Spanish Judge Violates Global Rule, Makes Bank President & Former IMF Chief Pay for Financial Crimes

by Don Quijones, Wolf Street Bankers never go to jail. This is one of the unwritten new laws to which most of us have grown wearily accustomed in this new post-crisis reality. Also begrudgingly taken for granted is the fact that a banker’s fortune will never be seized or confiscated by the authorities; in today’s new Gilded Age a banker’s gains, whether ill-gotten or not, are his of hers until death do them part. However, nobody seems to have told any of this to Fernando Andreu, the Spanish judge investigating Bankia’s allegedly fraudulent and for investors disastrous 2011 IPO. On Friday 13th, he ordered Bankia, its parent company BFA, the bank’s former chairman, Rodrigo Rato, its former deputy chairman, José Manuel Olivas, and former Bankia board members Francisco Verdú and José Manuel Fernández to pay an €800 million civil liability bond for signing off on the bank’s 2010 financial statements – financial statements that were included in the IPO brochure and “whose veracity is questioned with solid and well-founded evidence”. Referring to a report prepared by Bank of Spain inspectors seconded to the court for the investigation, Judge Andreu said:

From the current experts’ report, it can be seen quite clearly that the financial statements contained in the Bankia IPO pamphlet did not represent a true image of the company.

Breaking with Convention

Two months ago, I wrote that Bankia’s saga of lies, deception, and fraud should (but probably won’t) culminate in the imprisonment of Rodrigo Rato, crippling fines for the auditors (Deloitte), and fireworks at financial regulators [Spanish Judge Exposes Too-Big-to-Fail Bank Robbery].

But now this judge in Spain has decided that Rato and three other senior bankers should be held partly responsible – at least financially – for the economic and social destruction they have caused. By far the most important of these far-from-usual suspects is Rodrigo Rato, a man who, as I laid out in Portrait of a Kleptocrat, holds more responsibility for Spain’s current financial travails than just about anyone else on this debt-ridden planet. This is what it boiled down to:

    1. As Spain’s former vice-president and economy minister in the late ‘90s, Rato helped set in motion, through the creation of a very speculator-friendly land law, an unprecedented real estate bubble whose implosion just over a decade later sent the Spanish economy tailspinning into one of the most spectacular debt spirals of living memory.
    2. During the pre-crisis years of the mid 2000s, Rato was the president of the world’s most powerful international financial institution, the IMF. Under his tenure, the Fund of Funds hardly covered itself in glory, even by its usual standards. It did absolutely nothing to preempt or soften the blow of the global financial crisis. Even when, in 2005, its chief economist, Raghuram Rajan, began warning about the existential threat posed by complex derivative products flooding the system, he was sidelined by Rato’s management team and his warnings drowned out by a banner message of continued optimism.
    3. In his role as CEO of Bankia, Rato was responsible for shepherding Spain’s fourth biggest bank off a very steep cliff in world-record time, while giving his consent to policies that ended up swindling hundreds of thousands of retail investors and depositors out of their life savings. Indeed, so spectacular was Rato’s failure as Bankia’s CEO that it earned him fifth place in BusinessWeek’s 2012 ranking of the world’s worst executives. (Personally speaking, I think he deserved better).

By pinning part of the blame for Bankia’s criminally fraudulent practices on senior managers like Rato, Judge Andrea has broken with a convention that has gone virtually unchallenged in every country of Europe (except Iceland) and North America since the collapse of Lehman Brothers. That convention holds that only banking institutions (in other words, their shareholders) – and not the individuals who work for them – can be held financially liable for the illegal practices they engage in.

A Dangerous Precedent

The Spanish judge is also setting a very dangerous precedent: namely, that human agents in the financial sector can – indeed, should – be held accountable, whether judicially or financially, for the decisions and actions they take, even when the institutions they work for are “systemically important” (i.e. too big to fail). This issue is of particular import with regard to TBTF institutions such as Bankia, RBS in the UK, and Dexia in France and Belgium, all of which are part or fully owned by the public yet continue to routinely abuse public trust and flout the law.

Naturally, Andreu’s ruling has gone down like a lead balloon in Madrid’s establishment circles. Within hours, both Bankia and the Rajoy government had launched an appeal against the judgment. If the appeals are dismissed – and there’s actually a good chance they will be – the defendants will have just one month (from last Friday) to claw together the €800 million in compensatory funds. If they fail to do so, the authorities will embargo assets belonging to them with equivalent market value.

The problem is that none of the defendants have that sort of cash lying around. Last year Bankia declared meager profits of just €500 million – and only thanks to the sort of accounting gimmickry and trickery that would make even Enron’s former CFO blush. And while Rato and his former colleagues might have a few million stashed away here and there – perhaps even in the vault of HSBC’s Geneva branch – it will barely put a dent in the €800 million owed.

In other words, the defendants need to find a sugar daddy. And sharpish. One potential candidate is Spain’s biggest insurer, Mapfre. By far the worst hit of Bankia’s institutional investors, having already lost some €281 million in the bank’s IPO, Mapfre has also had to cough up €16 million to help disgraced former Caja Madrid boss Miguel Blesa make bail in his latest criminal court case (That’s right: in Spain some senior executives are actually officially insured against going to jail). Given that Mapfre’s management is trying everything it can to claw back some of the money it’s already lost in its deals with Bankia, now may not be the best time to ask for another helping hand.

Another Public Bailout?

Which leaves the most obvious candidate: Spain’s unwitting, albeit cash-strapped, taxpayers: 65% of “publicly listed” Bankia is owned by BFA, a fully publicly-owned institution. In other words, 65% of Bankia already belongs to the public. And it’s not as if the public isn’t already accustomed to saving the bank’s festering culito.

The problem is that people in Spain have already had their fill of paying for bank failures. What’s more, this is a potentially game-changing election year and many voters are determined to punish the two main parties for what is seen as widespread corruption, acute mediocrity, and chronic incompetence. As such, any attempt by the Rajoy government to make taxpayers pay (yet again!) for Bankia’s failings – in what could only be described as a “mini” bailout – just one month before municipal elections would probably be electoral suicide. So would any overt attempt to protect disgraced and widely loathed public figures such as Rato and Blesa from the law.

In the meantime, the clock keeps ticking down and the days keep passing. By the time this article is posted, Rodrigo Rato and his fellow defendants will have just 29 days to find €800 million. For the first time in decades senior members of Spain’s political and financial elite are beginning to sweat, just a little. And Spring hasn’t even begun.

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