The ‘winner’s curse’ claims Votron and haunts Goodwin

July 28th, 2008

Until three years ago, the Dutch beer brand Heineken used a clever slogan to promote its lager in the UK market, which gave rise to a string of rather amusing television commercials. The funniest was perhaps this 1985 one, when a posh girl — all twinset and pearls and strangulated vowels — was given elocution lessons by a cockney tutor. The slogan was “Heineken refreshes the parts wot other beers cannot reach”.

Today another Dutch product is having exactly the opposite effect on certain European banks, particularly Scotland’s Royal Bank of Scotland and Holland’s Fortis. The share prices of both have wilted since they splashed out on buying bits of ABN Amro last year. Both banks over-stretched themselves with this deal at precisely the wrong stage in the credit cycle.

Fortis, has already lost its chief executive Jean-Paul Votron as a result of the “reverse refreshment” brought about by the ABN purchase, and it remains to be seen whether something similar might occur at RBS. The FT’s Lina Saigol last year argued that some of the CEOs involved were so driven by “ego, conceit and a deep-seated need for power” they lost sight of the fundamentals of the deal.

In connection with this saga, a revealing comment has just been posted on The Economist’s website. This came in response to an article The Economist ran about the disastrous consequences the ABN takeover for both RBS and Fortis – Three amigos, only one conquistador.

In the comment, “Drummo” claims that central bankers are just as culpable as the protagonists in this sorry affair. In his view, the likes of the Bank of England governor Mervyn King, Nout Wellink of the Dutch central bank and Jean-Claude Trichet of the European Central Bank, were irresponsible in waving the unprecedented break-up deal to go through.

Drummo (who may just be a former ABN Amro employee) also points out that, unlike Santander, RBS ended up lumbering itself with dross.

Perhaps the Edinburgh-based bank was so determined to win its battle with Barclays, and was so chivalrous towards its two amigos, that it didn’t really care which bits of ABN it ended up with? Many observers are astonished RBS did not scrap its plans for the takeover as soon as it became clear that Chicago-based bank LaSalle (supposedly the unit RBS wanted the most) was no longer available.

Drummo also suggests that RBS chief executive Sir Fred Goodwin and his colleagues on the RBS board ought by now to have “written down” the goodwill involved in the €72bn ABN Amro deal. Will they get around redressing the balance with their eagerly awaited half-year results next Friday (August 8th)? We shall see.

By the way, I think that MPS stands for Banca Monte dei Paschi di Siena. It was to this Italian bank that Santander’s chairman Emilio Botin successfully “flipped” ABN Amro’s Italian subsidiary Banco Antonveneta for a tidy £1.7bn profit. If RBS had managed to do this sort of thing with the bits of the Dutch bank it didn’t want, it wouldn’t be in quite such a desperate position now.

Mr Drummo writes:

“I agree with Mr. Boyle’s comment on the fourth player (Bank of America) but there’s also a Fifth player who cannot be ignored. The central bankers who irresponsibly allowed the whole thing to happen.

At the time the final consortium offer was presented to the market (even after losing the Lasalle legal battle), most ABN Amro executives – the only ones who really knew what the valuable pieces of the bank were – noted the deal was smart for Santander, bad for Fortis (transformational yet irresponsible) and catastrophic for RBS, which was buying either “nothing” (unprofitable units with insignificant market shares like BU Asia, BU Europe, BU Spanish Speaking Latin America, BU Global Clients) or “trouble” (BU Global Markets, management of residual bank).

Such analysis was quite evident in July 2007, prior to the collapse of credit markets.

Fortis and RBS have recently raised capital but have not written down, even partially, the goodwill of the ABN Amro acquisition. Unfortunately, the biggest test is yet to come… the huge goodwill Fortis and RBS still carry on their balance sheet (by paying circa 30 times the book value of the acquired assets as the article well describes) can only be sustained (e.g. not written down) by passing a series of impairment tests based on the profits and synergies generated out of the acquired ABN Amro businesses. Strangely, the markets are not informed at all about that, other than by comments like “the integration is progressing well”.

RBS and Fortis should be transparent to investors and depositors on that and take the hit once and for all. By the way, the same goes for MPS, who carries goodwill attributable to the Antonveneta acquisition equivalent to a very large part of its capital.

So, the fifth and most important actor in this analysis, other than arrogant CEOs and misled shareholders who approved the acquisition are central bankers. The whole acquisition was possible thanks to the authorisation of the various supervisors. All central bankers allowed significant leverage of Fortis, RBS and MPS by simply choosing to ignore the fact that goodwill now represents a very significant portion of the capital of those entities. If the goodwill was written down, even partially, the three entities would be significantly below the minimum capital ratios required by law. Is this the new role of Central Banks under Basle 2?

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