Re-post from March 27, 2014: ABN AMRO, direct issuance, and CRD IV

This week, the government of the Netherlands will decide about floating ABN Amro. This after a perilous and turbulent recent past.

Apparently, the float will be compromised: a management-friendly foundation will be the new owner. That foundation then will issue certificates to investors. This protects ABN Amro against a hostile take-over.

The structure raises two important concerns.

Firstly is the structuring of the deal. From the Global Financial Crisis we learned to distrust structuring. The Dutch government ignores this lesson and contemplates a structure that puts a foundation between investors and the bank. This structure relies on a vulnerable ambiguity in Article 28 of CRD IV (CRR) on Common Equity Tier 1 instruments “Capital instruments shall qualify as Common Equity Tier 1 instruments only if all the following conditions are met: … the instruments are issued directly by the institution with the prior approval of the owners of the institution or, where permitted under applicable national law, the management body of the institution.”

The European Commission obviously dislikes Special Purpose Vehicles (SPV) that protect incompetent managers of weak banks. However, the current wording of Article 28 does not clarify what “issued directly” means. It is therefore ambiguous. The Dutch State may defend the structure by pointing out that the shares are directly issued … to the foundation. Sure. On the other hand, the foundation is an SPV with one purpose: to deny holders of the certificates a direct stake in ABN Amro. (There are other problems with a foundation structure as well: will it be liable for ABN Amro’s debt?  What if the foundation self goes bankrupt? Are the certificates fully loss absorbing?)

My point is that Brussels may decide to clarify the ambiguity, not in the foundation’s favour. That will create a problem for ABN Amro, because from then on the bank will be fair game.

The Dutch government plays a risky game, this to protect incumbent managers, and perhaps for electoral purposes.

Secondly, why float a firm that needs protection? This is like selling a car and then telling the new owner that it cannot drive faster than 50 miles an hours. That car is a lemon!

To me this indicates that ABN Amro’s float is premature, which is depressing: over the last years, management of ABN Amro has not been able to turn ABN Amro into a bank that can stand on its own feet.

Sure, the bank will float, the Dutch government will receive a return on its investment, and the incumbent managers will have their jobs protected. But the float will reveal the denial of the Dutch government. Seven years after the onset of the GFC, some Dutch banks can still not stand on their own feet. That too is depressing.

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