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.

Newsflash: Spain looks dicey

If it were not for Fannie Mae and Freddie Mac going insolvent this would be the biggest financial story in the world today.

Spain can’t sell its sovereign debt reported here and here. The spreads of Spanish bonds of German Bunds is still small - so this is a warning shot. But it is a shot that rings very loudly at Bronte Capital.

Background

Spain is a current account deficit country with large wholesale financed banks. If you can’t sell Spanish sovereign debt the you shouldn’t be able to sell Spanish (mortgage) covered bonds. Moreover it is a current account deficit country with a permanently fixed currency (it gave up the Peseta and joined the Eurozone).

A while back the most liquid bank stock in the world wasn’t Citigroup or JP Morgan – it was Santander. The second most liquid bank stock in the world was BBVA. These are giants.

They are highly dependent on wholesale funding. If they can't raise wholesale funds they will come close to failing - and Spain will wind up in a horrid recession.

And it is very hard for the Spanish government to bail the mega Spanish Banks out because the Spanish government can’t print Euros. (Being unable to print a fixed currency is part of a model for bank collapse I will deal with in some future posts.)

If the Spanish can’t bail out their own banks I guess the Bundesbank (I mean European Central Bank) can – but that would be a call on German taxpayers to bail out the Spanish.

Of course the Eurozone could collapse. Spain can then go back to its old ways printing pesetas.

Alternatively this could all wash over by next week. But the implications of the Spanish pulling sovereign debt auctions are pretty horrible. Even if the spreads remain under 50bps.

Watch this space...