ING is now supporting forced sale of ING Direct. Well, they better be!

Sometimes you start to read an article that seems to state the obvious. But when you actually read it, it doesn’t, as it contains an unexpected motivation.

The following article – printed in the Dutch financial newspaper Financieel Dagblad (www.fd.nl) – is such an article.

ING is now supporting forced sale of ING Direct (link in Dutch)

When I started to read the article I thought: well, what’s the news about that. When I would be in their position, I would be glad to get rid of this seemingly “bad bank”. This was the bank of which ING Bank CEO Jan Hommen said a few months ago in the 2^nd Chamber of Dutch parliament (translated to English by me – EL)

“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”

Well, that’s a done deal. Signed, sealed and delivered! ING Direct was the bank that made the mistakes by purchasing the Alt-A and Subprime mortgages, so the ING management will be glad to say goodbye to this bank. But the tone of voice of the article in the FD is totally different. As this article is a must-read, here is an integral reproduction of it, translated to English by me.

Bank-Insurer ING Bank ceases their attempts to stop the forced sale of their succesful American subsidiary ING Direct USA

Initially ING wanted to keep this branch, in spite of a European obligation to sell, but according to sources the company reconsidered this opinion.

In the meantime the rumors concerning possible buyers surge. Bloomberg states that SJB National Bank, Capital One, CIT Group and GE Capital are interested. ING refuses to comment.

ING should sell ING Direct USA before the end of 2013, by order of the European Commission (EC), in exchange for the received government support. This measure comes on top of the other measures, like the split-up of the bank and insuring branch and the sale of subsidiary Westland Utrecht.

Initially ING was not in favor of the sale of ING Direct USA. They hoped to use the $77.7 bln in American savings, stored in the bank, for financing their own demand for dollars.

However, this would require changed American legislation: ING is currently required to invest the larger part of the savings in mortgages. In contrary to what ING put their hopes upon, this change in legislation should not be expected shortly.

Besides that the European Commission is very decisive in this matter. The EC blames ING Direct USA as the source of all the problems for ING. This was the part of the company that invested in Alt-A mortgages.

ING is currently running an appeal procedure against the EC about the enforced penalties, “but waiting for the result is a risk” according to analyst Cor Kluis of Rabo Securities. “If they should postpone the sale until the appeal at the European Court in Luxemburg has taken place, they put themselves under time pressure. If ING loses the case, there is less time left for the sale”.

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 . These analysts think of $12-13 bln in their report. With the paper profit, in the best case-scenario, the whole remainder of Dutch state support can be paid back.

In this scenario ING Bank itself keeps leaning on the Dutch state guarantee that they received in 2008 for the ING Direct Alt-A mortgage portfolio. It is very implausible that ING can sell that portfolio ($16 bln in nominal value) without the state guarantee. Selling the portfolio with the state guarantee might be technically possible, but politically it is a no go-area. In that case the Dutch state would warrant a mortgage portfolio that is in possession of a foreign investor.

It is more plausible that the Alt-A portfolio is transferred from ING Direct USA to ING Bank and that the Dutch state maintains the guarantee. The analysts of J.P. Morgan Cazenove state that it is the most favorable solution to keep this construction upright.

A spokesman of the Dutch Finance Ministery states not be able to tell about the future of these Alt-A mortgages.

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!

Let’s get rid of the concept ‘System Bank”: every bank should have the possibility to fail.

The European countries Greece, Ireland, Spain and Portugal are fighting for their (financial) existence and membership of the Euro zone

·     Greece reported a staggering deficit of 10.4% over 2010.

·     Ireland’s banks immediately need an additional €24 bln to keep head above water, while the whole country is already drowning from debt.

·     Portugal needs soon to roll-over various national loans against deteriorating interest rates, as rating agencies Moody’s, S&P and Fitch lowered the rating of Portugal.

·         Spain suffers from:

o    high unemployment;

o    an enormous, but currently deflating bubble in residential and commercial real estate, with devastating results for the Spanish financial world.

These facts would be big, but not at all fatal problems when:

·    not the whole financial world in Europe and abroad was interconnected through the large, internationally operating banks

·    the largest European banks would not have enormous exposure to risky investments, like Greek and Irish sovereigns, large quantities of derivatives and commercial and residential real estate in Spain, Great Britain, Ireland and Portugal

·    some of these largest European banks were not called “system banks”.

Everybody in their right mind agrees that the only way to solve the problems of the PIIGS-countries is: 1. To allow these countries to restructure their debt. 2. To put these countries under a kind of legal restraint by the other euro zone countries to clean up the financial mess in a matter of 5 – 10 years. And 3. To let the bondholders of the sovereign bonds of these countries take a haircut: shared burden.

