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Wednesday, 30 January 2013

Endgame for SNS Reaal Part II: ‘Ernst’s Economy for You’ discussing at the ‘BNR Newsroom’ live radio show

This Monday, 28 January, I had again the opportunity to be present at the ‘BNR Newsroom’ live radio show (link in Dutch) with the distinguished anchorman Paul van Liempt.
Paul van Liempt - BNR Newsradio
Picture by: Ernst Labruyère
Click to enlarge
This week’s topic would be the ‘Endgame for SNS Reaal NV (SR), the Dutch bank that came under heavy cross-fire, due to its investments in Commercial Real Estate (CRE) gone awry. For this subject, a number of savvy insiders with different backgrounds had been invited: 
  • Michel Scheltema, a former State Secretary who had been involved as trustee in the settlement of the bankrupted DSB bank;
  • Prof. Harald Benink, a leading economist from the University of Tilburg; 
  • Sweder van Wijnbergen, the former secretary-general of the Ministry of Economic Affairs and an expert on economic policy; 
  • Peter Verhaar, founder of the Dutch pricefighter bank/stock-broker ‘Alex’; 
  • Pieter Couwenbergh, journalist of Het Financieele Dagblad;
The Endgame for SNS Reaal is still an extremely topical subject and the discussion at the BNR studio delivered some new and interesting insights. 

Therefore, I share a transcription in English of the most important subjects within this radio-show at my blog. 

As the cause for the problematic situation of SNS Reaal has been extensively illustrated in part I of this series, I skip the comments on this subject. I maintain the dialogue-style to give you an impression of this radio-program:

Paul van Liempt: Who are named as possible investors in SNS Bank?

Pieter Couwenbergh: One name that popped up was J.C. Flowers, a private equity investor with a stake in the Dutch bank NIBC Bank NV. Further, SNS had been negotiating with parties from inside and outside the EU; probably investors from Arabia, Russia and China that might want to set a foot on the Dutch financial market. Unfortunately, I don’t have more detailed information on these parties.

Paul: Is there a way for the Dutch tax-payer to escape from another bank bailout?

Pieter: Sure. To prevent this from happening, the SNS Bank must be expropriated and nationalized by the Dutch national bank DNB or the Dutch government. When the shareholders and holders of subordinated and normal bonds will share the burden, then the only loss for the Dutch tax-payer will be the €750 mln in state-support that won’t be refunded.

This would be a attractive scenario for the Dutch government, but the DNB will probably be against it for the following reasons:
  • It changes earlier made agreements between DNB and the banks;
  • The Dutch banks will have to pay more interest when they want to roll over debt on the financial markets, as the implicit government warrant vanishes;
  • Dutch companies and consumers will have to pay more for a loan or an overdraft on their current account;

Paul: Michiel Scheltema, how large do you consider the chance of a bank-run at SNS Bank;
Michiel Scheltema, trustee at the default of
DSB Bank in The Netherlands
Picture by: Ernst Labruyère
Click to enlarge
Michiel Scheltema: There is a much smaller chance for a bankrun than in the case of DSB Bank, the maverick mortgage and loan bank that defaulted a few years ago. The consumer bank and insurance branch are healthy and solidly operating. In itself, SNS Bank is a good, normal bank. Besides that, there is the Dutch deposit-guarantee system, that warrants private deposits and savings to an amount of €100,000. This system is fairly well-known at the general public nowadays.

Paul: How competent are the executives at SNS? They did in 2006 purchase Bouwfonds Property Finance after all, which had already been dismissed by Rabobank and ABN Amro in those days?!

Michiel: Yes, that is true. Ronald Latenstein, CEO of SNS Reaal, literally lost sleep on this decision. However, since the banking crisis started in 2008, the supervision by Supervisory Boards of banks has become much more strict, due to stricter supervision by De Nederlandsche Bank (DNB, i.e. Dutch National Bank). The new Dutch Bank Intervention law of 2011 has supplied DNB with far-stretching powers.

Harald Benink: The Bank Intervention law gives either DNB or the Dutch state a legal mandate for intervention when f.i. the solvability of a bank goes beneath certain thresholds, due to past decisions and errors. This gives DNB the possibility to supply the share and bond-holders with the losses of a non-profitable operation within the bank. DNB has a larger legal mandate, due to this law.

In case of SNS Reaal, a possible solution could be to transfer all equity and subordinated debt into the ‘bad bank’, together with all loss-bearing Commercial Real Estate (CRE). In this case, the remaining good bank is clean and without losses, enabling it to recapitalize itself. The equity and subordinated debt-holders go (partially) down with the bad bank.

Paul: What is better? When the Dutch state carries the losses, or the investors?

Michiel: It is always better when the investors carry the losses. Nevertheless, when the government carries the losses, there are two opportunities. 1. DNB intervenes. 2. The Dutch Finance Ministry intervenes. The latter happens at the end of the line, when the bite is already too big to chew for the DNB. When the DNB intervenes, there is no tax-money involved yet.

The DNB has the possibility to transfer equity and bonds from one legal entity to another (i.e. the Bad Bank) within SNS Reaal. When SNS constructs a rescue plan together with the DNB, then expropriaton of SNS is not in the planning.

Sweder van Wijnbergen: For me the question is: what happens with the healthy part of SNS Reaal. About what happens with the contaminated parts, I couldn’t care less.

Sweder van Wijnbergen – Former secretary-general
Dutch Ministry of Economic Affairs
Picture by: Ernst Labruyère
Click to enlarge

Paul: Where do we go with the healthy parts of SNS?

