2Feb06 Amicus Brief to U.S. District Court/Southern District-NY: Relational Investors, LLC./Sovereign Bancorp, Banco Santander, S.A.

February 11, 2006

Via First Class Mail
The Honorable Alvin Hellerstein,
United States District Judge
U.S. District Court
Southern District of New York
500 Pearl Street, Rm. 1050
New York, NY 10007

Re: 05 Civ.10394/ 05Civ. 10736
Relational Investors, LLC./Sovereign Bancorp and Banco Santander Central Hispano, S.A.

Dear Judge Hellerstein:

Please find this request for permission of the Court to submit materials related to the dispute involving Banco Santander Central Hispano, S.A. (“Santander”), Sovereign Bancorp (“Sovereign”) and Sovereign’s largest investor(s), Relational Investors, LLC.

I have sent (faxed/emailed) copies of these same materials to the counsel of the above parties.

Yours respectfully and sincerely,

Andrea Psoras
Senior Analyst

cc via email/fax:
Mr. Rodgin Cohen, Esq., Sullivan & Cromwell, 125 Broad Str, 10004.
Mr. Brian Frawley, Esq., Sullivan & Cromwell

Mr. Arthur S. Long, Esq., Davis Polk & Wardell, 450 Lexington Ave, 10017. (Thank you Mr.Long for copying these people)
Mr. Gonzalo de las Heras, Banco Santander Central Hispano, S. A.
Mr. Juan Inciarte, Banco Santander Central Hispano, S. A.
Mr. Juan Guitard, Banco Santander Central Hispano, S. A.
Mr. Alberto Sanchez, Banco Santander Central Hispano, S. A.
Mr. Jose Manuel de Araluce, Banco Santander Central Hispano, S. A.

Ms. Cristina Victoria Regojo, Esq., Davis Polk & Wardell
Mr. Randall D. Guynn, Esq., Davis Polk & Wardell
Mr. Joseph Rinaldi, Esq., Esq. Davis Polk & Wardell
Ms. Diane Kerr, Esq., Esq., Davis Polk & Wardell
Mr. Jeffrey Lenowitz, Esq., Davis Polk & Wardell

Ms. Pamela S. Wasserstein, Esq., Wachtell, Lipton Rosen & Katz, 51 W. 52nd Str, 10019.

Mr. Robert Zimet, Esq., Skadden, Arps, Slate, Meagher, Flom LLP Four Times Sq, 10036.
~~~~~~~~~~~~~~~~~~~~~~~~`
comments.applications@ny.frb.org
Ms. Gail Santora-Ferrer
Financial Specialist
Bank Applications Department
Federal Reserve Bank of New York
New York, NY 10045

Re: Complaint, Protest and Comments regarding Proposed Transaction(s) including Banco Santander Central Hispano, S.A. Madrid, Spain (“Santander”), Sovereign Bancorp (“Sovereign” or “Sov”), and Independence Community Bank (“Independence” or “ICB”)

Outline of the Complaint, Protest, and Comments
I. Introduction and complaint about the New York Stock Exchange (“NYSE”) for ruling while conflicted with this listed firm. Form-over-substance “arm’s length”. Page 1.
II. Reasons the proposed transactions falls apart, can be killed, and at the very minimum requires a shareholder vote. Page 5
III. Comments on Santander’s Application to NY Fed, Comments on Santander. Page 9
IV. Comments on OTS application, Comments on Sovereign Interest to acquire Independence Community Bank. Page 13
V. General Observations; Other Regulators and their Respective ‘Jurisdictions’. Page 18
VI. Comments and concerns on increasing concentrations in banking and the vulnerability to US community banking for large foreign bank target with Basel II. Page 19
VII. Conclusions on Sovereign doing a deal too expensive for current capital ratio and stock price, in turn needing a capital infusion from a bank, in this case a foreign bank from outside the market so as to remain capital compliant. Page 20

Dear Ms. Santora-Ferrer:

(cc: Mr. Long, Mr. Frierson, Mr. Gebert, Mr. Lesser, Mr. Albanese, SEC Market Regulation and Corporate finance/mergers, acquisitions, Secretary Schenck and colleagues, and the New York Stock Exchange, New York Attorney General, Secretary of the Commonwealth of Pennsylvania)

Thank you Ms. Santora-Ferrer (and all other parties copied) for your correspondence of December 12, 2005 responding to my preliminary comment and request for information related to the proposed transaction by Sovereign in a poorly (tangible) capitalized status interested to acquire the New York metro area based, $18.5B asset-sized Independence Community Bank, and undergo recapitalization with a 24.99% equity ‘stake’ with Banco Santander.

Please also include this official comment and protest to the proposed transaction between Santander, Sovereign, and Independence. For informational purposes, I am including my Resume and Transactions List to indicate my professional experience with the financial sector generally, and with banks and thrifts in particular.*

Also for the record, as of this time on January 9, 2006 I am not employed currently by any institutional or individual investor of Sovereign, Independence or Santander, nor has any quid pro quo been offered to me with regard to any of this submission to Public Comment.

I. Introduction and Complaint about the NYSE for prematurely ruling on the Santander, Sov, Independence while conflicted with Sovereign as an NYSE listed firm

Please note the other parties to whom I am directing my complaint(s), review and comments. I also am including my protest against the NYSE ruling to permit, without a vote of Sovereign’s shareholders’, its management to progress with its interest to acquire Independence Community Bank in the New York metro area. This likewise I am filing with the New York Stock Exchange pursuant to its 12/05-1/06 “Notice to Listed Companies and their Stockholders/Request for Comments on “A Change to Section 312.03 to eliminate or change the treasury stock exception”.

Please find my strong opposition to the New York Stock Exchange acting improperly, including its own Conflicts of Interest while ruling, if not prematurely on the Sovereign shareholder protest before Santander filed its change-of-control application with the Federal Reserve Bank of New York, then contrary to serving the interests of the non-management investors, contrary to the spirit of the Sarbanes-Oxley (Act of 2002) legislation, and contrary to principles of responsible, effective corporate governance.
Moreover, I conjecture the NYSE is conflicted with its chairman having worked at Goldman Sachs. I observed in my preliminary comment that the NYSE is a conflicted party in this proposed series of transactions, as its current Chairman formerly had enjoyed a long and fruitful profession with Goldman Sachs. It has a cozy, investment banking relationship with Sovereign Bancorp, although Goldman is not among the Investment Banks indicated as having provided advice related to these proposed transactions. I have learned a senior Goldman (investment banking) Executive has a father-son relationship with a management level employee at Sovereign. One could assume Goldman Sachs has acted in some way as an advisor to Sovereign and/or Santander regarding this series of proposed transactions. I also would assume with my experience in mergers & acquisitions that Sovereign and Goldman Sachs probably have a retainer relationship.

Sov could have listed NASDAQ, but listed NYSE. Given what has been happening at the NYSE since last fall, the NYSE knows who butters its bread, because Goldman can suggest listing NASDAQ or AMEX depending on the issuer and the issue, however, Goldman recommends NYSE.

Such as it is, one can conclude that the NYSE demonstrated it failed to remain disinterested when ruling in the calculation of 19.8% ownership, which permitted Sovereign to use a strategy omitting treasury shares that Santander actually is acquiring and in turn, giving to Santander control of virtually a quarter of all shares of Sovereign.

NYSE abused Sov’s shareholders with a poor judgment call, while the shareholders in the near term were forced to swallow management’s self interest for aggressive growth. Non management shareholders deserved the right and circumstances to vote on what management proposed, especially when the proposed transactions mean materially changing the nature and structure of the enterprise in which they own shares.

My observations follow regarding the transaction proposed by Sov for Independence to support my protest about the NYSE’s decision. Although my professional opinion of late is limited to ‘top-down’, conceptual corporate governance and shareholder rights principles via serving on the Corporate Governance/Shareholder Rights committee at the New York Society of Security Analysts, my experience dealing with management and Trustee and Director boards spans more than 20 years from working with non-public, closely held maritime companies, to large publicly traded money center banks and global, publicly traded enterprises.

That said, to speak about ineffective internal and board checks and balances at Sovereign, its Board through the 2004 Annual Report had only 6 people with the CEO serving as executive director. Only eventually in 2005 it added its 7th director.

The NYSE should have considered more carefully the enterprises on which they were asked to ‘rule’. One sees top down weaknesses elsewhere around Sovereign affecting its operating competitive quality. Keep in mind, I am working with the Annual Report year ended 2004. Reviewing this Annual Report, Sov’s Cash Flow Statement shows the thrift’s actual operations were producing insufficient cash flow and profit for the CEO to engage in his aggressive, ‘moral-hazard’ growth scheme management strategies. Likewise also note Non Deposit Borrowings have given Sov liquidity so that the CEO can claim a positive cash flow, however, backing-out the borrowings speaks to a diminished cash-flow from Operations. If management practiced effective Asset/Liability management, deposit maturities would match loan activity. When a bank or thrift’s operations produced cash flows that pale somewhat next to non-deposit liquidity from borrowings, this institution avoided blatant problems only because low interest rates and fiscal stimulus generally have kept the local economy out of a serious recession. Sov will need more than sufficient cash-flow if it acquires into the New York metro area.

And Sov’s profile contrasts with the operating strategy of the target, as well as the target’s urban market area and associated costs, while Sov’s management generally has avoided such de novo or acquisitions with urban profiles. Acquiring into a mature area uses more resources rather than less, and what resources the thrift has in any event that the CEO has shifted around the thrift’s balance sheet to give the appearance of a well run thrift.

As I previously mentioned, some might perceive this management as operating just this side of the moral hazard aspects of thrift banking. In Texas and the southwest, thriftees using borrowings, aggressively grew their thinly capitalized or negative net worth ‘shops’ while deposit insurance protected depositors up to $100k. Likewise, this management aggressively has ballooned its shop, paid itself more on its ambitious, and capital squeezing growth scheme actually with marginal profits – of late – from New England and its moribund economy.

Strangely however, Sovereign has failed to establish itself with the potential customers in its own Pennsylvania deposit base. One successful residential builder indicated that he and the other local builders have virtually no interaction with the banks and thrifts in the Montgomery-Bucks County (PA) area, known to be among the most wealthy Metropolitan Statistical Areas in the United States. One resident of Bucks county, and a recent new home owner in the area although having moved from within Sovereign’s deposit area, indicated Sovereign has very little presence throughout eastern Bucks County area, again considered among the most wealthy demographic regions in the United States.

One would observe the NYSE gave it again in the face of the non-management shareholders while Sov has been doing this slip-shod operating strategy. The NYSE’s ignorance of thrift economics and dynamics, and a so-so economy with virtually no recent thrift failures obscure inferior but ambitious management at Sov that has been operated to suit its self-interests.

Meanwhile, one could conjecture that neither application to the Federal Reserve Bank of New York or the OTS existed for the NYSE’s decision. One could argue the NYSE overstepped its legal jurisdiction by its premature decision excluding shareholder interests on these depository institutions, because these regulated institutions may not, and actually are prohibited from doing anything that not only violates their charters, but engaging in any transaction without appropriate regulatory approval.

The NYSE had no access to, and therefore matter available for judgement purposes, the regulatory applications Sovereign and Santander. Observe on page 1 of Sov’s application with the OTS, management declares “no approval of the shareholders of SBI is required for this transaction” even though Sov must have, and sought an equity infusion, which happened to be 24.99% effectuating a change in control of itself. And with further contempt for the approval process, Sov failed to explain how it can acquire a thrift about 1/5 its size, needing a capital infusion while insolently declaring itself without need of a shareholder vote (Sov application filed 12/22/05 to OTS, p1 110.10 proposed acquisition). Without any sort of explanation in this part of the application Sov explain itself. In addition to Sov’s comment where, in its opinion, management doesn’t need shareholder approval, I am calling this a misrepresentation of the true situation, especially without full disclosure as to how it insolently can make this claim.

