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.
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.”
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
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
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