But this does not happen: the countries of the Euro zone create emergency funds for current use and for 2013 to “rescue” the PIIGS, by handing out more debt to them. In no case until now, the bondholders are sharing the burden by getting a haircut on their bonds.

Even Stevie Wonder can see that the amount of money in the emergency funds will not be big enough to bail out Spain alone. Not to mention the other countries from the PIIGS zone. But still this is the path that the Euro zone wants to follow until the last taxpayer falls down.

Why? The reasons for this are the so-called “system banks”.

Who are these system banks? You should think of:

·    UK: HSBS Bank, Barclays, Royal Bank of Scotland

·    The Netherlands: ING Bank, Rabobank, ABN AMRO

·    Germany: Deutsche Bank, CommerzBank, Deutsche Postbank

·    Spain: Banco Santander, BBVA-Banco Bilbao Vizcaya

·    France: BNP Paribas, Société Generale, Credit Agricole

·    Italy: UniCredito, Intesa Sanpaolo, Banca MPS

·    Belgium: Dexia, KBC Group

These system banks are extremely large, measured by assets and they are very important on their home markets, but also for international trade (bank guarantees, Letters of Credit). They keep the money coming from savers, companies and pension funds and submit loans to large corporations, small and medium enterprise and private persons for mortgages and private loans. They exchange money for national and international business deals. They also render services for stock trading and IPO’s for companies.

In 2008 governments all over the world decided that these system banks could not fail, as this would bring down the whole global financial system, like a house of cards. As example of the havoc that would be created when the system banks would fail, people pointed to failed banks like Lehman Brothers and Washington Mutual in the USA, ABN AMRO in The Netherlands and Northern Rock in the UK. This should be prevented at all cost.

Therefore no system bank has failed since 2008 and the European and US governments make sure that the system banks remain fully operational.

But this “cannot fail”-principle for the system banks created enormous risk for moral hazard:

·    System banks didn’t feel the need to restructure their credit and write-off radically on their risky investments (PIIGS-sovereigns, CRE and Residential RE, derivative investments), as they knew the European governments would always foot the bill in case of future events.

o   Instead the banks acted like all assets on their balance sheet were “pure gold”, although everybody knew they were not.

o   They used the concept of “heads: we win, tails: you lose”.

·         Knowing the shaky assets on their own balance sheet, it led to mistrust of the creditworthiness of other banks, continuing to this day.

·         Banks on the other hand became arrogant again, as they knew they would always be saved by the governments of their domiciles.

o   The customer was put in the center only by words, but not by deeds.

o   There is a  renewed fondness for large bonuses in especially the UK and the USA.

o   CEO’s of system banks in The Netherlands were very indignant about being refused their bonuses by the Dutch government.

o   Barclays and HSBC even threatened the UK government to flee the London City as their domicile, in case of stricter banking legislation.

The result of keeping these system banks alive is that the European system banks are still extremely vulnerable to sovereign defaults and to restructuring of sovereign debt. As a consequence the European community is held hostage by these banks, as the default risks are in fact transferred from the large banks to the European countries: now only for the PIIGS-countries, but in due course to all European countries .

And now the taxpayers in all European countries are left holding the baby, knowing they should keep footing the bill. 

If Europe and the US don't want to remain paying for the system banks until the last taxpayer falls down, they should leave the concept of the system bank. When no bank is too large to fail, countries can write scenarios for what happens when a bank fails. We had some experience with it in 2008, so this is not all new.

The most important thing when a large bank fails, is damage control:

·    Keeping the healthy parts of the failed bank alive and making sure that day-to-day business can carry on.

·    Making sure that all corporate and private debtors pay back the money they borrowed, by continuing their term loans, mortgages and overdraft loans.

·    Bringing down all unhealthy parts of the failed bank at the cost of stock and bondholders.

·    Terminating all irrecoverable loans.

·    Bring back the trimmed-down bank to the financial market as soon as possible.

·    Remunerate the savers that lost money up to the state-guaranteed amount, when a bank cannot be saved anymore

But we should stop sponsoring banks that don’t deserve to be sponsored. The worst thing that could happen is that all system banks fail at the same time.

But if this happens, this would mean that these banks already have failed, but nobody dares to say it. And the price of this "don't ask, don't tell"-behavior is getting larger and larger.

For me it is certainly not worth it to shipwreck the whole European Union to save these system banks. So please, let them fail, if that is what should happen, to save the EU.

Green Sources of Energy: Which Green Energy Source has the X-factor??

If you look at Dutch and probably also German, British and American television, you will notice that these days there are many talent shows, like:

-     X-factor

-     [your country’s name] got talent

-     The voice of [your country’s name]

Only in The Netherlands there are a zillion talent shows.