Where are the regulators on this management? As I have said, this management apparently despises the block-and -tackle, plain vanilla model with which it is to operate. Other depository institutions successfully have operating under the S&L model, while Sov’s CEO wants to put a Formula 1 engine into a stock-car and race grand pris. The landscape is littered with the conceited that have failed in this come some unexpected crisis.

Sov’s management demands its due while it needs to realize what goes around comes around and one can’t demand respect when one hasn’t given it, speaking to how it failed to respect its shareholders and told them to sell the shares if they didn’t like how he ran the thrift. At a minimum, Jay Sidhu and his chummy board has ignored, rejected and abused Sov’s non-management shareholders by trampling on their access to vote on these material matters such as a change in control, change in charter, and material change in trade area and franchise.

I strongly condemn the NYSE for giving a pass to Sov’s abuse of its shareholders, where management was seeking to avoid a vote for this proposed transaction with Independence, with Sov’s need to seek recapitalization with an expedient player such as Banco Santander, SA. Santander itself operates above the law in its European, Latin and South American and Puerto Rican markets, while Sovereign engages in a growth strategy predicated on consumer credit products at risk for policy makers’ budget knives.

Let history serve us a key lesson in the US domestic economy: what should never leave the back of bankers’ minds are the assumptions and oversight bankers make while potential legislative and tax changes sit in committee that could rock and crater the economy. Given that, management’s ambitious growth strategies = reckless and shortsighted, rather than deliberated and farsighted thrift banking. It is a sector in legislative and structural flux. Given that, Sov’s management says it is serving its shareholders, while failing to have permitted a shareholder vote on these proposed material transactions?

The NYSE failed to respect any of this and proceeded in an uncoordinated, faulty way.

With this said, I complain against, and expect repeal of the NYSE’s decision to permit Sov to precede without a shareholder vote while Sov is attempting to engage in a transaction of material size actually needing Sov also solicit for a recapitalization. Little of this could reflect well on the NYSE for prematurely ruling on this situation without appropriate knowledge of the banking matters, the regulatory protocols, and the due respect and care to Sov’s shareholders while Sov’s management somewhat abused its shareholders who have endured the dilutive and borderline deals senior management has made, crowing that the acquisitions have been successful when I suggest management only makes this claim given the soft economy, and absence of a serious economic or legislatively produced crises similar to what we’d seen in the 80s and early 90s with legislation such as the 1986 Tax Act or Financial Institutions Reform and Recovery Act of 1989, (“FIRREA”), when interest rate increases and legislative/associated tax changes battered financial institutions and the domestic economy for roughly 7 years. Sovereign has enjoyed a low interest rate and reasonably stable legislative environment to shore up its shop while its shareholders have taken it in the face and have endured poor management operating and strategic decisions.

Typically for change in control and material acquisitions and divestitures, shareholders of exchange-listed companies involved have the right to enjoy voting to accept or reject management’s proposition. In its application to the New York Federal Reserve bank and the Board of Governors of the Federal Reserve System, Santander said that ICB didn’t want there to be a vote, and Santander then asked to permit its acquisition by Sovereign to proceed without a shareholder vote. I gathered it meant Sovereign’s shareholders, which have the power to kill all the proposed transactions. I question if either Santander or Sov prompted ICB to request that Sov omit a shareholder vote, meanwhile the issuers’ managements have power to abuse shareholder wealth tied up in the issuers’ shares. (Comments based on review of the Banco Santander application submitted late in the day 12/8/05 for up to 24.99% of the voting common shares of Sovereign Bancorp.)

As a comment and rebuke for the NYSE related to its deliberations to modify or eliminate the ”treasury stock exception”, in the case where permitting management to use treasury shares favor’s management with those shares diluting non management shareholders’ shares, rather than the NYSE omitting these shares from use and management purposes of control at various levels, the NYSE has a form of its own leverage, to which it really has no right to exercise over the issuer. Santander is looking to buy 24.99% of Sov, where the stake using the treasury shares weakens non-management shareholders’ hand, yet the management has access to them for advantage come a contested transaction that typically enjoys a share vote. And in this case, the NYSE has backed the hand of management over that of the non-management shareholders. The NYSE needed to coordinate its ruling given that Santander has published notice in 3 newspapers while filing a “change in control” application with the Federal Reserve Bank of New York for a controlling interest in Sov.

NYSE rules on the matter of treasury shares also address the event of a change in control, which we see given Santander’s public and application representations for interest to acquire, and thus change control of/in Sov. Given this, the NYSE needs to repeal its decision rather than resolving to make a better one in the future.

Who is it to capriciously say these shareholders must go without voting on these material matters, while future non-management shareholders the NYSE will treat better and force management accountability?

In addition for GAAP EPS purposes, management may show the smaller share number while for NSYE purposes, these shares still exist in the same status as the other publicly traded shares? Does the NYSE use different per share and diluted per share earnings numbers than what GAAP suggests? Does the NYSE always use the share number increasing each time management issues shares for a deal, stock dividend, and other reasons management would issue shares? Not to mention management uses treasury stock to offset management options, warrants and other stock related comp schemes, diluting non-management shareholder status, while the NYSE permits management to engage in these schemes when GAAP prohibits their use if in per share figures management added ‘treasury’ shares.

Why is this? And for what purpose? I protest this for the fraud it perpetrates on the non-management shareholders.

I. Reasons the deal falls apart, can be killed, and at the very minimum requires a shareholder vote.

One may see with little obscurity, unsheathed, undue interest, even a demand for secrecy by the applicants, including a failure to provide a fairness opinion to Sov shareholders.

Not directly related to my comments beginning above, however, if not in an evident, but what appears to be its careless or lazy attitude, I found disgraceful and insolent Sovereign’s disinterest or disinclination to provide the answers to the questions the OTS asked in its application, and Sov referred or suggested the OTS to find the information elsewhere, in the ICB proxy, but elsewhere. I also found an insolent comment when Sov stated in its OTS application that Santander’s interest to acquire a controlling stake in SLHC Sov is subject to Fed approval, and fails to consider any other regulator’s approval including OTS.

AND, I am not certain what can characterize what I witnessed with the Sovereign OTS application, however, I find no financial information about the deal; no financial info existed in the proxy to Independence shareholders and none from Santander related to these transactions in its NY Fed app. Nothing.

What contempt for all stakeholders and this process.

Although my previous professional experience in bank and thrift mergers and acquisitions involved me with applications of this general sort and confidential information, one must examine and question the issuing parties’ general interest, even demand and presumption for secrecy and such abuse of the corporate governance principals of transparency and board conduct, where we see such predilection for secrecy to the extreme in the case of Santander, along with Sov’s aggressive avoidance of shareholder voting and a pattern of insolence, and management conceit and, heavy handedness in its business as usual style to do its dilutive, grow-the-place-bigger-so- that- I-can- get-myself- paid-more- by-my-buddy-on-the-Comp-Committee-to-whom-the-Bank-has-lent-more-than-$10mm deals, with this most recent proposal needing a recapitalization to the thrift.

Further, consider neither Santander nor Sov operate in the 5 boroughs, i.e., the NY Metro area, as opposed to considering New Jersey, where Sov and ICB have some overlap, reasonably close to New York City. WE are not seeing “in-market consolidation”. We are seeing outsiders coming into the market, neither which have direct operating experience in the 5 Boroughs market, and have remained disinclined until *NOW* to acquire into the NY market. My experience and developed analytical intuition sees little gain for the local depositors targeted and affected by the ambitions and self-interests of either Sov or Santander.

Keystone Kops?
Santander’s asset quality given the bank’s new size improved only with its acquisition or inclusion of Abby National. And note this, Sov can barely add and subtract even its public numbers as demonstrated in its 2004 Annual Report where it fails to properly add by a $-5.9mm its Comprehensive Income for 2004. Here we are given a schedule for its public financial statements that the presenters make to appear to sum, although in this case we find a small, nit-picking inaccuracy. It thinks little of its Annual Report signed by a “Big 4 Auditor”, Ernst & Young, where it would have and could have but did not represent its financial position without error or misrepresentation. Perhaps that seems nonsequitor to my concerns over its operating representations, however I see management’s rhetoric and its actions with consequences illustrating something all together different than management would have the public, the analysts, the regulators, and its shareholders to believe. Its shareholders mean virtually nothing to it.

In coming into an demographic/geographic area that has no need for its business or its operating strategy, Sov is making a material change to its franchise, adding more than $18.5 billion of NY Metro Area assets. Sov typically avoided extensive urban demographic thrift activity.

Keep in mind, all financial information for which the OTS application asks, one finds in the public section of the application without any indication by the boiler plate for confidentiality which Sov seems determined to hide about what it will cost to operate in the NY metro area.

Meanwhile, Santander it its 12/8/05 application to the Fed states on page 20 of its General Statement “Sovereign has advised Santander that was of the date of this application, Sovereign has not come to definitive conclusion regarding how it will fund the remaining purchase for the Independence acquisition”, although in the OTS application Sov submitted on December 22, on a document of its board from 10/24/05 described in what management named the “Beluga Transaction” and the “Iceland Community Bank Corp. Transaction”, Sov gives the pretense it has the resources to effectuate the transaction described:
“RESOLVED, that the merger transaction between the Company, Iceland Acquisition Corp. (“Merger Sub”) and Iceland Community Bank Corp. (“Iceland”), providing for the merger of Merger Sub with and into Iceland, with surviving such merger as a subsidiary of the Company (the “merger”), on substantially the terms contained in the draft agreement and plan of merger between the Company, the Merger Sub and Iceland (The “Merger Agreement”) presented and reviewing at this meeting, including, without limitation, the exchange of each share of Iceland Common Stock outstanding for $42 in cash is hereby authorized and approved in all respects”.

While the source was in doubt of the resources/means for this proposed transaction at that date? Meanwhile, if Independence survives as a sub, its charter ‘goes away’ or if a separate operating unit, the charter remains according to regs and/or the law? If this charter is to remain because the laws and/or the regs dictate such for a separate operating unit and if autonomous, this keeps the New York State Banking Department involved as a regulator, as well as its supervision in this group of companies. Not to mention, with the new operating units Sovereign establishes, all that need some sort of capital on which to prosper, management sources that capital from where? And all of this is attempting to be done without the shareholders and their vote while they are the ultimate owner of the resources, behind the FDIC for the necessary resources to run these enterprises on safe and sound practices. All this and the regulatory matters around it, while not entailing sick banks and thrifts in regulatory assisted transactions, have been kept confidential from the shareholders who face the negative impact of these operating and regulatory decisions on their investment. I oppose and protest this, especially in the context of this proposed transaction between Santander, Sovereign and its investor dilutive proposed transaction. And I find Sov’s management way too presumptuous given the general circumstances.

Sov had filed all relevant financial information in sections labeled confidential. Not a single Income Statement financial number will one find in the Sov application to the OTS or in the Independence Community Bank Proxy to its shareholders. I was astonished at such disgraceful management self-interest to self-deal, and demonstration of contempt for the investor and the public at this opaqueness/lack of disclosure on this transaction between 2 publicly traded companies, while Sov management claimed it is serving the shareholders.

It becomes redolent of the (OTS predecessor) Federal Savings & Loan Insurance Corporation’s (pre) ‘Southwest’ days when thrift managements engaged in the most aggressive and contemptuous, moral-hazard “pump-and-dump” conduct so as to either ‘save’ their thrift franchises in the Southwestern US, or justify the size of their paychecks, recklessly growing their thrifts with brokered Certificates of Deposit. Their bailout cost the taxpayers billions when the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) closed these failing thrifts, but gave huge incentives to wealthy investors to serve as the new owners for the surviving enterprises. This all generally is so contrary to transparency and full disclosure that always serves the shareholder(s) and the responsibly social way to use taxpayer money, only if and when necessary.

And in other cases such as the Pritzker thrift, the OTS fire truck had arrived on the scene after the house had burned to the ground, so we will see. Perhaps we are still witnessing conflicts of interest, even given campaign finance reform and 2 thrift crises with the OTS under the Treasury Department as we find under the Executive Branch, potentially subject to the manipulation and strong-arming of corporate and special interest contributors soft/political money.

