Episode 378: How Spain Created A Banking Monster

Jun 12, 2012
Originally published on June 13, 2012 11:08 am

On today's show, we take you backstage in Spain's banking mess, the latest front in the never ending financial crisis that is Europe.

It's the story of how a group of people tried to fix a problem, but wound up creating a banking monster.

Music: Maldita Nerea's "El Secreto De Las Tortugas." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Note: Part of this podcast originally aired last year.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.


Hello, and welcome to PLANET MONEY. I'm Chana Joffe-Walt.


I'm Zoe Chace. Today is Tuesday, June 12. Today on the show, we're going to take you back stage behind a major bank failure. This is the story of how a group of people tried to fix a problem, and in the process, they created a banking monster.

JOFFE-WALT: But first, we're going to do our PLANET MONEY Indicator with Jacob Goldstein. Hi, Jacob.

JACOB GOLDSTEIN, BYLINE: Hi. Today's PLANET MONEY indicator - 6.8. If the government of Spain wanted to go out and borrow money for 10 years today, it would have to pay 6.8 percent a year in interest. This is monstrously high. This is disastrously high. In fact, this is the highest the interest rate on 10-year Spanish bonds has been since Spain joined the euro.

JOFFE-WALT: And particularly notable because Spain just got a huge bailout.

GOLDSTEIN: Right. The bailout was actually supposed to do the exact opposite, right? All along in the European debt crisis, the sort of key measure to keep an eye on is, what are interest rates for governments to borrow? And when investors get nervous, those interest rates go up, right? So after this huge bailout that happened over the weekend - Zoe, that you talked about on the indicator on Friday - if the bailout is sort of working, if it's convincing people around the world that, OK, Spain is going to be OK, you would expect these interest rates to be going down. Instead, they're going way up.

CHACE: And I talked about this bailout that Spain just got on Friday in the Indicator on the show. And there was this massive bailout. It's 100 billion euros, $125 billion. That should be enough to stabilize things. But one person's bailout is another person's mountain of debt. And Spain already has a lot of debt.

GOLDSTEIN: And so just to be clear, we call these things bailouts, but they're actually loans, right? So what happened in this case over the weekend - the eurozone countries, they all got together and said, OK, Spain, we're going to loan you a 100 billion euros, and you're going to use that money to make sure your banks are OK, right? But, you know, this isn't a bailout like, here's a bunch of money. It's a bailout like, here's a big loan. Oh, and by the way, Spain's already got a ton of debt.

CHACE: Exactly. You had a bunch of loans before. Here's some more loans. And I think that part of the reason that Spain is having trouble borrowing money right now is that it's sort of unclear, with all of these loans that are multiplying, who's going to get paid back first. You might not want to lend Spain money if you don't know at what point you're going to be paid back. And that's something that they didn't really clarify when they did the bailout over the weekend.

GOLDSTEIN: And in particular, right now, today - the last couple of days - what people are speculating is that this bailout money from the other European countries, that's the money that's going to get paid back first, right? So if Spain already owes you money, all of a sudden, now you've got to wait in line behind this new hundred billion dollars that Spain's got to pay back. So, of course, that's going to make you reluctant to lend Spain more money.

JOFFE-WALT: Or to ask for 6.8 percent.

GOLDSTEIN: Exactly. I mean, what investors do when they get nervous about lending money - they demand higher interest rates. And that's exactly what we're seeing now with these Spanish bonds.

CHACE: You'd think the eurozone would be good at doing bailouts by now. They're still working out the kinks.

JOFFE-WALT: OK. Thank you, Jacob.

GOLDSTEIN: Thanks, guys.

CHACE: Onto the show, and we're going to stay in Spain. And we're going to stay with Spain's troubled banking system. And we're going to revisit some of the reporting that Chana's already done. There are some shows in our archive that are all about the peculiarities of the Spanish banking system. And so today, on the show, we're actually going to be able to bring you some answers about what has gone wrong with Spain.

JOFFE-WALT: Right. So a year and a half ago, I went to Spain. And they were working on this very problem. They were trying to fix the problems in the Spanish banking system. And they had some interesting ideas about how to do it. And they had a particular man who was sort of supposed to be the savior of the Spanish banking system. You may remember him.

ANGEL BERGES: Angel, Angel. I don't know how to pronounce it in English. We say here, Angel. It's Angel, I mean, like "Charlie's Angels."

