Showing posts with label Spain. Show all posts
Showing posts with label Spain. Show all posts

Wednesday, May 8, 2013

Health of Spain's banking system in doubt as banks restructure $274 billion in loans

Bloomberg reports that in addition to the $50+ billion of bad debt Spanish banks sold to the taxpayer backed bad bank, Spain's banks restructured an additional $274 billion in non-performing loans.

Naturally, the question is "did this address all the bad debt in the banking system?"

Of course, in the absence of ultra transparency under which the banks disclose their current global asset, liability and off-balance sheet exposure details, there is no way to know.

Spanish banks had 208.2 billion euros ($272.4 billion) of refinanced or restructured loans at the end of last year, a figure that analysts said could translate into further losses. 
Twenty-four percent, or about 51 billion euros, of that relates to mortgages, 36 percent to non-real estate companies and 33 percent to property and construction, the Bank of Spain said in its financial stability report published today. The balance was in loans to households and government. 
An economic slump in its sixth year is generating mounting defaults for Spanish lenders that in some cases refinanced or restructured more loans to avoid booking losses....
So the Spanish lenders have in fact hidden more problems.  The question is how much have they hidden.
“In theory, there’s nothing necessarily wrong with refinancing,” said Daragh Quinn, a banks analyst at Nomura International in Madrid. “What matters is the quality of the refinancing and what is the level of re-default say 12 months down the line.” 
The refinanced or restructured loans amount to about 14 percent of credit in Spain, the regulator said. Of the 208.2 billion euros, 42 percent are classed as normal by the banks, 37 percent as “doubtful” and 21 percent as “substandard,” or having some risk of turning bad. 
“A number like this almost raises more questions than it answers in an economic situation like Spain’s,” said Nick Anderson, an analyst at Berenberg Bank in London. “It’s a big number, and I don’t think it’s going to let people sleep easier at night about the health of the banking system.”... 
Even so, the situation is different than in 2012 because of the loan-loss charges taken by banks and transfers of soured assets to a so-called bad bank, the regulator said.

Monday, May 6, 2013

LIke Ireland, Spain's bad bank good for bankers and disaster for taxpayers

As predicted by your humble blogger when Spain first began talking about setting up a bad bank to hold the bad loans in its banking system, the result has been good for bankers and a disaster for taxpayers.

The prediction was easy to make because Spain didn't require that the banks provide transparency before taking on the bad debts.

With disclosure of the individual exposures, markets could have valued these exposures and the taxpayer supported bad bank could have acquired them at market prices.  The banks that originated the loans would have been forced to take the losses on these loans.

Instead, the bad bank acquired the toxic debt at prices that were favorable to the selling banks.  One can only imagine the size of the bonuses that have been paid out to the bankers that should instead have been used to pay for the losses on the bad debt.

As reported by Reuters,

Spain's bill to bail out its banks may yet rise, some bankers and analysts fear, as a worsening economy hampers the government's early attempts to sell off nationalized lenders and threatens the "bad bank" housing their rotten property deals. 
Spanish banks say the worst is behind them after steep losses last year and they are now recovering - a view broadly shared by authorities such as the European Commission, backer of a 41 billion euro ($54 billion) rescue of ailing lenders. 
But while Madrid is on schedule with demanded industry reforms and banks are better protected against losses from a sunken real estate market, a growing number of bankers argue in private that more state funds may still be needed to help sell rescued lenders and keep "bad bank" Sareb ticking over. 
Sareb was used to clean the balance sheets of state-rescued banks by taking on 50.7 billion euros worth of foreclosed properties and troubled loans to real estate developers. 
The assets are matched by 50.7 billion euros in senior debt and backed by 4.8 billion euros in capital, more than half of which was contributed by Spain's healthy lenders to reduce the burden on state books. 
The 8 percent capital cushion may however be too thin to withstand losses without a top-up, which could be hard to source from the private sector, said several senior Spanish bankers and investment bankers who have worked with the government. 
"It was a big mistake. The government is going to have to take over the entire vehicle sooner or later," said a Spanish banking executive, on condition of anonymity, echoing a view from three other senior bankers.
Ireland went through the same exercise where it purchased bad debt from its banks at inflated prices.  All this does is transfers losses to the taxpayers and lets the bankers off the hook for paying for the losses.
Spain took 41 billion euros of a 100-billion-euro European credit line to bail out its banks last year. The bill added the equivalent of 3.5 percent of gross domestic product to a deficit that was already higher than allowed under EU rules. 
The bailout came after several failed government efforts to clean up the financial sector, crippled by more than 300 billion euros in bad loans after a housing bubble burst in 2008....
The starting point for cleaning up the financial sector is transparency.  Specifically, disclosure on an ongoing basis of all current global asset, liability and off-balance sheet exposure details.

With this information, markets can assess the losses at each bank.

With this information, markets can exert discipline so that the losses are recognized upfront.

Fortunately, Spanish banks are designed to absorb these losses as they have both deposit insurance and access to central bank funding.  As a result, the Spanish banks can continue to support the real economy during the years it takes to rebuild their book capital levels.
The real estate parked with Sareb was already written down by an average of 63.1 percent and the loans by 45.6 when the assets were transferred to the bad bank, but four bankers argued that further losses could still deplete its capital. 
Of its loans, only 22 percent are considered "normal"; 34 percent are rated "substandard" and 45 percent "doubtful". 
Most of the loans are linked to finished properties, for which it might be easier to find a buyer, but 4.3 percent are for unfinished developments and nearly 10 percent are for empty lots, for which there is little or no demand. 
Nearly all of the foreclosed properties in its portfolio are empty, including apartment blocks far outside big cities. Only 6,000 of nearly 83,000 housing units have tenants...
The real estate probably should have been written down by at least 78% and this assumes that "normal" means the borrower is performing out of current income and not drawing down on savings.
Meanwhile, Sareb is just beginning to comb through its assets. 
"This (structure) could be a problem if the vehicle starts making losses and needs more equity, something very likely to happen in our view once it reappraises its assets," JPMorgan analyst Jaime Becerril said in a recent note. 
One source familiar with Sareb said it was aware of the risk it might need more capital, but believed "that would only happen under an extremely distressed economic scenario." 
A stress test of Spanish banks last year by consultant Oliver Wyman, which served as the basis for some of Sareb's calculations, defined a worst case scenario as a 2.1 percent economic drop in 2013 and a 0.3 percent contraction in 2014.
JPMorgan's analyst will be shown as correct as so far no consultant has run a credible stress (hint: to be credible, the banks would disclose their exposure details so that market participants could confirm the results for themselves).

Wednesday, January 16, 2013

"Complete Strip-tease" by Spanish banks shows no more need for capital

The Telegraph reports that Spanish Prime Minister Mariano Rajoy thinks that the 'complete strip-tease' by the Spanish banks shows that they need no more capital.

