Spanish Judge Exposes Too-Big-to-Fail Bank Robbery

Bankia’s saga of lies, deception, and fraud should (but probably won’t) culminate in the imprisonment of a former IMF president, crippling fines for the auditors (Deloitte), and fireworks at financial regulators.

By Don Quijones: If the last six years have taught us anything, it is that the four-word combo “Too Big to Fail” should have no place in the everyday vernacular of any self-respecting market economy. It is an aberration that has robbed millions of people of untold trillions of dollars and could threaten to bring down the whole global economic shebang.

As TBTF cases go, few have been quite as spectacular as Spain’s Bankia. Born in 2010 from the loins of an ungodly merger of seven already failed or failing savings banks (Caja Madrid, Bancaja, La Caja de Canarias, Caja Ávila, Caja Laietana, Caja Segovia and Caja Rioja), Bankia was Too Big to Fail from day one of its four-year existence. By 2012 the Too Big to Fail entity had predictably failed and a massive infusion of taxpayer funds was needed to keep the colossal monstrosity alive (at least in some shape or form).

Now, two years on, the sordid events that lead up to the bank’s collapse are finally seeing the light of day, thanks to an investigation by Bank of Spain inspectors on behalf of Judge Andreu, the presiding judge in a legal case brought against the bank. What emerges is a saga of lies, deception and fraud that should (but probably won’t) culminate in the imprisonment of a former president of the IMF, crippling fines for the bank’s auditors, Deloitte, and serious questions being raised about the competence and integrity of Spanish financial regulators and the Bank of Spain itself.

An Edifice of Lies
In the lead up to its IPO in May 2011, a total of 360,000 investors bought shares in Bankia. Another 238,000 Spaniards bought “preferentes” shares or other forms of high-risk subordinate debt instruments being peddled by the bank as “perfectly safe investments.” Almost all of these people (representing over 1% of the Spanish population) would end up losing a hell of a lot of money.

Now, one can argue that investing in a bank that had been assembled from the festering corpses of seven already defunct banks was not exactly a wise move. But who said most investors were wise? In their defense, those that invested in Bankia were told that the bank was making a tidy (€300 million) profit – and not just by the bank’s senior management, led by Rodrigo Rato, a former vice president of Spain and one-time president of the IMF; but also by the ever-trustworthy audit giant Deloitte and Spanish financial regulators.

Unfortunately, it was all a big fat lie and everybody – except, of course, retail investors – was in on it. The bank called in all kinds of favours to get institutional investors on board. Even big clients of the bank with demonstrably unpayable debts were invited to join the party – a party that did not last long. Within hours or at most days, most well-connected, well-informed investors had already unloaded the trash. But most retail investors were left holding a decidedly worthless bag: on its launch in June 2011 Bankia’s shares were worth €3.50; within a year they were worth less than €0.01.

The bank that had been sold to unwitting investors as a perfectly sound investment by management, the government, the press, regulators and the Bank of Spain, was swiftly nationalized. Investors lost just about everything and, for the meagre price of €19 billion, millions of unconsulted Spanish taxpayers became the new owners of Spain’s biggest ever bankrupt bank. As if that were not enough, Spain had to request a bailout from the dreaded Troika and in the process lost a sizable chunk of its economic sovereignty.

A Confluence of Dodgy Interests
By then Rodrigo Rato was long gone, and Deloitte had terminated its relationship with Bankia. As recent revelations have shown, both played an intrinsic part in the bank’s downfall and the subsequent fleecing of hundreds of thousands of non-institutional investors. And now, it seems, their “alleged” (just in case!) crimes are catching up with them.

Rato (about whom you can read more here) is accused of fraud, falsification and conspiracy to mislead investors. According to the report, the “published financial state of BFA [Bankia’s parent group], even in its pre-launch brochure, did not in any way reflect the genuine state of the company.” Rato is also accused of sanctioning and personally benefiting from an illicit expenses scheme which allowed senior management to spend millions of euros of investors’ funds on goods and services completely unrelated to the bank’s operations.

As is becoming increasingly clear, Rato and his fellow senior managers were helped in their gargantuan scam by U.S. auditors Deloitte, who not only “ignored a dozen glaring errors and inconsistencies in the banks’ accounts” before its IPO but is also accused of changing its accounting criteria halfway through the 2011-12 financial year. Its decision not to sign off on Bankia’s accounts directly precipitated both Rato’s resignation and the bank’s eventual collapse.

Also accused of involvement are Spain’s financial market regulators and the Bank of Spain itself, the direct employer of the financial inspectors who carried out the investigation. Although the inspectors do not explicitly accuse their current employer of wrongdoing, they do raise serious questions about the supervision it provided, in particular in relation to Bankia’s IPO launch and the decision by Rato’s management team not to include the losses racked up by one of Bankia’s constituent members, Banco de Valencia. The central bank had a team of inspectors on hand at all times at Bankia’s parent group, BFA. They had the expertise to detect any book cooking but seemingly chose to turn a blind eye.

Rabid Rats
Now, as the damaging revelations continue to leak out into the public arena, those accused of responsibility in Spain’s biggest ever bankruptcy are turning on each other like rabid rats. Rodrigo Rato, who now faces the real prospect of prison time, has sought to exonerate himself by blaming the Bank of Spain. As he told the radio station Onda Zero, his management team “were completely controlled” by regulators and as such had “neither the possibility nor the intention” of “cheating investors”. In other words, he was just following orders. As for the Bank of Spain, it has completely disassociated itself from the investigation.

In a speech given last week, Spain’s economy minister and former Lehman Brothers advisor pinned the blame on the Bank of Spain’s former management team, which was conveniently appointed by the former “socialist” government. He also rejected any possibility of a government-led investigation of Bankia’s merger and launch – hardly surprising given that many of the banks that were merged, in particular the biggest of all, Caja Madrid, had served as former outposts of the governing Popular Party.

As for the primary victims of Spain’s biggest ever financial scam – i.e. investors – they now have a much stronger case to finally claw back the money they lost. Litigation proceedings potentially worth billions of euros will now begin in earnest. However, the money they are awarded is unlikely to come from Bankia’s own coffers – after all, the bank declared meagre profits of just 500 million euros last year, and only thanks to some very dodgy accounting gimmickry and trickery.

If the bank can’t pay the damages, Spain’s taxpayers will once again have to step up to the plate – as always happens in this Too-Big-to-Fail model of finance. As just about everywhere in the Western world these days, taxpayers (i.e. workers) are made to pay in myriad ways (layoffs, public spending cuts, higher taxes, lower salaries, zero interest on their savings…) to prop up a broken system of bank finance that is meant to serve the wider economy but is instead destroying it. As Ellen Brown recently reported, when the taxpayers can no longer pay, it will fall to banks’ investors and depositors to make up the difference.

By Don Quijones, freelance writer, translator in Barcelona, Spain, and editor at WOLF STREET. Mexico is his country-in-law.  Raging Bull-Shit is his modest attempt to scrub away the lathers of soft soap peddled by political and business leaders and their loyal mainstream media.

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