Spain's retail customers whacked under unnecessary bank bailout

As the final terms of the bailout of Spain's nationalized banks become known, it is clear that the retail customers who were duped into buying hybrid securities in these banks are going to take a sizable loss.

My question is why are they being forced to take a loss?

Regular readers know that banks in a modern financial system are designed not to need to be bailed out.  The combination of deposit insurance and access to central bank funding allows them to continue operating and supporting the real economy even when they have low or negative book capital levels.

Given that the banks don't need to be bailed out, why are retail customers being forced to incur a loss?

From a Reuters article,

Spain's four nationalized banks will more than halve their balance sheets in five years, slash jobs and impose hefty losses on bondholders, under plans approved by the European Commission on Wednesday. 

The measures open the door for nearly 40 billion euros ($52 billion)in euro zone bail-out funds for the state-rescued banks, offering hope for an end to Spain's banking crisis which has pushed the country to the brink of asking for sovereign aid....

There is zero chance that this ends Spain's banking crisis.  Spain has 180+ billion euros of bad debt associated with real estate alone in its banking system.

"Our objective is to restore the viability of banks receiving aid so that they are able to function without public support in the future," said European Union Competition Commissioner Joaquin Almunia said....

By design, banks have public support.  Public support that takes the form of deposit insurance and access to central bank funding.

With deposit insurance, taxpayers become banks silent equity partners when they have low or negative book capital levels.

Therefore, all a bailout does is change a silent equity partner into a shareholder.

Almunia said the nationalized banks would have to close up to half their branches during the five-year overhaul process. 

The biggest of the banks, Bankia, said it would lay off over a quarter of its workforce amounting to over 6,000 staff, reduce its branch network by around 39 percent and aim to return to profitability by 2013.

Neither of these required an "investment" by the taxpayer to accomplish.  Both could have been required by the banking regulators.

Bankia, formed from the merger of seven savings banks in 2010, said holders of hybrid debt would contribute up to 4.8 billion euros to the recapitalization, through losses incurred by swapping their holdings for shares....

Please remember, Bankia "sold" this hybrid debt to its retail customers because there were no institutional buyers for its capital securities.

At the time, your humble blogger observed that nobody would invest in Bankia without ultra transparency and disclosure of its current asset, liability and off-balance sheet exposure details as there was no way to assess the risk of the investment.

This prediction was true.

Many hybrid debt holders at the nationalized banks are retail customers who say they were conned into buying complex financial instruments that buoyed banks' capital levels instead of fixed-term savings accounts.

What was required to find investors was to misrepresent the investment to unsophisticated buyers.  As I recall, the representation was the investment was just as safe as buying a time deposit. Unlike time deposits, these securities were not guaranteed by the government.  An important misrepresentation.