Spanish Banks and Real Estate Games

The Spanish banks are in a lot of trouble, with real estate, like banks all over Europe and the United States. They are papering over their books by creating new SIVs and then using them as collateral for new loans from the European Central Bank. What is in the SIVs? Who knows? This stinks of an Enron-type of game. Real estate loans that are of questionable value are sold to a wholly owned subsidiary, which puts them in an offshore SIV. When it collapses the ECB is holding the bag.

Spanish banker are thought to have been creating securities and SIVs solely for the purpose of obtaining cash from the European Central Bank (ECB), the Frankfurt correspondent of the French daily Les Echoes reported. The paper quotes Adam Slater, of Oxford Economics, as saying "The worries are on the fact that, in certain countries, banks are creating SIVs whose only purpose is their use as collateral at the special discount window of the ECB and to use these loans to prop up their financial deficits." And you thought Enron was over?

The volume of asset-backed securities (ABS) being used as collateral for loans from the ECB has been climbing, with ABS rising since September to 215 billion euros, or 17% of the collateral provided by borrowers to the ECB, up from 12% in 2006. Spain is also the location of a massive real estate bubble. Since last September, the Spanish banks alone represent 9% of the volume of refinancing conducted by the ECB, whereas they comprised only 4-5% before then, not a very healthy trend at all. Mr. Slater comments that when the real estate bubble pops, the collateral will go bad, if it hasn't already. Then the banks will need more and more collateral.