Many years ago a genuine French Rothschild I knew commented about my recommending the Portuguese Banco Espirito Santo stock. We have long since exited the BES issue which no longer is on the Big Board.The Inquisition has been revenged. I was reminded of this anti-Iberian remark by the news that BES has shuffled off its family control of the board over concerns about financial misdeeds at the bank's 25% global controlling arm run by Espirito Santo family. Luxembourg-incorporated Espirito Santo Investment International, ESII, owns a quarter of BES.

In addition, Luxembourg is also the seat of the family holding company which controls BES and other assets in the group, called Espirito Santo Financial Group, ESFG, which has cross shareholdings with ESII. ESGF is listed in Portugal.

An unexplained euros 700 mn shortfall in the ESII accounts was revealed by its 2013 audited result blamed on financial irregularities. This according to Ricardo Espirito Santo Salgado, 70, who has now resigned as chairman and family head at BES. He will step down at the end of this month after serving 22 years. Of course the name means Holy Spirit but that is not important. It also means a big powerful Portuguese family.

Ricardo had a  key success,  restoring  the fortunes of BES after the bank moved to Brazil (along with clan members) during the 1970s Portuguese Revolution which topped the post-Salazar government and terrified oligarchs, bankers, and heirs to family fortunes.

However, in contrast the to the French Rothschilds, who abandoned any desire to resume their retail banking business for French citoyens after their bank was nationalized and then returned to them under Mitterrand, the Espirito Santo clan did not adjust to new times upon returning to Portugal. They deliberately set out to restore the glories of the past, with a bank offering accounts to the public, but also linked to global and even imperialist relics, hide-aways for banking secrecy, family holding companies in tax havens, and unknown sources of money. The
Luxembourg ESII, legally an investment bank, was the issuer of BES debt which was sold widely to those holding Portuguese banks accounts with BES, most recently last month. Luxembourg financial misdeeds were reported in response to an inquiry by the Portuguese central bank.

There are also difficulties for BES, not yet clarified further, over its Angola sub where BES had to put up $5.7 bn late last year to cover late payments and defaults that threatened the Angola bank's ability to operate as a going concern. BES owns nearly 58% of the Angola BES sub. The total loan book of BES Angola amounts to only euros 6 bn so virtually every loan must have gone south.
But rumor has it that the Espirto Santo clan which has run the bank since the late 19th century has its own shortfall at the holding company level which may be as high as euros 2.5 bn, The non-financial family holding company, Rioforte, is trying to stop the outflow of funds by a capital increase of euros 1 bn, according to the Financial Times, and asset sales. BES is on the hook for euros 200 mn lent to Rioforte. It also Meanwhile Moody's has put both BES and ESII on credit watch for a downgrade.

Making the Espirito Santo family's situation worse (in comparison to the stand-together Rothschilds) is that there are now 5 separate families of Espirto Santo rivals for power. Another branch from Salgado's, headed by Jose Maria Ricciardi, a cousin, who runs another entity called Banco Espirito Santo Investment Bank or BESI, tried a coup against him earlier. Officially neither BES nor ESII lent money to Ricciardi's entity, BESI. Who knows?

Now the Banco do Portugal, the CB, was to separate the family from its empire by creating an advisory body Senhor Salgado can head and removing all the family members from BES and ESF, if not from BESI or ESII, nor the Angola bank, which are covered by foreign law.

How this affects us? It does. More for paid subscribers in today's Sonnet from the Portuguese. There is also news from Mongolia, Australia, Spain, Britain, Canada, Poland, Finland, and Colombia. No blog tomorrow as it is July 4th.

My timing for a haha holiday in Portugal was perfect...

*Unfortunately apart from unknown cross-shareholdings there are also short-term loans between BES and our shareholdering, Portuguese Telecom. BES guarantees about 15% of 3 month short-term commercial paper debt of PT(which for whatever it is worth is providing me with better Internet connection than I get with BT.)

In return, PT covers a similar amount of BES debt through paper issued by the Luxembourg investment bank, ESII. The latest estimate is that PT lent euros 897 mn or roughly $1.22 bn to ESII, the Luxembourg entity of BES. Ai de mim!
Moreover the two leading Portuguese stocks own undefined cross-shareholdings in each other which is now being "restructured". Que chatice!

