Initially, the source of the bad assets are the cajas.
As reported by the Guardian, a caja is a traditional savings banks with a culture of greed, cronyism and political meddling.
So the logical question: is the bad bank nothing more than an 'slush fund' to hide this greed, cronyism and political meddling?
As European taxpayers prepare to rescue Spain's ailing banks, anti-corruption prosecutors, academics and regional parliaments are uncovering a tale of greed, cronyism and political meddling that has brought many of the country's leading savings institutions to their knees.
With the fourth biggest lender, Bankia, demanding €19bn (£15.4bn) and authorities now admitting a further €9bn is needed by two former savings banks – CatalunyaCaixa and Novagalicia – concern is focusing on both the mushrooming bill and the way banks have been run.
Court investigators are also scrutinising payments to former senior executives and the part-flotation of Bankia, in which 350,000 small investors saw two-thirds of their money wiped out.
The bill that Europe's rescue funds must pay has been increased by the multi–million euro payoffs taken by some senior executives shortly before their banks collapsed and decisions taken by unqualified board members who admit they were incapable of analysing the banks' books. Boards were stuffed with political placements or people who had little idea about banking – including, in one case, a supermarket checkout worker.
They often rubber-stamped decisions.
In some cajas they were rewarded with well-paid positions on the boards of subsidiary companies as well as with luxury foreign trips and soft loans.
Trips to India, China or Chicago and the hundreds of millions of euros in loans to executives, board members and their families formed part of the gravy train of political favouritism and cronyism.
Chairmen were often unqualified politicians, with academic investigators finding a close relationship between the size of a bank's bad loan book and the inexperience, lack of qualifications and degree of politicisation of the chairman.
A committee in the Valencia regional parliament is looking into how the Caja de Ahorros del Mediterraneo (CAM) – described by the Bank of Spain as "the worst of the worst" – collapsed last July.
"Did I check through the accounts?" asked José Enrique Garrigós, a small businessman who was a CAM board member. "Look, I'm an average businessman, I don't have the time or the training to do that."....
Analysing the accounts would have required her to be a superwoman, complained one CAM board member. "I didn't have sufficient financial, legal or accountancy skill… board members were not legally required to have any sort of qualifications or experience," agreed fellow board member Juan Pacheco....This clearly highlights the need for ultra transparency as market participants who could assess the accounts would have done so.
Mireia Mollà, a regional MP for the leftwing Compromis party, said a common way of getting round limits on paying board members at the not-for-profit CAM was to give them well-paid places on boards of companies owned – or part-owned – by the bank.
Local politicians appointed many board members and used cajas to fund pet projects.
"The use of cajas as the banks of regional governments is part of the origin of the problem," said Alvaro Anchuelo, an MP for the small, centrist Popular and Democratic Union party. "They used them to finance airports with no flights and theme parks that failed."
Two days before the collapse of CAM, the bank reportedly loaned €200m to the cash-strapped regional government of Valencia – run by prime minister Mariano Rajoy's People's party, which also controlled most board appointments....
Attempts to investigate Bankia have been blocked by the People's party in the national parliament and the Madrid regional assembly, but Spain's attorney general has admitted that it is under investigation. Twelve of the 45 cajas that existed three years ago are reportedly being looked at by anti-corruption investigators....
"If we really knew the truth about Bankia and the other cajas, the two big parties – the People's party and the socialists – would explode," said Arsenio Escolar, editor of the 20 Minutos newspaper.Hence, the question of is Spain's pursuit of a bad bank simply to set up a 'slush fund' to hide the truth about the greed, cronyism and political meddling?