This Is How A "Bail-Out" Becomes A "Bail-In"

Tyler Durden's picture

Authored by Simon Black via,

Here’s the perfect example of how insane our financial system has become.

It was announced yesterday that, after a 24-hour white-knuckled ride, Spanish banking giant Banco Popular had been sold to Banco Santander for the price of just 1 euro.

Note- that’s 1 euro in TOTAL. Not 1 euro per share.

Banco Popular had once been one of Spain’s largest banks.

But just as certain banks tend to do from time to time, Popular sacrificed responsibility and good conduct for quick profits.

They spent years gambling their depositors’ savings away on idiotic, dangerous, pitiful loans. And those bad loans eventually came back to bite them.

The modern business of banking is all about pooling customer deposits together and making various loans and investments with those funds.

Safe, responsible banks make sensible investments.

They maintain extremely high loan standards. And they keep a SUBSTANTIAL rainy day fund set aside in case those loans and investments go bad.

Banco Popular did none of those things.

Back in 2006 during the height of the real estate bubble, for example, Popular maintained a liquidity ratio of less than 2% according to its annual report that year.

This means that over 98% of its customers’ savings had been gambled away on bad loans and bad speculations.

Eventually those risky loans started failing, and the bank started losing money.

Last year alone Popular lost 3.5 billion euros, which is about as much as they earned in all of the bubble years combined.

Fearing for the banks ability to continue servicing its customers, European regulators stepped in on Tuesday and forced a fire sale.

Banco Santander “won” that auction, again, paying a symbolic price of just 1 euro.

This means that Banco Santander will now inherit all the toxic loans (and consequent losses) that Popular had on its books.

The insanity here is that Santander had almost no time to conduct its due diligence, i.e. research the business to understand what they were buying.

Banco Popular had a balance sheet worth over $150 billion with hundreds of thousands of different loans.

It would take months to even begin scratching the surface of such a massive balance sheet.

By comparison, the last time I bought a business I paid $6 million and spent more than a year conducting due diligence.

Santander bought a $150 billion business and spent less than 24 hours trying to understand what they were buying.

This is nuts. And ENORMOUSLY risky for Santander.

But perhaps even more insane is that this deal is now being hailed by European governments and financial media as a wonderful solution to the looming problem of bank insolvency.

It doesn’t take a rocket scientist to understand that this problem wasn’t really solved.

It was just transferred from one bank to another. The assets are still toxic. They just happen to be owned by Santander now.

Most importantly, Banco Popular is FAR from alone.

Here in Italy, in fact, a number of smaller banks are teetering on insolvency.

And regulators have been scrambling trying to find potential suitors to copy this shotgun wedding ‘solution’.

But so far, no success.

Not a single bank in Italy has sufficient capital to absorb the toxic debts of another.

Plus the government itself is totally bankrupt.

So basically an insolvent government and insolvent large banks are trying to figure out how to bail out insolvent smaller banks.

It’s total madness.

And this is the important lesson: eventually they run out of options.

There’s no one left to bail out a bad bank… no taxpayers, no white knight, no bondholders, no shareholders. Nobody.

Except for depositors.

This is when a “bail out” becomes a “bail in”, and the depositors get stuck with the bill.

Bottom line: This matters. It’s your money at stake.

Don’t simply assume that your bank is in good condition. Examine their financial statements and find out for sure.

Don’t keep 100% of your life’s savings at a single institution. Make sure you diversify. If a bail-in ever occurs, it will be the largest depositors who get hit first.

And definitely consider diversifying geographically. Avoid keeping everything in the same country, especially if that country is bankrupt– the bail-in risk is much higher.

The world is a big place and there’s a ton of opportunity out there, including plenty of responsible, conservative places to bank.

And it’s hard to imagine you’ll be worse off because a portion of your savings is in a safe, well-capitalized bank.

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Shemp 4 Victory's picture


Bottom line: This matters. It’s your money at stake.

Wrong. As soon as it is deposited, it's no longer your money.

Haus-Targaryen's picture

Correct, but then again fiat isn't real "money." 

Its currency. 

So when you put your currency into a a bank account, you trade currency to become a junior unsecured creditor, whose deposit is insured by a horribly undercapitalized insurance fund. 


philipat's picture

"The world is a big place and there’s a ton of opportunity out there, including plenty of responsible, conservative places to bank."

Where, however, they will not open accounts for non-residents AND since FATCA will definitely not open accounts even for resident Americans.

Croesus's picture

Where's the "Do you have a Plan B?"?

Arturo's picture

Mind this bank passed the stress tests.

Relentless's picture

But unfortunately, not any ethical or intelligence tests.

Looks like Santander is going to copy Lloyds, expect to see it in govt hands, if it lives, in less than 12 months

Hugh_Jorgan's picture

The big question is what is the real "behind the curtain" panic level at this point? How much poison can a bank like Santander consume before it gets sick and contagion takes over?

Mr 9x19's picture

and bail in and out is exactly the same at the end, you pay.

FIAT CON's picture

Bail in means biggest depositors take the biggest hit, Bail out means taxpayers take the hit. Again biggest tax payers take biggest hit.

 People with no savings are safe from a bail in.

NewNeo's picture

It's still your hours of labor converted to a unit of measurement, name $, £ etc. theft is theft!

Buck Johnson's picture

This bank was told to buy this other bank and take on the bad assets.  Knowning that they won't be responsible for them.  You see yes they bought them but do we know the contract that was made to buy them?  We don't and rest assured I'm sure a "capitalized bank" and one that has an IQ over mud knows that it's a bad bank with horrible assets and in the deal knew and was written in the contract that they aren't liable for the bad assets.



Polemos's picture

Debt is negative potential energy.

A world without debt is a world whose potential energy is zero.

