Spain has now committed 23.5 billion euros of public funds to rescue its third-largest bank, Bankia, amid last week’s revelation of fresh deterioration in real estate loans and other assets (which again makes us wonder what the losses would look like on the $100 billion-plus of European mortgage debt that JP Morgan has amassed, if JPM was actually required to mark these securities to market).
Worse, Spain is providing these funds not as part of any restructuring, but by purchasing newly issued stock of the unrestructured, insolvent bank. While this will give Spain nearly 90% ownership of Bankia, the bailout effectively gives the people of Spain nearly worthless stock in an insolvent entity, putting them behind Bankia’s bondholders. In the likely event that Bankia fails, is nationalized, and is then restructured, the 23.5 billion euros of public funds will vanish as worthless stock, and in the process of restructuring, the bondholders of Bankia will recover 23.5 billion euros more than they otherwise would have.
In short, by putting off the receivership and restructuring of Bankia, Spain is simply enriching the bank’s bondholders at the expense of its citizens, who are already being squeezed by budget austerity. [Link]
Source: Weekly Market Comment, John Hussman (May 28, 2012)
p.s: He is going on record that the next U.S. recession will eventually be dated May/June 2012. I am very much inclined to agree with him. David Rosenberg wrote recently that, but for weather-related sectors, the US 1Q GDP contracted. Orders for non-defense capital goods excluding aircraft have contracted in three out of four months in 2012. The Philadelphia Fed Manufacturing index is now in negative territory. The Citi US Economic Surprise index is -24.5. In plain English, consensus forecasts in recent days have consistently overestimated US economic data. Reality has disappointed. These are not sentiments on the US economy. These are facts.