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The Markets Are In Real Turmoil: Just Look At What Happened With Alliance & Leicester

July 16, 2008


The most amazing thing about the current crisis on the financial markets is how government officials and senior bankers and financiers are trying to pretend that things are not really as bad as we think they are and that everything will be sorted out in the near future. No one is really prepared to say when exactly things will start getting better – is it a year or two or three that we are talking about? – but practically every day brings more news of the crisis on the financial markets getting out of control.   Take, for example, yesterday’s announcement that Alliance & Leicester, a major UK retail bank, is going to be bought by the Spanish giant, Santander, for £1.3 billion. What, you may ask, is so bad about that? One big bank offers to buy another? Well, actually it’s not a straightforward takeover at all. In fact, this deal reflects the state of desperation that UK banks are finding themselves in.

Let’s analyse the figures. At the moment A&L holds more than £40 billion worth of mortgages, which in itself implies that it is worth much, much more than the price that has been offered for it. Furthermore, when the French bank, Credit Agricole, had set its sights on A&L in 2006 the price offered then was nearly £6 billion. And, even more revealingly, last December Santander had offered to buy A&L for £2.7 billion but got a ‘no’ for an answer on the basis that it wasn’t enough. Yet now, several months later, less than half of that amount is suddenly seen as a ‘good deal at a fair price’, as A&L chief executive, David Bennet, put it.

Some of the people in the City I spoke to told me that the price offered for A&L is rock bottom. So on that basis we can conclude that Santander is not just buying A&L but rather bailing it out.

By the way, as far ago as last October I have been hearing rumours that A&L was experiencing serious problems with raising funds. The same was said about Bradford & Bingley. The question then was: which of the two banks will be forced to take drastic measures to avoid a collapse? B&B eventually took the lead and then failed spectacularly when an American investment group pulled out of buying a stake in it. A&L held on for longer, but everyone expected it to start waving the white flag at some point soon.

The most amazing thing about the Santander’s offer is that some experts have actually come out saying that it was one more proof that international banks had confidence in the future of the UK housing market. That sounded bizarre, considering that A&L was offered a fraction of its real value. The Spanish giant, which already owns Abbey, would become the second biggest mortgage lender in Britain after Halifax if A&L shareholders approve the deal. And they don’t really have a choice, do they?

Now, it is a fact that the Financial Service Authority has actually requested the six British leading high street banks to bail out B&B after the American investment fund walked out on it. The question now is whether anyone has asked Santander to step in and save A&L. If so, the government is going to owe a lot of favours to a lot of banks and this would mean that these favours will have to be repaid in the future. At the taxpayers’ expence, obviously.

Also, in all the panic everyone has somehow forgotten that governments should not get involved – either directly or indirectly – in saving underperforming banks. That was what the Bank of England had been saying less than a year ago. Now, of course, the rules of the game have been changed. The government is throwing banks a life line to the tune of many billions.

It is quite ironic that when all the sectors of industry are going through difficult times and millions of people are feeling the pressure of growing prices and lack of credits the bankers themselves seem to be the only people who continue to feel quite comfortable. Have you heard of many top bank executives being fired or resigning themselves? Of course you haven’t. The money men seem to be convinced that the current mess has nothing to do with them. And what’s more, now that they know that they’ll be bailed out whatever happens they’ll feel even more inclined to take more risks.

And the taxpayers can only sit and watch how public money is being used to bail out the banks.

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