Don Quijones: Stealth Bailout of 2 Franken-Banks Now Happening in Spain

Lambert here. Yves comments: “I have never heard of an IPO underwritten by Investment Banks You Heard Of and a clean accountant’s opinion by a Big Four firm refunding investors.”

By Don Quijones, editor at Wolf Street. Originally published at Wolf Street

It just doesn’t let up.

Obscured somewhat by the spectacular antics of Deutsche Bank, there appears to be another bailout of two of Spain’s franken-banks: mostly state-owned Bankia and wholly state-owned Banco Mare Nostrum (BMN). The news was released so quietly that even in Spain barely a living soul is aware it’s happening.

The Next Madcap Merger

The two banks, each the product of two madcap mergers of Spain’s most insolvent savings banks, will be merged into one giant entity that is expected to become Spain’s fourth biggest bank by assets. The merger has been on the cards for a number of months since Spain’s Economy Minister (and former Lehman Brothers advisor) Luis de Guindos began dropping hints that one of the first jobs of Spain’s next elected government would be to find a solution to BMN’s ownership issues. Now it’s being brought forward, probably because the chances of Spain having an elected government any time this year are fading by the hour.

For the moment, BMN is completely state-owned, after its four constituent state-owned parts — Caja Murcia, Caixa Penedès, Caja Granada y Sa Nostra — were rescued by Spain’s taxpayers and lumped together for the modest price of €1.6 billion in 2010. But by the end of this year all that was supposed to have changed. Plans had been drawn up for an IPO of the bank, but in the current environment, with banks falling like flies all over Europe, investors refuse to go near it.

Hence the merger, which despite only being in the “study stage,” has already received the blessing of Spain’s caretaker government, Spain’s central bank, and Standard & Poor’s, which has promised not to downgrade Bankia’s credit rating after it has absorbed BNM’s assets and liabilities. The merger will also no doubt enjoy the undivided support of the ECB: Mario Draghi, announced just a few days ago the urgent need for greater concentration and consolidation of Europe’s banking sector.

Also firmly behind the merger is a motley crew of European and U.S. investment banks. They include Morgan Stanley, which predicts that the deal could add as much as €300 million to Bankia’s profits by 2018 or 2019.

Deja Vu

Such lofty promises have all been heard before — and by and large from the exact same institutional mouthpieces. Before Bankia’s public launch in 2011, Bankia’s management, led by former IMF Chairman Rodrigo Rato, reported in its IPO prospectus a healthy quarterly profit of €300 million. Deloitte, Bankia’s auditor and consultant responsible for formulating its accounts (no conflict of interest whatsoever), was happy to sign off on the accounts. So, too, was the Bank of Spain. As for the government, it was just happy something was being done to save its favorite bank, which many of its own former ministers — Rato included — had run into the ground.

It was all a blatant lie: in reality Bankia was bleeding losses (more than €3 billion) from every orifice. Within months of its IPO, the shares had lost virtually all their value. Cue the biggest taxpayer bailout of a banking entity in Spanish history with a total cost to date of €22.4 billion, of which €1.6 billion has been recovered, by a government that had repeatedly reassured the public that it would never spend “un centavo” on rescuing the country’s troubled banks.

A recent trial in Spain has established that the image projected by Bankia prior to its IPO “did not correspond with the bank’s true financial situation” and that without this carefully constructed “facade of solvency” conveyed in the IPO prospectus, the IPO would never have gone ahead. As of June 30 this year, the bank had returned €1.6 billion to 223,000 duped retail investors. Almost all of it was public money. And now a growing list of institutional investors, including Spanish corporations like Iberdrola, OHL and Melia, want their money back, too. almost all of which will be drained from the public coffers.

“Hiding Problems” (Again)

Now, Spain could be about to witness another major financial operation involving Bankia. And not everyone’s as excited about the prospect as Morgan Stanley. According to 15MpaRato, a Barcelona-based activist group that has single-handedly landed dozens of former members of Bankia’s board, including Rato, on trial, the overarching goal of the operation has more to do with “hiding the problems on BMN’s books” than creating value for either bank’s shareholders.

