The Fall of Banco Espirito Santo: Holy Spirit or Devil in Disguise?
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Publication Date:
September 22, 2016
Industry:
Financial Services
Source:
Kellogg School of Management
In 2014, after nearly 150 years as one of Portugal’s most wealthy and powerful families, the Espírito Santo family completely lost control of its empire, which included Banco Espírito Santo, Portugal’s largest bank by market capitalization and second-largest private-sector bank in terms of assets, along with stakes in numerous financial, non-financial, privately held, and publicly traded companies. During the European financial crisis of 2010 to 2014, many of the family’s companies required capital investment. To avoid family equity dilution, the family’s patriarch, Ricardo Espírito Santo Silva Salgado, engaged in a creative money-go-round structure whereby Banco Espírito Santo would legally raise short-term commercial paper with high interest rates and sell them to third parties that were partially owned by the Espírito Santo family. These third parties then would sell that paper back to the bank’s retail clients as safe investments similar to Portuguese deposits. The plan failed, and the house of cards that was the Espírito Santo empire collapsed. Students will consider whether Salgado and the board of Banco Espírito Santo acted appropriately or if they failed their fiduciary duties to the non-family shareholders of the bank.
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The Fall of Banco Espirito Santo: Holy Spirit or Devil in Disguise?
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