Downfall of a dynasty: The last days of Ricardo Salgado and Banco Espírito Santo
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Downfall of a dynasty: The last days of Ricardo Salgado and Banco Espírito Santo

Bankers in Lisbon say the demise of BES is a watershed moment for the country: the turning point when old Portugal became new Europe. Ricardo Salgado tried every trick he knew to save his empire, but found that the Portuguese establishment could not – or would not – save him. How did Salgado’s efforts to shore up Espírito Santo through the commercial paper market hasten, rather than avert, his downfall?


Early summer along the charming cobbled pavements of Rua Barata Salgueiro, Lisbon’s leafy financial quarter, is usually a leisurely affair.

As the heat kicks in, deals – those precious few to have exercised Portugal’s decimated banking community since it succumbed to the post-2008 eurozone malaise – start winding down, and bankers start thinking of their holidays; of the Algarve, the beach, of golf and lazy afternoons devouring plates of the delicious sardinhas grelhadas much prized by the loafer set.

But this summer was different in Lisbon, and not because of a sudden surfeit of late-spring business.

Getaways were temporarily put on hold and local restaurateurs reported a steady, later-than-usual traffic of suits into their eateries. And far from the sober occasions business lunches have been these lean recent years, bottles of alvarinho were broken out, and even champagne was spotted. Unusually for the mild-mannered Portuguese, large helpings of Schadenfreude were also on the menu.

“It’s been too exciting to go away,” one banker tells Euromoney on a hot, late August day. “Usually we don’t drink at lunch but these are special days. This has been the biggest and best thing to happen to us in years.”

The reason for all this celebration? That would be the dramatic failure of the closest thing Portugal has to an oligarch, Ricardo Espírito Santo Silva Salgado, and with him the demise of the bank that bears his family’s storied name across 20 countries. Portugal’s biggest privately-owned bank and second only in industry terms to the state-owned Caixa Geral de Depósitos,Banco Espírito Santo (BES)fell 145 years after it was founded by his great-great grandfather when, on August 2, the Banco de Portugal stepped up with Brussels’ backing to make a €4.5 billion rescue of BES.

That’s about the same amount that seems to be missing from the wider accounts of Salgado’s Espírito Santo group, in a scandal that at one point forced Portugal perilously close to systemic failure and, as Brussels briefly fretted, possibly Europe with it.

A few weeks on, and BES is no more, its solvent bits shuffled off under BdP supervision into a newly-constituted entity called Novo Banco, which is seeking a major shareholder to pay back the bailout funds that the central bank’s Resolution Fund temporarily ‘lent’ Portugal from the €78 billion that Europe provided in 2011 at the depths of the eurozone crisis.

The central bank has appointed BNP Paribas to assist with the sale of Novo Banco and hopes to have a deal done “within a few months,” a source close to the central bank tells Euromoney. “There is a very good chance to sell Novo Banco in a couple of months. It’s an attractive asset. It’s not exactly life as usual but very close to it.”

The BES bailout would guarantee the funds of thousands of BES depositors and, so far at least, has prevented a systemic meltdown that regulators feared would again afflict Portugal – and possibly the still shaky eurozone with it – with a new viral strain of financial contagion.

As Portugal wobbled yet again, President Anabel Cavaco Silva warned that “if some citizens, some investors, suffer significant losses they may delay investment decisions, or some of them may find themselves in very big difficulties. We cannot ignore that there will be some impact on the real economy”.

BES’s bad parts, mostly comprising its catastrophic exposure to Salgado’s largely unregulated and unaudited Espírito Santo Group, have been sectioned off out of further harm’s way, with the big losers being Salgado’s fellow travellers along the tumultuous BES journey; his wider family, France’s Crédit Agricole, Portugal’s state-owned Caixa Geral de Depósitos and BES shareholders, which include many of Portugal’s wealthiest people.

Carlos Costa 
The credibility of the Banco de Portugal and its governor Carlos Costa has been called into question over the collapse of BES. But a source close to the central bank says: “Our solution was well received in the political arena, and amongst our international peers and by Portuguese bankers. To have a public backstop is not luck”

Meanwhile, investigators in at least six countries – Portugal, Switzerland, Venezuela, Panama, Luxembourg and Angola – pore over bank documents, transfers and deals, trying to make sense of Salgado’s last days battling to keep his empire afloat. In Lisbon’s elite circles, they are referring to the Salgado collapse as “Portugal’s Madoff”.

As allegations of fraud, tax evasion and money laundering swirl around Salgado and his now defunct empire, there are few tears about his sudden removal from Portuguese banking.

