Search This Blog

Wednesday, 31 October 2012

Oh Lord, would you buy me a brand-new bad bank?! Dutch SNS Bank cries: ‘me too!’

Oh Lord, would you buy me
A brand-new bad bank
My company has got much real estate
I have to make a hedge

The SNS Reaal NV (SR) Bank/Insurer group and especially its subsidiaries SNS Bank and SNS Property Finance passed a number of times in these columns during the last 1.5 years. In almost all cases, it was due to bad news on either the property portfolio or the whole financial situation of this bank, lying under heavy crossfire from both its investors and the Dutch government.

The problems of SNS Reaal are huge. The bank is sitting on a €4.8 bln (book-value) commercial/residential real estate portfolio in The Netherlands and other countries like Spain. The marked-to-market value of this portfolio has vaporized during the last ten years, as a consequence of the rising (structural) vacancy of CRE in The Netherlands and the disastrous real estate situation in Spain, where numerous real estate projects have been cancelled or remain vacant.

Although the bank was among the first to carry out serious write-offs to the tune of hundreds of millions of Euro’s on its CRE/RRE portfolio, the problems remained. This was caused by the simple fact that the investors just didn’t believe that the remaining real estate portfolio was healthy.

Another complicating factor is that both the Dutch government and the EU want redemption of the €848 mln in state-aid that the bank received during the Dutch banking crisis in 2008/2009. The bank should return this money before the end of 2013. Unfortunately, this is money that the bank can’t pay at the moment without getting an immediate shortage in liquidity.

The latest spasm of SNS Bank on their doubtful way to recovery is the plan to start a ‘bad bank’, that would be filled with the vast real estate portfolio of the bank.

SNS Bank hoped that the ‘big three’ banks in The Netherlands – ING Groep NV (INGA)Rabobank and ABN Amro – would buy a large share in this bad bank and asked DNB to investigate this possibility. After hearing from this plan by SNS Bank, the big three watched their feet and whistled a merry tune, only to mumble something about ‘being willing to consider the idea when a state warranty would be in place’.  And they were right.

This is of course a plan that will be watched Argus-eyed by investors, who have a 20/20 hindsight at the financial situation of Spanish mega-bank Bankia. Bankia SA (BKIA), a very large bank formed by mergers between a number of local banks (i.e. cajas), like Bancaja and Caja Madrid, turned into a financial black hole, ‘sucking up billions of Euro’s in private and government money’. In a way Bankia has also been set up as a bad bank and stating that this turned out not so good is an understatement.

The Dutch financial newspaper Het Financieele Dagblad ( wrote on the bad bank-plans of SNS Bank. Here are the pertinent snips:

SNS Reaal investigates the possibility to put its problematic real estate subsidiary Property Finance outside the company, in a so-called ‘bad bank’.

This is stated to ‘Het Financieele Dagblad’ by insiders of the bank. With the help of American merchant bank Goldman Sachs (GS), SNS Reaal is looking for possibilities to repay the €848 mln in state aid, which should happen before the end of 2013.

The remaining, huge losses at Real Estate-subsidiary Property Finance, restrain the bank in its possibilities to set the necessary repayment money free. Earlier, the news was spread that SNS had the plan to sell its insurance subsidiaries Reaal and ZwitserLeven (aka Swiss Life), but this sale doesn’t yield enough money to solve all financial problems of the bank.

If SNS Reaal would want to return the state aid later than 2013, it runs the risk of receiving a new penalty from the EU, as this would again be considered state aid. The sale of SNS Reaal’s insurance-subsidiaries is heavily frustrated by the grim perspective for the life-insurance market and the uncertain outcome of the so-called loan-shark policy claims (i.e. insured investment policies that charge so many annual expenses to the investors that very little money remains for real investments)

The foundation of a bad bank is far from easy. SNS Reaal should find investors that are willing to take the risk on its €4.8 bln real estate portfolio. The ‘big three’ ING, Rabobank and ABN Amro were approached cautiously by the Dutch national bank DNB, but reacted cooly at the offer of taking a share in the bad bank. They stated that ‘the potential losses of the portfolio are very uncertain. A solution could be that the government (partially) warrants the investments in this bad bank’. This solution lies very delicate for the Second Chamber of Dutch Parliament.

In the meantime the pressure on SNS Reaal is mounting, now the supervisors AFM [Authority Financial Markets] and DNB are urging all financial institutions to re-evaluate their real estate portfolios. A one-time only write-off would greatly exceed the financial elasticity of SNS.

Cautious readers will have read that the whole scheme for ‘privatizing the profits and socializing the losses’ is in place again. Of course the big three asked for a state warranty (red and bold text) for the investment in SNS’ bad bank. I myself would have… 

However, that doesn’t mean that the Dutch tax-payers should grant this warranty. The banks – all banks as a matter of fact – had a large stake in creating this big mess we are in currently and the only solution they can think of is to let the tax-payer be on the hook again, when investments go awry. The Second Chamber will probably not like the smell of this scheme and so do I.

You could of course accuse me of populism and ‘bashing the banks’. This is not true. I work at a large and well-respected Dutch bank and I am convinced that this bank is on its way to a better and more solid financial future. I hugely respect this bank for walking this path.

However, the foundation of a financial-black-hole-bad bank like the ‘SNS Real Estate bank’ is not in the interest of the Dutch tax-payer and should therefore not happen at all, or at least with private money only.

One more thing. SNS Reaal is probably not the only bank that gets a migraine headache from the mandatory re-evaluation of their Real Estate portfolio, as desired by the Authority Financial Markets and the Dutch national bank De Nederlandsche Bank. Also at the big three banks, the aspirines will be swallowed by the dozen, when they look at the marked-to-market value of their Commercial and Residential Real Estate portfolios. You better believe it.

Monday, 29 October 2012

Letter from a reader: the consequences of being under water with your mortgage and how to get out of it

Today, I received again a letter from a reader, Melissa, who is in a dire financial situation as a consequence of the changes at the Dutch housing and mortgage market. I print it here for the benefit of my readers.