Today PT reported the resignation of a director, Otavio, the Marques of Azevedo, over the euros 897 mn or $1.22 bn matching loan to ESII. It was to cover a counterparty loan to PT for the same amount. PT needs the money to complete its takeover of Oi in Brazil which is in the course of being closed. The debt runs until July 15. The Oi deal is a significant globalization and rationalization move for PT. It cannot be derailed without huge problems for PT.

I am not sure if the Marques is related to the Espirito Santos. While lent to the Luxembourg investment bank, some of the loot may have slipped through to ESFG, the family entity, especially if the Marques is a relative rather than merely a friend of the family.

Now the Banco do Portugal, the CB, was to separate the family from its empire by creating an advisory body Senhor Salgado can head and removing all the family members from BES and ESF, if not from BESI or ESII, which are covered by foreign law.

The news has of course decimated the stock of BES, the only traded entity, wiping out Portuguese who were persuaded to subscribe the BES rights issue which raised euros 1 bn less than a month ago.
Now both the London Stock Exchange and the Bolsa de Lisboa have banned short-selling of BES stock, as well as the occasionally traded stock of ESFG in Britain and Portugal.

Now here is my prediction. The various posh Espirito Santos who committed crimes of peculation in the accounts of the will probably suffer some loss of face or even jail time. But there is no way the Portuguese central bank will let either Banco Espirito Santo, with branches in every village in the country suffer from the mess. The recent capital increase will be used to take control of the bank for the nation. It has happened before.

Nor will Portuguese have to give up their phones, cellphones, TV, and Internet because of a stupid man who was a director of Portugal Telecom. Moreover, there is no way Brazilians whose Oi telco is in the process of being merged with PT will be exposed to service cuts or rate increases from their former colonial masters in Portugal. In fact, PT is probably a buy now. It fell in Lisbon to a new low of euros 2.36 yesterday. It rose a bit later.

*Mongolia Growth Group is readying a medical facility which will be leased out later this month after restoration and will be fully occupied. Earlier it was only 40% rented out. The focus on specialized renovated to suit property is a hallmark of new MNGGF CEO Paul Byrne.

*Nokia will take over another small cell network company, SAC Wireless which offers indoor systems which are ready for 4G. The deal amount was not released. Last month NOK bought another firm in this area, Mesaplexx of Australia.

*Abengoa will build a vast water pipeline and reservoirs to serve San Antonio, TX, a long way from Spain. This will be under a 30-yr cost plus contract which includes a 142 mile water pipeline from Burlison county, which will become a new supplier in place of Edwards county for the city. Building infrastructure for environmental needs is ABGB's forte and now it is teaching Americans how to do this.

*GlaxoSmithKline hired a Chinese-American and Briton couple to seek the source of the sex video of its British head of Chinese operations. It was sent to HQ in the wake of the scandal over bribery in China already under investigation by the pair who were trying to find the source of the revelation letters on this sent to Chinese authorities. Now Peter Humphrey and Yu Yingzheng are to be tried in secrecy and there is talk that they are suffering health risks. Having been hired for the GSK investigation earlier into who revealed alleged bribes to hospitals and doctors for prescribing its drugs, they and GSK foolishly extended their mandate. Of course it is an outrage but the two investigations should not have been combined.

*CAE of Canada won C$110 mn in new contracts to provide flight simulators to the air forces of New Zealand, Germany, and South Korea.

*Barrick Gold is going to sell its Montana Sunshine mine. We own its US$ bonds, not its shares.

*Joe Shaefer in The Investor`s Edge and presumably in the money he managed has added Ecopetrol. EC is Colombian.

More on closed end funds follows:

*Hertzfeld Caribbean Fund, CUBA, has filed with the SEC to issue non-transferrable rights to buy new shares. Details later.

*Our Polish Capped ETF EPOL paid 24.867 cents per share in dividends. Poland is a growth stock with a yield. It is also a play on Eastern Europe untainted by Russia.

*Our Aberdeen Asia Pacific Income Fund, FAX, closed June 42.5% invested in A$s. It also is 4.2% in Indian rupees, 4.1% in Chinese yuan, and 3.2% in Korean won. Most of its US$-denominated funds, 40.8% of its total holdings, are in Pacific Rim emerging market loans in US currency.

*Its stablemate Aberdeen Pacific Global Income Fund closed out the quarter with only 21% of its holdings in A$s, vs 30.9% in US ones, again to leand to emerging market countries. It also had 13of its money in UK government paper; 12.9% in C$ loans, and 12.5% in New Zealand dollar ones. FCO.