On Tuesday, May 28, individual retail investors could sell shares of Bankia, Spain’s fourth largest bank, for the first time. This was small consolation, as the bank—in collusion with the Spanish government—had already erased four-fifths of investor value. Unfortunately, the investors were retirees and middle class families, tricked into sinking their savings in the bank’s bottomless pit.
In an attempt to consolidate failed bank assets and limit losses, the Spanish government created Bankia from the smoldering ruins of seven failed savings banks in 2010. Recapitalization of the bank required a whopping €15 billion ($19 billion), pieced together by the Spanish central bank and bailout funds from the European Union. As a condition of the loans, Bankia was required to raise funds on the equity markets via stock sales. Like most companies, Bankia used a two-tier structure for the offering: large investors and funds bought blocks that could then be traded freely on a specific date, while individuals purchased shares that could be traded at a later date, after the “big guys” bought their shares.
Faced with a lower than expected demand among large investors, Bankia heavily marketed shares to its retail savings customers. Representatives pushed this “preferred stock,” priced at €3.75 per share, as a safe, high-interest alternative to savings. The fact that the Spanish government owned the majority of Bankia may also have convinced individuals of the security of their investments. All told, hundreds of thousands of Spanish families invested a total of €6 billion in the shares.
But there was a twist, a complexity that Bankia failed to explain adequately. The so-called preferred stock was not, in fact, true ordinary shares. Instead, it was a complicated financial instrument blending debt offsets and shares. The European Union had imposed a condition on the bailout funds—to raise €6.5 billion by conversion of debt to equity at a heavily discounted rate. Holders of the preferred stock would be forced to swap their shares for ordinary stock priced significantly lower.
In this case, Bankia priced the swap at €1.35 per ordinary share—a loss of 36%. Trading for large investors and funds finally began on May 24, 2013. By May 28, the opening day for individual shareholders, Bankia shares had collapsed to €0.60 per share. Before they could even begin trading, individuals had lost 84% of their savings.
Not surprisingly, tempers are running high. Bankia has established a government-supervised compensation plan to address complaints through arbitration. After their experiences so far, however, many victims have chosen to file suit instead. Others have taken to the streets in demonstrations. In at least one case, violence ensued when a police officer stabbed the former Bankia employee who had sold him €300,000 in preferred shares.
The viability of the global fiat currency system rests on nothing more than public confidence. Incidents like the Bankia debacle, in which public trust is so brazenly violated by government and banking authorities, only hasten the day when the majority realizes they had better look out for themselves… because no one else is.