Project Midas: “Bad Bank” for “Bad Bank Debt”

I seriously do not understand this “Bad Bank” concept. The idea that you can take bad assets and shift them off to the side and it will make things better seems ludicrous.

If for some reason you disagree, please note that Spain now needs a “Bad Bank” for “Bad Bank Debt”.

They call this proposal “Midas N + 1”.

Via translation from El Economista, please consider Another bad bank? The government is considering transferring the debt of insolvent banking business to a fund

The Government is considering the possibility of creating a fund or financial vehicle to which banks could transfer the debt of insolvent companies in crisis. According to a banking source with knowledge of the negotiations, the Ministry of Finance instructed the investment bank N +1 to study the feasibility of this plan.

Concerned about the situation in which they find countless businesses in Spain burdened with high debt, there is a proposal to amend the law to try to save those companies and facilitate negotiations with creditors, mainly banks.

“We are working on legislation to adopt measures allowing companies with high debt and deleveraging but viable to continue operating,” recalled a spokesman for Economy in relation to a legislative initiative announced by the Minister of Economy, Luis de Guindos , without elaborating.

According to the confidential document called ‘Project Midas’ N +1, the operating mechanism allows changing banking debt to capital.

The project calls for businesses to reduce debt through the capitalization of unsustainable debt, so the creditor banks participate capital of the company, albeit indirectly.

Specifically, the plan to repay the debt is set in a period of 5-7 years.

Capitalized debt would be covered by the provisions that banks accumulated to meet the total debt of the company, while the rest would be classified as normal risk and, therefore, the current payment.

However, the paper notes that to launch this N +1 initiative, the government would have to make some legislative changes to “a number of elements of the Spanish regulatory and policy framework that could limit or discourage the creation of such vehicles.”

“Midas” An Appropriate Name

Midas is actually an appropriate name. The idea is to turn “sheet” into gold. Any investors in Midas will end up with “sheet”, but the banks (via capital injections by suckers buying into the proposal) will make out like Midas.

Hopefully investors in “bad banks” in Spain have learned their lesson.

Yet, I suspect not even though Midas is fresh on the heels of a December 2013 announcement Spain’s Bad Bank “FROB” Admits More Taxpayer Losses Likely

In that post, Guru Huky (whom I quoted) commented on the “FROB” (Spain’s bad bank).

The FROB croaked 26 billion euros in 2012 and 10 billion euros in 2011. Until recently they even sold us the idea that we were going to make money. Now the question we ask is whether we will recover anything,” said Huky.

Expect similar results from “Midas N + 1”.
PT Barnum would be proud.