Union calls for swap of Bankia preferred shares for common stock to be halted

Just a day after the Orderly Bank Restructuring Fund (FROB) announced that the holders of complex hybrid financial instruments such as preferred shares and subordinated debt would have to accept huge losses on their initial investment, nationalized bank Bankia opened a period of arbitration for retail investors who feel they were mis-sold such products.

In the case of holders of some three billion euros in preferred shares issued by Caja Madrid, one of seven savings banks that merged to form Bankia, the discount applied to the nominal value of the instruments that must be exchanged for Bankia shares is close to 70 percent.

The reaction of consumer and pressure groups to the cuts was swift. Consumer protection organization OCU said it was considering taking legal action against those with “direct responsibility” for selling these hybrid products to unsophisticated investors.

It advised those affected to avail themselves of the arbitration available, and those that are rejected as ineligible for mediation to seek redress in the courts.

A Madrid court on Thursday ordered Bankia to return the 37,000 euros that two financially untutored clients had invested in preferred shares because of the “lack of information and clarity” in the sale of them. The court ruled that the bank employees who sold the shares went beyond the role of intermediary and actively advised the clients in question to buy the products.

Leading labor union CCOO called for the process of swapping preferred shares and subordinated debt for Bankia common stock to be halted because it inflicted “disproportionate punishment on the holders of these instruments.” Apart from the discount applied to the nominal value of these instruments, holders also lose out because of the terms of the swap in that the common shares have been priced at a level above their book value.

Spain’s European partners insisted that holders of hybrid instruments accept a haircut on the value of their investments in exchange for the some 40-billion-euro loan the country was granted to clean up its balance sheets. The bulk of the bailout went to Bankia, which was heavily exposed to the ailing real estate sector.

CCOO described the swap arrangement as “another piece of nonsense in the process of the restructuring of the financial sector.”

“The public authorities, government and supervisors have decided to ignore their responsibilities and have put the burden of the adjustment on customers, whose savings they have expropriated,” the union said.