Don Quijones: The Bank That Nobody Wants To Buy

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By Don Quijones, a freelance writer and translator based in Barcelona, Spain. His blog, Raging Bull-Shit, is a modest attempt to challenge some of the wishful thinking and scrub away the lathers of soft soap peddled by our political and business leaders and their loyal mainstream media. Originally published at Testosterone Pit

The Spanish government is currently engaged in a desperate bid to offload one of the country’s recently bailed out, nationalised, and supposedly now fully restored savings banks, Catalunya Caixa — the ill-fated offspring of the post-crisis merger of Caixa Catalunya with two smaller Catalonian saving banks, Caixa Terrassa and Caixa Manresa.

The problem is that no one wants it. All three of Spain’s big banks (Santander, BBVA and Caixabank) have already turned their noses up at it — not once, not twice, but three times! The reason, according to a banker friend of mine, is that Catalunya Caixa is still filled to the gills with “impaired assets” (translation: worthless crap nobody in their right mind would ever want to touch, never mind own) — and this despite the billions of euros of taxpayer funds that have been spent on the entity and its supposed cleansing of toxic residues.

Throw in the fact that almost all of the customers that once created value for the bank have long taken their business elsewhere and you begin to see why the bank’s last two auctions went completely bidless.

Bankia’s Mini-Me

Of all Spain’s banks, Catalunya Caixa is probably the most insolvent. Having received more than 12 billion euros of bailout funds to date, its public financing needs currently clock in at 35 percent of its total revenues, dwarfing even that of Bankia (23 percent), Spain’s largest ever bankruptcy. Indeed, if Catalunya Caixa had been the same size of Bankia, it would have needed more than 50 billion euros to “clean up” its act — more than double the public funds thus far ploughed into Bankia.

Like Bankia, Catalunya Caixa was the victim of woeful, if not criminal, mismanagement by its politically appointed directors. Chief among them was its long-standing president, Narcís Serra, a former vice-president of Felipe Gonzalez’s champagne-socialist administration (1982-1996) who pocketed millions of euros over the last decade from executive directorships in eight different companies, including Gas Natural and Telefonica.

As president of Caixa Catalunya, Serra drew public opprobrium in 2010 when he awarded the bank’s senior management pay hikes of between 30 and 50 percent — at the same time that the bank was in the process of laying off 1,300 branch personnel and on the verge of being bailed out by Spain’s Fund for Orderly Bank Restructuring (FROB).

The Crawling Dead

Even now, with the full financial support of the state behind it, Catalunya Caixa can’t stand on its own two feet. Riven with unfillable holes, its rotting corpse is just waiting for nature (or better put, the market) to take its course. But that is the last thing the government wants.

After all, putting the bank out of its misery by liquidating its assets would probably mean transferring even more unpayable debt onto the government’s own rapidly expanding books — debt that even the most cunning corporate lawyers and accountants would struggle to conceal from the prying eyes of investors or the Troika.

Hence, the government’s desperation to find a buyer — and preferably before the next round of ECB stress tests get under way this Autumn. With just about every bank in the Western hemisphere refusing to return Spain’s Economy Minister Luis de Guindos’ phone calls, the government is left with just two potential buyers: Banco Popular and Evo Bank, itself the product of a failed merger between two defunct Spanish savings banks — Caixa Galicia and Caixa Nova — and now the property of NY-based Apollo Management Group.

A Sly Sleight of Hand

The problem for the government is that neither bank is prepared to take on Catalunya Caixa’s entire portfolio. As El Confidencial reports, Banco Popular wants to cherry pick only the most profitable pieces of Catalunya Caixa’s network of branches. More worrisome still, both entities are calling on the government to sweeten the deal with state-backed guarantees and juicy financial incentives, including Catalonia Caixa’s billions of euros worth of “deferred tax assets.”

DTAs arise when a bank makes losses that it can later offset against its tax bill. But under the new Basel III regime, such “assets” can no longer be counted as regulatory capital – a change that could have forced weakly capitalised lenders to raise billions in additional funding.

Faced with such a dire prospect, the Spanish banks frantically lobbied the government to change the rules. In time-honoured fashion, the government bowed to their demands, announcing at the tail end of 2013 “its” decision to transform the DTAs on bank balance sheets into tax credits backed by the state, thereby ensuring that they still counted towards the banks’ capital cushion under Basel III.

As I reported in Liars, Damned Liars and Spanish Banks, it was this sly sleight of hand — or in the words of De Guindos, “mere accounting issue” — that enabled the country’s banking sector to announce, to great public fanfare, 2013 profits worth some 7 billion euros. Even Catalunya Caixa was able to declare profits of 500 million euros. Without the government’s direct intervention, Spain’s financial sector could have suffered losses of over 30 billion euros, with the likely result that overseas investors would have fled the country, heaping unbearable strains on the country’s already unsustainable debt levels.

Now, Evo Bank and Banco Popular want to get their clutches on Catalunya Caixa’s richest — indeed arguably only — picking: not its branches, not its loan portfolio, but its DTAs. What’s more, Catalunya Caixa is by no means the only bank whose financial health depends on this rejigged accounting mechanism. According to research published last year by N+1, DTAs account for more than 80 percent of Bankia’s tangible book value. Even for Spain’s biggest bank, Santander, the corresponding figure is around 40 per cent.

In a nutshell, Spain’s government and banks are engaged in a frantic struggle to keep reality from intruding on their carefully erected facade of financial recovery. For the moment they are winning, but one can’t help but wonder just how close to the edge of the abyss Spain’s financial system really is if the banks’ most valuable asset is an “accounting issue” created out of expedience and thin air and backed by the nation’s cash-starved taxpayers.