At this point the regulators should force a Sov fairness opinion to its shareholders, full, public disclosure and transparency on these proposed transactions, and a Sov shareholder vote. Management also deserves for the regulators to issue it with an “MOU”, a Memorandum of Understanding for its deplorable public reporting and management conduct of a federally insured depository institution.

Further speaking to the Sov OTS application where Part 11C of the OTS Application asks if lines of business in that state in which the company holds or will hold an insurance line, … Sovereign responds “not applicable. Bank will not become affiliate with an insurance company as a result of the merger and bank merger bank will acquire.” A sub of Independence Bank is licensed in NY as an insurance agency, ICIA, however, it is not an underwriting company and may be combined with one if any of the existing insurance agency subs. This fails to include whatever insurance operations Santander may have/has that it would include Sov. And if Santander underwrites insurance, this language in the application is incorrect and misrepresentative to the OTS – especially since SOV cannot do this merger without Santander. Thus if Banco Santander underwrites insurance this is misrepresentative on the application and the investors should learn similarly about this.

We also must compare poorly completed and inferior responses from one applicant to the other: Item 13 of the Santander application, asked if proposed transactions would have divestitures: SOV “No branch sales or divestitures are proposed in connection with this transaction. See item 10, however for potential branch consolidations.” The application part labeled as Item 10, however, was not included in this Santander paperwork at the NY Fed.

This returns to the secrecy-opaqueness problem. While I worked on regulatory assisted transactions for sick banks and thrifts, often the regulators kept confidential the true condition of the depository institution if its CAMEL rating was below 3. Regulators feared depositor runs on the institutions and so they protected and practiced the confidentiality while depositors with accounts smaller than $100,000 had access to deposit insurance and depositors with larger accounts regulators assumed to have the financial acumen to access and review the financial condition of the institution. All deposits under $100,000 enjoyed the safety net and sometimes the regulators made whole all depositors in the event a resolution became a liquidation or litigation.

Generally one could say that Santander, Sovereign, and Independence do not resemble sick banks and thrifts. Given that, proposed transactions between publicly traded, presumably healthy financial institutions on their change-in-control application to the regulators which provides managements’ representations of pro-forma estimates, this same pro forma information, however, management and the regulators omit from public disclosure.

For what reason may they enjoy such lack of transparency? If these enterprises occupied another, unregulated sector, the proxy containing the pro-forma information would serve as some criteria for nonmanagment shareholder evaluation would exist for the shareholder vote. Nothing about this proposal rises to garner regulator or management confidentiality. Nothing. No depositor faces harm, and we assume the Bank Insurance Fund remains safe from a bank run on any of these enterprises. Yet, Santander has requested secrecy in its application to the NY Fed as well as Sov’s secrecy. Sov expected secrecy on its application to the OTS in section “Confidential Exhibit NO 1 for pro forma confidential information”.

I protest, oppose, and condemn this on grounds that the management has the power to make public representations or misrepresentations, if it so chooses, while making other representations confidentially to the regulators including the OTS. Sov management is looking for regulatory approval, while avoiding public opprobrium or thwarting (Sov 12/22/05 App to OTS p13, 210.10 Capital Accounts”). I generally find management opaqueness deleterious to the public company environment, and find it virtually unprecedented specifically in this case.

Likewise, in Santander counsel Davis Polk Wardell Arthur S. Long’s 12/8/05 letter to Jay Bernstein requested confidential treatment pursuant to FIOA 5USC552 and BOG regs 12 CFR261 for Santander exhibits under Sec 4c8 and 4j under BHC Act 1956 to not be available for inspection or copy, alleging that would cause significant harm to Santander within the meaning in 12CFR 261.14a4, 12CFR 261.14. Management often alleges excuses about harm from competitors to one’s business, when probably because if disclosure occurred, people would smell some buried body.

It also requested to be notified in advance if the Fed was not going to grant privilege to Santander’s request. Santander also asked that such info not available to any government committee, agency, or Congressional office or committee or court or grand jury and it asked the Fed that none of the aforementioned should have access to this ‘confidential’ information.

Is this standard language from an applicant’s counsel to the Fed and compliance with the Fed’s application process?

Was there part of the application with materials to which Santander requested confidentiality to which the Fed did not permit to access? On what had Santander desired to avoid disclosing that may have given us a better, more true picture of this enterprise that its management and the regulators blocking from which our knowledge with this sort of collusion for Santander’s secrecy, if you will, between the Fed and this applicant. What under its app to NY Fed 4(c)(8) and 4(j) of Bank Holding Company Act of 1956 as 12/19/05 was Santander disinclined to disclosed or ask for secrecy?

Any very experienced professional with banks would wonder what information is the application absent given the interest and request for secrecy, however, that information which management withheld may add to some aspect of moral hazard and operating above the law/regulatory largess interested to leverage over any ordinary regulator disciplinary oversight, although perhaps not to presenting a threat currently to the Bank Insurance fund, but risking the good faith compliance to public disclosure and management cooperation with the public nature in which banking and its regulation and oversight exist in the US contrary to the way such may exist in Spain.

No bank In the US generally enjoys such secrecy, nor should any foreign bank and until recently one with four board members of the same family interested in owning 25% of a US depository institution in the US 50 states.

Reasons the deal falls apart, can be killed, and at the very minimum requires a shareholder vote.
Omission of Sovereign Bancorp Change in Charter application to accompany paperwork.

From what I have read summarizing the Gramm Leach Bliley Act of 1999 (GLB), although as a Savings & Loan Hold Company (existent before 1999, “SLHC”, for which the OTS serves as the primary safety & soundness regulator) Sov identifies itself as an FSB that can avoid compliance with Reagle-Neal legislation related to interstate branching, GLB prohibits a FHC from acquiring a SLHC without the SLHC changing charter to either a state or OCC chartered bank or an FDIC regulated savings bank, the later which exists in only 13 states. In effect, GLB prohibits a unitary SLHC from transferring their exempt unitary SLHC status to other companies through merger and I figure, change in control, unless the unitary SLJC is the surviving entity. In this case Santander effectively would obtain outright control, while attempting to exploit the advantages of the unitary thrift charter from which it is now prohibited. GLB does not enlarge the scope of the OTS and so this would violate GLB subtly in substance (Clemens, Richard. “Insurance and Financial Services Report”, Bowne, First Quarter Issue 2000, p2)

Apparently Santander has applied for consideration as, and has elected “Financial Holding Company” FHC status (General Statement of Santander to Fed p. 11, 3rd paragraph). The impression I have gathered from the relevant literature indicates the applicants also should have produced an application and/or accompanying paperwork for Sov’s charter change, as FHCs may not engage as the grandfathered (“Unitary”) SLHCs under the legislation prior to GLB with the activities the grandfathered SLHCs enjoy, and financial institutions attempting to acquire an OTS regulated S&L or FSB must apply to become an SLHC, unless the target is changing its charter. SLHCs will lose their unitary SLHC grandfather status upon a change in control (Comizio, “Quarterly Report”, p154), nor may an SLHC elect to become a FHC under GLB unless its sub relinquishes its thrift charter (Comizio, Quarterly Report, SLHCs 3. “Disadvantages”, p154). Further, GLB states that an FHC’s sub’s primary regulator, if not the Comptroller of the Currency, then would be the state department of banking where the sub has its home base (Comizio, V.Gerard. “Bank Chartering Issues in the New millennium — Comparing Depository Holding Companies and Bank Charters”, Conference on Consumer Finance Law/Quarterly Report pps 153+).

FHC subs must be well capitalized, among other things. Sov as an S&L according to OTS guidelines, is considered sufficiently capitalized, although under FDIC guidelines, a depository institution its size would be considered to need capital, especially since Sovereign, while maintaining its Qualified Thrift Lender test, still lurches away from the classic S&L operating model of mostly or only 1-to-4 family mortgages, and instead makes other uses for its liquidity than home loans, while taking on other sorts of debt than deposits and FHLB borrowings.

GLB also prohibits after May 1999, where any enterprise may apply for or elect SLHC charter and engage in any sort of commerce at the parent level, while the thrift sub engages only in thrift activities, complying with the Qualified Thrift Lender test, and other related thrift enterprise matters. The legislators in the US intended to avoid Japanese keiretsu business conglomerate model, coincidentally which Santander has the power and opportunity in which to engage such a way in its home country, whether it chooses to do so or not (Comizio, “Quarterly Report”, II. Financial Holding Companies, Introduction. p155).

GLB also indicates that for Bank holding companies BHCs and financial holding Companies “FHCs”, the Federal Reserve district banks serve as the ‘holding company regulator, however parent companies under the Fed are not SLHCs nor if are these able to buy OTS regulated and chartered thrifts I believe after the expired grandfather date, without the target changing its charter ( Comizio, V. Gerard, “Evaluating your depository holding company; legal briefs” Community Banker, Gale Group, Sept 2005)

Although the OTS or the Fed subsequently may have established regs to end run the legislation, or where the legislation may have very loose language related to this point I am making, the body of literature points to Sov having to change its charter in order for FHC Santander to purchase and infuse capital of more than 10% into Sov, unless Santander is eventually going to apply for its SLHC designation. I found nothing of that sort in the OTS application from Sov.

And what about Santander’s paperwork with the OTS to acquire an OTS regulated thrift? I found no such paperwork from the OTS, even though Santander’s management and its attorney’s filed paperwork with the Fed for change-in-control, however, Santander and its attorneys evidently have contempt for the US banking laws; we aren’t talking about keeping the letter of the law, we are talking about a change in control of a $63B US based SLHC and thrift which has very little in the way of international operations. So where are these applications?

Cutting-a-corner by omitting a change in control application with a regulator with the targets regulator produces problems. Santander’s public part of its Fed application was 2000 pages, with some of that one can find on the SEC website. What would make it so difficult to file a Change in Control application with the OTS for an OTS charted thrift whose parent company has SLHC status?

Moreover, in considering an application involving a foreign bank, the OTS must deny the application if the foreign bank is not subject to comprehensive supervision or regulation on a consolidated basis by appropriate authorities in the bank’s home country.

What if the foreign bank completely failed to file the appropriate paper work to the OTS, considered in this case the functional regulator for Sov?

The OTS will consider the standards applied by the Fed including matters of the parent up-streaming funds from the thrift. Perhaps Santander wanted to avoid a more intrusive OTS application? Perhaps it never saw the OTS application even though it is attempting to obtain control in an OTS regulated and supervised institution. The OTS when approving or disapproving a proposed acquisition or in this case, change in control, it also considers if the acquiring person or party fails to or refuses to furnish information requested by the OTS. Realize the OTS is inferring that buyers of its thrifts it is also filing to become an SLHC and must file a registration statement with the OTS (Comizio, Annual Review of Banking & Financial Law, “Emerging Federal Regulation of Thrift Cross-Boarder Activities”, vol 23:637 pp642-4, 12 CFR SS584.1(a)(1)).

I recall no sort of application made by Santander to become a SLHC.

Meanwhile, the Fed may not approve an application involving a foreign bank unless the bank is “subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in the bank’s home country. Santander indicated in 1999 to the Fed, that to the extent not prohibited by applicable law, it will make available to the Board such information on the operations of Santander and any of its affiliates that the board deems necessary to determine and enforce complaints with the BHC Act and the “IBA” -the International Banking Act and other applicable federal law. It further added, and contrary to its demeanor with the Sovereign application, that it had committed to cooperate with the Fed to obtain any waivers or exemptions that may be necessary to enable Santander to make any such information available to the board (Federal Reserve/boarddocs/press/bhc/1999/April 1, 1999 “Approval of application of Banco Santander). What has happened to Santander since 1999?

Reasons the deal falls apart, can be killed, and at the very minimum requires a shareholder vote.
According to Santander in the Investment Agreement, if a third party accumulates over 10% of Sov’s voting shares – it can leave the deal.