Michiel: The DNB is the first party to decide this. However, although DNB’s legal mandate is rock-solid, it lacks hand-on experience in this situation. The DNB could split up good and bad bank. The bad bank might default, while the good bank survives. The Dutch law states in this situation: “creditors of the bank must not end in a worse situation than when the government or DNB had not intervened at all”. This part is quite clear at SNS Reaal: it will probably default at short notice without government intervention. In this case the creditors can’t expect much consideration.

Paul: Did Iceland prove that a bank can default without fatal consequences for the national financial system?

Michiel: Definitely. Iceland came back very well. The intervention at the Icelandic banks has been very early, which helped to recover remarkable amounts of cash. The longer you wait with intervening, the smaller is the chance that money can still be recovered. When you intervene quickly, almost everybody gets his money back.

Harald Benink: Fitch states that holders of subordinated debt didn’t take losses yet in Europe. This is definitely not true: it did happen in Spain. Fitch should not nag about a regime-change in Europe, when the bondholders of SNS are forced to do burden-sharing.

Sweder van Wijnbergen: Secured and non-secured bonds need to be distinguished clearly. When Fitch states that borrowing may become more expensive when banks can default, this is caused by the fact that the implicite state-support is removed from the equasion. Banks themselves need to assure their bond-holders that they are a safe investment. This is no government task. State-support is illegitimate in every aspect of business, except for when it comes to state-guarantees for bond-holders. That is weird!

Peter Verhaar - Founder of Dutch pricefighter bank / stock-broker Alex
Picture by: Ernst Labruyère
Click to enlarge
Peter Verhaar: During the parliamentary hearings on the banking crisis, CFO Bert Bruggink of the Rabobank stated that much more banks should default. This would return the risk-awareness.

Sweder: SNS is not a bad business. It has more value as going concern, than when it is liquidated. THE question is, however, where the will losses be put?!

Ernst’s Economy: Will Finance Minister Jeroen Dijsselbloem dare to let the subordinated bond-holders foot the bill? Can he withstand the moral pressure from “poor old retirees, appearing on TV in talkshows”, who invested their last penny in subordinated SNS bonds?

Sweder: These are certificate-holders. With €57mln invested funds, they are a small minority, against €1.8 bln in subordinated bonds.

Peter: Dijsselbloem needs to stand tall.

Michel Scheltema: Dijsselbloem is not in play yet. Now the DNB is at the table with SNS Reaal; therefore bailing out the bond-holders is no issue yet.

Peter: Investors with subordinated bonds get an interest of about 11% on their investment. They should not be so naive to think that they can cash these huge interest payments and still have an ironclad guarantee of receiving their investment back. Risk awareness should return. It is not fair when only shareholders have to foot the bill. Sadly, it is the question if this will actually happen.

In a default situation, the normal bondholders also need to pay their share of the burden. The problem is that it never comes that far in The Netherlands.

Paul: Without this risk, it is a lottery without losing lottery-tickets.

Harald Bening: Already since the end of the nineties, the pan-European committee of Economy professors that I preside and our American counterparts call that risk-awareness should return. When bondholders are always compensated, they stop looking at the risk: that is a moral hazard for bank-CEO’s. These guys take risks with too little equity, because the government is there for them.

Normal bondholders asked little interest returns during the last years, because they reckoned with implicit state-support. However, holders of subordinated bonds received 11% interest from SNS. If you compare that with the 3% on a normal savings’ account, you should know there is risk involved. Sub-bondholders should share the burden. That is fair.

Guest in public: How can you split up a bank with two healthy parts and one bleeder with the least amount of (legal) problems?

Sweder van Wijnbergen: Through negotiations between SNS Reaal and other parties. Legal constraints can be put aside, when everybody agrees. This scheme only won’t work when somebody protests against it.

The SNS Reaal holding should become the bad bank, with Property Finance in it. There is actually one serious snag: from the €1.8 bln in subordinated loans, €1.5 bln is stashed in SNS Bank (!) and not in the holding itself. You should transfer these loans to the holding, if you want to let those share the burden. But there are some legal constraints.

Harald Benink: Do you need the intervention law for that?

Sweder: I wonder if this could be done with this law. This is definitely against the spirit of the legislator. It is useful and should be done, but if it’s possible indeed?

Paul: Harald, can you please explain about this intervention law?

Harald: This law enables the supervisor or the government to transfer equity and bonds from one legal entity to another within a banking conglomerate. Decisive for the government is what would have happened when the government had not intervened. That is a source for negotiations with the private investors: where does the bank go now?! In case of the SNS, the CRE hangs like Damocles’ sword above its head. The bank might not survive if the government does not intervene; that is why it is a penny-stock currently. You should negotiate with holders of subordinated bonds from that perspective. Now perhaps this should be done by the DNB, but also the Finance Ministry might intervene.

Sweder: When SNS Reaal does not bleed hard enough for the state-support it received, they might receive colossal penalties from the EU. So if the government loses their certificates [a kind of bonds that can be exchanged for shares - EL], together with the other holders of subordinated debt, this might be considered another tranche of state-support by the EU. This could bring gargantuous penalties to the remainder of SNS Reaal.

Will be continued…

Monday, 28 January 2013

Working in the age of the credit crisis can be much harder than a few years ago.

Last week, the Dutch federation of labour unions 'FNV' came with a complaint against the largest supermarket chain Albert Heijn. The FNV claimed that the labour circumstances in the distribution centers of the supermarket chain left a lot to be desired, especially for workers of foreign descent. Workers would be put under enormous pressure to meet their production targets. They would also be intimidated if they complained about the circumstances.

