Rabobank Board Chairman Finds US Bailout Not Right

Utrecht, 4 Oct. The (government) purchase of “poisonous” credit is a reward for bad behavior. The American Congress may have approved the bailout of $700 billion, but a top executive of Rabobank* does not see much benefit: more, he rejects it. For a simple reason: “A good bank spreads risks. The banks that have now fallen had much too much in sub-prime related products.”

“When banks risk more than is good for them because government will rescue them when things go wrong, that is a moral hazard: then intervention should not be,” Heemskerk said. “What the banks did was just plain wrong, not smart banking. Period.”

Heemskerk is not against government intervention. He approves the rescue of Fortis and Dexia this week. But, “Governments should only intervene if savings accounts, pension funds, or small businesses are affected. Only banks that serve the public should be rescued. That is also important to prevent a recession. Investors should never benefit.”

Bert Heemskerk (born 1943) is an éminence grise (“a person who exercises power or influence in a certain sphere without holding an official position”) of the Netherlands’ banking system. Although his academic background is theology, he began his banking career in 1969 with the Amro bank. In the early 1990s he ran the wealth management firm Van Lanschot, and in 2003 Heemskerk became the chairman of the board of the Rabobank.

Almost 40 years experience as a banker also means almost 40 years experience with financial crises: he witnessed the consequences of the oil crisis, the crisis of the American savings and loan banks, the Asia crisis, the explosion of the dot-com bubble, and now the credit crisis. He blames banks that took too many risks–“It is only right that such partying of the market be punished.”

Editors: That is a refreshing thought, not many bankers will say that.

B. Heemskerk: “Well, yes, it is healthy for the market if those who caused structural damage are not only held responsible, but also have to take the losses. That is the only way the market can work. Let’s be clear, I am not eager for that to happen. We are in the market as well and every penny that I have to write off is a penny too many.”

Eds: But in order to clean the system the American government should not buy “poisonous” loans?

B.H.: “Yes, after all, we saw that two weeks ago. The market reacted with great glee when Uncle Sam wanted to issue a blank check for $700 billion. I absolutely don’t see the usefulness of such a plan. Nothing but fables and idle thoughts of politicians who present a plan and say they are going to rescue something. But if you think about that plan, you must conclude that the American government can never make it work, they cannot guarantee all the financial institutions in the U.S. Then I fear that the dollar shall crash.”

Eds: So, that rescue plan is wrong?

B.H. “Not entirely. The government must stay away from the markets when things go well, while having good supervision, and intervene when things go badly. The problem, however, is that now there is no direction: all banks and their shareholders in the U.S. are rescued. What they must do is put a floor under banks that provide services for the public. Raising the limit of covered accounts from $100,000 to $250,000 is a good adaptation of the plan.”

Eds: That sounds more like an extension of the Federal guarantee of deposits.

B.H.: “That’s what it is. In that respect I am more impressed with what the Irish are doing: they guarantee all deposits. Even that has its awkward aspects, of course. Why would you guarantee the wealth of the very rich? And why would you guarantee only to a certain amount, only for the seven largest Irish banks? This should also be so for smaller retail banks. What we now see in the U.S., namely that business banks can call on money from savings accounts — this should be forbidden. After the crisis in the 1920s in many countries banks for business and banks for people’s savings have been separated, because banks for businesses are more risky. An adjusted version of the Irish plan seems a good solution for the Netherlands, where the modest savings of working and pensioned people are rescued, Better anyway than the present system where strong banks, like Rabobank, are required to pay while weak banks that have made mistakes perish. The system of guarantees must be changed.”

Eds: Heemskerk says that the current credit crisis is of unknown severity and unknown depth. All financial systems of the entire world are affected. From business banks in the U.S. to Belgian/Netherland’s Fortis to banks in Hong Kong and India. The rescue of Fortis did not surprise Heemskerk: “I have always said that the Netherlands government cannot just let go a “system bank” like Fortis. But it happened much faster than I expected. That is true for the whole flow of events in Europe these last few weeks.”

Heemskerk thinks he understands the markets: “I knew exactly what subprime was, and how it all worked. We all knew that all too well. But what I did not know was that in the U.S. you can just hand over the key to your house and walk away if you want to get out of paying on your mortgage. If the bank sells your house at a profit, the [former] owner gets some back. If there is a loss, the [former] owner pays nothing, but he does not owe anything. It is easy for people to just walk away from their house. And a house that stays empty loses value, the grass is not mowed, the paint fades, leaks develop. So, the bank wants to sell as quickly as possible. And that means they lose big.”

Eds: Why is it that the crisis now hits Europe so strongly?

