The Euro Fiscal Corruption Contest – the Spanish entry

June 14th, 2012

Ian Fraser’s introduction: This blog was written by Golem XIV, a pseudonym for filmmaker and author David Malone.  

Let me make it clear straight away: the lies, corruption, cowardice and greed of Spanish bankers and government officials is nothing special. What is happening in Spain now, reminds me of the likes of RBS and Northern Rock in the UK, Hypo in Germany and  Countrywide in the US. So please don’t think that I dislike Spain or the ordinary people of Spain. The people I detest in Spain are the same people I detest in Britain and every country: corrupt bankers and their political parasites.

Every country will have its moment in the spotlight. Italy is preparing in the wings as we speak. But today, on the Euro Fiscal Corruption Contest, Spain is centre stage.

The mantra of most mainstream political parties and some media across Europe is that the present crisis was caused by too many people taking on loans they could not afford. Neither the bankers nor the politicians, according to this version, saw the crisis coming or could have seen it coming but have been engaged in heroic attempts to rescue us from a crisis of our own making.  However this version is simply untrue.

First, people did not ‘take’ loans they could not afford. The loans were ‘offered’  by bankers whose job it should have been to advise their clients on whether the loan was wise and sustainable. The bankers offered no such advice but instead pocketed the bonuses which came from selling as many loans as possible to all and sundry.

A more accurate summary of who is culpable, might be to say that people accepted loans (which they may have suspected might become unservicable in the event of property market downturn) which were promoted by professional bankers who advised them to do so because if not they would miss a chance to get on the property ladder. Second, a huge portion of the distressed debt in Spain is not held by individuals but to developers and construction companies.

I am not saying that ordinary citizens are entirely innocent. Instead I want to plunge a scalpel into the diseased carcase of Spanish politics and bring to the surface some of the parasites who have gorged themselves on Spanish flesh for decades.

Let’s start with some of those who arguably built and profited handsomely from the disaster that is engulfing Spain. They include Rodrigo Rato (pictured above), ex-chief executive of Bankia, current prime minister Mariano Rajoy, Bank of Spain governor Miguel Ángel Fernandez Ordóñez and former Bank of Spain governor Jaime Caruana. These men form a tightknit and incestuous group that has promoted and appointed each other to positions of power for many years. They were at the helm during the bubble and are arguably most to blame for the current crisis.

Rato is a former economy minister and a former IMF managing director who became president of the mutually-owned savings bank Caja Madrid in 2010. Last year Caja Madrid was merged with six other savings banks to become Bankia, of which Rato became president. Bankia’s recent collapse triggered the latest round of Europe’s debt crisis — and really angered other members of Europe’s elite. Just when they thought they’d managed to convince Europeans that what we’re living through is a sovereign debt crisis, as opposed to a bank debt crisis,  along came Bankia to remind us of the truth. Particularly in Spain, this crisis is not one of public debt.

As the BBC pointed out,

The Spanish government’s debts were a mere 36% of its gross domestic product (GDP) (the output of its economy) in 2007, while the German government’s were 65%.

And what is more Spain was living well within its means, spending less than it was taking in. Those are facts.

But, once Spain entered the euro in 2002, interest rates fell to inappropriately low levels. The result was that borrowing grew and grew. Those who borrowed first and biggest were the developers, construction companies and banks. The ordinary Spaniard followed their lead, and was encouraged to do so because those who had borrowed first, the builders, developers, speculators and banks, urgently needed customers. The big players led the market. They did not respond to demand, they created and fostered it.

But back to Rato. His role in Spain’s agony goes back long before Bankia. Rato was, in fact, Spain’s minister of the economy from 1996 until 2000 and vice president from 2000-04, centre-right People’s Party was previously in power. This means he was at the helm of the economy during the bubble years when property prices tripled.

Of course he wasn’t alone. Jaime Caruana was governor of the Bank of Spain from 2000-06, which overlapped with Rato’s time as  economy minister (1996-2004). Caruana too was a People’s Party nomination. As head of the central bank, Caruana shared with Rato oversight and regulation of the banks. Neither did anything to warn of the growing dangers from bank lending and debts or to rein in the property speculation that had gripped the nation. Indeed Caruana seems to have deliberately ignored specific warnings from Bank of Spain officials. As economist Edward Hugh writes:-

Back in 2006 inspectors at the Bank of Spain sent a letter to economy minister Pedro Solbes complaining of the relaxed attitude of the then governor, Jaime Caruana (the man who is now at the BIS, working on the Basle III rules) in the face of what they were absolutely convinced was a massive property bubble. Their warning was ignored. What could have been done, many say.