Santander’s application to the Fed stated in General Statement on pg 10 and in The Investment Agreement, the deal may also be terminated by Santander if any third party acquires more than 10% of Sov’s outstanding shares, as well as p74 of the 10/24/05 Execution copy of the Investment Agreement between Santander and Sov as a reason for termination of the interest to engage in this proposed transaction: if “(i) any Person (other than the Buyer [Santander] and its affiliates) shall have acquired Beneficial Ownership of shares of common stock representing more than 10% of all outstanding shares of Common Stock other than as a result of any Transfer by buyer or its Affiliates pursuant to Section 8.02”. At any point, any large institutional investor of Sov shares, if it felt like taking on more of this aggravation, could buy up to 10% and put Santander in the position to back off.

Perhaps Santander misunderstood the question… In the General Statement Item 2 found in section “Proposed Transaction”, the application asks for an “organizational chart of all banks and companies domestic and foreign in which it directly or indirectly will own or control more than 5 percent of the outstanding voting shares”. On this Change of Control application for a US SLHC, Santander answered “Not Applicable”. How is this Not Applicable? For what purpose is this Change in Control Application but to ask permission to acquire greater than 10% of a US financial institution not even regulated by the Fed? So Santander fails to provide an Organizational Chart of the other Financial institutions including Santander in which it holds great than a 5% stake? So it does NOT want Control of Sovereign for up to 24.99%? And for that reason it omitted the Organizational chart to this non-applicable question?

KEY for Large Shareholders of Sovereign stock, and you don’t have to buy more….
And in Santander’s omission of filing an application with the OTS, it also overlooked applicable OTS regulation. The OTS views “Rebuttable Control” as any person or company who acquires more than 10% of the voting stock or 25% of any class of stock, and holds more than 25% of the total Shareholders’ Equity or more than 35% of the combined debt securities and shareholder’s equity 12CFR SS574.4(a)-(c). Persons and/or companies must file and receive clearance of a “rebuttal of control” submission prior to taking any action that would subject them to any of the control presumptions (Cumizio, “Quarterly Report”, Control Regulations/Types of Control, p176).

With the largest shareholders probably controlling more than 10% of the voting stock, under “Rebuttable Control, they easily can make any case they want to the OTS, and over management and Santander. “Under terms of the agreement reached with the NYSE, Sovereign and Santander will change many parts of the deal that were labeled as objectionable to many disgruntled shareholders, a coterie that included Relational, Franklin, California Public Employees’ Retirement System and California State Teachers’ Retirement System, all of which wrote letters to the NYSE demanding the deal be put to a shareholder vote or scrapped entirely.” (Monga, Vipal and Peter Moreira. “Sovereign troubles linger” 03:56 PM EST, Nov-23-2005, The Deal, LLC.))

III. Comments on Santander’s Application to NY Fed, Comments on Santander

Santander states in its own application to the Federal Reserve Bank of New York (General Statement p. 13 “The Santander/Sovereign Partnership”) that it is an experienced NY metro area retail player, while this statement is a misrepresentation of its true position in the NY metro area as a passive capital investor in New Jersey based First Fidelity. With the capital infusion, one could argue First Fidelity was made unfairly stronger than and competitive over other local peers, eventually facilitating First Fidelity’s take over of PA neighbor Fidelity. Santander eventually cashed out of its investment in the First Fidelity-CoreStates merger or in the First Union acquisition of CoreStates, and quit the New York Metro area, even as a passive investor.

Moreover, in one of the applications, Santander indicated that Independence desired to progress with the transaction without a shareholder vote by Sov, although Sov’s OTS filing included a copy of ICB’s proxy issued to vote on the proposed merger on Jan. 25, 2006, where Sov wants ICB to become a ‘subsidiary’ of itself and a transaction from which it probably would be prohibited without a capital infusion.

Moreover, I would not consider the culture and operating environment in Puerto Rico equaling the operating environment in the 50 States. I conjecture Santander has enjoyed a great deal of latitude in PR, while banks and thrifts in the 50 states must function and coordinate differently with the public, its customers, the regulators or any other apparatus on which power is bestowed or assumed.

Disinclined to debate the status of Puerto Rico to the US, how its commercial bank sub operates there versus Santander’s interest to have a controlling interest in a poorly run thrift with an increasingly mediocre deposit franchise (and perhaps that may be why Sovereign’s CEO wants the NY metro area, with a stronger a deposit base – he’d bought 289 marginally performing commercial bank with associated higher overhead, not thrift branches with typically lower overhead, from Fleet Boston rip-corded from within FleetBoston’s branch network. (Fulwider, William. “OTS Gives Sovereign Green Light To Acquire 289 Branches From Fleet”, Office of Thrift Supervision press release, February 29, 2000, OTS 00-26202/906-6913, “As part of the deal, Sovereign will be permitted to defer a portion of the payment at the final closing, according to an agreement with FleetBoston not to compete for Sovereign’s newly acquired customers or employees).

Although this thrift passes for well run, many that failed similarly at one point had passed for well run. Research the Advest thrift. Perhaps Santander may have discerned this, remains interested in the cheap way it is accessing the New York metro area, and making representation it has the appropriate ability to control this franchise while thinking it can have a cozy relationship with the regulators and avoid regulatory discipline when the problems surface. Perish the thought!

Santander itself intrigued at this expedient way of accessing the New York retail banking market, which it has avoided until this current proposal, Sov is requesting of Santander to infuse a stabilizing amount of equity with associated shares, in order for Sov to remain sufficiently capitalized.

My observations on Santander include its material exposure to Latin and South America, *now, Sov shareholders would be subjected to this geography without a Sov shareholder vote*, as well as geographies regularly considered black holes for sucking in bank stock investor wealth, while management NEVER SUFFERS for engaging in slick banking and international finance strategies in those regions. In addition, I previously had noted that Santander’s asset quality and balance sheet in general vastly improved with its merger with Abby in the UK.

So Sidhu is determined to subject his shareholders and depositors to the risks of a new and controlling owner with substantial Latin and South American credit and operating exposure and the vicissitudes of it without even the principle of a vote about this lurch into engaging with the darker and seamier side of international banking. And emblematic again of the insolence and contempt both Santander and Sov have for their shareholders, where are the fairness opinions for these proposed material transactions? And to be available to the regulators to Sov’s management for the shares which Santander proposes to acquire?

Note likewise the Interesting similarity between Sov’s director Hove – although Sov doesn’t have a E5.8mm loan to him, however Santander has a E5.8mm loan to its former bureaucrat director Abel Matutes. A former Foreign minister of the Spanish government and the EU commissioner (1989-1993) he is one of the few non executive directors, while also sitting on the board of 3 other enterprises (Santander 20-F, 2005 pp 89,103, 108).

Banking luminaries in Spain populate the senior management of this bank. I have traveled extensively in Spain and because I have followed banking globally, these names all have familiarity with me. Although none are inferior or incompetent, the culture there and business as usual practices when finding such here, I particularly can only label it as insolence and contempt for the public, the analyst, and the investors’ interest for transparency reflected in superior quality corporate-financial reporting to the public. Our efforts and commitment for Transparency, quality and integrity in corporate reporting and corporate governance repairing to the highest standards, run contrary to the practices of those who control commerce and banking in Europe generally, and Spain in this case.

Elsewhere I have commented on this financial relationship between Santander and this particular director, who has the connections to run pass-interference on behalf of the bank, which is run and controlled by his buddies including the Botins, the rock stars of banking in Spain. Young Botins began board service early and for lengthy stretches. I know of virtually nothing comparable in the States at our large financial institutions.

And why should the regulators give Santander deference over the Sovereign’s current non-management shareholders? The regulators would find themselves facing a lawsuit, if they, for no legal reason were to discriminate against Sovereign’s current shareholders and favor the interests and requests of Santander, an outsider the banking community in the 50 US states, while many of Sovereign’s long suffering shareholders vote, pay taxes, and live and contribute to our domestic economy. Consider in the Fed app, Santander is looking for ‘Gross-up rights’, and generally throughout the application, Santander expects favor from the regulators and prominence ahead of the current shareholders. I strongly disagree with such a tact and interests. Under what US legislation and regulation has it unilateral right over the current non-management shareholders to enjoy gross up rights, without a vote to deal with the avenue by which Santander wants to claim such booty – voting on the ‘change in control’ matter.

By no means do I tell the Botins and the Spaniards how to go about their business as usual in Spain, but when they want to do that here, I draw the line. The regulators need to understand what sort of banks they want to have a regulatory relationship with rather than what they would find perhaps with the Botins and the problems we already have had with Keating, the Pritzkers, how many can I remember, who each enjoyed some sort of largess existent at that particular time. The largess buck must stop sooner rather than later.

I had complained before about the issuers’ presumption with this series of proposed transactions, including the ‘gross up rights’, however one can look at the Governance Section of Santander’s application and see their understanding of such a matter such as corporate governance. Sov’s Board members must pass Santander’s “‘reasonably acceptable’ hurdle, which seems to be a low test Santander will use to add three new board members to Sovereign’s 7 member board where at least one Santander board member shall serve on each board committee. I still am gathering that the shareholders and US banking regulation mean little to the Botins and their Banco Santander. And later in Item 11e, it indicates the interest to acquire all non thrift subs of Sovereign and Independence that are engaged in activities financial in nature pursuant to Section on 4(k) of the BHC Act, which requires only the filing of an after the fact notice within 30 days of the consummation of the transaction”. I gather they mean that also occurs without a shareholder vote. Although supposedly Independence has only one non-financial sub, which the applicant says it will close or divested, Sov has non-financial operating subs which seem to avoid mention, although Santander says it will acquire these. Sovereign has failed to mention this in anyway, or made a representation otherwise.

Although I have been including parts of my commentary about Santander’s application to the Federal Reserve Bank of New York, see 12/28/05 Davis Polk Wardell attorneys Christina Regojo, Arthur Long letter to Manuel Kursky at the NYSBD, where the counsel indicates that Sovereign requests yet to be elected ‘independent’ directors of Independence Community Bank to automatically serve on the board of Sovereign Bancorp and Sovereign Bank assuming it will have granted its request not only without shareholder vote, but as if the Fed has the power to grant this request over the interest of Sov’s shareholders given no evidence of this being a sick or failing thrift where the Fed could do this sort of heavy-handed thing over the current shareholders without a vote, but would face a shareholder lawsuit given Sovereign’s reasonably ‘healthy’ condition.

Meanwhile Santander’s counsel submitted this on behalf of Sov, as if in its proposed transaction with Sov and this application to the Fed, that it has the right to expect this request granted and assumes the Fed has the power over other shareholders of Sov while it is in reasonably good heath and the regulators typically avoid drastic intrusions into healthy institutions governance, management, and operating strategies assuming compliant to all regulations and statues. The request seems somewhat in audacity, and reflective of Santander’s business-as-usual way enjoyed in its home country versus how the relations exist between US depository institutions and nearly all of our financial regulators.

A Fed ‘regulated’ buyer BHC or FHC must file the Fed’s Change in Control application when interested to acquire more than 10% of a target institution. Santander’s application to the Fed indicates interest to acquire 24.99%. The lawyers’ letter here fails to mention the remaining 5% even though Santander would own this voting stock, and even if it agreed it wouldn’t have the power to vote it, 5% of the voting stock passes to hands that control more than 20% of the voting stock.

In addition, Sov is a PA incorporated SLHC with its FSB thrift interested to issue shares of 19.8%, which should have included public language about including treasury shares @$27/share, for approximately $2.4B way for to access NY metro area market on the cheap. Yet both managements have kept very coy about this.

Another DPW letter on 12/29 discusses competition and OTS deposit concentration – Sovereign has .74% as of 6/30/05, Independence has 1.36% same date, combined has 2.1% $16.168B. Herfenduhl (“HHI”) calculations time deposit concentration as HHI post-merger 1,004.91? And pre-merger HHI 1002.9? With change in HHI points 2.013. I can’t claim unfortunately that the HHI points to serious concentrations of one of these players or evident anti-competitiveness, other than my strong opposition to any further foreign ownership of US (banking) assets in the US.

