Morgan Stanley’s Penny-Stock Shenanigans in Spain

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It’s so bad, it’s almost funny. It happened on the last day of the month, May 31, on a Friday afternoon when no one was supposed to pay attention.

In December 2010, seven regional savings banks in Spain were cobbled together into one bank via a lightning-fast “cold fusion.” They’d been sinking into the quagmire that the housing bubble had left behind. The hope was that combining these seven dead cats would somehow create one live dog.

To dress up that dog, they gave it a new-fangled name: Bankia. The largest of those regional banks rolled into it was Caja Madrid which was owned by the government of Madrid. After the merger, the most toxic assets were transferred to a new holding company, Banco Financiero y de Ahorros, which was then bailed out by the government with €4.5 billion. July 20, 2011, Bankia, armed with presumably a cleanish balance sheet, went public. To bamboozle people into believing that this was in fact a live dog worthy of their savings, BKIA became part of the IBEX 35 stock market index.

But that dog didn’t make it far. A mere ten months after the IPO, Bankia negotiated a taxpayer bailout package of €19 billion, on top of the original €4.5 billion, and was partially nationalized by the central government of Spain. Last March, the loss for the year 2012 was pegged at €19 billion, an all-time record in the history of corporate losses in Spain.

Its stock has been a trash penny stock ever since. On Friday, May 31, it traded between €0.66 and €0.71 per share, when two strange things happened, according to the ever vigilant GURUSBLOG (Spanish):

– A huge block trade of 2.4 billion shares at €0.72 per share was executed for a total of €1.7 billion, via a financial intermediary, thus bypassing the stock exchange.

–  Moments before the close, when volume was dying down, Morgan Stanley bought up 145 million shares, as if it had suddenly fallen in love with this fermenting pile of financial manure, purposefully driving up the stock price by 31% from about €0.67 to €0.88 a share.

If MS wanted to buy the stock on the cheap, it could have done so over time. But it chose the moment when volume would be dead and then jumped in with both feet, a strategy it knew would guarantee a huge price move. And MS must have been satisfied with its success.

Friday was the last day of the month, and someone might have needed some major “window dressing” to pull a bag over investors’ heads. So we can’t wipe off the suspicion that there was a connection between the block trade and MS’s sudden efforts to manipulate up the stock price. The block trade executed at €0.72 a share earlier in the day would show a gain at the close of trading of 22.2% on €1.7 billion! A cool same-day gain of €377 million. Now that’s real money! There is no trick too dirty to gussy up a monthly report or even a financial statement. Whatever happens on Monday is irrelevant for now; and there are always other shenanigans to cover up that eventual hole too.

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