ING Direct was source of success and problems for Dutch bank

The internet savings bank ING Direct is the immediate cause for the ING financial services group being split. However, the American branch of ING Direct is being divested with great regret.

There was some confusion on www.wethesavers.com, the marketing blog of ING Direct USA. A 'Careful Saver' posted his concern on the blog on Monday following the announcement the bank would be split: “Read in Dutch news that ING will sell ING Direct. Time to remove funds?” ING’s web manager responded immediately: “Your savings are just fine. It’s business as usual at ING Direct. We’re still Orange, still as safe as Fort Knox and still committed to delivering a terrific customer experience.”

At first glance the history of ING Direct, the internet savings bank of the ING group, is quite a success story. After a cautious start in Canada around the turn of the century, the bancassurer set up a network of ING savings banks in North America and Europe. The internet savings bank quickly grew into a cash cow for ING. By the end of the second quarter, the internet savings bank had accumulated a total of 203 billion euros in savings.

The concept is simple: by cutting out expensive office network and related personnel costs, ING was able to offer competitive saving rates. It combined this with a good customer service (where you can make free calls to a help desk and be assisted by real people, not computers) and a marketing strategy based on invoking the community spirit.

This proved popular with savings averse Americans. In recent years ING Direct USA has been setting up ING Direct cafes: trendy, bright orange internet cafes where “saving is as easy as drinking a cup of coffee”. Over time, ING Direct cafes have sprung up in New York, Philadelphia, Los Angeles, Chicago, Honolulu and Wilmington to name a few. Wilmington also houses the headquarters of the company in a trendy factory building. Add the fact that the US chairman, Arkadi Kuhlmann, is a mediagenic financial cowboy and the success of the company is easy to explain.

Notorious Alt-A-mortgages

However at the same time, ING Direct USA is also the cause of the problems that the parent concern in the Netherlands is battling. Over the last few years ING has imported a problem portfolio totalling up to 32 billion dollars on American mortgage obligations. These notorious Alt-A-mortgages, also known as liars’ loans because information regarding the incomes of the clients was not checked out, have been responsible for delinquencies amounting to billions since the crisis broke out around mid 2007.

The investment in the portfolio of problem mortgages was the result of American regulations. A minimum of 50 percent of savings accumulated in the US had to be invested into housing market related products in the US. ING was aware of this requirement when the company started its ING Direct adventure.

Since ING Direct had no office network in the US, it was unable by itself to convert the rapidly growing savings amounts into mortgages. Instead it bought mortgage obligations, initially in the relatively safe and therefore low return obligations of semi public Fannie Mae and Freddie Mac, but progressively also in less conservative and higher return commercial alternatives like the Alt-As.

In this way the company loaded itself with 32 billion dollars (22.6 billion euros) in mortgage obligations. A similar amount was added on over a period of time in so-called primary mortgages, which ING Direct itself sold via the website and the cafes. In doing so, the company made a conscious choice to put in more than 50 percent of the savings funds into real estate related investments in the US. In the end the amount of savings funds invested in mortgages or mortgage obligations was in fact in excess of 86 percent.

EU pressure to split the conglomerate

The Alt-A portfolio is the direct cause for ING having to write off billions from its investments. The housing market crashed and the investments had to be drastically devalued each quarter. The problem became so big ING first had to receive a rescue package of 10 billion euros from Dutch finance minister Wouter Bos and subsequently transferred a large part of the portfolio of problem mortgages to the finance ministry.

That last transaction is now the direct cause for the entire concern to be split. Criticism came from Brussels over the manner in which Bos had drafted the agreement covering the bad mortgages. European Commissioner for Competition Neelie Kroes demanded an alteration of the package. In addition, she put pressure to split the gigantic conglomerate that ING had become over the last two decades, into more manageable units. Early this week it became clear how ING’s new chairman Jan Hommen plans to go about it: the insurance arm will be hived off, a new consumer bank will be formed and ING Direct USA will be sold. This way, ING will bid goodbye to a grand success story that in the end also became a huge headache.