The 12/20 DPW letter discussed the Investment Agreement. After “Closing Santander will have the right after the closing to purchase additional Shares in order to increase its ownership percentage to 24.99% of Sovereign outstanding common stock.” (Investment Agreement, Section 2.03) “Amounts above 19.99% will in the first instance be held in a voting trust with an unaffiliated bank as trustee”, because Pennsylvania’s Control Transaction statue [Subchapter E of Ch25 of PA Business Corporation law, 15PA C.C SS2541-2548; Investment Agreement, Sec 2.03] Although this provision of PA law is permitted to be made inapplicable to the acquisition of more than 19.99% of the Shares either by means of a legislative change or through a vote of sovereign’s shareholders, Santander has agreed that it will seek inapplicability only by means of a shareholder vote.

WITH WHOM DID IT AGREE TO THIS CHOICE OF INAPPLICABILITY ONLY BY MEANS OF SHAREHOLDER VOTE?

While reviewing the Investment Agreement between Santander and Sovereign, I found many items that leave me with the impression Santander intends to involve itself more than Sovereign would have anyone believe. Note it would have the right to purchase additional Shares or participating preferred stock of Sov upon the issuance of such Shares or participating preferred stock by Sov, or upon the conversion of convertible securities into Shares, to the extent necessary to maintain Santander’s ownership percentage in Sov “Gross Up Rights”. [Investment Agreement 2.04] Santander additionally requests have power over the shares in question found in the first bullet on p8 of the General Statement.

Shareholders exist currently who have the power to achieve more than 10% ownership. Perhaps the first bullet is standard language found in these agreements, however neither Santander nor the regulators have the power to prevent the current large shareholders from accumulating sufficient shares to open the door for Santander’s interests, or to progress in this proposal without a Sov shareholder vote.

Shareholder concern for Santander takes on a different meaning. In Europe shareholders typically include representatives from other large and generally powerful, often non-financial enterprises in the home country and elsewhere in Europe. Historically in Europe, middle class and individual shareholders of modest or ordinary means rarely have existed. US (institutional including mutual funds and some individual investor) portfolio diversification has introduced more ordinary, middle class American ownership in European companies. As it were, corporate governance and shareholder rights one would think the later among European institutions would have traction, however, the nature of board and management interaction in its formal and ad hoc on-goings still remains culturally different than our board and management practices in general and our efforts to improve our corporate governance and shareholder rights specifically.

And although the Europeans have given little respect generally to the ordinary investor other than wanting access to our wallets via our investment markets, US banking regulators similarly have been known to abuse bank stock investors with Southeast Bank Corp in mind. The Fed in 1990 or 1991 prematurely closed the bank and bid it to First Union, which had started business combination talks with Southeast’s management but a short time before the Fed closed the overnight window after 60 days of lending and floating Southeast’s need for liquidity. Shareholders of other bank holding companies have sued the Fed and other regulators for aggressive ‘regulatory’ action against other banks and their holding companies such as M-Corp in Texas, again, for matters where the Fed would require subs to upstream liquidity to the parent or parent would have to borrow from other subs to save a sub, under ‘Source-of Strength’ so as to avoid a bank or thrift failure that would have to claim funds from the Bank Insurance Fund. The regulators have maintained that safety and soundness of the bank and thrift sectors remain the dominant and preeminent interest, with shareholder concerns given less priority.

Change in Control and Sovereign-Santander Credibility Disconnect
Change in Control under Fed BOG definition final decision de minimus should be shareholder vote on the proposed transactions. And although I had submitted these comments in correspondence prior to December 8, 2005, if only for public record in keeping with the protocols of the Fed’s public comment, I will include what I previously had stated.

By the time Santander submitted an application to the Federal Reserve Bank of New York requesting to acquire 24.99% of Sovereign’s equity, and presumably associated common, publicly traded shares, according to Santander’s application filed later Thursday December 8, 2005, note divergence from the representation about per cent ownership stake these parties originally made to the public and perhaps also the New York Stock Exchange.

A salient, key fact we see with the Federal Reserve Bank of New York (“NY Fed”) and the Board of Governors (“Fed” or “Board” when specifically referring to the Board of Governors) requiring permission applications from Santander to review this series of proposed transactions, “CHANGE IN CONTROL “ according to the Fed to ‘acquire’ shares of a state member bank or bank holding company* occurs at a 10% threshold. Sovereign and Santander step over that by 14.99% according to the Santander application to the New York Fed.

While reviewing the General Statement and responses to questions found in the Notification to the Board of Governors of the Federal Reserve System (the “Board” or “Fed”), Santander makes no obvious representation otherwise that it endeavors to engage in a transaction that gives it less than full control, and is themed as this on this application it must file when a financial institution is attempting to acquire more than 10% of another financial institution, according to the responses Santander gives. Sov however appears to fail to accurately or properly represent this material change In ownership, how it and Santander had to file with the Commonwealth of Pennsylvania, where the change of shares from one hand to another unrelated party has such size that it triggered a change in control filing with the Commonwealth’s administrators where Santander and Sov must establish a special trust to administer and vote the shares in question, 24.99% and the voting of these. Sounds like just other ways and matters Sov’s management distracts the outside and its own shareholders from the pertinent issues. Although I am unclear on what triggers violation of SEC anti-fraud statutes, one could argue Sov’s management has misrepresented its transaction with Santander while Santander has represent otherwise this proposed acquisition to the regulators in its change in control application – only one filed – with the Federal Reserve Bank of New York. ON ITS FACE – ACCORDING TO THE FED, 10% CONSTITUTES CHANGE IN CONTROL REQUIRING PERMISSION TO PROCEED.

One may view Santander as opportunistic and perhaps determined or resolute, however, given enough contrary forces against this proposed series of transactions and its own conceit, insolence and missteps, one can conjecture it would go away and quit this proposal.

IV. Comments on OTS application, Comments and opinions on Sovereign Interest to acquire Independence Community Bank
ON ITS FACE – ACCORDING TO THE Fed as well as the OTS, 10% CONSTITUTES CHANGE IN CONTROL REQUIRING PERMISSION TO PROCEED. Given this alone, although no particular regulator may want to argue its turf supersedes that of another, in crisis times, the banking regulators supersede the SEC and the shareholders, as well as large depositors and large creditors of financial institutions which have suffered loss when the regulators must take aggressive action to prevent loss to the Bank Insurance Fund and as a result, often regulate from a safety-and-soundness perspective before they regulate from a shareholder perspective, even though the Fed regulates Bank Holding Companies, incorporated and often publicly traded enterprises which may own banks as well as other depository and associated enterprises engaging in related activities.

Any banking enterprise acquiring 10% or more of a financial/depository institution has substantial influence on the operations of the target, and as a result the regulators reviews these requests with concerns for safety and soundness. Given its vast experience with bank management matters, and its interest to maintain not only safety and soundness in the financial ‘net’, but even serve as discipline in proposed transactions where the managements have failed to run a bank(s) receiving a higher CAMEL (bank quality score where 1 is most high rating), where the bank (s) have failed to comply with the Community Re-investment Act, or where the bank has engaged in aggressive, ambitious or unsafe/unsound strategies, where I would place Sovereign, which has enjoyed largess under its primary, and known in times past to be permissive regulator, the Office of Thrift Supervision. I had sited the Pritzker thrift failure as an example of my aforementioned point.

Inferior disclosure on the OTS Application, etc.
As I stated in “Reasons the Deal Falls Apart” what appears to be its careless or lazy attitude, I found disgraceful and insolent Sovereign’s disinterest or disinclination to provide the answers to the questions the OTS asked in its application, and Sov referred or suggested the OTS to find the information elsewhere, in the ICB proxy, but elsewhere. I also found an insolent comment when Sov stated in its OTS app that Santander’s interest to acquire a controlling stake in SLHC Sov is subject to Fed approval, and fails to consider any other regulator’s approval including OTS.

Further, Sov’s misrepresentation to the OTS alleging that no shareholder vote is required leaves it liable for litigation given the change in control. As a battle hardened veteran of a number of bank and thrift recapitalizations, Sov’s proposed acquisition again is unlikely approvable without capital infusion and in the event of a economic downturn, the Sov capital position, asset quality and liquidity all face pressure depending on the depth of the economic crisis. Depository institutions sometimes enjoy regulator largess, however, I would not play the regulators for fools and have know them to be responsibly cautious, as they typically focus on safety and soundness of the banking system and protection of the Bank Insurance Fund.

We find no financial information about the deal in the Sov app w/OTS. On finds NO financial info in the proxy to Independence shareholders and none from Santander related to these transactions in its NY Fed application. Nothing. What contempt as I have stated . Although in my previous professional experience in business combinations involved me with applications of this general sort and confidential information, one must examine and question the issuing parties’ general interest, even demand and presumption for secrecy and such abuse of the corporate governance principals of transparent management and board conduct, where we see such predilection for secrecy to the extreme in the case of Santander, along with Sov’s aggressive avoidance of shareholder voting and a pattern of insolence, and management conceit and, heavy handedness in its business as usual style to do its dilutive, grow- the-place- bigger-so- that- I-can- get-myself- paid-more- by-my-buddy- on-the-Comp- committee- to-whom- the-Bank-has- lent-more- than-$10mm deals, with this most recent deal needing a recap to the thrift.

Speaking to another time when the OTS failed to take effective and prompt action, even though I desire no conflict between the regulators with my concerns, I had corresponded with Senator Phil Gramm or Senator Richard Shelby with my disgust over the Pritzker thrift failure and my suspicions about insider abuse with that, OTS regulatory lapses such as allowing the institution to operate in a marginal condition without disciplining it with a timely issued Memorandum Of Understanding, or even issuing a Cease and Desist to force change in Senior management and address abuses. Although Sovereign Bancorp has not quite risen to such a deplorable condition for the OTS to close it – a Memorandum of Understanding Sovereign could have been issued. Consider, in substance it qualifies as a depository institution engaging in substantially the same activities as member banks and bank holding companies albeit, at a significantly lower tangible capital level than the Fed would permit its member banks. Given that, its regulator has needed to consider MOU for Sovereign, given the CEO’s propensity to do dilutive and loser deals interfering with the quality of the franchise.

And no escaping it, the boiler plate aspect of the App in its public Section OTS s110.50(c)5, asks for a Fairness Opinion, while in Sov’s contempt for the regulators and the shareholders, Sov fails to provide this for the application purposes, as if the CEO is making an immaterial transaction, even though the discourse in the application indicates, in order to persuade ICB’s management to accept the offer to be considered Sov’s fill-in between the mid-Atlantic and New England, the CEO of Sov had to pay what ICB requested at $42/share for ICB, more than the $40/share Mr. Sidhu had intended to pay. Now Sov has to recap given its poor capital position and the interest to acquire more than $18b of assets.

Iceland Acquisition Corp, a Delaware organized enterprise Sov establishes in which to merge ICB, and about which there very, very little information. Why is Sov structuring this? I suspect so that it can combine the target with a purchase of assets and assumption of liabilities via cash for ICB- a great deal of cash on which Sov is to operate -shareholder cash but if It may, without shareholder approval, while not a single balance sheet or income statement of either issuer or of the combination at all exists even in ICB’s proxy, let alone the OTS application. No financial information exists in the proxy or in the application except, I was told perhaps under Freedom of Information Act (FOIA) request, which I asked if that was the protocol, but I would have to file to see the confidential materials including the proforma financial information.

Non-management Shareholders Enduring Practices from CEO, Director Inside Dealing/Insider Abuse
Meanwhile all this would reduce substantially the percent ownership of existing non-management shareholders AND IF LEFT UP TO THE CEO AND HIS OVERPAID DIRECTORS (in comparison to peers, while Sovereign’s shares have under-performed peers such as Golden West and Washington Mutual over the same time period), WITHOUT A SHAREHOLDER VOTE.

The CEO has desired to undertake this series of transactions in effect where 25% of the bank would go into foreign hands, and where the bought-off Directors have failed to look out for non-management shareholders’ interests shareholders by requiring the CEO to submit to a vote put to all the shareholders.

