Risks That Sank Bankia Unseen by Customers Tapped for Ove

During the seven years he helped oversee a lender fated to be embroiled in Spain’s biggest bank rescue, Jose Angel Hidalgo Pitarch, a telecommunications engineer, says he had little inkling that property loans were going bad.

“We were never shown any information or ratio that showed the extent of the real estate problem, or at least with any sufficient anticipation,” said Hidalgo Pitarch, an account holder at Bancaja who was selected to serve on the control committee of the Valencia-based savings bank.

The lender, which helped finance a decade-long building boom on the Mediterranean coast, merged with six other savings banks, including 310-year-old Caja Madrid, to form the Bankia group in 2010. The group was nationalized this week, less than a year after its banking unit sold shares to the public, following an International Monetary Fund report that highlighted its balance sheet and management weaknesses.

Shareholders in the Bankia group’s listed entity met in Valencia today seeking explanations for what went awry at the third-biggest Spanish lender, whose troubles helped push Spain to seek as much as 100 billion euros ($125 billion) in rescue funds from its European partners.

Shareholders Protest

As shareholders and client groups protested outside the hall where the meeting took place, the new chairman, Jose Ignacio Goirigolzarri, said in a speech he “profoundly regretted” their losses. He pledged to turn round the business by halving the lender’s 60 billion euros of non-yielding assets and seeking efficiency gains. Goirigolzarri said he will simplify the group, which owns or partly owns 832 companies.

The stock rose as much as 11 percent, and was 1.9 percent higher at 91.7 cents at 5:11 p.m. in Madrid trading, after euro- area leaders agreed to relax conditions on emergency loans for Spanish banks. The shares are down 75 percent since the initial public offering last July.

Putting account holders in positions of oversight was just one of the peculiarities of Spain’s cajas, foundation-based lenders that funded social and cultural programs with profits. Cajas were overseen by groups including local politicians and customers as a result of a 1977 law passed after Spain’s transition to democracy.

On May 25, Goirigolzarri asked the government for 19 billion euros of aid after mounting bad loans left the bank short of capital.

Boom Bust

“Creating one big good bank from five, six or seven smaller bad ones was never going to be a good idea,” said Eduardo Martinez Abascal, a professor of financial management at the University of Navarra’s IESE business school.

A Bankia (BKIA) official in Madrid declined to comment in a phone interview, as did a Bancaja official in Valencia.

Ill-judged property investments along the coastline of Valencia, Spain’s third-largest city and a hotspot for the real- estate boom, and investments in ventures from an amusement park in the resort of Benidorm to motor sports, had already started to undermine Bancaja before it joined the merger that formed Bankia, said Jose Camarasa, a former Socialist party spokesman in the region’s assembly.

Fish Farm

By 2009, Bancaja had listed 47 companies involved in real estate as part of its banking group, up from 16 five years earlier, according to corporate filings.

Among investments listed on the 2011 balance sheet of Banco de Valencia SA, a lender seized by the government last November that was previously controlled by Bancaja, was a 68 percent stake in a fish farm operating hatcheries of Mediterranean sea bream. The company was preparing to seek creditor protection after contributing 17 million euros of losses to the bank.

The cocktail of weak risk controls and a regional property boom in full swing has come under scrutiny in an inquiry by the Valencian regional assembly into last year’s seizure by the state of Caja de Ahorros del Mediterraneo, known as CAM. About half of CAM’s lending to property developers was in default and bad loans accounted for 19 percent of its loan book by the time of the rescue. The government propped up the lender with almost 6 billion euros of capital and loans.

Ballet Dancer

Among the witnesses to appear before the inquiry this month was Isabel Cambronero, a ballet teacher from Murcia, who ended up on CAM’s control committee after her name was picked at random to join the lender’s general assembly.

“If I had to audit the auditors, they should change the rules because I can’t audit an auditor because I don’t know how to audit anyone,” Cambronero said in June 11 testimony to the hearing, posted on the Valencian assembly website.

“In many cases it has been the strategy of the people we’ve heard from -- including the ballet dancer -- to say that they didn’t understand what they were doing,” said Angel Luna, a socialist party deputy on the regional assembly who heard her testimony.

The unraveling of Bankia has driven Spain’s borrowing costs to euro-era records on concern the expense of rescuing the financial system will overwhelm the state. A five-year property slump has piled up 184 billion euros of what the Bank of Spain terms “troubled” real-estate assets on lenders’ balance sheets.

Bankia Probe

Spain’s public prosecutor has begun investigating the formation of the Bankia group, which combined more than 300 billion euros in assets from the seven savings banks, as well as the initial sale of stock in Bankia SA last July, an official for the prosecutor’s office said on June 7.

Bankia raised more than 3 billion euros in the IPO by selling shares to as many as 347,000 investors, most of whom were its own account holders.

“I want to say sorry to Bankia customers for having sold them shares based on the information given to me by my superiors,” Xavier Capallera Gibert, a Bankia branch manager in Peralada, Spain, said at the shareholders’ meeting today.

Bankia’s woes stem from when its founding cajas piled up risk during Spain’s property boom, Martinez Abascal said. Risk controls will also come under scrutiny as Europe provides rescue funds for Spain and its banks, he said.

Among Bancaja’s 197-strong 2009 general assembly, which named the board and the executive committee, 121 members were appointed by the regional government, town halls and from among its staff, while customers held 66 seats.

“The governance of the cajas was a total mess, Abascal said. “Too often, control was passed into the hands of politicians and it was the regional political bosses who had the final say.”

State Embrace

Santiago Pedraz, a judge at the National Court in Madrid, has passed information on Banco de Valencia to anti-corruption investigators after the government’s bank rescue fund alleged fraud at the lender, a court official said in a phone interview.

Bankia fell into the state’s embrace last month after the May 7 resignation of Rodrigo Rato, the former International Monetary Fund managing director who became chairman in 2010. The government took control of the group by converting 4.5 billion euros of preferred shares into stock.

Bankia’s parent company, Banco Financiero y de Ahorros, booked 5.44 billion euros of provisions last year to cover the deteriorating value of its stakes in Bankia, Bancaja Inversiones, the holding company for its stake in Banco de Valencia, and CISA 2011. CISA 2011 is a company wholly-owned by BFA that includes Bancaja real-estate assets such as undeveloped building land.

Random Selection

At the end of 2011, the amount of group loans to developers and builders classed as “doubtful” or at risk of becoming so was 27.8 billion euros, up from 16.7 billion euros a year earlier.

On June 9, Prime Minister Mariano Rajoy’s government said it would seek European funds to help complete a clean-up of the banking system after at least three previous attempts since 2010 had failed to do the job.

Hidalgo Pitarch said he took his first step toward an oversight role at Bancaja when he was randomly selected from among the lender’s account holders to form part of the general assembly. A savings bank customers’ association in Valencia then invited him to represent it on Bancaja’s control committee, he said in a phone interview.

He said he did have some financial know-how from his job as head of communications services in the town hall of Villarreal, a municipality near Valencia, where he had prepared budgets. He said he was never subjected to political pressure in his work on the control committee.

Board Oversight

The committee’s tasks included making sure that the board run by then-Chairman Jose Luis Olivas, a former People’s Party head of the Valencia regional government, was effective, and to monitor its financial management, according to its bylaws. It took on audit committee functions in 2003.

The committee met 14 times in 2009 and shared 74,000 euros in payments to its 13 members that year, according to its corporate governance report.

Hidalgo Pitarch, whose parents opened his first Bancaja account for him as a child, said he was also hit by what happened at Bankia because he had bought shares in the bank.

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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