“They had tentacles and conflicts everywhere, in big companies, in politics, in the civil service,” a local banker says. “They were very close to the government, every government and so they would stand in the market as the de facto official bank of the system.”

A senior Portuguese investment banker echoes this view. “Because they had helped a ministry here, and another there, you know that this system would just continue when you stood in the market bidding for a deal.

“This is the real cleansing of Portuguese banking,” he says, referring to the ‘half-completed’ clean-out that followed the European Union/IMF/European Central Bank-led rescue of the Portuguese financial system in 2011.

“The end of the Espírito Santo group is the real restructuring of the Portuguese economy, it’s what the troika didn’t do. It was forced but it had to happen. Ultimately it is good, the cold shower after a hangover.”

They were valuing (the assets) using discounted cash flow, which gives a different value about, let’s say, 10 times the actual value of the market price. He wanted me to write a paper saying that not only was this possible but that it was appropriate  Professor Joao Duque

From the commanding heights of Salgado’s 15th floor eyrie in BES’s head office at the end of Rua Barata Salgueiro, the 70 year-old backroom networker had a ruthless knack of inserting himself, often uninvited, into nearly every corner of Portugal Inc – telecoms, property, tourism, hotels, construction and, of course, the financial sector.

Overcoming dictatorship, revolution, exile and Portugal’s modern transition to democracy, Salgado seemed to regard the nation as his personal fief, Portugal’s ‘Last Banker’ as a recently-published and none-too-flattering unofficial biography dubs him.

To his countrymen and competitors, he was part-godfather, part-oligarch. If people wanted to think he was an aristocrat that was fine. But to most, Salgado was a man known simply as DDT, ‘Dono Disto Tudo’ – Portuguese for ‘Owner of Everything’.

“They had contacts, they had friends and they knew all their secrets,” says a competitor banker still reluctant, despite Salgado’s demise, to go public with his observations.

 “Salgado didn’t let anyone fall,” he says. “There is always a safety net. They might go to work in the government, and then they return to BES…knowing something (useful). They always had some kind of lever to pull to get the deal. They knew where the proverbial bodies were buried because they helped bury them.”

The business media too were courted. Espírito Santo was famous among Lisbon’s media for inviting favourite journalists to go on Swiss skiing holidays and other exotic locales, where they would make a corporate presentation or announcement that would justify these trips.

According to another senior Portuguese banker, also a competitor to BES, Salgado didn’t operate on the level playing field Portugal was supposed to have become under European rules. “There are lots of former BES people around the government and the civil service, placed in strategic jobs,” he says. “BES is a bit like an old boys’ network, one with political power.”

Hindsight is a wonderful thing in business, and as Lisbon’s post-Salgado banking community hails his terminal eclipse, there seems to be a lot of reflection about those triumphant mid-summer business lunches, as bankers recall myriad ‘I-knew-it’ signs that all was not well at the Espírito Santo group.

There were the discreet word-of-mouth suggestions dropped around town by BES lieutenants that various Salgado assets might be for sale; a trophy hotel here, a telco stake there, a private hospital or perhaps a share of the family’s much-coveted 12klm-long coastal retreat at Comporta, south of Lisbon.

And the now notorious golf day earlier this year at a family-owned resort where Lisbon’s great and good were invited to a lavish day out on Espírito Santo’s coin, downtime presented as a no-frills goodwill junket to treasured clients and associates that unexpectedly turned into a hard-sell of Espírito Santo commercial paper on easy terms over post-dinner coffees.

Commercial paper came to play a key, and costly, role in the downfall of Salgado’s empire. Despite the Banco de Portugal’s specific instructions to Salgado from 2013 not to blur the lines between BES’ business with that of his family empire, post-collapse revelations in the media describe undeclared deals with institutions like Venezuela’s state oil company for it to buy $400 million worth of bonds in the family business. Goldman Sachs also reportedly loaned money, as much as $835 million, to BES just weeks before the central bank took it over.

The terms of the merger of Portugal Telecom and Brazil’s Oi also had to be revised after it was revealed that Portugal Telecom had built up a €847 million holding of short-term debt in commercial paper issued by Rioforte, a private holding company for some of the Espírito Santo family assets. Banco Espírito Santo had a 10% stake in Portugal Telecom.

But one of the more revealing windows into Salgado’s mindset during his 11th hour scrambling that marked the last months of the Espírito Santo regime came from Professor Joao Duque, a former director of Portugal’s securities market regulator, the Comissão do Mercado de Valores Mobiliários (CMVM) and now a senior professor of Lisbon’s prestigious School of Economics and Management.