Business radio station BNR had an interview with Ron Meijer of FNV Bondgenoten, the largest labour union in The Netherlands. Here are the pertinent snips of the resulting article:

The FNV comes with a serious complaint against Albert Heijn. The labour circumstances in the distribution centers of the supermarket chain are far from normal.
Employees are forced to meet their production targets. Who complains, will be intimidated. For instance, employees who wanted to take a few days off, heard from their foremen that they didn’t have to come back at all, if they did so. Especially Polish temporary workers go reputedly through a hard time at Albert Heijn.

The union collected the complaints in a black book. Ron Meijer of FNV Bondgenoten: “we used to know Albert Heijn as a friendly and cozy supermarket, but reality bites. Especially the temporary workers are intimidated and boosted.

The bottom-line is that people have to work, tow and carry for at least 425 minutes per day. This number has doubled in size during the last ten years. This can partially be explained with ‘working smarter, instead of harder’, but for the larger part it is caused by people being boosted to work harder”.

An important factor, according to Meijer, is the circumstance that 1 in 4 Dutch workers currently has a non-secure contract. “The labour union does not mind what the nationality of the complainer is and how long he will stay in The Netherlands. What is important, however, is how AH treats half of its personnel by applying this behaviour. This is also influencing the other half of their personnel, as people with fixed contracts realize that this situation might not last forever anymore. They also feel intimidated. It is not just about the Polish temporary workers.”

This is not the first complaint against Albert Heijn, that has been subject to public discussion during the last few years. Reputedly, Albert Heijn often hires very young personnel as cashiers and shop-assistants and dismisses them a few years later when they become ´too old´ and thus too expensive. However, I don’t have any kind of proof of these practices.

Many young teenagers started their working career as a shop-assistant or shelf re-stocker at Albert Heijn. My niece and nephews are among those youngsters and I never heard bad stories about AH from their mouths.

Also in the case of the FNV complaint, we must be careful to not start a witch hunt against AH. When you want to work in a distribution center, you know that it is hard and heavy work, often under time pressure from the foremen, the managers and (very important) your own colleagues.

Nobody likes colleagues who are constantly cutting corners, making too much mistakes and leave the heavy work to their colleagues. And yes, when the trucks need to be loaded in time, there can be a lot of pressure from the foremen indeed. Pressure to not take a day off, for instance. It is not good, but this is how it goes in organizations with much manual labour. This makes it often very hard to judge when an organization goes or does not go beyond the limit of good employership.

Besides that, we should remember that the FNV, who published this blackbook, is an organization in transition. It is currently looking for a reason to exist, after years of neglect concerning ´the old labour´ of labour unions. The federative FNV had become a powerful, totally politicized lobby-organization with large political influence, which had been speaking with employers and (national) politicians on a very high abstraction level.

From ‘steeled workers’ who were 24/7 ready for action, they turned into desk-jockeys that were wearing suits and lost most of the contact with their (diminishing) grassroots. That might have been good for the Dutch economy and employability, but it had been killing for the credibility of the FNV.

After last year’s near-implosion of the FNV federation, its federation members, like ‘FNV Bondgenoten’, are desperately looking to put themselves back on the map again. Alarming press stories and free radio publicity, like in the case of the Albert Heijn blackbook, might help in this process. This is a reason to look at news like this with a cautious eye.

As a youngster in the late eighties and early nineties, I spent (in total) a very pleasant year as temporary/holiday worker at Campina Melkunie, a large dairy company in The Netherlands. I loved the hard work and the companionship at the work floor and the feeling of achievement, when the job was done in time and without errors.

However, those could have been different times: working in a distribution center was an extremely well-paid job in those days, because of the bonuses for working in shifts, heavy labour and extra hours that you made on the job.

Just as in other kinds of labour that demand no special education, a race to the bottom started in the distribution centers a few years ago:
·    Workers with fixed contracts have been replaced with temp workers;

·    Dutch workers with their ‘sturdy’ salary demands have been slowly replaced with Polish, Rumanian and Bulgarian workers, who were willing to do the same job for much less money;

·    This development forced Dutch workers also to settle for less money, as they could only receive a temporary contract at a much lower hourly rate;

·    The economic crisis in The Netherlands put an extra edge to things:
o    Jobs became scarcer for people, so having a job was considered a treasured possession. When you had it, you didn’t complain about it, normally;

o    The number of applicants for these kinds of distribution and support services jobs rose at the same time with the influx of workers from Eastern Europe and South(-West) Europe. This made it easier for employers to cherry-pick people;

o    Eastern European workers needed the jobs and didn’t know the people that could help them in case of an argument on the job. “Our way or the highway” could be the difference between having a job and an income and having none. This puts the door wide open for unfair treatment and even abuse of these workers;

o    The battle for margins forced retailers to save every penny in the production and distribution chain;

The current working environment in The Netherlands is not per sé a good one for healthy and fair job circumstances. This is the reason that I would not be surprised when the complaints, collected by the FNV, are largely valid after all. The difficult economic situation can force employers to state against their workers: “You have a job, so be happy about that. If you don’t like it, ten others will!”.

These are exactly the circumstances where government bodies, like the Labour Inspection and the Dutch internal revenue service or the labour unions have an important task: protecting workers in an increasingly ‘hostile’ environment.

Let’s hope that these people have the time and the means to do this extremely important job. Unfortunately, this might not be expected from the current, business-oriented cabinet, in spite of the participation of the Dutch labour party PvdA.

Endgame for SNS Reaal: whatever happens with this bank-insurer, somebody has to pay dearly for it. And it will probably be the Dutch taxpayer again.

