The financial sector cleanup closed its latest chapter yesterday by setting the share price on Bankia's preferred and standard stock. The nationalized bank has met conditions imposed by the EU.
As a result, Bankia shareholders that bought stock at 3.75 euros per share are suffering the worst setbacks. The face value will increase by one cent, but later shares will be split 100-to-1. When capital increases after that (the Frob will inject 10.7 billion euros and preferential shares will add another 4.8 billion) shareholder holdings will drop by eight times, which makes it nearly impossible for them to ever recuperate investments.
The Frob?s decisoin seems almost cruel for the nearly 400,000 Bankia shareholders, but we must remember that capital qua capital needs to fluctuate with losses and gains. In other words, shareholders need to assume losses, because otherwise innocent taxpayers end up paying for the losses instead.
Something similar happened with people who own preferential and subordinated shares. They will also assume losses, but with one key difference: share conversions will give them an opportunity to recuperate all of their investments in the mid-term. If the solution for these investors is disappointing, it serves to remember that the costly 22-billion euro bailout could have been avoided if Bankia has been managed with professionalism and efficiency -- in short, exactly the opposite of how Blesa ran the bank. Now many are paying for the bank's past mistakes.
