By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The week has not been kind to Rodrigo Rato, the embattled former vice-president of Spain, former president of the IMF, and former president of ongoing bank-bailout-fiasco Bankia. First the Spanish news website Voz Populi reported that he was under police investigation for tax fraud, money laundering and embezzlement. That was on Tuesday.
Later that same day, Rato was recognized by passengers on an easyJet flight from Geneva to Madrid. Things must be bad if a man of his standing and financial means has to stoop so low as to travel low-cost with the hoi-polloi. One assumes it will be the last time for a long time after he was forced to spend an excruciating hour and a half being heckled, filmed and accused of robbery by his fellow passengers.
And on Thursday, in the early hours of the afternoon, he received an unexpected visit to his apartment in downtown Madrid from police officers affiliated with Spain’s Inland Revenue service. They had a warrant for his arrest and a search warrant. When shepherded outside to the waiting police car, Rato realized that just about every semi-professional journalist and photographer in Madrid had been tipped off about his arrest. Clearly someone somewhere wants his humiliating fall from grace to be a very public affair.
Things were not meant to be this way – not when you are a made man in the world of finance and a senior member of Spain’s untouchable political class. At the height of his career, Rato came this close to the zenith of political and economic power, both at the domestic and international level.
In the late 1990s, he was vice-president and economy minister in José María Aznar’s government. He is widely credited with lighting the fuse to Spain’s turbo-fuelled property bubble. According to the primary beneficiaries of his policies – people like the late CEO of Santander Bank, Emilio Botín – he was the best economy minister Spain has ever had. Indeed, many tipped him to replace Aznar as leader of the Popular Party.
Instead Rato was appointed IMF chief, a position he held until just before the subprime crisis broke. In the last real (i.e. non-advisory) position he held, he served as president of Spain’s fourth largest bank, Bankia, just before its collapse. It was in this role, at the helm of Spain’s biggest ever bankrupt bank, that Rato earned the scorn and ire of an entire nation. Now he faces the dual prospect of prison and bankruptcy [I first wrote about him in October 2013 in Portrait of a Kleptocrat].
But what could Rato’s spectacular fall from grace mean for Spain’s current government? How could it impact the upcoming do-or-die elections? And what about all the other tax-avoiding/evading members of Spain’s political, business and banking elite?
Here are five back-of-the-napkin observations:
1. This time it’s serious. The list of charges Rato now faces is too long to be ignored, covered up, or forgotten. What’s more, his most recent charges – money laundering, tax fraud and embezzlement – relate to defrauding and stealing from the central government. And that is a much more serious offense than robbing or defrauding shareholders, bank depositors, or pensioners.
2. Rato may lose more than just his freedom. In early March a Spanish judge ordered Bankia, its parent company state-owned BFA, and four former directors – including Rato – to pay an €800 million civil liability bond for signing off on fraudulent financial statements in the run-up to the bank’s IPO. Bankia has since made good on the payment but is now seeking damages from Rato and the other former directors. If the bank wins the case, Rato could end up losing just about everything he owns. Indeed, according to El Diario, the main reason Rato was in Geneva was to move his funds as far out of the reach of Spanish authorities as possible.
3. This is not just about Rato. For the first time since the crisis began, Spain’s political and financial elite are beginning to feel some real heat. According to some reports, Rato is one of over 30,000 people (including some 700 politicians) to have taken up the government’s one-off offer, in 2012, of tax amnesty. At the time the tax office desperately needed funds and it promised people like Rato that if they repatriated their wealth and paid 10% on what was owed – in the end it was a whole lot whole less – they would be forgiven their tax liability. Now, it seems, the government (or at least Spain’s tax office) is reneging on an important part of that deal – i.e. the “forgive and forget” part.
4. For Rajoy’s government, the timing of Rato’s arrest could not be worse. In one month’s time Spain will be holding municipal elections, which are widely seen as a dress rehearsal for autumn’s general elections. As I reported in The Rajoy Horror Picture Show Nears Grisly Climax, things do not look at all good for Rajoy’s scandal-tarnished government, especially with a new political party called Ciutadans enticing voters with the promise of similar center-right policies but without all the ugly baggage. Now, everyone in the governing People’s Party is desperately trying to convince themselves, each other, and the press that they never knew or had any kind of contact with Rato.
5. The IMF presidency is no longer a guarantee of judicial immunity. That two of the last three IMF chiefs have seen the inside of a jail cell system – one for alleged rape, the other for financial crimes – is the perfect indictment of the moral state of the current financial system. Indeed, the current occupant of the position, Christine Lagarde, allegedly was herself deeply implicated in the Bernard Tapie affair, although she was eventually assigned the status of “assisted witness.”
One assumes that as long as Lagarde continues to execute her duties with Gallic charm, anglo-saxon efficiency, and complete moral detachment, she should stay on the right side of the law. Judging by her performance to date, her “superiors” are probably delighted with their choice of replacement for the ill-fated DSK. Unlike DSK, she is not in the habit of using the word “greedy” to describe the world’s biggest banks; nor is she ever likely to say, as DSK did on the documentary Inside Job, that “the poorest – as always – pay the most.” By Don Quijones, Raging Bull-Shit.
Rato’s Bankia isn’t the only fiasco bank. And “bad banks,” launched to conceal the rising tide of triple-F rated financial junk, are suddenly hot. Read… “Bad Bank” Mania Spreads in Europe