The Dutch bank-insurer SNS Reaal has been a regular visitor of these lines. The bank/insurance conglomerate, formed by SNS Bank and the insurance companies Reaal and ZwitserLeven (i.e. Dutch Swiss Life) has had four difficult years, since the credit crisis broke out.

Together with ING Groep NV, the combination Fortis/ABN Amro (now ABN Amro bank) and a number of insurance companies, the bank received state support in order to survive the 2008 banking crisis. As SNS Bank is a relatively small bank, the amount was “only” €750 million, which is peanuts compared to the many billions of Euro’s that Fortis/ABN Amro and the ING Groep received.

Still, it seems that it is precisely the state support that is currently giving SNS Bank the last push down the drain.  The bank had already returned €185 mln of this state-support in 2009, but the €565 million in remaining debt, plus a penalty interest of 50% makes that the amount to be returned is still €848 million.

Normally, this amount would not have been a problem for a bank of the size of SNS Reaal, but the situation is far from normal. SNS has a subsidiary called SNS Property Finance, which had been called Bouwfonds Property Finance in an earlier life. Unfortunately, the name Bouwfonds is synonymous for ‘trouble’ in The Netherlands.

People from Bouwfonds had been the protagonists in the enormous Dutch Commercial Real Estate fraud case that shook The Netherlands to its foundations a few years ago. Through this fraud case, the large Dutch banks, like ABN Amro and Rabobank, who both had bought their share of Bouwfonds subsidiaries, came to know that Bouwfonds meant bad news.

SNS Bank was unfortunately no exception to this. In the years before SNS took over Bouwfonds Property Finance, Bouwfonds had invested heavily in North-American and Spanish Commercial Real Estate. The former had to deal with the consequences of the United States debt crisis, while the latter suffered from the implosion of the massive Spanish Real Estate bubble. But there was more bad news.

By purchasing Bouwfonds Property Finance, SNS PF had become the ‘happy’ owner of a shopping mall to-be-built in Luxemburg. While everything looked hunky dory on paper, reality was very much different, according to a story in Het Financieele Dagblad.

The real estate branch of SNS, earlier Bouwfonds Property Finance, financed the construction of two shopping malls, Belval Plaza 1 and 2. Construction? What construction?! The SNS experts are shocked by what they see. Offices, houses and shops are half finished, but there is no visible activity. 

The 110 subcontractors stopped working two months ago. Their bills were not paid by the Dutch project developer Multiplan, with whom SNS has a joint venture for Belval. Multiplan and SNS own each 50% of Belval. SNS pays all bills for the project, but doesn’t have it in legal control.

This was a common construction within the old Bouwfonds, but it bore the risk that in a bad market SNS would have to finance a money pit, without having anything to say about it legally.

The rest of this story is an absolute must-read on how not to do business in Commercial Real Estate financing (unfortunately only available in Dutch). 

Also the daily newspaper NRC wrote a story on bad investments of SNS Property Finance. These investments could happen, because bank executives didn’t listen at all to warning signals of their own risk management department.

Circumstances, like the aforementioned failed investments and others, were the main reasons that SNS Reaal is now struggling with a real estate portfolio that is worth €4.8 bln on paper, but in reality has no more value than €2.8 - €3.3 bln. The inevitable write-offs on this portfolio will be too much to bear for the bank. On top of that, the remaining €848 mln in state support must be paid back as late as 2013.

Already in the first part of 2012, it became clear that the refunding of the state support would be a mission impossible for SNS Reaal. Since 2012HY2, the bank hoped to be taken over (i.e. rescued) by a consortium, existing of the three largest banks in The Netherlands: ING Groep, Rabobank and current state-bank ABN Amro.

Not unexpectedly, however, this was forbidden by the EU for the following reason:

Both the ING Groep and ABN Amro had received large amounts of state support in 2008/2009. As a consequence, both were subject to an acquisition ban, which specifically forbid these banks to make large acquisitions, due to their 'competitive advantage' as a consequence of the state support.

Another reason could have been that the ‘three sisters’ in The Netherlands, with yet another bank in their portfolio, could have had a near-monopoly, which is bad for the negotiating position of consumers and businesses.

At this moment, SNS Reaal is in a very awkward position, with large financial problems and very little time to solve them. A position that could also cost the Dutch state a possible €750 mln in state support that won’t be returned anymore.

Last week, the Dutch newspaper Volkskrant came with the following story: in 2008, when the government paid the €750 mln in state-support to SNS Reaal, it received 142 million SNS share-certificates as a collateral. In those days, those certificates had a value of about €750 mln (one certificate = one share).

The agreement between SNS and the government stated that, if the bank would not be able to return the state support in cash, the certificates would be exchanged with normal shares; this would be considered a payment in full.

Unfortunately for the Dutch government, the value of those 142 mln certificates is currently not more than €98 mln, as SNS has turned into a penny stock. Deducted from the current SNS state-debt of €848 mln, this leaves €750 mln in state-support that possibly won’t be paid back: a considerable loss for the Dutch taxpayers. This is the reason that the Dutch government is also pushing a quick solution for SNS Reaal.

