Endgame for SNS Reaal pt III: “Alea iacta est”!

“Alea iacta est” – ‘The die has been cast’

Julius Caesar, when crossing the Rubicon (49 B.C.)

Today, the Dutch Finance Minister and rookie chairman of the Euro-group Jeroen Dijsselbloem had his Caesaric moment, when he announced the (expected) nationalization of SNS Reaal NV (SR). What seemed to have been inevitable for quite a while already, became indeed effectuated today.

My prediction of last Monday, 28 January, that A. the bank would be nationalized and B. the taxpayer would foot the bill, was spot on… but with a twist:

With ABN Amro / Fortis-bank and ASR (formerly Fortis insurance, now also in hands of the state), the Dutch government has ample experience with a nationalization proces in the financial world. Probably, the Finance Ministry has – in combination with the Dutch national bank DNB - the scenarios already written down and ready for action.

Whatever happens, this will be a costly solution for the Dutch taxpayer. In this case, the taxpayer is on the hook for all the losses at SNS Property Finance.

In the process he might lose at least €2-€4 billion in real estate write-downs, plus the €750 mln in state support. To keep the bank and insurer running, an additional €2-€3 billion might be necessary, bringing the total bill for the taxpayers to €5-€6 bln.

In exchange, the Dutch taxpayer receives a bank/insurer with a few healthy parts and a lot of dead bodies. This solution seems possible and very plausible.

The twist was that the Minister did some partial burden-sharing on behalf of the shareholders and holders of subordinated bonds, but saved the normal bondholders (the former I didn’t expect, the latter I did, of course).

The real amounts that this operation will cost for the tax-payer differ slightly from my assumptions, but in general I was quite close.  One thing surprised me today: I didn’t think in advance that the Minister would have the guts to send the other banks a bill of €1 bln, but he did after all.

Here are the pertinent snips from the speech by Finance Minister Jeroen Dijsselbloem. Readers who understand Dutch can find the integral speech behind the link:

“SNS is fully in hands of the Dutch state, as a consequence from the effectuation of the Dutch Bank Intervention law. Yesterday evening nationalization was inevitable in order to prevent from fundamental problems for the bank, the bank customers, the whole banking industry and the Dutch economy.

Yesterday, at 18.00 hrs (6 P.M. CET), a deadline passed for the time-box, in which SNS by itself could have found a solution for its problems. This deadline had been set by the De Nederlandsche Bank (i.e. DNB - Dutch national bank) for SNS to raise its capital ratio. The deadline passed without SNS increasing this capital ratio. Without the intervention by the Dutch state, SNS Reaal would have certainly defaulted soon. By nationalization, the daily business and services of the bank could be secured for savers, customers with an insurance and/or bank customers.

Shareholders, holders of subordinate bonds and the large Dutch banks do a considerable part of burden sharing. Private parties pay for this solution within the boundaries that DNB considers to be responsible and appropriate. 

This burden sharing means in reality that shareholders and subordinate bondholders have been expropriated. Their claims on SNS Reaal have lost their full value.

The financial data for the Dutch state and the other stakeholders are:

• Shareholders and subordinated bond holders share totally €1 bln in the burden; 
• The Dutch state pays directly €3.7 bln for SNS Reaal:
• A capital injection of €2.2 bln 
• €0.8 bln in write-offs on the 2008 state support 
• €0.7 bln to isolate the CRE-branch from the remainder of the bank-insurer; 
• The Dutch state also supplies a roll-over credit of €1.1 bln and €5 bln in additional guarantees. 
• In 2014, the large Dutch banks pay €1 bln to the Dutch state as a kind of burden-sharing. This is justified by the fact that the deposit guarantee fund, that must be maintained and replenished by the large Dutch banks,  now will remain without claims; this would be different in case of a default at SNS Reaal NV. 

All personnel will share in the burden through a policy of wage restraint. The new CEO will be paid a much lower compensation and there will be no bonuses for the whole executive management.

The new management has the task to sell or privatize (parts of) the bank, as soon as the company is stable again and the financial markets enable such operations.

Unless something dramatic happens very soon, SNS bank will remain in state hands for the next 5-10 years to come: first on the agenda is probably the privatization of ABN Amro, but I don’t see this happen soon. 

As I wrote in my Monday issue (see the first link), I see assimilation of SNS Reaal by ABN Amro (bank) and ASR (insurance) as a plausible option for the coming 2-3 years, but that is everything that is going to happen within this amount of time, I presume. 

The circumstances at the financial markets will remain too unfavorable within the next 5-10 years to take the risk of bringing two privatized (or even one) bank(s) up for an IPO. That is just impossible. 