As everyone knows, there is a difference between a strip-tease and the fully monty.  The former leaves much of the subject still covered, while the latter reveals all.

If Mr. Rajoy thinks that the Spanish banks have bared all, then his administration should be more than willing to require all Spanish banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

If there is nothing to hide after the strip-tease, then there is no reason for the banks to object to letting market participants confirm this fact for themselves.

On the other hand, by not requiring the banks to provide ultra transparency, the Spanish government is waving a red cape saying that the banks still have something to hide.

Mariano Rajoy has said that he is "absolutely convinced" that Spain will not need any more funds to prop-up its ailing banking sector, as he urged Germany and other stronger eurozone nations to do more to boost growth in the region. 
Spain's prime minister dismissed doubts over the current health of Spanish lenders, and argued that the country's banks had already revealed the extent of their troubles in a “complete striptease” of the sector. “I am absolutely convinced that Spanish financial institutions will not require any more funds than were given already,” he told the Financial Times.
Spain was forced to seek a bank bail-out of up to €100bn from the EU last June. A later audit revealed that the country's lenders would need a combined capital injection of almost €60bn

Monday, January 7, 2013

Pamplona's locksmiths join revolt as Spanish banks throw families from their homes

A Guardian column describes how locksmiths in Pamplona have agreed not to help Spanish banks foreclose on homeowners.

The article highlights how the Spanish government's policy of not making banks absorb the losses on the excess debt in the financial system is forcing these losses onto the real economy with very negative consequences.

The article also highlights how the banks are being bailed out while Spain's citizens lose out.
He is a locksmith who refuses to open locked doors; neither will he replace their locks with new ones. What may seem a disastrous strategy for Iker de Carlos, a 22-year-old Spaniard starting out in the world of cylinders, pins, bolts and lock springs in his home city of Pamplona, is actually part of a growing civic rebellion in support of the biggest losers in Spain's five-year story of failing, mismanaged banks – those being thrown out of their homes after falling behind on mortgage payments. 
Tired of accompanying court officials to evict unemployed people as banks foreclosed mortgages, De Carlos consulted his fellow Pamplona locksmiths before Christmas. In no time at all, they came to an agreement. They would not do the dirty work of banks whose rash lending pumped up a housing bubble and then, after it popped, helped bring the country to its knees. 
"It only took us 15 minutes to reach a decision," says De Carlos amid the racks of keys in the family's shop in the centre of this small northern city best known for its annual bull-runs and the adoration heaped on it by Ernest Hemingway in The Sun Also Rises. "We all had stories of jobs we had been on where families had been left on the street. When you set out all you have is an address and the name of the bank, but I recall an elderly, sick man who was barely given time to put his trousers on." 
The logic behind their decision was clear and simple. While Spain's banks mop up billions of euros in public aid, they are also busy reclaiming homes that in some cases they lent silly money for. 
At the height of Spain's housing madness, banks were, in effect, offering mortgages of more than 100%. They aggressively chased clients – especially among the immigrants who arrived from Latin America in their millions to build new homes – creating an uncontrolled spiral of self-fulfilling, but ultimately doomed, demand. Complex networks of guarantors were pieced together by middlemen among immigrants who often barely understood what they were doing.
"Spain must be the only country in the world where banks were allowed to offer 100% mortgages," said Guillermo Perilla, a 31-year-old Colombian immigrant who bought a house on the outskirts of Pamplona for €240,000 in 2005. "Not only that, but in some cases they also offered further loans to the people taking out mortgages. The bank staff were on commission." 
Seven years after buying his house Perilla, an unemployed painter whose wife works part-time, is fighting foreclosure. The bank has told him his house is now only worth €140,000 and refuses to accept it back in payment for the debt. 
"But it was their valuer who originally said it was worth a lot more," he said. "Banks inflated prices and now they are making ordinary people pay for them." The bank has now said he can just pay interest for three years: "But that still leaves me with the debt. These things crush you, both morally and physically."
Last month, Spain's banks began to receive what will eventually be more than €40bn (£32.5bn) in aid. The number of foreclosures, meanwhile, increased by 134% last year. 
"Social conflict is being created," said Gonzalo Moliner, head of Spain's higher judiciary council. Properties were often reclaimed through the courts on valuations well below levels at which the loans were given. Those unable to pay can be evicted while still saddled with ever-growing debt. 
De Carlos believes that Pamplona's locksmiths have now lost 10% of their trade, but recovered their honour and dignity: "This summer we were doing two or three foreclosures a week." 
The locksmiths' rebellion follows several widely reported suicides by people about to be evicted from their homes. Amaia Egaña, a 53-year-old former socialist councillor in the northern town of Barakaldo, threw herself out of a window just as the court authorities – and their locksmith – were about to evict her in November. 
"It wasn't suicide," demonstrators who marched through her town later that day shouted. "It was murder." 
The Roman Catholic bishop of Bilbao called for urgent action to prevent further suicides. 
"We had a suicide in Santesteban, too, where someone threw themselves out of the window," said Perilla, who now helps to campaign to stop foreclosures. "Banks still don't want to do anything. As you stop paying you cease to exist for them – they don't care if you are sick or if you have children. But they can buckle under pressure. They hate the bad publicity."

Sunday, December 30, 2012

Bankia's mom and pop investors turn to courts to get money back

Reuters reports that mom and pop Spanish investors have turned to the courts to get their money back based on Bankia having mis-represented an investment in its preferred stock as being covered by the Spanish deposit guarantee fund.

Retail investors have had to do this as the Spanish government has once again failed to protect them.

Spanish savers and pensioners who have seen their money wiped out by investing in state-rescued lender Bankia are likely to seek redress in court rather than wait for any official inquiry, which looks increasingly unlikely. 
About 350,000 stockholders will share the pain of the bank's European bailout, many of them bank clients who were sold the shares through an aggressive marketing campaign for its stock market flotation in 2011.... 
"Going to the courts and seeing if a judge can bring us justice is the only path left to us," said Maricarmen Olivares, whose parents lost 600,000 euros (490,509 pounds) they made from selling her father's car workshop by investing in Bankia preference shares. 
Neither of the two main political parties want to push for a full investigation into Bankia's demise, which could draw attention to their own role in a debacle that has driven Spain to the brink of an international rescue, commentators say. 
"Investigations work when a political party has something to gain over another. In this case, no-one has anything to gain," said Juan Carlos Rodriguez, of consultancy Analistas Socio Politicos. 
"I don't see the big parties investigating this because if there have been errors committed, they have been committed by both sides."
Please re-read the highlighted text again as it is not just the political parties in Spain that committed errors when it came to the nation's banking system, but also applies to the political parties in the other countries too.