Here are three possible scenario’s for a rescue plan that are widely discussed nowadays: 
  • SNS Reaal puts (parts of) SNS Property Finance and other bleeders in a so-called ‘bad bank’ and sells this in combination with a state guarantee;
  • SNS Reaal as a whole is nationalized by the Dutch government and the bank and insurer are split up and divided over the current state-companies ABN Amro (banking) and ASR (insurances);
  • SNS Reaal is rescued by letting the shareholders and holders of normal bonds and subordinated bonds bleed for the losses that the bank suffered. The bank will probably be either partly nationalized, or it will receive additional state-support. This would be a novelty in the Dutch banking industry; 
The Bad Bank-solution

When the bleeding elements of SNS (Property Finance) would be put in a so-called bad bank, the remainder of this bank/insurer would be quite healthy, with good opportunities for survival in the future. Reaal and ZwitserLeven are common insurers: Reaal sells common (personal) indemnity insurances, while Zwitserleven sells life-insurances. Both companies are doing fine in their own right.

Also SNS Bank, without the property finance branch, would be a small, but viable full-service bank with a fixed array of customers, that probably don’t like to go to the other large banks.

In this solution, the bad bank is the true problem: while the Volkskrant spoke of a real estate portfolio of €4.8 bln, Het Financieele Dagblad spoke even of €8.8 bln in property to be possibly stashed in the bad bank.

No group of investors in their right minds would invest a few billion in a bubble without a state-guarantee or another kind of financial parachute. Everybody knows that the property that SNS owns, is probably worth less than 50% of its balance value. On top of that, the Dutch and European markets for Commercial Real Estate (CRE) are still a disaster, with structural vacancy everywhere.

If the SNS CRE is not top-notch, which it probably isn’t, it will be very hard to sell. This makes the risk for losses a very large one, unless the bad bank property is sold to investors with an enormous discount AND a state-guarantee.

The freshman Finance minister and Eurogroup-chairman Jeroen Dijsselbloem does probably not want to have another open-end(?) state warranty to keep him from sleeping. This circumstance makes this scenario possible, but not very plausible.

The nationalization solution

With ABN Amro / Fortis-bank and ASR (formerly Fortis insurance, now also in hands of the state), the Dutch government has ample experience with a nationalization proces in the financial world. Probably, the Finance Ministry has – in combination with the Dutch national bank DNB - the scenarios already written down and ready for action.

In this case, SNS Reaal will probably be split up into a banking part and an insurance part. Although I don’t know if the EU will allow a merger between SNS Bank and ABN Amro at one hand and Reaal, Zwitser-leven and ASR at the other hand, I consider this a very plausible possibility.

The difference is that in this case the Dutch government takes the initiative and not ABN Amro itself. The same will be true for ASR.

When the EU still would not allow the Dutch government to merge SNS Reaal into the other state bank and insurer soon, the government might keep the SNS Reaal shops open, until both ABN Amro and ASR are private companies again (planned somewhere in 2014/15) and there would be no obstacles for the merger anymore.

SNS Bank would be assimilated within the ABN Amro group and most bank shops would actually disappear; SNS shops at A-locations would be renamed to ABN Amro, the others would simply be closed. 

The insurance-label Reaal would probably disappear, while ZwitserLeven IMHO would survive as a label under the ASR umbrella.

Whatever happens, this will be a costly solution for the Dutch taxpayer. In this case, the taxpayer is on the hook for all the losses at SNS Property Finance. 

In the process he might lose at least €2-€4 billion in real estate write-offs, plus the €750 mln in state support. To keep the bank and insurer running, an additional €2-€3 billion might be necessary, bringing the total bill for the taxpayers to €5-€6 bln. 

In exchange, the Dutch taxpayer receives a bank/insurer with a few healthy parts and a lot of dead bodies. This solution seems possible and very plausible.

The shared burden solution

Finance Minister Jeroen Dijsselbloem likes the idea of letting the share- and bondholders share in the burden of rescuing SNS Bank. With bondholders, he does not only mean the holders of subordinated bonds, but also normal bondholders.

This possibility send shockwaves through the financial world. Not only the holders of normal and subordinated debt where shocked that their “safe investments” were on the line suddenly, also Fitch reacted like it was stung by a wasp and warned that this could have grave consequences.

One of these consequences could be that the ratings of all European banks would be lowered, as the bondholders could not reckon anymore that the European banks would always be protected by the national governments of the Eurozone eventually.

At this moment it seems that Dijsselbloem is still resisting the pressure of Fitch (and probably the other rating agencies), so lets have a look at this possibility.

According to the annual report for 2011, SNS Reaal had equity to the tune of about €4.350 bln, in combination with €650 mln in subordinated debt and €1.9 bln in other liabilities (which I presume to be bonds). 

This brings the total value of SNS Reaal’s paper officially to €7 bln, although I am certain that the current value of the equity is probably not more than €1.5 - €2 bln, making it a total of €5 bln.

When the losses on SNS PF (for the equasion, I will set these to €3 bln) would be written off from the share- and bondholders, the shareholder capital would be totally wiped out and the bondholders would be in for a costly X-mas present of minus €1 - €1.5 billion. In my opinion, this would wipe out the subordinated debt holders and leave the normal bondholders with a write-off of about 15% - 50% of their bond value.

In this case the Dutch government would probably warrant €2 - €3 bln in additional state support to keep the bank up and running, making a total possible loss of €2.75 - €3.75 bln, due to the €750 mln in SNS share-certificates that would go up in smoke when this solution is chosen.

I consider this solution also possible, but not plausible.

I am certain that Dijsselbloem will pull the chicken-switch under the pressure of the rating agencies and financial markets on one hand and the bondholders (often private citizens, who bought these bonds under advice of SNS Reaal as a ‘safe’ investment), who would suffer a huge loss.

Conclusion: the probable path to go for SNS Reaal is being nationalized, making the Dutch taxpayers the ‘happy’ owner of yet another bank with executive management  who thought that ‘risk’ was just a theoretical concept, invented by misanthropes. Congratulations.


