Disinterested Parties

Hitting the wires yesterday was the news that the Spanish anti-corruption prosecutor was investigating the relationship between Banco Santander, Fairfield Greenwich and Bernard Madoff that has left various of Santander's private banking clients hung out for a 2.3 billion euro drying. Notwithstanding that at least one news report (from a daily in Botín's home town of Santander), dated the same day, has the fiscal denying that this is the case, the possibility that a bank is operating outside the law immediately brings to mind the case of Rumasa, the business empire that was removed from the control of its owner by the state just shy of 25 years ago.

This writer will not argue with the generally held opinion that the nationalization of the conglomerate that was generating 2% of Spanish GDP at the time was politically motivated. After all, its president, José María Ruiz Mateo, was a more than very important supporter of various organizations that would have liked nothing better than to see the very young Spanish democracy of the time put to a quick death. On the other hand, he sure made it easy for them.

At the centre of the government's legal justification lay the claim that Rumasa, because of the incestuous relationship between his banks and the rest of his holdings, was unstable enough to threaten the entire Spanish economy. In more specific terms (and very simply put), Banco Atlantico was lending too much money to other company divisions on the basis of inflated, internally assessed, collateral values.

Not that we mean to imply that either Banco Santander or Emilio Botín are to be compared to Rumasa or its principal owner with respect to accounting practices (or anything else) - except to the very great extent that the entire amalgam of Spanish financial institutions, construction companies and property developers ended up functioning identically to that 1983 threat to the Spanish economy. As Université de Montréal economics professor, Ricardo Verges*, points out in various papers, the banks and cajas who had lent to property developers had an undeniable interest in overvaluing these assets prior to lending the money to their other customers, home buyers. Add to the mix the multiple cases in which institutions held actual equity stakes in large constructors and the interesting fact that Tinsa, the dominant Spanish property assessor, is owned by the cajas de ahorros.

At its peak the real estate business constituted 20% of Spanish GDP. Rumasa's 2% pales at the side of this inadvertantly created monster.

*Sr. Verges' publications on real estate economics are true gems. Written primarily in French and Spanish, with a few in English, they can be found here. Well worth the visit.

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