Caruana smiled, waved and drew his salary. He was also appointed, again with Rato’s support, to be the chairman of the Basel Committee for Bank regulation, which was responsible for the dangerously flawed Basel II capital and liquidity framework. So Caruana, the governor of the Bank of Spain, who turned a blind eye as every Caja in Spain gorged itself on rancid, stupid and outright fraudulent loans, was also appointed to the pivotal Basel committee charged with creating the capital and liquidity framework for those self-same banks.

While Caruana ran the Bank of Spain and Basel Committee, Rato too found higher office beckon. As minister of the economy, Rato was a rising star in the People’s Party government, but so was another man, Mariano Rajoy. It was Rajoy, not Rato who, after the People’s Party was defeated in the Spanish general election of March  2004 became party leader and later prime minister (November 2011). What happened to Rato?

As Rajoy climbed to the leadership of the People’s Party, he and the defeated party head José María Aznar, lobbied for Rato to become managing director and chairman of the executive board of the IMF.  Getting their man to head the IMF was virtually the last act of the People’s Party leadership before they lost the March 2004 election. Rato was managing director of the IMF from May 2004 till he suddenly resigned in June 2007, leaving the fund in October 2007.  Hmm. During Rato’s time at the helm, the IMF said nothing unkind about either Spain’s property bubble or its banks.  Caruana was at The Bank of Spain and the Basel Committee, where he saw no evil, while Rato at the IMF spoke no evil.

Of course, Rato left the IMF in a hurry in 2007 while Caruana had been replaced in 2006 at the Bank of Spain by the new governor, Ordóñez, who was appointed by the new socialist government. You might think would upset things for Rato et al. But no. While Rato was still at the IMF in 2006 he plucked Caruana, even as he left the Bank of Spain job and installed him at the IMF as director of the new financial, capital and regulatory operation called the Monetary and Capital Markets Department. Where he could see no evil even more comprehensively than before. Rato was out of the IMF, but his man was newly in and in this January 2008 press conference seems surprisingly complacent about the strength of financial institutions. Rato was not done yet.

But before finding out what Rato did next it is important to remind ourselves of the saga of the Spanish regional banks, the Cajas. The first Caja to collapse was Caja Castilla La Mancha in July 2009 . As I wrote back in May 2010 in The Ugly Truth everyone expected others to follow. Even a year later none had. Then David Watts at CreditSights wrote a piece which Zero Hedge picked up and about which I wrote in The Stink is Out.

The Cajas and other Spanish banks had been quietly and selectively buying back the worst performing loans out of the securities they had sold. This meant that, when people looked at Spanish securities, they looked impressively healthy and appeared to speak of a well run and surprisingly resilient Spanish banking sector. This was a convenient fiction for Rato and Caruana.

But the fiction came at a cost. By buying back those bad loans, the Spanish Caja and banks were managing to hide the real extent of their losses and insolvency. While other banks in other nations were offloading whatever they could on to any idiot who they could cheat, the Spanish banks were shovelling their own toxic waste down their own throats.

Of course, for this to have worked, the banking regulators either had to be unaware or complicit. This is where the new governor of the Bank of Spain, Ordóñez, comes in. He was not from the People’s Party, but appointed by the new socialist government. You might have thought he would have blown the whistle, but he didn’t. Rajoy, Rato and Carauna, who were all either out of power or out of the country after 2004-06, were all so well connected it seems extremely unlikely they were not aware of what was going on in the Cajas. But they didn’t blow any whistles either. Why would they?

That would have exposed their own complicity and guilt. In fact Caruana is more guilty than the others, if that’s possible. For in 2009, just when Caja Castilla La Mancha became the first of the Cajas to choke upon and then vomit out all the toxic waste it had been shovelling down its own throat, Caruana had become general manager of the Bank of International Settlements (BIS).  He was the central banker’s banker and guardian of banking’s secrets. Naturally, he said nothing.

Let’s return again to Caruana’s benfactor, Rato.

Whatever caused Rato to suddenly resign from the IMF, it doesn’t seem to have harmed his career. By now, it is January 2010 and Rato, now ex of the IMF and no less determined to see any evil, is appointed to run Caja Madrid.

Madrid also happened to be where Rato’s family, who are very wealthy and have been involved at the heart of Spain’s politics  since Ratos’ grandfather was Mayor of Madrid and a minister in successive governments, happen to have deep business interests. Caja Madrid gave out a huge number of loans to… construction and development companies. It is the construction and development companies, such as Grupo Begar, Ploder Uicesa or Metrovacesa that ended up breaching covenants and going bankrupt.

