Reality Bites

Bankia has come into being as the result of the merger of several insolvent Spanish cajas. It was floated in mid 2011, with a large amount of shares sold to Spanish retail investors (mostly depositors and employees of Bankia itself). At the time the shares were marketed as a “safe” investment likely to garner a better return than run-of-the-mill savings deposits. European savers are as a rule getting next to nada thanks to the ECB's ultra-loose monetary policy, although a number of banks in Spain have to offer rather more competitive interest rates to attract deposits. Unfortunately, the higher the rates offered, the more likely the bank concerned is about to cross the threshold into the bank equivalent of the eternal hunting grounds.

 

Reuters now reports that “long-suffering Bankia shareholders are set for more losses”, but this is actually a slightly misleading headline. Their suffering was actually mercifully brief. Bankia went from praising its shares to the rafters in order to milk its depositors to requiring a massive bailout by the government in the span of less than a year. It took exactly one year for the stock to plunge from its post offering high of about € 3,90 to a low of € 0,50 – a decline of approximately 87%. Numerous naïve dip buyers lost their shirt along the way, usually at break-neck speed.

 


 

Bankia

The brief one-way street history of Bankia's share price – click for better resolution.

 


 

Now it turns out that the stock is soon going to visit strong lateral support at zero. Surprise, surprise, its losses have turned out to be “even worse than expected”. According to Reuters:


“Spain's Bankia will wipe out the investments of 350,000 shareholders, many of them small savers and pensioners, after it emerged that losses on bad loans at the troubled bank were even worse than expected.

The measure will hit small investors drawn in by aggressive marketing just last year after Bankia was formed from a merger of provincial savings banks. But it is described by officials as vital if the company, which was nationalized in May, is to return to profit in order to be sold on again.

Bankia will receive 18 billion euros of European Union money by Friday and launch a capital increase in the first half of January when current shareholders will lose practically their entire investment, a source close to the Bank of Spain said.

"Are we looking into leaving shareholders with something? Yes. How much? That's too soon to say. Will it be very little? For sure," the central bank source said on condition of anonymity. "But that will be purely symbolic. I can assure you they will lose up to the shirt on their back."

Under the EU plan to prop up Spain's banking sector, devastated by a burst real estate bubble, shareholders must be the first in line to accept losses. That was the case in Ireland, another victim of the global credit crisis, where shareholders in Anglo Irish Bank were left with nothing.

Bankia had negative equity – or an excess of debt over assets – of 4.2 billion euros, Spain's bank rescue fund, known as FROB, said on Wednesday. That measure will be used to help determine shareholder losses. Bankia's parent company BFA had negative equity of 10.4 billion euros. How much shareholders will lose will be unveiled when the capital increase takes place in January following discussions with EU authorities, the source said.

Hundreds of thousands of Spaniards, some of them retirees with little awareness of financial affairs, plowed savings into Bankia shares when the bank was listed in July 2011. The stock has lost more than 80 percent of its value since then. Small savers also bought billions of euros of other Bankia instruments, such as preference shares or subordinated debt, on which they will also suffer steep losses.

"It seems to be to have been managed extraordinarily badly. It is a total cock-up," said Enrique Marquez, 66, a retired technician who invested 7,000 euros in ordinary shares and more than 70,000 euros in preference shares with Bankia.

"I've been duped on the preference shares and I've been duped on the ordinary shares. It's been an abuse of trust," added Marquez, who said he had been told by his bank manager the stock could be very profitable in the medium term.

Many of Bankia's more than 20,000 employees also invested in the shares in the 2011 initial public offering and are set to lose their money even as thousands face job cuts enforced as a condition of receiving European aid.

Speaking of his fellow staff at Bankia, one employee at a branch in northern Spain said: "I don't know anyone who didn't buy the shares. I did and my family heavily invested in them too." He spoke anonymously and said he now feared for his job.

About 6,000 workers will be axed in Bankia's restructuring while remaining employees are being asked to take a 40- to 50-percent pay cut, trade unions said.