For example, the Nyberg Report on the Irish Financial Crisis documented this occurred in Ireland.

The fact is that the rest of the countries in the Eurozone, the UK and the US were not immune to this problem and none of them has set up an investigation of the role of the political parties in the financial crisis.
The Socialist Party was in power when Bankia was formed in 2010 from an ill-matched combination of seven regional savings banks, a union that concentrated an unsustainable exposure to Spain's collapsed property sector. 
Immense political pressure from the then government forced Bankia executives to push ahead with an initial public offering in July 2011 as Spain sought to bring private capital into its banking system and avoid a European bailout. 
Then chairman, Rodrigo Rato, a former chief of the International Monetary Fund, had strong links to the centre-right Popular Party (PP) and was finance minister in a previous PP administration. 
A small political party, UPyD, forced the High Court in July to open an investigation into whether Rato, ousted when the bank was nationalised in May, and 32 other former board members are guilty of fraud, price-fixing or falsifying accounts....
 Oh what a tangled web we weave, when first we practice to deceive.
The probe centres around Bankia's stock market listing, the formation of the lender from the seven savings banks and the gaping capital shortfall revealed at the bank after the state takeover in May.... 
Bankia, alongside other Spanish banks, sold billions of euros of preference shares and subordinated debt to high street clients, many of whom say they were tricked into parting with their savings and are seeking compensation. 
The investigating magistrate is not including the mis-selling of preference shares - hybrid instruments that fall between a share and a bond - in the probe. 
Holders of preference shares at Bankia will incur losses of up to 46 percent as part of the European bailout, receiving shares rather than cash in exchange. 
"We won't see our money again, that's for sure. They'll give us shares, but shares with no value or credibility in a nationalised bank," said Olivares, who said she had heard nothing from the bank as to how much their losses would be. 
The losses each investor will have to take has yet to be decided, a Bankia spokesman said, adding that hybrid debt holders at all rescued banks had to take losses, not just at Bankia. 
A source close to the court investigation said there would certainly be scope for a separate wider probe into the mis-selling of preference shares, not just at Bankia, but throughout Spain's savings banks.
However, nobody seems to have started this court investigation.
Olivares, like many other small savers at Spain's state-rescued banks, claims her parents were sold the preference shares as a kind of high-interest savings account and that the bank staff did not explain the risks attached. 
The government is in the process of setting up an arbitration process to compensate Bankia clients who can prove that they were duped into buying preference shares, Economy Minister Luis de Guindos said last week.
I think the fundamental problem here is that all of the mom and pop investors trusted the bankers they were dealing with.  Why would they ever guess that their government would allow them to be sold an investment that put their money at risk in an insolvent bank without the bank being required to disclose it was insolvent?
But many ordinary Spaniards who lost their life savings through the Bankia rescue say this is not enough and they want answers as to what happened to their money. 
"We want justice, at least some kind of recognition that we were swindled," said Raimundo Guillen, a 50-year-old electricity station worker who put 30,000 euros in preference shares with Bankia under the impression they were a form of savings account.
"It's as if they've stolen your wallet - blatantly, with their face uncovered."

Unpaid local government bills yet another way bank bailouts hurt real economy

The Wall Street Journal ran an article describing how local governments in Spain and the rest of the eurozone peripheral countries have been delaying paying their bills and the negative ripple effects that these delays are causing for the real economy.

The reason why the local governments are delaying making payments is a combination of lower tax revenue and limited access to financial markets to borrow money.

Bailouts of the banks factor into this delay in making payments as money that is raised by a sovereign with limited borrowing capacity and used to bailout the banks is unavailable to be used to support local governments and help these governments to stay current on their bills.

While delaying paying their bills effectively gives the local governments a zero interest rate loan, the cost of this loan is absorbed by the firms that provide services to the local governments.  This cost reduces their earnings and hence the capital they have available for reinvestment, growth and hiring.
Nuria Jarque's company has maintained water-treatment plants in Spain for 25 years, but lately she is being forced to act like a lender of last resort. 
Local governments across the country, facing a steep drop in revenue and largely unable to borrow from banks or financial markets, have been paying Ms. Jarque and other suppliers of goods and services months behind schedule. 
Ms. Jarque says the delays amount to interest-free loans to fund government operations, and are pushing her company to the brink of bankruptcy. 
Thousands of companies are shouldering similar burdens as the financial woes of Spanish government bodies ripple across an economy amid its second recession in three years. 
By the end of October, regional governments had accumulated bills in 2012 for providers, interest payments and other obligations totaling €13.7 billion ($18.1 billion), more than 1% of Spain's gross domestic product, a government report found.
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Suppliers are depleting their cash reserves, forgoing investments and postponing payments to their own providers. Many have dismissed workers, pushing up a national unemployment rate that exceeds 25%. A growing number are filing for bankruptcy—27% more through September of this year than in the same period in 2011, according to Spain's judiciary....
This is a direct consequence of the choice to bailout the banks rather than to focus resources on protecting the real economy and the Spanish citizens.
"Money is really, really tight, and the suppliers are having to bear it," said Ángel Saz Carranza, professor at ESADE Business School in Barcelona. "It is putting a further brake on economic activity." 
The central government has moved to cover some of the debts of local administrations, raising pressure on Spanish Prime Minister Mariano Rajoy to seek financial help from the European Union—a politically risky step. 
Overdue payments have long been a bigger problem in southern Europe than in the north. 
The debt crisis that has restricted lending to peripheral euro-zone governments is aggravating the problem, which is rising in Greece and Italy as well. 
Spain's crisis, set off by the collapse of a real estate boom nearly five years ago, is particularly acute in areas where declining revenue from real estate taxes pummeled municipal and regional finances.

Thursday, December 27, 2012

Anya Schiffrin: describes the true cost of austerity in Spain

In a must read column, Anya Schiffrin lays bare the true cost of pursuing the Japanese Model for handling a bank solvency led financial crisis.  Under the Japanese Model, Spain is bailing out its banks and by extension the banks of other eurozone countries while at the same time subjecting it citizens to austerity.

Regular readers know that pursuing the Japanese Model is the wrong choice as it has failed 100% of the time.  Rather, governments should pursue the Swedish Model and require the banks to recognize upfront all the losses on the excess debt in the financial system.

