Sunday, October 19, 2008

Dutch insurer ING reports first loss, accepts infusion from Netherlands government; indicates that Lehman Brothers was just a small piece of this

On Friday, October 17 2008, the stock of Dutch insurance giant “ING Groep” dropped about 40% when the enterprise announced a sneak-preview of its Nov. 12 financials for the third quarter, admitting a prediction of a $670 million loss in write-downs, much of it in real estate. Apparently this is the first quarterly loss ever for the global enterprise.

The American company “ING-USA” (headquartered near Atlanta) offers a Sept. 22, 2008 press release in which it notes that its exposure to Lehman brothers was “only” $100 million, when it has a capitalization of $30 billion.

Then on Friday the Netherlands press release detailed various write downs of about 1.6 billion Euros before tax, here. The point that strikes one here is that Lehman Brothers itself, on the global stage, while large, is still only a small portion of the bubble that exploded world wide and took down the whole financial system. Presumably ING’s experience is typical of most large financial institutions around the world (outside AIG and maybe Fortis). Hollywood-like conspiracy theories that short sellers and targeted CDS swap purchases targeted Lehman can hardly explain the size of this collapse, of a “bubble of bubbles.” (Hollywood examples include the Fox 2008 movie "Deception" and the NBC series "Knight Rider".)

On Sunday Oct. 19 ING issued another press release, now indicating the acceptance of an “injection” of 10 billion euros from the Dutch government, with all the technical details here.

Like all major global financial institutions, ING owns many subsidiaries, mainly banks and life insurance companies, in many countries. Insofar as employees and retirees (I am one, since 2001, from ING-ReliaStar, part of ING-USA, in Minneapolis) are involved, their concerns would focus on the operational profitability and viability of the constituent companies that actually employ (or employed) them. Generally, as with all insurance conglomerates, these are stable and operate according to the fundamentals of their own businesses and not the external issues of the holding companies. It is likely that individual units may be bought and sold and that, in general, insurance and banking will undergo more consolidation, involving ING and many other enterprises. The media covered this point in general terms when discussing the US bailout of AIG. International companies could spin-off US operations as separate companies for exchange trading (as conventional stocks rather than ADR’s) in some cases.

Having pondered all this stuff about debt bubbles (like James Grant’s musings (“The Confidence Game”) in the Weekend Wall Street Journal, I think back to a morning at a garden apartment in Dallas back in 1979 when a stray cat that had “adopted” me presented me with a bird carcass as “payment” for taking him in. Imagine that, a wild animal dealing with man with his idea of “fiat money”, barter perhaps, certainly cash and living within one’s means, Suze Orman style. (The domestic cat, or any cat, may be the only animal that can do this. It's interesting that ING's corporate trade dress contains a lion, as does the American movie studio MGM's).

Perhaps, a few hundred light years away (if one can dismiss the Goldilocks Theory) there is a league of civilizations on several planets, may even solar systems, with some “galactic” monetary system akin to ours. When you have to worry about the limitations of the speed of light, the notion of “present value” in actuarial formulas takes on whole new meaning. Perhaps in "dominions" (to refer to Clive Barker's work) the fiat currency is "souls" themselves. It's time to film "Imajica" (or perhaps a college student's "Profit Wars").

Update: Oct. 20

Ben Stein (the movie "Expelled") has an article on "How Not To Ruin Your Life: How to Ruin the US Economy" in which he traces the financial crisis to Democrat pressure on banks to make home ownership available to non-credit-worthy (translate loosely as low income) people. Then, the financial industry invented securities (derivatives and credit default swaps) to temporarily shield themselves from the risk and short sellers decided they could make money by shorting the holders of notes that could default, precipitating the crisis. A blog called "The Just Third Way: A Blog of the Global Justice Movement" comments here, and Stein's original article in on Yahoo! (there is also a video with numerous search references). Stein follows up with "Why I'm Still Buying" today here. As Stein explains, the politicians and Wall Street created a structure that sounded appealing (especially to salesmen who have to "always be closing") that was not sustainable; it could not survive the next period of softness in housing prices.

Stein suggests prospectively that if someone brought litigation in New York State, a judge might declare enforcement of credit default swaps contracted in the state (that's most of them) to be against "public policy" and that they be resolved by returning premiums. That could stabilize many companies.

Update: Oct. 22, 2008

Here is a discussion (by Gregory S. Davis) of ING's situation, "ING Capital Injection A Mere Booster Shot," link here. Davis writes in his "final thoughts": "The desperation that investors saw from firms like AIG (NYSE:AIG) for capital infusions was absent from ING's capital infusion from the Dutch government."

Update: Nov. 12, 2008

ING makes official third quarter report, "ING reports underlying net loss of EUR 585 million in 3Q", here.

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