When bureaucrats wipe out your investment

At the time of the banking crisis in Cyprus, a few years ago, I had a lot to say about the new ‘bail-in’ rules that would force investors and depositors, rather than government, to ‘rescue’ a failing bank.  Effectively, the former could be forced to hand over some, or even all, of their money to rescue the bank, even if the bank (or the government) was responsible for the conditions that caused its failure.  Other nations eagerly seized on the idea (after all, what government wants to have to find a few billion in spare cash, without warning?)  North America is not exempt, with both the USA and Canada adopting similar policies.

The reality of such policies has now been seen in Spain.

European authorities stepped in to avert a collapse of Spain’s Banco Popular following a run on the bank, orchestrating a last-minute rescue on Wednesday by Santander, the country’s biggest lender.

Owners of Popular bonds faces losses of some 2 billion euros, while Santander will ask its shareholders for around 7 billion euros ($7.9 billion) of capital to absorb Spain’s sixth biggest bank.

. . .

Santander’s takeover of the bank, which has been weighed down by risky property loans, for a nominal one euro marks the first use of a stricter European Union regime to deal with failing banks adopted after the financial crisis.

The sale was organized in less than 24 hours, and followed a recent acceleration in the withdrawal of deposits, which two people with knowledge of the matter said had in recent weeks hit 18 billion euros, equivalent to almost one quarter of the total.

. . .

“This deal is good for Spain and it’s good for Europe,” Santander chairman Ana Botin said of the agreement, which breaks the mold of using taxpayers’ money, instead imposing losses on shareholders and creditors of the bank.

This resolution worked in Santander’s favor, and was described by two debt investors as unexpected, with the owners of so-called AT1 and AT2 bonds suffering roughly 2 billion euros ($2.2 billion) of losses and shareholders losing everything.

There’s more at the link.  Bold, underlined text is my emphasis.

There’s no word yet on when (or even whether) depositors at Banco Popular will be allowed to withdraw their funds.  The takeover was orchestrated within 24 hours, for a token amount of one Euro.  Both banks were part of the seven largest Spanish financial institutions.  To put the transaction in US terms by the size of the financial institutions, it’s as if Morgan Stanley had been taken over by JPMorgan Chase for one dollar.

It’s worth noting that the takeover didn’t require all the new powers vested in European banking authorities.

The forced sale is the first major action by the Brussels-based Single Resolution Board, set up in January 2015 to deal with euro-area bank failures and wind them down with minimal impact on taxpayers and financial stability. Popular’s situation had become more urgent in recent weeks. Chairman Emilio Saracho struggled to find a buyer, plans for a possible share sale were complicated by a stock slump and the bank’s liquidity situation worsened.

. . .

In the case of Popular, the SRB used only a few of its resolution powers, including the sale of a failed lender to a sound firm for a token price, the wipeout of shares and additional Tier 1 debt and the conversion of Tier 2 bonds into shares. It didn’t have to resort to more drastic measures foreseen in EU law, such as taking over the institution or imposing losses on senior creditors.

Again, more at the link.  The SRB could have required depositors at Banco Popular to forfeit part or all of their funds (which would have been unilaterally ‘converted into bonds’ to fund the rescue, with no guarantee that the bonds would ever be worth anything or be capable of redemption).  At least the depositors dodged that bullet . . . but investors are out several billion dollars, in terms of bonds and shares that have been declared worthless by bureaucratic fiat.

It’ll be a worthwhile exercise to study how this plays out in the longer term.  Essentially, it demonstrates that in Europe, bureaucrats can now dispose of financial institutions as they see fit, and investors and depositors have no say in the matter.  The same principles are operating in the USA as well – as seen in the ‘bail-out’ of General Motors, where pensioners and bondholders in some companies were stripped of their assets to ensure union cooperation.  (This is why I swore at the time never to buy another new GM vehicle, ever, unless those wrongs were righted.  I was sickened by the hypocrisy of the bail-out.  I’ve kept that vow ever since, and I know many others who’ve done the same.)

The moral of the story is, the market is no longer in full control of our financial system.  In the last resort, it’s unelected bureaucrats who will make decisions that affect all of us – and our interests and needs are not their top priority.  They’re going to look after ‘the system’, because that’s what appointed them and pays their salaries.  Sucks to be us, I guess.



  1. The counterargument–and it's not a very strong one–is that if the bank had been allowed to fail (as it should have been), the investors and bondholders would have been wiped out anyway (in that order, at least under US bankruptcy law), so the net effect is about the same.

    Now, that assumes the bank is completely underwater; if it had any assets after paying depositors, those could have gone to bondholders in pro rata share, and if anything after to that, to shareholders similarly. We don't know, and without the formalities of bankruptcy court, never will. I'm not arguing that this was a good solution, just that it seems to place the loss where it would have occurred anyway. Better that than the taxpayers–better the voluntary investors than making the whole populace "investors-by-force."

  2. It appears to NOT have included the worst of the bail-in features, taking the depositors money (a "haircut") to pay off the bank's obligations. So far.

    The horrible Dodd-Frank law guarantees such things are coming here, exactly as you imply, by formalizing that some banks are too big to fail. These TBTF banks have essentially been given taxpayer protection for however stupid they can become.

    Privatize the profit, socialize the losses – the worst possible model to run anything. From the standpoint of the one who pays for the losses and doesn't get the profits.

  3. I agree with Dave that it LOOKS like it wasn't as bad as it could have been; while the article doesn't go into it, the holders of those specialized bonds were likely BIG investors or other financial firms, and bonds and stockholders are the last in line for assets if there had a bankruptcy.
    We really need more details to know how good or bad the situation really is.
    It appears to me to be unlike what happened in Cyprus where 'ordinary' people's accounts were frozen and accounts over 100,000 Euros were trimmed. People with that much cash in their accounts are not 'ordinary', though I agree it is a concerning precedent. To me, the freeze on accounts was the worst part.

  4. If the bankers involved went to jail for a million years, I could still put my money in a bank but that's not how it works. We lose all our money, bankers pocket a $7million bonus and go on to 'lead' other banks through insolvency. I don't think I'm alone. I want all of them dead.

  5. This simply proves something I have been saying since I was 13; we need a hunting season on Bureaucrats. Say; one month, no bag limit, moderately expensive permit (monies going to pay down the National Debt). Let the little weasels shoot back if they can get permits as private citizens … which should damp their enthusiasm for gun control.

  6. Nope. Credit unions make similar bad loans on a smaller scale.

    Either invest your savings in rental property, or stocks with a good P/E ratio ( not available now, wait until the US stock market corrects ), or buy physical precious metal, and store it privately.

  7. Somewhat … I use USAA but have never gotten a loan through them because their terms were not as good, so (as a example) they might be safer, but things could still happen, especially if a property bubble bursts.
    I have heard of tools that let you look a bank's exposure to various issues, but I don't know if the information is publicly available or not.
    It depends on the individual institution how good/ bad they are.
    One little known investment that I like is certain Church Investment Funds; all of them have a good history but only some have good returns, and you have to be involved in that denomination to invest in their fund.

  8. Jonathan H:

    Since most major churches and/or their groups are mostly SJW converged, I would advise close inspection of any investments controlled by them. Logic and rational thinking in areas connected with money and businesses are severely impacted when they attain control. They can be counted on to make poor decisions, since profit is not even on their list of objectives. They drive out good people, so a recent history of personnel changes is a red flag.

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