Tim Bourgaize Murray: In Search of Spanish Treasure

The concept of a zero-sum game has always fascinated me. Outside of certain theoretical conditions like Pareto optimality, a genuine zero-sum—where one actor’s gain is concomitant and exactly equal to another’s loss—rarely exists in real life. But something close to it does exist. Take, for example, an office bracket for the ongoing World Cup, such as the one Waters’ publishing house is running, where choosing both the right outcome and hitting the score precisely gains you points. A very thin line—and no small amount of chance—separates one point from three points, and from none at all, and choosing against the grain can mean a windfall or a disaster, because good or bad, just about everyone else has gone the other direction.

Into the Ether
Of course, this kind of thinking dominates finance, too. Some market bets are discrete and contingent, their justification floating off into the ether after a particular event is over—often with clear winners and losers. However, political and social considerations now play a greater part in the contour of many of those events, and therefore the consequences today are just as important as the event or the crisis, itself—not least because it presents unexpected opportunities, and extends the timeline of whatever’s happened, drawing things out. Strangely enough, the aftermath—not the macroeconomic event—is where the action is.

So does it remain the case with Spain’s beleaguered housing and lending sectors, where national and European authorities intervened when construction ground to a halt and the bubble spectacularly burst after the global financial crisis, finally bottoming out in 2012? That maelstrom threatened to shutter a number of local banks, and render significant foreign investment virtually valueless, but only a few years on, private equity and distressed-debt specialists are now playing in Spain with the verve of an emerging market—almost to the point that observers are starting to wonder if it is (again) becoming overheated. One man’s trash really is another’s treasure—if you know what to do with it, and perhaps more fundamentally, where to find it.

‘Bad’ Experience
One might call this trend dangerous; others might say it’s miraculous. But in reality, it’s a result of experience. Global finance in 2014 is almost as good at post-crisis restructuring as it is at creating cyclical crises to begin with, and operational and technological ramifications play no smart part in hastening the restructuring process. Spain is a perfect example. Bad Spanish real estate loans aren’t exactly liquid; likewise, even though enthusiasm for them has risen, off-loading these assets requires the seller to take a bath—mostly because terms of the Spanish bailout have left them with minimal leverage in negotiating valuation. So to shape the market effectively, both sides demanded a controlled venue, and Sareb—the Spanish banco malo, or bad bank—is now cited as a large part of the answer.

In profiling the construction and technical priorities of Sareb (see page 30), the most surprising thing is its chronology. From day-one of its initial design to becoming fully operational, the institution—now managing €80 billion ($108 billion)—was built in five months. Five. That’s shorter than a baseball season; it’s shorter than most post-merger technology integrations. And the idea of founding a traditional buy-side firm in that amount of time, with the breadth of Sareb’s assets—to say nothing of the transactional and legal mess their toxicity creates—is ludicrous.

One man’s trash really is another’s treasure—if you know what to do with it, and perhaps more fundamentally, where to find it.

Just what this says about the industry’s broader reliance on prolonged bailouts and “bad” banks is a different issue. Some would rather see the Icelandic model gain influence—simply let domestic banks fail, and then deal with the structural issues later. But what’s demonstrably clear is that finance has become very good at these vehicles, and especially good at working in concert to create them remarkably quickly using externally provided technology. That industriousness is admirable—if only it were applied earlier on, “bad” monikers and quarantined assets might become avoidable, too. Instead, they’re not only well-worn and prevalent—but hot commodities, as well.