Business View: Abbey's Spanish suitor has a secret under its kilt

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The Independent Online

What is Banco Santander Central Hispano, to give its full ornate Spanish name, doing considering a bid for dear old Abbey National? Sure, Luqman Arnold and Stephen Hester have done an excellent job cleaning up the Augean stables of bad investment at the bank. But Abbey has fallen further behind the big five banks into a distant sixth place. Why would someone without a presence in the UK spend the thick end of £9bn on a sub-scale high-street lender ahead of what might be a nasty correction in the housing market?

What is Banco Santander Central Hispano, to give its full ornate Spanish name, doing considering a bid for dear old Abbey National? Sure, Luqman Arnold and Stephen Hester have done an excellent job cleaning up the Augean stables of bad investment at the bank. But Abbey has fallen further behind the big five banks into a distant sixth place. Why would someone without a presence in the UK spend the thick end of £9bn on a sub-scale high-street lender ahead of what might be a nasty correction in the housing market?

Industry cynics believe that Santander is, if you forgive my pidgin Spanish, el caballo de Troy for the Royal Bank of Scotland. The pair go back a decade and a half. They have cross investments that make Santander the largest shareholder in RBS, though not quite vice versa. Santander chairman Emilio Botin-Sanz de Sautuola y Garcia de los Rios, to give him his full, ornate, Spanish name, sits on the RBS board. RBS chairman Sir George Matthewson sits on Santander's. So it is inconceivable that Santander can have entered these talks without discussing it with RBS. Even if Santander had been trying to keep RBS out of the picture, when the rumours broke in May that it was looking at Abbey, questions must have been asked.

If Santander is going to make a purchase of Abbey work, it has to have some help from RBS. This would be in the form of RBS running Abbey's back office. Any other involvement would be effective management of Abbey by RBS, which would be unacceptable to the Competition Commission, which blocked the bid for Abbey by the much smaller Lloyds TSB four years ago. Indeed, even an outsourcing deal might fall foul of the regulators.

RBS knows this. Though it wouldn't stand in the way of its old friend from San Sebastian, if Sir George Matthewson attends tomorrow's board meeting, I'm sure he will be counselling caution. That is, if he attends. I can't believe that, with any sensible interpretation of good corporate governance practice, Sir George will attend. And I can't see how Mr Botin can attend an RBS board meeting, as the information discussed there would surely be valuable to competitors, such as Abbey. But then again, as Mr Botin fired two of his main opponents on the Santander board, gave them payoffs totalling €164m (£110m) and installed his son as managing director, his attitude to corporate governance is slightly different to what we are used to in the UK.

Ultimately it is hard to see that Abbey is worth the 580p a share that traders have pushed it up to. Santander will be loath to pay that much. To make Abbey worth the £8.5bn this price implies, you have to want to build a genuine force in UK banking. You should maybe already have a toe in the water, and be willing to spend as much again hoovering up some or all of Alliance & Leicester, Northern Rock, Bradford & Bingley, Yorkshire and/or Clydesdale.

This would see you spending the best part of £20bn. There are few in the world of banking that have that money to spend. One name stands out. Citigroup.

Missing the target

JK Galbraith's new book, The Economics of Innocent Fraud (Penguin, £9.99), is published next week. Members of the Bank of England Monetary Policy Committee should read chapter nine: "The Elegant Escape from Reality". In it, the world's most popular economist details the failure of the Federal Reserve Bank's attempts to use interest rates to either stimulate the economy when things are bad or put a brake on inflation when there is "overheating".

At the same time, the MPC members should log on to moneysupermarket.com, which details all the loan deals available in the UK. There they will find that, despite the MPC having raised rates by a full percentage point in the past year, those offered for new personal loans have barely moved. In fact, if you borrow money on your credit card, you can probably do it for less now than you did a year ago.

Which all goes to show that the MPC's attempts to cool consumer spending are missing the target. Admittedly they only have one weapon. But if it's not working, there is no point continuing using it.

j.nisse@independent.co.uk

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