Under the Swedish Model, the real economy and the social contract are protected as the capital needed for growth and reinvestment is not consumed in servicing the excess debt.
In his entertaining lectures at Columbia Business School, the economist Bruce Greenwald likes to employ cite the line often used by Warren Buffett: When the tide goes out, you can see who is not wearing a bathing suit. This is the feeling I have in Spain. 
In year five of the financial crisis, I can see which of my relatives and friends had no swimming trunks. 
The slow downward slide is horrendous for the people living it. Over and over we see the bewilderment of those who worked hard and paid taxes. They don’t understand why they are seeing their first-rate healthcare system being undermined, pensions and salaries cut, and their education system — still not up to par — being squeezed further, while being told they have to bail out the banks because that is what Germany insists on.... 
Please recall that Germany's interest is in seeing that its banks get bailed out of the bad investments that they made and not in the economic well-being of Spain.
In this harsh new world, many people are now irrelevant to the daily functioning of the economy. Architects, graphic designers, book jacket designers–-these kinds of professions now seem like a quaint memory. No one needs them, and the fear is that, if and when the economy recovers, many won’t be needed then. The few friends who have jobs live with the threat of layoffs and repeated pay cuts.... 
Those who did the “right thing” and are managing can be smug — until they realize there are many others who did the seemingly right thing who are suffering. 
The hollowing out of Spanish society continues. Anyone who can leave is doing so, and so Spain is losing the educated people it needs the most and who would be the basis of its future prosperity — if and when it does recover. The existence of a few bright spots does not mean that Spain’s economy is functional. 
In the past, life was full of vicissitudes. Farmers always had work to do, but droughts, collapsing prices, disease, floods could leave them destitute — no matter what they did or how hard they worked. Markets didn’t provide the insurance that would insulate them from these risks. 
As we moved from these primitive economies, the nature of risks changed. Now, it is individuals who face the prospect of no employment. 
Governments need to step in and provide the kind of social protection that people want and need. We can’t simply throw up our hands and say we accept a society in which the only people who get jobs are those with MBAs who speak five languages. 
When a few kids can’t get jobs, it’s not unreasonable to blame them:  They didn’t study hard enough, they chose the wrong subject, they haven’t searched hard enough for a job. 
When half of a country’s young people are unemployed, it’s no longer their fault. 
Let’s be clear. Spain’s economy is in terrible shape and the reckless and irresponsible path of austerity the government is pursuing — a kind of austerity that is especially hard on those who are down and out — is already leading to social and political tensions and constant strikes and demonstrations. After all these years, it is astonishing that the Partido Popular has not learned a thing.

Spain to wipeout Bankia's small investors

Having allowed Bankia to sell stock to small investors with little knowledge of finance, Spain is now taking the next step and effectively writing off their investment as part of recapitalizing Bankia.

Regular readers know that Bankia, which has about 10% of Spain's banking market, does not need to be bailed out and the small investors forced to lose virtually everything.

The reason that Bankia does not need to be bailed out is the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers have effectively become Bankia's silent equity partner while it is rebuilding its book capital from their current negative level.

Wiping out the small investors sends a really bad message.  The message is that the Spanish government cares more about protecting bank book capital levels and banker bonuses than it does about its citizens.

The bankers who mis-sold the stock were only forced to give back their bonuses for the year preceding the nationalization of Bankia.  The bankers got to keep their bonuses for the preceding years.

Fairness suggests that the bankers and members of the Board of Directors should have been required to return 100% of the bonuses and director fees they ever received from Bankia or its predecessor cajas.  It is bad enough that they get to keep their salary 'earned' while underwriting all the bad debt on Bankia's balance sheet.

As reported by Reuters,

Spanish lender Bankia will wipe out 350,000 shareholders, many of them small savers with little knowledge of financial markets, after it emerged it had a negative value of 4.2 billion euros ($5.6 billion). 
The measure, which will hit shareholders who were encouraged by aggressive marketing tactics to invest in the company, is seen as vital if the nationalised bank is to be refloated. 
A source close to the Bank of Spain said Bankia would receive 18 billion euros of European money by Friday and launch a capital increase in the first half of January when current shareholders will lose practically their entire investment. 
Under the European Union plan to prop up Spain's banking sector, shareholders must be the first in the queue to suffer losses. This has already been the case in Ireland where shareholders in Anglo Irish Bank were left with nothing. 
"Are we looking into leaving shareholders with something? Yes. How much? That's too soon to say. Will it be very little? For sure," said the source on condition of anonymity.
"But that will be purely symbolic. I can assure you they will lose up to the shirt on their back."...
Please note that under the European Union plan, unsecured debt holders are not second in the queue to suffer losses.

In fact, the unsecured debt holders, primarily banks in other parts of the eurozone, are protected from any losses.

Spain's government faced a choice between bailing out banks in other parts of the eurozone or protecting Spain's real economy and citizens.  Spain's government chose to bailout the banks and but the burden of the bad debt on the Spanish economy and taxpayers.

As shown by Ireland and Greece, this choice will only make the situation worse.
Another source with direct knowledge of the process said the final value of the shares would be close to nothing but that neither the Spanish government nor the bank wanted to send the message that Bankia's shareholders had lost it all. 
Hundreds of thousands of Spaniards, some retired people with no in-depth financial knowledge, invested their savings into Bankia shares when the bank was listed in July 2011. Shares have plummeted more than 80 percent since then. 
Some small savers, lured by aggressive marketing campaigns, also bought high-risk instruments, such as preference shares or subordinated debt, on which they will also suffer steep losses. 
Enrique Marquez, a 66-year-old retired technician, said he had invested 7,000 euros in shares and more than 70,000 euros in preference shares with Bankia. 
"The bank manager advised me to buy the shares. He told me it was interesting, that the staff were investing too and that it could be very profitable in the medium term," he said.
"It seems to be to have been managed extraordinarily badly. It is a total cock-up. I've been duped on the preference shares and I've been duped on the ordinary shares. It's been an abuse of trust."...
Your humble blogger predicted that Bankia would be unable to sell its shares in 2011 without providing ultra transparency and disclosing its current asset, liability and off-balance sheet exposure details.  I said this disclosure was necessary so that investors could assess the risk of Bankia.

My prediction was wrong when it came to small investors, but right when it came to institutional investors.  Small investors bought and institutional investors stayed away.

I had not factored in that the Spanish government would let Bankia abuse its position of trust and sell these shares to small investors who relied on the bank to make honest representations about its financial condition.

I had also not factored in that the Spanish regulators would not communicate an honest assessment of the bank's financial condition.  If the Spanish regulators did communicate that the bank was solvent, then the Spanish government has a moral obligation to bailout the small investors as these investors were also trusting the government.

