Zombie Economics of the Bullring

Joe_Bloggs

What was Richard Thompson alluding to when he stated :-
"I consider such transactions regulatory arbitrage,"

If banks are trying to hide their balance sheet problems then they are just postponing the inevitable outcome. This should involve judicial penalties where there has been wrong doing. They can always plea bargain to escape to their luxury villas.

J_B.

HAMISH_MCTAVISH

macaque wrote: »

Their charges and conditions for a business overdraft would have made a 'pay day loan' company blush.

Yes macaque...... I know.

http://forums.moneysavingexpert.com/showpost.php?p=51624329&postcount=22

http://forums.moneysavingexpert.com/showpost.php?p=51628731&postcount=33

http://forums.moneysavingexpert.com/showpost.php?p=51634581&postcount=44

It's mildly funny however that it's only now you've been credit-crunched yourself, that you see the damage the lending famine is doing to the wider economy.

julieq

OK, so a few thousand loans of a few hundred Euros are really going to have a big effect on Spanish lending? Get real.

It's an extreme example chosen for effect and to sustain a particular view. If these loans were to buy cars over 5 years then no-one would have a problem, it's the fact that they're being spent on what a hair shirt protestant would call "frivolous" entertainment, and it's no great surprise that they've chosen something "typically Spanish".

In reality, the bank has seen a low risk opportunity for some highish interest rate short term lending. And NEWSFLASH: you can already buy a season ticket for bull fighting using a credit card. You'll pay more for it in interest, so having a bank loan available is a bit of a win/win.

Linking this to the idea of zombie banks - the word "zombie" in itself is heavily charged with a particular world view - is nothing short of ludicrous. The fact is lending globally is constricted from a few years ago. Therefore we are not increasing problems by increasingly mortgaging the future. There is still some way to go particularly in Europe, but it's a problem that by and large is being addressed.

What has happened in Spain incidentally is that despite all the "props" and support to the banks, house prices have fallen, due to oversupply, which has put pressure on the banks (as has the Eurozone sovereign debt crisis). If you'd like to live in an economy where house prices are low, then Spain is just a short plane ride away. You'll also find you're pretty certain to be unemployed, and with very low realistic prospects that situation will change.

This is the killing joke really, and the hole Macaque has rather gratifyingly fallen into. When the bears get what they want, they find it's not what they expected. Lending restrictions have excluded young people from the market, not reduced prices, and accomodation costs have increased. Banks are charging more on SVRs. Banks are carefully choosing which businesses to lend to and increasing charges generally. And house prices in the UK, where supply is far lower than demand, have not fallen signficantly.

macaque_2

HAMISH_MCTAVISH wrote: »

Yes macaque...... I know.

http://forums.moneysavingexpert.com/showpost.php?p=51624329&postcount=22

http://forums.moneysavingexpert.com/showpost.php?p=51628731&postcount=33

http://forums.moneysavingexpert.com/showpost.php?p=51634581&postcount=44

It's mildly funny however that it's only now you've been credit-crunched yourself, that you see the damage the lending famine is doing to the wider economy.

Not quite.

There is no credit crunch. Home buyers can borrow at historically low rates providing they have a deposit. This seems perfectly reasonable.

The problems of borrowing for small companies predates 2007 by many years. It is still difficult today but the charges have rocketed (even when the loan is secured).

Generali

Joe_Bloggs wrote: »

What was Richard Thompson alluding to when he stated :-
"I consider such transactions regulatory arbitrage,"

If banks are trying to hide their balance sheet problems then they are just postponing the inevitable outcome. This should involve judicial penalties where there has been wrong doing. They can always plea bargain to escape to their luxury villas.

J_B.

As I'm sure everyone knows, arbitrage is a French word meaning decision and is used these days to describe the ability to buy and sell an asset at the same time at different prices and thus turn a profit.

For example, imagine you can buy an oz of gold in London for $1,000 and sell it in New York for $1,100 and it costs you $20 to move it from London to NY. By buying London gold, and selling US gold you make $80/oz risk free. That is arbitrage and by doing that transaction, people will push up the price of gold in London and push down the price of gold in NY until the price is within the shipping cost in the 2 countries.

So now regulatory arbitrage. Regulatory arbitrage is when you make money by changing something from one regulatory form to another. One example is what happened with Subprime Mortgages.

Regulators changed the rules so banks had to hold more AAA rated assets on their books. Investment banks then worked out a way to create AAA rated assets out of subprime mortgages and sold them to retail banks slightly more cheaply than retail banks could buy AAA rated debt from Governments. The retail banks could then make a little bit more profit.

The Bullring is another example of regulatory arbitrage, in a way at least. You lend money to the customers of a company that is insolvent in order to prop up your loan to that company. You're not lending money to the season ticket buyers because it's the best way to make money, you're doing it to prop up someone that owes you money.

paddyrg

I was thinking Zombie Economics was a really cool shop name (I misread it as Zombie Electronics) - somewhat disappointed now!

Generali

julieq wrote: »

OK, so a few thousand loans of a few hundred Euros are really going to have a big effect on Spanish lending? Get real.

It's an extreme example chosen for effect and to sustain a particular view. If these loans were to buy cars over 5 years then no-one would have a problem, it's the fact that they're being spent on what a hair shirt protestant would call "frivolous" entertainment, and it's no great surprise that they've chosen something "typically Spanish".

Despite your slightly hysterical post, the point remains that this is an example of an insolvent Spanish bank lending ECB funds in effect to prop up an insolvent borrower.

The debt is contingent on being spent on a particular form of consumption. A car at least is an asset and can be used to drive you to work thus helping you repay the debt. This is a case of a bank cycling funds through a loop in an attempt to keep an insolvent entity cash flow positive. Don't forget the lender is a Caixa with net assets on the balance sheet of < EUR3,000,000,000. It is small fry but probably typical (if you have some evidence that most of the Caixa system is solvent I'd love to see it but that would fly in the face of compulsory mergers between the Caixas).

If you read to the end of the article there is a rather larger example:

Late last year, Spain's largest bank, Banco Santander SA, agreed to sell a chunk of its U.S. auto-finance business to a group of private-equity firms as well as the unit's chief executive. The sale generated a roughly $1 billion gain for Santander, one of a series of capital-raising initiatives by the company.
But there is a catch: the deal isn't necessarily permanent. The buyers have the right to sell back their stake to Santander starting in four years.
A Santander spokesman didn't respond to requests for comment.

AIUI, Santander will be required to hold the option on their books as a liability only if they feel that it is 'in the money', otherwise it is only a contingent liability. As it is impossible to value a non-quoted, nil cash flow asset they can assign any value they like to it and any auditor would have to sign off on it unless there was a material chance that the business sold was insolvent.

Generali

paddyrg wrote: »

I was thinking Zombie Economics was a really cool shop name (I misread it as Zombie Electronics) - somewhat disappointed now!

Sorry to disappoint.

If it helps I know of a liquor store in the gay district of Sydney called the Lick Her Store and a slightly rough offie in Fulham, London called Hair of the Dog.

paddyrg

Generali wrote: »

Sorry to disappoint.

If it helps I know of a liquor store in the gay district of Sydney called the Lick Her Store and a slightly rough offie in Fulham, London called Hair of the Dog.

Nice. Between Brum and Solihul is a bit of town called Shirley, they have a Cantonese restaurant called the 'Shirley Temple', which is genius :-)