Nearly a year ago, in June 2012, Prime Minister Mariano Rajoy said this was not the right moment to assess Miguel Blesa and Rodrigo Rato’s performance as presidents of Caja Madrid, the regional savings bank that later merged with six others to create Bankia – which subsequently required a record bailout of over 22 million euros.
That may have been the last bit of help that Blesa, 65, received from the Popular Party (PP), the political group that made him president of Caja Madrid in September 1997. A lawyer by trade, Blesa never concealed the fact that his close friendship with former PP prime minister José María Aznar was a key factor in his appointment to head Spain’s second-largest savings bank, with 190 billion euros in assets. Aznar and Blesa studied together to be tax inspectors, and before presiding Caja Madrid Blesa had served at FAES, the PP’s think tank.
Blesa, who was sent to preventive prison on Thursday on embezzlement charges, is one of the most representative examples of political interference in the running of Spain’s regional savings banks, which have undergone a major merger process to avoid bankruptcy after decades of overexposure to the property bubble and misguided loan policies based on political interests rather than sound business practices.
Blesa’s story illustrates the reason for the savings banks’ troubles: a president is appointed based on friendship with political leaders, rather than professional merit; the real estate bubble comes around, and money seems to fall from the sky; the industry watchdog fails to apply pressure, and managers end up ruining the businesses.
Even though he was on the PP’s wavelength, Miguel Blesa’s appointment received support from a CCOO union leader and the United Left coalition.
From the get-go, Blesa had a clear goal in mind: to double the balance, grow across Spain and expand the size of an institution that turned 300 years old in 2002, during his tenure. He wanted to open up new branches, hire more staff and multiply profits. In an interview with EL PAÍS in May 1997, Blesa rejected the idea of growing slowly. He felt hindered by the the fact that his company was linked to a region, Madrid, that did not comprise several provinces like many other Spanish regions. This placed him at a disadvantage compared to other savings banks. Thus his obsession with growing, even in the face of the upcoming storm.
Stock market operations and revenues from investment banking had a stabilizing effect on the business’ overall problems. Caja Madrid acquired stakes in Telefónica and Endesa, which brought in 600 million and 2.4 billion euros, respectively. This mitigated the losses of the commercial network, which expanded but never achieved much profitability.
By 2003, Blesa prepared a new expansion program. Bank of Spain reports show that “he took a long time to react to the loan default problems detected in 2006.” He was also accused of conducting an aggressive commercial policy without evaluating the risks.
Despite a sharp drop in the financial margin, in the middle of the property bubble Blesa got Caja Madrid into heavy debt in the international markets. He joined the rush to attract new customers among the immigrant population, and above all he invested billions of euros in real estate.
In 2008, he acquired the City National Bank of Florida for close to 1.12 billion dollars. It was probably not a very fortunate move, but far from the one that caused the lender the greatest losses. The expansion policy produced great benefits in the short run, but in the long run it was Blesa’s undoing – or rather, Caja Madrid’s undoing.
In 2009, when the crisis and international accounting rules made him feel the pressure, he issued massive amounts of preferential shares worth over three billion euros. “We have expanded the share issue because they’re flying out of our hands,” said Blesa to justify the increase from two billion to three billion euros. He did this even though the ratings agency Moody’s gave the May 2009 share issue junk bond status because it was very likely that Caja Madrid would be unable to pay the interest.
This is the same preferential share issue that has caused so many woes to customers who bought them and now stand to lose an average 40 percent on their investment.
Despite this ending, Blesa arrogantly told Congress in November 2012: “I do not admit to having caused damage with the preferential shares.”
Esperanza Aguirre, then the regional premier, had a great sense of ownership over Caja Madrid, and between mid-2008 and late 2009 she tried to eject Blesa from his post. She failed, but her maneuvering –a shameful example of political interference- helped destabilize the institution.
On his last day on the job, on January 20, 2010, Blesa presented the lender’s accounts, which showed a 68 percent drop in results due to the provisioning mandated by the Bank of Spain.
“It is not pleasant to end things with such a sharp drop; I could have set less money aside, but I preferred to reinforce the institution,” he claimed. Yet his replacement, Rodrigo Rato, was forced by the end of that same year to provision a further four billion euros, proof of the gaping holes left in Caja Madrid.
But the veteran lender’s real death sentence was its merger with Bancaja, another savings bank that was seriously affected by the property crash. It all ended with Bankia and the 22.4 billion euros that taxpayers had to provide to prevent bankruptcy.
Despite all these figures, the 12 years that Blesa spent at the helm of Caja Madrid were extremely profitable to himself and his aides. Upon arrival, he multiplied his salary by 18. The money he made in the first few years is not known, but he made 12.44 million euros between 2007 and January 2010. His closest aides made between two to 9.7 million over the same period of time. The Bank of Spain asked for reports but placed no limits on the exorbitant wages.
When he took over in January 2010, Rato –a former IMF chief- decided to cancel a 25 million euro bonus that Blesa had arranged for himself and nine other executives to receive after they left the bank. Nevertheless, Rato raised his own salary even higher. In February 2011, the Bank of Spain finally stepped in and ordered a 20 percent reduction on Rato’s and other executives’ bonuses, alleging the need for austerity and the fact that the bank had accepted public money.
Blesa passed on his problems to Rato, who inherited an institution that “asked its branches for business volume. For 10 years it went well, but when the crisis hit, everything turned into non-performing loans,” says a former executive.
Going to prison is the bitterest end of all for a man who was once one of the PP’s biggest bankers.