MADRID: Rodrigo Rato beamed as he rang the opening bell at the Madrid stock exchange one Wednesday last summer. The former chief of the International Monetary Fund raised a glass of champagne to the successful listing of Bankia, the bank he chaired.
But the good cheer on show that July day belied major concerns at Spain’s fourth-biggest lender, concerns that other Spanish banks and most institutional investors knew about but which many small retail investors who bought the bank’s shares say they did not.
What worried the professional moneymen was Bankia’s high exposure to Spain’s collapsed property sector. Their skepticism meant the bank had struggled to complete its 3.1 billion euro initial public offering, and had been forced to lean heavily on individual Spanish investors. Bankia branch managers personally touted the shares to longtime customers, offering them platinum credit cards and promising steady returns.
Just months later, Bankia collapsed after massive losses. The story of how the lender was able to pull off its share issue on the eve of its doom is one of the most remarkable in the banking and sovereign debt crises that have roiled the euro zone for almost four years.
The troubles at Bankia are a stark reminder that Europe’s woes are rooted in large part in its banks. Formed in 2010 from the merger of seven unlisted savings banks, Bankia was meant to be a symbol of Madrid’s faith in its famously conservative financial system. Instead the bank’s predicament has forced Europe to give emergency aid to Spanish banks and pushed Spain closer to a bailout itself. As in Greece and Ireland, the banking crisis is inextricably linked to the sovereign crisis.
Many Spanish investors, hundreds of whom have joined law suits against the bank, now say Bankia deliberately overstated the value of its real estate assets to lure people into investing in its IPO. Close to 400,000 ordinary Spaniards who bought Bankia shares have seen their investments all but wiped out in the turmoil following its takeover by the Spanish state in May.
Smalltime investors say they were not properly warned of the risks; some say they felt pushed into buying shares in the bank even as institutional investors avoided the listing.
The lack of interest from bigger investors raised alarm bells for those marketing the deal, said two investment bankers involved in the listing, forcing Bankia to focus its sales efforts on individuals and small businesses. “They were thinking of scrapping it up to 15 days ahead of the flotation,” said one source close to the bank.
But immense political pressure – the government had threatened nationalisation if the bank could not get an injection of capital from elsewhere – forced Bankia executives to push ahead with the IPO, despite a raft of aborted European listings in the preceding weeks.
Former Bankia executives, including Rato, have said that due procedures were followed and risks adequately disclosed. They point to a 403-page prospectus available on the website of the Spanish stock market regulator. External banking advisers including J.P. Morgan, Bank of America Merrill Lynch, Deutsche Bank, and UBS, did not publicly raise doubts about valuations, even if they were worried about the progress of the sale, according to investment bankers who worked on the deal. None of those banks would comment for this story.
But some Spanish politicians and many investors now believe the IPO was rigged. A small Spanish political party has forced Spain’s High Court to open an investigation into whether Rato and 32 other former board members of Bankia and its parent company BFA are guilty of fraud, price-fixing or falsifying accounts. At issue is whether the bank was honest about the value of assets on its books such as property and stakes in other companies, and transparent enough about the risks it, and therefore investors, faced, as required by Spanish law.
Andres Herzog, lawyer and secretary general of the UPyD party, which has one seat in the Spanish parliament’s lower house, said the issue of biggest concern is “the stock market listing. We believe that this was at the heart of the fraudulent activity … They falsely represented their financial situation in order to capture investors’ funds.”
The investigating magistrate on the case, Fernando Andreu, has so far not brought formal charges against anyone and may still drop the case. Formalities began in a Madrid court this week.
Spain’s parliament has also opened an inquiry, calling Rato and 23 others, including bank executives and cabinet ministers, to testify before a committee. Rato, who the government forced out as chairman in May when the bank was nationalised, appeared on Thursday and said he had a clear conscience and had done things properly.
Yet hundreds of investors believe they were swindled. “They (Bankia shares) were clearly overvalued … a year ago we were already in a full-blown crisis,” said Jesus Gonzalez Rubio, a computer science engineer from a small town near Valencia who bought 45,000 euros worth of shares in the bank’s IPO.
Unlike other small investors, Gonzalez Rubio had long investment experience – and still thinks he was duped. “I’ve spent many years putting money into stocks…I sincerely believe we were cheated,” he said, pointing to the fact that Bankia’s recent writedowns of its real estate holdings are far bigger than the fall in house prices over the last year.
A Bankia spokesman declined to comment on the allegations, but new chairman Jose Ignacio Goirigolzarri has said he will fully co-operate with legal authorities.