Spain's bad bank seen as unworkable

Bloomberg ran a very interesting article that confirmed all of your humble blogger's observations about why the bad bank to hold all of the dud Spanish real estate loans is not going to be successful.

Regular readers know that your humble blogger thinks that the only workable approach is to have each bank take the losses upfront that they are likely to realize if the bad debt were to go through the long process of bankruptcy and foreclosure.

With the losses taken, the debt can be written down to levels that the borrowers can afford to service or that other market participants would be willing to pay.

This has numerous advantages including keeping borrowers in their houses.

One of two things will happen to the banks recognizing the losses.

Either they will be able to generate earnings and rebuild their book capital levels or they won't be able to generate earnings.  Those banks that can generate earnings should be left alone.  Those banks that cannot generate earnings should be resolved.

Iceland followed this approach and Iceland has put behind its financial crisis behind it.  Spain could do the same thing.

Spain’s efforts to sell as much as 90 billion euros ($117 billion) of toxic property assets it uses to create a bad bank from lenders that take state aid will be constrained by the size and inability to provide credit to potential buyers, adding to the risk of taxpayer losses. 

“When managing tens of thousands of assets scattered across the whole of Spain, big is not beautiful, it’s sheer chaos,” said Mikel Echavarren, chairman of Irea, a Madrid-based financial adviser. A large, “clumsy” bad bank will be at a “tremendous” disadvantage and will generate losses that Spaniards will have to pay for.... 

“It won’t be a bank and the only way it may be able to achieve sales with attractive mortgages is by reaching financing agreements with other banks, which will be competing to deleverage their own real estate,” said Fernando Acuna Ruiz, managing partner of Taurus Iberica Asset Management in Madrid. 

Acuna, whose company oversees 60,000 foreclosed properties on behalf of 25 banks, said that while the structuring will be in place by December, it will be “mammoth,” with tens of thousands of assets and loans to service and transfer onto its books. “Integrated management won’t be up and running for 12 to 24 months after,” he said.... 

“It will need a legion of lawyers, notaries and debt servicers to ensure properties and loans have no legal issues and change title documents,” Echavarren said by telephone. “By the time they find out what and where the assets are, they won’t have any idea of what they have and what to do with it for at least a year.” 

The vehicle won’t have the resources to manage assets, which are like “livestock that consume capital,” he said. Holding the assets cost money in taxes, maintenance and security and will generate losses for Spaniards....

According to Carrascosa, the bad bank “cannot make losses in the short, mid or long term.”....

So what price are the loans going to be transferred to the bad bank at?

The bad bank’s limitations stand in contrast to Banco Santander SA (SAN), Spain’s largest lender. The company advertises homes on its Altamira real estate website for as little as 40,000 euros in Madrid and apartments complete with swimming pool and garage on the coast of Moncofar in Valencia for 65,100 euros. The lender offers 40 year mortgages with loan to values of as much as 100 percent.

The strategy is paying off. 

Proceeds from sales of homes on its balance sheet reached 1.3 billion euros in the second quarter -- almost as much as the total for the whole of 2011, according to Alfredo Saenz, the bank’s chief executive officer. 

Saenz said on July 26 that sales are taking place at discounts of as much as 45 percent. Santander has reduced its exposure to Spanish real estate to 26.5 billion euros from 42.5 billion euros in 2008, the bank said today in a results presentation. 

Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s second-largest lender, last year created BBVA Real Estate to handle its 30 billion euros of property assets. 

“Our policy is to sell at market prices with 100 percent financing,” Ignacio San Martin, head of research at BBVA Real Estate, said on Oct. 19. The bank is selling more houses than last year, though said that for large institutional investors, the bank prefers buyers to provide their own financing. “That way we don’t hold the loan on our books or have to provision them.”....

Why set up the bad bank in the first place?  The banks are fully capable of managing the assets.  What is needed to get them lending again is simply requiring them to absorb their losses upfront.