If you’ve been reading in the news on how Banco Santander is covering its customers over Madoff’s losses, and how it’s been cherry picking some banks in distress, as well as not using the Spanish’s government toxic assets relief measures you’ll be thinking that they are a rising star. And they are, I won’t be the one to deny that, but maybe they are not rising as much as it might look like. In any case, in comparative terms, their are enjoying a privilleged position, especially because the rest of competitors are worse off. The star ain’t that bright.
Santander, a beautiful port city in the north of Spain
Let’s focus on the bank’s last announcement where they claim to be covering their customer’s losses. Let’s go deeper into the figures for some interesting hints.
The bank is including in its 2008 books an extraordinary expense of €500 million with that purpose. Wait! Weren’t they €1,680 million?
Okay. Here’s the trick. Santander is emitting new preferential shares, creatures born half-debt half-shares. Those, in 10 years will be worth €1,680 million less any increment of the initial fund deposit and the earnings to the present date of those funds (whatever that figure might be). What is insured is the initial investment, nothing else. It will be recovered not now, but in ten years. And with no actualisation at all.
For any investor that means bearing a couple of huge opportunity costs: the one already borne and the one that lays ahead. That’s how €1,680 million transform into 500€. The preferential shares will be liquid in ten year’s time. In the meantime yielding a mere 2% per year.
So, what should an investor do? Some will think about it, if its true that, when they invested, Santander was selling these funds as their own trademark, not referring to the real custodian behind. It’s great to sell something that works well solely under your name, as long as it keeps working well! And that entails a responsibility.
But many will simply sign this rebate deal and forget about it. And with the deal the compulsory renounce of any legal claims against Santander, and the curious obligation to keep working with them for the next decade. Not too bad for many considering the alternative of entering a judicial quagmire that will carry expenses for sure as uncertain the outcome may be.
And here comes the final reflection that, from my point of view, explains many things about the Spanish banks. People in Spain, unlike in the US, take their time to assume their losses. At the moment there’s not property market in Spain as people are not selling, waiting for hint of hope to recover what they paid for it. And, as long as there are no transactions, there are no prices.
With raising unemployment covered by benefits that won’t last forever, eventually, many people will have to face reality. So will the Spanish banks. If Santander is betting that, when this moment comes, the worst will be over and the economy will be going upwards, I’m really sorry to bet in the opposite direction.