“Banking World cannot function without Bonusses”, says Jan Hommen, Chairman of ING Bank... Oh, Really?!?

I used to be a renegade,

I used to fool around
But I couldn't take the punishment,

and had to settle down

Huey Lewis and the News – ‘It’s hip to be square’

Today a delegation of Dutch Top Bankers visited the 2^nd Chamber of Parliament in The Netherlands (compare: House of Commons / Representatives) to explain why the bonusses are back on the agenda in the Dutch international banks ING, ABN AMRO and Rabobank

Jan Hommen, CEO of ING Bank and Gerrit Zalm, CEO of ABN AMRO Bank – both in the Top 75 of biggest banks in the world – were very firm in their statements in reference to the B-word towards the members of parliament.

“I can’t run a company if we would abolish all bonusses. I’m not going to make it…” was the statement of Jan Hommen. “We can’t punish a whole company for mistakes that our USA-based ING Direct branch made when purchasing those subprime mortgages”

Gerrit Zalm responded in a similar way: “If we have to compete with other banks for the best personnel in places like Hongkong and Singapore, it is inevitable that we have performance-related pay”.

When you read the following lines, you must know that I’m not a populist and that I don’t like populism, as it often states the obvious without looking at both sides of the story. But some things need to be said in my humble opinion.

Especially the statement of Jan Hommen about the USA branch of ING is very interesting: if you looked at the consolidated balance sheet of ING in 2008 – which I did – you would know there was a little bit more going on within the ING bank than a few odd subprime and Alt-A mortgages.

Without the financial help of the Dutch Government (10 billion EUR) the ING would have had a leverage of 70:1 for the ratio debt:equity. This would mean that a depreciation of the assets of 2% would have slashed the total equity of the bank. As a consequence the bank probably would not have survived the credit crunch of 2008. And this 10 billion Euro was not the only government support that the bank received: a package of subprime mortgages with a probable market-value at the time of 55% of nominal value was sold to the Dutch government for 90% of nominal value. How is that for state support?!

ABN AMRO Bank actually did not survive the credit crunch in 2008 as this bank and the Dutch part of Fortis Bank were both taken over and merged together by the Dutch government in order to rescue them.

Besides that the names of large Dutch banks kept popping up with some of the opaque trades that took place in recent years. Credit Default Swaps and other insurances gone awry at AIG, Bernie Madoff, Greek and Irish sovereign bonds, Special Investment Vehicles (SIV’s), Off balance sheet investments, you name it. Partly this was caused by the sheer size of these banks, but partly it was poor judgment on the subject of risk management.

Moral hazard and bonusses were often mentioned in the same sentence: the bonus-driven hunt for financial targets and return-on-investment caused bankers to close their eyes for the risks of investments and to trust blindly in the ratings that rating agencies supplied. Subprime mortgages with AAA-ratings were treated like pure gold, which obviously they weren’t.

To cut a long story short: these large Dutch banks do not have a perfect trackrecord over the last years and therefore their CEO’s are not the persons to trust blindly in the bonus-discussions.

My opinion: there are enough intelligent, wise and decent people in the world that are prepared to work very hard and smart for a fixed salary of 50,000 – 200,000 EUR and that can easily do without a Porsche 911 4s, a 1,000,000 EUR penthouse in the City and 1000 EUR lunches. Those people, however, are not necessarily the current generation of bankers that are inhabiting the City, Wallstreet, the Amsterdam Zuidas, HongKong and Singapore.

The arms race for salaries in the financial world has had a lot of unintended consequences, of which moral hazard was the worst one. Please stop with the bonus culture and pay decent people a decent salary of which they can have a good and prosperous life…

And don’t listen to the Pied Pipers and financial drug addicts that tell you they can’t stop using those bonus drugs… because they can’t stop using those bonus drugs.

Ernst

It’s over; war in small electronics and household appliances market claims another casualty

Don't look for me around this town
'cause I will be so far away, you'll never find me anywhere
and I won't take no souvenirs
no perfumed picture promises
because it's over
and I ain't coming back

Level 42 – It’s over

In The Netherlands there is a dirty war going on between the store chains that sell small electronics and household appliances. I guess this situation is not new for the rest of the world, but Holland is my home country.

This war has now claimed another casualty: It’s electronics, a not-too-spectacular, but decent electronics and household appliances store was crushed between the jaws of the murderous competion.

It couldn’t compete with the Kamikaze tactics and excellent supply of MediaMarkt, a originally German chain of electronics megastores:

-         Selling under the purchase price? No problemo, Señor!

-         Handing our V.A.T. (value added tax) away? You got it!

-         Leica Digital Camera’s? There in the corner, Sir!

It did neither have the stamina of BCC – a shop that tries to offer you the lowest price at whatever the cost – nor did it have the low fixed costs of internet shops that don’t have to pay for a shop on an A-location and a lot of personnel to advise the customers and can therefore offer lower prices.

If your fate is, that you don’t excel in anything in an extremely competitive market, then you have to disappear from this market. In case of It’s this happened at the cost of a thousand peoples job’s. And It’s is probably not the last company that fails to run the gauntlet.

