Friday, September 7, 2012

Bad bank and bad ideas

Sometimes I think that a big part of the crisis in Europe is cause by obsession with irrelevant details. The latest stupidity is centered around the creation of a “bad bank” which the government hopes to use to buy a bunch of worthless shit (also euphemistically known as a toxic asset) from Spanish banks at highly inflated prices. This allows the government to pretend that it is not really “giving” money to banks. If the government admitted it was just giving money to the banks (so that German banks don’t lose any money), it would be politically uncomfortable, and people might wonder “Shouldn’t the government get something in return for the money (at a minimum ownership of the bailed out bank itself)?”

But here’s the problem with a “bad bank”: the government doesn’t actually have the money to give the “bad bank” capital to pay face value for the 100s of billions of euros of worthless shit that the banks currently have on their books, which means that the “bad bank” would have to borrow the money to make these “purchases”. But which idiot would lend money to the bad bank? Well, maybe if the government guaranteed the debt. But wouldn’t that mean that the debt is just really government debt? Well, duh.

The workaround would be that according to the ESA-95 rules, if an entity is owned 50.01% by private investors, it doesn’t count as government debt. But how much would 50.01% of the “bad bank” be worth? If it is borrowing money to significantly overpay for assets (which by definition it must, otherwise there is no point), then by definition the value of the “bad bank” is actually far less than zero, so any money put in by investors would end up being worth zero. (For example, suppose I borrow 150 million euros and use it to buy the Castellón airport. Sure, the current airport owners would be very happy, but where the hell would I get the money to pay back the 150 million euros?)

So good luck with finding those investors.

But why the fuck does it matter whether that debt “counts” as government debt according to some obscure set of rules? Eventually the “bad bank” will run out of capital and then it’s Bankia all over again.


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