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
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Looks like the Spanish version of Rat”s”o Risso somehow managed to step on the genitalia of one or more of the global banking parasite class. Ergo he will be made persona non grata extraordinaire.
Ya gotta love it…!
This article misses a point clear to many in Spain: Rato is being thrown to the wolves now (why not earlier?) just because the elections are approaching, to make it look as though Something is Being Done.
Just as the old king Juan Carlos was bounced out to make way for his son Felipe when things were getting hot. He still has a very pleasant life.
He will be taken care of, and prison will be as comfortable as possible: ‘Potemkin Prison’. Not pleasant, but not the worst fate one can imagine.
Xavi,
I’m afraid I disagree with your thesis — though admittedly it’s an idea that’s gone through my head a number of times.
Clearly Juan Carlos’ abdication was an obvious attempt to save the system — and for the moment it seems to have worked. However, to suggest that Rato is a scapegoat intended to present the idea that somthing is being done about political corruption is, I fear, to grasp at one too many straws.
The question you should ask is: “cui bono”? Perhaps the system as a whole may benefit from a little Spring cleaning — or at least the perception of it. So might the PSOE — as long as the tax office doesn’t release the full list of the 705 politicians that were caught evading taxes (a possibility that is already being talked about). If it were to release the names the two main parties (the political pillars of the “system” of which you speak) would once again be shown to be infested with corrupt individuals wholly incapable of representing anyone’s interests but their own.
The only beneficiaries of such an outcome would be up and coming parties like Podemos and Ciutadans. Those who DON’T benefit from Rato’s humiliating fall from grace include Rato himself, the current government and the thousands of other people that entrusted their tax-evaded funds to Montoro’s tax office. After all, if Rato is eventually punished for tax evasion, what about all the others? One imagines that this weekend many of them will be having very serious conversations with their tax lawyers and accountants.
As for the government, this ongoing scandal is hardly likely to favor its electoral prospects. Remember, Rato was Aznar’s number two. Unlike Barcenas, he was blue-blooded PP royalty. He was “the best economy minister Spain has ever had” and one of the most connected figures in Spanish politics, both at home and abroad. As such, any attempt by the government to disassociate itself from him is almost certain to fail or even backfire horrendously.
Finally, your assertion that Rato is being thrown to the wolves NOW (why not earlier?) just because the elections are approaching makes little sense. Indeed, it’s counter-intuitive. Surely it would have made much better sense to have done this six months ago so the scandal might have died down before the municipal elections. The way things stand right now, when most people go to vote in a month’s time the first thing on their minds will be the government’s shocking record of corruption and tax evasion — and not the supposed improvements it has made to economic conditions.
As you describe this move makes no sense if Rato is being thrown to the wolves in order to make it appear that something is being done by the incumbent powers.
Could this be that the unelected bureaucracy of the government smells where the electoral winds are blowing and are making an offering in order to protect themselves post election? Why else renege on the previous tax amnesty deal, which was in essence designed to save the current party from yet another scandal?
Last thought, it appears to me that the unelected elite that holds the power behind the scenes has not made a choice who to back yet, merely playing for time to see who to go with.
Now that makes a lot more sense, John. In fact, I read today in a couple of places that the Hacienda (tax office) arrested Rato without first informing Spain’s highly politicised anti-corruption office, which is heading up the investigation into Rato’s involvement in the Bankia collapse. All of which suggests that elements in the civil service didn’t want the government to learn about their plans until they were executed.
As I wrote in the article, the fact that so many journalists were tipped off about what was going down could only mean one thing: there are powerful interests that want to obliterate what’s left of Rato’s reputation and perhaps also do serious damage to the current government’s electoral prospects.
Dear Don
Good reasoning, and an excellent article; you are one of the very best Anglo-Saxon observers of the Spanish scene
But, forgive me, I think you perhaps over-estimate the rationality and intelligence of the Spanish electorate, and the utter cynicism, ruthlessness, – and capacity for treachery within their own ranks, – of those who rule Spain.
Rato is the bone being thrown to the masses in their temporary frenzy: they -the rulers – know that they have a core vote for the establishment parties which will never go away -around 20-25% for ‘Socialists’ and ‘Conservatives’, and ditching Rato now will not affect that in any way, and it will certainly not be counter-productive.
The issue was not dying away, and is on everyone’s lips as the elections approach. It was never going to die down.
In their ammoral thought-world, a scapegoat, dramatically bound and sacrificed, had to be found. And we should note that the PP, amazing though it might be, is actually trying to re-brand itself as an anti-corruption party, one for all connoisseurs of cynicism!
The emerging details of the great ruthlessness with which Juan Carlos was treated are highly suggestive, one almost feels sorry for the old rogue.
These prosecutions often begin with a lot of noise, even end in jail, but then disappear in smoke.
There is much talk of the PSOE and the PP patching up some kind of government of ‘national and economic stability’ if the elections fail to produce, as is most likely, a winner with a clear majority for government.
In all of this, I see the old colluders and string-pullers, and the real establishment, manoeuvring against the newer parties. Rato just had too much sticking to him and had begun to smell too much even for them.
The rats are deserting the sinking ship, but not before turning on each other first.
Are the spaniards finally sharpening their pitchforks, or can we expect the judge in this case to be indicted any moment now?
When the former Socialist Vice President, Chaves, takes the perp walk for the ERE scandal in Andalucia, then we will know this is a serious attempt to address the corruption in Spain.
The Saturday TV show ‘Informe Semanal’ (Spain’s answer to ‘Panorama’ or ‘Sixty Minutes’) put Rato in the first segment… and no doubt for editorial balance, Chaves in the second. Probably the only politico enjoying the show was Pablo Iglesias.
It looks like he was unaware of the unwritten motto of the bonding firms: ‘If we pay a dime, you’ll do hard time.’