Monday, July 14, 2008

Santander buying Alliance & Leicester

Whoa big news just after I write about Spanish banks.

Santander is buying Alliance and Leicester. That fits with Santander’s other UK operation – Abbey National. So I shouldn’t be surprised.

Santander is a bank with funding problems – as is A&L. The funding issues however are reflected in A&Ls share price. A&L has been for sale for a long time – and Credit Agricole didn’t confirm the rumours by buying them at 12 pounds. 3 pounds (the Santander price) is a long way down.

All this reminds me of a conversation I had a long time ago at a banking conference in London. It was the conference dinner and I was sat next to an indescribably boring US fund manager who simply didn’t have a clue that there were risks in banking and a somewhat more interesting (but equally clueless) senior executive at Alliance & Leicester. I was drowning my sorrows in cheap cheerful French wine.

I remember taking the guy (who worked in the finance department at A&L) through his own balance sheet. Amusingly I seemed to know it better than him. They had relatively few risks in the mortgage business – but they had taken considerable funding risks. The inter-bank funding was growing 25% per annum – and that funding is hot. They were also running out of capital. My clueless executive understood they were running out of capital and suggested that that was OK because when they ran low they would just sell the bank. The clueless fund manager thought that was fine because he could buy A&L waiting for the takeover. And maybe he made money so maybe he wasn’t so clueless – provided he sold on the rumour of the Credit Agricole acquisition…

But neither of them realised that the liability side of their balance sheet contained risks. My notes clearly say that the senior finance executive simply had never thought about the risks on the funding side.

I guess Santander is thinking about them though. They are paying stock.

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.