The EU Smiled While Spain’s Banks Cooked the Books

[dipsydoodle]

Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.

But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.

By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.

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What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia (BKIA) group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.

http://www.bloomberg.com/news/2012-06-14/the-eu-smiled-while-spain-s-banks-cooked-the-books.html

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting.

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Irish Tell Spain to Imagine the Worst in Banking Bailout.

Ireland has this banking advice for Spain: imagine the worst and double it.

Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system.

“Think of the worst possible scenario on banking losses: then double it,” said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin. “Adopt the most conservative assumptions.”

Nine hundred miles northwest of Madrid, Irish analysts wring three lessons from its own banking crisis, among the worst in history. First, quickly present an accurate estimate of the bad loans. Second, force banks to face up to losses, possibly through the creation of a so-called bad bank. Third, share as much of the loss as possible with bank bondholders.

http://www.bloomberg.com/news/2012-06-14/irish-tell-spain-to-imagine-the-worst-in-banking-bailout.html

[Iggy]

1. Regulation? We Don't Need No Stinkin

regulation!

What’s now obvious is that Spain’s banks weren’t reporting all of their losses...

This is a polite way of stating they were lying. Clearly the banksters aren't to be
trusted when it comes to money. They have to regulated and monitored constantly.

[Igel]

2. Few can be trusted when it comes to money.

But the accounting technique wasn't, apparently, prohibited. In other words, it's unclear that they broke the law. "Lying" means to say something you know to be false while expecting people to be persuaded it's true. If you know that the accounting technique is there, you should know what the numbers mean. That would include government regulators and auditors.

If you're eavesdropping on the conversation and don't know what the words mean, then it's entirely "let the hearer beware." We're eavesdroppers. Perhaps you think we shouldn't be. Events that happened in the past doesn't really hold our opinion in nearly the regard we hold them.

Spain had a real problem in its basic approach: Don't let banks fail. If they failed, stockholders would be on the hook and government would be on the hook. So they paired up good banks with bad banks, and continued the same regulatory scheme. This allowed Spain's government to look out for its budget first and stockholders' second--and the country's well-being third. This isn't especially a partisan thing, it's a "I don't want to risk my political future and I want to avoid unpleasantness" kind of thing.

It also prevented the disposal of bad debt. It allowed large amounts of bad debt to stay on the books. This has the effect of removing liquidity while giving the impression that a lot of money's loaned out. It isn't--it's zombie debt, and the only thing that it does it act like a dead body tied around a person's neck. If you're especially healthy, it's disgusting and destroys your social life until the body decomposes and rots off of you; if you're not especially robust, it kills you.