In January this year, Duque received a call “out of the blue” from Salgado, who invited him to lunch at BES’s private dining room. Salgado was, according to Duque, his ‘golden’ self. “It was a very nice lunch, lots of sweet words,” Duque recalls. “He was charming.”

But soon came the rub.

“He wanted me to do some research, to write a paper in order to support something he was doing,” Duque says. “One of his companies was issuing zero coupon bonds, commercial paper based on the value of their assets.”

The Salgado company, the professor explains, was listed on the Lisbon exchange and thus its assets should have been valued in its books according to their market price, which he says is “normal international practice”.

“But they (Espírito Santo) were not doing that,” Duque recalls. “They were valuing (the assets) using discounted cash flow, which gives a different value about, let’s say, 10 times the actual value of the market price. He wanted me to write a paper saying that not only was this possible but that it was appropriate.”

Duque says Salgado offered to pay him for this service.

If Duque understood correctly, it seemed that Salgado wanted to avail of the professor’s stellar academic qualifications to legitimise the inflated valuations of Espírito Santo group assets, for a modest fee, of course. Duque says he diplomatically told Salgado that he could not do it because he did not have the appropriate qualifications.

“The issue had two components,” he explains. “One was based on market prices and the second was an accounting issue. I told him that I couldn’t write the paper in full alone because I’m not a licensed accountant, I’m not an academic in accounting and that meant that my paper on the subject would be easily destroyed.”

Duque chuckles at the memory: “Luckily, I didn’t do it.”

But the professor found Salgado a fascinating host, and told him so. At the end of the lunch, Duque says: “I told him ‘look, you have an appearance of someone who, regardless of the time of the day, it seems as if you just came out of the shower. You look so clean and fresh, so nice, so fluffy.’”

Duque says: “He just laughed.”

Salgado may have appeared to Duque to be unruffled, but his request for help could have been prompted by an article in the Wall Street Journal just a month before the lunch.

On December 12 last year, the WSJ published a story headlined ‘Espírito Santo engages in financial gymnastics to survive crisis’.

The article detailed how, following the international bailout of Portugal in 2011 and with the capital markets closed to Portuguese issuers, Espírito Santo had sold around €6 billion of its own debt into one of its own investment funds, ES Liquidez. At one point, around 80% of ES Liquidez’s assets consisted of commercial paper issued by the Espírito Santo group or its affiliates.

The article revealed that in 2012 Espírito Santo had valued its 33% stake in BES at €1.55 billion, when the stake had a market value of closer to €365 million. The valuation might have “strictly followed regulatory rules”, as Espírito Santo claimed at the time, and was justified by the illiquidity of the shares and the holding company’s control premium. The inflated valuation meant that Espírito Santo International’s debt did not exceed the value of its assets.

According to data provider Dealogic, various parts of the Espírito Santo network continued to issue commercial paper in size right up until the end. On July 15 and 16, Espírito Santo plc issued €300 million in two trades. July 15 was the day Rioforte failed to repay its debt to Portugal Telecom.

A fued between Salgado and a the head of another Portuguese business dynasty, headed by industrialist Pedro Queiroz Pereira (known locally as PQP), also played a key role in BES’s downfall.

Pedro Queiroz Pereira
 Pedro Queiroz Pereira 

That row was fuelled by Salgado’s clandestine attempts over the course of a number of years to build stakes in some of PQP’s core and profitable businesses, notably the construction company Semapa.

Insiders say Salgado was looking to take over the cash-rich Semapa and absorb it into the Salgado holding company to shore up the Espírito Santo group’s balance sheet.

Says Salgado biographer Maria Joao Babo: “If the holding company absorbed Semapa it would give it more strength. Everything was collapsing so if you put it in there, he could consolidate.”

The feud simmered into 2013, amid saucy leaks from all sides to friendly media. Here were two great clans at each others’ throats, as if, in US terms, the Vanderbilts and the Rockefellers were fighting to the death. Says one banker: “It was nasty, very un-Portuguese but very entertaining. We are more like the English than the Spanish. We are gentlemen.”

Incensed at the now permanent rupture Salgado had created in one of Portugal’s premier dynasties, as well as the damage of a whispering campaign, PQP commissioned grandee Lisbon lawyer Jorge Bleck and a crack 15-strong team of analysts to pore over the entrails of the Espírito Santo empire.

PQP was now playing a very hard ball, seemingly intent on nothing less than Salgado’s destruction. He deployed old shareholdings he held in the Espírito Santo group dating from happier times, so his team could legally demand information and previously-unseen documents.

