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 Salgado signed two letters to Venezuela’s state oil company, which
had bought $365 million in bonds from his family’s holding company.
The holding company was in financial trouble. But the letters,
according to copies seen by Reuters, assured the Venezuelans that
their investment was safe.
The "cartas-conforto" – letters of comfort – were written on the
letterhead of Banco Espirito Santo, a large lender controlled by the
family. They were co-signed by Salgado, who was both the bank’s
chief executive and head of the family holding company.
"Banco Espirito Santo guarantees ... it will provide the necessary
funds to allow reimbursement at maturity,” said the letters.
There were problems, though: By promising that the bank stood behind
the holding company’s debt, the letters ignored a directive from
Portugal’s central bank that Salgado stop mixing the lender’s
affairs with the family business. The guarantees were also not
recorded in the bank’s accounts at the time, which is required by
Portuguese law.
The following week, after intense pressure from regulators, Salgado
resigned. Within a month, the holding company, Espirito Santo
International, filed for bankruptcy, crumbling under 6.4 billion
euros ($8.4 billion) in debt. In August, Banco Espirito Santo was
rescued by the Portuguese state, after reporting 3.6 billion euros
in losses.
The two letters, whose existence was made public last month but
whose details are revealed here for the first time, are a key part
of an investigation into the spectacular fall of one of Europe’s
most prominent family businesses. Portuguese regulators and
prosecutors are examining them along with the bank’s accounts and
other evidence to determine whether there was unlawful activity
behind the fall of the Espirito Santo empire.
So far, shareholders and investors in the family companies and Banco
Espirito Santo have lost more than 10 billion euros, making this one
of Europe’s biggest corporate collapses ever.
The letters offer a glimpse into how Salgado ran the Espirito Santo
empire and its crown jewel, the bank, virtually unhindered. In
addition, interviews with family members, company officials and
Portuguese regulators, as well as financial documents, show how the
70-year-old patriarch consistently blurred the lines between the
bank’s interests and those of his family and even his country.
Around the time he signed the letters, Salgado sought public funds
to save the family empire, arguing that it was important for
Portugal.
"This is not just my problem, it’s a national problem,” he told
officials at Portugal’s central bank, according to people at a
meeting they held.
Salgado declined to comment for this story. One person close to him
said Salgado had asked Portuguese authorities to help him fix the
family business in 2013. The bank’s collapse, the source said, could
have been avoided.
The corporate meltdown also shines a light on Portuguese and
Luxembourg regulators and the gaps that can open up when companies
span different jurisdictions. The Espirito Santo family companies
were mostly registered in Luxembourg, while their main asset – Banco
Espirito Santo – was in Lisbon. Little information was exchanged
between regulators in the two countries. That helped hide the true
state of the family companies’ affairs.
Portuguese financial regulators knew in January about deep financial
problems at Espirito Santo International, the family’s
Luxembourg-based umbrella holding. ESI, though, continued to borrow
heavily in the months that followed, with deepening consequences for
the Lisbon-based bank.
Luxembourg’s regulator CSSF said it did not supervise any holding
companies of the Espirito Santo family, while the country’s central
bank said it had no responsibility for supervising Espirito Santo
entities.
Portugal’s central bank and its markets watchdog CMVM both say they
acted promptly and efficiently. Portugal’s central bank says Banco
Espirito Santo former managers repeatedly violated its directives.
CMVM chief Carlos Tavares told a parliamentary committee earlier
this year that the watchdog had examined Espirito Santo companies
various times over the past six years and alerted prosecutors about
possible wrongdoing after finding “signs of abuse of insider
information” and a “possible crime of abuse of confidence.”
Portugal’s prosecutor general says there are now several
investigations under way regarding the Espirito Santo empire, but
has given no details.
Antonio Roldan, an analyst for Portugal and Spain at Eurasia Group
in London, says the European Union, the European Central Bank and
the International Monetary Fund, who arranged the 78 billion euro
bailout of the Portuguese state in 2011, should also have spotted
problems.
“Portugal was supposed to be under very close supervision” by
international authorities as a condition of the bailout, he said.
A EUROPEAN TALE
In many ways, the rise of the Espirito Santo empire is a
quintessentially European tale. Family dynasties such as the
Agnellis in Italy or Germany’s Quandts have helped define the
continent’s corporate history using their stable shareholder base
and long-term planning as a recipe for growth. But Europe’s debt and
financial crisis, which has left one in five out of work across the
continent’s southern rim, has changed things.
The Espirito Santo business was founded in 1869 by lottery dealer
and currency exchange broker Jose Maria do Espirito Santo e Silva.
The family guided its banking empire through World War Two by
helping finance Europe’s trade in tungsten, a crucial ore found in
Portugal and used to make weapons.
By the early 1970s, Portugal was in the last years of the Antonio
Salazar regime, a dictatorship that looked favorably upon the
Espirito Santos and their glamorous connections. After 1974’s
peaceful “Carnation” revolution, the country’s left-wing government
nationalized the banks and the Espirito Santo clan lost the
business.
