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Tuesday, 7 June 2011

An SMS from Ernst (9): Short Messages Service

Old, but still not forgotten. The SMS is back at, because Ernst’s short messages service is everywhere where the news is. Today’s short messages are mainly concerning the banking world. Because we love the guys that keep our savings’ money and spend our taxpayer’s money.
The bonus boys: revenge of the EU
The following article was printed in Z24 (, an economic online newspaper in The Netherlands. The pertinent snips are translated to English by ‘yours truly’ and my comments are added below:
Ghost shares Rabobank because of executive bonus (link in Dutch)New rules for banker’s bonuses make it hard for the cooperative Dutch bank Rabobank. It should create a kind of ghost shares for the remuneration of the senior executives. 
In the aftermath of the credit crisis, the rules for the banker’s bonuses are tightened. European rules now prescribe that bonuses should be paid out for at least 50% in shares.This is to prevent that bankers take extreme risk to gain large sums in cash, without feeling the pain when transactions go wrong at the bank. 
For cooperative banks, like Rabobank, the new rules create a problem. Rabobank is not listed at a stock exchange and it only publishes member certificates. Supervisor ‘De Nederlandsche Bank’ (DNB; Dutch National Bank) states to the Dutch financial newspaper ‘Het Financieele Dagblad’ (, that this does not matter. “The provision about the payment in financial instruments is there for all companies, regardless whether they have a stock exchange listing or not”. 
Rabobank is not pleased about that. The senior executives have received their bonuses in cash, until now. “But DNB wants that Rabobank designs virtual stocks, only meant to pay a share of the bonus in paper, instead of cash”, according to Commisioner Arnold Walravens of Rabobank. The value of the virtual shares should be coupled to (for instance) the exchange rate of the subordinated bonds of Rabobank. Also ABN AMRO, that is currently stateowned, should have to work with virtual stocks when senior executives receive bonuses, according to the Financieele Dagblad. 
It is just me, or is this really only an issue in the strange and funny world that we lovingly call “the banking industry”. There is almost no Dutch citizen that thinks it’s a brilliant idea to restart paying bonuses in the banking world. The only ones I can think of are the bankers themselves.
The Dutch banking industry is hardly walking on two legs again and it still has the millstone, called “Sovereign bonds” around the neck, for which the Dutch taxpayers have to foot the bill eventually. 

And now these banks are whining to the financial newspapers that they can’t pay their beloved bonuses “without creating ghost shares”?! Please, do me a favor…
The following article was printed in the Financieele Dagblad (, about the sale of ING Direct USA. A sale that seems a little bit smelly…
General Electric and Capital One are offering for ING Direct USA (link in Dutch)General Electric and Capital One Financial made an offer on ING Direct USA, the American subsidiary of ING Bank Nederland NV. This is stated by Bloomberg, based on anonymous sources. 
The offer of GE would be totally in cash, while CO would pay in shares partially. The sale of the bank should yield an estimated $9 bln and should be concluded within this month. This morning on the Amsterdam Exchange, the exchange rate of ING increased by 2.0%.
ING Direct USA is the largest internet bank of the United States. According to the sources, also Ally Financial, CIT Group and SJB National Bank had talks with ING on purchasing ING Direct USA.

I wrote on April 5th about this intended sale of ING Direct: ING is now supporting forced sale of ING Direct.
Oops, ING Bank sells ING Direct USA to an American financial organization for a “token price” of about $10-12 bln (I’m not very optimistic) and in exchange the Dutch taxpayer receives enduring exposure to a portfolio of $16 bln in Alt-A mortgages, with a probable mark-to-market value of $8.5 bln?