Dear Ernst

I hope that you don't mind my contacting you directly.  I am in a terribly difficult situation, and I am trying to find some help and information in english, as to what I should do about my problems that I have.

I have just been reading your article on :Two reasons why the Dutch housing and mortgage market is critically ill. I was wondering if I may ask you for some personal advice?

My background and current information:

I have a house in holland, and I returned to the UK.  My house is in negative equity, so I cannot sell it (at least about Euro 50 - 60k).  I have let it to a company, who fill it with their staff.

Unfortunately, the rental income doesn't cover the monthly costs associated with the house, and due to my circumstances changing, I don't earn anywhere near what I earned as an expat in holland.  I have been trying so hard for the last 3 years to make-up the balance on the bond every month, but have got to the point of just not being able to anymore, as I have sunk all my savings into keeping the house/mortgage running, and now have to face the fact that I simply cannot afford to do this anymore.

I have been hoping that either the property market would pick up so that I could sell the house, or that the rental market would pick up, so that the rental income would cover the costs.  Obviously neither of these things have happened.

After reading your article, and thank-you for this, as I have been battling to try and find some information on this subject in english, I am contemplating, that I pay the bank what I can every month only.  And based on your article, you would recommend that I approach the bank directly and tell them up front about my situation, and ask for their understanding of this?

My concern about doing this, and the reason why I haven't done this so far, is that I worried that the bank sells the house for nothing, and then I spend the rest of my life with them hounding me for a massive amount of money, that I cannot possibly repay.  This may be out of your remit, but can they chase you for debt when you are out of the country?  I appreciate that I would be blacklisted in Holland, but as I am not planning ever to go back there, it's of little consequence.

You also mentioned something about tenants rights.  Does the fact that my house is let, mean that my house is somewhat protected from being sold by the bank?

Apologies for approaching you with my problems.  I am so desperate.  If you have any thoughts or advice, or an idea of where I can get some advice, it would be greatly appreciated.

Dear Melissa,

First, I'm sorry for the awkward situation you are in. You have it in common with many other people in The Netherlands, but that is hardly comforting.

I have mixed feelings about the fact that you're renting your house. Although it pays (part of) the bills, it could get you in trouble with your bank. I don't know if it is prohibited for you to rent the house under your personal mortgage conditions. My advice is to read your mortgage conditions very well and check if there are statements about renting the house or not.

On top of that it is a saddening conclusion, that even the firm that rents your house seems not able to pay your whole mortgage amount. If I read things well, the firm pays only a part of your mortgage.

This is a clear sign that you are bleeding money currently, together with your statement that it took all your savings to keep the house until now. Nobody wants you to get into dire straits. My advice: cut your losses and try to sell the house, even if it leaves you with a residual amount of €50,000 - €60,000. You abolish the uncertainty of not knowing what your house will yield in the future for the certainty of having a residual debt that won’t become higher anymore.

Therefore I would be open towards the bank. At this moment you could still make some agreements with the bank, as you are not in arrears yet. It is not in the bank's interest to foreclose the house, as a limited yield from an auction would leave them with a gap in their balance too. They might have some good ideas on what you could do to sell the house after all. They can also give you a clue about how they would handle the residual debt, as it is not in their interest that you can’t pay it anymore in the near future.

What I can't promise you unfortunately is that the housing market will improve very soon: simply because it probably won't for another 5-10 years.

And I also can't advice you to 'hit and run' with the residual debt: the world is turning into a global village and information exchange between internationally operating banks could mean that you could have a hard time in the future getting a mortgage in your own country.

Be fair and square to the bank and to yourself and realize that there is a mutual interest between you and the bank to make the residual debt as low as possible. 

Latest response by ‘Melissa’

My concern about selling [my house], is that in the same way as this would realise the loss for the bank, it would realise it for me too.  I can't be in a situation that I owe the bank Euro 60,000 and they are expecting to repay this?  And I presume that this would be re-evaluated as a personal loan, and they repayments would be extreme.

I understand your comment about letting the house, but without this, there would be no payment to the bank at all, so whilst in a perfect world, I would not let it out, the world is far from perfect right now.  To clarify, the company that rents it pays near enough the mortgage, and it is market related.  My problem is that I have other costs associated with the house that have to be paid too.  So it is costing me about Euro 500 a month, and I just cannot afford it.


I printed these letters, because they show you the flipside of being in a process of debt destruction. While necessary for the debt bubble to deflate and for the economy to become healthy again, it causes financial hardship for many people.

Especially people that went through a change in their personal / financial situation can suffer from the consequences of the sinking housing prices, when they should sell their house, but can’t due to the residual debt.

Unfortunately, there are no easy solutions in this case. Neither for politicians, nor for me. If politicians or special interest groups like NVM (realtors) or the VEH (homeowner association) promise you an easy way out, don’t believe them. Their ideas are often built on the quicksand of make believe: the makeable housing market.

The housing prices will drop as these have been too high during the last 15 years:

Maybe not too high, if you only look at the net interest amount to be paid after MID deduction.

Maybe not too high, if you look at the fact that people didn't pay for amortization of their mortgage.

However, housing prices were much too high for people and banks to feel comfortable in the end.

People and banks knew instinctively that their mortgage would become a timebomb when the interest rates would rise strongly and their mortgage interest rate had to be rolled over. People also knew that they had to pay for their house after all, when the mortgage would have matured and they saved too little money from their investments to pay the full mortgage amount. That is the situation that a lot of people are in currently. In 2007, the Dutch people decided that 'enough was enough' for rising housing prices.

Therefore, the only solution in my opinion, is to let the process of debt destruction do its work at the Dutch housing market. This process should be helped by abolishing the Mortgage Interest Deductability (MID), as this policy in combination with the artificially low interest rates of the last 15 years created this bubble in the first place. Then, when the demand for quality housing equals the available supply of good houses, prices will stabilize. However, that will be at a lower price level than currently.

Finally, if you are in an equal situation like Melissa and you want to talk with a specialized consultant on the topic of mortgages being underwater or debt restructuring, please get in touch with my friend Sophia van Scheindelen ((

I met Sophia and her partner during last year’s holiday in Spain. She is an intelligent and savvy woman with sensible ideas on the Dutch housing market, who knows that many things have gone wrong concerning mortgages during the period 1995 - 2007.