A dossier was prepared and, according to those who have seen it, it was damning. But rather than go public with the material en masse, on September 24 last year the PQP-commissioned report was handed to Pedro Duarte Neves, the vice-governor in charge of supervision at the central bank.

Through October and November, extra material was added, as the PQP-Salgado war intensified. (Duarte and Bleck did not respond to Euromoney’s requests to be interviewed).

Last November and December came the denouement. For Portugal Inc, this was monumental.

Under terms negotiated between Lisbon banker Fernando Ulrich, the CEO of Banco Português de Investimento who was representing PQP, and Francisco Cary of BES’s investment bank representing Salgado and PQP’s breakaway sisters, the ancient shareholding links connecting the two clans, dating from the 1930s, were comprehensively severed.

All legal fireworks ceased and, as the fascinated onlookers of Rua Barata Salgueiro saw it, PQP and those who travelled with him had triumphed.

Salgado really brought himself down but that probably wouldn’t have happened if it weren’t for PQP. It was ruthless, and PQP is the winner

PQP wasn’t to know at the time, but he was able to extricate himself from lifelong holdings in BES and Salgado’s wider Espírito Santo group six months before it collapsed. PQP had managed to maintain control of his wider Semapa and Portucel interests within his grip while, more importantly for him, keeping them well away from Salgado.

Outwardly, Salgado had exited with what appeared to be a profit but what the market didn’t know then but would fatefully come to know six months later, was that the exit deal was a disaster for him. As would be revealed in July and August this year, he had failed to get access to the liquidity lifeblood that would help keep his empire afloat.

“Salgado really brought himself down but that probably wouldn’t have happened if it weren’t for PQP,” says a banker. “It was ruthless, and PQP is the winner.”

When Banco de Portugal moved on BES this August, it didn’t take long for followers of the PQP-Salgado brawl to muse that PQP had led his demise, that the central bank had been led by the analysis contained within the Pereira dossier.

But the central bank vigorously denies this, claiming it was already aware of and was investigating ‘dangerous’ irregularities in the relationship between BES and the Salgado holding companies.

The source close to the central bank says it was ahead of the Quieroz Pereira report by a year “by a different means…when it started to make questions of ESI (Espírito Santo International).”

Those questions, the source says, were not linked to a specific investigation of BES but were instead part of the EU-driven asset quality reviews. More than a year ago, under European directives from the 2011 bailout it began asset quality reviews at BES and other banks.

But the source close to the BdP admits: “There is not such a thing as a stress test that detects all the problems of a bank. If the accounts of a bank under review are fraudulent or incorrect, there is no way to detect it.”

On July 30 this year, the annual accounts of BES were publicly released. Salgado’s bank had lost €3.6 billion. “Losses were extremely high,” the BdP source says, “and some provisions were made but much of it was not. The solvency ratios were on the very low side and there were signs of increasing pressure on the bank from investors and depositors and therefore it was necessary to take a decision…we had to take action pretty soon. We understood there would not be any private solutions in the foreseeable future to handle such a problem.”

The BdP source is keen to portray matters in the dry, methodical manner of a technocrat, but he is essentially describing a big systemic bank that’s primed to explode. Things had now dramatically changed. After months, if not years by some accounts, of his desperate paddling below the surface to keep BES and his family business afloat, the tide had risen too high for the drowning Salgado.

The BdP source says “we were expecting that private investors would step up” to bail out BES, notably the Salgado family interests. He says the central bank was receiving “endless” offers of interest elsewhere but, in the event, no-one actually did step up, least of all the Salgado interests.

The central bank source is at pains to point out that we “were very well prepared” to move on BES. “That’s how we could decide (what to do with BES) in a couple of hours. This was the best way to protect financial stability. Our depositors have been extremely resilient and calm.” The source points out, sleeplessly, that it has been a summer of office Sundays at the central bank.

“Our solution was well received in the political arena, and amongst our international peers and by Portuguese bankers. To have a public backstop is not luck. If you do not have a backstop, you don’t have anything credible to show that if you have a problem you have a way to get it sorted out.”

Some bankers are not convinced. “How come a regulatory alarm bell didn’t go off in Lisbon somewhere?” asks one. “This has been going on for a long time. How come someone at the Banco de Portugal didn’t ask? Someone has to take the fall for that.”

Another banker says: “The problem is now that people have less trust in the central bank. People are worried about the credibility of the regulator. BES passed the stress tests but these tests, they should also relate to shareholding structures. This is not part of the troika’s remit, not anyone who looks at banks.”