Saturday, December 15, 2012

Spanish real estate crisis far from over as prices tumble

The Irish Times reports that residential real estate prices in Spain continue to fall and based on the US and UK experience could fall 25% more.
Spain’s house prices have seen their biggest quarterly drop since the country’s crisis began...
Prices fell by an average of 15.2 per cent in the third quarter of 2012 compared to the same period a year earlier, the National Statistics Institute (INE) reported yesterday. 
With a lack of demand and shortage of credit in the recession-hit economy, prices have now fallen for 18 quarters in a row, with the drop accelerating since the start of 2011. 
In September, an economy ministry official said the housing market was showing signs of flattening out. But the three quarterly figures so far this year – showing price drops of 12.6 per cent, 14.4 per cent and 15.2 per cent – seem to tell a different story. 
A decade-long property boom drove the Spanish economy until 2008. But the ensuing collapse of the sector has contributed to a jobless rate of 25 per cent and house prices have fallen about 30 per cent since their peak. 
“If they’re going to show the same kind of behaviour that US and UK house prices did, they’d have to fall another 20 or 25 per cent,” said Gayle Allard, of the IE Business School in Madrid. “But it looks like Spain’s bubble was bigger, so prices would have to fall even further than that.” 
Toxic debts linked to property are blamed for dragging many of Spain’s banks into crisis. A new Nama-style bad bank will take on the burden of many of these assets.
Regular readers know that implementing the Japanese Model and protecting bank book capital levels and banker bonuses has made the financial crisis worse in Spain.

Under the Japanese Model, the burden of the excess debt in the financial system was placed on the real economy.  This has diverted capital needed for reinvestment and growth to debt service.

As a result, Spain's real economy is in a Japan-style economic slump.  Only the situation is worse in Spain, because its government has been forced to adopt austerity policies.  This has turned a slump into something much closer to a depression.

Wednesday, November 28, 2012

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.

Monday, November 12, 2012

Will suicides be turning point in Spain's financial crisis?

Bloomberg reports that in response to the mortgage foreclosure related suicides Spain's government committed itself to "no family should lose their home as a result of the crisis."

With this commitment, we may have finally reached a turning point in Spain's financial crisis.

The logical way to implement this commitment is to require the banks to write down the mortgages to a level that the family can support based on its current income.

In the US, the rule of thumb for debt service payments, both principal and interest, that a family can support is no more than 33% of gross income.  There is no reason this rule of thumb shouldn't work for Spain too.

Like Iceland, the intent of the write down is not to create "equity" for the borrowing family.  It is to simply have the banks recognize upfront the losses that they would ultimately incur if the bank went through the long process of default and foreclosure.  And do this without having the borrowing family lose its home.

What this means for the banks is the end of protecting bank book capital levels and banker bonuses.  Absorbing the losses on the mortgages will essentially erase bank book capital throughout the Spanish banking system.

This is not a problem because modern banks like Spain's are designed to be able to continue operating and supporting the real economy with low or even negative book capital levels.

Banks can do this because of deposit insurance and access to central bank funding.  Deposit insurance makes the Spanish taxpayers the banks' silent equity partner when they have low or negative book capital levels.

Prime Minister Mariano Rajoy said he will rush through measures to stem evictions in Spain after a woman committed suicide as officials tried to seize her home. 
A bipartisan committee is meeting today to draw up plans to reduce evictions as Rajoy, who faces a general strike this week amid mounting protests, tries to control a growing sense of outrage at mortgage foreclosures. 
Spain’s banking association responded today by announcing a two-year freeze on repossessions in cases of extreme need for “humanitarian reasons.”...
By definition this should apply to every borrower that is facing foreclosure.  If the borrower had money, they would still be making their mortgage payments.
“No family should end up homeless as a result of the crisis,” Economy Minister Luis de Guindos told the European Parliament in Brussels today. “That is the commitment.”
A commitment that implies that the banks are going to have to recognize their losses.  Iceland did this at the beginning of the financial crisis and their economy immediately recovered.
Rajoy has to respond to concern about rising eviction rates without inflicting further damage on a banking system crippled by bad debts following the collapse of a decade-long housing boom. Banks lent more than 600 billion euros ($763 billion) of mortgages that now have a default rate of 3.1 percent compared with 10.5 percent for lending as a whole, according to Bank of Spain data. 
“There will be pressure to try to limit the number of mortgage evictions and iron out some of the inconsistencies in the legislation,” Daragh Quinn, a banking analyst at Nomura International Plc in Madrid, said in a phone interview today. “It could cause increased losses on mortgages for banks and reported rates of NPLs if it affects their ability to recover assets.”...
While the bankers would like to argue that Rajoy and the Spanish government are limited to actions that don't inflict damage on the banking system.  This is a false argument.

Everyone knows that the banks lent 600 billion euros.  Everyone knows that unemployment is over 25%.  It does not take a rocket scientist to figure out that a sizable percentage of this mortgage related debt will never be repaid.

As a result, everyone knows that bank book capital levels are currently grossly overstated.  More importantly, market participants already make an adjustment for this overstatement.

Forcing the banks to recognize the losses simply confirms what the market already knows about the Spanish banks.
Banks, set to benefit from a 100 billion-euro rescue package that Rajoy requested from the European Union in June, have become the focus of public outrage over foreclosures amid a growing public perception that they use abusive lending practices. 
In a Metroscopia poll published yesterday, 91 percent of respondents said lenders exploit clients’ lack of legal knowledge to insert abusive clauses into mortgage contracts while 31 percent said some banks have acted in good faith. 
“If we bail out the banks, how can we not bail out families?” Socialist Party No. 2 Elena Valenciano said in a Nov. 7 interview on Telecinco.....
The beauty of how the modern financial system is designed is that families can be bailed out without having to bail out the banks.  The banks can be given time to rebuild their book capital levels through retention of 100% of pre-banker bonus earnings.

Saturday, November 10, 2012

Following suicides, Spain Prime Minister to halt evictions

Bloomberg reports that Spain's Prime Minister is going to halt evictions while it tries to come up with a solution that allows families to stay in their homes following several recent suicides.

The Spanish people are experiencing “terrible things and inhumane situations,” the premier said at an election rally in Lerida, Catalonia last night. The government “will defend the most vulnerable families affected by the evictions and act with seriousness, sensitivity and great humanity,” he said.
Amaya Egana Chopitea, 53, threw herself from the window of her apartment when representatives of Spanish bank La Caixa arrived with locksmiths to evict her yesterday morning, El Mundo reported. Egana and her husband’s mortgage debt of 164,000 euros ($208,640) rose to 213,000 euros because of charges and interest payments, while their home had been auctioned for 190,000 euros, the newspaper said. 
Rajoy is searching for a formula that can help families that have fallen behind on mortgage payments without increasing the strain on lenders trying to clean up about 180 billion euros of bad real estate assets, the legacy of a 10-year building boom.

Rajoy faces a simple choice:  protect the Spanish society or bank book capital levels and banker bonuses.

This is a choice between adopting the Swedish Model or continuing to implement the Japanese Model for handling a bank solvency led financial crisis.

Under the Swedish Model, Rajoy would require the banks to absorb upfront all the losses they will ultimately absorb by going through the long process of default and foreclosure.  This keeps families in their homes and protects the real economy.

