Portugal Should Let Espirito Santo Fail
Back in August 2008, as the credit crunch was really starting to bite, Tim Price, director of investments at PFP Wealth Management in London, had this to say:
A banking specialist Ph.D. who has spent 20 years at Bank College studying nothing but banks, and whose every waking second is committed to understanding banks, would struggle to conduct due diligence upon banks consistent with making an informed assessment of the risks they hold and the risk they represent.
Let's be thankful that six years later, the world has learned its lesson about bank complexity, and regulators are now ensuring that the balance sheets, ownership structures and risk exposures of the finance industry are transparent, intelligible and suitably constrained.
Except, of course, nothing in the above sentence is true, as illustrated by yesterday's record 42 percent collapse in the share price of Portugal's Banco Espirito Santo SA after it posted a first-half loss of 3.6 billion euros ($4.8 billion):
The Espirito Santo Group is a sprawling, byzantine web of interconnected entities run by a banking dynasty. Three of its holding companies have sought protection from creditors. Here's how Bloomberg reporters Henrique Almeida and Anabela Reis describe its structure:
Banco Espirito Santo is 20 percent owned by Espirito Santo Financial Group. ESFG is in turn 49 percent held by Espirito Santo Irmaos SGPS SA, which is wholly owned by Rioforte, a group that holds the family’s non-financial investments. Luxembourg-based Rioforte is 100 percent owned by Espirito Santo International, a holding company controlled by the family.
It makes the head spin and the eyes glaze over. Now, the bank needs more capital, and in time-honored fashion, the hat may pass to taxpayers. Portuguese newspaper Jornal de Negocios reports today that while the nation's central bank would prefer investors to put up additional capital, it is working on a "mixed" solution including public funds.
That would be a mistake. Again and again, banks have been rescued from their own misadventures. Financial Darwinism hasn't been allowed to cleanse the DNA. If Banco Espirito Santo can't raise sufficient private funding to remain a going concern, Portugal should oversee an orderly dismantling of the group. Until governments show the banking industry that the world of finance suffers the consequences of its failures, banks will continue to do somersaults on the money trapeze, secure in the knowledge that the safety net of a taxpayer bailout is there to rescue them. Enough is enough.
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