On top of that, she is specialized on the subject of debt restructuring for people with mortgages and loans gone awry. Get in touch with her; she might help you to find a way out of this misery.

And please do not forget that, while debt destruction is a very violent and ruthless process, the life after a period of debt destruction will become better again and will lead to new periods of prosperity. Keep the faith alive.

Thursday, 25 October 2012

New trend in The Netherlands: Trusted third parties show vulnerability when ‘nearly deceased’ financial institutions play for keeps

In the United States damage claims for millions (or even billions) of dollars and class action law suits against companies and private persons are common practice. In The Netherlands, however, damage claims above €1 mln, as a consequence of unlawful acts by companies and private persons are extremely rare.

The Netherlands has a non-jury administration of justice and civil cases can last for many years when both parties maintain their case until the bitter end (i.e. The Court of Justice of the EU or the Supreme Court in The Netherlands). For private citizens these kinds of cases prove almost always too expensive, as Dutch lawyers seldomly (i.e. never) work on a ‘no cure, no pay’ basis and few people can afford a lawyer’s bill of hundreds of thousands of Euro’s when winning a case is still uncertain.

In most legal cases between companies, the damage claim amount is almost never the true motivation for maintaining such a case: in The Netherlands it is the victory that counts, hardly the money. Only in extremely important cases between equally strong parties, where millions of euro’s are at stake with victory or defeat at the civil court, the battles are fought to the end.

If you keep this in mind, there were two very peculiar news messages in the media this Tuesday, October 23, 2012.

The first article in Het Financieele Dagblad ( was written about KPMG, the official auditor of  building cooperative ‘gone wild’ Vestia,  that suffered monstrous losses on its kamikaze investment of €23 bln in interest rate swaps.

According to the FD, KPMG, one of the Big Four auditors in the world (along with PwC, Deloitte and Ernst&Young), only wanted to approve Vestia's Annual Account for 2011, if Vestia abandoned its right to start a legal claim against KPMG-auditor Marco Noorlander, through a so-called Legal Safeguarding Clause. No clause, no approval of the annual account. Here are the pertinent snips from this explosive story:

Auditor KPMG demands an official promise from building cooperative Vestia, that it will not start a legal damage claim against KPMG auditor Marco Noorlander. Without this promise, KPMG refuses to approve the Annual account for 2011.  

This is stated by various sources close to the discussion. These sources are flabbergasted about this connection.

The current officials of the liquidity-strapped building cooperative Vestia consider starting a claim against KPMG, due to the fact that the auditor unjustly provided its approval on the annual account for 2010. KPMG withdrew this approval itself at the end of April 2012. Supposedly, because the auditor ‘doubted if all derivative transactions had been processed correctly in the 2010 annual account’. 

At the beginning of this year Vestia came in acute financial trouble, due to a staggering €23 bln derivative portfolio.

Already two cases have been started against KPMG auditor Marco Noorlander at the Auditor’s Chamber [a special auditor’s court for disciplinary jurisdiction, based on the Law for Disciplinary Jurisdication for Auditors (i.e. Wtra in Dutch) - EL]. One is started by Pieter Lakeman, an (in)famous lawyer and chairman of the Foundation for Investigation of Company Information (SOBI); the other by the Dutch Authority Financial Markets (AFM).

Although KPMG, the official auditor of Vestia since May 2010, categorically denies to have demanded the legal safeguarding clause as a condition for its approval of Vestia Annual Account 2011, sources close to the matter state differently: ‘the legal safeguarding clause is subject of speech in combination with Annual Account 2011’.

If KPMG has indeed demanded this legal safeguarding clause as a condition for the approval of Vestia Annual Account 2011, this is not a sign of self-confidence, to say the least.

To put it in other, more direct words: this would be an (il)legal, unethical kind of blackmail operation against a customer that is in desperate need of this annual account to just merely survive. If these proceedings at KPMG could be proven beyond reasonable doubt at the Auditor's Chamber or in the national financial press, it would be another knock-out blow against a financial services business that already has received blow-after-blow during the last decade.

Since Arthur Andersen had to close down its auditing operation in the aftermath of the Enron business cataclysm, several nasty cases against the Big Four have been brought to the surface already: in The Netherlands as well as abroad. At this moment, you could state that the auditing industry suffers from an enormous credibility gap and this Vestia/KPMG case doesn’t help at all.

I personally expect the Vestia case to end in a nasty trench war between Vestia and its tenants versus Vestia’s former officials, the banks who sold Vestia the derivatives (DB, BNP Paribas, Barclays and ABN Amro), KPMG and perhaps some other trusted third parties. This whole Vestia case might last as long as ten years to fully unfold and will probably be fought at the criminal as well as civil courts in The Netherlands. The final decision (whatever it might be) will probably send shockwaves through the Dutch legal society.

The second article has also been printed in Het Financieele Dagblad: the curator of Palm Invest, an investment fund seemingly set up with clear fraudulent intentions, has started a summary proceedings in the court of law against ABN Amro.

Palm Invest, an investment fund with the purpose of investing in Commercial Real Estate on the so-called Palm Islands in Dubai, had been started in 2006 by two rogue entrepreneurs.

The fund, with an investment threshold of €50,000 (just above the AFM threshold), had collected €30 mln in investments from wealthy, but naive investors, lured by promises of 9+% annual yields. 

Instead of investing all money in Dubai property, the founders spent no less than €26 mln on expensive cars (the usual Ferrari’s and Lamborghini’s), hotels, yachts and vintage watches, leaving just a ‘token’ €4 mln for the purchase of Dubai property. When the investors found out that Palm Invest had been a fraudulent hoax and their money was gone, a tumultuous hunt for the suspects followed: one of the suspects, together with an uninvolved business partner, had even been kidnapped by a group of fellow ‘business men’ who wanted to extort him.