Their name was the door opener everywhere. It provided the confidence of people to give them money, the most-trustworthy name in banking here, but now that name is worthless. There is no coming back

So, what now for Salgado, Portugal’s now one-time billionaire, the ‘owner of everything,’ friend of plutocrats and kings, a man feared and admired in near equal measure?

He has been arrested for tax offences as investigators pore over his and family’s affairs. His empire has been accused of fraud by no less an authority than Carlos Costa, governor of the Banco de Portugal, who only weeks earlier had been persuaded by Salgado that BES – and Salgado – had enough reserves to prevent the very action that the state later took.

Across several continents, investigators and regulators have launched forensic examinations of the Espírito Santo realm, including earlier declarations and filings to corporate authorities. The market regulator CMVM is also investigating market manipulation. “They will come with something and almost certainly it’s going to be bad for the Espírito Santo family,” a banker says.

As for Salgado himself, he has been spotted in the grounds of the glorious Hotel do Palácio in Cascais, the resort community west of Lisbon and a retreat popular among Portugal’s elite, alone save for a detail of Israeli-trained bodyguards engaged, his associates say, to protect him not because he fears reprisals from grumpy Portuguese who have been broken by him, but from Angolan interests who have lost a collective €4 billion in the wider BES wash-up.

      BES CEO
Protesters hold up posters with the image of former Banco Espírito Santo (BES) CEO Ricardo Salgado during a demonstration at BES’s headquarters office in downtown Lisbon. Portuguese bankers doubt he will be jailed

Euromoney attempted to speak to Salgado through his appointed lawyers and media advisers, and posed detailed questions about the circumstances of the fall of BES and his own role leading up to its filing for bankruptcy.

Salgado’s advisers declined to comment on our specific questions, and instead reiterated the public statements that Salgado made in July and August. These say: “Ricardo Salgado reiterates its willingness to co-operate in establishing the truth, as he has done under the process for about two years. [He] believes that truth and justice will ultimately prevail.”

Additionally, Salgado has said: “Ricardo Salgado is awaiting the findings of the forensic audit report on the accounts of Banco Espírito Santo, for the first half of 2014, which is being made by the Bank of Portugal and by PwC, and reserves the right to comment on them. When time and context allow for an objective and calm analysis of what precipitated the abrupt fall in the value of the BES and the consequent intervention of the state, Ricardo Salgado will pronounce on what, in his perspective, provoked this crisis and its outcome.”

The end of the Espírito Santo group is the real restructuring of the Portuguese economy, it’s what the troika didn’t do. It was forced but it had to happen. Ultimately it is good, the cold shower after a hangover

As for Portugal, BES and Salgado have failed but the country has soldiered on, scarred but undimmed. Unlike Spain’s experience with the crisis fallout and myriad allegations of collusive corruption between business and the political elite, Portugal has seen no mass demonstrations and spontaneous displays of people power in the wake of the BES failure.

“We are not like that,” says Salgado biographer Babo. “The people who have lost money are shareholders, who are seen as being able to afford their losses. Maybe it would be different if it was depositors.”

So is there any chance of a comeback for a determined corporate tap dancer who has proven over 70 action-packed years that no obstacle, no regulation can’t be overcome?

“No,” insists a competitor, one of Portugal’s leading bankers, “he is finished, the family is defeated. They will not come back from this.”

“It was always about their name,” says another Lisbon banker. “Their name was the door opener everywhere. It provided the confidence of people to give them money, the most-trustworthy name in banking here, but now that name is worthless. There is no coming back.

Ricardo Salgado biography
A biography of Ricardo Salgado calls him ‘The last banker’. Those in elite Lisbon circles call BES’s collapse ‘Portugal’s Madoff’

“People always thought of Espírito Santo as a great banking house, and there were many family members working in many connected businesses based on their name, and living well on their dividends from the bank, and suddenly they are nothing.”

Will Salgado go to jail?

“I doubt it,” says Duque at Lisbon’s School of Economics & Management. “Ricardo is a specialist at hiring and ‘touching’ people, a great networker,” he says. “He’ll do something.”

And besides, Duque says, noting the lack of public outrage at the large-scale fraud and corruption allegation surrounding the Espírito Santos, “we don’t kill the bull here”.

A senior banker and one-time rival of Salgado says: “Out of crisis comes opportunity. The country will reinvent itself, regenerate, and for the better. A cancer has been removed. The world has changed, this is new Europe now, not old Portugal.”


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