Breaking news: Tomorrow, on Monday, 28 January, I will again visit BNR Newsroom, the live discussion program on BNR Business Radio, hosted by Paul van Liempt. The topic of the evening is the rescue of… SNS Reaal. If I will hear radically different insights, I will write a follow-up on this story!   

Saturday, 26 January 2013

A referendum on the European Union in The Netherlands and in other European countries? Let’s do it and give the European citizens a real chance to decide on their future.

Last Wednesday, 23 January, Prime Minister David Cameron of the United Kingdom held his speech on the future of Great Britain in the European Union, in which he condemned the current democratic level of the European Union. Cameron stated that this democratic level should improve in the near future, if the European Union wanted to survive in its current form, thus including the British.

In order to improve the democratic level of the EU, Cameron aimed at reinforcing the power of the national parliaments in the member-states and retaining legislation and executive powers that have been transfered to the EU before. I disagreed with him on this topic:

Currently, the national parliament of Germany (“Der Bundestag”) and the constitutional court in Karlsruhe could decide over the future of the EU, through Germany’s veto. How democratic is that?!

The sad truth is that Europe’s future direction is decided upon by a few countries with a disproportionately large amount of influence: France, Germany, Italy and… the UK. If Cameron would not have messed up in December, 2011, he still would have had much influence. The relatively poor, “small” countries, like Greece, the Baltic states and the former Eastern Block countries (except for Poland) have the least influence, while they are at the same time the most dependent on the EU for their future.

I’m an advocate of the “one man, one vote” principle and I would like to have much more democratic influence on the European government bodies. The European Parliament is unfortunately a toothless tiger with too litle power.

The European Commission consists of too many (weak) politicians that are often appointed as a favor for their glorious past, not for their brilliant future. Or they are chosen, because they offend nobody with their personality.

One of the focal points of Cameron’s speech was the announcement of a national referendum on the British membership of the EU, to be held somewhere in 2017. A referendum ‘answering a simple question: Will the UK be in or out the European Union?!’

Last Wednesday, my advice to Cameron was: "if you want a referendum, be a man about it and do it at the shortest possible notice."

With this announcement, Cameron opened nothing less than a box of Pandora in The Netherlands. 

In the Dutch talkshow “Pauw en Witteman”, the fraction leader in parliament of the liberal-conservative VVD, MP Halbe Zijlstra, made something like the following statement: “a referendum on the membership of the EU?! No way, José… We tried that once in 2005 on the European Constitution and that turned into a disaster. We are not going to get burned twice”

Also the current chairman of the Euro-group, Finance Minister Jeroen Dijsselbloem, replied that he didn’t like the idea of a referendum: “It won’t help us to move on”. So far for Dutch bravery…

However, that was of course not the end of the subject ‘referendum’. The more Dutch politicians try to ignore such a referendum – like a true elephant in the room -  the more people start to like the idea of it.

Today, besides the ‘usual suspects’, like politicians from far left and right and  columnists in the national newspapers, a group of high-profile professors was asking for such a referendum in The Netherlands. 

This group, featuring well-known pundits like Ewald Engelen, Thierry Baudet and Paul Cliteur, did so through an Op-Ed in the Dutch daily newspaper NRC. Here are the most important snips of this request for a Dutch referendum:

Our democratic, basic rights  are the product of centuries of contestation and mobilisation. On a national level this resulted in collective decision-making capabilities, which are funded in the constitutional state. These capabilities can count on democratic legitimacy among the Dutch people. This legitimacy lacks at a European level and will not be developed there, due to the irreconcilable differences in language, history and culture.

The result is that European integration will always be an elitist, technocratical project that can count on little enthusiasm among the population. If it just would be intergovernmental coordination – free trade, based on recognized rule – this would lead to little problems. However, due to the open borders, the rules for harmonization and the disastrous Euro-experiment, we are irrevocably forced into a political union. The path of ‘federalisation’ that Barroso and Van Rompuy pointed out last year, leaves little room for discussion.

We think that this federal path is undesirable and unusable, even dangerous. Our main complaint, however, is that it only should be chosen after a consultation of the Dutch citizens, due to the large consequences of such a decision for their future. How do the Dutch citizens look at the future of their own country. Do they want to lose their democratic influence and be assimilated by a European state, which denies us the possibility to take the fundamental decisions on our own future?.

If you believe these professors and pundits, the leaders of the European Union are like the Borg in Star Trek: they assimilate people and rob them from their most fundamental democratic rights. This sounds like a classical case of fearmongering.

The differences in language, history and culture between the European people are “irreconcilable”. Yeah right, if you look at things through such a lense, then:
  • People in Canada, the United States, Australia and New-Zealand could never have lived together, due to the irreconcilable differences, as they didn’t share the same language and culture and hardly the same history.
  • East- and West-Germany could have never reunited again, due to irreconcilable cultural differences. Just like North- and South Korea can never reunite in the hopefully not to distant future.
  • People from other countries could never live in a new country within Europe for the same reasons. 
I call this a nimby-culture (not in my backyard) from a flock of notorious scaredy-cats. Wake up and smell the coffee, guys.

The truth is that a generation is growing up and raising children within the Schengen-countries, that has never known the concept ‘borders’ in Europe. Their children never had other money than the Euro.

The Netherlands is a country so full of different people from different cultures, that children and youngsters would be confused when everybody would become lilly-white and only from Dutch parentage again!

So, to the scaredy-cat, fearmongering professors, I would say:

“Have the confidence that the European Union is a good concept; one that brought us peace and prosperity, friendship and even love with people all over Europe, in spite of its current undemocratic governance and its obvious flaws.

