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

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.


Buck Johnson Haus-Targaryen Fri, 06/09/2017 - 11:06 Permalink

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.  

In reply to by Haus-Targaryen

Polemos Shemp 4 Victory Fri, 06/09/2017 - 05:35 Permalink

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. 97So, those who hate debt hate life itself.

In reply to by Shemp 4 Victory

Yoann Fri, 06/09/2017 - 05:43 Permalink

"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. 

peterk Fri, 06/09/2017 - 05:50 Permalink

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 THEIRmoney and assets basically under   their pillow.People generally  just keep their monry in BANKS.... silly thing is  banks dont do that

JailBanksters Fri, 06/09/2017 - 06:50 Permalink

Maybe they need to change the name, possible changes are:Money OptimizerWealth Transitioning SystemFinancial Underwriting Corporate Kontrol,  Intitionional Transfer 

0hedgehog Fri, 06/09/2017 - 07:06 Permalink

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 Fri, 06/09/2017 - 07:18 Permalink

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 Fri, 06/09/2017 - 07:19 Permalink

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 Fri, 06/09/2017 - 07:37 Permalink

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 Fri, 06/09/2017 - 07:37 Permalink

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 Fri, 06/09/2017 - 07:43 Permalink

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.