Next “Bad Bank” to IPO in Spain, after 2 Prior IPOs Imploded

Who Will Be the Bag Holders?

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

“There will be no Bad Bank in Spain, and we will establish procedures that will not be burdensome for taxpayers.” Those were the infamous words of Spanish PM Mariano Rajoy during the first few months of 2012. Months later Spain’s bad bank, Sareb, was born, and Spanish taxpayers were left holding the tab for the biggest bank bailout in Spanish history.

When Sareb was created, its creators assured Spain’s taxpayers that their money would be returned; some even claimed that the State would make a tidy profit from the operation. Since then, the losses have kept piling up. It is estimated that over €2.1 billion of public funds have been poured into the bank so far and a further €2 billion was provisioned for this year’s accounts alone.

Slowly but surely, the tune is changing. According to Jaime Ponce, the president of Spain’s Fund for Orderly Bank Restructuring (FROB), which has already splashed tens of billions of euros of public funds on bank rescues, taxpayers probably won’t get their money back until 2027, at the earliest. And even then, the plan to recoup public funds is based on hypotheses that are not “infallible.” They depend on the future cost of financing and the evolution of Spain’s real estate market, which in turn depends upon the buying power of Spain’s lost generation (its current unemployment rate: 47%).

In other words, Spanish taxpayers, don’t hold your breath.

A New Dawn?

While Spain’s bad bankers play for time, Banco Popular, Spain’s fourth biggest bank, is planning to spin off its own bad bank early next year, with around €6 billion euros in toxic assets. The listing is a last-ditch attempt to clean up its books by reducing its exposure to property assets.

Given that Banco Popular is, pound for pound, the largest owner of toxic assets in Spain as well as the country’s worst performing bank (according to the ECB’s latest stress test), it’s a big ask. In the last five years, Popular has had three capital expansions, with the last one taking place just last summer. To put that into context, Italy’s biggest problem bank, Monte dei Paschi, has so far had only two, though it would love to have a third. Popular’s share price, like MPS’s, has lost almost all its value, slumping from €15 in 2007 to €1.11 today.

The imaginative name Banco Popular has given to its real estate spinoff is “Sunrise” (in English, not Spanish), presumably with the intention of evoking nice positive feelings as well as the idea of a new dawn (as opposed to a false one).

The plan, which has been under deliberation for over a year and is still not ready for full public unveiling, raises far more questions than it answers. Foremost among them is just how toxic its toxic assets will be. Popular clearly hasn’t had much luck offloading its real estate assets over the last eight years. While it’s true that Spain’s real estate market has experienced some semblance of recovery in recent years, most of the demand is for prime assets.

And “prime” is a word that’s not likely to be associated with Sunrise’s assets, many of which will be in rundown barrios (city neighborhoods) or in the ghost towns that blight Spain’s suburban landscape.

Blanket of Opacity

Next question: what will be the real value of all these toxic real estate assets?

Once they are transferred to the newly floated real estate unit, their value is expected to drop from around €6 billion, their current value on Popular’s books, to between €3-4 billion. But as El Economista points out, “how can you possibly gauge the value of something when you don’t even know what it is?”

Even hazarding a guess at the potential value of Sunrise’s real estate portfolio is an impossible task, given that virtually nobody (apart from a select few at Popular) has a clear idea of what it actually contains. The blanket of opacity is unlikely to be lifted prior to the new firm’s launch. As the financial daily, Expansión, reports, Sunrise will not have to present any accounts for its last three years of operations, as is required for the lion’s share of IPOs in Spain, on the grounds that it has no accounts.

It’s a convenient get out clause. Two other IPOs that enjoyed this rare exception were the frankenbanks Banca Cívica and Bankia, both of which were launched on the basis of dubious accounts and ended up collapsing within months of their IPOs. It’s hardly what you’d call an auspicious omen.

Who Will Be the Bag Holders?

As things currently stand, the new firm’s capital — whose total amount is yet to be determined — will be provided initially by Popular — this is a spin-off, not an IPO — and will be divvied up among its shareholders. The lion’s share of Sunrise’s liabilities will consist of debt, the volume and price of which is also yet to be determined. That debt, we are told, will be sold to institutional investors, presumably with favors owed.

