How Greed Destroyed Spain’s Oldest Savings Bank

This is a sordid and ongoing tale of how a public bank – Caja Madrid – with a clear mission was corrupted and destroyed by a clique of self-serving politicians, business men and women, and union leaders.

By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

Before we get to the grist of the story, I’d like to begin with a little thought experiment:

Imagine that you had a very handsomely paid job in the upper echelons of a large company or bank. One day you’re summoned to the accounts department, where you are informed in a hush-hush meeting with the company’s chief accountant that you are now the lucky recipient of a very special kind of company credit card, a card that the bank likes to call the “tarjeta negra” (black card).

With that card you can buy literally whatever you want, including goods and services that bear no relation whatsoever to your professional duties or responsibilities. You can even make cash withdrawals from the bank. The company, the accountant says, will pay for it all, as long as you do not exceed the 50,000 euros-a-year limit. There is no contract and there are no tax obligations, for the simple reason that none of the transactions will ever be declared to the respective tax authorities.

For you, dear reader, this dilemma is a purely hypothetical one. Your employer is hardly likely to ever make such a harebrained, financially damaging, and blatantly illegal offer.

Madrid’s Free Money Tree

However, for the executives and board members of Span’s oldest savings bank Caja Madrid, now the festering rump of Spain’s Frankenbank, Bankia, the moral dilemma was very real. Between 2003 and 2012 Caja Madrid paid out over 15 million euros to its senior management and executive directors through its tarjeta negra scheme. According to accounts recently released by Spain’s bad bank, FROB, much of that money went on restaurants (€3 million), cash withdrawals (€2 million), travel and holidays (more than €1.5 million), property (€1 million), hotels (nearly €800,000) and clothes and accessories (€700,000 euros).

Of 90 Caja Madrid senior managers, executives and board members, only four – a pathetic five percent of the total – had the basic decency and wherewithal to turn down the offer. For the rest, it was an offer they could not refuse. Among those who maxed out their cards were Miguel Blesa, the bank’s former president and close friend to Spain’s former prime minister, José María Aznar, and Ildefónso Sanchez Barcoj, the bank’s former financial director. Between them alone, they spent just shy of €1million over an eleven year period.

In his last few months at Caja Madrid – just before the whole edifice came crumbling down – Blesa went on a mad spending binge. In one month alone he made purchases on his black card worth €19,000 – more than many Spaniards’ annual salary. It’s worth pointing out that this is a man who pocketed over €20 million in salaries and bonuses while at the helm of the bank that he almost single-handedly destroyed. On his departure in 2010, he was awarded a €2.5 million golden parachute. Yet even after his ouster he, like many other Caja Madrid executives, continued making liberal use of his tarjeta negra.

Perverse Justice

Now Blesa is the subject of a judicial inquiry into the tarjetas negras scandal, together with Sanchez Barcoj and Rodrigo Rato, the former Minister of Finance of Spain and IMF chief who took over the helm of Caja Madrid in 2010 and oversaw its doomed metamorphosis into the too-big-to-fail monster, Bankia. Like Blesa, Rato was more than happy to accept a tarjeta negra of his own, although he did pay back most of the money he spent when regulators began sniffing around Caja Madrid’s accounts in the wake of Bankia’s collapse.

That the likes of Blesa, Sanchez Barcoj and Rato are now under investigation for the dubious practices that took place under their watch should be cause for celebration, but few Spaniards are holding their breath. As I reported here, here and here, Blesa has already been sent to jail, without passing go, twice. On both occasions, he was sprung from the can by close friends in the Spanish judiciary.

Yesterday the same judiciary banned Elpidio José Silva Pacheco, the judge who sent him to jail, from serving on the bench for 17 years. His crime? Perversion of justice. By trying to make Blesa pay for the central role he played in Caja Madrid’s collapse – a collapse that has to date set back Spanish taxpayers over 40 billion euros – Silva crossed the line and broke the rules of a deeply perverse justice system, one which protects the guilty while scapegoating the innocent.

The Art of Destruction

The tarjetas negras scam is just a minor symptom of the culture of greed and reckless abandon that pervaded Caja Madrid’s executive suites under Blesa’s direction. From his arrival at the bank in 1996, Caja Madrid was transformed from a relatively conservative institution, with a clear social mission, into a feudal outpost of the then (and now) governing Popular Party.

As for the board, it was filled to the rafters with illustrious individuals whose appointment was based purely on the interests of the largest political parties (from both sides of the political divide), unions, hyper-connected corporations and regional governments. Almost all of them were bought off with the promise of cheap loans and black cards.

