Tuesday, 11 November 2008

The pain in Spain stays mainly on the plain

Or perhaps post-industrial wasteland is more apposite, for those of you who have been to Santander's headquarters in Boadilla. Anyway. The self-proclaimed over-capitalised and conservative bank isn't. Well-capitalised that is. There is a 7.2B EUR rights issue, according to the FT.

There are two readings of this. One is that if even a bank as old fashioned as SAN needs new money, the financial system is going to hell in a handcart and practically everyone needs new capital.

The other (not necessarily exclusive) interpretation is that SAN has some accrual accounted nasties on its balance sheet which, if they were fair value accounted, would already have produced substantial write-downs. SAN can only go to the fountain once because the admission that it needs new capital is tantamount to the one that its loan loss provisions are not sufficiently prudent. And once you say that, investors might never trust you again.

Personally, I am in favour of transparency. If I were CFO of a bank with a substantial banking book under accrual, I would disclose my estimate of fair value for the book just to keep the analysts quiet. Like JPMorgan seems to (the details are not clear), I would also use that estimate as the basis for my loan loss provision. But then I (thank the Gods) don't work in Boadilla.

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Blogger Charles Butler said...


Last evening, Bloomberg Spain scrolled a note across the bottom of the screen that the offering had been withdrawn. Nothing of the sort in the press this morning.

In addition to your notes, the proximate cause most likely falls under the heading 'Sovereign Bancorp', a bank that they wouldn't be, and hadn't counted on, buying. They were at the WaMu table when the stock market declared SOV insolvent.

Transparency you won't get because it threatens one of the fundamental Spanish cultural myths - that property, which 'never' loses value, is a hedge against the risk of holding money, which 'inevitably' does. The interest in defending prices starts to spill from the economic to the realm of national identity.

Don't like those Madrid suburbs? How odd.

9:45 am  

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