Under the Japanese Model, Rajoy would continue to protect bank book capital levels and banker bonuses and continue to allow Spain's real economy to crumble under the burden of this excess debt.

Regular readers know that a modern financial system, like Spain's, is designed so that Rajoy can adopt the Swedish Model.  Banks can continue to operate and support the real economy even when they have low or negative book capital levels.

The reason banks can do this is the combination of deposit guarantees and access to central bank funding.  The deposit guarantees make the Spanish taxpayers the banks' silent equity partners when they have low or negative book capital levels.

At the beginning of the current financial crisis, Iceland put its society ahead of preserving bank book capital levels and banker bonuses.  The result is they protected their real economy and have not suffered the "terrible things and inhumane situations" that have been inflicted on the Spanish people.

Your humble blogger hopes that the suicides spur Rajoy to adopt the Swedish Model.

Banco Popular selling shares at steep discount as nobody can tell what they are worth

As reported by Bloomberg, Banco Popular is offering a steep discount on its shares in an effort to attract new capital.  The reason for the discount is nobody knows what Banco Popular is worth.

Under current disclosure requirements, banks are 'black boxes'.  Nobody knows what is in them.  As a result, nobody can value them.

Regular readers know that letting market participants know what is in a bank requires having the bank provide ultra transparency and disclose on an ongoing basis its current asset, liability and off-balance sheet exposure details.

Market participants can assess this information and value the bank as they know what the bank's exposures are.

Banco Popular Espanol SA will sell shares at a discount as the Spanish lender seeks to raise as much as 2.5 billion euros ($3.2 billion) to help cover a capital shortfall. 
Popular will issue new shares at 0.585 euros each, excluding the value of subscription rights, Chief Financial Officer Jacobo Gonzalez-Robatto told shareholders in Madrid today. Existing shareholders can pay 0.401 euros and will receive three new shares for each one they own, he said. The bank’s shares closed at 1.118 euros yesterday and 1.701 euros on Sept. 28, the last trading day before the sale was announced. 
“It’s very difficult to say if this is a good price,” said Inigo Lecubarri, who help manage about $400 million at Abaco Financials Fund in London. “But what you can say is the price is good compared to other Spanish banks."
As regular readers know, the investment cycle begins with an independent assessment of the security (in this case, common stock in the bank).  The second step is to compare this valuation with the price being shown for the security.  The third step is to make a buy, hold or sell decision based on the difference between the investor's independent valuation and the price being shown.

Mr. Lecubarri observes that it is very difficult to say if this is a good price.  The reason is that the bank cannot be independently assessed and valued.

Lacking his own assessment, he then compares the price to the prices on other Spanish banks to suggest the maybe the price is 'good'.  This analysis assumes that the prices on the other Spanish banks reflect the value that an independent valuation using each bank's exposure details would set.

In fact, because of the lack of ultra transparency, what he should know is his assumption is false and that the price on all the banks was set by blindly betting.
Popular said on Oct. 1 it would sell shares and suspend its dividend as the Madrid-based lender seeks to avoid tapping state aid to cover a 3.22 billion-euro capital deficit revealed in stress tests that accompanied a European bailout for Spain’s banking system. 
Shares of Popular, the only publicly traded bank with a capital shortfall that hasn’t been nationalized, have declined 68 percent this year.

“It’s a brave step by them because they are raising actual equity,” said Benjie Creelan-Sandford, a banking analyst at Macquarie Bank Ltd. in London, who rates Popular underperform. “In the context of deleveraging and funding costs, it will be tough to grow revenue in absolute terms.”
Excuse me, but after the Bankia preferred securities disaster, other than a gambler, who would buy shares in any Spanish bank in the absence of ultra transparency?
The 15 underwriting banks include Deutsche Bank AG, Banco Santander SA (SAN), UBS AG, Bank of America Corp.’s Merrill Lynch & Co. unit and JPMorgan Chase & Co., which will act as global coordinators, Chairman Angel Ron said. They have guaranteed 2.08 billion euros of the sale with the remainder covered by pledges to buy stock from existing shareholders, he said. 
Deutsche Bank underwrote 400 million euros, Santander 300 million euros with the other global coordinators taking 230 million euros each, Gonzalez-Robatto said in an interview after the event. Commissions were about 2 percent plus a 1 percent success fee, he said....
Who would buy shares in a Spanish bank, why everyone's favorite gamblers:  the large, global financial institutions.

The very same large, global financial institutions that governments unnecessarily bailed out and continue to protect by not requiring them to provide ultra transparency and disclose the losses currently hidden on and off their balance sheets.
Popular is accompanying its pitch for shareholder funds with a new business plan that speeds up recognition of loan losses to produce a 2.3 billion-euro loss this year. The bank is targeting earnings of 1.4 billion euros by 2014, using a predicted operating profit of 7.2 billion euros over the next three years to absorb losses....
In the absence of ultra transparency, why should anyone believe that Popular's new business plan is any more credible than Bankia's plan when it raised preferred shares?
Ron said the stress test process had penalized the bank because its business model focused on small Spanish businesses. 
“Accepting the results of this hypothetical exercise does not mean that we share them,” said Ron, who also highlighted the “torrent” of regulation imposing new capital burdens and provisioning costs on lenders.
Considering how low the bar is to pass the stress tests, recall the number of EU banks that passed a stress test only to be nationalized within 3 months, Banco Popular must be in awful shape.

If Banco Popular was not in such bad shape, it would voluntarily provide ultra transparency and show the world the facts to support its claim it was not in bad shape.

The absence of Banco Popular providing ultra transparency is a very, very large red flag signaling that purchasing its stock is purely blindly betting.

Tuesday, November 6, 2012

Is Spain's pursuit of bad bank an effort to create a 'slush fund' to hide something?

Since Ireland had such a bad experience with its bad bank and Italy is pre-emptively saying it will not set up a bad bank because of all the negative consequences of doing so, the question is why is Spain pursuing a bad bank?

Initially, the source of the bad assets are the cajas.

As reported by the Guardian, a caja is a traditional savings banks with a culture of greed, cronyism and political meddling.

So the logical question: is the bad bank nothing more than an 'slush fund' to hide this greed, cronyism and political meddling?

