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The Canary In Spain's Coalmine - On Bankia's Downfall

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Submitted by J. Luis Martín, director of trumanfactor.com.

Bankia: Responsibility Matters

Last week, the Spanish government carried out the biggest financial bailout since the outbreak of the economic crisis. BFA-Bankia (BKIA), the giant which resulted from the merger of seven savings banks only a year and a half ago, was nationalized by Prime Minister Mariano Rajoy’s government through the conversion of a 4.5 billion euro holding of preferential shares into equity. 

As part of the bailout, and as part of a more comprehensive effort to reform the country’s ailing financial sector announced on Friday, the bank will need to provision additional taxpayers’ money (7-10 billion), which will come in the form of contingency bonds (CoCos).

Bankia has put Spain’s financial system under scrutiny from investors and analysts worldwide who worry about the country’s capacity to strengthen its banks while adopting harsh fiscal consolidation policies in the midst of a recession. However, among the many questions raised by Bankia’s nationalization in extremis, there is one that cannot go unanswered: who is responsible?

This should not be a rhetorical question, since the answer reveals much about the causes of Spain’s current state of economic affairs.

Too intimate a relationship

The Spanish savings banks (cajas de ahorro) became a cause for serious concern in the aftermath of the bursting of the property bubble and the economic downturn in 2008. De-regulation and increased political mingling has turned this 150-year-old fixture in the Spanish financial system into the epitome of incestuous relationships between government and finance.

Managed by boards composed of regional politicians, the Spanish savings banks became a precious instrument of political power, which, during the years of the housing boom, were subject to further abuse by the reckless granting of loans to local builders and the financing of the most pork-barreled public infrastructure projects.

The Caja de Ahorros del Mediterráneo (CAM) stands as the poster child for the politically-controlled savings banks’ credit feasting. Its failed transactions can be found as far as Mexico.

Considering that 80% of the banking system in Spain is managed by unions and politicians, the above should not come as a surprise, however.

Going systemic

Precious time was wasted during the first years of the crisis when the government - and the Bank of Spain - insisted on praising the exemplary solvency of the Spanish banking sector rather than forcing financial institutions to clean up their balance sheets and letting insolvent entities fail. When the problem could no longer be ignored, the Socialist-led government by José Luis Rodríguez Zapatero (with the support of the now ruling center-right Popular Party) opted for the worst possible alternative: to “consolidate” Spain’s banking sector by fusing the cajas.

Indeed, Bankia’s founding savings banks, Caja Madrid and BanCaja (both controlled by Partido Popular politicians in the Madrid and Valencia regions), merged a troubled bank with another even more troubled bank. Once Caja de Canarias, Caixa Laietana, Caja de La Rioja, Caja Ávila y Caja Segovia joined, Bankia became Spain’s fourth-largest bank (the first in terms of domestic business volume): 10 million clients and an estimated 37 billion euros in toxic real estate assets.

The new bank, led by Rajoy’s own Popular Party politician Rodrigo Rato (Spain’s Minister of the Economy during the Aznar Administration, and former IMF Manager Director), became a de facto systemic threat.

Perhaps a more disturbing element in the caja’s hangover is the inability to fully account for the damage so far. In March of last year, Spain’s central bank declared that the financial system required an additional 16.1 billion euro to recapitalize and strengthen its solvency. Now the government is asking banks to set aside an additional 30 billion euro in provisions for loans not deemed as problematic.

In an attempt to shed more light on the problem and to build confidence in Spain’s fourth banking reform in three years, the government will now hire independent auditors to review the banks’ balance sheets and to appraise toxic assets. Once the audit is completed, the financial institutions’ non-performing real estate assets will be transferred to separate entities.

“Bankia is solvent, the state is fully behind it” – Luis de Guindos

As Spaniards are told that their country’s economic woes are due to their “living beyond their means”, and that implacable austerity measures must be enforced in order to avoid an even more disastrous scenario - even risking euro membership - the bailing out of a politicians’ bank at the taxpayer’s expense only adds insult to injury.

For a government that supposedly defends free market ideals and whose economic policies are designed by a self-declared Austrian School economist, Spain’s Finance Minister Luis de Guindos, Bankia’s nationalization stands as yet another broken anathema, which brings the country a step closer to requesting financial assistance from Brussels.

“[The bailout] will not cost anything to the taxpayers,” stressed De Guindos during last Friday’s Cabinet press conference. When referring to the estimated 15 billion euro the government will end up loaning to troubled banks, the minister said that the state will actually make a profit, as CoCos will yield a 10% interest rate. Ultimately, the government will likely be forced to take a higher stake in the Spanish banking system, as it did with Bankia.

