Corsair Partnership, the international bank investment fund led by J.P. Morgan & Co., is negotiating to increase its stake in Banco Espanol de Credito, or Banesto.

Sources close to the bank confirmed a report in last week's Financial Times that Morgan is negotiating with Banco Santander, Banesto's new owner, and the Bank of Spain to purchase an extra $40 million worth of Banesto stock and options at $6 per share.

Banesto's shares traded at around $8.06 at the end of last week.

Stake Was Cut in Recapitalization

The shares dropped sharply in price after Spanish regulators took control of Banesto late last year, but have since recovered some of their value.

Corsair's stake was cut from 7.9% to between 2% and 3% after the Spanish government and the bank insurance fund recapitalized Banesto.

The deal would permit Corsair to bring its stake back up to around 7%.

Banco Santander will grant Morgan the discount as part of a deal with the Bank of Spain and the Spanish bank insurance fund to offset losses Corsair incurred.

Corsair, a $1.1 billion fund in which Morgan holds 10%, spent $163 million, or around $13.20 a share, last year to acquire a 7.9% stake in Banesto.

Sources said Morgan is seeking a cash deal on behalf of Corsair and hopes to conclude talks with the Bank of Spain and Santander within the next few weeks.

They added Morgan is for the moment continuing to explore possibilities for bringing legal action against Banesto and the Bank of Spain for its losses.

Banesto collapsed after its liabilities were found to exceed its assets by far more than the bank had ever admitted.

Santander subsequently acquired 60.2% of the bank at $5.58 per share, becoming the biggest bank in Spain.

Royal Bank of Scotland Buys 2%

The bank said it planned to distribute 8% of Banesto to shareholders of the bank and 1% to Banesto management.

Earlier this month, it sold nearly 12.3 million shares, representing 2% of Banesto's equity, at $5.58 per share, to the Royal Bank of Scotland Group. Royal Bank already owns 1.4% of Santander's equity.

Morgan has argued that it deserves compensation for its losses because it was misled by the bank's previous management about Banesto's lending losses and the true value of its assets.

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