JOFFE-WALT: So Angel was working day and night on this plan to save the Spanish banks. And today we're going to do something we like doing, which is to revisit that show which raised a question, is this plan going to work? Today we're going to find out what happened.

CHACE: It did not work (laughter), yeah.

JOFFE-WALT: OK. Thank you for listening. That's all. No, so what happened behind the scenes is really weird. So what happened in Angel's office was that this group of men sort of inadvertently, while trying to save the Spanish banks, created this monster bank that, at the moment, seems to have triggered this newest latest crisis in the European economy.

CHACE: And I've been doing some reading about Spain, trying to figure out exactly what is going wrong there. And Spain's situation is uniquely Spanish. No bailout is exactly like another. And Spain, unlike Greece, did not borrow way too much money and then spend it all really badly. The problem in Spain comes down to their banks - these bizarre banks that they have. So let's go to Cordoba.

JOFFE-WALT: Cordoba is a small, old city. It's got beautiful narrow cobblestone streets and really gorgeous old buildings. And it also has a lot of banks and, actually, lots of one particular bank, CajaSur. CajaSur ATMs seem to be like the Starbucks of Cordoba.

Do you have a bank account CajaSur?

UNIDENTIFIED WOMAN #1: Si, si. Una pension que tengo.

UNIDENTIFIED MAN #1: Si, Cajasur comenzo...

UNIDENTIFIED MAN #2: Mi famalia si.

UNIDENTIFIED WOMAN #1: Tambien mi padre.

JOFFE-WALT: You can spend hours asking people in Cordoba, do you have an account with CajaSur? And the answer will always be, yes, unless you are asking a nun, in which case she you will tell you her order has their finances with CajaSur.

So there are a couple dozen savings banks like CajaSur across Spain. And they're this uniquely Spanish type of bank. They're called cajas de oros (ph) and in English, literally, translated into boxes of savings, savings boxes. They're small, very local, very trusted savings banks that are based on a bizarre 15th-century banking model that, for the hundreds of years that they've been in existence, seemed like the last thing that would cause a crisis.

LUIS GARICANO: The cajas have been safe and boring. That has been the tradition until a few years back.

JOFFE-WALT: This is Luis Garicano, economist who teaches at the London School of Economics. And he had actually been teaching all day. When I talked to him, he was losing his voice, kept having to stop our conversation to sip his tea while we talked about what cajas are and then, later, about what went wrong. So first, what is a caja?

GARICANO: It's not a corporative bank. It's not a bank. It's a foundation with a nonprofit purpose, a nonprofit organization. And what it does is it lends and borrows and accepts deposits. And it's usually pretty local, or it was historically very local. It was based on local markets in the city, and it would do good works in that city.

JOFFE-WALT: Even though their ultra local, cajas, nationally, are a big deal in Spain. More than 50 percent of Spanish bank deposits are in cajas. So this is basically the way a lot of people in Spain bank.

CAITLIN KENNEY, BYLINE: But, Chana, I'm kind of confused. We're calling them banks, but he just said they're not for profit.

JOFFE-WALT: Right. So they're a really weird kind of bank. The money that they make they give back to the community. So they'll build community centers, or they'll give grants. And then there's another big difference from banks, which is that they're not run by bankers. They have a board of directors. And the board of directors is made up of important people in town - not bankers, but politicians or local leaders.

GARICANO: The people who run these institutions don't need to be very smart. They just need to know their market. It's very much about you are the branch manager, and you work in a very 9-to-5 organization where everything is kind of slow. And you know exactly what the restaurant owner - how he's doing, how many clients he has. And you know the doctor. And you know the family next door. You give mortgages, give little loans to the cafeteria or to the restaurant and take deposits.

JOFFE-WALT: This is the way cajas have always operated all the way back to when they were founded. And generally, the way a caja got opened was that a local wealthy family or a local business would start one. There would be a board, and the family or business would take seats on the board. And today, they'll still have some seats in a caja alongside a bunch of local politicians.

And the way this works, as Luis says, in many cases, you know, they'll be someone who works in a local construction company or at the local flower shop. And they'll get elected to the town council. And then they'll get a seat on the board of the local caja. That's very common. Also...

GARICANO: There is a caja in the south of Spain that was run by the Catholic Church. So all the people in the board - the managers, et cetera - were priests.

JOFFE-WALT: That caja in the south of Spain - it's CajaSur, the Starbucks of Cordoba, the one that everyone in Cordoba has an account with.

