SPANISH BANKS How dumped a bad bank on the little guy Hundreds of small-time investors say pressured people into buying the bank’s stock

UNDER PRESSURE Bankia president , here in February, stepped down in May under government pressure. REUTERS/Andrea Comas

SPECIAL REPORT 1 SPANISH BANKS How Spain sold bad bank to little guy

GHOST TOWN An unfinished housing complex near Malaga. Many residential projects in the country came to a standstill after the financial crisis. REUTERS/Jon Nazca

By Sonya Dowsett and personally touted the shares to longtime Ireland, the banking crisis is inextricably Sarah White customers, offering them platinum credit linked to the sovereign crisis. , July 27, 2012 cards and promising steady returns. Many Spanish investors, hundreds of Just months later, Bankia collapsed after whom have joined law suits against the odrigo Rato beamed as he rang massive losses. The story of how the lender bank, now say Bankia deliberately over- the opening bell at the Madrid was able to pull off its share issue on the eve of stated the value of its real estate assets to Rstock exchange one Wednesday its doom is one of the most remarkable in the lure people into investing in its IPO. Close last summer. The former chief of the Inter- banking and sovereign debt crises that have to 400,000 ordinary Spaniards who bought national Monetary Fund raised a glass of roiled the euro zone for almost four years. Bankia shares have seen their investments champagne to the successful listing of Ban- The troubles at Bankia are a stark re- all but wiped out in the turmoil following kia, the bank he chaired. minder that Europe’s woes are rooted in its takeover by the Spanish state in May. But the good cheer on show that July large part in its banks. Formed in 2010 Smalltime investors say they were not day belied major concerns at Spain’s fourth- from the merger of seven unlisted savings properly warned of the risks; some say they felt biggest lender, concerns that other Span- banks, Bankia was meant to be a symbol of pushed into buying shares in the bank even as ish banks and most institutional investors Madrid’s faith in its famously conservative institutional investors avoided the listing. knew about but which many small retail financial system. Instead the bank’s predic- The lack of interest from bigger investors investors who bought the bank’s shares say ament has forced Europe to give emergen- raised alarm bells for those marketing the they did not. cy aid to Spanish banks and pushed Spain deal, said two investment bankers involved What worried the professional money- closer to a bailout itself. As in Greece and in the listing, forcing Bankia to focus its men was Bankia’s high exposure to Spain’s sales efforts on individuals and small busi- collapsed property sector. Their skepticism nesses. “They were thinking of scrapping it meant the bank had struggled to complete 6000 euros up to 15 days ahead of the flotation,” said its 3.1 billion euro , and Average Bankia share purchase one source close to the bank. had been forced to lean heavily on individual by retail investors But immense political pressure - the Spanish investors. Bankia branch managers government had threatened nationalisa-