As for the subordinated debt issued by Sunrise, it will be acquired by Popular, yet apparently (and this is where things get truly interesting…) in small enough measures to ensure that the new, entirely separate, wholly independent entity (that is really little more than a sly balance sheet operation) is not in any way dependent upon Popular. Welcome to the rabbit hole.

Like Bankia’s IPO, Popular’s creation of Sunrise appears to have the undivided support of Spain’s government, market regulators and the Bank of Spain. No surprise there: all three gave their whole-hearted blessing to Bankia’s failed IPO in 2011, which courts in Spain now consider a full-blown criminal operation. Taxpayers have already had to cough up over €2 billion to compensate duped investors.

For the moment Popular’s future hangs in the balance. On Friday it reports its third quarter earnings, which could put even further pressure on its share price. Hedge funds, smelling blood, have piled on the shorts which now represent 7% of the firm’s total shares.

If Popular survives the coming months, its medium-term survival will depend on its ability to magic away up to €15 billion of toxic debt from its balance sheets. It’s a reminder that in today’s debt-saturated world, it is reverse alchemy — the ability to create nothing out of something (without blowing yourself or the system up in the process) — that is the real holy grail. By Don Quijones, Raging Bull-Shit.

The art of Making Bad Debt Disappear? Read…  Italy’s Banking Crisis Gets Addressed: How to Conceal a Problem that Threatens to Engulf the Entire Eurozone

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  12 comments for “Next “Bad Bank” to IPO in Spain, after 2 Prior IPOs Imploded

  1. George McDuffee says:

    Grandma called it “sending good money after bad.” Latest example of socializing losses and privatizing profits.

    There appears to be no “good” solutions at this point, only bad and worse ones. What is the risk of contagion into the EU? Spain is not a Greece or Ireland which can be bullied.

    • walter map says:

      “Spain is not a Greece or Ireland which can be bullied.”

      Greece and Ireland were just snacks, George. And Spain is just an appetizer. The smorgasbord is coming.

      Give a man a gun and he can rob a bank. Give a man a bank and he can rob the world.

  2. Jus7tme says:

    In the US we like to keep it simple. We just have *one* bad bank. namely the federal reserve bank (FRB or “The Fed”). FRB has accepted a huge quantity of low-quality debt securities as permanent bank reserves through the QE program. The act of such acceptance is what QE (Quantitative Easing) really is, and that fact cannot be repeated to often.

    How does it work? Well, when the FRB “buys” bonds from its member banks, it does not really “pay” for them. Instead FRB credits the reserve accounts of the selling bank with a dollar amount that is the purported value of the bonds. The 2nd important point is the following: “Reserves” constitute the currency of the interbank payment (or debt settlement) system. That is quite important, because EVERY payment or debt settlement eventually boils down to two banks netting out their amounts of payments between each other.

    QE therefore means that interbank debts are now in part backed by low-quality bonds. Basically, interbank debt payments is a transfer of claim on the debt instrument s(bonds) that is backing the “reserves”, and when the average safety/quality of these instruments decline, so does the soundness of the banking system. And the increase in the reserves cause asset inflation, because the banks (and their wall st clients), that converted their bad bond holdings into reserves, get first crack at buying assets (think:houses, companies/stock) at distressed prices, and then can watch asset inflation take off as ZIRP causes the general public into chasing assets since there is no interest yield to be had.

    Net result: The wealthy get wealthier, and the poor are left in the dust, with ownership of assets increasingly out of reach.

    And that’s how the bad-bank concept is implemented in the US. Spain to some extent uses a different set of tricks, but it amounts to the same thing in the end: Socialize the risk and the losses, and privatize the profits.

    • Maximus Minimus says:

      I am not sure what you try to say.
      My definition of QE is that the central bank creates money out of thin air, and buys government and other securities at face value from member banks, and keeps them supposedly until market conditions normalize (ha). It claims they meet some criteria, but if they were so great, the banks could and would unload them on investors. You could make a point that there is fraud in it.
      The repo market by which banks exchange short term funds is backed by highly rated, mostly government securities, hardly low quality bonds.
      The central bank also participates in this market by buying and selling securities to maintain the target rate.