“Most of the value attributed to BMN does not come from the financial assets” on its books but from its state-guaranteed tax assets [we covered this mess in 2014], the activist group told the Spanish daily El Boletin. As such, the reason why the bank’s IPO didn’t happen was “quite simply because its accounts are not reliable.”

If the bank’s “assets” are deteriorating fast, it would help to explain why Spain’s caretaker government is now in a mad rush to merge the two publicly bailed-out banks. In other words, it wants to “make BMN’s impossible numbers disappear.”

If true — and given Bankia’s six-year history, one can be forgiven for expecting the worst — the chances are that there’s yet more pain ahead for Spain’s long-suffering taxpayers. By Don Quijones, Raging Bull-Shit.

Everyone is denying everything. Read…  The Loophole for Deutsche Bank’s Bailout: Game almost Over?

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. JEHR

    There is so much rottenness in all of the major world banks that the putrid smell is nauseatingly overwhelming. How can two bad banks be merged to become a wholesome and profitable Mega-Bank?

    Plus large corporations pretend to have better assets on their books while off loading expenses to a footnote on the balance sheet and the income statement. In Canada, we have companies who leave out various expenses such as

    “asset impairments, stock option compensation expenses, restructuring or “non-recurring” expenses”

    (Information taken from The Globe and Mail, Saturday, September 24, 2016, written by David Milstead) so that adjusted profit figures look better than they really are. Why are these accounting games treated as legal?

    So many loopholes; so few ethical CEOs.

    1. TheCatSaid

      That quote is an eye-opener. Wow. I thought Canada was supposed to have better banking practises than its southern neighbor. Wishful thinking bites the dust yet again.

      1. Tony Wright

        No, the late Douglas Adams of ‘Hitchhkers Guide to the Galaxy’ fame had it right- “first with their backs to the wall when the revolution comes……”
        We trust them with our hard earned and they blow it on the Casinos (sorry, derivatives markets,) of the world.
        Send the Banksters to Las Vegas, or gaol, where they belong.

        1. Plenue

          How on Earth was removing the wall separating Commercial Banks from Investment Banks ever sold to the public? For most people the Bank is the place they stash their money, confident that it will still be their later. Maybe it even accrues some interest as a bonus.

          But then the barrier preventing banksters from gambling with other peoples money was removed, at which point, surprise, the banksters gambled with other peoples money. And then spent the last 8 years placing the blame everywhere but on themselves, and somehow avoiding being decapitated and mounted on pikes.

  2. ewmayer

    Make sure to check out Wolf’s memory-hole-recovered 2011 piece about the GAO audit of the Fed in the comments…

    No matter how many times reality demonstrates the ridiculousness of the [insolvent bank A] + [insolvent bank B] = [really big going concern C] fantasy math, the banksters keep peddling it. It’s the Rovian ‘when we act, we create our own reality’ hubris, and it persists because governments are complicit in letting the power of these dangerous lunatics continue to grow unchecked. And the bigger the size of the insolvent institution, the greater its power to ‘blow up the world’, and the lower the chance of any government finally saying ‘enough!’ and taking the painful but necessary steps to finally check the toxic pas de deux.

  3. RBHoughton

    We can’t go on like this. What little the bankers say is unreliable. Mainly they permit fraud, concealment and deception in their companies by junior staff who only know the boss pays huge bonuses if you do the dirty deeds without mentioning his name.

    The surprising thing is the people have not risen to assume the government themselves or at least to take and keep the power of control. Men or mice? I am very much aware that people in positions of power know the temper of the times and recognize the mood of the population and yet they do nothing! Isn’t that insulting?

  4. S M Tenneshaw

    another bailout of two of Spain’s franken-banks: mostly state-owned Bankia and wholly state-owned Banco Mare Nostrum (BMN).

    I thought state ownership of banks was supposed to help solve the problems. WTF?.

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