I was amused today while reading a story in the Business Standard titled, “Indian Overseas Bank cashes in on Realty.”
The paper reports that the Bank plans to “sell” some of its real estate to a “special purpose vehicle (SPV).”
The sale, at current market price, will produce a “profit” for the bank because the real estate is valued in its books at cost which is much below its current market value. This “profit” will increase the bank’s capital adequacy ratio. Moreover, the bank will then lease the real estate back from the special purpose vehicle!
There is no mention of the SPV paying cash to the Bank for the acquisition of the real estate assets.
In other words, without actually selling the real estate (in economic, not legal terms), the bank will magically increase its capital adequacy!
A simple revaluation of real estate wouldn’t have worked. So, we now have this new attempt at financial alchemy. Reminds me of John Galbraith’s words:
“The world of finance hails the invention of wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt, secured in greater or lesser adequacy by real assets.”