MADRID Rodrigo Rato beamed as he rang the opening bell at the Madrid stock exchange one Wednesday last summer. The former chief of the International Monetary Fund raised a glass of champagne to the successful listing of Bankia, the bank he chaired.
But the good cheer on show that July day belied major concerns at Spain's fourth-biggest lender, concerns that other Spanish banks and most institutional investors knew about but which many small retail investors who bought the bank's shares say they did not.
What worried the professional moneymen was Bankia's high exposure to Spain's collapsed property sector. Their skepticism meant the bank had struggled to complete its 3.1 billion euro initial public offering, and had been forced to lean heavily on individual Spanish investors. Bankia branch managers personally touted the shares to longtime customers, offering them platinum credit cards and promising steady returns.
Just months later, Bankia collapsed after massive losses. The story of how the lender was able to pull off its share issue on the eve of its doom is one of the most remarkable in the banking and sovereign debt crises that have roiled the euro zone for almost four years.
The troubles at Bankia are a stark reminder that Europe's woes are rooted in large part in its banks. Formed in 2010 from the merger of seven unlisted savings banks, Bankia was meant to be a symbol of Madrid's faith in its famously conservative financial system. Instead the bank's predicament has forced Europe to give emergency aid to Spanish banks and pushed Spain closer to a bailout itself. As in Greece and Ireland, the banking crisis is inextricably linked to the sovereign crisis.
Many Spanish investors, hundreds of whom have joined law suits against the bank, now say Bankia deliberately overstated the value of its real estate assets to lure people into investing in its IPO. Close to 400,000 ordinary Spaniards who bought Bankia shares have seen their investments all but wiped out in the turmoil following its takeover by the Spanish state in May.
Smalltime investors say they were not properly warned of the risks; some say they felt pushed into buying shares in the bank even as institutional investors avoided the listing.
The lack of interest from bigger investors raised alarm bells for those marketing the deal, said two investment bankers involved in the listing, forcing Bankia to focus its sales efforts on individuals and small businesses. "They were thinking of scrapping it up to 15 days ahead of the flotation," said one source close to the bank.
But immense political pressure - the government had threatened nationalization if the bank could not get an injection of capital from elsewhere - forced Bankia executives to push ahead with the IPO, despite a raft of aborted European listings in the preceding weeks.
Former Bankia executives, including Rato, have said that due procedures were followed and risks adequately disclosed. They point to a 403-page prospectus available on the website of the Spanish stock market regulator. External banking advisers including J.P. Morgan, Bank of America Merrill Lynch, Deutsche Bank, and UBS, did not publicly raise doubts about valuations, even if they were worried about the progress of the sale, according to investment bankers who worked on the deal. None of those banks would comment for this story.
But some Spanish politicians and many investors now believe the IPO was rigged. A small Spanish political party has forced Spain's High Court to open an investigation into whether Rato and 32 other former board members of Bankia and its parent company BFA are guilty of fraud, price-fixing or falsifying accounts. At issue is whether the bank was honest about the value of assets on its books such as property and stakes in other companies, and transparent enough about the risks it, and therefore investors, faced, as required by Spanish law.
Andres Herzog, lawyer and secretary general of the UPyD party, which has one seat in the Spanish parliament's lower house, said the issue of biggest concern is "the stock market listing. We believe that this was at the heart of the fraudulent activity ... They falsely represented their financial situation in order to capture investors' funds."
The investigating magistrate on the case, Fernando Andreu, has so far not brought formal charges against anyone and may still drop the case. Formalities began in a Madrid court this week.
Spain's parliament has also opened an inquiry, calling Rato and 23 others, including bank executives and cabinet ministers, to testify before a committee. Rato, who the government forced out as chairman in May when the bank was nationalized, appeared on Thursday and said he had a clear conscience and had done things properly.
Yet hundreds of investors believe they were swindled.
"They (Bankia shares) were clearly overvalued ... a year ago we were already in a full-blown crisis," said Jesus Gonzalez Rubio, a computer science engineer from a small town near Valencia who bought 45,000 euros worth of shares in the bank's IPO.
Unlike other small investors, Gonzalez Rubio had long investment experience - and still thinks he was duped. "I've spent many years putting money into stocks...I sincerely believe we were cheated," he said, pointing to the fact that Bankia's recent writedowns of its real estate holdings are far bigger than the fall in house prices over the last year.
A Bankia spokesman declined to comment on the allegations, but new chairman Jose Ignacio Goirigolzarri has said he will fully co-operate with legal authorities.
Bankia's listing came at a bad time. The sovereign debt crisis that had engulfed Greece and forced Portugal and Ireland to seek bailouts was fast approaching Spain. With the property crash dragging on four years after it began, markets were worried about the solvency of Spain's banks.
