Madrid, Spain – MariCarmen Lopez invested 24,000 euros ($33,000) in a new financial product in 2004 that her bank had recommended to her. Spain was in the middle of a real estate-driven boom, and with the five-year investment offering revenue worth double the interest of a regular bank deposit, she saw no reason not to accept.
“I asked about the risk involved and they told me there wasn’t any risk, that the money’s safety was guaranteed and that was it,” she says. “They said I could get the money back whenever I needed it after the five-year term was up.”
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But when the term finished, Lopez was told the conditions of the contract she had signed meant that she couldn’t withdraw the money – ever. Instead, she was told she could swap the investment for bank shares. Lopez is a housewife, now in her 50s, and a decade after buying into the scheme, the shares are virtually worthless and she has lost almost all the money she invested.
This is just one of hundreds of thousands of cases involving a financial product known in Spanish as participaciones preferentes, or “preferential shares”. Having impoverished many of its investors, it is one of the reasons why Spain’s once highly respected financial system is now widely reviled.
The bank was stealing - it's beyond belief. You trusted in someone that you were dealing with on a day-to-day basis, but now you don't trust anyone.
“The bank was stealing – it’s beyond belief,” says Lopez. “You trusted in someone that you were dealing with on a day-to-day basis, but now you don’t trust anyone.”
When Spain’s economy was booming on the back of the property industry throughout the late 1990s and most of the last decade, its banks had enjoyed a reputation for solidity. Lluis Torrens, head of the IESE business school’s Public-Private Sector Research Center, says offering traditional clients complex financial products had been a way of helping banks generate extra capital during the bonanza years.
“A lot of savings banks merged and sought to capitalise via the issuance of products such as preferential shares,” he says, adding banks put pressure on branch managers to offer these investments to their traditional clients. “They were sold to traditional, conservative clients of the banks, people who wouldn’t normally invest in stocks and shares,” says Torrens.
But when the country’s property bubble burst in 2008, the financial sector also started to struggle. Having lent heavily to property companies and homebuyers, the real estate crash left banks with massive losses and bad debts on their books.
The biggest liability in the sector was Bankia, Spain’s fourth-biggest lender and a merger of seven struggling regional savings banks which were being strangled by bad loans they had taken on during the boom years. In 2012, Bankia received a 19bn euro ($26bn) bailout from the government to keep it afloat. In June of that year the financial crisis appeared to be spiralling out of control when Prime Minister Mariano Rajoy requested a 100bn euro ($137bn) rescue for the financial sector from the EU.
‘Relationship of real trust’
As the economy nosedived, so did the market performance of the preferential shares. Many of those who had bought them sought to cash in their investments, only to find that they couldn’t under the terms of the contract they had signed. Bankia alone had sold the product to an estimated 200,000 clients, says Miriam Guajardo, head of the consumer defence association ADICAE, in Madrid.
“In Spain, your banker was your friend, he was the person you asked for money, someone who helped you – it was a relationship of real trust,” she says. Waiting in the foyer outside her small office in central Madrid is a line of people who want advice on how to claim back money they believe their bank owes them from preferential shares and similar investments.
“People would have the same bank all their life,” she adds, pointing out many of those sold participaciones preferentes were elderly and not well-versed in finance. “The problem now is that not only have people lost their money, but that relationship of trust has been broken. They feel cheated and embezzled.”
Torrens concurs, explaining that during the economic crisis, many of Spain’s banks earned a reputation not just for mismanaging risk, but also for actively deceiving their clients.
Two-years on, Spain has exited its EU financial sector bailout, having only used 41bn euros ($56bn) of the emergency credit line. With the country now also having emerged from its second recession in five years, its lenders have been restructured and their accounts are much healthier. But the backlash against the banks is still raging.
Two former heads of Caja Madrid, the largest of the savings banks that merged to form Bankia, are facing legal action: Miguel Blesa was briefly jailed twice last year over the purchase of a US bank; and Rodrigo Rato, a former IMF managing director, is facing a lawsuit by two political parties for alleged incompetence and fraud in overseeing the merger and stock exchange listing of Bankia, as well as its issuance of the notorious preferential shares.
During a parliamentary committee hearing in November 2013 into the financial crisis, deputy David Fernandez angrily brandished his shoe at Rato and said: “I’ll see you in Hell.”
Meanwhile, preferential share investors are presenting a series of mass lawsuits against the banks that sold them the products.
The banks are evicting people, they're throwing people onto the street like rubbish. The private banks took public money and saved themselves while we were getting hungry and losing our jobs.
A recent poll showed Spain’s banks to be one of the country’s least popular institutions, above only political parties and politicians. Jose Juan Toharia, of Metroscopia, which carried out the poll, noted that “the ones seen as being mainly to blame for the economic crisis are the financial institutions and what is known as the political class.”
This hostility to the banks is not due exclusively to the preferential share issue or to the bailouts lenders received during the downturn. Many Spaniards also point to the high number of evictions of families who are unable to keep up mortgage payments. One of Europe’s highest jobless rates – currently at 26 percent – and strict mortgage laws have made this a particularly deep problem in Spain, with over 400,000 foreclosures having taken place since the crisis started to bite, according to the judiciary’s watchdog, the CGPJ.
In Puerta del Sol, Madrid’s large, central square, hundreds of people gathered on May 15 to celebrate the third anniversary of the indignados protest movement, while thousands of other activists staged events across the country. Campaigning for tighter controls over the economy and politicians, the indignados have made evictions one of their core issues, often blocking the doors of homes due to be repossessed by banks.
“The banks are evicting people, they’re throwing people onto the street like rubbish,” said Alex Sanchez, a 29-year-old IT professional, who was at the indignados anniversary event.
“The private banks took public money and saved themselves while we were getting hungry and losing our jobs. The real power in Spain is with the bankers. If the bankers went to prison and paid back the money they took, we could pay back our national debt five or six times.”
Follow Guy Hedgecoe on Twitter: @hedgecoe