As part of our brief to “tackle the world’s biggest social, political, and cultural issues by exploring why we do what we do,” it is sometimes necessary for us here at the magazine to look at truly baffling, obtuse behavior. Today is one such day.
Early this morning, news broke here in Europe that an American hedge fund, Cerberus, named for the mythical tri-headed dog guarding hell’s gate, intends to start buying up shaky real estate debt in Spain. To do so Cerberus is acquiring the real estate investment division of Spain’s Bankia, a so called “bad bank” that quarantines toxic assets in one place, where institutions specializing in high-risk, high-return investments can make deals. Cerberus is such an outfit.
In theory this should be good news. Following the burst of a real estate bubble that led to an ongoing, six-year financial crisis, a Spanish institution has found someone willing to take a large portfolio of toxic loans off its books.
Economists still argue about what precisely happened to cause Spain’s implosion, but much of the conversation turns on a property development liberalization program, which opened thousands of miles to real estate speculation.
The oddity of the tale is the players themselves. Back in January Cerberus announced it was appointing the son of former Spanish President José María Aznar, to work on the hedge fund’s entry in the Spanish market. Aznar fils (unhelpfullyalso named José María Aznar) was one of a number of particularly well-connected people involved in the deal. The Cerberus side includes former U.S. Vice President J. Danforth “Dan” Quayle, who is Cerberus’ chair of International Investments, and John Snow, who was the secretary of the Treasury under George W. Bush.
Why does Cerberus want Spanish real estate investment, and is anything wrong with that? Buy when there’s blood in the street, the saying goes. But Spain’s bloodier than most. Cerberus is entering a market virtually no significant investment body on Earth has seen as viable since 2008 or so, at least as measured by the closely-followed risk ratios. And by Bankia’s inability to offload its holdings—until now.
Economists still argue about what precisely happened to cause Spain’s implosion, but much of the conversation turns on a property development liberalization program passed under the eight-year rule of Aznar pere, which opened thousands of miles of Spanish land to real estate speculation. Combined with the early 2000s boom in mortgage debt securitization—which indirectly made mortgages a lot easier to get—a building boom that rivaled and arguably surpassed the one in the U.S. hit Spain, starting in 2003 or so. The liberalization program proved to have gone too far, and the boom ended up inflating a hopeless bubble, which burst, taking much of Spain with it.
So there’s the discomfort on display in Spain today. The bad paper and fallow properties from that half-decade bubble occurred under policies people involved in the current deal were promoting at the time, including some from government posts, or close associates and family in such posts. The wreckage of those failed policies are the assets these same people seek to acquire as private investors.
Is that anything more than unseemly, though? On one hand, business is business. Spain’s a mess. Few investors are willing to take the kind of risk Cerberus is taking. And without that—without someone to buy toxic assets—it will be hard to close out billions in bad debt. And without that, Spain continues to hobble along, without the trust of international investors.
Guilt by association is also a bit too easy. The big names involved are only a surprise if you expect these kinds of international transactions to be carried out by average people. Would you really want your 401(k) speculating in Spanish real estate? Who would you expect to be doing so? Your mailman?
But you also have to wonder about the level of risk. Is Cerberus really that much of a cowboy outfit? Maybe. But the personal connections of the players in the story, and the history they or close associates have to the worlds real estate-driven crashes, is hard to overlook. You try to lower risk any way you can, and these are people with pull, in an opaque process. It’s fair to ask questions about these deals in an industry and a country mired in a series of corruption cases lately.
Still, we have no way of knowing how this deal was brokered. Is it the sort of deal with huge incentive to somehow lower the enormous risk? We don’t know. Today, we have no reason to suggest it’s anything but high-wire finance among some former politicians cashing in on the old revolving door. But it’s a case a lot of people will follow, because in this case, that revolving door leads to a deal that involves people’s homes, in a country with a 60 percent unemployment rate among its young people, and nearly 30 percent broadly. People are jumping off their balconies in Spain because they’re losing their homes. Trust in this particular cast of characters isn’t so high.
Spanish press is referring to Cerberus today as a fondo buitre. That’s “hedge fund” idiomatically. Literally, buitre means vulture.
