Ernst’s Economy in discussion at BNR Newsroom: Investigating the downfall and nationalization of SNS Reaal, pt I.

Last Monday, on 17 December, I was present at the last episode in 2013 of BNR Newsroom. This is the semi-live talk radio show of BNR News Radio, hosted by my good friend Paul van Liempt.

The official microphone of BNR Newsroom
Photo copyright of: Ernst Labruyère
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This week’s subject was the downfall and nationalization of SNS Reaal: the Dutch bank-insurer that found its Waterloo at the beginning of 2013 and was subsequently nationalized by the Dutch state, represented by Finance Minister Jeroen Dijsselbloem (the article behind the link contains links to the other articles upon this subject).

The reason for this subject of BNR Newsroom was a joyful event: the official presentation of a non-fiction, investigative book on SNS Reaal’s downfall, by five journalists from Het Financieele Dagblad. This presentation would be a part of the program.

In the introduction to this event, Paul van Liempt interviewed two of the five journalists: Cor de Horde and Pieter Lalkens, who wrote the book in cooperation with Martine Wolzak, Pieter Couwenbergh and Vasco van der Boon.

FD Journalists Pieter Couwenbergh and Pieter Lalkens (right)
Photo copyright of: Ernst Labruyère
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The second guest of this evening was Dolf van den Brink, the former Chief Information Officer of ABN Amro and current Professor Financial Institutions at the University of Amsterdam. The interview with him lasted until the half hour break of BNR Newsroom.

Tomorrow, the second part of the show will be printed on this blog.

Interview with Cor de Horde and Pieter Lalkens of Het Financieele Dagblad

Paul: Cor, what was for you the most important discovery, with respect to the downfall and nationalization of SNS Reaal? 

Cor: That the rescue process was such a mess. You think that everybody is working cooperatively, in order to rescue the bank: SNS, the Dutch finance ministry, Brussels and De Nederlandsche Bank. However, we found out that this was not true at all. 

Everybody was riding on his own track, without ever coming together for the benefit of the bank.

Paul: There wasn't a conspiracy going on at SNS, right?

Cor: No indeed. Tell me, when was there ever a conspiracy in such cases?!

FD Journalists Martine Wolzak and Cor de Horde right)
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Paul: Pieter, what was your biggest discovery?

Pieter: That the contacts with Brussels were arranged and upheld by the Dutch Finance Ministry alone and that nobody else knew what had been going on between these parties: that includes DNB and the big banks. The big banks were actually willing to help in those days, but they were kept 'out of the loop' for (decisive) weeks.

At one time, it seemed that the Dutch Finance Ministry had gotten a commitment from Brussels for a certain plan; they worked on that plan for weeks, only to be informed by Brussels that the plan was not allowed after all. Such things made it very hard to work with the European Commission.

Paul: Did you notice during the creation of your book, that people tried to hide against the circumstance that some events took place quite some years ago?

Pieter: When you talk about the SNS case, you are talking about commercial real estate (CRE). In the early eighties, we already had our share of commercial real estate problems in The Netherlands [Pieter is here probably referring to the downfall of Slavenburg Bank in the eighties, due to CRE investments gone awry. This bank had to be taken over by Credit Lyonnais in order to be rescued - EL].

However, it seems that this information is not shared between generations, resulting in it that SNS made the same errors once more. Generations seemingly don't want to accept information and good advice from each other and want to make their own errors, instead of listening.

Paul: Sjoerd van Keulen once said the same thing, right? Still, IMHO he made a U-turn a few years ago.

Cor: Yeah, that was really funny. When he was in his rookie year as CEO, he said once at a press conference that people often forgot about the past. A bank should better not consider an IPO at all, because of the short-term decisions and focus and the lack of contemplation among stock funds. 

As an ex-Fortis man, he knew what he was talking about. Unfortunately, he didn't take his own good advice to heart after all.

FD Journalist Vasco van der Boon
Photo copyright of: Ernst Labruyère
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Interview with Professor Dolf van den Brink

Paul: Dolf, you wrote last week in the FD that the solution for the banking industry does not lie in the capital ratios, but in the management of the banks, right? How are the managers of the banks doing right now?

Dolf: As far as I can see, from my relative outsider's position, they are doing much better now, but there is still much work to be done.

Paul: What went wrong in the past and what is going better now?

Dolf: In the past, there have been too many people from outside the retail banking industry, that didn't know the core business of retail banks... at all. 

These people either didn't come from the banking industry at all or they came from investment banks, which is a whole different ball game.

Paul: What went wrong with such people at the helm?

Dolf: These people were much too opportunistical to handle the interests of these 'bulk tankers' of retail banks. These retail banks have to be governed with a long-term vision in mind: with a rock-solid, prudent and conservative approach, instead of an adventurous one.

