Spain’s Caja’s – the stink IS now out

Back on 25th May I wrote a piece called, “Caja’s – will the ugly truth out soon-ish”. Bad title, but it turns out I was correct. The truth is now out. Thanks to a really good report by David Watts ( I wondered what happened to him after he left school – Jam fans will know what I mean) of Creditsights.

The report was written about over at Zerohedge. http://www.zerohedge.com/article/ticking-time-bomb-are-spanish-cajas

My reason for mentioning my earlier writing is NOT to tell you how clever I am. But the opposite. I think half of our present predicament is because too many people have made it their business to tell everyone how clever and expert they are and how only people as clever and expert as they, could possibly understand what is going on. It is not true.

There was and is a concerted effort, I believe, to make people afraid to trust their own common-sense and intelligence. So people may have the sense that what they are being told is wrong, may think that they see an obvious problem, but are constantly told they can’t really unsderstand, that their notions are not to be believed and that we must all defer to the opinions and judgement of those more expert than ourselves. BOLLOCKS, is what I want to say to that.

The Caja case is a good example.

Back on 25th May I said, “Here is my guess. Take it for what it is – an eduated guess, no more.” It was just that, but it was correct. And that is my point – neither you nor I have to wait to be told by experts, who it is clear are generally parsimonious with the truth or are out right liars looking to save their own skin. Finance IS NOT really that complicated. There’s a bit of jargon, a few basic concepts and a lot of detail. But common sense is a VERY good tool for cutting to the truth.

Anyway back to the actual story. What I wondered, back in May, was why the Caja’s which had begun to blow up right at the beginning af this bank crisis, had stopped and seemed to be just A OK? How could that be when Spain has had its own property crash and has had 20% unemployment for a long time? It made no sense. I smelt a rat and said so. Common sense told me there had to be a lie going on in the Cajas. I just didin’t have access to the financial data to work out what lie.

David Watts did a nice peice of analysis and comes up with the answer. The Caja’s did, as I had thought, have a massive problem with non-paying/defaulting loans. Despite them and the government claiming the contrary. But they found a way to hide it. Like most banks the Caja’s had packaged their loans into securities in the customary way. Each security was based on a a whole pool of mortgages. Having the mortgages in securities like this serves many purposes. In the bank crisis one purpose is that securities, unlike raw mortgages, will be accepted by the ECB as collateral for loans. Provided of course that the securities are rated as high quality.

And there, trying to slip by un-noticed, is the key. ‘..rated as high quality….’ If the quality of their securities was found to be declining, due to more and more of the loans in them becoming non-performing, then the Caja’s risked their access to the ECB funding that was their ONLY life line. So what they did was simple. The went into each of their secutiries and bought back any non-perfoming loans. They bought them back from the security and brought those bad loans back on to their own books. So whenever anyone checked the non-performance rate of their securities they found hardly any that were non-performing and gave the security a AAA rating.

This action did two things. It kept the securities healthy enough to use as collateral. And because the easiest way to estimate a banks’s health is look at their securities, it also meant whenever anyone looked into the health of the Caja’s they looked miraculously good.

The rotting bad loans were kept hidden away in the banks own internal loan book which the Caja’s were not obliged to let anyone look at. Whether the Cental Bank of Spain and the Financial regulator knew – I don’t know. If they didn’t they are incompetent. If they did they are complicit to fraud. Seems common sense to me!

Mr Watts’ wider conclusions are also, as common sense had suggested, – bad. The Caja’s have disguised the seriousness of their situation but not made it go away. As unemployment stays high and growth stagnates the rate at which loans go bad, will increase. So far that rate has not exploded because interbank lending has been low thanks to ECB intervention. But that will change and as rates finally start to rise so will the default rate. As it does the Caja’s will not be able to continue to hide all the bad loans within their own books.

These loans are not just for home owners but the large loans made to developers.

Mr Watts’ analysis also shows how property prices in Spain have been held far, far above where the true rate of non-performing loans suggests they should be. Which means property prices in Spain are due for an epic crash. Followed by a cave in across all the Caja’s reagrdless of their recent mergers. All that will save them, is the 100 billion euro fund the Spanish government still has for bank bail-outs. But once that is spent the Spanish position becomes very dangerous indeed.

So Hungary to the East, Spain and its Cajas to the West. This is not over by a very long way.