Responsibility matters

De Guindos was specifically asked about the government’s plans to investigate and identify those responsible for Bankia’s downfall and subsequent nationalization. His poker-faced response was: we have not identified any responsibility.”

The lack of accountability in the Bankia disaster goes in hand with our politician’s long tradition of not having to recognize their mistakes - and the public accepting such behaviour. Tellingly, in the four months since Rajoy took office as prime minister, the only time socialists and conservatives appeared to have shared a common voice was last week, and it was to support Bankia’s bailout.

Last year, when discussing the causes of the financial crisis, Hernando de Soto, one of the world's leading economists, told me, “one of the disadvantages of the communist countries was that they constantly disguised their failures, so there was no way to fix the system.” And this is exactly what has happened in Spain’s banking crisis.

Like failure, accountability is an essential principle for the survival of a free-market capitalist system. It is quite dangerous for the political class to continue to hide its mistakes at the public’s expense. If markets are not forgiving when trust is gone, the people, as Greece reminds us, are even less so.

On Bankia´s Downfall for El Confidencial (in English): http://en.elconfidencial.com/opinion/2012/05/14/bankia-responsibility-matters-13/

 

 

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Mon, 05/14/2012 - 07:55 | 2423100 GeneMarchbanks
GeneMarchbanks's picture

'incestuous relationships between government and finance'

Theme of the entire 'crisis'.

Nothing new here, the cajas have been the epicenter since day one.

Mon, 05/14/2012 - 08:01 | 2423109 ZeeGerman
ZeeGerman's picture

Can you please pass the tapas?

It is going to be a long flight...

Mon, 05/14/2012 - 07:56 | 2423101 Sandmann
Sandmann's picture

Contingent Convertibles must be the dodgiest way of propping up a bank since that now gives the Spanish taxpayer a huge Contingent Liability that Bond Markets factor in to Sovereign Debt but which gves the Banks nothing to write off against until conversion. So in effect Spain has a double-whammy when impairment takes out both Government and Banks together. Would be cleaner simply to nationalise.

Mon, 05/14/2012 - 07:56 | 2423102 THX 1178
THX 1178's picture

Chirp Chirp Dead

Mon, 05/14/2012 - 07:55 | 2423103 Oh regional Indian
Oh regional Indian's picture

The real Spanish Canary waiting in the "Wings"... Santander...

And this was in 2010, when this baby goes belly up, that is Spain's and the Eurozone's "Uncle" moment:

http://larouchepac.com/node/13413

 

Step carefully, Spain is chock full of Dead Bullshit!

ori

the-deep-perversion-of-language

Mon, 05/14/2012 - 07:56 | 2423105 cossack55
cossack55's picture

Easy. George Bush.....or Bill Clinton.....or Hank Paulson.....or etc,etc

Mon, 05/14/2012 - 08:05 | 2423124 Joe The Plumber
Joe The Plumber's picture

It's bush's fault lol

Mon, 05/14/2012 - 08:05 | 2423120 ivars
ivars's picture
The ultimate driver for currency values has become sovereign debt risk, not economic performance as such- but impact of economic performance (or other factors, like low interest rates or reserve currency status adding demand for given currency) - on abilility to reduce/maintain country solvent. In this measure, the USD performs relatively better today than many other currencies (EUR definitely) - but its catching up with weaker countries/blocks. Still, for those, mostly people in the USA calling for USD fall today,  they must be lacking the relative picture- USD is in terrible shape but there as currencies which are in even more terrible shape and as they fail one by one, USDx will stay elevated- may be for few years more- until the moment the  USA debt crashes ( partial but sudden default). As USD is debased for sure, many other currencies are just more debased. So the picture from outside USA looks that USD as reserve currency with highest weight ( not as compared to PMs) has more years to live- till 2015-2016 at least-though from inside it might look its already gone and is not the reserve currency any more. These are just facts, no matter what we here or some of us would like to happen.