SPECIAL REPORT 2 SPANISH BANKS How Spain sold bad bank to little guy

tion if the bank could not get an injection of capital from elsewhere - forced Bankia executives to push ahead with the IPO, de- spite a raft of aborted European listings in the preceding weeks. Former Bankia executives, including Rato, have said that due procedures were fol- lowed and risks adequately disclosed. They point to a 403-page prospectus available on the website of the Spanish stock market regulator. External banking advisers includ- ing J.P. Morgan, Merrill Lynch, , 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. SIGN OF THE TIMES Public sector workers demonstrate last month against cuts imposed by Madrid. A small Spanish political party has forced The sign shows Spanish Prime Minister wearing a t-shirt that reads: “Bankia: Between Spain’s High Court to open an investigation honor and money the second one comes first”.REUTERS/S usana Vera into whether Rato and 32 other former board members of Bankia and its parent company BFA are guilty of fraud, price-fixing or falsi- government forced out as chairman in May RISKY BUSINESS fying accounts. At issue is whether the bank when the bank was nationalised, appeared Bankia’s listing came at a bad time. The was honest about the value of assets on its on Thursday and said he had a clear con- sovereign debt crisis that had engulfed books such as property and stakes in other science and had done things properly. Greece and forced Portugal and Ireland to companies, and transparent enough about Yet hundreds of investors believe they seek bailouts was fast approaching Spain. the risks it, and therefore investors, faced, as were swindled. With the property crash dragging on four required by Spanish law. “They (Bankia shares) were clearly over- years after it began, markets were worried Andres Herzog, lawyer and secretary valued ... a year ago we were already in a full- about the solvency of Spain’s banks. general of the UPyD party, which has one blown crisis,” said Jesus Gonzalez Rubio, Political pressure to get the deal done seat in the Spanish parliament’s lower house, a computer science engineer from a small was intense. said the issue of biggest concern is “the stock town near Valencia who bought 45,000 eu- Spain’s then Socialist government want- market listing. We believe that this was at ros worth of shares in the bank’s IPO. ed to avoid an expensive injection of public the heart of the fraudulent activity ... They Unlike other small investors, Gonzalez money into banks to patch up losses from falsely represented their financial situation in Rubio had long investment experience – and the crash. It had already forced unlisted re- order to capture investors’ funds.” still thinks he was duped. “I’ve spent many gional lenders, or ‘cajas’, to raise private capi- The investigating magistrate on the case, years putting money into stocks...I sincerely tal or face nationalisation. Bankia’s IPO was Fernando Andreu, has so far not brought believe we were cheated,” he said, pointing held up as a way to inspire faith in Spain’s formal charges against anyone and may still to the fact that Bankia’s recent writedowns ‘cajas’, who had not yet managed to get a drop the case. Formalities began in a Ma- of its real estate holdings are far bigger than single private-equity investor on board. drid court this week. the fall in house prices over the last year. Elena Salgado, finance minister in Spain’s parliament has also opened an A Bankia spokesman declined to com- Spain’s last administration, yesterday told inquiry, calling Rato and 23 others, includ- ment on the allegations, but new chairman parliament that its reform plans were “ap- ing bank executives and cabinet ministers, Jose Ignacio Goirigolzarri has said he will propriate” based on all the information to testify before a committee. Rato, who the fully co-operate with legal authorities. available at the time.

SPECIAL REPORT 3 SPANISH BANKS How Spain sold bad bank to little guy

ABANDONED: A Bankia-Bancaja branch near the southern Spanish city of Malaga July 5, 2012. Small investors in Bankia’s 2011 IPO say they were misled and kept in the dark. REUTERS/Jon Nazca

Bankers running the initial public offer- You never think that “They talked about it being a stable in- ing of Bankia shares say the bank was up someone you know well is going vestment over the medium term,” she said. front about the risks inherent in buying the to sell you rotten fish. “They said that in a few months you would stock. The prospectus for the listing details be able to receive dividends.” the bank’s high exposure to real estate and Roberto Oscar Vetere Hijosa says she did not come under any the possibility the bank could be nation- teacher pressure to buy the shares, and that staff alised. Flagging those risks drove the issue had also invested in the offer. She was given price down, banking sources involved with Some of the several hundred small inves- a 4-page contract to sign, but did not read the listing say; Bankia shares were priced at tors joining these causes argue that they never the small print. 3.75 euros each, or 0.4 times book value, a saw a prospectus at all and were not adequate- Another investor from the Mediterra- discount to other mid-sized Spanish banks ly warned of the risks - a point repeated by nean city of Valencia, 59-year-old teacher like Popular and Sabadell. five investors interviewed by Reuters. Roberto Oscar Vetere, said he was sold the One such investor is Concepcion Hi- shares by a bank manager he considered a PLATINUM CARDS josa, a 52-year-old unemployed clerk, who friend, investing 3,000 euros in them on an But shareholder action groups bringing law- said her family lost the best part of 13,000 impulse after stopping in the bank with his suits against Bankia are probing whether the euros in the stock market listing. Hijosa wife in the middle of their grocery shop. prospectus described the bank’s true state, heard about the offer from a television ad- “You never think that someone you know given that the bank later restated its 300 mil- vertising campaign and went into her local well is going to sell you rotten fish,” Vetere lion euro profit for 2011 to a 3 billion euro Bankia branch to find out more. A custom- said, adding it was the first time he had ever loss. Rodrigo Rato said on Thursday that the er with the bank, and before that its big- bought shares and that he signed a contract change was not due to real losses or holes in gest constituent member, , for of a few pages. “Nobody put a gun to my the accounts, but writedowns against future more than 30 years, she had a close personal head to make me do it...we were told our losses when the bank changed management. relationship with staff. investments would double.”

