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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…

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