Here is the superexponetial growth scenario of the USA debt- and that is the only plausible scenario given both nature of process and weakness of economies over the world- which should cause some form of approx 20% ( 4 trillion) crash default in 2015-2016 the latest. But , before that, the illusion will be retained since there is no other choice.

http://www.tfmetalsreport.com/comment/78029#comment-78029

Machinery that was released 40 years ago with letting gold standard go works its way to its own predetermined conclusion. Linear or exponential extrapolations of the USA debt are simply wrong/non-applicable  in this situation- debt will reach 21 trillion USD already in the end of 2015 and that level ( between 20-23 trillion USD) is unsustainable for the system it works for, so it will crash - sharply reduce USA debt by some 4 trillion=USA will partially default for the FIRST time. There may be second time etc...But that will already happen in a different world.

Mon, 05/14/2012 - 15:21 | 2424627 MeelionDollerBogus
MeelionDollerBogus's picture

Indeed. Now if China & Russia decide to actually throw gold into the mix that will change everything - a gold-backed Rouble or Yuan will indeed hasten the demise of the dollar.

Mon, 05/14/2012 - 08:11 | 2423121 ArrestBobRubin
ArrestBobRubin's picture

Oh golly Yes, Who COULD it have been? It's not like we have any clue at all. None.

So, are we playing Sargeant Schultzie all day today?

Mon, 05/14/2012 - 08:10 | 2423126 Snakeeyes
Snakeeyes's picture

To make matters worse, US banks CDS spiked as well. Spanish housing is still tanking, killing their banks.

http://confoundedinterest.wordpress.com/2012/05/14/med-uncertainty-greek-and-spanish-yields-spike-10-yr-us-treasury-futures-highest-on-record/

Mon, 05/14/2012 - 08:11 | 2423132 Monedas
Monedas's picture

Don't need no canary....Socialist gas stinks like the Socialist shit it volatizes from !       Monedas    1929     Comedy Jihad Busy As A Deaf And Dumb Apologist For Socialism On 60 Minutes With Leslie Stahl

Mon, 05/14/2012 - 10:01 | 2423483 Zero Govt
Zero Govt's picture

even the 'right' Parties are socialist in Europe

Sarkozy and Cameron are about as free market as State healthcare, State education and State subsidised transport

Mon, 05/14/2012 - 08:14 | 2423138 Element
Element's picture

Difficult to decide which Spanish graph is more horrifyingly impressive today.

Hystery in the making.

Mon, 05/14/2012 - 08:18 | 2423141 PR Guy
PR Guy's picture

What wasn't even discussed in all the figures about Spanish bank debt being bandied around last week was the fact that Spanish banks are sitting on €625bn of residential mortgages marked to original values (i.e. marked to fantasy) in a property market that has fallen by a quarter since 2008 (and is still falling). The official figures say that only 2.4% of these mortgages are behind on payment. They are having a laugh aren't they?

Even in Ireland, where unemployment at 14% is almost half that of Spain's near 25% (and rising fast) loans more than 3 months in arrears are now around 10% (and rising fast) after the property bubble burst there - which was even before Spain's burst. What does that tell you about where Spain's bad mortgage debts are headed and the write offs their banks are going to need to take. Looks like they are just being set up to be nationalised in time for the taxpayers there to take the hit.

Like Ireland, they are probably being set up so that :

a) no bank is allowed to fail (and after nationalisation will be dutifully returned to investors at a knock down price just before the markets 'recover')

b) all bondholders will get 100% of their money back

c) all debts will be socialised

d) most of the shareholders are small, typically retired people investing in 'safe' bank shares to have the dividends as income.... well they all got wiped out with no compensation...

e) all bank executives will keep their jobs and not go to jail

You couldn't make it up. 

Am I right in thinking that no major Spanish bank has reported a loss since 2008? Wake up and smell the coffee shareholders (and about to be ripped off taxpayers).

Footnote: Ireland's bankruptcy/insolvency legislation was written in Victorian times and people still have to spend 12 years in penury before they are released from it (that's not a type, twelve years). They are talking about reducing it in forthcoming legislation (which mysteriously keeps getting delayed) but maybe excluding mortgage debt from it - that will stay with you for life... never to be written off no matter what your circumstances. Do you think they fear the mortgage debt problems are about to get even worse in Ireland? It's a tiny country so just imagine what would happen if the same shit hit Spain.

Mon, 05/14/2012 - 08:38 | 2423169 Element
Element's picture

 

so just imagine what would happen if the same shit hit Spain.

 

Nice summary, I'm guessing that debts that can not be repaid, will not be repaid.

That's permanent too. 

The fruits of insisting such hopium-backed debts will be repaid is to commit the country to no holds barred revolutionary war - us against them. 

Heck, even the National Socialists could make a come-back to Brussels if that sort of situation festered.

 

... oh, wait a minute ...

