“The European Union should try to get even with the United States, after its financial colonialism against BNP Paribas”; the integral ‘BNR news radio’ column of bank founder and financial expert Peter Verhaar

Ah, I'll get even with you

Ah, that's what I'm gonna do

Megadeth – I’ll get even with you

Peter Verhaar, a general financial expert and co-founder of ‘Alex’ bank – a Dutch bank for online investors –had an intriguing and provocative radio column on BNR News Radio (www.bnr.nl), last week.

In this must-hear column (in Dutch), Peter made minced meat out of the massive penalty, which BNP Paribas received from the American government, for having traded with countries that were on the United States blacklist of ‘rogue states’: Iran, Cuba etc.

He argued that the European Union – and The Netherlands to begin with – should get even for the events, which occurred during the prelude to the crisis of 2008 and for the involvement of at least one American bank in the derivative trades, which brought building cooperative Vestia almost to its knees.

Peter Verhaar, Co-founder of Alex Bank
in The Netherlands and general financial expert
Picture of: Ernst Labruyère
Click to Enlarge

Here is the integral, translated column of Peter Verhaar:

“Nobody is fooling with the American Justice Department. The Americans know exactly where they can hurt people and companies, breaking US laws: in their wallets and checkbooks. There are no moralistic talks and no sermons are delivered; you just are going to pay… big time, with amounts that really hurt you.

Today, the news will be announced that the largest bank in Europe, BNP Paribas, will be penalized with a €6.5 billion penalty. BNP Paribas’ Swiss subsidiary did business with countries, which are on the United States blacklist of ‘rogue states’. It is a large penalty, but the bank will not implode from it. It is one time the gross annual profit, and with an equity capital of €90 billion, BNP is more than able to pay it.

It is not the first time that the Americans administer penalties for this offence against their laws. Until now, eight European banks have been penalized: the Dutch banks ABN Amro (penalty €370 million) and ING (penalty €450 million) were among those banks.

Criticism from Europe is soaring against these penalties and in the meantime Danièle Nouy, chairman of bank supervision, and even the French president, François Hollande, have participated in the discussions. The penalties could jeoparidize the financial system in Europe and, besides that, the transactions of the Swiss subsidiary of BNP Paribas were not violating French or Swiss laws.

The basis for the sentence is the fact that BNP has an American banking permit, which it does not want to lose. Not just for the reason that BNP Paribas wants to remain active in the United States, but – even more important – just because the dollar is still the currency in which the large majority of international trade actions is denominated. Dollar clearing transactions must always go via the American subsidiary of BNP Paribas eventually.

I can somehow understand the penalty, but now the American Justice Department also wants to exclude BNP from dollar-clearing transactions for the duration of one year. This is serious, as the United States are now radically interfering in the business model of European banks. This goes much too far, as far as I’m concerned, and it is akin to ‘financial colonialism’, as a former Fortis banker wrote in Het Financieele Dagblad (www.fd.nl) recently.

In 2008, the large American merchant and business banks sold totally useless products to European banks and pension funds. How long will the European Union leave these actions unpunished? It is about time to get even with the United States and The Netherlands could be frontrunning, in this respect.

Last week, it became all too clear that also an American bank – JP Morgan - has been involved in ransacking Dutch building cooperative Vestia. Nevertheless, this bank does not have to appear before the ‘Dutch Parliamentary Inquiry Commission for Social Housing and Building Cooperatives’.

I say: ’ Let us withdraw their banking permit for the next five years. As a matter of fact, I don’t have to tell you, which banks – and from which country – will be first in line, when the highly profitable assignments will be offered, to help the Dutch state sell state-owned insurance company Reaal and service the IPO of stateowned insurance company ASR. Would I?!”

Of course, the chance that the Dutch state starts the suggested actions against American banks, is that of a snowball in hell, unfortunately. Although the European Union has a much better trackrecord, as far as such actions are concerned – think for instance about the actions from the European Commission against Microsoft and Google – , the chances for such a counter-action against the American banks are still very dim.

Yet, it is an intriguing thought: the American government is making its legislation applicable worldwide, through American subsidies of European and Asian companies.

This is more or less defensible, in my humble opinion, when it concerns crimes and misdemeanors of which the American government or American citizens are direct victims: for instance, when these crimes or misdemeanors are committed against American citizens or the American state, by the American subsidies of European or Asian banks, or when these subsidies are indirectly involved in such crimes.

Things change, however, when the undeniably biased American government enforces its own boycott-laws on the rest of the world, through American-based subsidies of non-American companies:

• Why are f.i. Iran and Cuba considered rogue states, while Iraq, Afghanistan and Pakistan are not? Is it because the leaders in the latter countries are ‘buddies’ of the American government?! It definitely seems to help, as the ‘failed nation’ stamp is certainly applicable to all these five countries…
  
• When European banks do business on European territory with the first two rogue states on a fully legally approved basis AND by using the Euro as their trade currency, it is none of the Americans’ business, in my humble opinion.
  
