Santander to make a profit on its “compensation”?

As discussed in previous posts, Santander’s offer to clients was actually worth around 20% of the value Santander claims it to be. This, in itself is an insult to clients – if you only want to pay out 20%, at least you should be honest about it. Santander has refused to allow clients to keep copies of the offer, presumably to prevent proper analysis of it.  Despite this, many clients have felt that even such a derisory offer was better than nothing and have been succumbing to the pressure from the bank to accept. As more details emerge, this begins to look an even worse deal than at first sight.

By signing, the clients are obliged to keep their assets with the bank (and are prevented from selling the preferred shares, meaning they don’t see any cash). They are giving up the right to sue Santander and any further claims on the losses from Optimal. This implies that any money that Santander/Optimal manages to recover goes into Santanders pockets.

So far, liquidators have listed some $1bn in Madoff assets. These will be available as compensation. It seems the $50bn total loss figure was exaggerated – the numbers are probably more like $30bn according to Harry Markopolos, meaning there is cover for around 3% of the final value of funds (contrast to Santader offering 20% of funds originally invested). Additionally there are a number of legal actions against the fund custodians (HSBC, UBS) and auditors (Ernst & Young and others). These could be liable to significant damage payments and have deep pockets. It is therefore not implausible that Santander could recover a larger cash amount than the value of securities it has offered its clients. It would then make a profit on the compensation scheme.

The current injunction to prevent Santander using its pressure tactics is in US courts. Deadlines given to clients range from 5th -15th of Feb. The bank wants to get as many people to sign up as possible as it is a fantastic deal from its point of view. Of course for the victims it feels like a case of a bird in the hand versus two in the bush. The problem is that Santander wants you to think you’re getting a healthy chicken, while giving you a dead sparrow.