Wealth redistribution in progress.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The last five years have been a bumper period for banking scams and scandals in crisis-ridden Spain. From Bankia’s doomed IPO in 2012 to the “misselling” of complex preferentes shares to “unsophisticated” retail bank customers, including children and Alzheimers sufferers, all of the scandals have had one thing in common: the banks have consistently and ruthlessly sacrificed the welfare and wealth of customers, investors, and taxpayers on the altar of short-term survival.
Some commentators claim that the problem of banking instability in Spain has been put to rest in recent times, thanks chiefly to a robust, debt-fueled recovery, a tepid resurgence of the real estate sector and the transfer of the most toxic assets from banks’ balance sheets to the festering balance sheets of the nation’s bad bank, Sareb. They could not be more wrong.
Despite the untold billions of euros of public funds lavished on “cleaning up” their balance sheets and the roughly €240 billion of provisions booked against bad debt since December 2007, the banks are just as weak and disaster-prone as they were four years ago.
And now, it seems a new scandal is in the works. Last month Spain’s sixth largest financial institution, Banco Popular, announced that it was urgently seeking to raise €2.5 billion in capital in a desperate bid to shore up its finances. The news triggered a sell-off that wiped out 33% of the bank’s market capitalization in just two days, before investor nerves were steadied somewhat by revelations that the bank had found 10 global mega banks as underwriters for its €2.5 billion rights issue, including Goldman Sachs, Morgan Stanley, Santander, Deutsche Bank and HSBC.
But in recent days the stock has once again begun to crumble following allegations that Popular is also doing some creative selling of its own. The Spanish investment group Blackbird claims that the bank is offering customers dirt-cheap loans or refinancing deals, at an interest rate of just 2.5%, as long as they use some of the funds to purchase the bank’s new shares.
“Popular is offering loans to its customers on the condition that they subscribe to the rights issue… and then deposit the €1.25 per share in their bank accounts,” asserts Marc Ribes, co-founder of BlackBird.
If Blackbird’s allegations are well-founded — and so far there’s been no official denial — Popular is in the process of taking the dark art of banking misdeeds to a whole new level. In the preferentes scandal, Spanish banks effectively plundered billions of euros of their customers’ savings to keep their balance sheets in tact, at least for a little while longer. That was bad enough. But now it seems that the already heavily debt-laden, loss-leading Popular is creating new debt for broke customers so that they can participate in the bank’s rights issue.
Such behavior is not just unethical; it’s illegal. Banks cannot lend customers money to buy the banks’ own shares. At least not in Spain.
The allegations against Popular have reached such a level that Elvira Rodríguez, president of Spain’s National Securities Market Commission (CNMV), was yesterday asked to comment on them. She declared that the CNMV “will be monitoring and asking for information from” Banco Popular about its forthcoming capital expansion. This should, in an ideal world, be a source of relief to investors. But this is not an ideal world and there is no source of relief — at least not from financial regulators, whose role is to guard the foxes as they eat the hens while telling the hens not to worry about the foxes.
In the last five years Spanish banks have been able to bend or break just about every rule in the book with not so much as a slap on the wrist from Spain’s two biggest financial regulators, the CNMV and Banco de España, both of whom have been accused of a raft of oversight failures in Bankia’s IPO.
The chances of the same two regulators suddenly taking an interest in the misdeeds of one of Spain’s biggest financial institutions are paper-thin. As for Spain’s caretaker government, it’s not hard to fathom where its loyalties lie, particularly in light of the fact that the governing People’s Party just received a €1.2 million loan from Banco Popular so that it could post bail for three former treasurers accused of operating a multi-decade slush fund to channel corporate kickbacks to senior party officials.
Meanwhile, Spain’s fourth biggest party, the center-right Cuidadanos financed its last election campaign with a €4 million loan from (yes, you guessed it…) Banco Popular.
With 10 of the world’s biggest and most deviant banks preparing the ground for Popular’s capital expansion while Spain’s regulators and government look the other way, it’s hard to shake the feeling that a trap is being laid. If the last five years are any indication, the chosen prey will be (in order of appearance) gullible customers, retail shareholders, and Spain’s unconsulted taxpayers. Once again, the wealth of the country will be redistributed from middle-class taxpayers, investors, savers, and pensioners to the executives and creditors of financial institutions.
As a former Barcelona-based banker told me a couple of days ago, “the banking sector — once the foundation of the economic system — is a disgrace; it has lost all sense of purpose, apart from sucking dry what little marrow remains of the productive economy.” By Don Quijones, Raging Bull-Shit
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