A House of Cards aka Un Castillo de Naipes

Tyler Durden's picture

From Mark Grant author of Out of the Box

A House of Cards (Un Castillo de Naipes)

“Fraud and falsehood only dread examination. Truth invites it.”

                                  -Samuel Johnson

I wrote a piece over the weekend explaining how Europe had closed the circle  on its finances by gaming the system. This involved the non recognition of contingent liabilities, the printing of money, the use of the money by the European banks to lower the yields on the European sovereign debts and to shore up their balance sheets and finally to have the central banks buy the Euro so as to sustain its price, the best they could, which lowers their cost of Oil/Energy as they trade in Dollars. At current levels this gives Europe a 32% discount on Oil and a 32% discount when buying American goods and services. Europe has, in fact, done something which has never been attained before and that is to control the relative value of their entire monetary system. The piece was titled, “Leaving Ponzi in the Dust” and was sent out on Saturday at 9:16 A.M.

“Whoever is detected in a shameful fraud is ever after not believed even if they speak the truth.”

                                  -Phaedrus

The largest problem with Europe, in my view, is what we do not know and what is purposefully hidden from us. There are so many examples of this that it sometimes makes my head spin but if their philosophy is “what we don’t know can’t hurt us” or that “ignorance is bliss” let me assure you that while our ignorance might be their bliss that the consequences from making investment decisions based upon incorrect or incomplete financial statements will cause a tremendous amount of pain as the truth ekes out. The most recent example of this kind of deceipt is to be found in the Spanish proposal to create a special purpose vehicle for the Real Estate obligations of their banks.

The proposal is to take the bad loans and to put them in some type of SPV which will be the responsibility of the banks and not the public. It all sounds fine on its face doesn’t it? Well it is not and I will explain. Let us suppose that the real marks-to-market on these loans are 40% of face value and that the Spanish banks are carrying them on their books at 80% of face value. If the Spanish banks gave an accurate accounting they would be bankrupt and so they have created a gigantic charade. Now the European Statistics office wants to examine the books and so the Spanish banks are in panic mode. Their economy has also degenerated so severly that the country cannot afford to back-stop these loans without going to the EU/IMF for help which they are trying to avoid at all cost so that they do not become another ward of Berlin. Germany and the IMF, at the same time, recognizing the size of the Spanish problem have also entered panic mode because the German economy cannot withstand supporting Spain without ratings agency downgrades and quite real financial stress. So Europe concocts a solution and hopes no one recognizes what they are doing but I can differentiate the forest from the trees; thank you.

“Fraud is the ready minister of injustice.”

                                  -Edmund Burke

The bad loans are put into the SPV and never heard from again. The banks do not have to take the mark-down as they are put in at 80% of book value. The loans are off the balance sheets of the Spanish banks so that their financials do not cause bankruptcy. The loans in the SPV have become “contingent liabilities” and so are no longer counted by the banks or the nation as part of anyone’s debts. The liabilities have vanished into thin air and while trumpeted as obligations of the banks and not the public; they have become Zombie Liabilities that are the obligations of no one as no one will count them any longer. Deceit? Yes! Fraud? Yes and exactly the reason why I continue to counsel to avoid European credits as there is just no truth in the financials that they give us and the Fraud is purposeful, carefully planned and surreptitiously orchestrated.

“A conception not reducible to the small change of daily experience is like a currency not exchangeable for articles of consumption; it is not a symbol, but a fraud.”

                                                 -George Santayana

May had arrived in Spain. It was not, however, the May of years’ past but a Spring that was somehow devoid of warmth and of joy. The flowers had begun to blossom but they were gnarled, deformed, as if the land was reflecting the mood of the people. It seemed as if the Devil had arrived in Spain and, having conducted his Inquisition, was loosening various punishments upon the country based upon the confessions that he had witnessed.  The Cathedrals appeared to have been defaced, the bones of the Saints were pocked with mildew and the once dazzling Crosses in the churches were inlaid with some type of worm that had not been seen before. Sadness, like a thick band of fog, had descended upon the coastline and it moved inward untouched by any wind or plea to God for Salvation. The malfeasance of what Spain had brought upon herself was about to be bourne and the hope of any other conclusion was now but a faint prayer remembered in our winter memories. The Piper has arrived from Hamelin; and Spain, like so many before her, will be forced to pay.