Thursday, 25 February 2010

Rotten to the core

A lot has been, is being and will be written about the state of Spanish banks and the Spanish economy.  One of the reasons I do not write more regularly about economics, finance and investments is that there are plenty of very smart and intelligent people already doing so, not least Catalonia-based Edward Hugh. The other reason is because I work in the damned sector (asset management) that bears a great deal of responsibility for the boom, the bust and subsequent economic mess we are all involved with.

A few months ago, I tried to reply to a post in The Badrash about the banking crisis but I think it was far too long...  I was cleaning up my hard drive when I came across the text I had written at the time. So this is a bit of a recycled text from Q4 2009 but still valid nevertheless:

Any published investment research uses ramping to some extent. Everybody talks their own book and it is just a matter of degree how unsubtle some people are. Let’s ignore the xenophobic PIGS slur nonsense and focus on the numbers.

Ramping or not, the banks are not recognising loan losses. That much is clear. 
Whether they are insolvent or not is not the point anymore –the government is always there so it does not really matter unless you are a shareholder or a junior debt-holder. Retail depositors will be fully protected, which is the main thing these days, and rightly so.

This story has been brewing for a few months now, so let’s recap: (taken from FT AlphaVille)

February 2009: FT publishes warning piece on the grandstanding of Spanish banks and the “miracle” of dynamic capital provisions.

April 2009: BdE governor issues infamous list of cajas at risk.

May 2009 (a week later): Moody’s Ratings division issues release announcing it would review ratings for 36 Spanish institutions.

June 2009: Moody’s Ratings division issues ratings downgrade update/

Questions start to arise about the ability of cédulas to pay out.

During the summer, rumours start to spread in the web about the financial strength of Spanish banks and all kind of wild predictions are made. It all kicks off at the end of August.

18 August 2008:
Expansion publishes famous article about 1 in 5 mortgages at risk of being in arrears or default:

This is picked up by Edward Hugh in the Fistful of Euros blog:

21 August 2009
Variant Research (affiliated with a UK hedge fund) issues gloomy report.

25 August 2009: Felix Salmon at Reuters publishes article on Spanish banks.

2 September 2009
Iberian Equities (Madrid-based) takes patriotic exemption at Variant’s research and issues counter-report.

3 September 2009
Variant Research replies to Iberian Equities counter-report.

11-21 September 2009
Edward Hugh publishes various articles about Spain:

9 September 2009
UBS publishes research on Spanish banks.

14 September 2009
Credit Suisse issues less gloomy report on Spanish banks.

15 September 2009
S&P issues report on expected credit losses.

5 October 2009
They are even talking about it in Australia.
13 October 2009
Moody’s issues updated report on Spanish banks.

15 October 2009
Nomura issues research report on Spanish banks. Nice graphs.

So, Spanish banks are fucked, and it is only the political will of the ECB that there have not been in Spain more bank failures like Northern Rock, B&B, etc.
Dynamic capital provisions, prudent lending standards, all well and good and thanks to this it is not worse. An airbag would not save you from a 200 Km/h crash, and the same applies to dynamic loan provisions in Spain.

Let’s stop and think for a second:

Is it possible that Spanish banks are somehow immune and unaffected to the biggest property bubble in modern history and still with an inventory of c3m properties unsold?

So that is what I compiled and wrote around mid-October 2009. 
Since then, a few things have happened. 

 9 Dec 2009: S&P places Spain sovereign debt outlook on negative watch. Edward Hugh expands and explains. But check this older post for a back-to-basics explanation and background on the whole fiasco.

3 Feb 2010: BBVA presented results in Q1 2010 and people started asking questions [again] about NPL (non-performing loans), or mortgages in arrears/default to you and me. 

17 Feb 2010: JP Morgan issues a report on regulatory reform and capital requirements of the banking sector, looking at dynamic provisions, one of the idiosyncratic features of the Bank of the Spain regulation of the banking sector. This report vindicates something I wrote many months ago in someone else's blog and at work in 2008:  "..dynamic provisioning or not, Spanish banks are toast. Would you be saved by an airbag if you were driving at 200Km/h?". 

18 Feb 2010: Credit Suisse publishes a research note on Spanish banks. Top read. 

 And of course we have the whole sovereign debt crisis in Greece and moving westwards across the Mediterranean (and Ireland) into what the europhobe and ignorant anglo-saxon media have termed the PIGS. 

So let's recap:

1) The banks get themselves into a mess of their own and end up insolvent or bankrupt.

2) Sovereign states (ie: taxpayers) come to the rescue of the banking and wider financial sector and inject billions of euro/pounds/dollars into the financial system. 

3) Now the financial sector turns their attention to the fiscal position of sovereign states and demand that spending be curbed or taxes raised to reduce debt. 

4) Politicians across the western world get ready to cut public sector investment (that's schools, hospitals, police, transport, and so on) and/or  lower corporate taxes to attract foreign investment and encourage growth

And then when people complain about this rotten state of affairs, they are labelled populist and that banker-bashing is childish. 

If I was a teacher/policeman/nurse/bus driver/social services officer about to lose my job because of the demands of the very people that got bailed out by the taxpaying public I would feel nothing but hatred for any manager/front office dumb-ass working in the financial sector who is still defending the indefensible against any logic.

There is no other "industry" in the world of business that can get away with deception, duplicity, theft, tax avoidance and an absolute disregard for the wider common good in such a massive scale as the self-serving, socially useless banking and investment sector. 

And what can be done about this? 
Nothing, absolutely nothing because our politicians are all in the pockets of the financial sector. It is all very depressing.


trebolín said...

Except that banks (particularly in Spain) didn't get into a mess on their own, but rather in collusion with a corrupt political class serving its own needs and those of a population which thought it could get rich painlessly. German banks and society aren't in trouble.

Are you contemplating auto-defenestration, now you've acknowledged guilt on behalf of your guild?

Rab said...

TerrorBoy, I have not acknowledged guilt let alone on behalf of anybody else. I have enough trouble trying to speak for myself.

I am just a minnow with no real influence in my own company. I shuffle numbers about and I get paid very well for very little.

Anyway, since when is gambling with other people’s money considered a guild?

trebolín said...

There used to a be a charitable association in the City which referred to its visits to the underprivileged as guild trips.