Saturday, June 9, 2012

Spain requests bailout to save banks and bankers' bonuses

Once again putting bankers' bonuses ahead of the needs of its citizenry, a government, specifically Spain's, has decided to needlessly inject capital into its banking system.  To this end, according to the Telegraph, Spain has gone to the EU to request funds.

Like Ireland and Greece, these funds will not only not restore confidence in the banking system, but rather will send the definitive message that now is the time to run to the banks and pull out deposits.

Nobody knows what the losses are that are currently hidden on the Spanish banks' books.  JP Morgan suggests upwards of 350 billion euros will be needed.  There is zero chance that the bailout will be large enough to cover these losses plus add in a significant margin for error (say, another 350 billion euros).
After hours of crisis talks between eurozone finance ministers, Spain's Luis de Guindos confirmed that the country will ask for money to aid its stricken financial sector. 
"The Spanish government will request assistance ... for those banks that need it," he told a press conference in Madrid. "The amount required will be enough to cover the capital necessary, plus a significant margin.... 
"The amount on the table at the moment is as much as up to €100bn but this hasn't been decided yet," a senior EU official told AFP during the nearly three-hour call. The money will come with conditions attached entailing a "clean-up of the financial sector", the source said....
A needless bailout that completely lacks credibility relative to the size of the losses in the Spanish banking system.
Ceyla Pazarbasioglu, Deputy Director of the IMF’s Monetary and Capital Markets Department, said: “Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate."...
Actually, there is already a capital backstop in place.  It is called future bank earnings.  Who cares how many years it takes for banks retaining 100% of their pre-bonus earnings to rebuild their book capital levels.  So long as the financial system has deposit insurance and access to central bank funding, the banks can continue to operate and support the real economy.

By trying to estimate capital shortfalls without ultra transparency, policymakers are simply blindly guessing.  A fact that is known to all market participants.
On Friday, US President Barack Obama demanded European leaders act “right now” in an impatient and forceful message. He said there was “a path out of the crisis” if only leaders would take the “decisive actions” needed.
“The focus must be on strengthening the banks, like we did in 2008,” he said. “EU leaders are in discussions about that and they are going in the right direction.”
Actually, repeating the mistakes of 2008 is clearly a step in the wrong direction.  If the policies adopted in 2008 worked, then we would not be experiencing the difficulties in the global economy or financial system that we are experiencing.

The policies that were adopted in 2008 were based on the Japanese model for handling a bank solvency led financial crisis.  They have never successfully worked anywhere.  They only result in bankers being paid bonuses they do not deserve.

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