Original article from nytimes.com
MADRID — Lax lending and deadbeat borrowers nearly brought down the Spanish banking system a few years ago. That’s why the remnants of some of the failed banks are resorting to a time-honored form of loans with can’t-miss collateral: pawnshops.
When borrowers cannot repay, there’s another way to recoup the money.
A recent jewelry auction by the pawnshop of the Caja Madrid Foundation, a spinoff of the biggest failed savings bank, raised 909,000 euros, or about $994,000. Although bidding for some of the cheaper items started as low as €45, a 1950s Van Cleef & Arpels bracelet of white gold, diamonds and sapphires fetched €27,500.
The proceeds did not plow back to the national government’s bank bailout fund. Instead, they went to the nonprofit foundation that Caja Madrid has become, fully separate from its former owner, Bankia, which is now under government supervision. The money will help support a school for the deaf or autistic children of migrants, among other activities, as Caja Madrid continues trying to finance the community-support projects that have long been part of the social obligation of Spain’s cajas, or savings banks.
That social-support role, as part of Spain’s approach to welfare, was an issue in Spain’s elections last weekend, in which the party of Prime Minister Mariano Rajoy won the most votes but lost its parliamentary majority. There could be weeks of political uncertainty as the politicians try to form a coalition government. One thing unlikely to change is the need for the nonprofit caja foundations to continue supporting cultural and social services — particularly in light of the yearslong government austerity that is a reason for Mr. Rajoy’s shaky political standing.
Spain’s commercial banks, like Banco Santander and BBVA, have either bounced back from the crisis or they largely sidestepped it, buffered by their international operations. But the cajas that went bust trying to compete with the commercial banks have fared less well. That is why many of the cajas’ surviving offshoots have expanded their pawn-brokerage businesses as they seek alternative forms of funding.
The trend is a throwback in many ways. Centuries ago, many of Spain’s cajas were set up as pawnshops under the auspices of the Roman Catholic Church, functioning as something akin to credit unions whose proceeds were meant to support the local community. In modern times, the clergy gradually ceded control of most cajas to regional politicians who started using them to help finance city projects.
But the cajas eventually grew overly ambitious and acquisitive, losing their way in the frenzy that resulted in a Spanish real estate boom and bust. It was the collapse in mid-2012 of Bankia, a giant formed by the consolidation of Caja Madrid and six other cajas, that nearly brought the country’s financial system down with it. The fiasco required a €41 billion European Union rescue of Spanish banks.
As Caja Madrid and many other caja foundations now try to revert to their roots, their goal is to get back on their financial feet so they can maintain their tradition of supporting community activities.
“This is where and how our business really started, so we’re returning to our origins,” said Santiago Gil, director of Caja Madrid’s pawnshop, the Monte de Piedad de Madrid, which was founded in 1702.
Until the financial crisis, cajas were obliged to reinvest into social projects whatever profits were not needed as capital reserves against bad loans. As their profits rose during the financing of Spain’s construction boom, so too did their funding of schools, libraries and art centers — as well as some trophy investments like the Palace of Music, a planned concert hall in Madrid. In 2008, the cajas made a combined investment of more than €2 billion in social projects — more than dispensed by the Spanish ministry in charge of social projects.
After 2012, however, the cajas had to be restructured, leaving most of the foundations cut off from the banking revenue they had previously received. Even now, many are saddled by the legacy of the earlier excess.
In Madrid, for instance, the Palace of Music building on the city’s Gran Vía thoroughfare has been for sale for three years. Caja Madrid acquired it for €33 million in 2008, with the blessing of Madrid’s city hall, as part of an ambitious plan to convert the 1920s building, formerly a movie theater, into a 1,700-seat concert hall. The project was halted in 2012 after the government seized Bankia.
“It seems to me that Madrid already had what it needed in terms of offering classical music,” said José Guirao Cabrera, who took charge of Caja Madrid’s nonbanking activities at the start of 2013.