Excessive harm to investors

The government has just closed the final chapter in an extraordinary financial crisis that arose in the Spanish banks, particularly in the cajas (publicly administered regional savings banks).

The preferential-shares crisis has been settled by confirming considerable losses to thousands of clients by arbitrating their exchange for new shares, after a huge devaluation of their face value. The result is prejudicial to a very substantial number of the 700,000 bank clients who invested more than 32 billion euros in these shares.

Many will suffer severely — those whose losses are in the upper part of the bracket range from 10 to 70 percent of their capital. We are looking at a vast multitude of savers, the banks having “placed” these toxic products with them ever since, in 2007, liquidity began to run dry, largely because institutional investors shrank from the shares as from the plague. This multitude is thicker on the ground in certain regions — Galicia, Catalonia, Madrid and Valencia, though not these alone — and concentrated around the principal centers of the nationalized cajas.

It is certain that many investors, even those of some financial sophistication, acted imprudently, tempted by the juicy remuneration offered by the preferential shares. But the strict arbitrations carried out so far have yielded an average of about a third of cases favorable to the clients, who were often deceived or not properly informed — so much so that these complicated products were in many cases sold to functional illiterates, or old-age pensioners suffering from Alzheimer’s. This indicates that the malpractice was of a systematic nature, and far from a case of a few isolated incidents.

That is to say, it was the fault of the banks: especially the worst-managed ones — which have ended up being bailed out by the taxpayer — but also others, which have arrived at settlements for partial reconversion of these shares. The responsibility also extends to the public regulatory bodies who, though warning of the problem, made little effort to curtail it; and also to successive governments, ever since in 2003 the Aznar government legalized preferential shares to cancel the proceedings opened by the anti-corruption prosecutor against their sale.

The compensation to shareholders arbitrated by the present government is miserly indeed. It is true that the EU, naturally enough, demanded in exchange for 100 billion euros to bail out the Spanish banks that their shareholders and bondholders pay a portion of the bill. But the size of this portion might have been better negotiated; and in the last resort, a greater quota of their cost better distributed throughout the whole sector, as is now being done on a smaller scale by way of the Deposit Guarantee Fund. Curiously, the bank that is protesting the loudest is the one that contributed most to the real-estate fiasco, also at the origin of the crisis.

Additionally, the value officially accorded to Bankia shares means a catastrophe for many of its 400,000 shareholders. These people now have nowhere to turn to, apart from the settlements that may be imposed by the courts.