Bankia issuance challenged

Savings banks are facing widespread criticism. A number of Court rulings have depicted their subordinated debt issues as being close to utter fraud which have ransacked individual savers. Allegations of gross mismanagement and abuse reached a climax recently when the use of tax-evading credit cards was exposed. Now, BANKIA´s valuation when issuing shares could prove crippling if it turns out to be fraudulent.
Many could profit from stirring such adverse news in the melting pot.

The Government seems all too eager to blame the former Socialist administration for the clumsy way in which it conducted the financial restructuring, thus diverting the attention from the blunders it also made in performing this task. Deprived investors may seize this opportunity to get back the money they lost. Yet, should the Justice Ministry conclude there was gross misconduct, Spanish financial markets will bear the brunt in the long run.

Nowadays, many feel that turning saving institutions into common banks was a flawed strategy. Yet, it allowed the system to get rid of political patronage, paving the way for more professional management structures. Some mergers failed as regional governments adamantly opposed any attempt to loosen their political grip on their own saving banks. BANKIA stands as an outstanding example.

The loss-ridden Valencia concern was merged with its counterpart in Madrid, with both coming under the tight control from the centre-right PP party. The ensuing result produced a lame duck institution. In a desperate attempt to avoid bankruptcy, the merged entity (BFA) split its better assets giving rise to BANKIA. Setting up a brand new bank meant running it as such.

The IMF had forecast a sustained recovery, the growth rate ranging around 2.5%. As 2011 went on, the economy witnessed a downturn that shattered all hopes for BANKIA. It incurred in heavy losses. Yet, the real problem lay in BFA whose balance sheet was only kept afloat by listing its fat share in BANKIA at the unchanged issuance price. Was this pricing a deliberate fraud? On the face of it, the initial balance sheet value would not appear to be grossly unfair. Some months afterwards, it certainly would.

Should the Justice Department consider the BANKIA issuance as a devious cover-up for duping its parent company out of money, banking and financial market supervisors involved in the process would certainly suffer a credibility blow. Spain as a whole would be likely to lose.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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