Clients Lose Again with Santander's Madoff Compensation - Barron's

| About: Banco Santander (SAN)

Spain's Banco Santander has offered to compensate clients for nearly $2B lost to Madoff's Ponzi scheme, giving the bank's American depositary shares (STD) a brief lift. The catch, writes Barron's Bill Alpert, is that the "solution" on offer is a far better deal for Santander than for its clients.

Santander is offering Madoff-hit clients preferred shares of the bank nominally equal to their initial Madoff investment. There's no compensation for money-management fees or investment gains. The securities pay a 2% dividend but are noncumulative so Santander can skip payments. The issue is 'perpetual,' so investors can never redeem the shares but must leave them with the bank, although the bank can call the issue if it wants to. The market value of the preferred shares would probably be less than 40 cents on the dollar.

Santander says around 70% of affected customers have accepted the bank's offer so far. In exchange for the illiquid securities, clients will release the bank from any legal claims and commit to leave their money with the bank.

In a class-action suit for fraud filed in Miami, documents filed by the plaintiffs' attorneys said customers were told if they refused to give up their legal claims, their bank accounts would be managed by Santander's lawyers. On Thursday, the judge hearing the case agreed to send a corrective note to Santander customers letting them know about the existence of the class-action suit; in the 39 pages of Santander's exchange agreement, the case wasn't mentioned once.

Last week, the Wall Street Journal reported that Santander had softened its stance somewhat, permitting clients to accept the deal but still move their money to a different bank. But a bank spokesman on Thursday said the offer remains unchanged.

On the other hand, the deal is great for Santander. In the December quarter just reported, the bank only had to reserve $600M for the entire $2B of losses covered by the exchange offer. Moreover, the deal gives the bank the customers' claims against the insurers, the Madoff bankruptcy estate, the accountants at PricewaterhouseCoopers, the fund custodian HSBC and the U.S.-based Securities Investor Protection Corp. Santander's recoveries in any suits could well exceed December's write-offs.