The whole Palm Invest business blew skyhigh and now a curator is very busy trying to return as much of the original investments as possible. This is where ABN Amro comes in, according to yesterday’s article in FD:

The curator of defaulted investment fund Palm Invest demands, through a summary proceedings, documentation from the state bank. ABN Amro was the house banker of the dishonest investment fund.

The curator demands, among others, the starting contracts that ABN Amro had entered into with the founders of Palm Invest.  He also demands inspection of the customer file for Palm Invest and the due diligence investigation that ABN Amro would have performed into Palm Invest in 2007. ABN Amro refuses, without further explanation.

According to the last curator report, 397 bond-holders and 11 business creditors have a claim on Palm Invest to the tune of  €31,740,825. The curator earlier held ABN Amro liable and responsible for the damage done by the Ponzi fund.

The curator takes the view that ABN Amro violated its due diligence obligation. The ‘very peculiar’ money flow of Palm Invest (according to the curator), has unjustifiably remained unnoticed by the bank. After the bank concluded in a secret internal investigation in 2007 that ‘irregularities had been found’, it took another three months before the banking relation with Palm Invest had been dismantled. The curator demands the paper trail of this internal investigation.

Again a trusted third party – in this case a bank – fulfills an undesired role in a civil / criminal case that could lead to large legal and financial repercusions. Although the maximum amount of €31 mln in financial damage from Palm Invest can be considered ‘peanuts’ for the state bank, the consequences of this case could be grave.

This case could start or reinforce jurisprudence that takes customer research, like a due diligence investigation, to a much higher level and it could cause massive overdue maintenance operations on the customer bases of all banks in The Netherlands.

Besides that, regular readers from this blog know that ABN Amro is one of the four banks involved in the Vestia case that is currently under criminal investigation. Yet another ‘scandal’ could prove an enormous setback for this  tormented bank that is so much longing for an IPO (Initial Public Offering), in order to diminish the state involvement in the bank.

Summarized, the time that auditors and bankers were all considered to be ‘honorable men and women’ in The Netherlands, seems over foregood. Banks and auditors seem to have lost a substantial part of their credit (as in credibility) and this does not only lead to loss of trust by their customers and relations, but it can also lead to legal repercussions of the very nasty kind.

Let the banks and auditors be warned, when nearly deceased financial institutions play for keeps.

Monday, 22 October 2012

The battle pro or contra further political integration of the European Union has only just begun. EP-chairman Martin Schulz fires a warning shot at The Netherlands, accusing PM Mark Rutte of “blocking everything”.

In The Netherlands, the week of October 15 has been the week of Martin Schulz, the chairman of the European Parliament (EP).

German social-democrat Schulz, who had become president of the EP in January, led an existence as ‘nobody’ as far as the Dutch were concerned. Nobody had heard from him and nobody really cared about that. However, this changed on September 20 when Martin Schulz in his role of chairman of the EP, standing together with two Arab leaders,  apologized for the fact that many muslims had been hurt by the so-called anti-islam film The Innocence of Muslims.

Although not everybody in and outside the European Parliament was very happy with Schulz’ demeanour, to say the least, it put the chairman definitely on the map for many people.

For The Netherlands, there was a renewed acquaintance on Thursday, October 18, when Martin Schulz gave an interview to Dutch daily newspaper De Volkskrant ( In this interview he criticized the Dutch attitude of navel-gazing, instead of looking at the things going on in the world.  

Due to the importance and controversity of the statements made in this interview, I will print a substantial part of it.

The disdain in The Netherlands for the European  Parliament is the result of a narrow-minded look at the world. “The problem of the Dutch is that they suffer from navel-gazing. The own belly-button as center of the earth’. This was stated by chairman Martin Schulz of the European Parliament in an interview.

Schulz loves confrontation. He doesn’t care that he evokes resistance and repulsion. ‘At least the people are listening to me’.  When asked if the 26th crisis summit will lead to the desired breakthrough, he answers clearly: ‘there will again be no big bang. Why not? The government leaders, who took all decisive power in their own hands, have to decide based on unanimity, while they are hopelessly divided. I stated loud and clear to the leaders: you are the problem of Europe. PM Mark Rutte of The Netherlands was one of the few agreeing with me’.

Schulz: ‘It would be better for Europe if this week’s summit would be the last one and finally some decisions were made. This will not happen, however, many more meetings will be required. Without a 180 degree change in the decisionmaking process, these meetings are pointless. Last summer, the leaders promised a European plan for growth and jobs, were €120 bln would become available. Four months later I still wait for the first concrete proposals. In the meantime, the Dutch and German keep emphasizing the need of budgettary discipline and more austerity. You don’t need to have a chair in Economy to know that this strategy demolishes all growth.

When asked if the European leaders are performing crisis- or mismanagement Schulz states: ‘I want to be fair and square: they reside in the center of the crisis and try to manage it. However, the reality in Brussels is that Rutte and Merkel first think of their Dutch and German interests. I can’t even blame them. But there is also a common, European interest and that has been neglected during the last few years. The biggest mistake of the last years has been that the leaders exclusively decide the policy. Or to put it stronger: blocking policy with their national veto’s. Examples: there will be no eurobonds, the common financing of state debt, because there is no unanimity. There will be no remission fund for European debt, because Germany, The Netherlands and Finland – a small minority – don’t want that.

‘This proves my case: with unanimity the crisis can’t be solved. Can you imagine that the Dutch government can’t govern, because one minister is vetoing every policy?! The EU needs more power. It should be steered by a European Government, chosen by the European Parliament. This government could be sent home when their policy fails. As long as this doesn’t happen, we will muddle through the crisis’.

‘The United States have one market, one central bank, one currency, one parliament and one government. This is effective, the financial markets trust the US. The EU has one market, one currency, one central bank and SEVENTEEN governments. That is not effective.'

Schulz: ‘Why does not one member of the Second Chamber say to Rutte after 25 failed summits: “Why the heck are you blocking everything”. That is my point. If the Dutch think they are better off without the EU, fine. These are the consequences: your companies lose access to the world markets; your criticism against China and Brazil to stop deforestation will be neglected; your guilder with be blown to smithereens by speculators and you are on your own while looking for tax dodgers.’