Summarized, this means that the Dutch tax-payer is again on the hook for  €9-odd billion in order to save a bank. That is sad, but inevitable, it seems.

From this position, I want to say that I respect Dijsselbloem’s decision concerning the nationalization of SNS Reaal and I applaude his guts to let shareholders, subordinate bondholders and the other banks do burden-sharing. Letting the normal bondholders do burden-sharing was obviously one bridge too far for the DNB, like I already predicted.

DNB-director Jan Sijbrand shared in his speech (directly after Dijsselbloem's speech) some information about the acquisition process for a private investor that could take over SNS. This process ran until yesterday evening, but it failed eventually.

Sijbrand (and Dijsselbloem earlier) confirmed that these private investors asked for guarantees and involvement from the state that were unacceptable: too much risk for the state vs too little ownership and possible revenues.

Like I stated last Monday: “No group of investors in their right minds would invest a few billion in a [commercial real estate ] bubble without a state-guarantee or another kind of financial parachute. […]

If the SNS CRE is not top-notch, which it probably isn’t, it will be very hard to sell. This makes the risk for losses a very large one, unless the bad bank property is sold to investors with an enormous discount AND a state-guarantee.

This guarantee and enormous discount was probably exactly what made the deal impossible.

The shareholders, represented by Jan Maarten Slagter of the Shareholder’s association (i.e. VEB) were not amused with the expropriation of the bank, to say the least:

“We are flabbergasted. For the first time since the expropriation of Dutch-owned shares in the Russian state railroad, shareholders are fully expropriated. We have serious doubts whether this was necessary and proportionally. We are looking into our legal position, from two points of view:

• We will ask the business branch (i.e. ‘Ondernemingskamer’) at the Amsterdam Court of Justice to investigate a case for mismanagement at SNS, since the time that the bank did an IPO (Initial Public Offering) in May, 2006;
  
• We will ask in Court whether the bank intervention law has been applicated appropriately or not.”;

How about that for risk awareness by the shareholders!

Slagter totally victimizes the shareholders and almost makes it seem like they had been obliged to buy shares of SNS Reaal in 2006 and beyond. Well, they haven’t. 

Besides that, every investor with half a brain, who had just read the daily (financial) newspapers, knew since the take-over of Bouwfonds in 2006(!) that SNS Reaal would be bad news. Nobody has been obliged to KEEP his shares until yesterday-evening?!

Perhaps a trial for mismanagement on behalf of SNS has a slight chance, but further it seems that Jan Maarten Slagter rather lets the taxpayers foot the SNS bill than the 'poor' shareholders themselves. It’s truly disgusting…

The final bombshell for the day came (of course) from the mouth of Kees de Kort, the obstinate, but savvy commentator of BNR Radio (link in Dutch):

Abn Amro, ING Groep NV (ING) and Rabobank also own very large Commercial Real Estate portfolios. 

Currently, we know that SNS has to write off at least 30% on its current CRE portfolio after an earlier series of write-offs. However, you don’t hear anything about write-offs at ABN Amro, ING or Rabo! How reliable are their annual data?! Do these banks already reckon with write-offs?

You don’t know whether these banks have better CRE portfolios than SNS or not. SNS was not the only owner of bad CRE in The Netherlands. Ergo: there must be enormous potential losses at the other banks too. Did they create reserves to handle possible write-offs in the future? Or are they just keeping up appearances?! You can put some serious question-marks at the data of these large banks.

We do, Kees! This should only be news for the ignorant and the unaware: people that should simply not invest!

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…

Working in the age of the credit crisis can be much harder than a few years ago.

Last week, the Dutch federation of labour unions 'FNV' came with a complaint against the largest supermarket chain Albert Heijn. The FNV claimed that the labour circumstances in the distribution centers of the supermarket chain left a lot to be desired, especially for workers of foreign descent. Workers would be put under enormous pressure to meet their production targets. They would also be intimidated if they complained about the circumstances.

Business radio station BNR had an interview with Ron Meijer of FNV Bondgenoten, the largest labour union in The Netherlands. Here are the pertinent snips of the resulting article:

FNV: Labour circumstances AH are not in order

The FNV comes with a serious complaint against Albert Heijn. The labour circumstances in the distribution centers of the supermarket chain are far from normal.

Employees are forced to meet their production targets. Who complains, will be intimidated. For instance, employees who wanted to take a few days off, heard from their foremen that they didn’t have to come back at all, if they did so. Especially Polish temporary workers go reputedly through a hard time at Albert Heijn.

The union collected the complaints in a black book. Ron Meijer of FNV Bondgenoten: “we used to know Albert Heijn as a friendly and cozy supermarket, but reality bites. Especially the temporary workers are intimidated and boosted.

