Bankers
face backlash from Spain’s boom years
Trial
of a former banker and economy minister gives hope to Spanish
‘mortgage victims.’
By GUY
HEDGECOE 2/1/17, 1:59 PM CET Updated 2/2/17, 8:23 AM CET
MADRID — On a
January morning outside a government building in central Madrid, a
group of campaigners from the Platform for Mortgage Victims (PAH)
gathers to hand a document to the authorities, calling on them to
ensure that banks pay back in full money to those who have suffered
financial abuses.
Among them is
Caridad Lomas, a frail-looking woman of 70.
“Before, I thought
the banks were important,” she says. “But since they’ve bullied
me so much, I think they’re bad people — they’ve made me cry a
lot.”
She and her husband
were the guarantors of their daughter and son-in-law’s mortgage.
But when the latter lost his job, he and his family could no longer
keep up mortgage payments and were evicted. The bank is still
demanding money from them because of the property’s loss in value
since its purchase.
Lomas blames the
eviction in great part on a condition contained in the mortgage known
as a cláusula suelo, or “floor clause,” meaning the interest the
family had to pay never went below a certain level, even when market
rates plummeted.
“The floor clause
has cost us a lot of money,” Lomas says. “We’ve paid more than
we should.”
There are only a few
dozen activists gathered outside the government delegation building,
but Lomas’s case is by no means unusual. Many of the others here
have similar stories and an estimated three million Spaniards are
believed to have signed floor-clause mortgages.
After decades during
which banks were seen as trustworthy pillars of society, they are now
facing a costly and painful backlash. The recent economic crisis saw
public opinion turn against Spain’s lenders. And now, ordinary
customers are finally receiving compensation for abuses while bankers
are starting to feel the force of the law for their allegedly corrupt
practices.
On December 21, the
European Court of Justice delivered a key ruling regarding Spain’s
banking practices. It acknowledged the right of homeowners affected
by floor clauses to be reimbursed money dating back to when their
mortgage contract was signed. Previously, they were only entitled to
reimbursement as far back as May 2013, when the Spanish Supreme Court
first ruled that such clauses were unlawful.
Estimates vary as to
how much lenders will have to pay back clients as a result of the
ruling, but financial consultancy AFI has put the figure at
approximately €4.5 billion and it affects many of the country’s
biggest banks, such as BBVA, Banco Popular and Banco Sabadell.
The conservative
government of Mariano Rajoy has called on customers and the financial
industry to carry out the reimbursement swiftly through negotiation.
Bankia, Spain’s fourth-largest bank, has obeyed, announcing on
January 30 a fast-track payback scheme, for which it has provisioned
€200 million. Other lenders could follow.
But beyond the
now-notorious floor clauses, a litany of other cases of financial
abuse and mismanagement had already eroded Spaniards’ faith in
their financial sector.
Black credit
Bankia’s former
chairman, Rodrigo Rato, was investigated for allegedly misleading the
authorities over the bank’s accounts in the lead-up to its
disastrous 2011 stock exchange listing and he is waiting to find out
if he will be tried. Last year, Bankia agreed to pay back €1.5
billion to 200,000 small investors who lost money in the listing.
In a separate case,
Rato has been on trial for his role in a system of credit cards that
were handed out to executives of Bankia and its predecessor, Caja
Madrid. The cards were used for personal expenses — in Rato’s own
case for buying shoes, alcohol and other similar items — yet were
apparently not registered on the books of the bank, which required a
€22 billion state bailout in 2012. A former IMF managing director
who was economy minister between 1996 and 2004, Rato is credited with
overseeing the property-driven economic boom that preceded Spain’s
financial crisis. A verdict for him and 64 other defendants is
expected soon.
“Even if you’re
a lawyer you don’t really understand what it means” — Francisco
Romero, lawyer
The so-called “black
credit card” case saw €15.5 million in the banks’ funds being
spent — a relatively small sum in the bigger picture. But another
scandal, that of so-called preferential shares, had a much bigger
impact on the pocket of ordinary Spaniards.
The shares were a
complex and ultimately poor-performing financial product that many
banks aggressively sold to long-time customers, often without
explaining how they worked. Several million people invested in them
through different banks and many ended up losing their life savings.
A Supreme Court ruling in March of 2016 admonished banks for not
informing clients sufficiently about the product.
As with the floor
clauses, customers often bought into such investments without fully
understanding what they were signing.
“When you read
this kind of clauses, they are quite complex to read, even if you’re
a lawyer you don’t really understand what it means,” says
Francisco Romero, of law firm Arriaga Asociados, which specializes in
claims by customers against banks.
“So imagine a lay
person, they don’t really understand what they’re reading,” he
adds. “That’s why the banks are in an abusive position in this
sense, and they can impose any clause.”
Living dangerously
Founded in the
middle of Spain’s financial crisis, Arriaga Asociados started with
four lawyers. With demand for its services soaring, it now has 450 of
them. Since the European Court of Justice ruling in December, the
company has received thousands of calls from mortgage holders who
wish to claim their money back through the courts, rather than
negotiate with their bank.
