Saturday, September 1, 2012

Continuing to protect banker bonuses, Spain sets up bad bank to "buy" troubled assets

Once again, given its choice between its unemployed youth or preserving banker bonuses, Spain's government preserves banker bonuses.

The Spanish government is preserving bonuses by setting up a bad bank to purchase the 'bad assets' in the financial system.

A bad bank is nice in theory, but there are several insurmountable problems:
  • What is a bad asset?  Is it a 'zombie' loan that the bank continues to keep current using 'extend and pretend'?  Or is it an asset that is so far gone that it is actually non-performing?  For example, is Spanish government debt a bad asset?
  • What is the 'purchase' price for the bad asset?
Regular readers know that ultimately the only way to show that the banks have been cleaned up is to require the banks to provide ultra transparency and disclose all of their current global asset, liability and off-balance sheet exposure details.

This is the information that market participants need if they are to be able to independently confirm that the banks have been cleaned up.

Without ultra transparency, market participants will continue to assume that the banks are fully loaded with bad loans ... if they weren't, there is no reason not to provide ultra transparency and show it.

As reported in the Guardian,
Spain will inject emergency capital into the country's biggest ailing bank, Bankia, as it puts into place reforms to allow loss-making banks to receive eurozone bailout money....
Please recall that by design a modern banking system does not need the government to inject taxpayer funds into any banks.

Because of deposit insurance and access to central bank funding, a bank can continue to operate and support the real economy even when it has negative book capital levels.  It can do so since the deposit insurance effectively makes the taxpayer the 'silent' equity partner in the bank.
The Spanish government passed an ambitious banking law on Friday pledging once more that this would be the definitive shakeup for its finance sector that needs up to a €100bn (£80bn) bailout. 
"This brings reform of the finance system to its crowning point," the deputy prime minister, Soraya Saenz de Santamaría, said as the government presented its third reform in six months.
No chance this is true.  Like Greece, Spain's economy is spiraling downwards.
A so-called "bad bank" will swallow large amounts of the toxic real estate that has brought down several Spanish banks and threatens several more. The property is left over from the housing construction bubble that burst in 2008, just as the credit crunch happened, and which lies at the root of Spain's double-dip recession and 25% unemployment.
Ireland also tried a bad bank and all it succeeded in doing was undermining the financial capacity of the country.  The same is true of Spain.
The bad bank will receive building plots, unfinished developments and possibly tens of thousands of unsold homes from developers who went bust or are struggling to repay loans. It will be expected to sell this stock at a profit over the next 10 to 15 years. "It will be viable and will not post losses," the finance minister, Luis de Guindos, said.
No chance that it will be 'profitable' if the government were to receive a return that reflects the risk of the bad bank.
The creation of the bad bank – which the government hoped would be mostly privately financed – was one of the demands made by the eurozone countries providing the €100bn loan facility to Spain's banks....
Who would invest in the bad bank unless the government effectively guarantees their return?
De Guindos did not say what price the bad bank would pay for toxic assets, but promised a transparent system. This should be in place by December. 
"The reform is a step in the right direction, but there is still much to do," said Carlos Vergara, of the IESE business school, pointing to doubts about the price the bad bank will pay for toxic assets and the names of those banks that are not considered viable. 
"The key is at what price these assets are bought," agreed Jordi Fabregat of the Esade business school. "If it is too high, then the Spanish people will end up paying for it." 
De Guindos said the two rounds of provisioning ordered earlier this year should ease the process of setting a price as some of the worst assets, such as building land, are now provisioned at 80%. 
The worst assets may effectively be worth less than zero (think half built houses in the middle of nowheres).  An 80% write-down from original value still leaves the bad bank with a 100+% loss from its purchase price.
Spain's banks have an estimated €184bn in toxic real-estate loans and investments, but only some will go to the bad bank.
 If not all of the toxic debt goes into the bad bank, why have a bad bank at all?

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