By Don Quijones, Raging Bull-Shit .
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.
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.By Don Quijones, Raging Bull-Shit
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.