Ex-central bank chief complains about minister’s meddling in Bankia

Shares of Bankia on Friday continued to plunge on concerns about a write-down of the capital of the nationalized bank as a probe continued into its crash less than a year after listing.

Bankia was taken over by the Bank of Spain’s Orderly Bank Restructuring Fund (FROB) in May of last year after the lender buckled under its heavy exposure to the now-dysfunctional real estate sector. Shortly before the nationalization, the chairman of Bankia, former IMF managing director and economy minister, Rodrigo Rato, had resigned.

In testimony to the High Court on Thursday, the then-governor of the Bank of Spain at the time of the nationalization, Miguel Ángel Fernández Ordóñez said the central bank did not trust Rato because he lacked “sufficient banking experience,” adding that he had tried to get the former IMF chief to leave Bankia before he eventually resigned.

As Fernández Ordóñez gave testimony, some 300 holders of preferred shares, a complex financial product, who have incurred heavy losses on their investments, protested outside the High Court.

The former governor also questioned the abilities of the chief executive officer at Bankia at the time, Francisco Verdú, describing him as the “former president of a small bank,” in reference to the private Banca March. Fernández Ordóñez complained in general about the level of professionalism on the Bankia board and that of its parent, Banco Financiero y de Ahorros (BFA), but said he could not do anything about the situation because the composition of the management was the responsibility of the Madrid regional government.

The BFA-Bankia group emerged from the merger of seven savings banks, or cajas,> led by Caja Madrid in July 2010. The Bank of Spain instigated a massive makeover of the sector as a means, among other reasons, of trying to wrest control of the cajas away from local politicians and bring a halt to investment decisions by the lenders that were not based on strict banking criteria.

Fernández Ordóñez also told Judge Fernando Andreu he tried to get a probe carried out to determine if fraud had been committed in Bankia’s listing in the Spanish stock exchanges in July 2010. The bank listed at 3.75 euros a share, but its closing price on Friday was less than a tenth of that, leaving some irate 350,000 small investors greatly out of pocket.

Fernández Ordóñez also complained that he had “totally lost control” of the situation at Bankia shortly before the nationalization because of the intervention of Economy Minister Luis de Guindos in plans to recapitalize the bank. The arrangement put forward by Rato required an injection of 7 billion euros by the state. However, the man who replaced Rato, José Ignacio Goirigolzarri, put forward an alternative plan that raised the cost to the taxpayer to 19 billion euros.

Bankia’s share price closed down 17.8 percent at 0.337 euros after shedding at one point as much as 25 percent to a record low of 0.306.

The main reason behind the fall is investor concerns about a huge dilution in the value of their stakes resulting from the need to recapitalize the bank. The FROB in December calculated Bankia had a hole in its books of 10.444 billion euros and a negative net worth of 4.148 billion euros, resulting in the need for the losses to be write off against its capital.

The FROB has subscribed to 10.7 billion euros in convertible bonds issued by BFA. It remains to be determined at what price those bonds will be converted into shares, but the FROB has warned that there will be a significant write-down in the nominal value of Bankia’s shares prior to the bonds being converted into equity, resulting in large losses for existing shareholders as required under the terms of the approximately 40-billion-euro European bailout granted to Spain to clean up its banks.