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Banks in Europe are creatively sidestepping risks, with thanks due, primarily, to the European Central Bank, The Wall Street Journal reported. What did Sigmund Freud say? To paraphrase, he said the thing human beings were experts at, from a psychological point of view, was avoiding pain. Businesses often run with this in mind and when the creativity hits the fan, the pain is all the worse for having been avoided for too long.
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Postponing pain doesn't get much more obvious than having Spain's largest bank, Banco Santander SA, sell a $1 billion portion of its U.S. auto financing business to a contingent that includes private equity groups and the chief executive officer of Banco Santander's auto finance division.
That sounds pretty straightforward, until one reads the fine print, which says the buyers have a right to sell these assets back to the bank in four years, no questions asked.
That isn't a sale. That's a way for Banco Santander to trade a tax write-off for in return for not having to raise capital. Four years from now, this prolonged short-sell could backfire, of course. The bank, meanwhile, will still not have the extra capital cushion that regulators are asking for now.
All this is compliments of the European Central Bank which loaned more than $1 trillion in 3-year, 1 percent loans to commercial banks, following a risky formula for financial fix -- one that is specifically based on avoiding pain all along.
A business is in trouble paying back a loan, so a bank loans more money to the business, expecting to increase its chance of success. Perhaps it's a retailer in need of inventory. Banks expand on risk everyday, but when a financial crisis hits, those fault lines look very different. Banks taking on the risk with the retailer just mentioned can do so the bank knows other loans are helping to their wilder bets.
A risk in a recession is quite different from the same risk in good times.
Try this on for size: Bullfighting company Empresa Pages is struggling to pay off its loans. Its bank, Banca Civica, the Journal reports, agrees to sending money to bullfighting fans, so they can buy tickets, which are expensive, costing several hundred dollars apiece, the Journal says.
Given this is about bullfighting, the theme of putting off pain can only go so far. All that aside, who is to say the bank is not asking for more trouble by spreading the risk around. This is kind of like the splatter effect. There's one big, untenable glob representing the Empresa Pages loan, so the bank hits it with a hammer and the mess scatters in smaller globs from the business to bullfighting fans.
Meanwhile, unemployment in Spain is above 20 percent. When ticket buyers struggle to pay their loans, will the banks simply hit them with a hammer, too, and have the even smaller amounts be passed on to relatives. This is, essentially, a pyramid scheme in reverse. Should the patter continue, eventually a bailout is required.
Except, in this case, that's where it all began -- with loans from the European Central Bank with artificially suppressed interest rates presented as emergency loans.
In international markets Monday, the Nikkei 225 index in Japan rose 0.26 percent, while the Shanghai composite index in China gained 0.47 percent. The Hang Seng index in Hong Kong fell 0.16 percent, while the Sensex in India rose 0.42 percent.
The S&P/ASX 200 in Australia slipped 0.14 percent.
In midday trading in Europe, the FTSE 100 index in Britain rose 0.15 percent, while the DAX 30 in Germany was up less than 0.01 percent. The CAC 40 in France shed 0.29 percent, while the Stoxx Europe 600 added 0.03 percent.
