In part one of Spain – Bad Banks, Assets, Losses and Lies – henceforth known as Spain’s BALLS. I set out what a Bad Bank actually is and how I think it will be used largely to the detriment of the Spanish people. In this second part I want to see if we can piece together what Assets, Losses and Lies the bank will house.
We’ll start with Bankia. Why? Because it is easy to forget that although it is Spain’s third largest lender, is actually just the nightmare result of sewing together seven failed Caja’s. I say nightmare because less than two years after its creation the monster ruptured and had to be stapled back together with Spain’s largest ever bank bail out of €19 billion. And then, just a few days ago, Bankia started haemorrhaging again, with another brand new and ‘surprise’ loss of €4.5 billion. The reason was, according to the press release,
*BANKIA GROUP BAD LOANS RATIO 11% IN JUNE VS 7.63% IN DEC.
A 44% increase in its loans going from good/performing (being paid) to toxic/non-performing (not being paid). Nearly a doubling, in just the last six months! That’s what I call a recovery!
These loans are currently in Bankia or a bank holding company called Banco Financiero y de Ahorros (BFA), which is part of the Bankia group but was ‘separated’ from the retail part of Bankia when it was first ‘rescued’. Though they are bailed out together. So keep in mind, when you hear the rosy reports of how the bad bank and its ‘investors’ will eventually profit from the loans and securities they are going to buy, that those ‘assets’ will be the ones currently going toxic at twice the rate they were just 6 months ago. Sound like a money spinner to you?
So what can we tell about this pile of …assets? Well back in 2009 an article was published in Catalonia’s largest daily paper called La Vanguardia. The article was picked up by a Times columnist who added his own research to it and published it on his web site. To be clear I am quoting from his article which in turn quotes the original. For the sake of brevity I shall refer to them both as ‘The La Vanguardia’ article.
The figure most quoted for the Spanish banks’ bad loans is usually €180 billion. This figure is usually described as being for bad property loans. The article points out however,
If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to 470 billion Euros. That’s almost 50% of Spanish GDP.
That is 50% GDP in 2009. That total, now including exposure to construction companies, gets fewer mentions. As far as I know it is not included in the oft quoted €180 billion and we can be pretty sure most of those loans are toxic. Just one example will suffice.
Metrovacesa was once the largest Spanish construction company. Today it has debts of billions and very little of it being paid. So little, in fact, that its creditors, the banks, as reported in Bloomberg, now own 96% 0f it. The banks in question are all the big Spanish banks including Bankia. Metrovacesa has lost €1.8 billion since ’08. It has €5.1 billion in debts with only €3.9 billion in assets. And of course the €3.9 billion value for the assets is an estimate – their estimate.
As for the banks that Metrovacesa owes, well, they have spent more energy hiding the truth than clearing it up.
In August, its [Metrovacesa’s] lenders renegotiated the terms of 3.6 billion euros of its debt, extending maturities on 2.47 billion euros of obligations and granting a five-year grace period for interest payments on 1.12 billion euros of loans.
It is one thing to renegotiate a debt so as to give a life-line to a struggling but viable employer. That is what banks should try to do. But it is quite another to keep alive a business which has no life, is not employing people in useful work and has no prospect of doing so because of the overwhelming volume of its debts. Yet that is what the banks are doing and they are doing so largely for their benefit not anyone elses.
The reason the banks are endlessly rolling over the unpayable debts of a dead company is that those new, ‘renegotiated’ and ‘extended’ debts are the very same debts that are then described by both the banks and the authorities, as ‘performing’. Extend and pretend. Or as Mikel Echavarren chairman of Irea, a Madrid-based finance company specializing in real estate said in the Bloomberg piece,
“Spain has engaged in a policy of delay and pray,…The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”
Precisely. If the banks admitted the builders weren’t paying and weren’t likely too any time soon, then the banks would have to move the loan from ‘Performing’ where it is calculated as an ‘asset’ and thus contributes to the bank’s own solvency, to ‘non-performing’ where is becomes a loss and help would reveal just how insolvent THE BANK is. The banks have simply refused to recognize a ton of loans as defaulted AND they won’t sell any of the properties the builders have as tangible assets ether.
Many Spanish banks are avoiding property sales so they don’t have to make mark to market valuations, which reflect current prices. Instead, they’re giving developers new loans to pay debt coming due to prevent defaults, said Ruben Manso, an economist at Mansolivar & IAX and a former Bank of Spain inspector.
Basically the banks are lying about their loans, their losses and their assets. Not a lot they’re being honest about if you think about it. A huge number of their loans described as performing aren’t. The banks describe themselves as solvent. They aren’t. The banks have not set aside capital to deal with the real numbers because they don’t have the money. Neither frankly does Spain.
And just to cap it off the banks which own the construction companies like Metrovacesa are holding the shares of those companies act ridiculous values. Santander, which owns about 35% of Metrovacesa values the shares, on its, the bank’s, books as an asset , at about €2.24/share. They actually trade at about €0.57/share.
So it seems clear that the Spanish banks are still sitting on and lying about a shed load of bad loans to builders. What about that larger pot of bad property loans, might the banks be lying about them as well? As the La Vanguardia article (and the one based on it) put it back in 2009,
…the really mad thing is that loans to developers almost doubled between 2005 and 2007, from 162 billion to 303.5 billion Euros, at a time when there was no shortage of signs that Spain was suffering from a property bubble.
Half of the loans made at the height of the global bubble. Bubble era loans are rarely good. Who could do such a mad thing? Or to ask it another way, where are those loans now?