As European taxpayers prepare to rescue Spain's ailing banks, anti-corruption prosecutors, academics and regional parliaments are uncovering a tale of greed, cronyism and political meddling that has brought many of the country's leading savings institutions to their knees. 
With the fourth biggest lender, Bankia, demanding €19bn (£15.4bn) and authorities now admitting a further €9bn is needed by two former savings banks – CatalunyaCaixa and Novagalicia – concern is focusing on both the mushrooming bill and the way banks have been run. 
Court investigators are also scrutinising payments to former senior executives and the part-flotation of Bankia, in which 350,000 small investors saw two-thirds of their money wiped out. 
The bill that Europe's rescue funds must pay has been increased by the multi–million euro payoffs taken by some senior executives shortly before their banks collapsed and decisions taken by unqualified board members who admit they were incapable of analysing the banks' books. Boards were stuffed with political placements or people who had little idea about banking – including, in one case, a supermarket checkout worker. 
They often rubber-stamped decisions. 
In some cajas they were rewarded with well-paid positions on the boards of subsidiary companies as well as with luxury foreign trips and soft loans. 
Trips to India, China or Chicago and the hundreds of millions of euros in loans to executives, board members and their families formed part of the gravy train of political favouritism and cronyism. 
Chairmen were often unqualified politicians, with academic investigators finding a close relationship between the size of a bank's bad loan book and the inexperience, lack of qualifications and degree of politicisation of the chairman. 
A committee in the Valencia regional parliament is looking into how the Caja de Ahorros del Mediterraneo (CAM) – described by the Bank of Spain as "the worst of the worst" – collapsed last July. 
"Did I check through the accounts?" asked José Enrique Garrigós, a small businessman who was a CAM board member. "Look, I'm an average businessman, I don't have the time or the training to do that.".... 
Analysing the accounts would have required her to be a superwoman, complained one CAM board member. "I didn't have sufficient financial, legal or accountancy skill… board members were not legally required to have any sort of qualifications or experience," agreed fellow board member Juan Pacheco....
This clearly highlights the need for ultra transparency as market participants who could assess the accounts would have done so.
Mireia Mollà, a regional MP for the leftwing Compromis party, said a common way of getting round limits on paying board members at the not-for-profit CAM was to give them well-paid places on boards of companies owned – or part-owned – by the bank. 
Local politicians appointed many board members and used cajas to fund pet projects. 
"The use of cajas as the banks of regional governments is part of the origin of the problem," said Alvaro Anchuelo, an MP for the small, centrist Popular and Democratic Union party. "They used them to finance airports with no flights and theme parks that failed." 
Two days before the collapse of CAM, the bank reportedly loaned €200m to the cash-strapped regional government of Valencia – run by prime minister Mariano Rajoy's People's party, which also controlled most board appointments.... 
Attempts to investigate Bankia have been blocked by the People's party in the national parliament and the Madrid regional assembly, but Spain's attorney general has admitted that it is under investigation. Twelve of the 45 cajas that existed three years ago are reportedly being looked at by anti-corruption investigators.... 
"If we really knew the truth about Bankia and the other cajas, the two big parties – the People's party and the socialists – would explode," said Arsenio Escolar, editor of the 20 Minutos newspaper.
Hence, the question of is Spain's pursuit of a bad bank simply to set up a 'slush fund' to hide the truth about the greed, cronyism and political meddling?

Italy rejects bad bank

After the Irish experience with a bad bank, I expected the Spanish government to reject setting up a bad bank as a bad bank doesn't restore confidence in the banking system and only consumes the government's access to credit (the Irish experience).

Clearly, the Spanish government did not reject setting up the bad bank and by doing so has committed itself to continue to place the burden of the excess debt in the Spanish financial system on a real economy that cannot afford this burden.  The result will be further shrinkage of the real Spanish economy.

Bloomberg reports that Italy is getting ahead of the curve and is rejecting setting up a bad bank.  The reason Italy is rejecting the bad bank is it produces only negative consequences for Italy.

Italian Treasury officials rejected proposals to create a so-called bad bank to take non-performing loans off the books of the nation’s lenders amid concern the plan would strengthen the link between sovereign and bank debt, said people with knowledge of the matter. 
At least three restructuring advisers held talks with government officials about a bad bank that Italy could fund without seeking external aid, said the people, who declined to be identified because the discussions were private. The bad bank could hold 30 billion euros ($39 billion) to 100 billion euros of assets and lenders would receive government bonds in return for their bad loans, according to one person....
I am shocked! Shocked I tell you to see that bankers are out there pushing for a solution that benefits them and nobody else.

Regular readers know that a bad bank does not work because of the issue of how to value the assets taken off of the bank balance sheets and the question of how does anyone know that all the bad exposures were transferred.  [These problems undermined the US Treasury's plan to buy opaque, toxic assets from the banks.]

To address these problems requires the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  With this information, market participants can independently value the exposures.

As a result, the market knows if the exposures are transferred at their market value or the bad bank pays too much (a boost to the banks at taxpayer expense).

If the exposures are transferred at market value, why bother with the bad bank in the first place as the banks have already written the loans down?
A bad bank is a tool the government could use to spur a turnaround in the country’s economy by easing funding needs among smaller banks that would allow them to boost lending, said the people.
This assumption is false.

It bears repeating that bank lending is independent of the bad debt on the bank balance sheet.  For proof, just look at how much lending the US Saving and Loans did during their crisis in the 1980s.

Bank lending is separate from how the loan is financed because the bank can sell the loan to other financial market participants like an insurer, pension fund, hedge fund...
Still, it could strengthen the link between government and bank debt, going against reforms including plans for a European banking union that seek to weaken that nexus that has exacerbated the region’s debt crisis. 
“The last thing Italy needs right now is a further strengthening of the links between the sovereign and the country’s banks,” said Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy. “While Italian sovereign debt is a much safer asset class than a year ago, Italy is by no means out the woods and is seeking to differentiate itself favourably from Spain as much as possible.”
Please re-read the highlighted text as Mr. Spiro's comment about not setting up a bad bank as a positive point of differentiation between Italy and Spain is telling.

If having a bad bank makes your sovereign debt a riskier asset class, then a government should simply not set up a bad bank.

It is worth repeating, given the design of a modern banking system, there is no need for setting up a government funded bad bank.  Between deposit guarantees and access to central bank funding, banks are capable of absorbing the losses on their bad debt and continue supporting the real economy even if they have low or negative book capital levels.

The reason banks can continue to support the real economy is the deposit guarantee effectively makes the taxpayers the banks' silent equity partner when they have low or negative book capital levels.

Monday, October 29, 2012

Spain's bad bank underscores depth of Spain's bad loan problem

As I was reading the presentation from the Bank of Spain (hat tip Zero Hedge) on the bad bank to hold troubled real estate loans, it was clear that Spain's taxpayers and its real economy would be much better off if the Spanish banks were required to recognize upfront the losses on the bad debt that they would realize if the debt went through the long process of default and foreclosure.

One reason that bad banks do not work is the price that the bad assets are transferred to the bad bank at is not determined by the market.  Instead, it is determined by financial regulators.  This can lead to a host of problems.

For example, if the price for the bad assets is too high, it is effectively a subsidy of the bank by the taxpayer.  Private investors will not invest in the bad bank because the assets cannot generate the return necessary to compensate for their risk.

