This Is How A “Bail-Out” Becomes A “Bail-In” by Simon Black

Banco Santander just bought Banco Popular for one euro and probably overpaid. From Simon Black at sovereignman.com:

Here’s the perfect example of how insane our financial system has become.

It was announced yesterday that, after a 24-hour white-knuckled ride, Spanish banking giant Banco Popular had been sold to Banco Santander for the price of just 1 euro.

Note- that’s 1 euro in TOTAL. Not 1 euro per share.

Banco Popular had once been one of Spain’s largest banks.

But just as certain banks tend to do from time to time, Popular sacrificed responsibility and good conduct for quick profits.

They spent years gambling their depositors’ savings away on idiotic, dangerous, pitiful loans. And those bad loans eventually came back to bite them.

The modern business of banking is all about pooling customer deposits together and making various loans and investments with those funds.

Safe, responsible banks make sensible investments.

They maintain extremely high loan standards. And they keep a SUBSTANTIAL rainy day fund set aside in case those loans and investments go bad.

Banco Popular did none of those things.

Back in 2006 during the height of the real estate bubble, for example, Popular maintained a liquidity ratio of less than 2% according to its annual report that year.

This means that over 98% of its customers’ savings had been gambled away on bad loans and bad speculations.

Eventually those risky loans started failing, and the bank started losing money.

Last year alone Popular lost 3.5 billion euros, which is about as much as they earned in all of the bubble years combined.

Fearing for the banks ability to continue servicing its customers, European regulators stepped in on Tuesday and forced a fire sale.

Banco Santander “won” that auction, again, paying a symbolic price of just 1 euro.

This means that Banco Santander will now inherit all the toxic loans (and consequent losses) that Popular had on its books.

The insanity here is that Santander had almost no time to conduct its due diligence, i.e. research the business to understand what they were buying.

Banco Popular had a balance sheet worth over $150 billion with hundreds of thousands of different loans.

To continue reading: This Is How A “Bail-Out” Becomes A “Bail-In”

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