The bottom-line is that people have to work, tow and carry for at least 425 minutes per day. This number has doubled in size during the last ten years. This can partially be explained with ‘working smarter, instead of harder’, but for the larger part it is caused by people being boosted to work harder”.

An important factor, according to Meijer, is the circumstance that 1 in 4 Dutch workers currently has a non-secure contract. “The labour union does not mind what the nationality of the complainer is and how long he will stay in The Netherlands. What is important, however, is how AH treats half of its personnel by applying this behaviour. This is also influencing the other half of their personnel, as people with fixed contracts realize that this situation might not last forever anymore. They also feel intimidated. It is not just about the Polish temporary workers.”

This is not the first complaint against Albert Heijn, that has been subject to public discussion during the last few years. Reputedly, Albert Heijn often hires very young personnel as cashiers and shop-assistants and dismisses them a few years later when they become ´too old´ and thus too expensive. However, I don’t have any kind of proof of these practices.

Many young teenagers started their working career as a shop-assistant or shelf re-stocker at Albert Heijn. My niece and nephews are among those youngsters and I never heard bad stories about AH from their mouths.

Also in the case of the FNV complaint, we must be careful to not start a witch hunt against AH. When you want to work in a distribution center, you know that it is hard and heavy work, often under time pressure from the foremen, the managers and (very important) your own colleagues.

Nobody likes colleagues who are constantly cutting corners, making too much mistakes and leave the heavy work to their colleagues. And yes, when the trucks need to be loaded in time, there can be a lot of pressure from the foremen indeed. Pressure to not take a day off, for instance. It is not good, but this is how it goes in organizations with much manual labour. This makes it often very hard to judge when an organization goes or does not go beyond the limit of good employership.

Besides that, we should remember that the FNV, who published this blackbook, is an organization in transition. It is currently looking for a reason to exist, after years of neglect concerning ´the old labour´ of labour unions. The federative FNV had become a powerful, totally politicized lobby-organization with large political influence, which had been speaking with employers and (national) politicians on a very high abstraction level.

From ‘steeled workers’ who were 24/7 ready for action, they turned into desk-jockeys that were wearing suits and lost most of the contact with their (diminishing) grassroots. That might have been good for the Dutch economy and employability, but it had been killing for the credibility of the FNV.

After last year’s near-implosion of the FNV federation, its federation members, like ‘FNV Bondgenoten’, are desperately looking to put themselves back on the map again. Alarming press stories and free radio publicity, like in the case of the Albert Heijn blackbook, might help in this process. This is a reason to look at news like this with a cautious eye.

As a youngster in the late eighties and early nineties, I spent (in total) a very pleasant year as temporary/holiday worker at Campina Melkunie, a large dairy company in The Netherlands. I loved the hard work and the companionship at the work floor and the feeling of achievement, when the job was done in time and without errors.

However, those could have been different times: working in a distribution center was an extremely well-paid job in those days, because of the bonuses for working in shifts, heavy labour and extra hours that you made on the job.

Just as in other kinds of labour that demand no special education, a race to the bottom started in the distribution centers a few years ago:
 

·    Workers with fixed contracts have been replaced with temp workers;

·    Dutch workers with their ‘sturdy’ salary demands have been slowly replaced with Polish, Rumanian and Bulgarian workers, who were willing to do the same job for much less money;

·    This development forced Dutch workers also to settle for less money, as they could only receive a temporary contract at a much lower hourly rate;

·    The economic crisis in The Netherlands put an extra edge to things:

o    Jobs became scarcer for people, so having a job was considered a treasured possession. When you had it, you didn’t complain about it, normally;

o    The number of applicants for these kinds of distribution and support services jobs rose at the same time with the influx of workers from Eastern Europe and South(-West) Europe. This made it easier for employers to cherry-pick people;

o    Eastern European workers needed the jobs and didn’t know the people that could help them in case of an argument on the job. “Our way or the highway” could be the difference between having a job and an income and having none. This puts the door wide open for unfair treatment and even abuse of these workers;

o    The battle for margins forced retailers to save every penny in the production and distribution chain;

The current working environment in The Netherlands is not per sé a good one for healthy and fair job circumstances. This is the reason that I would not be surprised when the complaints, collected by the FNV, are largely valid after all. The difficult economic situation can force employers to state against their workers: “You have a job, so be happy about that. If you don’t like it, ten others will!”.

These are exactly the circumstances where government bodies, like the Labour Inspection and the Dutch internal revenue service or the labour unions have an important task: protecting workers in an increasingly ‘hostile’ environment.

Let’s hope that these people have the time and the means to do this extremely important job. Unfortunately, this might not be expected from the current, business-oriented cabinet, in spite of the participation of the Dutch labour party PvdA.