• The US has its own laws, but so does the European Union. US laws are therefore not universal laws and should not be treated as such!

Besides that, I fully sympathise with Peter Verhaar’s vision that some of the American banks – you can guess which ones – played a more than prominent role in firing up the credit crisis among the European countries and banks as well.

Deeds, for which a severe punishment still seems fair.

Blowing up the Dutch “mortgage mountain”: why securitization of mortgage portfolios might not be such a bad idea after all, when the price and the risk assessment are right!

Two days ago, I wrote about the Copperfieldian illusions that retired professor Dolf van den Brink and independent advisor Peter van den Berg sketched in their Op-Ed with respect to the Dutch ‘mortgage mountain’, in Het Financieele Dagblad of last Saturday.

While their proposed solution for the Dutch mortgage problem contained a lot of smoke and mirrors and – in my humble opinion – only shifted the problem for a short while instead of solving it permanently, their analysis of the awkward Dutch situation was spot on.

Perhaps, the first part of their proposal – creating a special entity, which buys large parts of the banks’ mortgage portfolios and deploys securitized National Mortgage Paper (i.e. NHP) for funding – might not be so bad after all.

The main difference between the proposal of 'Van den Brink et al' and mine – which I will describe in the remainder of this article – is that the ownership of the mortgage would shift permanently from the bank to the new entity in my proposal: a new, specialized mortgage bank or financial institute.

Of course, this transfer should happen through an official ‘certificate of public cession’ – possibly signed at a public notary – and after explicit (!) consent of the customer, who, in exchange, could benefit from slightly better conditions.

[Read this article for the Dutch legislation with regards to cession of debt and the accompanying certification process; non-Dutch speaking readers could use translation.google.com]

This mortgage entity itself could be funded through the deployment of common stock and/or corporate bonds. The purchases of (bundled) mortgages could be funded through the deployment of the aforementioned securitized national mortgage paper, in the form of fixed interest bonds with a maturity period equal to the maturity period of the underlying mortgages.

Of course, this whole idea is very much akin to:

• a.    the US entities for mortgage supply Fannie Mae and Freddie Mac.
• b.    the Mortgage Backed Securities, which started the US credit crisis in the first place;

We tried both once and it blew up in our faces…

The difference is, however, that in the first place the Dutch entity should be a fully private entity, with no strings attached to the Dutch government. 

This in contrary to the US-based Fannie Mae and Freddie Mac, which are both (partially) public entities. This entity should be funded by the Dutch banks and insurance companies, as well as pension funds and private investors.

Besides that, the discrimination between (bundles of) mortgages should be fully based on the history and broad risk profile of the mortgage owners AND the underlying pledge. Full disclosure must be the name of the game for this new mortgage entity, in order to make it work.

This could lead to discrimination of mortgages, based upon the following mortgage trademarks:

• Client history, including past (temporary) arrears situations;
• Maturity date of the interest fixation period;
• Amortization method;
• Accompanying insurances and savings arrangements;
• NHG (Dutch national mortgage guarantee) included or not
• Current interest rates and risk surcharges for the customer;
• Former and current pledge value;
• Risk profile and ‘similar sale’ history for the domicile of the pledge.

In my opinion, this would be the only viable way to prevent moral hazard from occuring: a situation in which banks and insurance companies could sell their worst or most risky mortgages to this new mortgage entity and subsequently diminish their prudence with respect to future customers for mortgages, as ‘it does not matter anymore’.

In the United States, many corporate customers had been lured with the often unjustified, but nevertheless seemingly ‘rock-solid’ AAA-ratings on opaque bundles of mixed Prime, Alt-A or Subprime loans, which were especially dangerous. Generally, these customers hardly knew exactly what they had bought and what their risk would be eventually.

So when the collaterized mortgage based securities (CMBS) suddenly became ill-reputed – just before the collapse of Lehman Brothers bank – the market for these securities totally imploded and trade became virtually impossible.

In other words: in order for this new Dutch mortgage entity to survive and even thrive with its investments – and the buyers of its securities too – the regulation and risk mitigation must be 180 degrees different from the situation in the United States, which ultimately led to the credit crisis in 2008. 

Based on these aforementioned (and additional) trade marks, the mortgages for sale could be bundled in risk packages, each with their own kind of NHP paper: ranging from the ‘extremely low risk category‘ for the most rock-solid mortgages to the ‘very high risk category’ for challenging mortgages with current or past arrears situations.

Of course the sales price (read: the net amount of cents to be paid per €uro of mortgage value) of the securitized bonds, should contain a substantial discount for the latter category, in order to cover the risk on this particular portfolio. 

To put it simply: the lower the risk of the mortgage, the smaller the discount on the sales price. Price calculation would work in a way akin to this:

Model for calculating the price of mortgages
being sold to the new mortgage entity
Table created by Ernst's Economy for You
Click to enlarge

The creation process for the NHP securities would take place in a similar way, based on the risk rating report, emerging from the typical trademarks of the underlying mortgages.