But what has that to do with an economic blog? This: In these days all non-green sources of energy are in some way under fire:

-     Nuclear energy is now as popular as an alcohol ban during “spring break”. The events at Fukushima showed the world unfortunately that two characteristics of nuclear energy are not under control yet:

o    The uncontrollable energy and radiation outburst of nuclear fuel at moments when all safety systems fail.

o    The nuclear waste problem: what to do with the extremely radioactive, used-up fuel rods. Especially the mixed-oxide fuel rods containing plutonium are so radioactive that it is almost impossible to store them

-     Oil suffers from the enduring problems in the Middle-East and North-Africa in countries like Libya, Syria, Bahrein, Iran, Jemen and Saudi-Arabia. Besides that oil is still polluting the earth heavily: as well during extraction (Nigeria) as during usage.

-     Natural gas is delivered either by Russia, or by some of the same countries in the Middle-East that are suffering from civil unrest nowadays. Those are not the kind of countries you want to be totally dependent on for your energy supply. Gas, however, is the least polluting non-green energy source.

-     Pit coal and brown coal are:

o    extremely dangerous to extract (every year more than 2500 people die in the Chinese coal mines alone)

o    extremely devastating for the landscape in case of opencast mining

o    extremely polluting during usage in power plants.

But still it seems that there is no serious alternative for these kinds of non-green energy. 

That’s why I thought it could be a great idea to put all the green sources of energy in a kind of talent show to find out which green source of energy has the X-factor.

1. Bio-fuel

What is it? Fuel created from the oils or other combustable substances in plants, algae and produce like sugar cane, sugar beet and corn.

Pros

-     Bio fuel is cleaner in usage than oil-based fuels

-     If you use plant species for the extraction of bio-fuel that are not usable for human or animal food and that grow easily on all kinds of surfaces, than it is morally OK to make bio-fuel. A good example are algae that grow in the sea or in special basins and that contain a lot of oil.

Cons

-     These days a lot of human / animal food is used to create bio-fuel, like corn, sugar cane of sugar beet. This is very immoral and can cause starvation in the poorest countries.

-     The cultivation of bio fuels can lead to less farming land being available for food crops, especially when the number of cars in the world is only increasing.

-     Especially in countries like Brasil indispensable rainforest is removed for creating farmland for bio fuel production.

X-factor?

-     The disadvantages of bio fuel make that it doesn’t have the X-factor.

2. Natural hydro-electric power stations

What is it? Power stations that are placed at the fountainheads of rivers and streams. Melting snow and ice supplies water, while gravity makes it possible to drive a turbine.

Pros

-     When these hydro-electric power stations use the gravity effect of water sources in mountains or fjords and don’t change the course of the rivers and streams that rise there, it is excellent to extract electrical energy from this.

-     It is a 100% clean way of extracting electric energy.

Cons

-     Mountains and fjords are very local circumstances. This makes storage and distant shipping of extracted energy very hard. Only the country of exploration itself and its neighboring countries can profit from these energy sources.

X-factor?

-     This is an example of non-polluting production of electrical energy. But due to the predominantly local usability this energy source doesn’t have a large X-factor.

3. Artificial hydro-electric power stations

What is it? Power stations are placed within a dam that creates a massive storage reservoir. When the water escapes from the storage reservoir it drives massive turbines.

Pros

-     It is a 100% clean way of extracting electric energy.

Cons

-     The creation of large storage reservoirs can change the course of rivers and streams in a potentially devastating way. Especially the Three Gorges dam in China is an example of this. It changed the course of the Yangtze river dramatically and caused periods of long drought for villages behind the storage reservoir

-     Once the water has escaped, it often needs to be pumped back into the storage reservoir. On balance this costs more energy than it delivers.

-     The risk of massive floods due to overflow and construction problems in the dams

-     These storage reservoirs and dams are excellent targets for terrorist groups

X-factor?

-     This way of creating electrical energy, although clean, doesn’t have the X-factor, due to the heavy disadvantages.

4. Tidal power-stations

What is it? Power stations are placed in the sea at locations with a big difference between high-tide and low-tide. The massive amounts of waters that pass during the transition from high-tide to low-tide and vice versa drive turbines that gain the energy.

Pros

-     It is a 100% clean way of extracting electric energy.

-     When it happens at places with a naturally big difference between high-tide and low-tide, like the North-west coast of France, it is an excellent way of extracting electric energy.

Cons

-     A big difference between high-tide and low-tide is a very local circumstance. This makes storage and distant shipping of extracted energy very hard. Only the country of exploration itself and its neighboring countries can profit from these energy sources.

-     There is not much experience yet with tidal power-plants. This limits the usability of the technique until the experience is there.

X-factor?

