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“Bad Bank” Mania Spreads in Europe

 

One thing that the world is not in short supply of these days is bad banks. They are everywhere, it seems. But there are bad banks, and there are Bad Banks. This article is about the latter, the officially dubbed “Bad Banks” launched by governments and central banks to conceal the rising tide of triple-F toxic junk (derivatives, securitized debt, non-performing loans…) that threatens to engulf the world’s financial system.

As Bad Banks go, few are as bad as Spain’s SAREB, the public-private company responsible for managing assets transferred from the four nationalized financial institutions BFA-Bankia, Catalunya Banc, NGC Banco-Banco Gallego, and Banco de Valencia.

In theory, SAREB was never meant to exist: “There will be no Bad Bank in Spain, and we will establish procedures that will not be burdensome for taxpayers.” Those were the famous words of Spanish PM Mariano Rajoy during the first few months of 2012. The promise was made on numerous occasions, and not just by Rajoy but also by his Minister of Economy (and former Lehman advisor) Luis de Guindos.

But in politics, promises are not made to last; they are there to be broken. By December of that same year, Sareb was born and Spanish taxpayers were left holding the tab for the biggest bank bailout in Spanish history.

Fast forward to today. Sareb is hemorrhaging. In 2014 the firm’s total losses were €585 million, more than double the amount registered in 2013, its first full year of operations (€260.53 million). It’s a stark contrast from the rosy picture painted by KPMG, the firm hired by the government to draw up Sareb’s original business plan. According to KPMG, investor returns, based on “conservative estimates,” would be in the order of around 15%!

Enough investors needed to be brought on board “to ensure that the participation of the FROB (the government’s Fund for Orderly Bank Restructuring) remained below 50%. That way, Sareb’s debt would not count as official public debt,” one source told Spanish financial news website El Confidencial. “To do that we had to reel them [investors] in with promises of really high returns,” said another.

 

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