The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (34 page)

‘It’s hard for me to believe that a formula or a bunch of quantitative methods would cause the crisis,’ Vasicek says. ‘Greedy investment banks who took too many risks because they are gambling with other people’s money. The collusion of regulators and politicians and government agencies not exercising even most rudimentary oversight, letting them do whatever they want. A naivety on the part of the public, homeowners and mortgage borrowers who would accept mortgages forced upon them while any reasonable person must see that they could not handle them.’

But in splitting credit risk from a bank loan book, Vasicek’s formulae
were
ultimately responsible for creating the shadow banking system. The story of these formulae illustrates the role of complexity as a conscious tool of bonus-seeking bankers. It also reveals the subtle hand of political interference. And it is the engine of the dysfunctional relationship between finance, politics, people and property that lies at the heart of the crisis.

Dramatis personae

Nelson Hernandez, a waiter from Ecuador

His wife, Kelly

Samuel, from Ghana

Paco ‘el Pocero’, Spanish construction magnate

José Luis Ruiz Bartolomé, Spanish property expert and author of
Bye Bye Brick

José Manuel Campa, Spanish secretary of state for economic affairs (2009
–11)

Rodrigo Rato, ex-managing director of the International Monetary Fund (IMF)

Cándido Méndez, leader of the UGT, one of Spain’s biggest trade unions

Luis Garicano, professor of economics and strategy at the London School of Economics

They are called the Puerta de Europa – the Gateway to Europe: two 115-metre, 26-storey towers at the end of Madrid’s main thoroughfare, leaning into each other like crooked fangs. They are the tallest leaning skyscrapers in the world. Impressive, yes, but they are far from practical. To get to the highest floor you need to take two lifts, one to floor 13 and another to the top floor, floor 26. And to clean them is a hugely expensive business, requiring a specialised €1 million gondola to glide underneath the 15-degree slant of the towers.

They may be the Gateway to Europe, but to many Spaniards they have become the Gateway to Hell. There was an uncanny premonition of this in Álex de la Iglesia’s 1995 cult comic horror movie,
El día de la Bestia
(
The Day of the Beast
), in which the towers become the birthplace of the Antichrist, a terrifying portal to the infernal regions that lie beneath.

Unfortunately for Spain, the reality turned out to be worse than the film’s worst nightmares. The east tower was to become the headquarters of Caja Madrid, and then of its wretched spawn, Bankia. The west tower housed a real-estate company half-owned by Caja Madrid. The denizens of the east tower helped to bankrupt tens of thousands of ordinary Spaniards, inflated Spain’s calamitous property bubble, and funded reckless spending by a number of Spain’s regional governments.

In May 2012 the people of Spain lost trust in the bankers in their leaning towers and began withdrawing their money by the tens of millions. Caja Madrid (by this time wrapped into the new institution called Bankia) itself went bankrupt. So bankrupt was Bankia that the proud Kingdom of Spain required a €100 billion external bailout of its entire financial system. Spain could not raise the money itself, and was forced to accept the supervision of foreign monitors.

Caja Madrid was not really a bank. In the UK, a
caja
would be called a building society. In the USA, it would have been called a savings and loans association (although many of these disappeared in the notorious 1980s S&L debacle). The primary business of cajas is savings and loans – or rather, it
was
savings and loans. By 2012 the entire caja system, bar two tiny institutions, had been dismantled by the centre-right government under the watchful eye of the Troika – a tripartite committee of the European Commission, the European Central Bank and the International Monetary Fund. Just three years previously, the demise of the cajas would have been unthinkable: local and regional cajas had been a vital feature of Spanish society and finance since the 1830s. The impact of their disappearance was to be felt well beyond Spain’s finance system. The back-story of the cajas is also the central story of Spain’s incredible boom and its spectacular bust. Financial excess, incompetence and corruption all infected the heart of simple, social institutions long trusted by ordinary people with their money.