Like many of Spain’s other savings banks, Caja Madrid was given a new mission in the late nineties: to support and fuel the country’s burgeoning real estate bubble – a bubble that was first given life by a “liberalizing” land law passed in 1998 by the government’s then-Economy Minister, Rodrigo Rato (ring a bell?). To fulfill its newfound mission, Caja Madrid began offering mortgages to all and sundry while lending out huge, in many cases suicidal, loans to construction firms and real estate developers, most of whom were channeling millions of euros in kickback funds to the Popular Party’s headquarters. Naturally, all took place under the nose and with the tacit approval of Spain’s financial regulators and the Bank of Spain.

As the bubble grew, so too did Caja Madrid. Annual profits shot up from 2.3% in 2002 to 23% in 2005 right up to an incredible 117% in 2007 (year on year increases). And as the profits grew, so too did executive compensation. Even when the profits began shrinking, eventually turning into big losses, Caja Madrid’s board continued to award itself astronomical salaries. And when austerity began to bite and the Spanish economy began to bleed jobs at an alarming rate, the bank’s management continued to max out their black cards.

Since the bank’s collapse, only a handful of executives have returned the money they spent – and almost certainly out of fear rather than any real sense of moral obligation. No one, not a single soiled soul, has paid the price for Spain’s biggest ever bankruptcy. Except for, of course, Judge Elpidio Silva. By Don Quijones. An exclusive for Wolf Street.

Catalonia is in an independence tussle with the central government of Spain. In the worst case scenario, financial chaos would ensue, in Madrid and in Catalonia. Read… Catalonia’s Choice: Chaotic Divorce or Loveless Marriage

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  4 comments for “How Greed Destroyed Spain’s Oldest Savings Bank

  1. williamwilliam
    Oct 10, 2014 at 9:57 am

    A friend of mine did his MBA in Madrid a few years ago. Class was in English, overpriced, and 98% non-Spaniards. He told me the country’s banking fees were so high, that he would use other people’s Spanish bank accounts to bring money into the country and withdraw cash on a regular basis. The inconvenience, and requirement to trust the account holder, was worth it compared to the immense amount of money the bank would skim from him.

  2. Ray
    Oct 10, 2014 at 1:24 pm

    Greed will always be blamed and everyone will be clamouring for another nobler soul to take the reins of power. Some altruist who does not suffer from moral weakness. That way everyone can ignore the REAL problem, i.e. moral hazard inherent in the system.

  3. Dead at 18, buried at 65
    Oct 11, 2014 at 12:48 pm

    Ok. I am a bit slow here, but I still cannot see what was done wrong? If Blesa and Co. spent €1 million Euros over 9 years (2003 – 2012) then that works out to be roughly €111,000 Euros every year. This seems to be relatively “conservative” spending, if we consider that most of it went to restaurants, cash and hotel fees, with a few clothes and accessories thrown in!

    This does not seem in any way excessive considering the size of the bank, and the nature of the job and persons involved. A lot of Anglo-Saxon companies carry out this “standard practice” for their management, and then they write the expenses off, so that they do not pay taxes on it.

    If any paid the money back “out of fear”, then it certainly was done because of it; Seeing, that no laws were broken, and no company rules were flouted.

    • Don Quijones
      Oct 12, 2014 at 5:02 am

      Hi Dead & Buried,

      The total amount of money was not 1 million euros but 15. And as you yourself said, many Anglo Saxon companies write the expenses off, which means that they at least declare them. In Spain Caja Madrid did not declare a single cent of these “expenses”, hardly any of which bore any relation to the bank’s core business. All of which is illegal, even here in Spain. As you said, no company rules were flouted, but the reason for that is that there were no rules to speak of.

      Now the Spanish authorities, bowing to pressure from smaller political parties and civil organisations, have finally opened an investigation into the practice, and there is a razon-slim possibility that the worst offenders might actually pay a heavy price for their frivolous ways (though I’m not exactly holding my breath).

      Granted, 15 million euros is a drop in the ocean compared to the hundreds of billions of taxpayer funds spent on keeping Spain’s banking sector from keeling over completely. But the fact that the bank’s management was so blasé about executive expenses tells you all you need to know about how it approached risk management as a whole. And lest we forget, it was the collapse of these ancient savings banks that eventually put paid to the country’s economy — and continues to exert a huge drag on its phantom recovery.

      What Ray says is true: the core problem in the financial system is a systemic one. But that shouldn’t take away from the fact that these institutions are/were run by human beings who made an obscene amount of money while running their companies — and by extension, the economies on which we all depend — into the ground.

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