-     This is an example of non-polluting production of electrical energy. But due to the predominantly local usability this energy source doesn’t have a large X-factor.

5. Windmills / turbines

What is it? Everybody knows this.

Pros

-     It is a 100% clean way of extracting electric energy.

-     When it happens at places with constant winds, mostly from one direction, it is a good way of extracting electrical energy. There are a lot of these places on earth, which makes it very easy to place wind turbines.

Cons

-     Wind turbines are very big, very noisy and (i.m.o.) very ugly. And you need an awful lot of them to extract enough energy to supply f.i. a middle-large city of 500,000 citizens or a large factory with them.

o    The total produced energy by wind turbines in The Netherlands was about 2250 MW in 2008. As a large wind turbine produces about 1.5 MW, this means that at least more than 1500 wind turbines were necessary to produce this amount of energy. I think 2500 wind turbines is probably a better estimate.

-     Birds and bats suffer a lot from large wind turbines. Both species are crushed by the blades and besides that bats are vulnerable for the differences in air pressure that are caused by the blades.

o    Bats in US and Europe are extremely important for the removal of insects.

X-factor?

-     The large disadvantages of wind turbines make that wind energy doesn’t have the X-factor.

6. Solar Cells

What is it? Semi-conductors gain electrical energy from the sun rays by using the potential difference between the two layers of the semi-conductor.

Pros

-     Solar cells are a 100% clean way of extracting electric energy.

-     They are easily applicable in small-scale environments

o    Everybody can fit a few solar cells on his house and have a small-scale power plant.

-     Already with a little bit of sun you start to gain energy.

Cons

-     Solar cells are very expensive, as gallium (part of gallium-arsenide) is a rare earth-metal.

-     The efficiency of solar cells is with 32% at most (only the most expensive solar cells have this efficiency) very low.

-     Storage and usage of solar energy during night is very difficult.

-     Usage of these solar cells needs to be heavily subsidized to make it affordable for normal people

X-factor?

Solar cells have a little bit the X-factor, because of the small-scale, low-threshold possibilities. However, the little efficiency and high production cost are serious disadvantages.

7. Concentrated Solar Power

What is it? Large amounts (hundreds) of electrically controlled mirrors, called Heliostats, cluster the rays of the sun at one central point. At this point a fluid (seawater) is heated up to superheated steam and this steams drives a turbine. The temperature in the central column can reach a maximum of 1000 °C (1,832 °F) for the largest plants.The PS10 Solar Power plant in Spain produces about 11MW of energy (source: Wikipedia)

Pros

-     This is a 100% clean and quite effective and efficient way of producing electrical energy.

-     Especially in deserts and other unhabited, extremely warm and sunny places it can deliver a lot of energy.

Cons

-     Deserts and other places with much sun and virtually no clouds are very local circumstances. This makes storage and distant shipping of extracted energy very hard. Only the country of exploration itself and its neighboring countries can profit from these energy sources.

-     The ultra high-tech mirrors make it a very expensive technique

-     The mirrors make it also a very vulnerable technique: sandstorms, hailstorms and gales / storms can create havoc under the mirrors. The time necessary to rebuild this mirror configuration after a storm is substantial.

X-factor?

For me this technique has the X-factor, although it is nowadays very expensive and has the disadvantages of needing a special environment. But there is a lot of desert all over the world and the producing techniques for the mirrors will become much cheaper.

8. Geothermal energy

What is it? In places where the earth's crust is very thin (a.o. Iceland, the Canaries, Alaska and near vulcans in general), the temperature of molten lava / magma is used to heat up water into steam. This steam can drive massive turbines and generate a lot of energy.  

Pros

-     This is a 100% clean and quite effective and efficient way of producing electrical energy.

-     The earth is an inexhaustable source of heat energy and this makes the supply of Geothermal energy in theory limitless.

-     This technique can create energy 24/7 throughout the whole year. It never has to shut down, in contrary to solar energy.

Cons

-     Places with a very thin earth’s crust are also very local circumstances. This makes storage and distant shipping of extracted energy very hard.

o    The advantage of this technique, however, is that you can create energy in such great quantities that the loss during storage and shipping can be much smaller (advantage of large-scale efficiency)

X-factor?

For me this technique has the highest X-factor, due to the enormous pro’s. The shipping of energy is still a problem, but the development of batteries and capacitors might improve in the future, making it easier to ship electrical energy. As the generated electrial energy is (in theory) the highest here, the efficiency is probably also the highest.

Summary

These are not the techniques to solve the earth’s energy problem for the next 20 years. Fossile and nuclear fuel, although detested by many people, are unfortunately the fuels of the near future.

But especially geothermal energy and concentrated solar power are promising techniques, that definitely have the X-factor.