The following year members from the family’s five branches decided
to rebuild their empire with $20,000 (around $90,000 at today’s
value) of their own money and loans from several international
banks.
The move offered a chance to shine for Ricardo Espirito Santo
Salgado, great-grandson of the bank’s founder. He had joined the
family business a few years earlier as a mild-mannered 31-year-old
to head Banco Espirito Santo’s economic studies unit. Once the
family set out to rebuild he opened a bank in Brazil, together with
French lender Credit Agricole. In the mid-1980s, when Portugal began
to encourage private investment again, Salgado returned to Lisbon
and set up a new bank, again with Credit Agricole. He bought back an
insurance firm, called Tranquilidade, that the family had once
owned.
The family business grew. So did its ownership structure. At the top
was Espirito Santo Control, a non-listed holding company that owned
Espirito Santo International, the umbrella for businesses spanning
hotels, property and finance. Luxembourg-registered ESI was 57
percent owned by the family, with the rest held by friends and
Portuguese executives who wanted “a seat at the Espirito Santo
table,” according to a person close to the family. Through an
intermediary company, ESI owned Espirito Santo Financial Group (ESFG)
which in turn owned Banco Espirito Santo.
A family council, with representatives of the five branches, ran the
shop.
Salgado’s big break came in 1991 when the Portuguese state sold
Banco Espirito Santo back to the family and Credit Agricole. Salgado
became chief executive. Under his leadership the bank more than
doubled its share of the Portuguese lending market to 20 percent in
2013, becoming Portugal’s second-largest lender after a state-run
bank.
According to people who worked with him, Salgado was courteous but
distant. Every year, at a meeting with senior staff in a Lisbon
hotel, he would sit in the middle of the room, shooting detailed
questions to department bosses. At family company board meetings, he
rarely faced dissent. “People never turned around and said, ‘no, you
can’t’,” said a person who attended the meetings.
The Espirito Santos lived in style. Isabel de Melo, matriarch of one
family branch, hosted grand parties in her country estate outside
Lisbon, a mansion whose dining room comfortably seats 75. On her
piano sat silver-framed photos of the family with Richard Nixon, the
Rockefellers and the King and Queen of Spain.
Salgado himself built a holiday home in the coastal estate of
Comporta, a sprawling estate larger than Lisbon that the family has
been developing into an up-market tourist spot. Every Christmas Eve
he gathers 50 family members for lunch at Visconde da Luz, a
traditional wood-panelled restaurant near Lisbon.
FAMILY TENSIONS
Portugal fell into recession after seeking its international bailout
in 2011. As part of the bailout terms, Banco Espirito Santo, like
other Portuguese banks, was no longer allowed to pay dividends to
its shareholders, including the Espirito Santo clan, who at that
time owned a majority stake in the lender. That meant a big source
of the family’s income was gone.
The stock market value of Banco Espirito Santo fell to 1.97 billion
euros at the beginning of 2012 from 3.5 billion a year earlier –
costing the family 420 million euros on paper. Most banks sought
state-backed loans. Banco Espirito Santo did not. Salgado boasted
the bank had maintained "strategic independence.”
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Turnover at the family’s hotel, property and other businesses
suffered. To avoid selling assets or losing their controlling stake
in the bank, the family companies, led by Salgado, simply borrowed
more – including from the bank, and from the bank’s customers.
For the first time, though, not everyone agreed with the patriarch’s
approach. Among the dissenters was Jose Maria Ricciardi, a cousin of
Salgado’s who headed the bank’s investment arm. In early November of
2013, Ricciardi organized a small gathering of family members at his
father’s house.
According to a source with knowledge of the meeting, Ricciardi said
he was worried about the family empire’s debt. In particular,
Ricciardi was concerned about the way the empire was financing
itself by selling bonds of the family businesses to clients of Banco
Espirito Santo. He argued that Salgado should step down.
Ricciardi went public with his criticism of “practices” at the group
but did not give details. He urged Portuguese financial regulators
to order an overhaul.
But at another family meeting on November 7, he was overruled. Even
his own father voted to keep Salgado on. “I did not support my son
... to avoid an immediate institutional break” within the family,
said Ricciardi’s father, Antonio Ricciardi, in an email to Reuters
at the time.
The reason for the family tensions soon became clear to Portuguese
regulators. The Bank of Portugal had earlier reviewed the top
borrowers at the country’s largest banks and discovered Banco
Espirito Santo’s heavy loans to Espirito Santo family companies. The
central bank asked auditors KPMG to go through ESI’s accounts and
the results were shocking: ESI’s accounting had “materially
relevant” irregularities that put into question the “veracity and
completeness of accounting records,” according to a copy of the KPMG
report seen by Reuters. The report’s contents have not been detailed
before.
KPMG found that ESI had either not recorded or had under-reported
financial liabilities and risks, had grossly overvalued its assets,
and had scant evidence for its reported transactions. The 6.4
billion euros of debt it held at the end of September 2013 was an
“atomic bomb,” according to a person close to ESI, because most of
it had to be paid back within one year.
KPMG would not comment for this story.
After the audit, the Bank of Portugal moved to protect Banco
Espirito Santo from its founding family.
