Is El País Forgetting Something?

This weekend's El País article on the causes of, and possible solutions to, the Spanish property boom and bust has been translated in is entirety to English - courtesy the efforts of Edward Harrison of Credit Writedowns.

Disagreeing with little of its analysis, we nonetheless take exception to the piece's failure to mention the role played by the unnatural relationship that arose between the banks and cajas, on the one hand, and the builders and promotors on the other. Dealt with here earlier, we will repeat only the salient points.

1). The Spanish banks and cajas, aside from having loaned heavily to the real estate industry, in the form of mortgages for raw land or construction loans, also have or had important equity stakes in many of the country's largest players;

2). The dominant national firm in the property valuation business, TINSA, is owned, directly or indirectly, by a large swath of the country's cajas de ahorros;

3). The financial institutions, like those anywhere, also lend money to house buyers.

The last thing Spain, with its culturally-ingrained tendency to value property over liquidity, needed was this group of oligopolistic cheerleaders urging the masses to buy more - price and value be damned. And the first order of business in the matter of structural reforms would be the prohibition of the holding of stakes, either equity or credit, by financial institutions in companies whose end products they are also financing the purchase of.

As a possibly naïve aside, is there not more than a passing similarity between this strategy of lending heavily to the property industry, later to pretend to slice up the risk inherent in those loans into individual home mortgages, and that of packing and selling these latter into various bond-like items? If Spain, through the foresight of the Banco de España missed out on this last step, the United States skipped the first. Might end up being a tie.

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