There is no politics in this contribution: It is the plumber telling you that your prestige mansion is a now a foul smelling swimming pool.

Banks will never admit to their bad loans – no matter how worthless.

The reason is simple: If a bank impairs bad loans this loss will go from equity. If equity is negative – you have no business. With the huge amounts of bad loans few banks exist except as figments of the management’s imagination.

This state of affairs is totally unacceptable from the point of view of society. This has nothing to do with political perspective: It is unacceptable for a communist and it is unacceptable for a born-again christian capitalist. The problem is how to proceed to get some sort of sense of reality into the finance sector.

It is imperative to get that realism or bank managements will keep sitting and nursing their illusion – not only that, but they will block for a functioning finance sectors working with moving deposits into investments and jobs. The alternative is to terrible to contemplate: A zombie-economy like the Japanese where any small tilt of a nuclear power plant threatens to push the entire country into the abyss.

The workings of a method can now be gleaned!

It is slow and laborious; but let’s get started!

  1. Due to rescue missions a lot of debtors have ended up in the various public financial dustbins. The loans of any conceivable value are sold off – but they aren’t: Due to undercapitalisation in the banks they have no money to buy for – and nobody is going to loan them the money: They are simply insolvent and now illiquid.
  2. But these rescue actions have resulted in a list over de facto worthless debtors. You could pronounce them bankrupt and drag them and the other creditors through court – but that would only drag the system further into the quicksand, as the other creditor would just take over the loan at zero value – and continue to keep their distressed loans in deep coma.
  3. No have to reassess every client and his ability to service debt – what the loan giver should have done before granting the credit – but didn’t. Farm loans are a good place to start. You know what an acre of land can yield in that particular area – and with reasonable assumptions as to reasonable farming and prices a fair evaluation can be made.
  4. What you do is to ally give that list of debtors to the bank inspecting authorities, who at the next inspection will ask to the state of affairs: What loans and what impairments does this bank have with these clients?
  5.  The next step is to demand impairments of specific named debtors to the value of zero, thus reducing equity. When equity is gone the bank cannot raise loans to keep afloat and that bank will end in the dustbin. The alternative for the bank – with an inspection authority of sufficient brutal disposition – is to sell off that loan at rock bottom price to the dustbin – one debtor at the time.
  6. This means that the dustbin will be able to consolidate every debtor to a standard where they can be sold to a bank. Farms are particularly good in this process, as the write offs can be consolidated in a non-serviced loan that will only demand repayment if and when the property is sold above a “reasonable” price.

Rental real estate could possibly use the same method.

As the observant reader might recall there is something afoot in Denmark where the major bank (Danske Bank) is blocking and sabotaging any attempt to get transparency into the finance sector. The trick used is to use confidentiality and bank secrecy as an impenetrable smoke screen. Another is off loading bad debt into a new company and buying their shares – there are lots of tricks – and a major bank knows them all.

How can this deadlock be broken?

Well in Denmark the key seem to be the mortgage banks! Not the big ones, as they are hopeless. There is an outstanding mortgage debt is 2.400 bio. DKK.  The small mortgage banks will be the active player:

  • A)    DLR has loans of 133 bio. DKK or 5½% of the mortgage market. They are reasonably concentrated in the agricultural sector: 84.5 bio. DKK. or 1/3 of the agricultural mortgage loans. DLR is the gateway to reconstruction of the agricultural sector.
  • B)    FIH has an old and defunct mortgage bank. It doesn’t issue new loan; but it IS some sort of structure. This will be the foundation for industry and business.
  • C)    BRF is a terrible mess – the annual report is so misleading that it is bordering on the fraudulent: F.i. Assets in temporary possession are noted as being ¾ of a billion DKK; but that is less than a half truth as considerable parts have been sold to dubious characters at a frictional value at very low interest – and guaranteed repurchase price. It is no more than 8½% of the mortgage industry. It almost exclusively exposed to housing. Rental (About 40% of the 250 bio. DKK market) and private housing (7½% of the 1400 bio. DKK market. The point is that BRF have the most hopeless loans in private owned housing – the condominiums in Copenhagen.
  • D)    LR: There exists a small mortgage bank for publicly supported rental housing (no more than 10 bio. DKK – if memory serves).

Now the mortgage banks will not move towards foreclosures, as they have some sort of intimate connection with the banks that have the totally unsecured part of the loan. These associated banks will then with various tricks of the trade see to it, that the mortgage loans are served – if that is the expression because the interest rate is forced down by buying of own issues AND there is no payment on principal.

Now the handle on the debtors will come from more or less deceased banks within Finansial Stabilitet’s tombs.

But these dead bodies need a slap to be reconditioned for resale:

  • a)    The distressed loans from the rental sector comes originally from FIH, where they will be separated into a new company – financed under guarantee from FIH and with the impairments moved over as well. This new company “cooperates” with Financial Stability.
  • b)    DLR will (probably) connect their distressed loans to the impaired or fictional loans in the banks. Finansiel Stabilitet will make a new company to scoop up these reconstructed farms – and farmers.
  • c)    BRF and its paralysed zombie bank seem to be the access to the hopelessly insolvent home owners in the capital.
  • d)    The publicly supported rental housing is a minor problem at the moment; but here LR seems to be the fulcrum.

It is all one huge sorting mechanism to connect the re-assessed values of the debt to sectors (agriculture, rental housing, business etc.) to the debtors (developers, rental agencies, persons etc.).

When that is done the banks will be pursued by social security number and company number like decoding a hostile code. A way to gain insight into the books of all the banks.

The other way is to give loans in the Central Bank with “good” loans as collateral – and the banks will come whining and cough up with the lists, as they are being denied credit. The events of the December 30th 2011 when Danske Bank could not transfer pensions and salaries are significant. It will not be the good loans that are interesting; but the loans that are rejected by the Central Bank as distressed in another context.

The Central Bank and the regulating authorities will thus collect a database of distressed debtors and their collateral to break the wall of silence and obfuscation. There will be an instrument – in the form of a mortgage bank and a dustbin bank – to recondition the debtors so they can be sold off.

Slowly and steadily the meat will be picked from the bones of the major banks and their mortgage banks. Like a carcass picked by worms.

The major financial institutions Danske Bank, Nykredit, Nordea have no future but a lingering deathbed.

Just a conspirational theory? The term is rather crisis management by Central Bank and government.