Tuesday, 5 May 2009

Remembering ABN Amro


Remember ABN Amro. It was one of the largest European banks, operating in some 60 countries. This venerable institution had a history dating back to 1824.

In October of 2007, it was acquired by a consortium of Royal Bank of Scotland (RBS), Fortis and Banco Santander for a staggering price of $ 100 bn. By this time, the financial crisis had already started, although it was in its early stages. Still these three banks went ahead, paid a fortune and carved ABN Amro amongst themselves.

Just one and a half years later, look at the scenario

RBS needed huge bailouts from the British government to exist- its in effect nationalised. Its share price has plunged more than 80%. Its declared huge losses, in no small part due to huge writedowns of the ABN Amro acquisition.

Fortis has fared even worse. Its now completely taken over by the Dutch government. Its effectively dead.

Banco Santander is the only one standing , and perhaps smiling a bit. It took the Italian and Brazilian parts of ABN Amro and immediately on sold the Italian bank, leaving only the Brazilian business it wanted. Smart.

This is a plaintive post moaning about capitalism at its worst. A venerable institution was destroyed. The acquirers have virtually gone bust. The employees haven't benefited one inch from the deal - in fact they've got screwed too with big layoffs, although you could argue that they would been screwed anyway. The customers of ABN Amro haven't seen anything better. The taxpayer has landed up picking the tabs for the disastrous deal.

So who won ? The erstwhile shareholders of ABN Amro . They got a fantastic price. If the deal had not happened, their value would have plummetted in the financial crisis, as with every other bank. So what has in effect happened is a massive transfer of wealth from the shareholders of the RBS, Fortis and Santander to the shareholders of ABN Amro. Correction. actually a transfer of wealth from the tax payer to the shareholders of ABN Amro. Of $ 100 bn.

In the process a lot has been destroyed and zero economic good has been created.

This just can't be right.

11 comments:

a journey called life said...

its been a while since i read these kind of write ups (blame it on being a mom.. im going to keep using this excuse as long as im able to;)

but all this aside.. very nice write up, more importantly, not packed with too many jargons.. so easy to understand.. thanks

Ramesh said...

Thanks Aparna. You are very kind.

Hey; mom means juggling two thousand and one things at the same time. Can't forget business can you ? - your superb post on appraisals is testimony to that !

Ravi Rajagopalan said...

I can perhaps offer two comments:

1) Santander is run by Emilio Botin, with Ana Botin waiting in the wings. They are still trading on promoter's equity. Arguably they will take huge risks but not stupid ones, and in my recent and extensive experience with Spanish banks, I think these guys are really smart. The Brits on the other hand are now OPM dealers (Other People's Money). Taken together with poor regulation and even poorer shareholder activism, they have played havoc.

2) The Spanish regulator is tough as nails. They never repealed the Spanish equivalent of the Glass-Steagal Act, and they insisted on counter-cyclical provisions. Though the Spanish banks are exposed to the real-estate meltdown (and Santander to Madoff) it is not as bad as what is happening in the UK and the US.

Adesh Sidhu said...

Barclays must be feeling lucky as they lost their ABN Amro bid to RFS consortium. Barclays would have been worse if that deal went through.

A journey called life said...

ideally i should have brought out points like how Adesh or Ravi above have, but look at what i wrote, motherhood has taken me far away from the happenings of the real world.. and articles like the ones u write, will help me come back to these step by step..

Ramesh said...

@ Ravi - Absolutely right. The real estate meltdwon in Spain is probably the worst in the world, and yet Spanish banks haven't done too badly. The regulator has been superb. In a small way, our own RBI follows a similar approach. And Santander -don't think Ana is in the same league as Emilio

@ Adesh - Yes, Barclays shareholders must be thanking their stars. But not hugely I would think - their share price has fallen the same as RBS !

@Aparna - You are missing nothing. Chotu is much more interesting than such mundane stuff !!

rads said...

Hmm the shareholders did a right thing selling it but the one's who bought are definitely a breed of worst management. Heard a similar story about AIG Life Insurance company too.

Thomas said...

Quote: "The real estate meltdwon in Spain is probably the worst in the world"

So far, Spanish real-estate prices have hardly fallen, though. If they start falling as fast and as far as in California, we will see how Santander can cope...

Ramesh said...

@rads - The CEOs of RBS and Fortis have paid for the folly and the shareholders deserve the kick they got !

Ramesh said...

@Thomas - Thanks for visiting. Yes, of course prices have not fallen as much as in say California, but considering the bubble of of the previous years, the sharpest decline in the construction industry and the relatively higher importance of construction to Spanish economy, Spain has been hit severely, hasn't it ?

Thomas said...

Sure, definitely. All I meant to say is: The jury is still out on Santander...

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