The madmen lending vast amounts of money to developers at the blow off stage of the property boom were mainly regional savings banks, known as cajas, who wrote 54% of new loans to developers in 2008, compared to 41% for the commercial banks.
And here we are again back to Bankia and the Cajas. Next question. How bad could the loans be?
Well…pretty bad. You see the Caja’s were shall we say… lightly regulated. I have written about the Caja before, in “The Stink is Out”, pointing out that they were always closely allied, if not controlled by the wealthy and powerful, who were most often also the politicians and developers in their region. This led to an unhealthy incestuousness of lending to powerful friends regardless of the finances and then hiding the results with the help of those same friends. But in case you think I am exaggerating the following is taken from a quite good summary paper, “The Spanish Financial Crisis” written at the University of Iowa Center for International Finance and Development.
Cajas are not publically traded, and usually regional politicians control the cajas instead of shareholders….
Before the crisis, cajas often loaned to those that the larger banks turned away because they were considered “undesirable”—clients that were less likely to pay back their loans.
Which doesn’t sound great, but then again there are regulations to prevent the worst silliness. Aren’t there? Well,
Unlike the rest of the banking system, cajas were relatively unregulated, and were not required to disclose certain information such as collateral on loans, repayment history, and loan-to-value ratios.
Fantastic. Loans made without disclosing what collateral underpins the loan, whether the value of the collateral bears any relation to the size of the loan, or if the borrower has the means or even the inclination to pay back the money. And if you don’t have to disclose, then you don’t have to adhere to any standards if you don’t feel like it that morning or for that particular friend, sorry client.
So we know from both the lack of regulation and from the continuing collapse of those loans as seen in Bankia that the property loans were and are truly awful. So where are they now? Who is sitting on them and are they all out yet? The answer gets back to what I wrote in The Stink is Out.
It turns out that while most other banks were trying hard move the most toxic loans from their balance sheets, either by selling them to bigger idiots, or by hiding them in off-balance sheet companies, the Caja were actually specifically buying them back. The Caja’s relied, more than most, on the loans and securities they made, as collateral for borrowing from the central bank or ECB via re-financing or other short term loans. In order to use those securities as collateral they had to be AAA rated. And of course they were. Which congenital cretin rated them AAA in the first place I don’t know. BUT if it was found that too many of the underlying loans in the securities were non-performing, then the security in which they were bundled would lose its AAA rating and with it its usefulness as collateral for loans. This would leave the Caja unable to borrow. Without short term borrowing almost any bank will fail.
So the Caja began to buy back the worst loans from their securities and hide those loans back on their own balance sheet. This kept teh securities from going bad – people used to comment on how robustly made Spanish securities seemed to be – but only by piling the toxins up back in the Caja. Making them, as this article from Zerohedge describes them, in to ticking time bombs.
Tick, tick, tick. It sounds bad. It gets worse. This is how it went not just for individual loans to individual borrowers but also for large scale developers. From the 2009 La Vanguardia derived piece again,
“The cajas have tried to grab market share with aggressive strategies,” explains Eduardo Martínez Abascal, a finance professor at IESE Business School in Barcelona, quoted in the article. “In the past they used to grant 100 mortgages to 100 home buyers, but recently they have preferred to lend 100 million to a developer.
That was unwise on many levels. First, as Bloomberg from May 2012 reports,
More than half of Spain’s 67,000 developers can be categorized as “zombies,” according R.R. de Acuna & Asociados, a real-estate consulting firm. They have combined debt of 180 billion euros that will lead to 104 billion euros of losses that hasn’t been fully provisioned for, Acuna estimates.
These companies still exist, are officially, at least, not bankrupt and their loans still counted as performing. 32,ooo zombie developers, 32,000 loans the banks are lying about. Will they ever be repaid? Well here’s a wrinkle that is often over looked when dealing with Spain.
Spanish mortgages, unlike American ones for example, are what are called recourse loans. Recourse means if you default, the bank has ‘recourse’ to not just the house but any and all your other assets. It can pursue you and all your other assets including your income to get their money back. A non-recourse loan, as they have in America, means you can walk away and all the bank can get is the house you leave behind. In America it is sometimes called jingle mail. The borrower simply posts the keys back to the bank and walks away. People in Spain cannot do this. BUT businesses, developers and builders, can.
You wonder if the Cajas left any means of hurting themselves untried. They made unwise, unregulated loans at the top of the bubble market to businesses that could and now have walked away.
But it’s OK because the Bank of Spain doesn’t publish figures on ‘restructured’ loans to developers. So the losses don’t exist. Doubly they don’t exist. The first loan and its associated loss doesn’t exist because it was refinanced and replaced by a new loan which, although it won’t ever be repaid, nevertheless set a new later repayment date by the bank. Allowing the bank to pretend it is still a good loan and an vluable ‘asset’ for the bank. And the second loan and the loss it will create doesn’t exist because the Bank of Spain doesn’t collect those figures.
What all this means, I think, is the the Bad Bank will house a lot of stuff not yet declared. They will continue to hide the real state of what they buy. The bank will contain more lies and losses than real assets. The Bad Bank will not make a profit on any meaningful timescale, if ever. It will be used, not to help the Spanish people, but rather to continue to protect the wealth and power of those who created the mess. Let’s not forget the people we are talking about are people like Rato. Former Minister, former CEO of Bankia, former IMF.
I will break again here. I have one more part – hopefully much shorter – in which I look briefly at what this mess is doint o Spainn and the people os