SPECIAL REPORT 4 SPANISH BANKS How Spain sold bad bank to little guy

and apologised to his clients for selling them shares. Xavier Capallera, a bank manager in the eastern region of Catalonian, declined to comment further on why he felt the need to apologise. Other Bankia employees contacted by Reuters also declined to comment.

“A DIFFICULT EXERCISE” Selling the IPO to institutional investors both inside Spain and elsewhere was much harder, bankers involved in the process said. “They went through each and every page of the prospectus. It was a difficult exercise to convince those guys,” said one investment banker. An internal survey by an adviser to the deal during the lead up to the IPO showed 90 percent of institutional investors polled NOT STRAIGHT: Bankia headquarters in Madrid. Spanish banks’ bad loans rose to 8.37 percent of had major concerns about the issue. Close banks’ outstanding loans in May. REUTERS/Paul Hanna to 20 percent of those said they would not even look at it. One of the investment bankers involved Some Bankia account holders say they “Some of them have lost a lot too,” Gon- in the issue says he wrote a strongly worded received multiple calls from their bank man- zalez Rubio, the computer science engineer, email to Rato days before the flotation, saying agers. Gonzalez Rubio said it was partly the said. “They feel pretty bad. They feel they it should not go ahead, two sources familiar sheer insistence of the bank, which called can’t even go out into the street.” It was with the situation said. The banker said he’d him three or four times, that persuaded him hard for bank staff to complain publicly had the worst feedback he’d ever seen on a to convert some of his savings into share in- like other investors, Rubio said, because deal and it would be impossible to get it off vestments. Customers were told that if they they feared for their jobs. the ground with international investors. did participate there would be no handling At Bankia’s shareholder meeting, in Valen- Bankers involved in the IPO say Rato fee, he said. Others that were promised a cia in late June, one bank manager stood up was much more hands on than the chair- platinum credit card if they signed on. men of other companies that list their Bankia deposit holders were also sold shares, especially on the investor road- the deal when their fixed-term deposits ex- Fallen stock zone show. “It is the perfect chairman situation: pired. Pedro Lorenzo, a 70-year-old former The Bankia share price is down 82 you have a guy that is strategically smart, driving instructor, said the bank would not percent since its IPO in July 2011 understands the situation,” one banker renew his 4 percent deal when his savings said shortly after the deal was completed. investment ran out, but Bankia then pre- “I think he was a key part of getting this sented with an alternative: Bankia shares. €3 over the finish line.” Rato himself invested A Bankia spokesman said that bank 250,000 euros in the listing. managers were under no pressure to either 2 The global co-ordinators on the deal sell shares to clients or buy shares them- were J.P. Morgan, Bank of America Mer- selves. Employees had sales targets, like in rill Lynch, Deutsche Bank, UBS and Ban- any other campaign, but did not receive in- 1 kia itself. The underwriters on the retail centives for sales, he said. tranche were Sabadell, , , The shareholders contacted by Reuters the Spanish savings bank association and 0 said they did not blame bank branch staff, broker Renta 4. None of the banks would some of whom told clients that they had 2011 '12 comment publicly on Bankia. bought shares to reassure them. Source: Thomson Reuters Investment bank Lazard, where Rato

SPECIAL REPORT 5 SPANISH BANKS How Spain sold bad bank to little guy

worked between 2008 and 2010, advised Bankia itself on the IPO. It declined to comment on the process. Deloitte, which audited Bankia’s ac- counts, also declined to comment.