Given the materiality of the per cent of the thrift proposed to go into foreign hands, the shareholders deserve due process, in the same way any other property holder would when his/her property was proposed to be sold out from underneath them. Potential dilution entails impact to property rights. Given Mr. Sidhu’s interest at fiefdom, perhaps we could conjecture he felt he had the right covet others’ property, when in reality through some wished-for wrinkle in the law and the regulatory framework, he is attempting to pilfer and pirate others’ property without their say, in this case, vote.

Conduct of this sort I call *ABUSE*.

Likewise reviewing the size of the transactions between Sovereign and some of its directors, when the CEO had opined why should the directors take their business outside the bank and while the Bank’s size may have promoted the CEO to insolently claim this business is immaterial, notwithstanding, he coveted this paltry business it in any event, when his judgment failure about what constitutes an arm’s length, unconflicted relationship between Sovereigns’ directors who he wants as customers of the Bank over which he is CEO and where the size of the transactions have materiality to them, he has compromised their status as a disinterested third party.

Again, I conclude he and they have acted in poor judgment.

So although these directors may enjoy no particular employment position at the bank, they enjoy the benefit of access to favor with the CEO of the bank with which they are doing business, but on whose Board of Directors they sit. In form, although what may seem at market rate and terms, however, in substance the relationship and the materiality of these interrelations to the directors smack of insider abuse of sorts, and appear to influence them and their judgment. One can conclude this conflicts with non-management shareholder interests.

Although the OTS has regulation prohibiting this, given its track record at acting to prohibit such abuses, and generally with its supervised institutions often existing at such low tangible capital levels, experienced analysts would have cause for concern. The history of the OTS subjects it to question its aggressiveness at ensuring the safety and soundness of the Bank Insurance fund, given the fairly recent Pritzker thrift failure (OTS supervised- where it served as the Thrifts primary and functional regulator), among the most large of failures to hit the Bank Insurance Fund and producing Congressional hearings to examine the OTS’s actions against this failure and bankruptcy. One could conjecture when reading all the facts and analysis surrounding the matter that the Pritzkers and their management bilked/looted the thrift for $100s of millions with the loss to the Bank Insurance Fund summing to roughly $2 Billion. This occurred while the OTS supervised the thrift. One likewise could conclude insider abuse produced that failure, and in the case of Sovereign, even though former FDIC executive Mr. Hove sits on Sovereign’s board, I see the CEO adding him only to serve as window dressing, while Mr. Sidhu pursued his thrift fiefdom, which I had described in my earlier letter.

Insider Abuse even under OTS rules/regs
Although not blatantly violating in letter, the following violates the spirit of the rules: conflicted, chummy boards with management where non officer, non employee directors are doing business with the bank with transaction(s) in size or substance that compromise the capability for the board member to remain a disinterested 3rd party remote/removed from the influence of access to cozy, insider favor by insider relations.

Sarbanes-Oxley SEC. 402. ENHANCED CONFLICT OF INTEREST PROVISIONS knocks out of the Box Sovereign and the way Mr. Sidhu and his Board run their shop. Section 402 also adds: (a) PROHIBITION ON PERSONAL LOANS TO EXECUTIVES.—Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m), as amended by this Act, is amended by adding at the end the following: ‘‘(k) PROHIBITION ON PERSONAL LOANS (one could include any counter-party relationship material to the individual rather than the issuer) TO EXECUTIVES and SEC. 403. DISCLOSURES OF TRANSACTIONS INVOLVING MANAGEMENT AND PRINCIPAL STOCKHOLDERS. Where ‘(a) DISCLOSURES (is/are) REQUIRED (1) DIRECTORS, OFFICERS, AND PRINCIPAL STOCKHOLDERS REQUIRED TO FILE… or who is a director or an officer of the issuer of such security, shall file the statements required by this subsection with the Commission.

Even though financial institutions are excluded from this particular section, notwithstanding, disclosure is the requisite. So parties in position of influence at the enterprise must disclose commercial relations they have with the issuer, so as to give the public, the non-management shareholders and other stakeholders transparency with regard to the issuer’s corporate governance profile. This goes beyond the ‘check-the-box’ style of what had been corporate governance, which Sovereign and Jay Sidhu think they can practice.

Enron received high marks with the check-the-box corporate governance people.

Although some may think I am rocking the boat, when I think if Enron had been a bank, would any or all of the bank and thrift regulators been fooled by Lay, Skilling, Fastow, et al? Sadly, I conclude the OTS would have given a pass to Enron and its management with Enron failing on that regulator’s watch. Generally however, the regulators can be very tough when left to do their jobs. Like the military, they are paid to take orders unless told otherwise.

SOX Sec 402 included enhanced review for conflicts of interest. Merely because these directors work for depository and lending institution that makes loans and takes deposits, the size of the institution should preclude the management from coveting the business of the directors who are to serve as responsible arm’s length parties on behalf of the shareholders and not business partners with the management, who are employees of the shareholders – management shareholders and non-management shareholders alike. Although it seems as if its primary and functional regulator, the OTS, gave this a pass as well as the tangible capital compression the thrift suffered below FIRREA guidelines for adequately capitalized institutions and national banks of its size, while the CEO and the cozy, too friendly board allowed the aggressive acquisition to suit the largely unchecked ambitions of the CEO, without explicit redlines and inconsistencies between regulatory frameworks, appearances of cozy, and to the extent – insider abuse according to an ‘in -spirit’ versus by the letter reading of OTS insider rules supports my assessment the management and the board made of many parties, seemingly independent of the board – not employed by the bank as senior management, however are customers of the bank and conflicted in their judgment with regard to the interests of the senior management, with whom they are engaged in business. Sincere, observant regulators/examiners would comment about this in the exam report, and conservative regulators may reprimand this with a Memorandum of Understanding.

Subpoena the OTS examiners’ Exam Report on Sovereign.

Note in the Bank Holding Company Act Sec(4) (2)(B)(ii) although referencing interests in nonbanking organizations, the section in making its decision whether to engage in such transactions, the Board shall consider whether the company has made a good faith effort to divest such (nonbanking) interests. One should consider the Board will see practices, which cause concern and given under Gramm Leach Bliley Act’s interest to ‘even-up’ the oversight of itself it invited of financial and depository institutions, given the size and geographic reach of Sovereign Bancorp and its interest to change control of its institution (when it desired to acquire a New York based, state chartered Savings Bank operating under the name of Independence Community Bank).

The FDIC, although not directly involved in this matter, from 5 different operating and related activities, measures operating quality of a depository institution. The CAMEL acronym, which gives a composite score of 1 for the best-rated institutions through 5 for the worst rated, the FDIC measures, Capital adequacy, Asset quality, Management quality, Earnings, and Liquidity. Although the rating exists without the management figure, management decisions influence the 4 other components. To somewhat discern where the FDIC judges management in some way, as I have indicated that the FDIC never would have permitted any of its institutions to operate on such a thin tangible capital ratio, regardless of its business strategy and (loan) portfolio mix. The Sovereign CEO has operated aggressively in a thinly (tangible) capitalized manner. Although federal banking legislation prohibits running thinly capitalized banks, the FDIC rates management quality and conduct.

One of my former employers, KPMG, had audited Independence prior to its conversion to a mutual holding company and was knowledgeable of its conservative, “plain vanilla”, owner-occupied, 1–4 family mortgage operating strategy in the 5 boroughs/New York City area. Sovereign’s CEO is interested to acquire this local community bank, and pay its senior management a great deal of money in order to persuade them to engage in further discussions and persuade the shareholders of Independence community bank to sell to Sovereign, an institution that has a long history of insufficiently returning rates to its shareholders. Only because the nominal cost of capital over the last 5 years has existed at 40 year historical lows, has the CEO and the senior management been able to nurse the bank to higher tangible capital levels, and while the markets in general have trended higher floating all the boats with it, Sovereign’s shares have risen with that tide. The CEO and the senior management have engaged in the most aggressive of S&L practices profitable only according to the low interest rates and the current and capricious middle class tax breaks existing in the federal tax code. This would include the use of home equity loans where the purposes for those loans would be used for consumer activities where the interest on that debt on those activities no longer enjoys tax deductibility. In addition, the CEO has preferred a strategy of operating in the suburbs of larger metro area of Pennsylvania and New Jersey, and in the early 2000s, has acquired in New England and outside the New York Metro area with Fleet branches sold in its transaction with Bank America.

No member bank may extend credit to any of its executive officers, directors, or principal shareholders, or to any related interest of such a person, except to the extent permitted under paragraphs (2), (3), (4), and (6). (FEDERAL RESERVE ACT SECTION 22(h): Extensions of Credit to Executive Officers, Directors, and Principal Shareholders of Member Banks) of the Federal Reserve Act (12 U.S.C. 375b).— Offenses of Examiners, Member Banks, Officers, and Directors. Even the OTS considers if dealings with insiders has exceeded aggregate individual and overall lending limits. It also requires that these dealings and loans be approved by a majority of the entire board, however for Sov, that would be a pass: Sidhu is the CEO and executive director. The balance of his board until at some point in 2005 totaled 5 without the CEO. So any director more than likely got what he wanted and in turn, gave Sidhu what he wanted with little, if any accountability.

Mr. Sidhu including Santander is proposing to become (B) A person (who) controls a company or bank if that person, directly or indirectly, or acting through or in concert with 1 or more persons— (i) owns, controls, or has the power to vote 25 percent or more of any class of the company’s voting securities; (ii) controls in any manner the election of a majority of the company’s directors; or (iii) has the power to exercise a controlling influence over the company’s management or policies. Even though Santander applied for 24.99% of Sovereign, the immaterial difference gives them control.

In addition, the customer relationship(s) the director(s) has/have with Sovereign definitely is material to the customer, even if to Sovereign, this customer relationship is said to be immaterial. For disinterested third party status, the director cannot say he in good faith engage as a director given his counter-party relationship with Sovereign. (G) A “related interest” of a person is— (i) any company controlled by that person.

Perhaps other regulators would have more lightly assessed Mr. Sidhu, however, I am finding that he and/or Sovereign’s spokesperson with their comments have exhibited insolence, smugness, and contempt for the non-management shareholders, greed for (director) business on which the thrift needed to have demurred, and foolishness with regard to presumption of appropriateness to fairly judge their corporate governance and their customer -Directors’ conflicts and lack of separation given their desire for a self-interested customer relationship with the bank. The thrift should have directors with more to them than the current group who give strong appearances of having needed a cozy, quid pro quo relationship with a bank or thrift in order to materially prosper.

Additional Observations on Sovereign
Explain the flurry of operating subsidiaries to operate in New York Sov files with the OTS the day before its 12/23/05 the day before it files the OTS application. This List follows with no description or explanation: Independence Community Investment Corp., Independence Community Realty Corp., Renaissance Asset Corporation, Staten Island Funding Corporation, Wiljo Development Corp., Broad National Realty Corp., Broad Horizons, Inc., BNB Investments Corp., Bronatorco, Inc., ICM Capital LLC., Independence Community Commercial Reinvestment Corp., ICB Leasing Corp., and SIB Mortgage Corp. AND SANTANDER WANTS TO ENJOY FHC STATUS AS IF IT COULD GRANDFATHER UNDER THE OLD UNITARY THRIFT BANKING LEGISLATION THAT PERMITTED COMMERCE AND BANKING MIX, WITHOUT FILING AS AN SLHC?

I don’t always like the laws, but there were reasons Congress ceased the grandfathering of that legislation. Our society has problems with increasing concentrations of power and its abuse of the rights of and overall breadth and depth of prosperity to all aspects of American Society. We were not formed in statism and we err to erode or deteriorate to that. What Sovereign is doing is attempting to use its charter while given the transaction it wants, it may not longer enjoy and technically should or must charter change.

Meanwhile, I find management pompous and presumptuous: “We at Sovereign are gratified that the uncertainty surrounding our pending transactions with Santander and Independence Community Bank Corp. has been eliminated,” Jay Sidhu, chairman, president and chief executive of Sovereign said. “Now we can focus our efforts on planning for the integration of Independence that significantly enhances our franchise, attempting to close the acquisition as soon as possible and enhancing shareholder value.”

