Wed June 13, 2012
Spain's Bank Matchmaker On What Went Wrong
Originally published on Mon July 9, 2012 8:55 pm
A couple years ago, Spain hatched a plan to help its small, regional banks. The banks, called cajas, had made lots of bad loans during Spain's real estate bubble.
The plan: Merge the bad cajas with the good ones, in order to make the losses more manageable and bring down overhead.
The government brought in Angel Borges, a banking consultant from Madrid, as a sort of yenta — a matchmaker who was supposed to help the cajas get together.
The plan didn't turn out so well. The biggest bank to come out of those mergers was Bankia, which collapsed last month and was partly taken over by the government, prompting the latest round of trouble for Spain.
I recently spoke with Borges, who told me the story of Bankia.
It starts with Spain's second largest caja, Caja Madrid. Caja Madrid was in OK shape. Angel says he went out and found Caja Madrid some great partners — five small banks that needed a little help.
But all Caja Madrid seemed to care about, Borges says, was size. The leaders kept asking: "Will this merger make us the biggest caja?"
No Angel, would say, you'll be the second biggest, same as you are now.
Caja Madrid went ahead and merged with the five small savings banks, just as Angel suggested.
But then Caja Madrid absorbed one more bank — the third largest caja in Spain, which had a portfolio full of terrible real esate loans and was in awful financial shape.
But it made the newly formed bank the biggest caja in Spain. That caja was renamed Bankia.
"I wasn't asked whether I was in favor or not," Borges says.
Borges was not in favor. Bankia, he says, is too big.
"A failure of that bank is not a failure of a normal bank," he says. "You may end up putting the whole system at risk."
Which is exactly what has happened. The Spanish government had to rescue Bankia, and Europe had to lend Spain money for more bank bailouts.
Angel now says Spain never should have tried to marry good with bad. The bad banks should have been kept on their own and wound down. It would have been painful, but at least the good banks might have survived it.
DAVID GREENE, HOST:
Turning to Europe, the failure of Bankia, the large Spanish savings bank, has ignited a new crisis in the eurozone. Bankia was created just a few years ago when seven different savings banks merged together. The merger was meant to help save the Spanish banking system. Instead it looks like it has done the opposite.
Chana Joffe-Walt with our Planet Money team introduces us to the man who was supposed to be Spain's banking savior.
CHANA JOFFE-WALT, BYLINE: The banking system of Spain is made up of a couple huge banks - they're doing fine - and dozens of small savings banks. They're called cajas and they're doing terribly - too many bad real estate loans. So a couple years ago, Spain hatched a plan to help save the cajas and that plan essentially was mergers - combine the good cajas with the bad. That is when our savior got the call. He's got a good name for the job.
ANGEL BORGES: Angel. Angel. I don't know how to pronounce it in English. We say here Angel. Angel, I mean like Charlie's Angels.
JOFFE-WALT: Angel Borges is a banking consultant in Madrid, and he helped put together a lot of the caja mergers over the last couple of years, although he is clear he never thought the Bankia merger was a good idea. But he can help explain the back story - how it came to be and why it was such a huge disaster. So the story starts with Angel's job, to help 46 cajas become 12. With the right combinations, the good banks would swallow up the losses of the bad banks - that was the idea. So Angel started trying out different matches. He'd bring in the heads of a couple cajas, sit them around the table, and say things like...
BORGES: Let's know each other, to see whether there is what we call here in Spain is chemistry. And if there were some good - good looks between the two of them..
JOFFE-WALT: Angel, do you know the word yenta?
JOFFE-WALT: Yenta - it's somebody who arranges marriages.
[POST-BROADCAST CORRECTION: The word "yenta" was used improperly. The word comes from Yiddish and means a busybody or gossip, not someone who arranges marriages.]
BORGES: Yeah, yeah, something like that.
JOFFE-WALT: Spain's banking yenta - that was his job. And Angel says for the record, he was good at it. The only problem: his clients. Cajas, you see, are not run by corporate bankers in suits, or really bankers at all. These are generally extremely local operations - politicians, local businessmen and priests run these banks. And Angel says these guys didn't know what was good for them. He'd come up with good matches and then...
BORGES: Many of them unwilling to match with each other.
JOFFE-WALT: He says often these local leaders were just looking out for themselves, and that is what went wrong with the Bankia merger. Here's what happened: Spain's second largest caja, Caja Madrid, came to Angel and he went out and found Caja Madrid some great partners - five small banks that needed a little help. And he told Caja Madrid and the five small banks all of you together could have a great future. But all Caja Madrid seemed to care about was size. The leaders kept asking Angel: Will this merger make us the biggest caja? No, he would say, you'll be the second biggest, same as you are now.
BORGES: So don't try to be a winner against the others. Everybody has to win.
JOFFE-WALT: Remember, he'd say, this is about the banking system as a whole, not just you. Caja Madrid went ahead and merged with the five small savings banks, just as Angel suggested. But then they added another bank to the mix, and not just any bank, the third largest caja in Spain, a bank that was doing terribly, had terrible real estate loans. But together the seven could be the largest caja in Spain. That enormous caja would be called Bankia.
BORGES: I wasn't asked whether I was in favor or not.
JOFFE-WALT: He says if he had been, Angel would have told them - screamed - don't do it. Terrible match.
BORGES: Now a failure of that bank is not a failure of a normal bank. It's the failure of the biggest bank. That's not good. You may end up putting the whole system at risk.
JOFFE-WALT: Which is exactly what seems to have happened. The Spanish government had to rescue Bankia, and now Europe is bailing out more Spanish banks. Spain's government may be next in line. Bankia wasn't available to talk about this. Angel now says, looking back, Spain never should have tried to marry good with bad. The bad banks should have been kept on their own, cordoned off and unwound. It would have been painful, but at least the good banks, Spain, might have survived it. Chana Joffe-Walt, NPR News. Transcript provided by NPR, Copyright NPR.