Monday, May 4, 2009

Remembering ABN Amro

Remember ABN Amro. It was one of the largest European banks, operating in some 60 countries. This venerable institution had a history dating back to 1824.

In October of 2007, it was acquired by a consortium of Royal Bank of Scotland (RBS), Fortis and Banco Santander for a staggering price of $ 100 bn. By this time, the financial crisis had already started, although it was in its early stages. Still these three banks went ahead, paid a fortune and carved ABN Amro amongst themselves.

Just one and a half years later, look at the scenario

RBS needed huge bailouts from the British government to exist- its in effect nationalised. Its share price has plunged more than 80%. Its declared huge losses, in no small part due to huge writedowns of the ABN Amro acquisition.

Fortis has fared even worse. Its now completely taken over by the Dutch government. Its effectively dead.

Banco Santander is the only one standing , and perhaps smiling a bit. It took the Italian and Brazilian parts of ABN Amro and immediately on sold the Italian bank, leaving only the Brazilian business it wanted. Smart.

This is a plaintive post moaning about capitalism at its worst. A venerable institution was destroyed. The acquirers have virtually gone bust. The employees haven't benefited one inch from the deal - in fact they've got screwed too with big layoffs, although you could argue that they would been screwed anyway. The customers of ABN Amro haven't seen anything better. The taxpayer has landed up picking the tabs for the disastrous deal.

So who won ? The erstwhile shareholders of ABN Amro . They got a fantastic price. If the deal had not happened, their value would have plummetted in the financial crisis, as with every other bank. So what has in effect happened is a massive transfer of wealth from the shareholders of the RBS, Fortis and Santander to the shareholders of ABN Amro. Correction. actually a transfer of wealth from the tax payer to the shareholders of ABN Amro. Of $ 100 bn.

In the process a lot has been destroyed and zero economic good has been created.

This just can't be right.