Did you know that CajaSur was run by priests?

UNIDENTIFIED WOMAN #3: (Speaking Spanish).

JOFFE-WALT: So, Caitlin, I went to CajaSur because CajaSur had become sort of the poster child of what went wrong with the caja system. Just like dozens of cajas in Spain, CajaSur worked incredibly well for 150 plus years and then suddenly didn't. It fell apart. And also, a bank run by priests just seemed a little weird.

UNIDENTIFIED MAN #3: No, normal, normal. (Speaking Spanish).

JOFFE-WALT: Just as everyone I talked to had their deposits in CajaSur, no one I talked to thought it was weird that the priests ran a bank. At one point, I realized, actually, that I was asking people - didn't you think it was weird? - in this random plaza. And I realized that we are surrounded on four sides, as I'm asking that question, by churches.

Are we in the middle of four churches here? There's this one...

UNIDENTIFIED MAN #4: That one there.

JOFFE-WALT: Most everyone in Cordoba is Catholic. The church is involved in every other part of people's lives. So it's not that surprising that they happen to run the bank, too. Why not the bank?

KENNEY: Why not the bank? Didn't you just tell me they ran the bank into the ground?

JOFFE-WALT: Well, only after more than 100 years of running it perfectly well. So the trouble with CajaSur and with a lot of the cajas in Spain started 10 years ago. So far away from Cordoba and the priests, something happened that ultimately transformed the Spanish cajas - Spain joined the euro. And those investors who are now scared of what may happen to Spain, 10 years ago, they felt exactly the opposite.

Luis Garicano, the Spanish economist with the tea, says, 10 years ago, investors were excited for the many great things that may happen to Spain. They were eager to lend money to Spain and at very low rates.

GARICANO: Spain, at some point during the euro run, had lower borrowing rates than Germany.

JOFFE-WALT: So the investors of the world thought that Spain was a better bet than Germany?

GARICANO: At several points in the euro run, incredibly enough, yes.

JOFFE-WALT: None of the priests from CajaSur would talk to me, Caitlin. I called. I showed up. I wrote letters. But I did talk to a close ally of the CajaSur president and several people who worked closely with the board. And they all said this was a really exciting time for CajaSur - when Spain joined the eurozone.

And the priests, at this time, would call board meetings where everyone would exclaim about how fast the country was growing and how there was money to be made. And they started to wonder aloud, wouldn't it be nice to maybe expand outside of Cordoba? We could make some of that money, and we could put it back into our community.

And all around the priests, you know, people seemed to be making a lot of money in real estate. So they started to talk about building their own housing developments and then placing a CajaSur branch right in the middle of the new development so all the people could come and get their mortgage loans right there.

And over the next 10 years, that is what they did. CajaSur built developments along the coast - really far away from Cordoba - and more development outside of Madrid, which is 250 miles away. They opened a travel agency. They invested in three construction companies. And the loans grew and grew and grew in size.

GARICANO: The way they expanded was by getting into giving loans for mortgages and for real estate promotions. And what you're using to give those loans is you're borrowing it from international banks or international markets in many cases.

JOFFE-WALT: Oh, so they stopped...

GARICANO: The expansion...

JOFFE-WALT: So they stopped using regular people's deposits in the banks to make their loans, and they started borrowing from international markets?

GARICANO: Exactly. They...

JOFFE-WALT: Like from who? Who were they borrowing from?

GARICANO: I would think you should picture a large German bank or a large insurance company. The Germans - definitely, the Germans are the largest creditors of the Spanish financial system.

JUAN OJEDA: (Through interpreter) Yes, largely German and British investment funds, pension funds, but also some American ones.

JOFFE-WALT: This is Juan Ojeda in Cordoba. He worked with the CajaSur board for many years.

OJEDA: (Through interpreter) But suddenly, from a traditional business of relying on small investors saving their small investments in the banks, we changed to suddenly working with companies that were making vast and spectacular amounts of money very quickly. And that was a jarring sensation.

JOFFE-WALT: Cajas were set up to be small and local, to take deposits and make small loans. But now there was a new kind of money available. One caja opened an airport in La Mancha.

KENNEY: Don Quixote land,

JOFFE-WALT: Right. Apparently, it is still just as remote and empty as when Don Quixote was there. Only now, there is an airport in the middle of all those fields sitting, you know, 120 miles from Madrid. Another caja opened a theme park. But mostly cajas got deep, deep into lending for housing developments and resorts and commercial buildings. Here's Luis Garicano again, the tea man.