But remember that with many of the most reckless and fraudulent loans, the Cajas have been hiding away by buying them back and swallowing them. There is little reason to believe that Caja Madrid, at the epicentre of Spain’s banking and property bubble was not engaged in such activity. When Rato took the helm, he would surely have become aware of this potentially explosive situation. No sooner had Rato taken the helm than the Caja implosion engulfed them both. The answer dreamt up by Spain’s socialist prime minister José Luis Rodríguez Zapatero, and Rato was to merge seven dying Cajas, including Caja Madrid, into Bankia.

Perhaps they thought that stitching together seven dying men into one multi-limbed zombie would somehow make them all much healthier. On January 31, 2011 one of Spain’s more shameful events began (with parallels to the scandalous joint decision taken by bank managements and the FSA to launch  rights issues for HBOS, RBS and Bradford & Bingley in April 2008). Rato annouced that Bankia would go public and they would offer Spanish investors, ordinary people, pension funds etc, the chance to buy into this new wonderful bank which Rato said, and I quote from the official press release, was:

solid, healthy and with a vast capacity for generating resources, a factor that has already proven its values on the market”.

On July 15, 2011, Rato’s version of reality was confirmed when Bankia passed what the European Banking Authority called its definitive and completely transparent stress tests.  The finest financial experts of the EBA and the Bank of Spain working, as they said, hand in glove with Bankia’s own overseers, found nothing was amiss at Bankia. And the bank even declared a profit of €44 million.

Those who believed all the bankers and their expert friends and bought Bankia shares at the offer price of €3.75 have now lost over 60% of the money they invested. Bankia shares are today worth €1 each. Bankia is now so close to death, the death it was in actual fact always close to, that  the Spanish people and European Union are once again being forced to bail it out.

Rato was forced to resign. No sooner had he gone but Ordóñez, governor of the Bank of Spain has also said he will resign too.

The rats are leaving the sinking ship in Spain. A right leaning pressure group, Manos Limpias, founded and led by a lawyer, recently filed a law suit against both Ordonez and Rato. The suit, which has been admitted to court by a judge in Madrid, accuses Ordonez of mismanagement of the banking sector particularly during the Bankia bailout and accuses Rato of falsifying financial statements. Caruana is so far safe at the BIS. He should not be. While Rajoy is protected by still being in power. And he too should be made to answer.

Rato, Rajoy, Caruana and  Ordóñez all saw no evil, heard no evil and spoke no evil. Together, however, they profited personally from destroying the lives of their countrymen and women. That, to my mind, is evil.

Original version on Golem XIV

Short URL: https://www.ianfraser.org/?p=7148

Posted by on Jun 14 2012. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

4 Comments for “The Euro Fiscal Corruption Contest – the Spanish entry”

  1. This article by Victor Mallet in the Financial Times is excellent on how Spanish banks including Bankia and Santander continue to rob people blind http://www.ft.com/cms/s/0/772a64b6-b6d1-11e1-8c96-00144feabdc0.html#axzz1xlwGDLgH

  2. Not only an excellent piece which explains the nonsensical behaviour I have experienced at the hands of Bankia over the last four years but it also explains their disinterest whenever I have tried to communicate with them.

  3. The one person who is not mentioned in Golem XIV’s excellent article is the Harvard-educated economist and “cautious technocrat” José Viñals who, like Caruana, effortlessly transitioned from Madrid, where he was deputy governor of the Bank of Spain, to the IMF. At the Fund, Viñals’ powers of observation vis-a-vis Spain also seem to have failed him and it’s all spelt out here: http://www.nytimes.com/2012/06/27/business/global/spanish-officials-hailed-banks-as-the-crisis-built.html?pagewanted=print
    You can watch a Bloomberg TV interview with José Viñals here:-

  4. Good article! The outcome of the credit excesses of 2000-2007 should surprise no one. When a country of 40M builds 700,000 dwellings in a year (2007) in comparison to the highest ever in England 387,000 for a population of 60M+ you get an idea something had to give. Cheap credit seems to induce a level of exuberance that makes bankers, borrowers, bondholders and shareholders go insane. Factor in a culture where employment is based on enchufe (friends at court) rather than skill and chaos is inevitable. The guilty include politicians, planners, bankers, investors and borrowers. Create cheap credit at your peril is the message here. Yes bankers and politicians have to take much of the blame but again when you look at what the regional governments did – namely get high on cheap money by issuing shed-loads of bonds this mess is the result. The real pity is ordinary working Spaniards are being asked to pay for the sins of others. Surely default is a better prospect. This is not going to end well. As an a former Spanish resident I feel I understand this better than many. Push too hard and it will turn to custard. My guess is the end of the line is very close in deed.

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