A veteran banker with extensive experience and keen on dodgy vocabulary made the distinction between real money and books’ figures: when there is an abundance of the latter, we are on the brink of a disaster. Lately, there are loads of books’ figures, which only exist on the balance sheets and that sustain themselves on the fictitious notion that time (and inflation) will make up for mistakes and excesses. The real estate crisis, the bubble, represents a great stimulus for books’ figures because of the tendency to postpone problems and continue inflating the balloon that is already flying on its own.
Since the real estate bubble burst (at the end of 2007) savings banks and banks trapped in impossible mortgages breathe into the balloon to maintain fictitious assets that have deteriorated while waiting for someone to remedy the situation. Yet, no one does. Had the errors been recognised and the deteriorated mortgages set back to zero at the very first signals of the crisis, things would have quieted down and the bill would not have reached the unmanageable size that is making the new government cringe.
If the ‘bad bank’ had been set up (it already existed as the Deposits Guarantee Fund; in Spanish, Fondo de Garantías de Depósitos) in mid 2008, when it was quite obvious what was going to happen and when the government still had four legislative years ahead, it would have been possible to deal with the crisis with fewer costs and a greater guarantee of success. Nobody then dared to bell the cat and, indeed, there was no lack of advisors who sweet talked the ‘rulers’ into believing everything was just fine, that the real estate sector would recover in no time and that things would work themselves out on their own. The opposite happened.
On the road to refinancing impossible debts, large, medium and small, events stacked a great big unbearable pile of books’ figures. The mechanism is as old as the hills; in the past it was called ‘paper ball’, which took the form of bills of exchange bought in stamp shops, backed by absolutely nothing except for the possibility of discounting them in banks to produce useful money from nothing.
That ‘paper ball’ is now called mortgages and credit participations in virtual real estate-linked packages: unsold buildings, uncompleted promotions and undeveloped land. All of this is a problem in itself, but it spells contagious trouble especially along its recent development in providing income statements with interests that have not been paid but that have generated fictitious profits, and that have become assets on balance sheets when they are nothing if not liabilities.
Those responsible for these mistakes, frauds and frivolities are the ones who executed them, many of them scandalously compensated, but the ones responsible for maintaining this fictitious situation are those whose duty and legal obligation is to watch over and limit excesses and avoid dangerous fictions. To bring back to zero problematic credits is a drastic decision that requires a great deal of courage, but to keep on with that sort of fiction is what swindlers and fools do.
The best example of this stupidity comes from the now government-seized entities that a few days before the intervention flaunted in their accounts profits (albeit shrinking ones, but still profits), which a few days later became clamorous losses to the extent that all the affected institutions, and their own evaporated resources, ended up in bankruptcy.
The phenomenon is well known, repeated in each crisis following the same pattern, but the lesson is not learned. That CAM, Bancaja, the Banco de Valencia, the Galician savings banks, all of the Castilian and various Catalan ones… were in the red in 2009 was obvious; yet, they held on tight to their books’ money hoping for a miracle. There are no miracles; only facts, actually.