Accept that we are in a pessimistic time currently, with much negativism, mass lay-offs, high unemployment and people that are increasingly turning away from other countries and cultures, towards their own home-town and white-pickett fence. This is a time with soaring nationalism everywhere. A time in which people from other countries and cultures might seem scary and the thought of making friends in other countries may seem further away than ever.

Also accept that this will change again, when the social mood is improving and people regain more confidence in themselves and others. This social mood and economic crisis is a pendulum swing and it will swing the other way around in a number of years again. Don’t throw away what is good about the EU, but fight instead for what should be better in it”.

And to the scaredy-cat Dutch politicians:

“Bring up the darn referendum. You know that these professors are right, that the future of our country is decided within the future course of the EU. People have the right to decide on that themselves.

Trust the Dutch citizens in voting wisely. Don’t be so arrogant and self-fulfilled to think you know better what is best for the Dutch citizens than these citizens themselves. Don’t be afraid that they make the wrong decision on the European Union. 

But don’t wait too long with starting to lead the European Union on a real democratic basis in the future: one man one vote and much more direct influence for the European citizens. The people are worth it!

Personally, I don’t want to be governed by a bunch of mediocre European Commissioners, who were themselves chosen by a bunch of mediocre, national politicians from 27 countries. People, like PM Mark Rutte that don't know the meaning of the word "vision" and that think that political / economic panoramas for the future are something bad. 

People that did a history study, but mentally flunked at it, because they didn't understand one syllable of what they learned.

I want to choose really talented and dedicated people on the most important positions in Europe myself. I want to choose visionaries and emphatic people that I can be proud of. I am intelligent enough to do so. 

And if the Dutch and other European people will choose to leave the European Union after all, this will bring clarity in our political position too. Then you don’t have to beat about the bush anymore.”

Anyway, the EU will have my vote, in spite of its adolescent flaws and its current, undemocratic leadership. I believe in a prosperous future for Europe and its citizens…

Friday, 25 January 2013

State Secretary Frans Weekers for Tax Affairs: “The Netherlands a tax-haven? I’m not going to do much about it!”

I have a riddle for you. Which country doesn’t belong among the following countries?
  • The Cayman Islands;
  • Bermuda;
  • Mauritius;
  • The Netherlands; 
The answer is… none. This is a list of (in)famous tax havens and The Netherlands is a very much appreciated member of this list.

The Netherlands is famous as a tax-haven among high-profile companies and people. The following entities have reputedly been using The Netherlands as a tax haven:
  • international companies like Google, Amazon and Starbucks;
  • famous pop-groups like The Rolling Stones and U2;
  • captains of industry, like CEO/Owner Alexandre Soares dos Santos of the Portuguese investment company Jeronimo Martins, which owns the Pingo Doce supermarkets chain in Portugal;
  • VIP’s like Mitt Romney, the former candidate for the US presidency;
These rich and influential companies and people appreciate The Netherlands for the close-to-zero rates that have to be paid for taxes like:
  • Corporate taxes on the revenues of foreign subsidiaries;
  • Capital growth taxes;
  • Withholding taxes on foreign dividends and royalty earnings;
Those companies and people all make usage of Dutch letterbox-companies to collect foreign sales yields and income, dividends and royalties.

By letting these kinds of foreign revenues/income flow through such a Dutch letterbox firm, these entities may use a special loophole in the Dutch tax-laws. This so-called participation dispensation allows companies to pay only a token percentage of (maximum) 5% taxes on their foreign earnings, while the foreign subsidiaries don't have to pay corporate taxes in their host country.

For pop groups, like U2 and The Rolling Stones, the tax rate is even lower. According to an article in the Dutch newspaper Trouw, these groups earned combinedly €331 million in 2005, over which they paid a staggering 1.6% in taxes.

By the way, The Rolling Stones frantically denied using The Netherlands for tax avoidance purposes and even threatened the KRO (, a Dutch TV-station, with a subpoena for slander on this subject.

Nevertheless, The Netherlands is a tax-haven that is used by many VIP’s and many companies in the Fortune 500 for legal tax-avoidance. Please read my earlier articles for more details on this subject, through the aforementioned links. You can also use my search engine in the top of my blog.

Today, January 24, the Dutch Second Chamber of parliament debated over “The Netherlands as a tax-haven” with the State Secretary for Tax Affairs Frans Weekers.

Summarized, the opinion of the state secretary and a majority in Dutch parliament was: “The Netherlands being a tax-haven is not our problem. It supplies us with decent money and lots of highly-qualified legal jobs. Ergo, we go through the motions, but we are not going to do much about it…”

Here are the pertinent snips from today’s article in Het Financieele Dagblad:

State Secretary Frans Weekers for Tax Affairs is willing to apply more stringent audits on private limiteds that make usage of Dutch tax-treaties.

Before acting, however, Weekers first awaits the results of an investigation by the Holland Financial Centre (HFC) into the interests of the about 23,500 special financial institutions (bfi’s), that Dutch and foreign companies use to transfer money flows through The Netherlands.

Weekers made this commitment yesterday in a debate with the Second Chamber over tax-treaties and the possibilities that the earlier mentioned bfi’s offer to legally avoid taxes via The Netherlands. He expects that the HFC’s report offers him better judgment in instructing the Dutch internal revenue service, about the kind of bfi’s that especially enable tax avoidance.

Weekers emphasized that he didn’t want to deteriorate the Dutch fiscal climate, by carrying through stricter demands, concerning the added value of these ‘letterbox firms’. ’This would endanger current and future investments and employment’, according to the VVD-official.

