Friday, October 18, 2013

How bad is the Spanish bad bank Sareb?

Last year, the Spanish government created SAREB (the “bad bank”), which effectively lets banks in Spain offload their bad loans at above market price to the government. In order to prevent the balance sheet as counting as part of the government deficit, SAREB is owned 55% by private “investors”. These private “investors” happen to be the same banks that are trying to offload their debt.

The head of SAREB is a relatively unimpressive Belen Romana, who has relatively little banking experience. For the 500,000 euro a year salary, you’d think they could have found someone better. My guess is that they just wanted someone who would take orders and shut up.

Until now SAREB has only accepted empty homes in order to avoid the bad press of having to evict people, which worked great in theory until squatters figured out that if they moved into SAREB owned properties, they wouldn’t be evicted.

If the squatters can prove they’ve been inside for several days without leaving, the home is classified as theirs and the owner’s only recourse is to begin lengthy and costly legal action to prove ownership in court, the guide says.

Private investors have been able to get discounts of up to 80% on properties that SAREB is now buying for a 54% discount, so it’s a pretty damn good deal for the banks. On the selling side, in order to offload properties, SAREB has been offering crazy financial incentives to private companies that can buy assets with a guaranteed profit. The only thing that SAREB gains from the transaction is an accounting trick that makes their asset mix look better than it actually is. So effectively, SAREB is buying high and sell low, enriching banks on one side and private equity on the other.

Will the bad bank eventually blow up? As long as SAREB has the support of the government, it could just borrow the money to fund any shortfall. As long as the ECB is cool with this, expect losses to just continue to pile up.

Long term, my feeling is that the net result of all these accounting fictions is that we will end up with a very small part of the population owning everything, and everyone else owning nothing (and in debt).

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