The scheme derailed.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Plunging shares, shrinking profits, and a spate of new regulations and court cases that could end up setting it back billions of euros – that’s what the Spanish banking sector is facing. But now, banks are also grappling with the complete absence of a friendly central government to insulate them from the cruel vagaries of the global economic downturn.
And the strain is beginning to show.
“The political parties must reach an agreement as soon as possible and form a government that is stable,” pleaded Francisco González, president of Spain’s second biggest bank, BBVA. Such a government must not “think about utopias, which only serve to create frustration,” must be “realistic” and (most important of all) must “continue with the policies of the last three of four years.”
González cautioned that foreign investors “are phoning less often” than before. Those “investors” probably include firms like Blackstone and Goldman Sachs, which made a fortune in the immediate aftermath of Spain’s real estate collapse and EU-funded bailout, by picking up publicly subsidized housing on the cheap and either flipping them or renting them at much higher rates.
In those days, the city council was led by Ana Botella, the then Mayor and wife of Spain’s former President José María Aznar. One of the main brokers in the deals struck between the city council’s two housing agencies and international funds like Goldman and Blackstone was José María Aznar Botella – their son!
Despite his lack of investment banking experience, Aznar Botella served as an advisor and go-between at the Madrid-based real estate firm Gesnova Gestión Inmobiliaria Integral, which enjoyed close ties with firms like Blackstone subsidiary Fidere, Lone Star, Apollo, KKR, Goldman’s Madrid-based subsidiary Azora, and U.S. private equity firm Cerberus Capital Management LP, whom Aznar-Botella also serves as an advisor.
Here’s how the scheme worked: in the aftermath of Spain’s real estate bust, the Rajoy government set up a bad bank by the name of Sareb, a public-private venture responsible for managing distressed assets transferred from the four nationalized financial institutions BFA-Bankia, Catalunya Banc, NGC Banco-Banco Gallego, and Banco de Valencia.
As soon as the bad bank was operational, global investment firms began flocking to Madrid to pick up the juiciest pieces at the best prices, part-subsidized by Spanish taxpayers. To get their hands on the really good stuff, however, investors needed someone on the inside, which is presumably where the Aznar-Botello mother & son partnership came in.
But it’s one thing to sell tranches of unoccupied or foreclosed properties to foreign investors to help put a floor under Spain’s property market; it’s quite another when you start selling huge batches of social housing at a ridiculous discount to some of the biggest financial firms on the planet, in a country that has one of the smallest stocks of social housing in Europe. It didn’t take long before rents began soaring and the police began knocking doors down.
For the best positioned investors, the scheme worked a treat — until local elections last May, when the city councils of both Madrid and Barcelona, Spain’s two biggest real estate markets, fell under the control of leftist administrations led by two Podemos-affiliated mayors, Manuela Carmona and Ada Colau.
In Madrid, Carmona has just finished negotiating the release of 300 Madrid flats from Sareb’s stock, which will be used as subsidized accommodation for vulnerable families. She has also refused point-blank to sell any more of Madrid’s social housing stock to global investment firms. Meanwhile, a civil servant in charge of public housing in Madrid is under investigation over the sale of 3,000 social housing units to Goldman for €200 million, an average of around €60,000 a piece. A couple of years later, Goldman was reported to have sold the same apartments for over double that.
In Barcelona Colau’s council has announced a range of measures aimed at reducing evictions, as well as expanding the stock of properties available for social housing. Similar measures were proposed for the whole Catalan region and received the support of all the main political parties, including (amazingly) the People´s Party.
Big investors are not happy. In the first shot across the bow Moody’s just warned the Catalan government that its anti-eviction law could pose a “very serious threat,” not only to real estate investment in Catalonia, but also to Spain’s mortgage market. The main bone of contention, it seems, is a clause that states that if a bank sells a mortgage to a third party, such as, say, an investment firm on the other side of the planet, the debtor can be released from the credit arrangement. What’s more, to pay off the mortgage, the debtor need only pay the third party the same amount that the third party itself paid to buy the mortgage from the bank.
It would be the equivalent of a debt haircut, Moody’s says. And debt haircuts are not meant for mere mortals. If applied across the board, it would make global investment funds think twice before investing in Spain’s mortgage market. More to the point, if a coalition of left-wing parties were to form the central government (unlikely but not completely out of the question) and adopt a similar measure, it could spark a stampede of investors.
As for the likes of Goldman and Blackstone, they no doubt have their sights set on fresher, juicier targets. At a meeting held in New York last month, Aznar Botella recommended to managers of Cerberus that the good times in Spain were probably over — in other words, the political party his father used to lead no longer enjoys an absolute majority in parliament — and the fund would be well advised to seek opportunities elsewhere.
The country he singled out as the most promising candidate was Italy, which, as luck would have it, just set up its own bad bank with over 200 billion euros worth of distressed assets to feast on. By Don Quijones, Raging Bull-Shit.
And the missing capital buffers at these banks? Read… Who Gets to Pay for the Italian Banking Crisis?