Spain’s strict
mortgage laws have compounded the tensions between many customers and
their lenders. With the eurozone crisis sending unemployment soaring
as high as 27 percent, hundreds of thousands of those who had bought
property during the boom were unable to meet their monthly mortgage
payments. Foreclosures became a daily occurrence and continue now,
since the country’s return to economic growth — over 29,000
families were evicted from their homes in 2015, according to the Bank
of Spain.
A member of the
anti-eviction entity Platform of Platform for Mortgage Victims (PAH)
holds up an association T-shirt after interrupting a private event
organised by Spanish bank Sabadell as Spain's Prime Minister Mariano
Rajoy speaks | Lluis Gene/AFP via Getty
A member of the
anti-eviction entity Platform of Platform for Mortgage Victims (PAH)
holds up an association T-shirt at private event organised by Spanish
bank Sabadell, as Spain’s Prime Minister Mariano Rajoy speaks |
Lluis Gene/AFP via Getty
Another European
Court of Justice ruling, in January, chided the lack of protection
for Spaniards in the mortgage market.
Reacting to that
decision, Economy Minister Luis de Guindos pledged more transparency.
“The problem is the clauses which aren’t clear,” he said. “The
abusive ones are the murky clauses and we have to stop the
murkiness.”
Such controversy is
a far cry from the days when Spain’s banks enjoyed a huge degree of
respectability.
Throughout the 20th
century, millions of working Spaniards trusted their money with
cajas, or regional savings banks. Highly regulated, they restricted
their low-risk activities mainly to their own geographical area. But
after the transition from dictatorship to democracy in the late
1970s, they became increasingly deregulated, expanding their
investments beyond the confines of their region. At the same time,
politicians and union leaders started to sit on their boards, turning
many of them into political instruments, or hotbeds of nepotism.
In January, the
national Audit Court estimated that the banking crisis had cost the
country €61 billion.
“Soon, many
regional presidents and mayors ended up controlling the credit policy
of the banks operating in their political territory and behaving like
pharaohs,” wrote Mariano Guindal in his account of Spain’s
economic crisis, Los días que vivimos peligrosamente (“Our days of
living dangerously”).
As the property boom
picked up in the mid-1990s, this phenomenon increased, at times to an
absurd degree. Caja Castilla La Mancha (CCM) helped finance costly
white elephants such as Ciudad Real airport, which now sits empty on
the plains of La Mancha, before requiring a bailout in 2009. The
board of Valencia’s Caja de Ahorros del Mediterráneo (CAM), which
was bailed out in 2011, included a dance teacher and a supermarket
check-out employee.
Much has changed
over the last five years. Spain’s bloated financial sector has been
reformed and streamlined, cleaning up balance sheets and stabilizing
the industry to great effect. But the boom-and-bust years still cast
a long shadow. In January, the national Audit Court estimated that
the banking crisis had cost the country €61 billion.
Despite recent
developments, the president of Spain’s Banking Association (AEB),
José María Roldán, remains bullish.
“No, I don’t
think [Spaniards] feel betrayed by the banks,” he told POLITICO.
“We have a problem right now in terms of the impact on our
reputation, which we need to rebuild going forward, but no, we don’t
think that this is the case.”
“The mortgage
market in Spain works very well,” he added. “If you look at
international comparisons, the home ownership ratio is higher in
Spain than in other countries and the interest Spaniards have paid
over the last 10 or 15 years has been lower than in some other
markets.”
Scapegoats?
A civic group called
15MpaRato has been deeply involved in uncovering many of the cases of
banking abuse. Starting in the depths of Spain’s financial crisis,
in 2012, a handful of Barcelona-based activists, aided by a large
online network, have been combing through publicly available
documents and identifying financial irregularities.
“If one of the
consequences of this massive fraud is to stop people from trusting
their banker, then that’s to be welcomed” — Sergio Salgado,
founding member of 15MpaRato
“If [the banks]
were able to do this, it was because nobody was watching them,”
said Sergio Salgado, one of their founding members. “Perhaps people
believed that there were institutions that would do that, that the
stock exchange supervisor, or the Bank of Spain, all those
institutions would be watching and that if a banker offered you
such-and-such a financial product, it couldn’t be fraudulent.”
Surprisingly,
perhaps, Salgado believes there is an upside to the breakdown of
trust.
“A bank is not
your friend,” he said. “A bank shouldn’t give you financial
advice. So if one of the consequences of this massive fraud is to
stop people from trusting their banker, then that’s to be
welcomed.”
But 15MpaRato
remains dissatisfied that the bankers responsible have not been going
to jail. That also looks like it is about to change.
On January 16, five
senior executives of the former Novacaixagalicia bank were jailed on
two–year sentences, for enriching themselves while bankrupting the
lender.
El Confidencial
newspaper described it as “a historic moment for Spain: the first
case of people responsible for the collapse and appropriation — the
plundering — of the money of savings banks going to prison after
being convicted.”
Rato’s credit card
trial, currently coming to its conclusion, will be watched even more
closely. Acutely aware of the former minister’s status as a symbol
of the excesses of an era, one defense lawyer has warned that the
accused in the case must not be used as the scapegoats for Spain’s
entire banking crisis.
However, Rato’s
imprisonment would be a stunning message that Spain’s years of
impunity have ended. By contrast, his acquittal, or a soft sentence,
would cause many Spaniards to conclude that little has changed after
all.
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