Bartender?! Can I skip this round of drinks? I suddenly had enough.
Let’s cut to the chase: I understand from the European Commission that they force ING to sell ING Direct USA. And being in the shoes of ING, I would even be glad about it, as the obligation to invest the American savers’ money in American mortgages is like a kind of poison pill.
But I don’t understand why ING and the Dutch state didn’t leave the whole portfolio of Alt-A mortgages in ING Direct and charged the buyer an extra $5 bln for it on top of the price of $10-12 bln. In that case the buyer of ING Direct USA would have a fair chance of making money on these mortgages and ING and the Dutch state would be freed from this millstone.
Now it seems that the Dutch taxpayer ended holding the baby!
It looks like that I was still overly optimistic with my ‘token’ price of $10-12 bln. Now it seems that ING bank is settling for $9 bln. To let you understand what is going on, I will print one more quote of the aforementioned article:
At this moment ING  is very busy with the sale. The first rumors spoke of expected proceeds of $10 bln, but according to the calculation of J.P. Morgan Cazenove this is very little, as the buyer receives already $8.9 bln in cash
Why ING Bank NV would sell ING Direct USA for a real token price of $100mln ($9bln -/- $8.9)? And why, in case of Capital One would ING Bank accept (f.i.) $4.5 bln in shares to only make a lousy $100mln profit on this deal. Reading this, I assume that someone knows more than I do. The only explanation would be that legal action is currently threatening ING Direct. Please, let me know if someone has heard something about this.
At one topic of this ongoing sale, I was not too optimistic. It seem indeed to be the Dutch taxpayers that end holding the baby for the $16 bln of Alt-A mortgages that were stashed in ING Direct. I think we will hear more of this story in the coming weeks.
That it ain’t over ‘til the fat lady sings, can be seen in the next article from the FD (
Barclays should pay more than $1bln to receiver Lehman Brothers. (link in Dutch)The British bank Barclays should return $1.2bln in assets to the receiver that handles the bankruptcy of Lehman Brothers.
This was decided by the judge of the court hearing the bankruptcy in New York.
Barclays took over the stock trading division of Lehman after the bankruptcy in 2008. Assets of the American bank were subsequently used as collateral in stock trading. Last year, however, the receiver demanded billions of dollars back from Barclays, as this bank would not have been honest on a discount they negotiated while purchasing the stock trading division from Lehman. 
Barclays should now return $2bln in ‘margin assets’ and $270 mln in back interest. The $1.1bln in assets that both parties agreed before to transfer to Barclays, will be settled with these amounts.Barclays has announced to lay an appeal against this decision.
Sounds a bit like smelly bargaining by Barclays in the aftermath of the Lehman bankruptcy.
That the reaction to news sometimes can be puzzling, is shown perfectly in the following article from the FD: 
Exchange rate Ahold falls over after higher than expected profits. (link in Dutch)
The large Dutch super market group Ahold booked a net profit of €291mln in Q1, an increase of 6.2%. In spite of this higher than expected profit, the exchange rate dropped this morning.
Ahold announced the Q1 results before opening of the exchange. CEO of Ahold, Dick Boer spoke in the press conference on the Q1 results of ‘a solid achievement with volume growth in all markets’.
The net profit of €291 was higher than analysts expected. Rabobank analyst Patrick Roquas expected a net profit of €272. He is satisfied with the results, but sees the operations in The Netherlands bottom out with an equal turnover and a lower margin than Q1, 2010. According to Ahold, this was caused by inflation that could not be totally recharged to the customer in The Netherlands.

The total turnover of the supermarket group increased by 5.9% to €9.25bln, especially due to volume growth, according to Ahold. For the whole company this margin was 4.9%, a little lower than the 5% of last year.
In the US, where Ahold is active with the chains Stop&Shop, Giant Landover and Giant Carlisle, the identical turnover increased to 3.2%. Analysts spoke of a ‘surprisingly good result’. Ahold took advantage of a better moment for the Easter sales. The margin increased to 4.6%, from 4.4% last year. Ahold doesn’t offer a forecast for the rest of 2011
It is hardly surprising, that exchange rates for a distinct stock can drop after ‘better than expected news’. Todd Harrison of Minyanville ( always states: the reaction to the news is more important than the news itself”. If you look at the exchange rates of Ahold today, this statement of Todd makes much sense.

A few weeks ago I wrote the article “Seven reasons why stocks in general do…” about the (sometimes) strange reactions of exchange rates to news about a company. I will print a few pertinent snips of my article of May 5th:

       The table of expectationThe exchange rates of a stock at times of financial data (quarterly data, annual data) are influenced by what you could call “the table of expectation”:

Annual / quarterly results are
What does the stock price do?
Good and better than expected by analysts
Goes up (strongly)
Good, but worse than expected by analysts
Goes down
Exactly as expected by analysts
Remains stable / goes down slightly
Bad, but better than expected by analysts
Goes up (slightly)
Bad and worse than expected by analysts
Gets hammered

It is a fact that a lot of expectance is already priced into stocks and that commonly known news is no news: if a company achieves as expected, then nothing really changes as far as stock prices are concerned. Money can be made if you can predict deviations of a company in relation to analyst’s predictions.

What happens with Ahold today, seems even to be a variant on the first item in the “table of expectation”: although the results were good and better than expected by analysts, the stock gets hammered, because a few items in the presentation were not pleasing for the investors.

The Dutch results were quite dissatisfactory and the fact that Ahold doesn’t offer a forecast for the rest of 2011, makes the shareholders feel that there might be some corpses floating around at Ahold.

Mish ( wrote a zillion interesting articles on the definitions for inflation and deflation. I don’t want to burn my fingers on that subject, except for the fact that I agree with Mish’s definitions. Please read his articles on this subject, as these are absolute must-read’s.

For me, the fact that Ahold cannot recharge higher purchase prices for food products (‘inflation’) to the Dutch customers, is not an inflationary signal, but a deflationary signal from Dutch people: “if Ahold doesn’t keep its prices low, than we go to their competitors”. It it something to think about, if you think that the credit crisis is totally finished now.

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