Instead these people were steering these bulk tankers like a speedboat - like investment bankers.This resulted in it that the universal banking community lost the right track for retail banking.

Paul: Lately, a generation change took place within the banking industry. This new generation has the courage to bank conservatively again, as they don't feel forced to start crazy adventures in order to get shareholder value. Do you agree with that?

Dolf: We have to see that. There is a lot of uncertainty in the market. There is not much demand for banking activities at all. Many customers of the banks are caught in a financial trap currently and don't want to have loans at all. 

Things will become interesting, when the economy becomes healthier again. Then we will see what we learned from the crisis.

Professor Dolf van den Brink of the University of Amsterdam
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Bankers need to realize that they are working with other people's life savings and deposits. These people always want to have their money back. At the other side of the balance sheet, these bankers have to help people with developing viable business models and they should make money in the process. 

Consequently, a banker should aim at a long-term relationship with both these customer groups.

Ernst: Should the banks not start with paying a decent interest rate to their customers? At this moment the interest is often less than 1%: you could almost say that the money is for free. This is not helpful at all for the risk awareness of the bankers!

Dolf: It depends whether you mean long-term or short-term money. On long-term money, we pay more interest and a better margin than in the good old days. 

And as far as short money concerns: the banks didn't put the interest rates close to zero. That were the central banks.

If the banks would pay too much margin on top of the Euribor interest rate, they would make a bad deal for themselves. They don't ask  much interest from their borrowers either, on short-term loans. Banks must live from the margin that they make between borrowing and lending. Besides that, at the Central Banks they don't get interest at all for their deposits.

Paul: Will there ever be negative interest?

Paul van Liempt, presenter of BNR Newsroom
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Dolf: It could be. Luckily, we don't have experience with that in The Netherlands. On the other hand, I'm not optimistic about the business cycle that the world is in currently. Negative interest would be an "interesting" experiment for us. Anyway, a deflation scenario is no good news.

Ernst: That was exactly my question. The fact that people are speaking about negative interest currently, isn't that a proof that we indeed entered an era of deflation?

Dolf: You can blame the banks for a lot of things, but not that they caused deflation. A bank is an intermediary; between people and companies, that have excess money and people and companies that need money. They try to make a margin between the credit and debit side of their balance sheets. You neither can blame the banks for deflation nor for hyperinflation.

Paul: Did the situation at SNS shock you?

Dolf: Undoubtedly, you are referring to the fact that I've have been commissioner in the Supervisory Board at Bouwfonds [the real estate company, of which the subsidiary Bouwfonds Property Finance was the root cause for the downfall of SNS Reaal - EL]. 

That is a long time ago. I have been commissioner for about a half year. To be frank, I didn't have a clue about what was going on at Bouwfonds. And the specialists that held a 'due diligence' investigation at the time of the takeover bid, seemingly also have been clueless about the abuses that took place there.

Paul: Didn't people speak about the risks that ABN Amro took, when it took over Bouwfonds?

Dolf: Yes, of course we sent a number of specialists to Bouwfonds to perform the due diligence investigation. I have not been involved further, as my focal point was ICT in those days.

Just by coincidence - Rijkman Groenink, the CEO of ABN Amro was abroad for a brief period of time - I have held a speech at the shareholders' assembly of the Bank Nederlandse Gemeenten (BNG | i.e. Dutch Municipality Bank - the former founders and owners of Bouwfonds Nederlandse Gemeenten, as it was called in those days).

At this assembly, I've told the shareholders about how good it was that ABN Amro took over Bouwfonds. 

I had not taken further knowledge of the files and data of Bouwfonds in those days. The only thing that I did was playing stand-in for a colleague, who was abroad. 

The outcome of this assembly was clear in advance: the BNG - and its shareholders, the Dutch municipalities - were extremely pleased to sell Bouwfonds to ABN Amro, as we paid a very good price. We didn't have a clue about what was going on: had we known of this, the deal would have been off, of course.

Paul: Isn't that strange that people, who should have had expert knowledge about banking and financial issues, were so utterly clueless about what happened at Bouwfonds?  

Dolf: That was a lesson learned. At the bank we didn't know a thing about commercial and residential real estate. I have been brought up by people, who stated: "We should stay away from real estate, as we know too little about it". This saved us a lot of trouble in the seventies and eighties: times in which ABN Amro didn't squander one penny in profit losses on real estate. Unfortunately, we had forgotten those wise lessons in the nineties.

Professor Dolf van den Brink of the University of Amsterdam
Photo copyright of: Ernst Labruyère
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Paul: Is it not too easy to state it in such a simple manner?

Dolf: There was a new generation in those days. I had never been involved in real estate myself, due to my mentors at the bank.

