Bankia was an “elephant in the room,” BBVA chief says

The chairmen of rival banks to nationalized BFA/Bankia questioned the reliability of the earnings presented by the lender and the feasibility of its recapitalization plan shortly before it was taken over by the state Orderly Bank Restructuring Fund (FROB) in May of last year.

That was the gist of what emerged from testimony given to High Court Judge Fernando Andreu by Emilio Botín of Banco Santander, Francisco González of BBVA, and CaixaBank’s Isidro Fainé on Friday based on talks they held with Economy Minister Luis de Guindos.

The then chairman of Bankia, former economy minister and IMF chief Rodrigo Rato, estimated that the bank needed an injection of seven billion euros from the state to repair the damage to its balance sheet caused by its exposure to the ailing real estate sector. The bank also reported earnings of 300 million euros. After Rato stood down and the FROB took over, the bank restated its 2011 earnings to show a loss of 21.238 billion euros, the largest in Spanish corporate history. The state subsequently had to inject 22.424 billion euros into the group to keep it afloat, the bulk of the 40 billion euros Spain borrowed from its European partners to clean up the sector.

Bankia was an “elephant in the room,” González told Andreu, an assessment Botín and Fainé concurred on, according to judicial sources present at their testimony. The BBVA chief said Rato’s evaluation of the situation at bank was “hardly credible” and “overly optimistic.” González said accounting presentations are a bit like a “piece of chewing gum,” meaning that items can be stretched.

Rato and other former Bankia officials have been directly implicated in possible fraud committed in the listing of Bankia shortly after it was formed from the amalgam of seven savings banks. Shareholders have lost most of their initial investment in the bank.