HEAVY LIFTING The reticence of bigger buyers meant the listing was skewed towards ordinary Span- iards. But Bankia also targeted small and medium-sized companies with credit lines at the bank, said three banking sources. Spanish institutional buyers included Spanish banks such as Sabadell and Popu- lar. , the Spanish insurance com- pany in which Bankia parent BFA holds a 15 percent stake, also ended up taking a 4.3 percent stake in Bankia. Mapfre said at the time that it had no obligation to buy. The Spanish banks bought into the list- FEELING THE HEAT: Inside the Madrid stock exchange. Spanish stocks have been hammered by a ing as the flotation became closely linked to series of bad news this year. REUTERS/Paul Hanna the health of the entire banking system. the share price of Spanish banks bounced on the day Bankia listed, even though its own share age of 6,000 euros each. Spanish institutions scale public bailout worth 11 billion euros. price fell below the initial offering price. made up almost all the remaining stock, with But by this time, Economy Minister “Nobody made us buy,” said Jacobo international institutions accounting for just 3 wanted a much more Gonzalez-Robatto, Chief Financial Offi- to 4 percent of the institutional tranche, two radical rescue for the bank according to a cer of Popular, at the time. “We think the sources close to Bankia said. source familiar with the matter. Shortly be- price is good and it’s good to show there are Given that Bankia hoped to attract a lot of fore Rato’s resignation, De Guindos, Rato’s enough resources in Spain to carry through overseas interest, “to all intents and purposes junior when the Bankia boss had served a stock market listing like Bankia.” it was a failed IPO,” said one Madrid-based as Spain’s finance minister between 1996 Even some of the underwriters ended banker. “It wasn’t a real IPO. There was no and 2004, called Rato and the heads of the up taking stakes in Bankia. money coming from outside the country.” country’s three biggest lenders – Santander, “Some banks had to lend a hand and buy “The capital raising bought time for BBVA and Caixabank – to a meeting. shares so that the stock market listing could Bankia and Spain,” said a banker involved When they were gathered, de Guindos go ahead,” said one executive at a bank tasked in the issue. “Nobody was to know the asked Rato to make BBVA executive Jose with selling some of the retail shares. “We economy would continue to deteriorate.” Ignacio Goirigolzarri Bankia’s chief executive couldn’t sell our tranche of shares and were officer, effectively undermining Rato’s power. RATO’S OUSTING left holding them as institutional investors.” “He tells him that he wants to put in a Bankia declined to say how much of the But it did, and Bankia’s financial health kept strong chief executive officer, making Rato institutional tranche was due to underwriters slipping. Ten months later, the bank present- the honorary chairman, and Rato refuses,” being left holding shares they couldn’t sell. ed a recapitalisation plan to the Bank of Spain one source said. In the end, small investors and Span- alongside 134 other Spanish banks, explain- Santander, BBVA, Caixabank and Ban- ish institutions made up the overwhelming ing that it would meet tough new capital re- kia all declined to comment, as did the majority of subscribers to the issue. Bankia’s quirements set by the government. The Bank Economy Ministry. , BFA, kept 52.4 percent of of Spain approved all the banks’ plans. The government’s desire for a bigger the equity. Around 60 percent of the free float Just two weeks later, Rato drew up an- shakeup was repeated by Prime Minister was sold to retail investors, spending an aver- other plan, seen by Reuters, for a small- Mariano Rajoy in a meeting with Rato

SPECIAL REPORT 6 SPANISH BANKS How Spain sold bad bank to little guy

on May 7. Spain’s banking sector and the management team for 19 billion euros in Chris Vellacott in London, Edited by Simon International Monetary Fund backed the state funds, and itself asked Europe for 100 Robinson and Mike Williams government, Rajoy told Rato according to billion euros in aid. a source close to Bankia. Rato immediately “The merger of the banks (that made up handed in his resignation without consult- Bankia) and its stock market listing were FOR MORE INFORMATION ing his board. One high-ranking Bankia not appropriate, and now we have to put Sonya Dowsett, correspondent board member heard the news from a wait- things right,” said Economy Minister Luis [email protected] er who had seen it on television, a source de Guindos shortly after. Simon Robinson, Enterprise Editor, familiar with the matter said. Europe, Middle East and Africa On May 9 the government nationalised With extra reporting by Jesus Aguado, Fiona [email protected] Bankia, which restated its 2011 accounts. Ortiz, Tomas Gonzalez and Rodrigo de Michael Williams, Global Enterprise Editor Madrid agreed to a request from the new Miguel in Madrid, and Kylie MacLellan and [email protected]

NOW BOSS: Bankia’s new Chief Executive Jose Ignacio Goirigolzarri last month. Now under government ownership, Bankia says it will cooperate with investigations into its behaviour. REUTERS/ Susana Vera

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