Unraveling: The last six weeks of reassurances about the financial condition of Banco Espírito Santo were false. The financial report released Wednesday revealed €3.5 billion in losses, the worst report ever for a bank in Portugal. The loss is bad enough to wipe out the bank’s capital and put it at the brink of insolvency. The bank would be effectively insolvent right now but for a €1 billion recapitalization completed in June. Those who invested then will surely be asking for their money back, as it seems unlikely that current shareholders will end up owning any part of the bank after its next round of capital. The bank’s stock has plummeted accordingly. After being temporarily suspended (again) by the stock exchange in Lisbon, the stock fell by nearly half yesterday and again today. In all, the bank is down to one eleventh of its stock value at its April peak. The low stock value casts doubt on the central bank’s newly reiterated plan of fixing the bank with private capital.
Banco Espírito Santo was said to be financially stronger than its two parent companies, which share the Espírito Santo name and the association with the family of that name, but if so, those two companies will surely be headed for liquidation in the coming weeks. After the earnings report, the central bank removed the three family members who remained on the board and hinted broadly at more arrests to come. It also removed KPMG as auditor, faulting it for failing to notice billions of euros in unreported loss exposure.
Comeback: Bank of Ireland reported a profit for the first time in 6 years.
Standoff: New economic sanctions from the European Union and United States target banks in Russia. They are meant to isolate Russia after it apparently provided weapons, training, and support, if not the actual staffing, for the anonymous military unit in Ukraine that shot down a passenger aircraft. The economic sanctions come with plenty of loopholes which make it possible for Russia to keep trading internationally, but those loopholes could disappear on short notice, creating risks for anyone involved in trade between Russia and other countries in Europe. Among other restrictions, the banks are prevented from selling stocks and borrowing money in European and American markets. Russia’s central bank is more than capable of supporting the banks affected, but only at considerable cost to the Russian economy. Few banks outside Russia are expected to be affected, but those that have the most at risk in Moscow are banks based in Austria, and they may need a measure of support to maintain liquidity.
Guilty: Bank of America must pay a $1.27 billion fine for the systemic fraud in subsidiary Countrywide Financial’s HSSL or “Hustle” program, in which the lender bypassed most of its usual underwriting process in order to reduce the time it took to package mortgage loans into mortgage-backed securities from weeks to days. Many of these mortgages were missing required paperwork, for example, because the HSSL timelines didn’t allow time for an independent review of loan documentation. The court concluded that the lender concealed its looser underwriting from Fannie Mae and Freddie Mac and defrauded these two companies of about half of the $3 billion that they paid for the mortgages. An executive in charge of HSSL was fined $1 million.
Raising capital: Barcelona-based Catalunya Caixa is selling a portfolio of residential mortgage loans mainly in Catalonia to Blackstone for €4 billion, about a 40 percent discount from nominal value. JPMorgan is selling a $1 billion global loan portfolio to Bain Capital.
Closing: Congress is leaving for vacation without coming to any agreement on the Export-Import Bank, so the U.S. trade financing agency will prepare to shut down September 30. The shutdown will leave a $1 billion hole in the federal budget, the approximate size of the bank’s annual profit. It will also limit the ability of major equipment exporters to sell overseas.