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  1. Synopticist

    Perish the thought that they should just let it go broke.
    Who are the bondholders?

  2. Clive

    Because… perish the thought that the bastion of fiscal responsibility (Germany) might have to eat losses !

  3. kevinearick

    Disposable Wage/Rent: Quan-Fusion, Exchange Rates, & Adjusters

    Who do you want setting exchange rates for your community?

    The majority doesn’t care, so long as it gets something for nothing at some duration frequency, creating the top-down market for money. Within the empire, consumers with no interest in scientific inquiry set the exchange rate with technology demand, and the economists are the blind squirrels looking for the nut, drug merchants addicted to their own drugs. When you accept debt as money, you are voting for more of the same.

    Every city operates artificial crisis to artificial crisis. That a few are suddenly waking up in Oakland isn’t going to change the process. Employing best business practice, global city exploitation down the MSA circuitry with fiat, at the community level, can only grow deficits and debt, with increasing leverage.

    If you take $1M profit on a Bay Area condo and buy a $150k home in the countryside for $200k, flipping on the continued assumption expectation of real estate inflation, what do you expect to happen? If money printed in China is laundered accordingly, what do you expect to happen? Does installing a Jacuzzi add 20% to RE productivity?

    Public education in public housing is all about the stuff. Like GM, Freddie and Fannie can be bailed out/in with fiat, but the only thing that changes is recognition timing. What you see, on average, in public education is children mimicking their parents absent political correctness, as they adopt their own political dress. That explains resistance, but not current.

    If A causes B, which is inequality, and you address B, adding resistors, what do you expect to happen to current draw? Money is nothing more than a recursive call to itself, with demographic expansion and contraction, a relativity circuit. The economists have no idea how to make an economy work, because they don’t make it work. They simply breed and program real estate inflation habits, within borders created for the purpose.

    Physical war, direct demographic control, is about re-accelerating money that cannot be accelerated otherwise, which is why empires fall into permanent warmongering. Watching is a waste of time. London has been controlling LIBOR, and several other pegs, pitting Europe against Europe, for quite some time, big surprise.

    The point of travelling when you are young and able is to learn how to identify and discount middle class event horizons consuming inflation, by eliminating the middleman, to adjust the wage/rent ratio. You charge legacy $150/hr and serve a young family at no cost. You charge civil marriage a premium. If that circuit doesn’t exist, the economy is severed and recycled by the planet. If you don’t interrupt the empire, it implodes automatically.

    If you think this planet does not know you better than you know yourself, or better than the Fed and all its rockstars can measure, you are a derivative moron. The ocean does react to the body surfer. Climate variability is increasing because the ability of current social behavior to push the natural supply and demand curve beyond equilibrium is coming to an end. Arbitrarily closed models breed unintended consequences intentionally ignored by the public eye. HFT is just another derivative.

    Money can only be made to appear to work, until it can’t, by commandeering wealth and issuing debt as credit in a duration mismatch, by rewarding willful ignorance, stupidity. Legacy doesn’t care who governs, so long as it can print. Labor doesn’t care who governs or who prints, so long as it can discount. War begins as labor evacuates the space regulated.

    To adjust, eliminate biased observation. What remains, no matter how improbable…Rent is like your mobile bill, full of surprises, which shouldn’t be a surprise. Water rate acceleration on the margin is just the latest addition, in a growing circle of corruption. The circuit you make depends upon your development, the components discounted.

    Data creates the function. The critters remake the function to fit their model, to produce the outcomes they want. Whether they pay me $150 for twenty minutes of my time, or pay a couple of empire brats $2500 per day to get further behind is of no concern to me, because leverage works both ways. Incremental collection is a waste of time.

    The difference between rent required to reboot the economy and the artificial ‘bad bank’ market rent is licensed and bonded, certified consumers, transferring debt issued to the upper middle class, to the lower middle class. Money simply eliminates the need for intelligent discrimination until it can’t, which is up to you. You are the future, and in 5000 years the economists haven’t figured you out, because their job is to impose arbitrary order on chaos.

    Character recognizes character. You build a trading post without boundaries, and they organize it, not the other way around. Go back and take a look at who supplied medical research and development equipment in the concentration camps. The Jewish consumers threw their own under the bus. The German consumers were just stupid enough to supply the bus. And that, my young friends, is the nature of propulsion in the universe.

    The speed of light is only a limit if your vision is limited by your eyes, which is why you have a brain, and a conscience. Climate, anesthesia, combustion and bombs are all the same thing, gas exchange, with pressure, volume and temperature.

    Empires blow up of their own accords. The consumers herd up to keep you behind, inviting predators. The answer is to focus on your future together, and leave both behind, to play their games, waiting for a labor market to develop under their microscope. Don’t be so quick to assume and adjust your assumptions accordingly. Making your bed in the morning is productive, but it’s just the beginning. Whether the day is an adventure or a purgatory of satans and saviors swapping polarity is up to you.

    “The European elections have delivered their truth, and it’s painful.”

    Unless you show up, all three sides, a man, a woman and a snake play both sides against the middle, themselves, tyranny of the majority prevails. Twenty four hours a week is more than enough to keep the Nazis busy with busy work, so they don’t kill each other, if you both want to participate equally. In reality, you help each other climb.

    Marriage is the only path forward, and to the extent you allow civil marriage to interrupt yours, you will be liquidated. Government is a brake, grown and killed by legacy to suit itself, to hunt and kill what it doesn’t understand. Government itself is of, by and for the middle class.


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