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Tuesday, 25 January 2011

Was saving the banks a good investment for the Dutch government?

In 2008, after Lehman Brothers went down, the financial crisis also broke out in The Nether­lands. In fact there were a number of dangerous situations looming within the large Dutch banks that came to an acute crisis:
ING, the largest Dutch bank and one of the Top 20 banks in the world was heavily overleveraged with a debt to equity ratio of 70:1 and substantial investments in the Alt-A and Subprime mortgages that ignited this crisis in the first place.
Fortis, when taking over ABN AMRO in 2007, together with Royal Bank of Scotland (RBS) and Banco Santander, tried to take a much bigger bite than they could chew. The blowback came in 2008: Fortis tried in vain to convince their savers and shareholders that they were well-capitalized while everybody and their sister knew that they weren’t.
ABN AMRO suffered in the last years before 2008 as a result of the drama with Banco Antonveneta. The initially failed and later “successful” take-over of the Italian bank turned the formerly solid Dutch bank into a big prey for Fortis, RBS and Santander. With 75 billion EUR this would be one of the biggest take-overs in history.
SNS and AEGON didn’t have so many acute problems, but were merely victims of the overall financial instability. Rabobank was – as the only large bank - seemingly untouched by the problems on the financial markets.
When “Lehman” happened, Wouter Bos, the Dutch Finance Minister came to the rescue: he first offered a EUR 10 billion government loan to ING and afterwards bought for EUR 22 billion of assets (mortgages) from the bank at a price of at least 15%  above market value (35% might be a better estimation: who will know?).
He nationalized Fortis and ABN AMRO and decided that these banks would have to merge together, with ABN AMRO in the roll of overtaking bank: the hunted suddenly became the hunter.  SNS Bank and Aegon were pushed to accept government aid in order to remain well financed.
The result: all banks survived and seem to prosper again, the ING remained the biggest Dutch bank and ABN AMRO became the name of the ABN / Fortis combination, which is now a “healthy” bank. All’s well when it ends well?
Let’s take a look at the facts: about EUR 50 billion in government aid is paid to the Dutch banks. This is EUR 3000 per man, woman and child in The Netherlands, which is a substantial financial burden. And what did we get for it:
·    The direct government loans will probably be returned by the banks in the near future. Aegon and ING already paid back some of the loans against a “healthy” interest. This seems to be a quite reasonable investment.
·    The EUR 22 billion of mortgages that were bought from ING seem to be a very bad investment. The chance that these mortgages, which were bought at about 90% of nominal value, will return more than 55-60% of nominal value is not very big. This means a loss of EUR 7-8 billion: EUR 500 per Dutch citizen. It might even be more as the market for these kind of mortgages is still locked tight.
·    ABN AMRO received about EUR 20 billion in government aid when it was nationalized, but will at best return about EUR 10 billion if it is brought to the stock exchange in 2014. This is again another loss of EUR 750 per Dutch citizen.
 There is also an ethical component in this question. Did these banks deserve to be saved? And are these the best banks in handling the interests of the Dutch savers and tax payers? Kees de Kort, the macro economist of BNR radio in The Netherlands and one of the brightest economists I know, says this about it:
“It is true that you need to have banks in your country. But should it be these banks?? I seriously doubt that”
ING did enable some changes in the organization of the Bank. The Bank and Insurance company that were never very successful working together are now going to be separated. I expect this might be considered a success in the near future. But for the rest the bank still acts like a supertanker, the captain of it trying to avoid a collision by frantically pulling the steering wheel and on the other hand forcing a smile on his face to reassure the rest of the crew. I don’t buy that kind of optimism, so the collision might come sometime in the future.
Main problem: the assets on the balance. What they are and what they are worth, nobody knows. Bad American mortgages, sovereign bonds from the PIIGS-countries, Dutch mortgages and loans that were handed out too optimistically? One thing is sure: these assets are not worth the amount they are booked for currently and they probably are not enough to pay off all bank debt, leaving the Dutch and European taxpayer in jeopardy.
ABN AMRO, this bank is currently led by former Dutch finance minister Gerrit Zalm. Does a good minister make a good banker? We will find out, but I have my doubts. Facts are that the bank is still in a merger with Fortis and nobody seems to know what the status of that process is. Uncertainty under personnel is still high and the balance sheet of the bank over 2009 still looks extremely weak, with real equity being only 2,5% of all assets. Absolutely no Basel III material.
Rabobank, Aegon and SNS are not doing bad at all, but Rabobank still has the burden of too many Dutch mortgages against too high Dutch housing prices: in the end something´s got to give and when this happens (see my other articles) the assets of the bank might be worth a lot less.  
For me personally it would have been an interesting experiment when the following would have happened with ING: the government takes over the bank and declares all shares and bonds being “worthless”. The key parts of the bank – savings and loans and normal banking activities – are separated from the investment bank activities and are being put in a new, healthy bank which is (temporary) run by true banking experts (old bankers in the best sense of the word). The unhealthy parts, however, are liquidized on behalf of the share and bond holders. This is a painful operation for the equity holders, but less expensive for tax payers. The same could have happened with ABN AMRO.
Instead the taxpayers now foot the bill, while nobody knows how high it will be. I don´t like that idea.

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