets are put into the bad bank.  The good bank then turns around and tries to sell equity to investors.

Please note that the good bank/bad bank model tries to send a very explicit message about the quality of the assets.   That message is that an investment in the good bank is safe as the problem credits are in the bad bank.

The fact that the regulators embrace this model and its message is confirmation that the investors had no interest in investing capital into the cajas without asset level data.

There is just one tiny problem with the good bank/bad bank model.  It only works for investors if all troubled assets are truly moved into the bad bank.

Unfortunately, as Ireland showed repeatedly, what bankers and their regulators claim is a good bank may still have a significant amount of bad assets on its balance sheet.  An amount of bad assets that renders an investment worth zero.  Investors are not going to forget this lesson just because the banks are in Spain and not in Ireland.

How are investors to know if all the bad assets have been moved to the bad bank particularly after regulators have been allowing the banks to practice extend and pretend with a number of loans for years?

Ultimately, the only way the banks are going to attract capital is by disclosing asset level data so the investors can analyze this data and decide for themselves the attractiveness of an investment in the good bank.

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