Rato Is Grilled on Bankia as Pensioners, Investors Suffer

Former chairman of Bankia SA Rodrigo Rato
Former chairman of Bankia SA Rodrigo Rato gestures as he speaks before a parliamentary committee in Madrid. Photographer: Angel Navarrete/Bloomberg

Rodrigo Rato was grilled in Spain’s parliament over the bailout of Bankia group, deflecting blame for Spain’s biggest banking collapse, which has put funding for Alzheimer’s patients at risk and spelled losses for investors.

Rato, a former managing director of the International Monetary Fund who led the seven-way savings bank merger in 2010 that formed Bankia, appeared today before lawmakers probing how the lender that was nationalized last month after seeking 23.5 billion euros ($28.5 billion) of state aid helped trigger a new stage of Europe’s debt crisis. Rato, Bankia’s ex-chairman, said the government pressured him to push ahead with an initial public offering in which retail investors lost money and said the Bank of Spain encouraged the merger.

“We did the right thing, in collaboration and under the control of the corresponding public regulators, supported by the advice and supervision of auditing and consultant firms,” Rato, 63, told the committee, punctuating his speech with deep breaths and gulps of water.

The collapse of the Bankia group, Spain’s third-biggest lender, has sparked public outrage as the country assesses the wider impact of a bailout that helped lead the nation to seek as much as 100 billion euros in European rescue loans. As well as hurting junior debt investors and other customers who bought shares last year in an IPO, the group’s collapse will be felt by vulnerable Spaniards who were relying on it to generate funding for social spending programs as the economy shrinks.

‘Sleepless Nights’

Rato told the hearing the government never gave final approval to his 7 billion-euro cleanup plan for Bankia. He said the Bank of Spain in 2010 encouraged him to expand his six-way merger to include Bancaja, another savings bank that was heavily exposed to the property boom on Spain’s Mediterranean coast.

“You have created many problems for many people and have caused sleepless nights and direct ruin for hundreds of thousands of people,” Irene Lozano, a deputy of the Progress and Democracy Union party, told Rato in the hearing. “Are you going to say sorry or not?”

“Everyone has assumed their responsibilities, and I assume mine,” Rato said. He told deputies that they shouldn’t underestimate the scale of the damage caused by Spain’s economic slump, the worst since the 1930s.

Donations Decline

Spain’s cajas, savings banks that distribute a share of their profits for social and cultural activities, spent 1.12 billion euros on such programs in 2011, a 23 percent drop from the previous year. Their social spending in 2008 was about 2 billion euros, according to the savings bank association, known as CECA.

“What happened is a scandal because there was no control,” Noelia Rodelgo, an administrative director at an association of families of Alzheimer’s patients in the town of Torrejon de Ardoz that has gotten help from Caja Madrid, one of the group’s founding savings banks, said in an interview. “If there’s no money from the caja, it’s going to be harder to pay for what we do.”

Rato is among 24 officials, including former socialist Economy Minister Elena Salgado and ex-Bank of Spain Governor Miguel Angel Fernandez Ordonez, called to appear in congress on the banking crisis. The testimony before the economic affairs committee came as protests mount over the cost of bailing out lenders, including Bankia, and the 110 billion euros of government measures to cut spending, raise taxes and shrink public wages over three years.

Bankia’s Roots

A former economy minister in the government of Jose Maria Aznar who helped lead Spain into the euro, Rato is also among 33 board members included in a Bankia investigation by a National Court judge.

Rato led the formation of Bankia in 2010 by combining Caja Madrid with Valencia-based Bancaja and five smaller lenders to create a company with more than 300 billion euros of assets, almost a third the size of Spain’s economy.

Rato wasn’t to blame for the poor credit control that sunk Bankia because most of the loans were made before he took over as chairman in 2010, said Lorenzo Bernaldo de Quiros, an economist who served on a panel that advised Rato when he was economy minister. Even so, he made a mistake by including Bancaja, a lender exposed to the building boom on the Mediterranean coast, in the merger, he said.

“He was blinded by the desire to be big and didn’t understand the scale of the problems at Bancaja,” de Quiros said in a phone interview.

Share Sale

The group hived off its banking business into Bankia SA, which raised more than 3 billion euros with a share sale aimed at its own branch customers. The shares have since lost more than 80 percent of their value, while holders of subordinated debt also widely sold through the branch network face capital losses under the terms of Spain’s banking bailout.

Meanwhile, the founding savings banks held stakes in a parent company, Banco Financiero y de Ahorros SA, which controlled Bankia after the IPO. Dividends from BFA were supposed to finance the social spending done by the cajas including Caja Madrid, which in 2010 spent 100 million euros on such activities.

That model fell apart last month when the government took ownership of all BFA’s stock after finding it had a negative valuation of 13.6 billion euros. The move wiped out the cajas’ stakes in BFA and also revenue for the former lenders including Caja Madrid, founded 310 years ago by a priest named Francisco Piquer, to fund loans for the destitute and masses for the dead.

‘Dead End’

Bancaja, the second-biggest shareholder in BFA, posted a 557,000-euro loss in 2011 and predicts pretax profit for 2012 of about 2 million euros. Those numbers compare with its profit peak of 796 million euros in 2006 at the height of Spain’s lending boom. Bancaja, which has about 90 million euros of reserves, will spend about 28 million euros on social and cultural spending this year, down from 85 million euros in 2008.

“We have maybe four years to keep funding social spending as we use up our reserves,” Jose Camarasa, a Bancaja board member, said in an interview. “After that it’s a dead end.”

The collapse in social spending by the former Bankia savings banks will be felt in Torrejon de Ardoz, a suburban Madrid town, where the Alzheimer’s support group that Rodelgo helps run relied on donations such as a 6,000-euro grant in 2010 to equip patients’ homes with handrails, said Rodelgo.

Our Lady of Montserrat Foundation, which runs a senior citizens home for 97 people, will also be hurt. The foundation had relied for years on Caja Madrid to fund repairs and therapy programs, Director Mari Cruz Hidalgo said in a phone interview.

Regional Cutbacks

Caja Madrid has also contributed since 2002 to Medecins du Monde, which runs a fleet of mini-buses providing medical attention to prostitutes, said Guillermo Algar, a spokesman for the group. The organization distributed 210,187 condoms in 2011, according to a statement on its website.

The blow to the social spending is especially painful because Spain’s national and regional governments are also paring their budgets, said Juan Jose Toribio, a professor at the IESE business school, and a former head of finance policy at the Economy Ministry in 1977, when it drafted a law governing the savings banks. The Madrid region is seeking to cut spending and boost revenue as it commits to reducing its budget deficit to 1 percent of its gross domestic product from 1.5 percent this year as part of a government austerity drive.

For the former savings banks now bereft of their main revenue source, the future may lie in converting into foundations or selling assets to find new income, said Toribio. Bancaja’s art collection includes more than 5,000 paintings, including works by the Valencian artist Joaquin Sorolla, and engravings by Pablo Picasso.

“It’s not for me to enter into a personal judgment on what happened at Bankia, but there must be a process of explanation and reflection on everything that happened,” Toribio said in a phone interview.

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