I like Schulz’s style. He doesn’t beat about the bush and doesn’t try to become popular in The Netherlands. Although his demeanour in September may be entitled as a banana peel slip, he has a strong comeback with this interview.

He will step on a lot of people’s toes with his message that a seventeen government leadership doesn’t work in the Eurozone and that the government leaders are looking too selfishly at their own country’s interests, but he definitely has a point with that.

I totally agree with him that Rutte has been blocking everything in Europe during the last few years. I said it myself a few months ago in The Dogs bark, but the caravan moves on. As far as I’m concerned, PM Mark Rutte of The Netherlands and PM David Cameron of the UK are in a neck-on-neck race about who did the most damage to the European Union and eventually to themselves and their own countries. While it could make them ‘hometown heroes’ among many, many voters, because they ‘fought for the interests of their own countries’, in reality they have been shooting in their own two feet.

Readers of this blog might not like this thought, but ask yourself this question: How much chance do The Netherlands and the UK have as single economies in a world where the United States, China, Russia, India and Brazil rule and where is no EU to protect them from these larger economies. “Well, do you feel lucky?!”

However, this Saturday, 20 October, the savvy European correspondent of Het Financieele Dagblad, Ulko Jonker, wrote a must-read piece opposing the vision of Martin Schulz. In the interest of letting you look at things from both sides, here are some pertinent snips from this excellent article.

If we want to survive, than there is no alternative: more Europe. And so, for the first time in the 60-year history of the European cooperation, there is on the agenda that countries abolish sovereignty to the European Union.

‘Towards a genuine economic and monetary union’ is the shameless title of Herman van Rompuy’s proposal to repair the Euro. Twenty years after the Maastricht Treaty the fact is acknowledged that the then new, pompous name ‘European Union’ was nothing but a disguise for the same ole’ European Economic Community. Believe us, now we are really going to do it, this title states. This mantra is not only a repudiation of the success story that was repeated over and over again in all euro-countries until 2008, it is also a warning.

If the Economic and Monetary Union (EMU) of the last twenty years was not real, what more is not real about the European Union? Is the whole Europe not an illusion then?

As long as the nation state is the dominant governance model in the parts of the European Union, Europe will be an emperor without clothes, an attempt to make believe. The Euro was a brave attempt to rise to the occasion, to seal the European dream in the new reality of an ever closer union. Now we can start all over again.

As a consequence of a sequence of compromises, financial juggling and naivity, the EMU became a political triumph, but also a political monster. The inherent weakness of the EMU was not the concept, but the way that European politics turned it into an empty shell. Also Germany did so, when that was in their advantage.

The new reality is that the saving of the Euro and the Euro-zone is a condition to conquer the crisis: within the Euro-zone as well far outside. The question is if the United States of Europe are the answer to the technocratic and rational challenges, like the financial crisis, the globalisation of the economy and the question how 9 billion people can be offered a home and food.

Can the United States of Europe exist in a community that found her true enemy in the defenders of the nation state, that have been sent to Brussels by their voters to defend their sovereignty and own interest against the federal enemy. Schulz is theoretically right when he states that Europe should have one government to solve its problems. However, he is believing in fiction when he states that only the government leaders are stopping Europe in its final destiny. Referendums in France and The Netherlands, in North- and South-Europe already made a radical end to the dream of a federal Europe, when even the first steps towards this direction were blocked.

Europe, as a warrant and principle for food and a place to stay during the rest of the 21st centry is an existential concept. But the trust that is necessary for making the definitive choice between a European Community of Nations and the real European Union, must be regained step for step, as it won’t succeed with visions and illusions. The European dream is over, the long march has started.

This was without a doubt the best article that I read from Ulko Jonker and therefore I printed a large part of it. Undoubtedly he is right with most things he states in this article.

However, there is one thing that I disagree upon with him. The fact that The Netherlands abolished the European Constitution in 2005 was not an anti-European sentiment as such in my arrogant opion, but rather a protest against a Dutch government that treated the European unification with the self-evidence of a steam-roller that rolled ever countering voice flat.

There was no room for a fair debate on the necessity of this European Constitution. The only parties against it were on the extreme left and extreme right side of the political spectrum: the contaminated sides. The opinion of The Hague was: there is the yes-vote and the wrong vote. The results of this steam-roller attitude are now history. The Netherlands voted against the European Constitution and started a growing anti-European attitude since those days.

What makes things difficult for me on a personal level is that I agree very much with both Schulz and Jonker. Schulz for acknowledging the fact that there is no other option than a further unification of the EU to get the Euro and the Euro-zone safely through this economic crisis. Jonker for pointing out that it are not only the leaders of the Eurozone countries that are stopping this unification process, but also the citizens of the different European countries.

That is the strength and at the same time weakness of a democracy: you have to listen to the people that you don’t agree with. This is something that both the European nation leaders, the European commission and the European leadership failed to do. The price for this failure might be high in due course when the whole Euro-zone would sail in the mud. 

Thursday, 18 October 2012

Will the Mother of the ‘Mother of All EU Summits’ finally decide something about the social-economic future of the EU and the Euro-zone?! Chief Commissioner Jose Manuel Barroso doesn’t seem too optimistic about the expected result. So am I!

Today, on October 18, 2012, is the day that yet another decisive summit starts on the future of the Euro-zone. Although this summit is very important of course, it seems that all elephants in the room (i.e. Spain and Greece) are cautiously left out of the official agenda.

Instead of ‘Don’t mention the war’, the creed of this summit could have been ‘Don’t mention Spain and Greece’. This statement led to the savvy Dutch economic journalist Hella Hueck heaving a sigh: ‘what the hell these guys will be talking about then?!”. She wrote a must-read column in Dutch on the summit (please use the Google translate service).

Here is a translated snip:

My experience with these kind of summits? After a meeting running for hours, well past midnight, you receive a two page document with vague agreements that every government leader can explain in his advantage before his national press. It’s much more interesting to look at the topics the government leaders didn’t agree upon and which subsequently will be decaying further.

I’m afraid that Hella is totally right with this statement. In her column she mentions five other elephants in the room that won't be discussed during this summit.