GARICANO: If you're doing something very small, you cannot make much damage. But once you are using such a governance structure to give loans in the hundreds of millions of euros or in the billions, in some cases, to real estate developments, for example, then, suddenly, you have an institution that doesn't fit at all this problem. And what you have is loans that are crazy. You have a village in the outskirts of Madrid with 16,000 - 60,000 units sold where nobody is going to live.

JOFFE-WALT: Those crazy loans were just sitting on the cajas' books, losing money. So the government of Spain developed a plan to fix this problem. And that is where we get to our Spanish banking savior.

BERGES: Angel, Angel. I mean, like, "Charlie's Angel."

JOFFE-WALT: Angel, Angel Berges. And Angel is a small energetic banking consultant who actually prefers to communicate while scribbling numbers and graphs on a piece of paper. Like, he was writing Angel in really big letters as we were talking. And about six months ago, Angel got a call requesting that he please assist in saving the Spanish banking system, more specifically, saving the Spanish cajas. And at this moment, the Spanish government thinks it has a pretty clever idea. There are some healthier cajas, and there are some sicker ones. So take the sick cajas and combine them with the healthy ones. You average everything out. You have a less sick banking system

GOLDSTEIN: And the Spanish government decided, we don't want to intervene. We don't want to tell each caja who they should merge with, who they shouldn't merge with. So they just said to the entire world of cajas, OK, guys, there needs to be way fewer of you. There are too many of you. So you guys got to merge. So now, cajas, go figure it out.

JOFFE-WALT: Enter Angel and his paper and pen.

BERGES: OK. One year ago, there were 46 saving banks in Spain, 46. From 46 to 12, you need to find combinations of these. So some of them...

JOFFE-WALT: So who's going to get partnered with who?

BERGES: Yes, that's it.

JOFFE-WALT: Angel works for a consulting company called Afi, and he had worked with a lot of the cajas before. So they hired him to facilitate this merger process. And you can imagine, you're one of these local cajas - you're a politician or a local leader or maybe you are a priest - and you and your family or your church, your colleagues have been running that caja in your town for more than a century. And now you're supposed to go out there and find new partners? So the calls started coming in to Angel from caja presidents across Spain, at first, a little hesitant.

BERGES: This cajas is - looks nice to me. I mean, do you know them? Can you help me to get in contact with them? And I organize a meeting or whatever, and we will talk. First of all, we will talk without any type of commitment or anything like that. Lets know each other to see whether there is - we call here in Spain, whether there is a chemistry, chemistry between them. And if there were some good looks between the two of them, we will move along. I mean, let's work together in what would be a nice arrangement of what would be...

JOFFE-WALT: So you're like the man arranging marriages between cajas?

BERGES: Something like that. Yes, something like that, something like that. So it was funny. It was funny, the process.

JOFFE-WALT: It was funny for a month, maybe two. There were good looks. There was chemistry. There were dreams. Angel would arrange more meetings. And it would all be going well until, inevitably, someone at the table would ask the question.

BERGES: Who's going to lead? Who's going to lead?

JOFFE-WALT: Who's going to be in charge?

BERGES: Yes, who's going to be in charge? That was the main aspect for breaking up.

JOFFE-WALT: So Angel got out his pen and paper and sat down with tons of data about what each caja was bringing to the table. And remember, these are not public companies. So there's not a lot of information out there about their value. He had to value them. And he'd look at the market share of each caja - their assets, the potential for growth. And he'd assign power. Caja A gets 20 percent, caja B, 40 percent, caja C, 40 percent.

BERGES: I have to tell you that during the process, there was a lot of pressure from any of them. They were calling us. This guy was calling us, hey, guy, you are valuing me wrongly. I am worth more than 20 percent. This guy - I am valued more than 40. This guy - I am valued more than 40.

JOFFE-WALT: Angel had to push aside the lobbying calls and just come to his own numbers. And when that was done, it seemed like the hardest part was behind him, right? He's figured out how the power is distributed. And all the cajas know who's in charge. And all they had to do was work out the details of their new union.

CHACE: So this is where you left us Chana. Angel had come out with his plans for the cajas to merge. The good would merge with the bad and take over the losses. And he seems like a smart guy. And this seems like a plan that can work. It did seem like that. But then, just a few weeks ago, this happened.


