The Bad Bank Solution

It appears that the state-controlled bad bank solution to Spain's financial sector crisis is just around the corner. Made much less onerous by yesterday's announcement that Bankia - the elephant in the room created by the merger of Caja Madrid, Bancaja and several other minor players, will be fobbing of a full 13 percent of its assets off to parent entity BFA before coming to the equity markets with a proposed value of about 10 billion euros for the remaining 275 billion. Included in the stinky diaper will be all of the equity-for-debt property portfolio as well as non-performing and substandard loans and some of the industrial porfolio and the 4.65 billion in preferred convertibles, yielding 8 percent, issued to the FROB in exchange for its assistance in shoring up the bank's capital. The parent will keep this ugly thing alive through the dividends received from its 80 percent ownership of Bankia and property sales. In the end, who swallows all this are the owners of BFA - the charitable organizations that are all that remain of the original cajas that form the group. Hard times for cultural centres and artificial football turfs in hundreds of small towns in Valencia, Castilla y Leon and the Madrid region.

Combining this solution with that already undertaken by La Caixa*, and assuming (possibly erroneously) that another 15 percent of the sector is fully solvent, we might guess that cajas representing around 35 percent of the sector might be dedicating assets to a FROB-controlled bad bank. Then, assigning some sort of credibility to Emilio Botín's reported estimate that such an institution would need 100 billion in capital (if all the nation's bad assets were dumped into it, we assume) and that it would be funded by a bond issue which would be 50 percent taken up by the adhering institutions themselves, we end up with half of 35 billion euros to be coaxed from the markets. That would be 17.5 billion euros.

*Those wishing to heap yet more praise on La Caixa might take note of what the charitable institution that remains after CaixaBank is hived off intends to do with all those apartments that they will have inherited. This writer's bank manager reports that they will, in the fullness of time, go towards fulfilling its mandate. In other words, socially-assisted housing. This remedy is not directly available to cajas that have assigned assets to a parent IPS. They would have to buy the places back first.

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