The Dutch network of tax-treaties enables it to forward money flows against a (near-) zero tax rate to countries that hardly charge corporate taxes. Especially developing countries have been financially harmed through this policy.

Weekers defends the Dutch fiscal policy with the argument that international companies profit from differences in national tax-laws between different countries. As long as a means of financing is considered an equity in one country and a liability in another country, companies could use this lacuna.

And boy, do foreign companies use this lacuna. Last Wednesday, the FD printed an article on French firms that use The Netherlands as a tax-haven.

Many French companies – also companies in which the French state owns a large stake – are establishing financial holding companies in The Netherlands for fiscal reasons. The usage of Dutch holdings by French companies is increasing, according to an investigation by the FD.

Recently, the energy companies EDF and GDF Suez, defense giant Thales and water-supply company Veolia established financial holdings in The Netherlands. The French state owns a considerable stake in all four companies. In case of EDF, this stake is even 84%.

The tax-avoidance by French state-companies is peculiar: recently, movie-star Gérard Depardieu and famous entrepreneur Bernard Arnault caused a scandal by planning to leave France in favor of a foreign country with a more favorable tax-rate. PM Jean-Marc Ayrault and other ministers were furiously criticizing these ‘traitors’.

However, now it becomes clear that the French State itself profits from fiscally favorable arrangements abroad. ‘We are totally hypocrite’, according to French senator Eric Boquet (Partie Communiste) in a reaction to the FD investigation. Boquet led an investigation by the French senate into fiscal optimization and tax-havens.

Twenty large French companies (sales revenues north of €2 bln) have established one or more financial holdings in The Netherlands [data from the FD investigation – EL]. Among these twenty companies, there are former state-companies, but also companies in which the state took a strategic interest.

It is not clear how large the tax-benefit in The Netherlands is for the French companies. The consolidated annual account of these companies does not disclose how much profits are transfered via The Netherlands. Dividends coming from Polish subsidiaries, for instance, have a tax exemption of 100% in The Netherlands, while France charges 5% in taxes.

Also the Dutch newspaper De Volkskrant ( carried out an investigation into the subject of The Netherlands as a tax-haven. Here are the pertinent snips of this investigation:

Since 2005, the largest multinationals in the world established litterally hundreds of new fiscal constructs in The Netherlands. This was disclosed by an investigation of De Volkskrant into the annual reports of the hundred largest, worldwide-operating companies and their Dutch subsidiaries.

In 2011, these multinationals transfered at least €57 bln into and out of The Netherlands, without paying much taxes. Google, IBM and ENI transfered the most amounts through The Netherlands. The investigation disclosed that the Dutch tax-pressure on these letterbox-firms is very opaque, but very low anyway. These companies have made confidential agreements with the Dutch internal revenue service – the so-called tax rulings – and paid between 0 and 5% of taxes over the money they transfered into and out of The Netherlands.

For these transactions the companies used about thousand letterbox firms, recently established in The Netherlands. On top of that, the companies like Google, Microsoft, Gazprom and Wal-mart used a wide array of Dutch fiscal constructs to reduce their tax-pressure.

The yields for The Netherlands are relatively low, when compared to the money flows themselves. An estimated thousand people work in and around the fiscal industry and the estimated yields for our country amount to €1 bln.

It seems to me that with thousand persons, the Volkskrant’s estimate of the number of workers in the fiscal industry is quite low, although I can’t challenge the number. Still, even if the number would be 300% higher, this industry would not be a very large driver for jobs. Nevertheless, The Netherlands thinks this is a lucrative source of income and employment.

I have a different description for it: receiving of ‘stolen’ goods. Most of these fiscal constructs are legal tax-avoidance and only some could perhaps be considered as illegal tax evasion.

So, from a fiscal / legal point-of-view everything is hunky dory. However, from a MORAL point of view, this is legal robbery.

Many countries – and not only the developing countries – need their tax-income to pay for:

  • Central and local governments;
  • Keeping the economy and employment in good shape;
  • Development of business, housing and recreational areas and  environmental protection;
  • Development of transport, ict and energy infrastructures;
  • A national health (insurance) infrastructure;
  • Unemployment benefit and welfare for people that are not so lucky;
Through the Dutch tax-arrangements, these countries are now deprived of this very necessary tax income and earn much less income than they should earn from a moral point-of-view. The VIP's and companies involved in these tax-schemes profit from the infrastructure and utilities of their host-countries, but refuse to pay their fair share of taxes to these countries.

And then there is one more thing: Joe-the-Plummer, Jan Modaal or Otto Normalverbraucher (i.e. the average middle-class person in a country) sees/hears that large and powerful companies and VIP’s avoid / evade taxes through tax-havens, like The Netherlands.

Then he thinks: “when I forget to pay my income taxes and social security, I am hunted down like a wild animal. But look at them! Why should I pay my taxes anyway?! It’s not fair!” I won’t argue with Joe the Plummer in this situation.

When the Dutch government would make a gargantuous profit on these tax-deals, I would think: “at least somebody profits from it”. However, the Dutch state earns a token income of €1 bln for their strains (compared to the hundreds of billions of Euro’s and Dollars in transfered money) and the tax-industry offers only work to one thousand fiscalists and legal attorneys.

That is nothing compared to the amount of jobs that Small and Medium Enterprise companies supply. Companies that pay much more taxes. 

In the process, the Dutch could be seen by other countries as swindlers and brokers that deprive them of their fair income. That is not illegal, but it is wrong!