UNIDENTIFIED REPORTER #1: Shares in troubled Spanish lender, Bankia, are trading down, oh, just 23 percent.

UNIDENTIFIED REPORTER #2: This meeting to finalize the amount of money that Bankia is going to seek from the Spanish government.

UNIDENTIFIED REPORTER #3: The problem is Bankia is not alone. They have also...

UNIDENTIFIED REPORTER #4: Now it's Bankia. Who will it be next?

JOFFE-WALT: Zoe, Bankia - that is the largest caja in Spain. And just a few weeks ago, it failed. Now, Bankia didn't exist before Angel started doing these mergers. Bankia is a merger of seven different cajas. So a couple of days ago, I called back Angel Berges and asked him what happened. And he says, I had great marriages for these cajas. I had come up with great matches, but these cajas did not want to take my advice.

BERGES: And many of them unwilling to merge with each other.

JOFFE-WALT: Angel told me that a lot of the heads of the cajas - the priests and the businessmen and the politicians - were often just looking out for themselves. And he didn't have the power to tell them they had to merge with each other. He would just make recommendations. And he says, essentially, what went wrong with Bankia was that these were a bunch of cajas just looking out for themselves.

So here's what he says happened. He says he was working with Spain's second largest caja, Caja Madrid. And Caja Madrid was in OK shape. Angel went out and found Caja Madrid some great partners - five small banks that needed help. And he told Caja Madrid, all of you together, you with these five small banks, you have a great future. But all Caja Madrid seemed to care about was size. Angel says the leaders kept asking him, is this merger going to make us the biggest caja? No, he would say, you'll be the second biggest, same as you are now.

BERGES: So don't try to be a winner against the other. Everybody has to win.

JOFFE-WALT: Remember, Angel would tell them, this is about the banking system as a whole, not just you and your caja and your region. And he says, for a while, it seemed like it was all going to work. Caja Madrid went ahead and merged with the five small savings banks just as Angel had recommended. But then they added another bank to the mix and not just any bank - they added the third largest caja in Spain, a bank that was doing terribly, had terrible real estate loans. But it would make them, altogether as seven, the largest caja in Spain. And that enormous caja would be called Bankia.

CHACE: So they just wanted to be the biggest bank? Is that, like, every bank's dream - to be the biggest?

JOFFE-WALT: Angel says they were obsessed about size. They were obsessed with becoming the largest caja and beating the number one caja, becoming the biggest and most powerful. I tried to reach people at Bankia. I mean, all the people who were apart of these negotiations with Angel aren't there anymore. And nobody called me back who's currently in the leadership of Bankia. And Angel says he made it really clear. He was not supportive of this particular marriage.

BERGES: I wasn't asked whether I was in favor or not.

JOFFE-WALT: Angel says if he had, he would have told them, he would have screamed, don't do it, terrible match.

BERGES: Now, a failure of that bank is not a failure of a normal bank. It's a failure of the biggest bank. That's not good. Then you may end up putting the whole system at risk.

CHACE: Oh, I've heard of this thing of putting the whole system at risk. Over here, we call it too big to fail. And that is exactly what has proven to be the case. So the Spanish government has had to rescue Bankia and that made people nervous about all the other Spanish banks, right? But Spain can't rescue all their banks. They don't have the money. So they've had to ask for help. And we talked about that beginning of the show. Over the weekend, the European Union stepped in and did help. They have lent the Spanish banks $125 billion dollars. And this was supposed to calm things down. But things are not calm. And the Spanish government may be the ones next in line for the next bailout.

JOFFE-WALT: Yeah. Angel now says, like, looking back, they made a mistake. They never should have been so obsessed about mergers and marrying the good with the bad. He feels like they should have just taken the bad banks and let them fail. Like, that would have been painful. It probably would have been painful for a while. But he thinks, looking back, they may have been able to get through that without it bringing down the whole banking system. Of course, it was hard to know that back then because they didn't know the problems in Europe were going to go on for so long. But he says, looking back, it was probably a mistake.



CHACE: We'd love to hear what you think of the show. Please email us, planetmoney@npr.org. Find us on Facebook or Twitter. Download our Planet Money app. I'm Zoe Chace.

JOFFE-WALT: I'm Chana Joffe-Walt. Thanks for listening.

(SOUNDBITE OF SPANISH MUSIC) Transcript provided by NPR, Copyright NPR.