By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“It’s just a matter of time before injustice prevails…”
A Spanish judge by the name of Fernando Andreu recently violated one of the most important unwritten rules of global finance: namely, that banks and bankers are effectively immune to all laws of all lands (barring, of course, Iceland). As I reported roughly 10 days ago, Andreu had ordered Bankia, its parent company state-owned BFA, the bank’s former chairman, Rodrigo Rato, and three other former directors to pay an €800 million civil liability bond for signing off on fraudulent financial statements in the run up to the bank’s 2011 IPO.
If the defendants fail to cough up the full amount before March 13th, the authorities will embargo assets belonging to them with the equivalent market value. With the clock ticking down and the days flying by, it was just a matter of time before the defendants hit back – and hard!
The Banker Alibi
The first to hit back was Rodrigo Rato, the bank’s former chairman and one-time IMF president. In a 75-page notice of appeal that was leaked to the Spanish press, Rato cautioned that Judge Andreu’s “premature” decision to force the six defendants to compensate the thousands of shareholders they are accused of defrauding could end up provoking a “much greater evil” than that it is supposed to address.
In the worst case scenario, the document warns, it could send a “message of uncertainty to the markets,” which could in turn exert downward pressure (otherwise known as gravity) on the already semi-defunct bank’s share price. This is not the first time that a panicked banker has used this argument; indeed, it is the preferred alibi of all 21st-century banking racketeers.
The argument is simple:
Don’t touch me, or the bank gets it. And if the bank gets it, so will everyone else.
Spain’s economy minister (and former Lehman Brothers advisor) Luis de Guindos recently adopted a similar line of reasoning: if taxpayers wanted to claw back any of the billions of euros they had (involuntarily) poured into Bankia’s black holes, the best chance they had of doing so would be to sell the public-private entity at the highest possible price. In other words, no actions should be taken that could undermine its share price – actions such as, say, fining the bank or its former executives for “misleading” shareholders out of billions of euros.
A Fragile Game of Confidence
The one thing Rato does get right is that the apportioning of blame for Bankia’s collapse should be much more evenly spread out (although this in no way excuses him of engaging in the criminal acts of fraud and deception of which he’s accused). As Rato reminds both investors and voters, Bankia’s public launch “was not a whimsical decision” taken by its chief executives, but was the inevitable result of regulatory changes at the beginning of 2011.
What’s more, Spain’s financial regulators, the CNMV, and its central bank, the Bank of Spain, closely monitored Bankia’s progress before, during and after its allegedly fraudulent IPO. According to Rato, the CNMV even played an active role in drawing up the bank’s lie-infested IPO brochure.
As anyone who followed these events should be able to recall, everybody (the Government, regulators, the financial sector as a whole) had an economic stake in Bankia’s successful public launch. After all, confidence in the Spanish financial system depended on it.
And to a great extent it still does. Investing is – and always has been – one humongous confidence game. As long as enough investors believe that the assets underpinning the economy actually have the “official” value they are apportioned, everything is rosy. However, the moment that doubt and uncertainty creep into the equation – as happened during Bankia’s last collapse, when the bank’s auditors Deloitte refused to sign off on its accounts – that confidence can evaporate very quickly.
No Country for Good Judges
That Rato is prepared to jeopardize public confidence in Bankia’s financial health – and by extension, Spain’s phantom economic recovery – is illustrative of the stakes involved in this very dangerous game of political and judicial brinkmanship. Not only are his personal finances on the line; so, too, is his personal freedom. If he’s found guilty of the crimes of which he’s accused (fraud, misstating earnings, misuse of credit card privileges), he could face up to 10 years in prison.
Curiously, if he were sent to prison (granted, a massive “if”), Rato would be following in the footsteps of both his father and uncle, who spent three years in prison in the late sixties for illegally channeling client funds through their family bank, Banco de Siera, to a private bank in Switzerland. In a police operation that would be wholly unimaginable today, the two brothers were arrested during the no-expenses-spared wedding of Rodrigo Rato’s sister, María de los Ángeles Rato Figaredo, with Emilio García Botín, the nephew of Spain’s recently deceased banking godfather Emilio Botín.
It is indeed a sign of our times that in Spain’s post-Franco democracy the senior figures of the financial establishment enjoy even greater immunity from the law than they did during Franco’s brutal dictatorship. At least during the dictatorship, wayward bankers occasionally saw the inside of a prison cell. By contrast, today’s senior bankers hardly ever see the inside of a court room. Indeed, the last Spanish judge (a man by the name of Elpidio Silva) who tried to punish a senior banker for his frontline role in the country’s financial crisis was himself expelled from the bench for over 17 years.
Silva’s fate should serve as a stark warning to Judge Andreu as he takes on the combined forces of Spain’s financial, political and highly politicized legal establishment. Given the stakes at hand – not only for Rato but also for the Spanish economy and the governing Peoples Party, for whom Rato once served as vice-president and economy minister – it’s probably only a matter of time before injustice is served once again. By Don Quijones, Raging Bull-Shit.
Have banks gotten tired to seeing their actions show up in the media? You bet. And they creeping all over the media to control the message, often successfully so. But it doesn’t always work out. Read… As Banks Tighten Grip on the Media, British Journalist Rebels Against HSBC-Run Telegraph