The primary reason that bad banks do not work is that unless the banks are required to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details nobody knows what other losses are hidden on or off their balance sheets.

The Spanish government, at the Troika's request, lays out this nice plan.  First, we stressed tested the banks to determine how much capital was needed.  Second, we take out the bad debt.  Third, we inject new capital.

Unfortunately, each step of the plan is fatally flawed.

  • First, the stress tested banks have far bigger losses than envisioned by the stress tests.


  • Second, the bad bank isn't taking all of the bad debt off the balance sheets of these banks.


  • Third, the amount of capital being injected doesn't make the banks solvent.  

If Spain wants to fix its banking system, it will follow Iceland's lead and require its banks to recognize all their losses upfront.

Next, it will implement ultra transparency so that market participants know that all the losses have been taken.

Then, banks that are capable of generating earnings and rebuilding their book capital levels will be allowed to continue operating.  Banks that cannot generate earnings will be resolved.




Saturday, October 27, 2012

In a first, bank executives asked to give back bonuses when bank fails

In what appears to have been a first since the current global financial crisis began, executives at a high profile bank, in this case the Spanish bank Bankia, have been asked to give back their bonuses from the year prior to the bank's failing.

Up until now, banker bonuses have been protected at all costs.  Not only banker bonuses, but in the US, Treasury Secretary Tim Geithner also tried to protect the bonuses of the employees who worked in the area of AIG that effectively bankrupted that firm.

Asking the bankers to repay their bonuses is a huge policy shift.

Once banker bonuses are no longer protected at all costs, then the idea that bank book capital levels don't have to be protected at all costs becomes viable.

Once bank book capital levels don't have to be protect at all costs, banks can actually be required to recognize all the losses hidden on and off their balance sheet that they would ultimately realize if the excess debt went through the long process of default and bankruptcy.

Once banks recognize their losses on the excess debt in the financial system, the burden of servicing this debt is lifted from the real economy.  This allows the real economy to grow as capital that is being used to service the excess debt can instead be used to purchase goods and services.

With the real economy growing, monetary policies like quantitative easing and zero interest rates can be ended.  This in turn will stimulate further growth as savers will now receive a return on their savings.

As reported by the Guardian,

Top executives at Spain's giant nationalised Bankia are to be ordered to pay back last year's annual bonuses as the bank admits to having run up record-breaking losses of €7bn (£5.6bn) in the first three quarters of this year. 
The size of the losses, the biggest ever reported by a Spanish bank, was revealed on the same day that recession-hit Spain also saw unemployment rise to above 25%. Some southern Spanish provinces are now reporting unemployment at almost 40%. 
Bankia will tell its executives to return the money in response to a petition from the European commission, which says they should not have been paid bonuses just months before the bank admitted it needed €23bn in bailout money. 
"We have received the instruction via the Bank of Spain and, effectively, those people will have to return their bonuses," a spokeswoman said....

The bonuses were agreed in April when the bank claimed 2011 profits of some €300m. 
But auditors refused to sign the accounts and the bank eventually recognised a €3bn loss.... 
It was not clear whether any of the Bankia executives would refuse to pay back their bonus....
Spain's government has since capped salary payments to executives at state-rescued banks.

Thursday, October 25, 2012

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.

Fight between Santander and Barclays' analysts shows bank capital meaningless

As reported by the Telegraph, Santander sees a report by Barclays analysts suggesting it might need to raise 18+ billion euros of new capital as inaccurate.

Because Santander does not provide ultra transparency and disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details, your humble blogger has no way of knowing if Santander or the Barclays analysts are right.

Capital is an accounting construct.  To know who is right, you have to know the current market value of Santander's assets so that you can compare it to the book value of these assets and make an adjustment to Santander's reported book capital levels.

What is clear though is a fight like this is not a ringing endorsement for bank capital as being meaningful.
Santander has dismissed as “inaccurate” a research report by Barclays analysts that warned the Spanish lender could need to raise nearly €18bn (£14.7bn) in new capital. 
The Barclays report, entitled Capital doesn’t add up, claimed that Santander’s domestic Spanish business has a capital-loss buffer about one-fifth the size stated by the bank’s accounts. 
“While Santander reports a 10pc core Tier 1 ratio for its Spanish business, it’s more like 2pc based on the capital that is actually available to absorb domestic losses. This suggests a €15bn to €18bn capital deficit in Spain,” wrote Barclays analyst, Rohith Chandra-Rajan. 
Mr Chandra-Rajan argued that Santander’s accounts “overstate” the ability of its Spanish business to absorb losses by including capital that is effectively locked up in foreign subsidiaries. He claimed that capital would be unavailable to the parent company should it be hit by new losses in its domestic operations.
Barclays estimated that Santander’s Spanish business has just €5.1bn in core Tier 1 capital, equivalent to a core capital ratio for its domestic operations of 2.3pc, below the minimum threshold of 9pc. 
Responding to the claims, a spokesman for Santander said the Barclays report used faulty methodology and that its conclusions were wrong. 
“Besides using incorrect figures, this exercise assigns a value of zero to the units outside of Spain, which are owned by the Spanish parent and worth considerably more than zero,” he said. “Deducting subsidiaries’ capital from the Group’s figures to calculate a figure for Spain does not work because of differing local definitions of capital and reporting criteria from country to country.” 
The spokesman added that Santander had passed recent European stress tests.
Passing a European stress test is not a ringing endorsement of capital adequacy.  The history of these tests as shown by a couple of Irish banks and Dexia is that banks still fail shortly after passing the tests.

In addition, there is a legitimate question about how much capital the parent can get from the subsidiaries in the form of dividends or by selling its ownership interest.

Update
From another Telegraph article,
Santander, the eurozone's biggest bank, said nine-month net profit fell by two thirds to €1.8bn (£1.4bn), hit by writedowns on bad property investments made during Spain's decade-long housing boom. 
The bank said on Thursday it had completed 90pc of government-enforced writedowns on repossessed housing and unrecoverable loans to developers after writing off €5bn (£4bn) in losses.
Why not 100%?
The bank said it had also increased provisions against loan defaults in Spain to €9.5bn during the nine months to end-September, giving it a coverage of 70pc.
Why not 100%?
Rising bad loans in Spain have spread beyond the real estate sector as more Spaniards default on their debts in a crippling recession, with a quarter of the workforce out of a job. 
Bad loans hit record highs in August..... 
Santander has been tarnished by its home country's woes as investors fret about the future of a banking sector which is being recapitalised due to a €100bn European credit line. 
The bank passed an independent audit of the sector with flying colours and a massive capital surplus in September and will not receive funds from the bailout. 
Yet credit ratings agency Moody's rates the bank just two notches above junk - although one rank higher than the sovereign. 
Not a ringing endorsement of Santander's capital adequacy.