Sale or takeover

The failed Banco Base operation, the financial alliance of of Cajastur, Caja Cantabria, Caja de Extremadura and Caja del Mediterraneo, is a serious setback for the credibility of financial reform in Spain. The circumstances of the failure lend themselves to the biased argument that the balance sheets cajas (publicly administered regional savings banks) are opaque and contain more toxic assets than what has been officially admitted.

The assemblies of the cajas of Asturias, Extremadura and Cantabria almost unanimously rejected a merger, once it was known that the restructuring of CAM would require more than 2.5 billion euros owing to the risk of its larger-than-expected exposure to the real estate sector. The future of the merger is uncertain (Cajastur, Caja de Extremadura and Caja Cantabria will probably go ahead with it), but the CAM now constitutes a serious financial and political problem.

It could be sold, but not before costly restructuring, or taken over by the central bank, which would also be an onerous solution.

The CAM case has surfaced after what was considered to be some decisive steps in the reform of the savings banks. The revelation of CAM's ills may undermine confidence in the balances of other cajas at a time when stress tests are under way, and when the financial markets seem bent on sniffing out any economic, financial or political weakness in order to trigger short-term speculative movements against a country's debt.

All such merger operations are assumed to be overseen and sponsored by the Bank of Spain. Thus, the supervisor of the Spanish banking sector bears some of the responsibility for the failure. When a merger operation is mounted in which a "high risk" caja, which is the case of CAM as others were, is involved, it is unacceptable for surprises of this nature to crop up in the required restructuring exercise being undertaken. The extent of CAM's impaired assets ought to have been known to all the players in the merger before it was set in motion. But not only must the Bank of Spain rethink its supervisory duties, the managements of all the cajas involved also need to explain why they had such deficient knowledge of the balance sheet of the partner with which they were about to merge.

The most reasonable political option is for the three other cajas to proceed with their merger, after revising their plans jointly with the Bank of Spain, and for the CAM to be taken over by the central bank with all of what this entails.

All of this, because there is no room for impunity in the management of a financial entity. If a financial institution's finances causes the failure of a merger, it is necessary know through intervention whose decisions brought about such a serious deterioration in a caja; and whether these decisions conform to the criteria of due prudency action; and what norms have to be imposed now to avoid the repetition of such collapses in the future.

The answers to these and other questions will reveal, more clearly than any academic theory, how the real estate bubble was financed, who made money out of it, and who is to blame for the lack of credit now being suffered by many inherently solvent companies.