Santander ratcheting up the confusion factor

After the initial and ridiculous offer to investors in its Optimal Madoff vehicle, of preference shares worth 20% of their supposed value, Santander seems to be trying to improve on the offer according to the WSJ.

Apparently the bank will lend selected clients up to 85% of the value of their preference shares at 3%. Assuming you had $1,000 originally invested, you get your hands on $850 and pay the bank $25.5 annually for the privilege. Of course the preference shares are paying you $20, so your net cost is $5.5, effectively you have been given a loan for $850 at an admittedly low interest rate of 0.6%. Assuming you are not forced to repay this loan before the preference shares redeem, and that the interest rate is fixed (both pretty hopeful assumptions), this is like getting 85% of your original investment back (in return for promising not to sue and relinquishing all claims on any money Santander recovers). So why not just offer all  its clients 85% of their original investment back instead of this farce?

At the same time Santander apparently argues that the original offer might be worth as much as 40% of what they claim it’s worth. So why did they claim it’s a 100% refund in the first place? Furthermore, the bank claims that 75% of its clients have accepted the offer. If this is really the case, they must be particularly concerned about the damage from lawsuits if they are sweetening the terms. What is worrying is that the bank is being selective about the initial offer, and even more so about the subsequent sweetener. Effectively it is bullying people into accepting the worst they think they can get away with and hope to smother any legal action before it takes off. Those that give in too early, get a really bad deal, while the tougher ones get some improvement.

What emerges from this is that the bank is willing to play as dirty as it needs to with its customers, but is genuinely afraid of the repercussions. Overall it does not help Santander’s image and is unlikely to prevent legal action gathering pace unless its offer is broadened and made clearer.