Check the accent of tomorrow’s finance here. It’s the video message from Banco Santander‘s chairman Emilio Botín, broadcast at the Euromoney Awards, in which he praises his bank’s way of going “unaffected by toxic instruments”. A quote (but better listen):

“If you don’t fully understand an instrument, don’t buy it. If you would not buy a specific product for yourself, don’t try to sell it. If you do not know your customers very well, don’t lend them any money. If you do these three things, you will be a better banker, my son.” (transcribed in “Santander chief offers lessons in banking”, Financial Times, July 14 2008)

Fair enough: this program looks pretty much like removing finance.

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  1. It is a surprising advice. But, two weeks ago, in conversations with Spanish venture capitalists over tapas in Madrid, I heard a fascinating story that might help explain all this.

    Spanish banks have done remarkably well in the subprime context — and not just the Santander. Apparently, much of the credit is owed to the Banco de Espana, which pressured the big Spanish banks to not issue CDOs with mortgages originated in other institutions.

  2. panik

    I am not claiming any expertise in the Spanish real estate market, but from anecdotal accounts of friends and stories of expat Brits who have become trapped in properties they bought to develop for the holiday-home market and which quickly became worth less (even post re-development) than they had paid to buy them, it appears to me that the property downturn in Spain came much earlier than the US and UK and many other major property markets. That probably means that there was much less insentive for the Spanish banks to get into the game of securitisation of mortgages and their trading as the assets would have already been pretty unattractive and unmarketable right at a time when all this securitisation and trading was really taking off in other economies. In a rising market, even uncreditworthy borrowers appear less of a bad bet if the underlying assets that (apparently) underpin their borrowing (and can theoretically be realised) are rising in value. I am hazarding the guess that assets from a falling market, like the Spanish property market has been for some years, were just not really wanted internationally, even if linked to more creditworthy borrowers. They didn’t really have such a potential for toxicity because they were already flagged-up as undesirable and hence the Spanish banks had less to come to the party with.

  3. daniel, panik,

    A cogent contextual bit about the meltdown in Spain found here:

    http://www.rgemonitor.com/euro-monitor/253042/what_is_the_risk_of_a_serious_melt-down_in_the_spanish_economy

    That post links to an interesting piece of analysis from BNP Paribas.

  4. panik

    Very informative article.

    It appears to me that there are two sides to this issue.

    One is to do with the domestic exposure to the real estate market of the banks and the other with the involverment of those banks in the international markets for such debt.

    If I am reading this correctly, the Spanish banks have got a pretty massive exposure to their domestic (falling) property market, but little exposure to the property markets of other economies (e.g. US) due to the kind of claims made in the original posting that they didn’t understand these instruments and hence did not buy them. Might sound like a negative kind of prudence, but of course one could also read this non-participation (if it is true) as the reason Spanish banks have apparently not sold-on their own low quality assets with which they are now saddled.

    I have a hunch that many banks got involve in the international dealing in these instruments in the first place by trying to sell-on their own stuff as much as wanting to buy that of others as a kid of no-lose investment gambit. Of course once they are in the game and it is not likely they will then get out of it.




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