Spain to wipeout Bankia's small investors

Having allowed Bankia to sell stock to small investors with little knowledge of finance, Spain is now taking the next step and effectively writing off their investment as part of recapitalizing Bankia.

Regular readers know that Bankia, which has about 10% of Spain's banking market, does not need to be bailed out and the small investors forced to lose virtually everything.

The reason that Bankia does not need to be bailed out is the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers have effectively become Bankia's silent equity partner while it is rebuilding its book capital from their current negative level.

Wiping out the small investors sends a really bad message.  The message is that the Spanish government cares more about protecting bank book capital levels and banker bonuses than it does about its citizens.

The bankers who mis-sold the stock were only forced to give back their bonuses for the year preceding the nationalization of Bankia.  The bankers got to keep their bonuses for the preceding years.

Fairness suggests that the bankers and members of the Board of Directors should have been required to return 100% of the bonuses and director fees they ever received from Bankia or its predecessor cajas.  It is bad enough that they get to keep their salary 'earned' while underwriting all the bad debt on Bankia's balance sheet.

As reported by Reuters,

Spanish lender Bankia will wipe out 350,000 shareholders, many of them small savers with little knowledge of financial markets, after it emerged it had a negative value of 4.2 billion euros ($5.6 billion). 

The measure, which will hit shareholders who were encouraged by aggressive marketing tactics to invest in the company, is seen as vital if the nationalised bank is to be refloated. 

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

Under the European Union plan to prop up Spain's banking sector, shareholders must be the first in the queue to suffer losses. This has already been the case in Ireland where shareholders in Anglo Irish Bank were left with nothing. 

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

Please note that under the European Union plan, unsecured debt holders are not second in the queue to suffer losses.

In fact, the unsecured debt holders, primarily banks in other parts of the eurozone, are protected from any losses.

Spain's government faced a choice between bailing out banks in other parts of the eurozone or protecting Spain's real economy and citizens.  Spain's government chose to bailout the banks and but the burden of the bad debt on the Spanish economy and taxpayers.

As shown by Ireland and Greece, this choice will only make the situation worse.

Another source with direct knowledge of the process said the final value of the shares would be close to nothing but that neither the Spanish government nor the bank wanted to send the message that Bankia's shareholders had lost it all. 

Hundreds of thousands of Spaniards, some retired people with no in-depth financial knowledge, invested their savings into Bankia shares when the bank was listed in July 2011. Shares have plummeted more than 80 percent since then. 

Some small savers, lured by aggressive marketing campaigns, also bought high-risk instruments, such as preference shares or subordinated debt, on which they will also suffer steep losses. 

Enrique Marquez, a 66-year-old retired technician, said he had invested 7,000 euros in shares and more than 70,000 euros in preference shares with Bankia. 

"The bank manager advised me to buy the shares. He told me it was interesting, that the staff were investing too and that it could be very profitable in the medium term," he said.
"It seems to be to have been managed extraordinarily badly. It is a total cock-up. I've been duped on the preference shares and I've been duped on the ordinary shares. It's been an abuse of trust."...

Your humble blogger predicted that Bankia would be unable to sell its shares in 2011 without providing ultra transparency and disclosing its current asset, liability and off-balance sheet exposure details.  I said this disclosure was necessary so that investors could assess the risk of Bankia.

My prediction was wrong when it came to small investors, but right when it came to institutional investors.  Small investors bought and institutional investors stayed away.

I had not factored in that the Spanish government would let Bankia abuse its position of trust and sell these shares to small investors who relied on the bank to make honest representations about its financial condition.

I had also not factored in that the Spanish regulators would not communicate an honest assessment of the bank's financial condition.  If the Spanish regulators did communicate that the bank was solvent, then the Spanish government has a moral obligation to bailout the small investors as these investors were also trusting the government.