When the potential energy is zero, the actual energy is zero too:

"And where did the energy come from to create this matter? The answer is that it was borrowed from the gravitational energy of the universe. The universe has an enormous debt of negative gravitational energy, which exactly balances the positive energy of the matter."
--Hawking, Stephen W. Black Holes and Baby Universes and Other Essays. Bantam Books, 1993, p. 97

So, those who hate debt hate life itself.

The Merovingian's picture

I am not sure how much you've been drinking but either double it, or quit altogether.

Moski's picture

I'll be purloining that one.

FIAT CON's picture

Alcohol is obviously not enough for this guy he needs drugs.

44magnum's picture

Who pays the interest to the universe?

Wahooo's picture

Good morning, Lloyd. Clearly, you are going god's work today.

blargg's picture

> A world without debt is a world whose potential energy is zero.

So, a cellar full of food vs an empty cellar with an IOU taped to the door?

AVmaster's picture


The money isn't really yours either...


Gold Bitchez...

True Contrarian's picture

So you're saying that the risk as an unsecured creditor having my life savings rehypothecated into oblivion resulting in c. 95% of my money tied up in high risk investments is not worth the .25 % interest rate that my Bank pays me.


God help the poor chumps who think this way.



GunnerySgtHartman's picture

Indeed.  Reason enough to keep as much money out of the bank as possible.

VWAndy's picture

 Spain the new Greece.

2banana's picture

Funny how Cyprus is no longer remembered or talked about.

new game's picture

we be running on a whole lota faith...

Yoann's picture

"It doesn’t take a rocket scientist to understand that this problem wasn’t really solved.

It was just transferred from one bank to another. The assets are still toxic. They just happen to be owned by Santander now"

But they bought it for 1 euro !

set aside the toxic assets, if banco popular business is worth (i don't really know) 15 ou 20 billions, they can take a charge of that amount. 

Debugas's picture

why should one even care - pull out and keep cash

oh wait they are banning cash transactions all over the place hm...

Bemused Observer's picture

Well, they're certainly TRYING to ban cash transactions. But trying and succeeding are two different things.

CRM114's picture

Cash use is increasing where I am - black and grey economy.

The people here are generally very honest, certainly on a personal level, but they've got no choice. They have been taxed up to the eyeballs and then some. If the car needs fixing, it needs fixing, and if a guy can fix it for cash, he gets the work.

OverTheHedge's picture

Some business where I am are now refusing to do work "on the books" - it is a guaranteed loss-making proposition to conduct business legally. Got to love the government.

FIAT CON's picture

Encourage your friends and neighbors to use cash!

peterk's picture

ROthschilds was said to keeop a large personal vault in his building.... obvioulsy he didnt trust banks.


Where do the banks keep their money?... not in OTHER  banks.. they keep DEBT in other banks but keep THEIR

money and assets basically under   their pillow.

People generally  just keep their monry in BANKS.... silly thing is  banks dont do that

Croesus's picture

Every truly wealthy person I've ever known, has/had a private vault. Some 'money' kept on deposit, but everything else was stored/hidden privately.

It makes no sense to be an "unsecured creditor" at a bank now; the risk is high, and the reward is nonexistent.

Mr 9x19's picture

got plenty small vaults, 19 rounds capacity.

VK's picture

I wonder how many toxic assets Santander just swallowed?

Dr. Dooms-a-lot's picture

Comming to a country near you.

JailBanksters's picture

Maybe they need to change the name, possible changes are:

Money Optimizer

Wealth Transitioning System

Financial Underwriting Corporate Kontrol,  Intitionional Transfer


Miss Informed's picture

I like "Wealth Transitioning System", that sounds very solid and high tech. The more straightforward "throw your money in a filthy rathole and let the flipping Jews steal it" would not inspire confidence.

Mungo9000's picture

Spanish lender LIBERBANK is down 22% today BME:LBK

Mungo9000's picture

Now minus 30% and still falling. they're going to halt trading soon.

0hedgehog's picture

It's funny, not a single bank in the U.S. has enough liquidity/funds to service 2% of deposits either. FDIC covers the rest with the 2% of coverage they give the total banking system. If there were to be even a small run on U.S. banks, both the banks and the FDIC would shut their doors and you would get next to nothing. This is the real reasoning behind a cashless world, it's to prevent that bank run from happening. God knows they couldn't handle it whatsoever if it did happen. Possession is nine tenths of the law.

Let it Go's picture

You never want to be caught on the wrong side of a debt default where you don't get paid or are paid with a less valuable currency that has seen its value eroded by inflation. Debt defaults can take many forms but what they have in common is they all can be considered as reneging on financial obligations.

Consider the possibility that inflation has been kept in check primarily because we as a society have invested a large percentage of our wealth into intangible products or goods such as stocks, bonds, and even currencies. If faith drops in intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation would soar. More on this subject in the article below.

Wahooo's picture

This means that over 98% of its customers’ savings had been gambled away on bad loans and bad speculations.

And the lesson is: when you give someone your money, they get to do whatever they want with it.

Miss Informed's picture

Put down 1 euro, then get massive government bailout. Dictate the terms of that so you get big executive bonuses. Like JPMorgan did eating Bear Stearns. Not a bad deal at all

Let it Go's picture

Any hope the Euro-zone is about to suddenly turn the corner is more based on false hope and a wish than a reflection of events on the ground. The fact is their banks are neither "fixed" or the system healthy. Greek debt it again an issue. Italy is deeply in debt, unemployment is high in many countries especially among the youth population, and refugees continue to flood in adding more stress to an overburdened social system. The article below delves into these problems.

yogibear's picture

This is not the Federal Reserve  of the 80's and prior. It's one that lies, constantly spews conflicting info.  One that will do anything to stop price discovery.