‘
Si se puede, si se puede
,’ chant the throng of Spaniards angry at house evictions, banking excess and corrupt politicians. It is the Spanish translation of President Obama’s slogan ‘Yes we can’, and it is the creed of an unlikely coalition of citizens and residents who are beginning to alter some of the easy certainties of Spain’s austerity plan. In February 2013 thousands of Spain’s dispossessed gathered at the Plaza de Colón (Columbus Square), 5 kilometres due south of the leaning towers, along the same road. Among the crowd were immigrant workers in Ecuador football tops who’d lost their jobs in construction, pensioners in pointy green hats whose savings in preference shares in Caja Madrid were being wiped out, and young Spanish families facing eviction. Their placards bore angry slogans: ‘Danger: thieving banker’, ‘Where is our money?’ and ‘People without a home, homes without people’. It was a march of the Platform of Mortgage Victims, a powerful grassroots organisation that had successfully resisted and challenged evictions in cities throughout Spain, using the law, direct action and social-media campaigning.

A few months before, I had attended one of the weekly Tuesday night meetings of the Platform in Madrid. Rhythmic ‘
Si se puede
’ chants rang out as mortgage victims told me their shocking tales of financial mistreatment. I was in the midst of a sea of poor families mired in hundreds of thousands of euros of negative equity, their misery made worse by unemployment. But they were not going to accept their fate meekly. One mulleted Spanish father recounted how he had used legal mistakes made by a mortgage broker to prevent his eviction. A mother implored the crowd: ‘The bankers are pulling your leg. Don’t let them get away with it.’ One group of borrowers was particularly hard done by: these were the South American and African immigrants who had come to Spain to work during the property and construction boom. Renting a flat was difficult in Spain, particularly given the fairly common demand for a year’s rent up-front as a deposit. But although many could not rent, they found instead that they could buy – by taking out massive mortgages. As soon as they arrived at Madrid-Barajas airport, they were bombarded with advertisements from lenders eager to do business.

And so these immigrants ended up buying Spanish property at vastly inflated prices, at the very top of the market, just prior to the crash. Nelson Hernandez, a waiter from Ecuador, and his wife Kelly were attracted into buying by a raft of local high-street ‘worker groups’ that turned out to be fronts for estate agents and mortgage brokers. In many cases, mortgages were, without the borrower’s knowledge, fraudulently cross-guaranteed with another immigrant family. The result? Despite not being behind on their own payments, Nelson and Kelly faced repossession because they were unknowingly the guarantors of another Ecuadorean family’s mortgage. ‘We tried to rent a flat around here, but they would not let us, because they could see our financial situation in the bank,’ Kelly told me as the couple showed me round the modest flat from which they expected to be evicted. ‘We have a mortgage problem – we already have a debt of €222,000, and that puts you on a blacklist.’

At the Platform event, another ‘victim’, Samuel from Ghana, explained to me how the Spanish justice system had repeatedly left him disenfranchised after his eviction in similar circumstances. His entire family of four had to live in a single rented room as he serviced the debt from the overpriced repossessed flat.

There were endless stories like this. But the victims resisted. Evictions were prevented by concerted action from campaigners. Spain’s courts became clogged up with repossession cases. It is difficult to assess the scale of the problem, as statistics on repossessions are not even collected in a detailed manner. The 400,000 repossessions since 2008 also include a huge number of properties seized by banks from real-estate developers. Banks have put the number at 172,000. Only in December 2012 did the Spanish government order the production of detailed repossession statistics. Whatever the truth of the figures, the suicides are real. Every month there are stories of Spanish homeowners taking their own lives, sometimes during the actual course of an eviction.

It is April 2012. A giant white banner is flapping in the wind, draped down the side of a new block of flats in Seseña, a town south of Madrid. It reads: ‘2, 3 and 4 bedroom flats from €65,000’. The price is a third of the original selling price. Only a few months previously, the same flats had been the headline offer at a property show, starting at €89,000. The current price is below the building cost, and so assumes a zero or negative cost for the land. It’s a bargain that few want to take up just yet, and certainly not here. As in many other boom-time developments, entire blocks in Seseña remain empty. The original plan was to house 40,000 new residents in a town of just 10,000, half an hour south of Spain’s capital. The main attraction was price, compared with booming, unaffordable Madrid. The apartments were just beyond Madrid’s official border in Castilla-La Mancha, sandwiched between two motorways with limited access roads, and next to an 11-hectare dump of used tyres. By 2012 Seseña, along with other such schemes, was being called a ‘ghost town’. But this suggests a place once inhabited by a mass of living people who have passed into the afterlife. Not so in Seseña and thousands of developments like it. There aren’t even any ghosts.