But what makes the market for electronics and household appliances so extremely competitive? Please look at this table (roughly based on average prices at the time) and remember that the performance (that is not the Quality(!)) of almost all electronics increased over the years:

Prices (EUR)       1980-1985        2010
Product         
Color TV             800             500
Hifi Installation    800             600
Videorecorder        750             300
Washing machine      500             700
Tumble drier         400             550
Electric razor        75             150
Personal Computer   2500             500      

Please notice, that most things only became cheaper over the years and only a few things became more expensive. There is, however, a price to pay for this:

-         Instead of being built up with transistors, capacitors, diodes and resistors all electronics nowadays are built up using micro-electronics. Repairing it when it is broke is something from the past

-         Even your German Miele washing machine, in the past built to last you at least 20 years, does not have the indestructible bearings anymore and might last you now only 10 years instead.

o        Your South Korean or Chinese washing machine might even last you only 5 years before it is broke.

-         Your personal computer, although it is 40,000 times more quickly than your first one in the 1980’s, seems also 40,000 times more flimsy.

-         The durability of goods in common ranges from average until extremely poor nowadays:

o        Remember those Nokia phones in the 90’s that you could play football with? Don’t try this now. Instead you are happy now when your smartphone lasts for more than a year.

Result of keeping prices for electronics and household appliances at roughly the same level for 30 years or even lowering those prices in time is:

-         The German, American and Australian factories can’t make electronics at all anymore and only a limited range of household appliances

-         The Chinese and South Korean factories can only make these by:

o         using 3^rd grade parts,

o        ignoring all environmental rules

o        exploiting their workers

-         The margins for importers, wholesale companies and shops reselling those appliances are extremely small.

This means that only the strong store chains  survive and – in return- get almost a monopoly position on the business-to-consumer market and people will have to get used to crap quality and durability, except for a happy few that can afford German, Swiss and American goods of impeccable quality. For It’s, however, it’s over…

Ernst

It’s over; war in small electronics and household appliances market claims another casualty

Don't look for me around this town
'cause I will be so far away, you'll never find me anywhere
and I won't take no souvenirs
no perfumed picture promises
because it's over
and I ain't coming back

Level 42 – It’s over

In The Netherlands there is a dirty war going on between the store chains that sell small electronics and household appliances. I guess this situation is not new for the rest of the world, but Holland is my home country.

This war has now claimed another casualty: It’s electronics, a not-too-spectacular, but decent electronics and household appliances store was crushed between the jaws of the murderous competion.

It couldn’t compete with the Kamikaze tactics and excellent supply of MediaMarkt, a originally German chain of electronics megastores:

-         Selling under the purchase price? No problemo, Señor!

-         Handing our V.A.T. (value added tax) away? You got it!

-         Leica Digital Camera’s? There in the corner, Sir!

It did neither have the stamina of BCC – a shop that tries to offer you the lowest price at whatever the cost – nor did it have the low fixed costs of internet shops that don’t have to pay for a shop on an A-location and a lot of personnel to advise the customers and can therefore offer lower prices.

If your fate is, that you don’t excel in anything in an extremely competitive market, then you have to disappear from this market. In case of It’s this happened at the cost of a thousand peoples job’s. And It’s is probably not the last company that fails to run the gauntlet.

But what makes the market for electronics and household appliances so extremely competitive? Please look at this table (roughly based on average prices at the time) and remember that the performance (that is not the Quality(!)) of almost all electronics increased over the years:

Please notice, that most things only became cheaper over the years and only a few things became more expensive. There is, however, a price to pay for this:

-         Instead of being built up with transistors, capacitors, diodes and resistors all electronics nowadays are built up using micro-electronics. Repairing it when it is broke is something from the past

-         Even your German Miele washing machine, in the past built to last you at least 20 years, does not have the indestructible bearings anymore and might last you now only 10 years instead.

o        Your South Korean or Chinese washing machine might even last you only 5 years before it is broke.

-         Your personal computer, although it is 40,000 times more quickly than your first one in the 1980’s, seems also 40,000 times more flimsy.

-         The durability of goods in common ranges from average until extremely poor nowadays:

o        Remember those Nokia phones in the 90’s that you could play football with? Don’t try this now. Instead you are happy now when your smartphone lasts for more than a year.

Result of keeping prices for electronics and household appliances at roughly the same level for 30 years or even lowering those prices in time is:

-         The German, American and Australian factories can’t make electronics at all anymore and only a limited range of household appliances

-         The Chinese and South Korean factories can only make these by:

o         using 3^rd grade parts,

o        ignoring all environmental rules

o        exploiting their workers

-         The margins for importers, wholesale companies and shops reselling those appliances are extremely small.

This means that only the strong store chains  survive and – in return- get almost a monopoly position on the business-to-consumer market and people will have to get used to crap quality and durability, except for a happy few that can afford German, Swiss and American goods of impeccable quality. For It’s, however, it’s over…

Ernst