Paul: What was your idea in those days? Something like "We are going to make a lot of money on real estate"?

Dolf: In the eighties, Bouwfonds had an ironclad reputation as being THE experts in the area of commercial and residential real estate. We felt that real estate was a risky business, but we trusted Bouwfonds for their conservative, no thrills, way of doing business. In the eighties, this kind of mischief didn't take place yet. That started in the nineties and we didn't see that.

Paul: Bouwfonds always wanted an independent position for their business, right? My FD colleague, Pieter Couwenbergh, has written a column last Saturday, in which he concluded that this kind of independence often leads to trouble. Is that not one of the lessons learned?

Dolf: In those days, the policy at ABN Amro was that large business units had to take care of themselves. We did so for instance with the Bank of Chicago. 

When we bought this bank, we positioned a few supervisors there, but let them further run their own business. This led to an enormously successful sale a few years later: we made a profit on that sale, which multiplied our investments in this bank.

We presumed that the involved people of Chicago and (in this particular case Bouwfonds) knew their business much better than we did at the time. In general, we fared well through this policy.

Paul: Really?! There have actually been some accidents, as a consequence of this policy! Should we not choose for a model with much closer guidance, when such companies want to be independent: with people of the bank at pivotal positions?

Dolf: Pivotal positions? In those days the director-general of ABN Amro became the new CEO of Bouwfonds. And as a matter of fact, the ABN Amro didn't lose money on Bouwfonds.

Paul: Now we come to SNS. What should happen with this bank? Should we denationalize it and bring it to the stock exchange? Or should it remain a state bank in years to come?!

Dolf: In the parliamentary commission that investigated the issues in the banking industry, and in which I was heared, I pleaded on behalf of ABN Amro (and consequently also for SNS) that it would be unwise to sell this bank at short notice. The financial data from these banks discloses that they are still 'banks in distress' and a lot of things should happen there (especially at SNS).

On top of that, there is the issue that SNS is a bank-insurer at the moment. The split-up of the bank and the insurance companies will cause a lot of extra work, which should be done before the bank can be sold to another party or at the stock exchanges. Before this is over and SNS bank has stabilized again, we are ten years ahead in time. 

The same is true for the financial markets: before all the uncertainties have disappeared from the financial markets, you are again five to ten years ahead in time. We should wait for a long time with selling these banks: at least five to ten years.

Paul: Is SNS large enough to operate as an independent bank?

Dolf: Not as an independent fund at the stock exchanges. SNS is too big to be a niche player and too small to fight the other banks through economies of scale. It could be a possibility to sell this bank to a foreign bank. BNP Paribas could be one of the options.

I seldomly comment the answers and remarks of the guests in BNR Newsroom, especially in such sensitive topics as the downfall of SNS is.

These people had the courage to step forward and give their side to the story. Had they not done this, then we would not have known it at all, or only in a very politically biased version: especially when politicians, with their soundbites, are involved.

Still, I got an obnoxious feeling from the statements by Professor Dolf van den Brink, in his role as ABN Amro executive: especially the ones concerning the takeover of Bouwfonds by ABN Amro.

Summarized, to me these statements sounded like:

• I didn’t know anything about Bouwfonds at the time that ABN Amro took the company over;
  
• I didn’t care much about Bouwfonds, during the takeover by ABN Amro, as it wasn’t my duty to care about Bouwfonds;
  
• I was only a stand-in for Rijkman Groenink during the takeover of Bouwfonds. My promotional story about Bouwfonds to the shareholders of the ‘Bank Nederlandse Gemeenten’, was nothing more than propaganda for people, who wanted to sell Bouwfonds anyway, at the price that ABN Amro offered;
  
• The experts, who performed the ‘due diligence’ investigation, seemingly also were clueless about Bouwfonds, in spite of their research;
  
• Frankly, we – as ABN Amro - didn’t know one rat’s behind about Commercial and Residential Real Estate, as our predecessors had warned us for this business in the past and made us stay out of it;
  
• Nevertheless, we thought that we could make money with CRE/RRE and that Bouwfonds was the right party to do so, as this company had been very sound and conservative in the eighties (!). We were unaware of the fact that things had dramatically changed in the meantime;
  
• When we had taken over Bouwfonds, we gave them all kinds of freedom to do business in the way they wanted. Lucky enough, they didn’t mess it up much, with ABN Amro at the helm;
  
• Summarizing, we – as ABN Amro – have been very lucky to not lose an enormous amount of money on this company. SNS Reaal pulled the losing straw; we didn’t. Lucky us! 

It might be that Professor Dolf van den Brink is not very happy about this summary of mine, but these are the signals I received from him during BNR Newsroom.

And I print these signals for the purpose of informing you, my dear readers.