This hasn’t been approved, meanwhile, why at this point given Mr. Sidhu’s proclivity for saying he’s improving shareholder value, while a number of his acquisitions have eroded shareholder value and only with the overall market regaining ground over the years 2002-2004 could one say Sovereign share price increased generally because all the boats float higher when the tide comes-in (FT reporters. “NYSE intervenes on Sovereign-Santander deal”, Financial Times 7:40 p.m. ET Nov. 23, 2005)

Note Sidhu’s way of running the thrift recently has found him to have to back track on his fief like preferences where: “Sovereign Bancorp Inc., which is trying to complete a deal in the face of opposition from shareholders, has quietly stripped one of its directors of his positions on three key board committees. The director, Cameron C. Troilo Sr., has been removed from Philadelphia-based Sovereign’s Compensation Committee, which he had chaired, as well as the board’s Nominating and Ethics and Corporate Governance panels. New York Stock Exchange rules require that compensation and governance committees be staffed entirely by independent directors.” (Author Uncertain. “Sovereign Scales Back Director’s Duties” The Associated Press 6:15 p.m. ET Dec. 2, 2005/ NEW YORK. MSNBC.com URL: http://www.msnbc.msn.com/id/ 9967386/from/RL.2/)
A group of Sovereign shareholders have resisted the deal, arguing that bringing in Santander would dilute the shareholder base, as well as attempting to entrench himself on the board and in his position. The CEO very much exhibits a fief mentality with a typical deal that screws the shareholders while it lines managements’ pockets.

“It is disturbing that this hedge fund has taken the playbook from the most negative of political campaigns and transplanted those tactics for use in a baseless and disruptive corporate campaign,” added Sidhu. “When you cut through the smoke and mirrors of the hedge fund’s negative campaign and look closely at the Independence and Santander transactions, we believe you will like what you see.” (McSherry, Mark. “Sovereign lauds deals, takes swipe at Relational”, Reuters 4:44 p.m. ET Nov. 28, 2005/ NEW YORK. (URL: http://www.msnbc.msn.com/ id/10176850/from /RL.1/).

“A Sovereign spokesman defended Troilo’s independence, but wouldn’t say why his committee duties were reduced. Sovereign’s policy is not to name its spokesman. “The company is highly confident that Mr. Troilo meets the New York Stock Exchange definition of independence,” the spokesman said. The spokesman accused Relational of trying to “distort facts in an effort to discredit Sovereign, its management and its board for Relational’s own short-term interest.” (Author Uncertain. “Sovereign Scales Back Director’s Duties”, The Associated Press 6:15 p.m. ET Dec. 2, 2005. MSNBC.com URL: http://www.msnbc.msn.com/ id/9967386/from/RL.2/)

Again we see absurd and flailing response from Sovereign despite all reasonable evidence to the contrary about Mr. Troilo passing the disinterested 3rd party status in which he must serve on Sov’s Board as a director. Especially when the thrift’s CEO eventually had to report it altered the role in which Mr. Troilo was serving on key board committees.

“Sovereign said in a statement on Tuesday that its pending transactions were “thoroughly reviewed by the advisors to Sovereign, Santander and Independence”. If Sovereign’s advisor included Goldman Sachs, why would Goldman have Sovereign ‘pay-up’ for Independence Community bank, a widely held judgment among the bank and thrift M&A community? For the reason that Sovereign sought the capital infusion from Santander, Sovereign was going to overpay for Independence; buying out management very happy to go to work every day cost Jay Sidhu in order to have an easy access to the New York metro area deposit market, not only a great deal of money more than Independence probably is worth, it cost the shareholders 25% of the thrift they own.

And he had the imprudence and poor judgment as a responsible agent to attempt it without having a shareholder vote. In addition, an experienced M&A analyst wondered why he (Sidhu) paid his directors so much, and also said that he’s been doing these dilutive deals because he wants to grow the place to rationalize paying more to himself, except he had his buddy, Troilo, to whom he’d made some influential business loans on the ‘Compensation’ Committee so that Troilo could pay more to Sidhu.

Sovereign also said: “We are confident that both transactions are in accordance with all applicable laws and regulatory requirements”. Sov all along has contemptuously overstepped and conceitedly misjudged it’s choices, decisions and plans for Independence and Santander, and has been given a pass by the NYSE only because the NYSE is a lapdog perhaps to other member firms, but to Goldman Sachs, from where the NYSE chairman had been an employee, an investment bank known to have served as an advisor and currently an investment banker to Sov, even with an employee related in a father-son relationship to someone in upper management at Sov. Subsequent to Sov’s comments quoted in the FT on Nov 8, 2005, the NYSE forced Sov reversal matters related to Troilo’s committee service and other things only subsequently evident in the executed versus proposed agreements between Santander and Sov. “According to the (NYSE Listing Requirements) rules, a vote is only needed if there is a change of control or if a buyer takes more than a 20 per cent stake.” (Politi, James, and Leslie Crawford in Madrid. “Santander faces Sovereign storm” Financial Times, November 08, 2005 /Posted: 05:20 PM EST (22:20 London. 2005 MSNBC.com URL: http://www.msnbc.msn.com /id/ 10300657/ from/RL.3/).

We are there — 24.99% is greater than 20%. Santander’s application to the New York Federal Reserve Bank however indicates interest to acquire 24.99%, 14.99% greater than this regulator’s threshold for what it considers change-in-control, regardless of the means and strategy the applicant will use to acquire the shares of the target.

V. General Observations
My December 12, 2005 Query for Information and Preliminary Comment provides more detail related to my description of Sovereign’s CEO as ambitious and aggressive, from its CEO’s exploitation of regulator latitude and using operating strategies that have any substance only as these currently exist in recent history’s low interest environment and in part from largess in the tax code at the present time, subject to change according to the whims of policy makers. Finding insufficient regulator discipline and little regulation to impede the ambition of Sovereign’s CEO to build his ‘banking empire’ and into the New York metro area, while he and his board failed to conduct themselves in a fair and bona fide manner towards, or with respect to its shareholders.

That said, I had mentioned before Jay Sidhu’s conduct resembles what management had been known to practice when such conduct put its thrift or bank into a crisis from moral hazard choices, or some other more systemic economic or policy breakdown, and so pushing the institution to near, if not failure. Regulators force senior management to leave the bank or thrift while stronger partners are sought to infuse capital or ‘recapitalize’ the institution. The partners have an equity stake at a point when the shareholders are encountering severally diminished book value and price for their shares, if they have any remaining value in ownership in the bank or thrift. While I was a shareholder of Bank of New England, the recap diluted the remaining shareholders to 8% of the original owners’ equity.

I also may have mentioned that the regulators need to respect investor groups in good times as well as bad. I attempt to practice vision and foresight about the future of banking in the US. For example, in the mid 1920s or even with the stock market crash in 1929, who would have understood Roosevelt’s Bank holiday or the two thrift crises in the 1980s, combined with a bank crisis in the 1990s largely resulted from lurches in tax and banking legislation? We encountered not a few failures or closures of depository institutions. Perhaps some at that point understood the unintended consequences of policy and legislative changes that can drastically alter the banking landscape and require the regulators to reach out to other deep pockets including investor groups. So it would be imprudent to unfairly treat or deal with these in Sovereign, which has abused its investors for a number of years.

Thrifts historically had been mutuals with only the interests of its depositors to serve. The various thrift crises have produced circumstances where in search for capital, in some cases from a status-quo plain vanilla business of taking deposits and making residential mortgages, sometimes involved in Acquisition, Development and Construction loans before FIRREA, thrifts have traded and now hire professional management/agents who are very self-interested and remote to respect for the S&L business, along with often disinterested owners/non-management shareholders. The devil they knew for the one they didn’t; I have mentioned agent moral hazard and again, Sovereign’s management demonstrates this in the CEO’s flawed decision to grow aggressively in regions without effective support and expecting merging into other regions responding to his lame deals.

The S&L model as I have said is a Chevy – a “stock-car” that has performed well when run in the way the Sandlers or Killinger have run their enterprises; their respective stocks have far out performed Sovereign’s. Sidhu has attempted to put a Formula 1 engine in a Chevy without respecting how the stock-car model can work well when keeping its operating strategy and avoiding the higher cost of commercial banking while attempting to do it with a marginally profitable franchise and simultaneously self enriching. If he had a vision to really improve his shop and not feel so insolent to self enrich, one could say he made tough decisions during a tough market. One can make the stronger case, however that in enjoying historically low interests rates and a mild economy, Jay Sidhu has avoided real accountability for his poor and ambitious management.

His stock price anyway went up only because the market improved from 2002 to almost 2004. An observation over 10 years gets nothing for Sov’s management; look at Sov’s stock over a 10-year period from 1995 until 2005. The stock was roughly the same price then as it is today. Perhaps a flat stock market promoted him in desperation to approach Santander.

So, and even if for perhaps normal reasons for reducing the Loan Loss Provision, although he’s reduced by $35mm from 2003 to 2004, while the net income for the same time period was up more than $51mm. Looking carefully through the income statement however, an experienced eye would have the impression of management which knows its franchise well enough and how to manage their income statement and balance sheet so as to represent themselves as successful, grow the place with Securities and/or borrowings and acquisitions, then pay themselves more in salaries and other goodies such as warrants, etc, while the overall quality of the business has eroded. Sadly, the rough calculations and casual analysis I have done on Sov’s 2005 annual report, however, can not contradict what I have state above.

Management has made a number of acquisitions over the last few years for stock while the equity markets generally have been flat since the end of 2003, early 2004. With the thrift’s use of stock as its currency to acquire its targets, it has incurred more goodwill, more than 100% alone since 2003. Although some of that goodwill includes core deposit intangibles, the franchise overall has been marginally profitable as compared if it hadn’t acquired what it did, perhaps referencing the FleetBoston branches specifically. Warrants and other Employee stock options issued however from 2003 to 2004 had grown more than 2000%. Aside from being a marginally managed thrift, with Sov’s executive management controlled by 1 senior decision maker who also serves as Chairman of its Board, one could argue operating and strategy decisions largely have been made to self-enrich the insiders, despite any protest to the contrary.

And the CEO wants to make yet another dilutive deal, with the conceit to think he can do it without a shareholder vote or that he is too arrogant make the decisions to responsibly run an S&L and respect the shareholders who own the enterprise for which he is hired as an agent and employee, or that it doesn’t deserve a shareholder vote. Considering he had to throw more money at Independence CEO in order to get his shareholders to sell, Sov’s own shareholders deserve the vote to push back against overreaching management that has eroded the franchise with dilutive, poorly considered deals.

Only while the market increased in the period between 2002 until early 2004, while the tide came in, all the boats including sovereign floated higher. So no credit to the CEO or its chummy, overpaid board. Why did the NYSE permit this of one of its listed companies?

And where few people can draw the parallel between recaps of sick thrifts in the 80s and 90s versus the recap Sovereign would need if its CEO de facto caputs the thrift from overpaying for a target, I am calling attention to this and condemning it.

Speaking to the point about management self-enrichment, I have observed at other times and vigorously had pushed at the regulatory, legislative, and FASB level for management to expense options, although I preferred below the tax line, so that the full brunt of management goodies garner focus of the non-management shareholders while the taxpayer/voter our policy makers would spare from management self enrichment schemes the non-management shareholders can and may control. Exec comp then rests fully between management and the shareholders. In the past, absentee owners have left this to the consultants the CEO’s buddies on the board hired. Hopefully those days have ended. And as Sov’s management after its aggressive acquisition binge grew the shop on its marginal currency, management self enriched because it felt justified.

And I only mention this because I laughed at Sovereign’s 2004 Annual Report where it indicated its 6 Board Members, with Jay Sidhu as its Executive Director. That reduce the board to non-executive 5 members with Troilo and his more than $11mm in Sovereign loans rendering him compromised while he sat on the Compensation and other key committees. Aside from the chummy, buddy board, has anyone measured Jay Sidhu’s pay while Troilo has sat on the board with Sidhu doing dilutive deals? Sidhu and his board failed to observed others who fell by the wayside for also doing this, even with shareholder votes.

