Wednesday, May 22, 2013

Lashing Out!

Caja Madrid's ex-Chairman, Miguel Blesa, carted off to jail.

The frustration is understandable.  A nation's banking system brought to its knees.  Multi-billion euro bank bailouts required to stabilize the financial system.  Economic wreckage in the form of a deep recession, sky-high unemployment, and homeowners thrown into the streets as the bank foreclosure machines create their own personal and indelible pain.  Families losing life savings after having been sold preference shares marketed in bank branches, while being told, or at least believing, that they were like bank deposits.  Someone needs to pay.  Someone needs to go to jail.

That may sum up the public vitriol directed at bankers in Spain.  So far, over 100 Spanish bankers are under some form of legal investigation for their actions leading up to the current banking crisis.

One of the higher profile figures, Miguel Blesa, Chairman of Caja Madrid between 1996 and 2010, was recently remanded to preventive detention in a Madrid jail, tagged with a 2.5 million euro (US$3.25 million) bail requirement, for alleged criminal "disloyal administration".  This is in connection with Caja Madrid's $927 million 2008 purchase of 83% of the Miami-based City National Bank of Florida ($2.8 billion total assets).  Considered a flight risk, his passport was confiscated.  The bail was set to be equivalent to the severance payment that Mr. Blesa reportedly received from Caja Madrid.  He posted bail the next day.  Formal charges have yet to be filed.

Subsequent to the City National Bank of Florida purchase, Caja Madrid participated in an organizational consolidation, with six other Spanish savings banks, to create Bankia... a banking behemoth and the largest mortgage lender in Spain at the time.  Owing to the rapid and deep deterioration of real estate values in Spain, Bankia later required a $22 billion European Union bailout.  Bankia has now been nationalized by the Kingdom of Spain.  Shareholders, including those holding shares that were sold in Bankia retail branches, have lost billions.

The Spanish magistrate uses an April 2010 report from the Bank of Spain to claim that: 1) the transaction was structured in a way to avoid required government and civic approvals in Madrid; 2) that the price paid for City National Bank of Florida exceeded the prices paid by other Spanish banks (Banco Sabadell and Banco Popular Espanol) for their Miami-area acquisitions at the time; 3) that an (undated) U.S. Office of the Comptroller of the Currency (OCC) examination of City National Bank of Florida was emphasizing the bank's high and growing strategic risk to the bank's executive leadership.  Taken together, the magistrate alleges a loss of value to Caja Madrid of more than 500 million euro ($650 million) and thus the charge of criminal "disloyal administration".

According to the figures listed in the 2010 report from the Bank of Spain, Caja Madrid paid the equivalent of 3.7 time book value  and 32.9 times earnings for City National Bank of Florida in 2008.  While Banco Sabadell, in January 2007, paid 3.4 times book value ($175 million) and 19.4 times earnings for the $600 million TransAtlantic Bank in Miami.  It states that Banco Popular Espanol in July 2007 paid 3.5 times book value ($300 million) or 14.9 times earnings for its purchase of the $1.4 billion TotalBank in Miami.

That's an interesting report from the Bank of Spain, but the numbers don't seem to square exactly with other reports.  Reuters reported that the Caja Madrid/City National Bank deal was valued at 3.4 times book value and 16.3 times earnings.  Raymond James reported the Sabadell/TransAtlantic deal at 3.5 times book value and 20 times earnings.  The publicly-reported Banco Popular/TotalBank deal numbers match those quoted in the Bank of Spain report.

Raymond James estimated that since the beginning of 2006 through 2007, in the southeastern United States, bank deals were going at an average of 2.6 times book value and 26 times earnings.

One web commentator, based in Spain, speculated that because Mr. Blesa was a close friend of then Spanish Prime Minister Jose Maria Aznar and arrived at his post as Chairman of Caja Madrid with no previous banking experience, he must have been taken for a ride by the owner of City National Bank, Leonard Abess, Jr.   Mr. Abess disagrees.  In a recent Miami Herald interview:  "He disputed that the purchase price was too high and said the Spanish conducted substantial due diligence.  He said the Spanish bankers courted him for two years before he would even let them make an offer."  This article in Florida Trend at the time of the deal seems to support him.

Was it a very high price to pay for a bank?  Seems so, compared to the Raymond James regional averages.  Was Leonard Abess, Jr. a talented deal-maker?   Surely so.  There is a saying in Miami banking circles - if Leonard Abess is standing in a hole and he tells you that he is digging for gold.... you had better go run and grab a shovel!   Was City National Bank of Florida worth paying more for?  It had always received the highest ratings from rating agencies.

Criminal "disloyal administration" regarding the City National Bank of Florida acquisition?  I just don't see it from this angle.  Times were frothy in 2007 and early 2008, bank purchase premiums in Florida were very high back then.  During the period the Spanish banks were buying into the Miami banking market, the worst of the financial crisis had not set in.  Every South Florida bank took severe credit losses during the downturn.  Owing to a more conservative credit underwriting culture and support from Caja Madrid, City National Bank of Florida was more resilient than most and bounced back earlier.

Having said that though, underlying this attempt to nail Mr. Blesa is an understandable desire by official representatives of Spanish society to hold somebody criminally accountable for the carnage in their financial system and bring a sense of justice and closure to a painful period for all.

In the United States, we took a pass on that kind of accountability, justice, and closure during the financial crisis that precipitated the Great Recession.   No high profile criminal prosecutions, just an unsatisfying broad societal feeling of numbness, fatigue, and senselessness.

As the New York Times noted in a 2011 story: "This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s.  In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail.  Among the best-known:  Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida."

By taking a pass on accountability, justice, and closure, the U.S. has created another moral hazard that will sow the seeds for even more dangerous banking practices in the future.

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