Elsewhere in La Mancha, 150 kilometres south of Seseña, is the city of Ciudad Real. For some reason, the city permitted the construction of a new, private airport with a runway long enough to host the world’s biggest aeroplane, the Airbus 380 superjumbo. The attempt to brand it ‘Madrid South’ was a quixotic stretch too far, even for Ryanair, though there was a plan to connect it to a high-speed rail link to the capital. The station was never completed. For a time it was actually called Don Quixote Airport, and was to be accompanied by a theme park celebrating the man and his horse. It closed completely to air traffic within four years of opening, after hopelessly overestimating demand. Astonishingly, there are another three completed airports in Spain that currently do not host (and two of them have never hosted) a plane – in Castellón, Huesca and Corvera.

Homes without people. Towns without communities. Airports without planes. And most of this empty real estate is heading into the reluctant arms of the Spanish state. Welcome to the eighteenth region of Spain: Sarebria.

Since the death of Franco, Spain has been divided into seventeen regional communities, from Andalusia and Murcia in the south to Cantabria, Galicia and Catalunya in the north. These regions have varying degrees of political autonomy. Since the financial crisis, an eighteenth region has emerged, a region that stretches from the Mediterranean to the Atlantic, from the Bay of Biscay to the Strait of Gibraltar, taking in the plains and hills and valleys that lie in between. It exists on the outskirts of almost all of Spain’s towns and cities, takes form in a myriad, identikit redbrick apartment blocks, a plethora of lurid architectural experiments, a whole herd of extravagant white-elephant projects. Call it Sarebria, the land of Sareb. Sareb stands for Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria (‘society for the management of assets proceeding from the reconstruction of the banking system’). It is the state-backed ‘bad bank’ set up to become the buyer of last resort for tens of billions of euros’ worth of empty new homes and unfinished property developments. It has been given a decade and a half to carry out this task. It is far from autonomous. Its establishment was a condition of the European loans to bail out Spain’s financial sector.

At Sareb’s offices opposite Real Madrid’s Bernabéu stadium the mother of all clean-ups is underway. They are trying to find a hangover cure after the world’s longest fiesta. Sharp-suited financiers from American hedge funds and European pensions companies file through the glass-walled offices in an attempt to grab a property bargain. Sareb might be regarded as Europe’s biggest property company, but its staff reject the label. That would only be true, they say, if they foreclosed on the loans they have been passed.

Señor Hernando looked up proudly at the bronze sculpture of his parents. They are holding hands, his father looking down fondly on his mother. The large bronze statue stands on a plinth in the middle of the roundabout at the entrance to the complex in Seseña that he named after himself: ‘Residencial Francisco Hernando’. ‘This is my city, everything you see here is mine,’ he told a British journalist from the
Daily Telegraph
in 2009. ‘I’ve built eight cities, and I have six more in mind. I’m like a painter, I love creating things.’

Señor Hernando goes by the nickname ‘Paco el Pocero’, alluding to his first job, drilling sewers in Madrid. He did not go to school. As a youngster in Franco’s Spain he says he lived in a shack in a working-class quarter of Madrid, rummaging for food in the rubbish dumps, and ‘eating banana skins and cheese crusts from the bins outside the houses of the rich’. By 2009 he had ridden Spain’s construction boom to its very peak, becoming a billionaire with a frigate-sized yacht, a private jet and a helipad. His dream for Seseña was that it should be a haven for working-class Madrileño couples who could not afford their first home. The quality of the flats was, and still is, rather good. There are wooden floors, extra bathrooms. Other phantom developments such as Aranjuez in the south, or the area of El Escorial in the north of Madrid, fared as badly. Valdeluz, next to the town of Guadalajara (also in Castilla-La Mancha but further away than Seseña) was another 30,000-capacity town built by a different developer, Reyal Urbis – now Spain’s second biggest bankruptcy. In February 2013 it owed its creditors €3.6 billion, including €700 million to the Sareb ‘bad bank’, and €400 million to the Spanish tax office. Seseña’s particular notoriety came as a result of its positioning on the main motorway south out of Madrid, and the reputation of el Pocero. After the crash, Seseña’s external infrastructure was left incomplete. Prices plummeted.