In the meantime in Brussels:
  • Dutch PM Mark Rutte has been planning to make minced meat of Herman van Rompuy’s proposal for a more politically integrated union with an integral Euro-zone Budget and to say ‘nyet’ as often of possible without running the risk of being kicked out of the Justus Lipsius building.
  • PM David Cameron of the UK is softly humming the tune ‘Should I stay or should I go”, concerning the British membership of the EU. A lot of countrymen would not mind if he chooses the latter.
  • Chancellor Merkel finds it officially a good idea that representatives of the EU assess the state budgets of the individual member-states, but thinks silently: ”Everybody should understand that this is only about the State Budgets of the PIIGS, Eastern Europe, France and Belgium. The first SOB that has remarks upon the German State Budget will be thrown off the Bundestag (German parliament)”.
  • PM Antonis Samaras of Greece and PM Mariano Rajoy of Spain simultaneously think: ‘Don’t mention the troika, don’t mention the troika, don’t mention…’.
  • President François Hollande of France thinks: ‘Why did I have the big mouth to tell that the Euro-zone crisis would soon be over. What was I thinking when I stated it. Now the people are expecting something from me. And I can’t deliver anything, can I?!’
  • Herman van Rompuy sobs: ‘Why do I not have the charisma of Tony Blair, the eloquence of Barack Obama and the looks of Ashton Kutcher. Nobody likes me really and nobody wants to endorse my ideas when push comes to shove. Still, I am right about it and the ideas I presented are really great ideas. Sh*t, I hate my job’.

Of course these are (bad) jokes, but they do reflect the positions that the various protagonists in this summit are in currently. With this in mind, the hopes for an agreement with muscles are very, very slim.

Jose Manuel Barroso, the uncharismatic chairman of the European Commission was very well aware of this problem. In a speech held hours before the official start, he spoke upon his hopes for this summit. Here is the larger part of his speech:

Let me start by saying that I believe we had today a very good, open and dense exchange between the social partners and also the representatives of the European institutions. I think it is critically important at this moment to have this kind of serious, open exchanges.

But let me also address a message to those in Europe that are hit hardest by the current crisis. We are perfectly aware of the very difficult situation in which many of our fellow citizens face themselves. And I want to say to all those who are experiencing hardship from the current crisis that the European Commission is making every effort, together with our Member States and social partners, to move Europe back on the path to growth and jobs. We are working to provide them with hope and perspective
[…]  we can say that we all agree on the need to come back to sustainable growth and jobs, to more competitiveness but also more social cohesion in Europe.

[…] we have to be clear that there is no easy way out of this crisis. We need the right mix of differentiated fiscal consolidation, structural reforms for more growth and
competitiveness, and targeted investment. And of course we need a comprehensive solution for the financial instability in the Euro zone, because without this solution we will not have the confidence that is so critically important for investment and for growth.
Clearly, this will require increased efforts from Member States to take decisive and immediate action.

I want to thank president Van Rompuy for putting at the centre of this European Council precisely not only new measures, but to see in which way we are or we are not implementing the measures agreed before. Implementation is key and I believe an additional sense of urgency is necessary when it comes to growth.

Very frankly I am not happy with the progress made so far. That's why I call on the European Council to accelerate the adoption and implementation of many important growth-enhancing measures included in the Growth and Jobs Compact. It is true that we have been making more efforts in terms of fiscal consolidation than on the measures for growth that were already agreed at the European Council level. We need to balance the important efforts made in terms of sound public finances with the right measures to have growth enhancing policies.

We also need to move ahead with our structural reform agenda – the country-specific recommendations have to be implemented at national level. In a few weeks' time already, the Commission will launch the next European Semester for economic policy coordination, outlining the reform priorities for 2013 in our Annual Growth Survey and we are associating the social partners for that exercise.

Finally, targeted investment at European level needs to be made in areas with a high potential for growth and jobs. This is precisely also the main purpose of the future European budget between 2014-2020. Unfortunately we see little willingness on some of our governments to ensure appropriate funding for key instruments to help to bolster the negative social impact of the crisis. And I want to make this clear – I believe that proper funding for the European Social Fund, the European Globalisation Adjustment Fund or aid for deprived persons (for which we will present a new programme next week) is very important. There are some of our citizens in Europe that are in a very difficult and emergency situation.
To conclude: today and tomorrow, EU leaders will once again have the important task to show that they are serious about their commitments and about the implementation of those commitments.

I sincerely hope that the European Council will give a strong political impetus in this regard and I believe today's meeting with the social partners was for us, for me it was certainly, a way of bringing this sense of urgency to all the Heads of State or Government. The message that we are receiving from trade unions, but also from businesses, namely SMEs, is the need to work more with a better focus on the way to promote sustainable growth and jobs at European level.

This is truly a good speech and Barroso addresses the problems correctly: during the last two years the Euro-zone and EU have mainly spoken on the fiscal aspects of the crisis, but merely failed to address the economic side-effects of the current crisis and the devastating consequences it had for the social cohesion in the South-European countries. 

These side-effects are huge and will be huge for the coming years, still they aren't addressed properly.

Unfortunately, this is only a speech and unfortunately it comes from someone with the same image-problem as Herman van Rompuy: too little charismatic and decisive to be taken seriously by the European leaders. This is exactly the reason that people like Van Rompuy and Barroso get these kind of jobs.  They are not posing a threat to anybody and let the government leaders do their thing without serious protest. Could you imagine someone like Churchill in the role of chief of the European Council? Exactly!

Therefore I am very pessimistic on the outcome of this summit. It will be the same ole’ same ole’ that it has been before during the many previous summits. All government leaders will bragg on the important results that have been reached during the summit, but the true outcome will be dead on arrival.

Wednesday, 17 October 2012

State bank ABN Amro should be sold ‘at all costs’, according to Z24, as ‘state banks usually suffer from low performance’. The newspaper is right indeed, but for different reasons!

Today, the online Dutch economic newspaper Z24 wrote in an article that ABN Amro, the Dutch state bank should be sold 'at all costs'; even if this meant a loss for the state.  Their argumentation was that a state bank in general performed worse than a privately owned bank. I happen to agree with Z24, but not for their reasons.

