Too big to fail? The (in)famous story of a Spanish bank

Autumn 2017

Seven years after the creation of one of Spain’s largest and most problematic banks, advanced Liberal Arts students discuss the case.

Below the Surface

Iciar Beteré

November 2017

Bankia is a Spanish bank founded in December 2010, in the middle of a restructuring process of the financial system, which took place in Spain because of the financial and economic global crisis. In 2010, Caja Madrid, one of the biggest saving Banks in Spain, merged with a series of smaller savings banks to become what is nowadays known as Bankia. Caja Madrid’s former president was Miguel Blesa, who actively took part in the Bankia scandal (S.A., 2017). In other words, we are talking about a financial institution that arises from the merge of seven Spanish saving banks, with Rodrigo Rato as chairman. A few years before, he was managing director of the IMF and Spain’s finance minister. A year later, on 20 July 2011, Bankia started trading on the Spanish stock market, giving the possibility to invest a minimum of 1000 euros and a maximum of 250.000 euros, making the promise to those who acquire more than 1000 shares to be exempt tfrom bank charges for the use of cards or account maintenance (Expansión, 2017). At that time, Bankia had 12.000 million clients and 26.000 workers.

The fraud allegedly started at Caja Madrid bank, but Rodrigo Rato continued it when Bankia was founded in 2010. He and his management team manipulated the accounts just before it entered on the Spanish stock market, with the objective of providing the sales of shares, by showing profits that were, in fact, losses. Mr Rato and his team have been accused to hiding important information, like for example the fact that the company was bankrupt when it entered the stock market. Bankia´s fraud is regarded as massive (in the range of millions). On the side of individuals, 500 million shares were sold, which adds to the 329 million on the institutional side.

But Rodrigo Rato and Miguel Blesa were not the only ones responsible for this fraud. Bankia´s auditors, Deloitte, which is one of the most important auditing firms in Spain, were also complicit, since they closed their eyes to just how badly the financial situation at Bankia was. They certified that the bank had a 304.7 million euros profit in 2011, while in reality, it had economic losses that of over 2,979 million euros. Moreover, in May 2012, this big Spanish lender forced the Government into a banking bailout plan of 77 million euros, after the bank published the largest loss in Spanish corporate history.

Out of all the crimes of which Rato and his colleagues are accused, I will highlight two – that of misleading its investors and fraud. Directors stole money from the company and put it into their own pocket and embezzled money using corporate credit cards for their own purchases (hotels, entertainment, travel, etc.), which became known as “black cards”. Purchases made with these cards were not declared to the tax authorities. In addition, the directors were accused of fraudulent administration, manipulating prices and misappropriation, the last one especially related to early retirement benefits.

The Court sentenced Miguel Blesa to 6 years in prison and a fine of 12 months with a diary quota of 20 euros, and the special disqualification for the exercise of banking business for the duration of his sentence. He committed suicide in 2017, before serving his sentence. Rodrigo Rato was sentenced to 4 and a half years in prison. Sixty three other executives were also sentenced to between 6 months and 6 years in prison, as collaborators. The bank had to repay the money to its investors. The Court had to exempt Deloitte of criminal responsibility because of its status as a professional society, in which the auditing firm partner in charge does his/her job under the principle of autonomy, so his/her illegal activities cannot be imputable to the society as a whole.

Bankia was regarded by some people as “too big to fail”. When an average company goes bankrupt, workers lose their jobs, shareholders lose their money, the entity proceeds towards liquidation and is divided among its creditors; whatever is left is distributed between shareholders. However, when a bank fails things are not like this. Depositors also lose their money, which they had deposited in one of the safest financial instruments.

One positive aspect in all this is the fact that, in Spain, the legal and moral responsibility of organisations is insightfully regulated, especially since 2015, when the law was modified and improved because of the rise in business crimes and the necessity of better controls (Ley 20.393 – Responsabilidad Penal de las Personas Jurídicas). One of the most important aspects in this law is the need for a monitoring system for employees. Companies are powerful, and in the absence of increased controls, they will continue in their wrongdoing and as a result people will continue losing their jobs, and society will continue being tricked. Punishments should be appropriate to the level of crime, but actually we should ask ourselves – what is the appropriate punishment for people losing their lives? Even if a country has the right king of regulations, no punishment is high enough to compensate for a single life lost. Organisations in are legal entities, and consequently they can be held responsible for their crimes and sentenced if found guilty, which corresponds to an organic view of organisational responsibility. In other words, organisations can be liable in their own right – not just in virtue of their employees’ behaviour.

Bankia started as an unethical business right from the beginning, and the number of people affected was particularly high; as a consequence, the company deserves an exemplary punishment. The problem is that the relevant laws are not effective enough. States should focus more on the enforcement of these laws, because of the impact of these types of crimes on society, which is higher than other (average) kinds of organisations, In this particular case, the number of victims was thousands of people. Unfortunately, I don’t believe that justice has been achieved at all, because the level of punishment was not appropriate for that of the crime committed.

In time, however, Bankia has been able to take appropriate measures to mitigate its reputational risk. It has repaid the small investors all the money they had invested in it, plus a compensatory interest. On the other hand, the bank failed to repay its institutional investors, as it is assumed that as skilled professionals they should assume the risk for their investments.