B.H.: “Good question: how can a very local American mortgage lead to problems in Europe? That was literally because of “securitization.” You put mortgages in a big box, take slices of it and sell them world-wide, in Asia, in Europe. And all money markets, whether they were in Asia, Europe, or wherever, everyone wanted those high returns. I know no exceptions. In the end it turned out that some banks were in over their heads, for instance the German Landesbanks. Some banks were so hungry for margin that they had all their liquidity in that kind of paper. That is even more true for the now defunct American banks, Bear Stearns and Lehman Brothers.”

Eds: What is the involvement of Rabobank in the fall of Bear Stearns in March of this year? You would have been one of the first to turn off the money faucet.

B.H.: “I can’t say too much about that. But, as the European central bank, who recently increased the cost of loans in order to get European banks more in line, so do we. I hope you will praise us for that. It is not true that Rabobank helped to bring down Bear Stearns. No, Bear Stearns had set up their balance sheet totally the wrong way.”

Eds: But you also know that if one bank stops refinancing, a whole troop follows.

B.H.: “And rightly so.”

Eds: Were you in time?

B.H.: “We got all our money back. Even with the fall of Lehman Brothers, in September. Business banking is one of the most uncertain forms of banking. If traditional banks — if they have their book keeping straight — now say that they will only loan out money to business banks at higher rates, I think that is smart. And if they walk away if it turns bad, then that is very good, and good for the system.”

Eds: When did it first occur to you that there was something going on with the financial markets?

B.H.: “Early 2007 we knew that something was going to happen in the U.S. Then it was already known that the number of missed payments on subprime mortgages was increasing. We were not deep into that market, but deep enough to worry about it. Our people in New York did a stress test, and they told us that we would lose no more than 8 or 10 million euro if things got worse. I had questions. Refigure, I told them, and start with the assumption that it will be twice as bad. There was too much optimism in the American mortgage market. Everyone thought even the worst mortgages could never break down.”

Eds: But before 2007 you did not see a problem?

B.H.: “No, the real signal that something was going wrong came from Europe, not the U.S. The bomb exploded when last year early August a big money market fund of BNP Paribas got problems. To avoid a forced sale of investments at fire sale prices the fund was frozen, so that people could not get their money. From that moment everyone wanted to get rid of their subprime paper. The panic started and the price fell further.

Eds: What happened at Rabobank when Paribas got in trouble?

B.H.: “We immediately looked at our investments in subprime, we looked at what we could sell, and we did that in the next month and a half. We could not sell all we wanted. Then we looked, as everyone did, at our lines with other banks and other financial institutions. That meant that the subprime crisis became a credit crunch. From August the interbank system and the lines between banks were strongly restricted, as they remain today. Now trust between banks is virtually gone.”

Eds: Why did banks take such irresponsible risks?

B.H.: “That happened because of the game of private equity and hedge funds. That whole idea of leverage was overdone. There were private equity funds that seemed to be getting richer while they were asleep, but it was based on the assumption that everything is going fine and getting better. Risk was not considered enough. The private equity market is now on its ass, rightly so, because it was based on nothing. Finance people became entrepreneurs, bought businesses and promised management a reward if they made 15 or 20 percent interest. I find it great that all that gets cancelled, now we go back to sustainable businesses. Good businesses are lasting, built stone by stone. The rest is gambling and guessing.”

Eds: Will banks become staid banks again?

B.H.: “The market for combining, cutting and selling mortgages is dead. For now it is traditional banking. If you have savings, or a fortune, you can put it in a bank. If you don’t, then you can’t. Banks will look at deposits again, giving credit only in markets where there is a return. The growth of credit gets strongly restricted. The world’s banking system has so far lost $150 billion from their own wealth. Banks give out ten dollars in credit for every dollar they hold, so 150 billion then is $1.5 trillion less credit available. And it is probably double that.”

Eds: That impacts the real economy?

B.H.: “Absolutely, strongly. Big corporations will feel it, real estate also. Some financiers have already stopped, others, like us, go on, but only for our big clients. We’re not eager to give credit to everyone. We have sufficient credit available, albeit more costly. We like to give credit, but now it is more expensive. That affects the individual.”

Eds: So your clients, not the bankers who perverted the system, pay the bill?

H.B.: “Not really. The people who did wrong, the share holders of the institutions that had big losses, pay the price. You might say, Why should a Dutch home owner now have to pay more interest and satisfy the stricter requirements of the Rabobank. But you should say, That’s the way it always should have been.”

*Translator’s Note: the largest bank in Holland, and the only “large” bank (meaning international) still un-nationalized.