Hypo Real Estate's Plight Reveals Huge Problems in Spain

Every country has a problem child or two in the financial services sector. America has Citigroup (C) and Bank of America (BAC). Britain has RBS and HBOS/Lloyds (LYG). And Germany has Hypo Real Estate.

I have been chronicling problems at the real estate lender on my blog for some time now and last posted on HRE in April (“HRE: defusing the German financial time bomb”). Back then, the German government was looking to step in and effectively nationalize the company. Subsequently, on June 23rd, Hypo Real Estate warned of heavy future losses. Having already received €100 billion in support from the government, you could be forgiven for thinking HRE is a bottomless pit.

Now that the company is a ward of the state, taxpayers are on the hook for another 10 billion. But, Hypo Real Estate’s plight reveals stresses in Spain as well. Ambrose Evans-Pritchard reports.

"The bank clearly has a solvency problem," said Michael Endres, head of the board in an interview with Welt am Sonntag. "It wouldn’t surprise me if a capital injection of €10bn proved insufficient."

Meanwhile, the extent of credit damage in Spain is becoming clearer after America’s GMAC revealed that it had been selling Spanish mortgage assets at 14.5 cents on the dollar as it withdraws from global ventures to focus on the US home market.

Until now, it has been hard to measure the extent of the "haircuts" being suffered on Spanish mortgage securities since there is no obvious gauge such as the ABX Index used to track sales prices on US subprime and Alt-A debt.

The GMAC sales suggest that Spain’s property crash will inflict large losses on foreign creditors, mostly from Germany and France. The Spanish government has long insisted that higher credit standards in Spain have spared the country the sort of debacle seen in the US.

Hypo Real’s Mr. Endres said earlier management had expanded at breakneck speed in foreign markets that they never understood, wading cluelessly into US housing through its Dublin operations. "The property market is like farming: you don’t buy a field until you have walked around it a few times," he said.

First of all, I would love to know what GMAC is doing in the Spanish mortgage market. Considering GMAC just got a second bailout in May, American taxpayers have the right to know what GMAC is doing and where.

The revelation of GMAC’s involvement also makes clear how intertwined the global financial system is – an American auto lender gets a bailout and then dumps Spanish mortgage assets for a ridiculously low price. These losses make clear that a reckless German real estate company speculated away billions in the same foreign market, turning it into a government-owned company and requiring yet more money from German taxpayers.

But, I should also add that 14.5 cents on the dollar is extremely low given the fact that Spanish house prices have only fallen 13% to date (see my post “House price declines accelerate in Spain”). What does that tell you about likely losses in the Spanish banking system going forward?

Comments

[Roger Knights:]

Many more bottles of beer on the wall.

Jul 20 07:22 AM

[ain't no fo...:]

"What does that tell you about likely losses in the Spanish banking system going forward?"

It, and much additional news out of the Eurozone, tells me that much of Europe, especially Italy, Spain and eastern Europe are sucking chest wounds that will bring many financial institutions to their knees.

Here's a good analysis of where Europe is at from John Mauldin:

www.safehaven.com/arti...

Jul 20 11:46 AM

[Tack:]

>>But, I should also add that 14.5 cents on the dollar is extremely low given the fact that Spanish house prices have only fallen 13% to date (see my post “House price declines accelerate in Spain”). What does that tell you about likely losses in the Spanish banking system going forward?<<

What all the above tells you is how ruinous it is to be forced to sell debt assets into an absurdly-priced market. Real housing prices down 13%, but the paper priced at 14 cents on the dollar? That only sounds reasonable in the fantasyland that is mark-to-market accounting and the accompanying panic that it has created.

What the facts suggest is that prices of debt paper are completely out of sync with underlying reality and that continued holders of such debt will suffer no catastrophic losses at all, when reality reasserts itself. They need only hold and collect the interest payments. It's only the chumps that dump at 14 cents that get hosed, as, perhaps, they should.

Any investors that have liquidity to buy such assets will make a huge killing. That's why new investment funds are being created nearly daily to venture forth and buy up these assets at once-in-a-lifetime prices.

Jul 20 02:14 PM

[Swashbuckler:]

ain't no fortunate son---I read the Mauldin piece this past weekend and it is good. But the link that cracked me up was the Youtube one you posted yesterday from Tyler Durden on the South Park bank. I played that thing eight times. Hilarious.


On Jul 20 11:46 AM ain't no fortunate son wrote:

> "What does that tell you about likely losses in the Spanish banking
> system going forward?"
>
> It, and much additional news out of the Eurozone, tells me that much
> of Europe, especially Italy, Spain and eastern Europe are sucking
> chest wounds that will bring many financial institutions to their
> knees.
>
> Here's a good analysis of where Europe is at from John Mauldin:<br/>
>
> www.safehaven.com/arti...

Jul 20 02:58 PM