      • Justme says:

        The phrase “out of thin air” is a terrible exaggeration, that is exactly the point. When someone says that QE “creates money out of thin air”, it is incorrect. People will and should dismiss such statements as crazy-talk. But even fairly well-known journalists such as Greg Ip have written that QE means money is created by “keystrokes”, which is balderdash. By describing QE in such crazy-talk terms, a sane person would just give up and dismiss trying to understand QE (and the badness thereof) altogether.

        And that is very unfortunate, because it detracts from understanding of how bad QE really is for the common man.

        Let me try again: QE means to create money (really: reserves, see above) that is backed by assets that are 1. already impaired and/or higher risk than what is conventionally accepted, and 2. nevertheless accepted at face value or even higher than face value.

        Maximus, do you know understand what QE really is? I’m not really sure I can make it any clearer. And how QE makes the FRb into the bad bank I assume is clear now?

        • Wolf Richter says:

          “QE means to create money (really: reserves, see above) that is backed by assets that are 1. already impaired and/or higher risk than what is conventionally accepted, and 2. nevertheless accepted at face value or even higher than face value.”

          QE creates money with which the Fed BUYS assets. Primary Dealers (banks and broker-dealers that the Fed deals with) sell the Fed these assets (Treasuries, agency bonds) for cash (electronic entries in their accounts with the Fed, not currency). The Primary Dealers can use the proceeds from these sales (this cash) to buy other assets (stocks, bonds, etc.), to replace the assets that they sold the Fed. Or they can keep that cash in reserves. The Primary Dealers can do whatever they want to with the money they get from the asset sales to the Fed.

          “Printing money” and “creating money out of thin air” are common figures of speech (metaphors) to describe this process in an easy and succinct manner. Everyone knows what is meant by these expressions. There is no need to re-explain the process every time. “Quantitative easing” is a figure of speech too.

        • Maximus Minimus says:

          I understand it the same way that Wolf described below.

      • Petunia says:


        I think you are overlooking the fact that QE is buying junk the banks can’t unload anywhere, at full face value. By issuing credits(cash equivalents) for these impaired assets it is inflating the value of all cash and creating asset bubbles.

        • Maximus Minimus says:

          Well, do I have to spell junk instead of saying: paying face value for less than worthy securities.
          Just wanted to add, that some of this liquidity was used to re-inflate the housing bubble, as well as other bubbles, but some of it apparently still sits on banks accounts with FED. Why? Because it was estimated when the FED finally decided to raise rates by 1/4 percentage, that it would need to soak up around half a trillion in liquidity to achieve the higher rate. Can’t imagine what it would take to move up to one percent.

    • Petunia says:


      I agree with you. The Fed is sitting on a pile of what could be complete junk, and because they don’t get audited, we don’t know for sure. Not that an audit amounts to much these days, but nobody knows for sure what the quality and marks are for their balance sheet.

  3. walter map says:

    I’m sure leftists are to blame somehow. Darn that Trotsky. It’s all his fault.

    Is there any way of turning these bankster acrobatics into a game show, or maybe some sort of professional sport? I’d like the parking franchise.

    It was a carefully contrived occurance. International bankers sought to bring about a condition of despair, so that they might emerge the rulers of us all.

    – Louis McFadden

  4. d says:

    The don has supplied good information on this again, he has good sources.

    These club-med governments and Bank’s seriously annoy me.

    Solve this NPL problem the proper way, start liquidating the borrowers.

    Or do what the Japanese are doing, and wait for the borrowers or the borrowers guarantors, to die, then wind up the NPL’S in the estate resolution process (which is a liquidation process, by default).

    What these club-med states are doing is play pass the parcel, with a bag full of puss, their economy’s can not heal, until the NPL issues are properly resolved.

    Quietly turning a large % of that puss parcel, into state debt, which is effectively what they are doing, still leaves it in the economy, poisoning it for decades more.

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