Shares in Bankia fell a further 16 percent to 0.58 euros on Thursday after the FROB disclosure of its negative equity. Bankia will be taken out of Spain's blue-chip index, the Ibex 35, as of January 2, the stock exchange said on Thursday.”

 

(emphasis added)

Since this is our “apposite Steven Wright quotes week”, here is what he would tell Mr. Marquez and all the others who have been taken to the cleaners by way of the Bankia offerings:


“Experience is something you don't get until just after you need it.”


The memorandum of understanding (MoU) that forms the basis of the € 100 billion EMS-financed bailout of Spain's banking system rightly insists that shareholders and holders of hybrid securities must take their lumps. This is in principle a commendable approach, in fact there is no realistic alternative to it. 

 

Restitution = Mission Impossible

One question is however to what extent the sale of these securities was actually bordering on fraud. It should have been clear (and it always was, to us) that merging a bunch of insolvent banks wasn't going to magically create a solvent one. In fact, if one or two of the banks included in the merger were strong enough to survive on their own (we're not saying that this was so, this is merely hypothetical), then they would actually have been killed by the merger – along the lines of the infamous Kreditanstalt-Bodenkreditbank merger of 1930, which also ended with the bankruptcy of the merged entity. This particular bankruptcy soon dragged the entire European banking system down with it (no 'TBTF' bailouts were available at the time, because the banks concerned were 'TBTB'- too big to bail).

On the face of it, the buyers of Bankia's securities would seem to have a good case, especially as so little time elapsed between the aggressive marketing of the IPO and the demise of the bank. However, we believe it will actually be very difficult to prove that the actions of the issuers of the securities were negligent or fraudulent. The decisive term has already been mentioned above. It is “unexpected”. How could anyone have known that loan losses in Spain would escalate so dramatically? Why, one would have needed a crystal ball to know such things (alternatively, reading obscure blogs may have been helpful). Incompetence and a rare talent for creating giant cock-ups are however not considered crimes, especially when they come in such widespread and often well-respected company.

This is especially so when it comes to the fickle business of economic forecasting. As a general example for this, Alan Greenspan and Ben Bernanke both are well known for being among the world's worst economic forecasters, especially at those junctures in history when better forecasts might have made a difference. This seems not to have harmed their careers in the slightest.

Finally, even if shareholders were able to prove their case, they could at best hope for revenge, but not for getting any of their money back. All the putative avenues to restitution lead to entities that are on the ropes themselves (including the government). Of course this doesn't change the fact that the whole affair stinks to high heaven and that it has very real consequences for a great many people of the innocent bystander variety that are already forced to face the worst economic crisis of the entire post WW2 era. They are obviously losing their savings at the worst possible time. There is also no question that many or even most of them are not sophisticated investors and were essentially duped.

It should also be noted that the “unexpected” twist of Bankia's losses being even larger than previously thought is likely to be repeated across the entire Spanish banking system.

 

Addendum: Unexpected Good News

There are also good news to report from the European banking sector. As an example for a successful turnaround and transformation of a bank that found itself under great pressure, the International Financing Revue presents the case of BNP Paribas, which it has named the 'Bank of the Year 2012'.

 

 

 

Charts by: BigCharts


 

 

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6 Responses to “Bankia Shareholders Wiped Out”

  • God has been acting behind the scenes for centuries, bringing forth global empires, Daniel 2:30-33 and dispensations, that is ages or epochs. He has appointed His Son, Jesus Christ, as Sovereign Administrator, and placed him in charge of the economy of God, Ephesians 1:10, to pivot the world from the fullness of prosperity and choice in the age of Liberalism, to the completion of austerity and diktat in the age of Authoritarianism.

    With his universal authority, Jesus, has unleashed the First Horseman of the Apocalypse to effect global political and economic coup d’etat to transfer the baton of sovereignty from nation states to regional leaders, Revelation 6:1-2.

    Today, in Europe, insolvent sovereigns and their insolvent banks have neither sovereign authority, nor monetary authority; all the PIGS, use proxy sovereign and monetary authority, they use that of Mario Draghi to obtain seignorage for their fiscal needs; and in so doing, these have brought about the end Liberalism, through the peaking out of debt, AGG, currency, DBV, and fiat investments, VT.