In addition several missteps committed by Sovereign deserve derivative shareholder litigation. Sov’s management has violated its responsibility to show due care to its non-management shareholders, and failing to conduct itself in a disinterested, arm’s length way equally to all its shareholders, while engaging in activities that typically have access to a shareholder vote. Sov management and board have engaged in insider abuse and self-dealing. Following my comments about Sovereign’s CEO, I discuss Sov’s failure to provide a fairness opinion for its shareholders for either of the proposed material transactions which it is contemplating.

Mr. Jay Sidhu, Sovereign’s Chief Executive Officer, has fancied to pay richly and aggressively for the outstanding shares of Independence (not to mention substantially enriching the senior management of Independence), the proposed transaction ‘cashing-out’ the golden parachutes and lucrative compensation packages of the senior management. And presumably, Sovereign arrived at its offering price for Independence from a ‘fairness opinion’ typically rendered by an investment banker or some other publicly acknowledged qualified expert on such matters, even if Sovereign and Santander failed to provide any Fairness Opinion in their applications.

Sovereign’s management negligence to provide a Fairness Opinion would produce a successful derivative lawsuit by Sovereign’s shareholders. JP Morgan Chase experienced this with its interest to acquire BancOne. Notwithstanding, some disinterested 3rd party review for nearly 25% of the bank may report and opine otherwise. But this mutual Faustian pact proposes to give Santander access to the New York retail banking market, and Sov a partner for Jay Sidhu’s ambitious operating expansion in the NY metro area, metro areas in general he has avoided because he had opined those areas present a higher operating cost than to which he would subject the company.

Keeping the above thought in mind, Sovereign’s management subjected the shareholders to a $200mm break up fee with Santander. This would encourage me to ask for all resignations of senior management and the Board of Directors and if they failed to resign, accordingly I would fire them.

Other Regulators and their Respective ‘Jurisdictions’
Sov operates in perhaps half dozen states, where any of it’s state Attorneys General, Secretary, or Departments of Banking may not want a large foreign bank or even Santander to have control of a depository institution operating in their respective states… Nothing in Santander’s application mentions any sort of regulatory or legal filings with any other entity other than the Commonwealth of Pennsylvania, to satisfy Pennsylvania’s Control Transaction Statute. Meanwhile for the Commonwealth of Pennsylvania, Santander and Sov would have to establish a Voting Trust with an unaffiliated financial institution prior to closing the transaction.

From the application, I have discerned Santander expects the regulators to permit banking regulatory override and in general override also known as “Pre-emption” perhaps beyond what we already are debating in US federal and state chartered banking, of state’ commercial laws and areas in which Sovereign is doing business. Speaking to this point, General Statement Sect 13.07 says that parties seeking action arising out of, or in connection with the agreement or the transactions contemplated shall be brought in the US district court of NY. No other state is given respect or consideration. Meanwhile, the entire matter is lurching along without Sov’s shareholders given their access to due process with a vote.

Shareholders with whom I have spoken, meanwhile, and anecdotally include in this complaint/comment all have said that they have disapproved how Sovereign’s senior management has handled its interest and offer to acquire Independence Community Bank while thwarting and avoiding, even rejecting interests for a shareholder vote, broadly preferred among Sovereign’s shareholders. Sovereign’s three biggest investors — Relational, Franklin Mutual Advisers and Harris Associates, which collectively own 16 percent of the No. 3 U.S. savings and loan — have argued shareholders should have been given a vote on the Oct. 24 transaction.

The investors said the Oct. 24 deal transferred a degree of control to Santander that should require shareholder approval. The agreement gives Santander the option to buy Sovereign outright from July 2008. Some shareholders called for the deals to be scrapped and argued Sovereign would be paying too much for Independence at $42 per share in cash. Independence shares fell 19 cents to $39.60 on NASDAQ on Monday. (McSherry, Mark. “Sovereign lauds deals, takes swipe at Relational”, Reuters Updated: 4:44 p.m. ET Nov. 28, 2005/NEW YORK. © 2005 MSNBC.com URL: http://www.msnbc.msn.com/id /10176850/from/RL.1/).

VI. Comments and concerns on increasing concentrations in banking and the vulnerability to US community banking for large foreign bank target with Basel II (also mentioned above)

An expert on the bank tech told me Basel II will prove deleterious to US community banking where it will make community banks easily targeted for acquisition by foreign banks. Perhaps some do not mind increasing foreign ownership of our banks and business. Although I do not hold in highest regard some of our banking practices and largest banking players, we have a way of doing business not only different than the Europeans, but we have a culturally different, far more prosperous society than the Europeans (if just left be to thrive and function without the class stratification and other cultural inhibitions from which their societies have suffered). For that reason their corporate enterprises have coveted access to our investment and banking markets, our domestic economy, and our wallets.

Despite how cheap this deal is for it to access actual New York metro area and then with Basel 2 believed to weaken the condition of community banks and thrifts, Santander has access to other community thrifts and banks on this cheap price (for which we have no knowledge if Sov had a fairness opinion done to quote the price of its shares to Santander or whether at all if Sov management used some sort of due process to arrive at its decision per share for Santander’s recap into Sov). This last matter I describe, I vigorously oppose any further increase of US banking/thrift assets into hands of foreign owners.

Rep Leach and other legislators drew the line on writing into the Gramm Leach Bliley legislation to permit other than insurance with banking and investment banking, which although the FDI Act had omitted mention, but that no sort of mix between commerce and banking/investment banking/financial services would we allow. Even though I had opined conversely in this very matter via correspondence to the Senate Banking staff while Senator D’Amato was its chairman in late spring of 1998, I agreed with Rep Leach given his comments from him that foreign commercial enterprises would have acquired some of our largest financial institutions in the event commerce mixed with banking would have been written into and permissible in the legislation.

I perceive contempt by foreign issuers for our society, our problems, our resources, while foreign issuers covet the larger wealth perceived to be here, and the power of our wallet given what little growth occurs in their own stultified, class/socially stratified societies where people didn’t have anywhere near the ability, flexibility, or access to develop wealth, own property, and access to class mobility (upward). We didn’t have royalty and the positioned to control everything including the land and access to class mobility, while in Europe, all such is controlled by its ruling elite (an expression I dislike using, however find it appropriate here). The US had differed significantly from the European societies; we err to assume we are similar or that we should embrace how they go about things, especially for their “Positioned” such as the Botins, of which there were or are 4 on the board of Santander, and the Bank itself to operate above the law in its own backyard.

We have serious problems in the US with our campaign contributions/political money and the power the trade associations’ lobbyists have to make contributions into the political activities and elections of our public servants, who when elected write the laws its campaign contributors wanted to suit often management’s interests, self interests and self- dealing. At least with ours we have leverage against it.

With less due process and public friction, in Spain the Botin’s bank can hire a former bureaucrat to serve as an independent director who serves on its Audit and Compliance, and Appointments and Remuneration Committees, who coincidentally is an economist, lend him millions, while he perhaps runs pass interference on behalf of the bank when it decides it wants to do things and conduct itself in its own way.

VII. Conclusions on Sovereign doing a deal too expensive for current capital ratio and stock price, in turn needing a capital infusion from a bank, in this case a foreign bank from outside the market so as to remain capital complaint.

The investors said the Oct. 24 deal transferred a degree of control to Santander that should require shareholder approval. The agreement gives Santander the option to buy Sovereign outright from July 2008. Some shareholders called for the deals to be scrapped and argued Sovereign would be paying too much for Independence at $42 per share in cash. Independence shares fell 19 cents to $39.60 on NASDAQ on Monday. (McSherry, Mark. “Sovereign lauds deals, takes swipe at Relational”, Reuters 4:44 p.m. ET Nov. 28, 2005. NEW YORK. © 2005 MSNBC.com URL: http://www.msnbc.msn.com/id /10176850/from/RL.1/).

• As it were, I opposed the Santander -Sovereign proposal in part for that reason, not to mention the cozy, chummy board agreement that I found vulgar. Community banking typically can produce this sort of thing.

• At the very least, Sovereign’s non-management shareholders deserve access to vote on these material decisions and proposed transactions.

• At the very least, this premature and flawed, inferior decision of the New York Stock Exchange on an issue involving financial institutions should be given better, full respect and consideration with, or subsequent to some letter by the regulators concerned.

Given the NYSE ruled on the matter on Nov. 22, 2005 prior to Santander’s application late 12/8/05 to the Federal Reserve Bank of New York for Change in control over a depository institution not even under the NY Fed’s regulation, not by any means speaking for the regulators, however, I would reject these transactions, require a shareholder vote, and force the NYSE for the record to repeal its decision.

I have appreciated the public comment period made available and your consideration and attention given to my efforts to provide this Opposition, Review and Comment on the proposed transaction.

Respectfully submitted
Andrea Psoras
Senior Research Analyst
QED International Associates, Inc.
708 Third Avenue, 23rd Fl
New York, NY 10017
apsoras@qedinternational.com
http://www.qedinternational.com
(212) 953-4058
(212) 953- 5145 Fx

*One may note that I serve on the Corporate Governance/Shareholder Rights Committee of the New York Society of Security Analysts, as well as also serving on its Committee for Improved Corporate Reporting and Socially Responsible Investments. By no means do I render opinion for the Society or my fellow committee members, although I am a co-author on the Committee’s Corporate Governance Handbook, later used by the CFA Institute where that body used our efforts as a base for its more comprehensive corporate governance guidelines.

For the record, to silence any who wish to serve against me as some form of ‘critic’ including Sovereign and/or related parties and alliances, I had worked for 3 months as an Associate Vice President in Investment Banking at Ryan Beck in 1993 simultaneously with a 14 day period in the hospital for a ruptured appendix, and was professionally abused from the years 1995-2005, most aggressively and destructively from 2001 until 2005 after whistle blowing against another investment banker at a major investment bank because he was insidiously espionaging via psychotronic technology information from me and others including his co-workers.

Cc:
Mr. Arthur S. Long Counsel, Davis Polk & Wardell, 450 Lexington Ave, NYC 10017 arthur.long@dpw.com

Board of Governors of the Federal Reserve System, Attn: Clearing Unit, Division of Banking Supervision and Regulation, Mail Stop 712 Washington DC 20551 FX 202 872-7562, bob.frierson@frb.gov

Richard Gebert, US Department of Justice (Attorney General c/o Antitrust Division, Litigation II Section/Banking Unit, City Center Building Suite 3000, 1401 H Street NW, Washington DC 20530. Richard.gerbert@usdoj.gov

Mr. Michael Lesser, Deputy Superintendent of Banks, New York State Banking Department One State Street, NYC 10004. Michael.lesser@banking.state.ny.us

Mr. Robert C. Albanese, Regional Director, Office of Thrift Supervision Harborside Financial Center Plaza Five, Jersey City, NJ 07311

Securities and Exchange Commission. Marketreg@sec.gov , corporate finance/mergers, acquisitions cfletters@sec.gov
NYSE

Bill Schenck Pennsylvania Secretary of Banking
Pennsylvania Department of Banking
333 Market Street, 16th Floor
Harrisburg, Pennsylvania 17101-2290
Toll free: (800) PA BANKS
Office: (717) 214-8343
Fax: (717) 787-8773
ra-pabanking@state.pa.us, jmoretz@state.pa.us
http://www.banking.state.pa.us

Timothy J. Blase | Director of Supervision & Enforcement

Issues concerning Savings Institutions contact James Acri
Office of Chief Counsel
Request interpretations of the law, pertinent to the state-chartered financial services industry.
Albert H. Masland, Esquire
Chief Counsel
NORTH OFFICE BUILDING HARRISBURG, PA 17120 PHONE: (717) 787-6458/ FAX: (717) 787-1734

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One Response to 2Feb06 Amicus Brief to U.S. District Court/Southern District-NY: Relational Investors, LLC./Sovereign Bancorp, Banco Santander, S.A.

  1. Pingback: Psoras TRANSACTIONS/PROJECTS/ACTIVITIES LIST 2Q14 | Apsoras1's Blog

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