Political pressure to get the deal done was intense.
Spain's then Socialist government wanted to avoid an expensive injection of public money into banks to patch up losses from the crash. It had already forced unlisted regional lenders, or 'cajas', to raise private capital or face nationalization. Bankia's IPO was held up as a way to inspire faith in Spain's 'cajas', who had not yet managed to get a single private-equity investor on board.
Elena Salgado, finance minister in Spain's last administration, yesterday told parliament that its reform plans were "appropriate" based on all the information available at the time.
Bankers running the initial public offering of Bankia shares say the bank was up front about the risks inherent in buying the stock. The prospectus for the listing details the bank's high exposure to real estate and the possibility the bank could be nationalized. Flagging those risks drove the issue price down, banking sources involved with the listing say; Bankia shares were priced at 3.75 euros each, or 0.4 times book value, a discount to other mid-sized Spanish banks like Popular and Sabadell.
But shareholder action groups bringing lawsuits against Bankia are probing whether the prospectus described the bank's true state, given that the bank later restated its 300 million euro profit for 2011 to a 3 billion euro loss. Rodrigo Rato said on Thursday that the change was not due to real losses or holes in the accounts, but writedowns against future losses when the bank changed management.
Some of the several hundred small investors joining these causes argue that they never saw a prospectus at all and were not adequately warned of the risks - a point repeated by five investors interviewed by Reuters.
One such investor is Concepcion Hijosa, a 52-year-old unemployed clerk, who said her family lost the best part of 13,000 euros in the stock market listing. Hijosa heard about the offer from a television advertising campaign and went into her local Bankia branch to find out more. A customer with the bank, and before that its biggest constituent member, Caja Madrid, for more than 30 years, she had a close personal relationship with staff.
"They talked about it being a stable investment over the medium term," she said. "They said that in a few months you would be able to receive dividends."
Hijosa says she did not come under any pressure to buy the shares, and that staff had also invested in the offer. She was given a 4-page contract to sign, but did not read the small print.
Another investor from the Mediterranean city of Valencia, 59-year-old teacher Roberto Oscar Vetere, said he was sold the shares by a bank manager he considered a friend, investing 3,000 euros in them on an impulse after stopping in the bank with his wife in the middle of their grocery shop. "You never think that someone you know well is going to sell you rotten fish," Vetere said, adding it was the first time he had ever bought shares and that he signed a contract of a few pages. "Nobody put a gun to my head to make me do it...we were told our investments would double."
Some Bankia account holders say they received multiple calls from their bank managers. Gonzalez Rubio said it was partly the sheer insistence of the bank, which called him three or four times, that persuaded him to convert some of his savings into share investments. Customers were told that if they did participate there would be no handling fee, he said. Others that were promised a platinum credit card if they signed on.
Bankia deposit holders were also sold the deal when their fixed-term deposits expired. Pedro Lorenzo, a 70-year-old former driving instructor, said the bank would not renew his 4 percent deal when his savings investment ran out, but Bankia then presented with an alternative: Bankia shares.
A Bankia spokesman said that bank managers were under no pressure to either sell shares to clients or buy shares themselves. Employees had sales targets, like in any other campaign, but did not receive incentives for sales, he said.
The shareholders contacted by Reuters said they did not blame bank branch staff, some of whom told clients that they had bought shares to reassure them.
"Some of them have lost a lot too," Gonzalez Rubio, the computer science engineer, said. "They feel pretty bad. They feel they can't even go out into the street." It was hard for bank staff to complain publicly like other investors, Rubio said, because they feared for their jobs.
At Bankia's shareholder meeting, in Valencia in late June, one bank manager stood up and apologized to his clients for selling them shares. Xavier Capallera, a bank manager in the eastern region of Catalonian, declined to comment further on why he felt the need to apologize. Other Bankia employees contacted by Reuters also declined to comment.
"A DIFFICULT EXERCISE"
Selling the IPO to institutional investors both inside Spain and elsewhere was much harder, bankers involved in the process said. "They went through each and every page of the prospectus. It was a difficult exercise to convince those guys," said one investment banker.
An internal survey by an adviser to the deal during the lead up to the IPO showed 90 percent of institutional investors polled had major concerns about the issue. Close to 20 percent of those said they would not even look at it.
One of the investment bankers involved in the issue says he wrote a strongly worded email to Rato days before the flotation, saying it should not go ahead, two sources familiar with the situation said. The banker said he'd had the worst feedback he'd ever seen on a deal and it would be impossible to get it off the ground with international investors.