    Greece is no longer a sovereign nation state, rather it is a client state that exists in a region of economic governance overseen by the Troika and the ECB. A European Super State is forming where the ECB is sovereign over all in Euroland. Soon, every one of the PIGS, will be satellite peripheral appendages to Sovereigns in Brussels and Berlin.

    Greeks cannot be Germans. There is an ethnic, cultural and historic divide between Nordic and Latin Europe, yet the Greeks and the Germans will be one, all living together in austerity and debt servitude, under true European economic governance, as leaders will be meeting in summits to announce regional framework agreements which waive national sovereignty and pool sovereignty regionally to address a regional banking, credit, and financial system collapse; the accumulated debts of Liberalism will be applied to every man, woman and child in the Eurozone.

    These constructs will provide diktat which will provide peace, security, stability and sustainability regionally, and will serve as a model for Regionalism throughout the world.

    Thus the Beast Regime of Regionalism, Totalitarian Collectivism, and Authoritarianism, will rise to govern mankind in all of the world’s ten regions, and throughout all of mankind’s seven institutions. The Banker Regime of Floating Currencies, Choice and Liberalism, was simply a means for the completion of the age of prosperity. With the trade lower in Stocks, VT, Bonds, BND, and Major World Currencies, DBV, on December 20, 2012, the world has entered into the age of austerity.

    Liberalism’s Fiat Money System is simply an epitaph on the tombstone of a bygone era. Jesus Christ is most assuredly bringing forth Authoritarianism’s Diktat Money System, where Dikta will serve as credit, currency, and wealth.

    Chuck Watts writes The Empathy Surplus Project has been following the work of the Public Banking Institute and feature it’s work under the meme of Ethical Business. Ellen Brown is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how a private banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

    Most assuredly, Jesus Christ, is not going to relinquish his sovereignty to Chuck Watts, Ellen Brown, Steven Keen, Michael Hudson, or anyone else, rather, he is introducing and will produce all those things that were ordained from eternity past, these things are those events which are described in Revelation 1:1, which must, shortly come to pass, meaning that once that have been set in motion, cannot be restrained or abandoned which includes the destruction of all existing economic and political life.

    Jesus has every intention of bringing forth a Beast Regime, Revelation 13:1-4, a Beast Ruler, Revelation 13:5-10, and a Beast Banker, Revelation 13:11-18, to rule the world.

    • worldend666:

      You are on the wrong site pal. Please take your ramblings over to David Icke, Prisonplanet or Alex Jones.

      This is the one place I thought I could get away from this jibberish.

  • JasonEmery:

    You don’t want to be a big buyer of the stock or debt of your employer, although pundits frequently say the oppossite. You already have huge financial exposure by being an employee: salary, pension, 401-k matching, etc. If conditions deteriorate and your job disappears, chances are your stock investment is tanking at the exact same time. If they want to put some free shares in your 401-k, fine, but don’t put any in your outside investments.

    • Jay:

      This is certainly true. Many telecom workers are working well past their retirement age (if they could keep their jobs) to try to recover some of their retirement savings losses from investing in their own employers.

      • JasonEmery:

        Look at Chesapeake Energy (chk). Stock is at a multi year low, except for an oversold panic condition last May. As the stock plunged from $34 to $14 in late 2011/early 2012 the employees couldn’t sell because of an Enron type lockup!!!!

        BTW, chk is another one of those natural gas stocks. Also, the oil to gas ratio ($WTIC:$NATGAS) is at 26.21, which is way off the April 2012 high of 55:1. However, the btu equivalent ratio is 7:1, and averaged 9:1 during the 20-year period ending in 2000. In other words, oil normally trades at a premium, but only 25% or so, not the almost 300% at present. How anybody could predict anything other than hyper inflation in the near future is beyond me.

  • jimmyjames:

    Maybe now the Swiss border guards can stand down-since there’s so much less capital to worry about flowing into the country-

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