Tuesday, September 15, 2009

ING's big Alt-A surprise

If you think the US taxpayer got a raw deal with bank bailouts, have a look at what the Dutch government has done with ING, one of the largest Dutch banks. During the crisis the Dutch authorities synthetically bought ING's structured (mostly) Alt-A portfolio of US mortgages. The Dutch government agreed to receive cash flows on $39 billion of these mortgages in return for fixed payments (effectively a TRS) at 90 cents on the dollar. This is Maiden Lane, Dutch style. During the crisis such a portfolio would not have cleared at 50 cents on the dollar (Merrill was dumping some of it's portfolios at levels below that.) And this was in addition to the $14 billion of preferred equity injection (TARP equivalent) by the Dutch government into ING.

The Dutch taxpayer is in for a surprise - time to get close and personal with their overlevered borrowers across the pond. US Alt-A mortgages are not quite sub-prime but they are not prime either. They usually have incomplete documentation, higher leverage, lower credit scores, and/or are often on properties bought for speculation. The Dutch are going to have to wait for their cash flows for a while. According to Bloomberg nearly 30% of Alt-A mortgages are delinquent by 30 days or longer. Over 22% are delinquent by 90 days or more (or in foreclosure).

Source: Bloomberg

Now the European Commission has ruled that this was such a sweet deal for ING, it violated the European Union anti-competitive subsidies rules. That is ING's European competitors who didn't get such a sweet deal are being disadvantaged. This may force ING to pay a "fair price" to the government for this portfolio protection. And that could get ugly for the bank, but will help the taxpayer recoup some of the losses. (This is in addition to the executive compensation limitations recently put in place for Dutch banks that will send senior staff leaving in droves.) From the NY Times:
“The commission supports member states’ efforts to stabilize financial markets by dealing with banks’ impaired assets,” Neelie Kroes, the E.U. competition commissioner, said in a statement. “However, state aid in the form of impaired-asset relief has to be properly remunerated and should not give undue advantages to banks.”

Now the European Commission has opened a Pandora's Box because other European states have also provided unprecedented deals to their banking institutions. And with ING's precedent, they also may be forced to pay up.

The review comes as the commission moves toward a ruling on whether similar bailouts in Britain, to the Royal Bank of Scotland and the Lloyds Banking Group, were in violation of E.U. policy. (NY Times)

This has got to be making the UK "zombie banks" nervous. In the US on the other hand, AIG and Citi must be celebrating the fact that the US is not part of the European Union.

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