The rescue of banks, a business profitable only for auditors and consultants

Nongovernmental organization Transnational Institute (TNI) of Holland recently published an analysis of the costs and losses borne by the European taxpayers for the rescue of some of the important banks in the EU.

"Between 2008 and 2015, the EU member states, with the approval and encouragement of the EU institutions, have spent 747 billion Euros for various rescue or bailout packages", according to the document "The Bail Out Business", which can viewed at www.tni.org. Aside from these direct expenses, almost 1.2 trillion Euros in guarantees were granted for the debts of the financial institutions.

But that is not all. The bailout programs also have hidden costs, to the tune of hundreds of millions of Euros, afferent to consulting contracts.

The four biggest international audit and consulting firms - Ernst&Young (EY), Deloitte, KPMG and PricewaterhouseCoopers (PWC) - have drawn up the biggest bank bailout programs. "Their roles as auditors and consultant have created the circumstances for conflicts of interests", the TNI report states, but in spite of this, "the consultants have often created new contracts, in spite their repeated failures".

When the auditors and investment banks, that have "supervised" the bailout programs, have not been forced to pay for their "mistakes", the taxpayers have fully paid, through the "care" of their representatives.

"By October 2016, 213.2 billion Euros of the taxpayers' money have been lost forever following the various bailout programs", the report further states.

The amount is equivalent to the combined GDP of Finland and Luxemburg, or with the combined financial resources allocated for healthcare in Spain, Sweden, Austria, Greece and Poland.

The TNI report also includes "case studies" concerning banks in Spain, Greece, Holland, Great Britain and Ireland.

In the case of Greek bank Eurobank, the estimated loss exceeds 10 billion Euros. This is where we note the preservation of the auditor, PricewaterhouseCoopers (PWC), even after the application of the bailout program, even though "PWC did not issue any warning about the potential risk of the bank prior to the bailout".

The auditor, this time Deloitte, was also kept when it came to the "saving" of giant Royal Bank of Scotland, where the losses incurred by the British government amounted to 27.6 billion pounds (34 billion Euros).

The Dutch government lost over 5 billion Euros following the saving of ABN Amro, after injecting 21.7 billion Euros in the bank following its nationalization in October 2008.

The Bankia financial conglomerate illustrates the situation in Spain, with the losses estimated at 16 billion Euros. Made in December 2010, through the merger of seven regional savings banks, Bankia was managed until 2012 by Rodrigo Rato, former executive director with the IMF.

In July 2011 an IPO was conducted, in which many of the bank's customers participated, as they were "convinced that the investment is as safe as a bank deposit".

The bank reported a profit of over 300 million Euros in 2011, the financial result was audit by Deloitte. The nationalization came after less than a year. The audit conducted after the nationalization, by the same company, showed a loss of 4.3 billion Euros in 2011, and "hundreds of thousands of small investors lost their life savings". The Spanish Supreme Court convicted Rodrigo Rato to 4 years and 6 months for the role he played in the Bankia "deal".

The TNI report includes another interesting section on the financial assistance granted to the German banking system. The beneficiaries were particularly the financial institutions called Landesbanken.

In 2008, the Berlin government has created a fund for the stabilization of the banking system, which initially amounted to 480 billion Euros. The net loss posted by 2015 was 38 billion Euros, of which 18 billion is represented by the loss generated by the liquidation of WestLB, the biggest of the Landesbanken.

"Recent studies show that the German authorities have shown great weakness in maintaining discipline among banks, and they have adopted risky practices, because they knew that the state would help them if necessary", the authors of the TNI document state.

The financial consultants hired by the governments were also "selected" from a very short list. Thus, Lazard handled Bankia, Eurobank and ABN Amro, Rothschild - RBS, while Merrill Lynch drew up the program for Anglo Irish Bank.

Unfortunately, the saga of saving European banks at any cost, is far from the end. A recent editorial by Bloomberg brings arguments in support of creating a continental-level "bad bank", following the proposal of the European Banking Authority (EBA) and the European Stability Mechanism (ESM), amid a combined value of non-performing loans of approximately one trillion Euros.

The arguments are not solid at all, however, especially if we consider the disaster presented in the TNI report. The only "achievement" of such a bad bank would create an unprecedented bad bank without a historical precedent and the socialization of losses that no one will answer for.

And among the biggest winners will see the big audit firms, who basically have an oligopoly on the market (author's note: a situation where the market is controlled by a very small number of suppliers, while a large number of consumers exists).

"Companies that should have assured investors and the regulatory institutions that banks are stable and they are maintaining their market domination, despite the serious mistakes in assessing the credit risk", is the conclusion of the TNI report, which also reminds that a number of measures have been taken to eliminate conflict of interest.

But these measures are almost ineffective when it comes to the resolution of another major problem: "the dependence of governments and EU institutions on the Big Four".

Additional, stricter regulations on the audit and financial consulting sector won't have the desired effect either, as demonstrated by the total ineffectiveness of the bank regulations when it comes to the prevention of financial crises.

A robust solution cannot lack the measures to increase competition in the market and a strict framework for the establishment and the taking of material and criminal responsibility by those guilty for the bankruptcy of banks or for the inaccurate audit reports.

Unfortunately, with the way the situation is evolving on a European level, such a solution will never be accepted and only a collapse of the Eurozone can stop the Ponzi scheme "shepherded" by the European Central Bank