The biggest problem facing investors today is that “the rules” of the game change almost every year.
What I mean is that any basic rule investors previously took for granted can and often is thrown out the window by the regulators when they deem it prescient. Indeed, in the last five years we’ve seen:
1) Accounting standards at financial institutions suspended.
2) Capital requirements for banks (Basel III) postponed multiple times.
3) Rampant fraud go unpunished.
4) Obvious insider trading amongst political officials and banking insiders.
5) Central bankers openly admit that they lie to investors.
Why are so many laws and rules being thrown out?
The Powers That Be are committed to propping the system up by any means possible.
Consider Spain.
Spain’s banking system, by any reasonable analysis, is totally bankrupt.
The reason for this is that Spanish banks are all packed to the brim with garbage assets (mortgage loans and Spanish Government bonds… both of which aren’t worth the paper they’re printed on).
Consider the story of Bankia.
Bankia was formed by merging seven bankrupt regional Spanish banks in 2010.
The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion in funding for the bank (all provided by taxpayers of course).
These preference shares were shares that A) yielded 7.75% and B) would get paid before ordinary investors if Bankia failed again. So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors (including said taxpayers).
Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything when the new bank was created.
Bankia was taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.
One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank (again) and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to).
When the bailout took place, Bankia shareholders were all but wiped out and forced to take huge losses as part of the deal. The vast majority of these were individual investors, NOT Wall Street or its European equivalent (Bankia currently faces a lawsuit for over 140,000 claims of mis-selling shares).
So that’s two wipeouts in as many years.
The bank was taken public a second time in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed.
Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).
Which brings us to today.
Bankia remains completely bankrupt. But its executives and the Spanish Government continue to claim that things are improving and that the bank is on the up and up. Indeed, just a few weeks ago, the Wall Street Journal wrote an article titled “Investors Show Interest in Bankia.”
The story featured a quote from Spain’s Finance Minister that, “… it is logical. The perception of Spain has improved and Banki has improved a lot.”
Bear in mind, this is a bank that has wiped out investors THREE times in the last THREE YEARS. So that’s three different rounds of individual investors being told that Bankia was a great investment and losing everything.
Every single one of these wipeouts was preceded by both bankers and Spanish Government officials claiming that “everything had been fixed” and that Bankia was a success story.
And now the Spanish Government is trying to convince them to line up for a fourth round.
This kind of fraud and lawlessness is unbelievable to me. But it is how the world works today. Those who have power will do anything they can to retain it. This includes, lying, cheating, and stealing.
And while certain items relating to this story are unique, the morals to Bankia’s tale can be broadly applied across the board to the economy/ financial today.
Those morals are:
1) Those in charge of regulating the system will lie, cheat and steal rather than be honest to those who they are meant to protect (individual investors and the public)
2) Any financial problem that surfaces will be dealt with via fraud or lies rather simply allowing those who screwed up to be fired or go to jail.
3) When the inevitable collapse finally does hit, it will be individual investors and the general public who get screwed (not bank executives or politicians).
If I were to be blunt, the investment world has gone insane. If one were rational, one would think that the entire Bankia episode would have resulted in investors fleeing Spain en masse.
It hasn’t. In fact, Spain’s bonds now have lower yields than Treasuries indicating that Spain is fiscally in a better position than the US and less likely to default (incredible given that Spain cannot print money to repay bondholders while the US can).
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Best Regards
Phoenix Capital Research
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