By Charles Penty
Dec. 18 (Bloomberg) -- Banco Santander SA, Spain’s largest lender, risks flunking its chairman’s own test for what makes a “better” banker as clients face losses of 2.33 billion euros ($3.3 billion) from Bernard Madoff’s alleged fraud.
“If you don’t fully understand an instrument, don’t buy it,” Emilio Botin said in a speech recorded for a Euromoney magazine awards ceremony in July. Playing on British poet Rudyard Kipling’s 1895 poem “If,” he added that anyone taking his advice would “be a better banker, my son.”
After collecting the magazine’s “Best Bank in the World” award, Santander described itself as such in full-page newspaper ads. The same bank now accounts for almost a quarter of the $13 billion potential losses European investors have said they may incur after Madoff’s arrest. Santander said it won’t compensate clients because Madoff’s investments were a fraud.
“Comments like that have a way of coming back to remind you to be humble,” said Peter Hahn, a fellow in finance at London’s Cass Business School. Santander may have a “moral duty” to compensate individual clients for the money lost through its Swiss-based Optimal Investment Services, Hahn said. “The dilemma is how do you explain that to shareholders, who would rightly feel ticked off.”
A spokesman for Santander declined to comment on whether the bank was breaking Botin’s rule. The bank itself may lose as much as 17 million euros on an investment linked to Madoff.
Santander said individual customers in Spain face potential losses of about 320 million euros, mostly on structured products linked to its Optimal Strategic U.S. Equity fund, whose investments were executed by Madoff.
‘Absolute Incredulity’
“Absolute incredulity, what more do you want me to say?” said Luis Angel Rojo, a former Spanish central bank governor who now sits on Santander’s board and is chairman of its audit committee, when asked his reaction when hearing of Madoff’s allege scam. He declined to answer questions on Santander.
Madoff, 70, was arrested by federal prosecutors Dec. 11 and charged with operating what he told his sons was a long-running Ponzi scheme in the New York-based firm’s business managing money for rich people, hedge funds and institutions. He told senior employees that the firm was insolvent and “had been for years,” prosecutors said in the criminal complaint.
Wealthy Spanish investors have been among the hardest hit by the Madoff collapse. One is billionaire Alicia Koplowitz, who inherited a stake in Spanish builder Fomento de Construcciones & Contratas SA from her father that she later sold for $800 million. She risks losing 10 million euros through a fund, a spokeswoman for her investment firm said.
M&B Capital
Clients of M&B Capital Advisers, a Spanish brokerage founded by Botin’s son Javier and Guillermo Morenes, husband of his daughter Ana Patricia, have 137 million euros in funds at risk from the alleged fraud, as well as an additional 15 million euros in funds-of-funds managed by the firm.
European banks may have been worse hit by Madoff’s collapse than their U.S. counterparts because the number of wealthy individuals has swelled rapidly in countries such as Spain, which enjoyed a decade-long economic boom fueled by construction before its economy stalled this year, said Hahn.
Santander’s private banking unit generated a 445 million euro profit for the company, according to its annual report. The bank hailed the division’s “strategic importance” saying Santander aimed to have “dominant positions” in European private banking.
The bank had also prided itself on staying clear of the investments linked to subprime mortgages that helped spark $1 trillion losses and writedowns since the start of the credit crisis last year, according to data compiled by Bloomberg. In October, the bank confirmed Botin’s target of achieving record 10 billion euro profit target for this year.
Everyone ‘Hoodwinked’
“Everyone seems to have been hoodwinked” and it’s hard just to single out Santander for criticism in its handling of the Madoff affair, said Simon Maughan, an analyst at MF Global Securities in London. Santander’s over-confidence “will come back to bite them in the backside but more through their exposure to property markets in Spain, the U.K. and the U.S.”
Santander faces rising loan defaults and a jump in wholesale funding costs. The bank was forced to announce 7.2 billion euro rights offering last month, less than a fortnight after saying one would not be unnecessary.
The Madoff affair has combined with losses suffered by customers on products linked to failed U.S. investment bank Lehman Brothers Holdings Inc., to hurt Santander’s private banking business, said Fernando Luque, an analyst at Morningstar Inc. in Madrid.
Santander’s global private banking division, with almost 110 billion euros under management, was targeting 18 percent growth in managed assets in 2008 and a 20 percent increase in pretax profit, according to Santander’s 2007 annual report.
“It’s not good news for Santander, because of the effect on reputation,” Luque said.
For Related News: News on Santander and Madoff: NSE SANTANDER MADOFF
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