It ordered the bank to make sure any loans it had made or would make
to family businesses were secured by assets, in case the family
could not repay its debts. The central bank also ordered that any of
the bank’s retail clients who had bought bonds from the family
business be given guarantees that their money was safe.
The existence of the audit was not made public at the time. But
Reuters has learned that four months later, in April, the board of
ESFG – the family company that owned a 27.4 percent stake in Banco
Espirito Santo – was alerted to the problems at its parent company
ESI.
During a teleconference meeting, some directors argued that they
should publicly disclose the problems, because ESFG’s other
shareholders and creditors had a right to know. But Salgado, who was
both CEO of ESI and ESFG chairman, argued for silence. "He
recommended the board let him deal with the situation. The board
believed in him and that his recommendations were the right things
to follow,” said a person with knowledge of the board meeting.
Salgado decided that ESFG would provide guarantees to Banco Espirito
Santo’s retail clients who had invested in family bonds, according
to a person familiar with the decision. Salgado had previously
argued within ESFG that it was in ESFG’s interest to guarantee bank
clients, because the lender was its most valuable asset.
Some at ESFG, however, thought this was unfair to the company’s
other shareholders and creditors, the person with knowledge of the
board meeting said.
Parent company ESI set out to repay the bonds it had sold to Banco
Espirito Santo retail clients. There was a problem, though: The
reimbursements didn’t come from new revenue. Instead, ESI and other
family companies issued even more debt.
The companies issued bonds through an opaque transatlantic ping
pong, involving an ESFG holding company in Panama and another
family-linked firm, according to people familiar with the family
company accounts. Many of the bonds – whose value could reach five
billion euros – ended up back in the hands of Banco Espirito Santo
clients. That opened up the prospect that the bank would have to
compensate clients in the event that the holding company could not
repay the bonds.
The problems at ESI were publicly disclosed on May 20, as Banco
Espirito Santo told investors that it would raise more capital. The
empire kept up a brave face. Earlier that month, the bank had
prepared a slide show for investors titled “Wisdomland,” playing up
the family’s history and reputation. "Wisdom is something that needs
time to grow."
Now, though, in addition to disclosing the financial problems at ESI,
the bank told investors that it had sold debt in family parent
company ESI to its customers. It said this posed a “reputational
risk” for the bank. If ESI defaulted, customers could start asking
questions about how the debt was sold, and the bank’s brand could
suffer, especially if there was any hint it knew the bonds were
risky.
Salgado told a Portuguese business newspaper that the extent of
ESI’s problems hadn’t previously been known. “We didn’t know that
there was such sickness as we have subsequently found inside ESI,”
said Salgado, ESI’s chief executive at the time. “There was serious
negligence. I don’t think there was wilful misconduct.”
These assurances helped the bank complete its one billion euro
capital increase.
In the weeks that followed, the true extent of the bank’s links with
its troubled founding family began to emerge. Investors panicked.
Shares in Banco Espirito Santo would dive 87 percent in the
following two and a half months.
In early June, Salgado made his move to save the business, and his
name.
He first visited members of the Portuguese government and central
bank governor Carlos Costa. Salgado asked both for loans worth 2.5
billion euros to avoid the collapse of the family company. He said
an implosion of the Espirito Santo group would reverberate
throughout the economy.
The officials refused. “We will not use public instruments to solve
problems of a private nature,” Prime Minister Pedro Passos Coelho
said. “When private companies do bad business they have to bear the
costs.”
Salgado and his cousin, Jose Manuel Espirito Santo, signed the
letters for the bank to guarantee the family debt bought by PDVSA,
Venezuela's state oil company. PDVSA and a Venezuelan state-owned
fund, to whom one of the letters was addressed as a proxy of the
state oil firm, declined to comment on the correspondence. It is
unclear whether PDVSA will get its money back.
The letters were not shown to the bank’s internal audit committee
and were not recorded at the time in the bank’s accounts. The Bank
of Portugal later said this violated the law.
In late June, Portugal’s central bank chief organized a meeting with
representatives of the five Espirito Santo family branches. At the
meeting, Costa ordered family members, including Salgado, to step
down from top management of the bank. New executives would be named.
Weeks later, Espirito Santo International filed for creditor
protection in Luxembourg, and most of the other family firms
followed suit. Salgado presided over a July 18 meeting to discuss
the bankruptcies. "He was cerebral and polite, but imperial as
always," said a person who saw him at that time.
A few days after Banco Espirito Santo reported a record loss of 3.6
billion euros for the first half of 2014, Portugal bailed it out.
The state formed a new bank, called Novo Banco from the healthy
parts of the old lender.
Salgado has now set up an office at a high-end hotel in the coastal
resort town of Estoril. He has mostly stayed silent throughout the
affair. In a brief interview with a local newspaper, he said: "I
will fight for honor and dignity, mine and my family's."
Quoting Pope Francis, he added: “Don’t cry for what you have lost;
fight for what you have.”
(With additional reporting by Axel Bugge; Writing by Alessandra
Galloni; Edited by Simon Robinson)
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