Banco Espirito Santo's sudden difficulties turned out not to be systemic, however. At their root, it seems, is one man's hubris.
The spotlight has fallen on Ricardo Espirito Santo Salgado, the family patriarch and, until recently, chief executive of the bank it controlled. Authorities suspect Salgado of money laundering, fraud and forgery. After daylong questioning by an investigating magistrate last week, Salgado was released on $4 million bail.
Adding to the pressure, Banco Espirito Santo on Wednesday reported a half-year loss of $4.8 billion, its worst-ever result. Its share price fell 10.6 percent, to an all-time low of 47 cents on the Lisbon stock exchange even before the results were announced. The stocks have lost more than half their value since mid-June, relegating Banco Espirito Santo to the country's third-largest bank by market capitalization. Though it is not expected to go bust, the losses could make the bank a takeover target.
Dozens of senior members of the Espirito Santo family, which has for generations sat at the same table as royalty and top international financiers, stand to lose heavily — and maybe lose all they have.
The family has already surrendered its places on the board of the bank. The family's three holding companies, unable to repay debt built up by the tourism-to-farming-to-health care empire, have sought legal protection from creditors. Politicians, who once could be counted on to support the well-connected family, are mindful of the public mood after years of austerity and are demanding justice.
"It's shocking now" said Antonio Barroso, an analyst with Teneo Intelligence, a political and business risk consulting firm in London, "but when you look back it makes sense." The sometimes close connections in southern Europe among banks, politicians and public institutions discourage transparency — a feature exposed by the recent crisis, Barroso noted.
The storm broke in May when an audit found "serious" accounting irregularities at Luxembourg-based Espirito Santo International SA, one of the holding companies through which the Espirito Santo family owns its assets, including a stake in the bank. Salgado blamed the company accountant. But media reports began documenting financial shortfalls at another two holding companies, which then conceded they also were unable to pay money they owed. All three are now insolvent, which could result in a fire sale of the assets they hold, wiping out the family's riches.
The Espirito Santo family's financial business began in 19th-century Lisbon. Portugal was neutral in World War II, and the Espirito Santo's bank offered a harbor for European private fortunes. The Espirito Santos were close advisers to Antonio Salazar, who ran Portugal as a dictatorship for four decades from the 1930s. After a 1974 army coup toppled the dictatorship and brought a leftwing backlash, the bank's board was jailed for three months for being prominent capitalists. Following their release without charge, the executives fled through neighboring Spain and set about rebuilding their wealth abroad. After Portugal joined what is now the European Union in 1986, the government handed back to the Espirito Santo family the bank and insurance company nationalized after the coup.
Ricardo Espírito Santo Silva, 70, the great-grandson of the founder, got the bank's top job in 1992. He cultivated an air of somber elegance and distinction. He valued discretion and behind-the-scenes deal-making.
His powerful position at the head of the country's biggest bank gave him political influence: he was consulted by Portuguese presidents and prime ministers; he provided loans for public works that won votes; and he gave retired politicians jobs as consultants. Senior bank executives have sat in Portuguese governments.
In financial circles, Salgado was known by the acronym DDT — "Dono Disto Tudo," which roughly translates as "Owner of all he surveys." He has long been regarded as one of Portugal's most powerful men.
Suddenly, he is an isolated figure. Cabinet minister Luis Marques Guedes said last week "it is always good when the law functions properly."
The full scale of the Espirito Santo Group's financial problems will likely take some time to emerge.
Regulators say Banco Espirito Santo account holders won't lose their money, though investors — including Banco Espirito Santo — who lent money to other businesses controlled by the family may not get all theirs back. Bank of Portugal governor Carlos Costa, who has admitted embarrassment at trusting the numbers Salgado gave him, says the government has 6.4 billion euros available to recapitalize the bank if necessary. Costa told lawmakers that private investors are ready to step in but he did not identify them.
The central bank, the Lisbon stock exchange and Portugal's attorney general are all investigating how Salgado juggled money between the various family businesses and whether he misled regulators and investors. Authorities are also reportedly checking Espirito Santo assets in the United States, Luxembourg, Switzerland and Panama. Angolan officials say they have identified "irregular operations and bad debts" at Banco Espirito Santo Angola.
While Salgado could face prison time, hundreds of other family members who have long lived off the company's success may lose everything — including the family's good name.