Mon, 05/14/2012 - 09:01 | 2423249 PR Guy
PR Guy's picture

I believe that Spain has a bit of a track record in no holds barred revolutionary/civil war ;-)

Which is one of the reasons why Spanish central government announcing this morning that it is willing to impose more austerity style cuts on Asturias region (a semi-autonomous area of northern Spain) is a bit of a time bomb. Franco's wife came from Oviedo and had a bad habit of popping into local shops when she was back there visiting and demanding expensive 'gifts'. The locals weren't too complmentary about her so Franco allowed the Germans to practice their Stuka dive bombing tactics there. They aren't too enamoured with central government telling them what they should and shouldn't be doing up in Asturias.

 

Mon, 05/14/2012 - 08:39 | 2423176 Al Capowned
Al Capowned's picture

Its amazing that after everything that happened before and after 2008 and arguable over the last 50 years in particular, the only thing that is still trying to be saved by governments all over the world is the one thing that should not be .... the banking system.

It shows who answers to who; this is all rhetorical as we all know this but still its just unbelivable in this day and age of information and relative awakening.

Hopefully the people will not accept the same archaic banking sytem to be implemented again of centralised Usury on a scale never before witnesed in human history

Mon, 05/14/2012 - 09:21 | 2423238 Sandmann
Sandmann's picture

Try Lloyds Banking Group formerely 6th safest bank in the world......or RBS

Try buying Lloyds Shares at £11 to have them worth 30 pence. The British Stock Market was Telecoms, Oils and Banks - now look at the portfolio

 

Noone is marking to market on bank balance sheets. look at the accounting trickery throughout the banking system. The whole edifice is fake with banks chosing their own valuations to pretend the have equity. All banks are Trading While Insolvent and all Bank Directors should be on trial

Mon, 05/14/2012 - 10:00 | 2423462 Zero Govt
Zero Govt's picture

"..the only time socialists and conservatives appeared to have shared a common voice was last week, and it was to support Bankia’s bailout."

in public both Parties posture and dribble vacuous ideology for the public to swallow

behind the scenes it's all the same scum 

there is no democracy, there is only 1 party, the public sector

Mon, 05/14/2012 - 10:19 | 2423566 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

 

 

“[The bailout] will not cost anything to the taxpayers,” stressed De Guindos during last Friday’s Cabinet press conference.

De Guindos was specifically asked about the government’s plans to investigate and identify those responsible for Bankia’s downfall and subsequent nationalization. His poker-faced response was: we have not identified any responsibility.”

Time line of a bank collapse

1. The Board issues a statement accusing bloggers of spreading both irresponsible and factually incorrect rumours as the bank is sound and has no need of new capital.

2. The Bank issues a statement of confidence in its management.

3. The Bank tries to raise more private capital in spite of it having no need for it.

4. If this does not work the relevant government(s) express(es) complete confidence in the bank and tell us that it has a sound management structure and business model. Indeed the bank had only recently been giving the government advice as to how to run the public-sector more efficiently.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

9. Debt costs of the relevant sovereign nation or nations rise.

10. Consequently that nation finds that its credit rating is downgraded.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforseen difficulties”.

http://www.mindfulmoney.co.uk/wp/shaun-richards/belgium-and-dexia-are-now-trapped-in-an-unholy-embrace-where-the-biggest-loser-will-be-taxpayers/

 

Steps # 6,11 and 12. 

 

Mon, 05/14/2012 - 11:15 | 2423736 Sandmann
Sandmann's picture

Exactly same pattern at HBOS in March 2008 with a secret £60 billion support loan from the Bank of England omitted from Shareholder Prospectus - repaid by Lloyds Bank the day AFTER Shareholders had been suckered into merging with HBOS - again secretly and not mentioned in any Shareholder documentation.

FALSE MARKET anyone ?

Mon, 05/14/2012 - 11:39 | 2423862 Alejandrito
Alejandrito's picture

Spain have no future. Only ECB LTRO kept alive spanish banks. Time is running out.

Destructio of industrial sector. bankruptcy

http://www.colectivoburbuja.org/index.php/juan-carlos-barba/los-concurso...

 

Loans

http://www.colectivoburbuja.org/index.php/juan-carlos-barba/actualizacio...

 

The truth about Spanish banks

http://alejandrogarciastock.blogspot.com.es/2012/05/truth-about-spanish-...

Mon, 05/14/2012 - 17:30 | 2425022 Dead Canary
Dead Canary's picture

I smell gas.

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