Only when the customer knows exactly what kind of mortgage he buys and what risks he encounters while buying it, he will be willing to invest in such NHP paper. And then he can decide in what kind of NHP paper he invests (more or less risky), depending on his risk preference and time horizon.

The advantages for all parties in such a construction could be substantial, while the disadvantages are manageable in my humble opinion:

Advantages and disadvantages of this
new mortgage entity for all involved parties
Table created by Ernst's Economy for You
Click to enlarge

Summarizing, while I disagreed with the proposed implementation of the ideas of Dolf van den Brink and Peter van den Berg, I agreed with their opinion that the Dutch mortgage mountain, at the balance sheets of the Dutch banks, should be diminished.

Perhaps this proposed, new mortgage entity could work as a catalyst for enabling such process. When we use the lessons learned from the subprime crisis and avoid the errors made in the prelude to that very crisis, then this mortgage entity could help to reinforce the large Dutch banks.

Bill Clinton, insurance company Achmea and the Dutch treasure hunt in the Frisian polder: a story of large egos and even larger pay checks

Imagine that you are Willem van Duin, CEO of a Dutch insurance company. 

A company which has become the largest insurance company in The Netherlands through an endless series of mergers and acquisitions?

And imagine that ‘Eight million people in The Netherlands are insured by (at least) one of the brands of your company’, as you state so proudly on your corporate website? And that your company exists 200 years in 2011?

Is it time to throw a party then?! Oh yeah, it is definitely time to throw a party!

And do you invite some really inspirational guests then, which can firmly send your party into ‘the World Series of corporate parties’?! You betcha!

Not those boring local heroes, with their old and excessively exploited, boring stories and their boring charisma! No, heck, you throw in a real name!

Someone that everybody knows and with a charisma and stamina that fills up a whole convention centre. Someone, whose flamboyant personality illuminates your insurance company and lifts it to a whole different level.

Heck yeah! You invite… Bill Clinton. It costs some, but then you have some…

And so did Achmea, the Dutch insurance company in question, on May 28th, 2011. They ‘invited’ Bill Clinton to go on an expedition to a Frisian polder hamlet, called Achlum. 

A tiny village, but with a big attitude!

And boy, had it been a party. Bill Clinton had litterally speeched his heart out upon various subjects:

The theme of Clinton’s speech is maintaining solidarity in the 21st century. He discusses the ‘zeitgeist’. People have never been so mutually dependent. Never in a time there has been so much traveling. ‘The information for which I had to do a full university study, can be found by a child on the internet within 30 seconds’.

Clinton emphasizes the similarities between people. “Most people descent from the same, small group of Africans. Research has disclosed that just 1 to 4 percent of human DNA originates from the Neanderthal people. My wife and daughter were not at all surprised, however, that I’m one of those Neanderthals”.

After Clinton’s impassioned speech, Achmea's CEO Willem van Duin almost exploded with feelings of pride and victory. Former president Bill Clinton and Willem van Duin at one stage. Touchdown!!!!

Obviously, he took his chance to throw in a few questions. 

Willem van Duin: “How should we convince people that there is a strong self-interest in solidarity?”

Clinton responds with the example of Greece. “When the economy was doing fine, the success of the euro was skyrocketing. Nevertheless, in case of an emerging crisis, as it happened in 2008, the poorest countries are traditionally the first victims of it. That is no problem in the United States, as the national government can support those poorest states. However, this is different in Europe”.

Clinton does not want to tell the European people what to do, except: “In the long run, cooperation will always beat conflict and large will always beat small. We do not have any other option than to enlarge our sense of community. This is how the human race has always survived”.

The sheer presence and the speech of Bill Clinton had been a mindboggling success for Achmea. ‘Veni, vidi, vici’ (i.e. “I came, saw and conquered”) in full Julius Caesar style. In the Frysian polder… Can you believe it?! 

Achlum, this tiny Frisian hamlet, had been history in the making that very day in May, 2011…

Last week on 26 June 2014 and a little over three years after the event, the Washington Post published an overview of Bill Clinton’s most lucrative speeches in an article called ’How the Clintons went from ‘dead broke’ to rich’. And on a prominent fourth position in the top ten list of this overview, there was a tiny Frisian town that we know all too well now!

A screen shot of the article in the WaPo
Picture courtesy of: Washington Post
Click to enlarge

Willem van Duin of Achmea cursed, when he was informed about the article in the Washington Post. He knew that hell would break loose on him in this tiny and envious country, called The Netherlands, where everybody was jealous about one’s success and pizazz.

“Heck yeah! Clinton was expensive with his $600,000 speech! [i.e. €440,000 - EL] But if the price ain't right, this kind of people simply doesn't show up."

Still, Van Duin knew that Clinton had been worth every cent that he paid for him.

“Every darn cent! Besides that, these are simple expenses, which are divided among all these eight million customers! And what is €0.06 per customer anyway?! It is nothing! It really isn’t! So get off my back, please!!!” 

And later he fell asleep and dreamt of Bill Clinton and him: on that stage in Achlum in 2011. And in his sleep, he put a glorious smile on his face…