Up in smoke

The bill comes in for investors in bankrupt cajas

By The Economist

CYPRIOT depositors are not the only ones suffering the aftermath of a banking bust. People who bought shares or subordinated debt in Spain’s dodgiest cajas, or savings banks, have either been all but wiped out or forced to take hefty losses. Many small Spanish investors are among them.

Four months after Spain requested a €40 billion ($51 billion) chunk of its banking bail-out funds from its euro-zone partners, on March 22nd it delivered the blow that hundreds of thousands of retail investors feared. The FROB, Spain’s restructuring fund, imposed haircuts of up to 61% as it turned junior debt and preference shares in four nationalised banks—Bankia, Catalunya Banc, Banco Gallego and NCG Banco—into equity.

Many of the 350,000 retail customers who bought Bankia shares in its €3.1 billion flotation in 2011 have already seen their money go up in smoke. Retail investors spent an average of €6,000 each buying stock at a price of €3.75. Within a year Bankia needed a €19 billion bail-out; within 18 months it had a negative value of more than €4 billion. The shares are now trading at around 15 cents, a 96% fall on the issue price. A Madrid court is investigating whether the then Bankia chairman, Rodrigo Rato, and his executive team misled investors. They protest their innocence.

Shareholders should know the risks but the hundreds of thousands of Spaniards who bought preference shares and complex subordinated debt from their cajas often did not. All they saw were fail-safe investments with high returns. Clients infamously included Alzheimer’s sufferers and at least one customer who signed by dipping a finger in ink. “It was a sophisticated product,” said Luis de Guindos, Spain’s finance minister, as he ordered other banks to pay around €2 billion into the bank deposit-guarantee fund to help clear up the mess.

Haircuts range from 36% for Bankia’s subordinated perpetual bonds to 61% for preference shares in Catalunya Banc. Those who end up with stock in unlisted NCG Banco and Catalunya Banc face a period of uncertainty: the topped-up deposit-guarantee fund will buy their shares but has yet to set prices. It’s not Cyprus: the lower rungs of the capital structure are the ones being hit. Losses for investors unlock European money to recapitalise the banks. It still ain’t pretty.