Bankers involved in the IPO say Rato was much more hands on than the chairmen of other companies that list their shares, especially on the investor road show. "It is the perfect chairman situation: you have a guy that is strategically smart, understands the situation," one banker said shortly after the deal was completed. "I think he was a key part of getting this over the finish line." Rato himself invested 250,000 euros in the listing.
The global co-ordinators on the deal were J.P. Morgan, Bank of America Merrill Lynch, Deutsche Bank, UBS and Bankia itself. The underwriters on the retail tranche were Sabadell, Bankinter, Barclays, the Spanish savings bank association and broker Renta 4. None of the banks would comment publicly on Bankia.
Investment bank Lazard, where Rato worked between 2008 and 2010, advised Bankia itself on the IPO. It declined to comment on the process.
Deloitte, which audited Bankia's accounts, also declined to comment.
The reticence of bigger buyers meant the listing was skewed towards ordinary Spaniards. But Bankia also targeted small and medium-sized companies with credit lines at the bank, said three banking sources.
Spanish institutional buyers included Spanish banks such as Sabadell and Popular. Mapfre, the Spanish insurance company in which Bankia parent BFA holds a 15 percent stake, also ended up taking a 4.3 percent stake in Bankia. Mapfre said at the time that it had no obligation to buy.
The Spanish banks bought into the listing as the flotation became closely linked to the health of the entire banking system. the share price of Spanish banks bounced on the day Bankia listed, even though its own share price fell below the initial offering price.
"Nobody made us buy," said Jacobo Gonzalez-Robatto, Chief Financial Officer of Popular, at the time. "We think the price is good and it's good to show there are enough resources in Spain to carry through a stock market listing like Bankia."
Even some of the underwriters ended up taking stakes in Bankia.
"Some banks had to lend a hand and buy shares so that the stock market listing could go ahead," said one executive at a bank tasked with selling some of the retail shares. "We couldn't sell our tranche of shares and were left holding them as institutional investors."
Bankia declined to say how much of the institutional tranche was due to underwriters being left holding shares they couldn't sell.
In the end, small investors and Spanish institutions made up the overwhelming majority of subscribers to the issue. Bankia's holding company, BFA, kept 52.4 percent of the equity. Around 60 percent of the free float was sold to retail investors, spending an average of 6,000 euros each. Spanish institutions made up almost all the remaining stock, with international institutions accounting for just 3 to 4 percent of the institutional tranche, two sources close to Bankia said.
Given that Bankia hoped to attract a lot of overseas interest, "to all intents and purposes it was a failed IPO," said one Madrid-based banker. "It wasn't a real IPO. There was no money coming from outside the country."
"The capital raising bought time for Bankia and Spain," said a banker involved in the issue. "Nobody was to know the economy would continue to deteriorate."
But it did, and Bankia's financial health kept slipping. Ten months later, the bank presented a recapitalization plan to the Bank of Spain alongside 134 other Spanish banks, explaining that it would meet tough new capital requirements set by the government. The Bank of Spain approved all the banks' plans.
Just two weeks later, Rato drew up another plan, seen by Reuters, for a small-scale public bailout worth 11 billion euros.
But by this time, Economy Minister Luis de Guindos wanted a much more radical rescue for the bank according to a source familiar with the matter. Shortly before Rato's resignation, De Guindos, Rato's junior when the Bankia boss had served as Spain's finance minister between 1996 and 2004, called Rato and the heads of the country's three biggest lenders - Santander, BBVA and Caixabank - to a meeting.
When they were gathered, de Guindos asked Rato to make BBVA executive Jose Ignacio Goirigolzarri Bankia's chief executive officer, effectively undermining Rato's power.
"He tells him that he wants to put in a strong chief executive officer, making Rato the honorary chairman, and Rato refuses," one source said.
Santander, BBVA, Caixabank and Bankia all declined to comment, as did the Economy Ministry.
The government's desire for a bigger shakeup was repeated by Prime Minister Mariano Rajoy in a meeting with Rato on May 7. Spain's banking sector and the International Monetary Fund backed the government, Rajoy told Rato according to a source close to Bankia. Rato immediately handed in his resignation without consulting his board. One high-ranking Bankia board member heard the news from a waiter who had seen it on television, a source familiar with the matter said.
On May 9 the government nationalized Bankia, which restated its 2011 accounts. Madrid agreed to a request from the new management team for 19 billion euros in state funds, and itself asked Europe for 100 billion euros in aid.
"The merger of the banks (that made up Bankia) and its stock market listing were not appropriate, and now we have to put things right," said Economy Minister Luis de Guindos shortly after.
(With extra reporting by Jesus Aguado, Fiona Ortiz, Tomas Gonzalez and Rodrigo de Miguel in Madrid, and Kylie MacLellan and Chris Vellacott in London; Edited by Simon Robinson and Mike Williams)