Here are the pertinent snips from the Z24-article:

State banks often perform bad. That is the reason that ABN Amro should be sold as soon as possible, in spite of a possible loss. This is stated by Harry Huizinga, professor International Economy at the Tilburg University.

Extensive research has been done into state banks, according to Huizinga. This research disclosed that statebanks:
  • have lower efficiency than private banks;
  • have to book more depreciations on bad loans;
  • have to make a higher interest margin at the expense of their customers.
On a macro-level statebanks give rise to lower economic growth and badly developed financial markets.

There is a bright spot, however: state banks bring more stability in times of crises. They keep the brake on loans in good times, but are less afraid to lend in bad times. However, there are better means of stabilizing the economy, like a monetary policy for interest rate reduction in bad times and rising capital buffers for banks in good times.

Former Finance Minister Wouter Bos paid €16.8 bln for the Dutch parts of ABN Amro and Fortis in October 2008 and spent another €6 bln on reorganizations within the bankparts (i.e. ABN Amro and Fortis Bank) and insurance company (i.e. Fortis Insurance, currently called ASR).

CEO Gerrit Zalm of ABN Amro stated recently that a future IPO remains the best option for the nationalized bank. Huizinga agrees: as soon as the stock markets are stable, you have to sell ABN Amro.

I agree with both persons, but for different reasons. I want to make one thing clear: ABN Amro is a good, professional and customer-friendly bank for private customers and its internet telebanking application is probably the best in The Netherlands. However, that is not the point.

Unfortunately, ABN Amro’s current reputation is far from undisputed.

The bank has been heavily involved with the still developing Vestia affair, while the name Fortis Bank (now part of ABN Amro) has been mentioned in the bribery affair of VVD-delegate Ton Hooijmaijers.

ABN Amro was the first bank to issue a structured finance product again after the crisis started in 2008/2009 in The Netherlands. It has also a reputation of using ‘near-extortion’ tactics to force its suppliers into handing out vast discounts.

Then there is the issue that ABN Amro – just like all SIFI (systemically important financial institution) banks in The Netherlands – has a large base of houses with mortgages that are underwater, while the number of arrears on mortgages is soaring currently.

On top of that it calls itself the most important credit supplier for Commercial Real Estate in The Netherlands’,  which means that the bank is therefore heavily involved in CRE financing. What that means won’t be a secret for the regular readers of my blog.

At this moment the bank seems to be explicitely looking abroad (especially to the Far East) for new business opportunities. This is a 180 degree change with last year’s policy to become a national champion, instead of an internationally aimed SIFI-bank.

All in all there are quite a number of reasons why the Dutch citizens should be not too proud of owning a share in ABN Amro through their tax-money.

Most of these reasons have to do with moral hazard: why should the bank shy away from taking risks with the full firepower of the Dutch government (i.e. the Dutch tax-payer) behind it. It can privatize the profits and socialize the losses.

For me this is the main reason that the bank has been consistently showing more risk-seeking behaviour than (f.i.) ING Bank over the last 3-4 years, together with the fact that the bank wants to become as valuable as possible in case of a future IPO. A national champion gains less shareholder’s money than an internationally operating bank with a bright future ahead.

This brings us to the difficult point of an IPO for ABN Amro. The reasons that the Dutch government should be interested in bringing the bank to the stock exchange as soon as possible, presumably even at a loss, are the same reasons that shareholders should be not too interested in buying shares of this bank.

There are simply too many hazards at this bank, that could mean future loss of shareholder value: the risk-seeking behavior of the bank, the moral hazards, the still unfolding Vestia case or the CRE/RRE issue that could take a big bite out of the bank’s balance in the future.

All these hazards mean that an IPO for ABN Amro in 2013-2014 might not yield much more than €7-8 bln for the government, that invested a staggering €22 bln in this bank (although even amounts of €30 bln have been mentioned in the press).

That will be a very bitter pill to swallow for the next Dutch government. On the other hand: keeping this bank in the hands of the state could mean much larger losses in the not too distant future.

Tuesday, 16 October 2012

Welcome in the strange world of Building and Construction

Today, there were two news items concerning the strange world of Building and Construction. Both news items were shocking in their own right.

Default Fraud or ‘a means to an end’?!

2012 has turned into a very bad year for the whole Building and Construction (B&C) industry: 

Many building projects for Residential and Commercial Real Estate have been withdrawn, due to a total lack in demand from potential buyers and the mounting difficulties among project developers to finance new building projects.

A second cause is that even the most backward communities and cities are nowadays wondering whether it is wise to continue building new residential areas, commercial buildings and industrial zones like there is no tomorrow. 
Many cities and communities are still filled to the brim with building ground, but there are no buyers to take their bait (see the second part of this article). 

Both  circumstances turn 2012 into an annus horribilis (i.e. horrible year) for communities, project developers and building companies. Although there is still some work to be done for infrastructure (waterways, railroads, highways and other infrastructural projects) and special projects, like football stadiums and concert halls, it is nowhere near enough to keep all building companies alive with their current amount of personnel.

What makes life difficult for the B&C companies in The Netherlands is that it is quite hard to lay off people, unless a company can make clear that it is on the brink of defaulting if nothing happens with the worker base.

Worker and dismissal protection are still at a high level in The Netherlands. Although there have been very good and justified reasons for maintaining our level of dismissal protection in The Netherlands, it might force companies to take desperate measures to keep their head above water.

Building and Construction companies may have discovered a new ‘trick’ to lay off their excess personnel: they file for bankruptcy for (parts of) the company, enabling them to lay off all their workers in that part of the company. Afterwards they make a second beginning with the company (part) and re-engage (some of) their former workers using a so-called ZZP-contract (Freelancer / Independent worker without personnel).

This is much cheaper for the company that can finish its projects and meet its contractual obligations, but doesn’t have the hassle with excess personnel. The workers, however, lose their job and their fixed income and enter an uncertain future as freelancers for the company, knowing that their assignment might end when their projects are finished.

The question is: is this default fraud or a means to an end to survive with one's company?!

The Dutch newspaper Algemeen Dagblad ( writes on this story:

More and more building companies file for bankruptcy in order to ditch their fixed personnel. After such a bankruptcy, these companies quite often have a second beginning with freelancers (zzp), which enables them to work much cheaper.

On top of that: as a consequence of this construct, defaulted building companies don’t have to pay dismissal fees to their workers, where they should pay such fees normally. According to the labor union for the B&C industry ‘FNV Bouw’, these unfair defaults ‘ are how its goes here in this industry’.

“Building companies are in dire straits nowadays. Competition is killing. Employers only want one thing and that is to rent personnel at the lowest possible price”, according to FNV Bouw managing director Wilco Veldhorst..

By hiring a freelancer employers save on their personnel expenses. Besides that, it is quite easy to get rid of excess workers when their project is finished.

Employers in this industry, gathered in Bouwend Nederland (i.e. ‘Building Holland’ ), state ‘they don’t recognize themselves in these kinds of abuse. According to the organization, ‘this is not a widespread phenomena’ and ‘it is a way of working that we certainly don’t endorse as employers’.

Before I give my opinion on this news item, first I want to state this: the labor unions in The Netherlands are in dire straits themselves. With dropping numbers of members, the new pension and retirement plan disaster that backfired enormously at the largest federation of unions 'FNV' and the internal cat fights within the FNV ‘mothership’ on the question who is ultimately in charge within the union, the union could use some positive attention to show it's still alive and kicking.

Therefore this news ‘might’ be a virtually non-existent problem that has been blown up to substantial proportions. On the other hand, I tend to rather believe the union in this situation than Bouwend Nederland that states that everything is hunky dory within the industry.

Although I can understand that some building companies would deploy these kinds of desperate measures and sometimes are even forced to do so, I do not approve of it. It would not be correct to call it ‘default fraud’, but it comes darn close!

Workers that already go through a difficult situation with lots of uncertainty as a consequence of the continuing crisis, must either ‘earn’ their own job again, while entering into a very unsecure ZZP-contract or they are fired: straight into Unemployment Benefit without any dismissal fees. Especially workers that have worked long years for such a company feel betrayed by this treatment. 

Especially in this economic situation, it should be more easy for companies to lay off excess personnel, when they can show that the company needs it to survive eventually. However, this personnel should be entitled to either outplacement services delivered by the company or a fair dismissal fee. 

Unfortunately it happens much more often that excess personnel is ditched through defaults of company parts. Especially the Dutch BV (private limited) is a very suitable legal form for this kind of personnel reduction. Personnel can be moved internally from one limited to another limited within the holding. When this so-called personnel limited defaults, the rest of the holding company (operations limited + management limited) can continue their operations without any problems whatsoever.

That this kind of operation skims over the edge of legality is obvious, but it happens. That is very unfortunate for the workers that work at such a company.

Cities that took ‘a bigger bite of building ground than they could chew’, now start to pay the price for it.

In the past I wrote several times on the ‘kamikaze tactics’ of cities and communities concerning the purchase of building ground for new residential areas and commercial/industrial zones.

Yesterday, the Dutch news magazine Nieuwsuur ( presented data on the financial losses that communities and cities suffered as a consequence of excess ground purchases in the past. Read, shiver and hold your pants:

Many Dutch communities lost millions of euro’s on building ground they purchased in the past. This became clear from a Nieuwsuur investigation among 40 communities. These losses force substantial austerity measures in these communities.

From the fourty communities, with among those the thirty largest in The Netherlands, 33 suffered a loss in excess of €1 mln. Eleven communities suffered a loss in excess of €20 mln. The five communities with the largest losses were:

Kaag and Braassem
-/- €46 mln
-/- €63 mln
Den Haag
-/- €64.8 mln
-/- €79.5 mln
-/- €124 mln

At the beginning of this year, it became clear that the community of Apeldoorn took a large risk by purchasing vast amounts of building ground. That ground turned out to be unsaleable. The investigation proves that more communities suffer from the same problem.

According to Erwin van der Krabben, professor  with a chair in Real Estate, it are enormous losses that the communities had to take. “Most communities have no flesh left at their bones. They ran out of any reserves. This means: closing swimming pools and libraries and making an end to subsidies for sporting clubs and local welfare associations.

The end to the financial misery is not in sight yet, according to Van der Krabben: ”Most communities reckon that the Dutch housing market might improve again in a few years. However, things might remain bad for the next five to ten years. This means taking additional losses”. Van der Krabben also found that many communities kick the can down the road, instead of taking losses immediately.

Alderman Lucas Vokurka(D66) from Delft thinks that the Dutch national government has to intervene:”We have large amounts of building ground. Our neighbour cities have that too. There is a large overcapacity that causes further drops in prices”. According to Vokurka, the central government should make an inventory of all building locations and ”should decide top-down what building locations should be scratched. The communities involved should be compensated by the central government”.

Alderman Vokurka is a blatant fool.  So are all the other aldermen that have been involved in the kamikaze actions concerning the purchase of building ground.

The central government should not compensate the communities that purchased excess building ground, but should put these communities under legal restraint and force austerity measures on them: especially among the parts of the civil service that are involved in building and construction. Parts of the community budget that involve necessary utilities like swimming pools and libraries should be left unharmed.

On top of that, it should be explicitely forbidden for these communities to raise municipal taxes and parking fees and to lower the degree of service to their citizens. The inhabitants of these cities should not suffer from the stupidity of their city council and civil service.

To give you an impression, I will calculate the losses per inhabitant that the communities in the aforementioned table suffered:

Kaag and Braassem
-/- €1782 per inhabitant
-/- €327 per inhabitant
Den Haag
-/- €129 per inhabitant
-/-  €1826 per inhabitant
-/- €789 per inhabitant

Heerenveen, the lovely Frisian city, is the clear loser in our ‘Pathetic Top Five’, but the other communities should also be very ashamed of themselves.

I hope that central government will be hard on these communities, but the strong and growing trend among central and local governments to tax themselves out of misery makes this a very implausible option, unfortunately.