Thoughts on Fine Gael’s Bank Plan
This post was written by Karl Whelan
As Patrick Honohan has noted often in his recent contributions, despite the confusion prevailing in Ireland today about our banking problems, there is wide agreement among banking experts about what constitutes best practice when dealing with banks that are either insolvent or failing to comply with capital adequacy regulations. Regulators seize the bank, place it into administration and the bank’s assets are used to pay off depositors first with bondholders getting paid off if there is anything left.
In our current circumstances, the almost-blanket guarantee on liabilities agreed on September 30 prevents such a solution from being imposed now on the covered Irish banks. I interpret Fine Gael’s new plan as an attempt to achieve an FDIC-style resolution while sticking within the restrictions imposed by the guarantee.
By dispensing with further government recapitalisation and also with NAMA and instead announcing that the guarantee will not be renewed beyond September 2010 , the FG plan would send a signal to holders of longer-dated bonds that they are going to be cleaned out. FG then envisage assessing the banks next year and putting the insolvent ones into administration. These insolvent banks would be restructured into good banks based on the branch deposit networks and the good assets of the banks, and bad banks left with bad assets and debts that expire after September 2010. If the good banks need further capital at that point, this would be underwritten by the State.
In its attempts to achieve best practice within the limitations imposed by the guarantee, it’s easy to be sympathetic to the FG plan. However, factoring in that we are where we are, the plan strikes me as likely to have enormous practical risks. It sends a message to all our leading banks that they are heading for liquidation in August or September of next year. We will be left with the zombiest banking system in the world, most likely involving a complete collapse in the flow of credit coming from our current banks. (Note that the FDIC arrive secretly on a Friday afternoon—they don’t signal 16 months beforehand that they’ll be shutting a bank down.)
The element in FG’s proposal that is supposed to allow credit to still flow during this interim period is the establishment of a National Recovery Bank, re-capitalised with €2 billion from the state. The statement envisages this bank getting €30-€40 billion in additional short-term funding from the ECB, with (as I read it) a state guarantee working as collateral. With these funds the NRB would be “willing to buy at a fair market price the small business lending books or the mortgage books of covered banks.”
The document doesn’t mention the idea of the NRB making loans itself. Instead, it states that the bank “would stand ready to provide the necessary liquidity to the covered banks to get credit flowing.” In other words, it views the NRB as a mechanism to get the zombie banks to lend.
At this point, I’ve lost track of why FG think the zombie banks would do this. Their only possible hope of survival would lie in getting their assets down to such a low level that their (hopefully positive) low levels of capital are in compliance with capital adequacy rules. Indeed, the FG plan itself says that these banks should be “instructed by the Regulator to focus on shrinking their balance sheets” so why they would be keen to borrow from the NRB is unclear.
I’m sympathetic to what FG want to achieve here but the plan strikes me as potentially a recipe for chaos if adopted.
Tags: FG banking plan, NAMA, Nationalisation
May 15th, 2009 at 10:44 am
Karl
You’ve offered a reasonable interpretation of the proposals, but allow to offer some reassurance on your concerns.
The idea of the National Recovery Bank is not to lend to the commercial banks, which indeed need to shrink their balance sheets, but to purchase outright existing easy-to-value performing assets from the banks (loans for cash), and to purchase new lending by the banks subject to agreed criteria.
The sale of high-quality assets to a new state bank (set up under the Irish Asset Covered Security Legislation) allows Ireland Inc. to access more funding from the ECB than can be accessed by the banks themselves under current rules and operating practices. The banks would be expected to use the cash to pay down foreign, short-term liabilities, with the effect that their loan-to-deposit ratios improves. It also has a modest positive impact on the banks’ capital requirements as their risk-weighted assets are declining.
I understand that the French Government have adopted this model and that it is working successfully, though further comment on this would be welcome.
The banks are also paid to act as agents for the new National Recovery Bank in extending credit to business. This has no (or very little) impact on their balance sheet and capital requirements (though they may be required to have some “skin in the game” to ensure reasonable credit standards are maintained).
The proposal is an attempt to address the conflicting objectives by the banks by the Government: (1) to reduce the risk of the Guarantee by shrinking their balance sheets and (2) to get lending going again to make sure economic recovery can be financed.
It is also an attempt to transfer some of the risk from tax-payers to the providers of long-term capital and funding to the banks (not just the shareholders) that will remain locked into the banks even when the Guarantee expires. All other short-term liabilities will effectively remain guaranteed to avoid a disorderly run.
Clearly, there are imponderables on all of this, and I understand the preference of nationalisation to NAMA. But surely it is worth considering other alternatives before we ask the tax-payer to jump headlong into owning banks that seem to be plummeting towards insolvency by the day.
Once we own these banks, there is no way we can avoid paying the entire liabilities of the banks. For a state-owned banks to default would invite national bankruptcy. As occurred in Anglo, we would immediately be pressured in making statements that all the liabilities of the banks will be honoured when they fall due.
Who knows what the ultimate losses of the banks will be? But we have to plan for the possibility that they could be enormous.
Andrew
May 15th, 2009 at 11:01 am
Just wondering if an unstated intention of the proposal might be to induce holders of long dated bonds to turn them in for shorter term instruments at a steep discount.
May 15th, 2009 at 11:10 am
I was just talking to a fairly senior bond trader who works in London. His initial reaction to reading this piece: “they’re (FG) suggesting AIB & BOI bankruptcy ala Iceland”. He then asked what % probability i put on an Irish general election this year, the implication being that FG getting in with this sort of plan would spell very very bad news for Ireland Inc.
May 15th, 2009 at 11:16 am
@ Andrew C:
“Who knows what the ultimate losses of the banks will be? But we have to plan for the possibility that they could be enormous.”
True, but short of watching the banks fold completely, how does this plan help us avoid paying for these losses? My (mis)understanding was that tax-payers will ultimately pay for losses in all scenarios bar the unthinkable?
May 15th, 2009 at 11:51 am
FG’s plan whereby the bank staff would put in a huge effort over 18 months and then 5 years with a view to destroying their organisations, jobs and possibly pensions seems is beyond ambitious. It is suicidal.
Any solution will require the co-operation of motivated bank staff. NAMA tries to address this at a cost. Nationlisation may be weaker in that regard but may work. Those motivational/incentivising drawbacks of Nationalisation are dwarfed by the FG plan of “working hard to make yourself redundant”.
FF certainly messed up terribly in their failure to curb the property boom, and especially in the last few years. However, there is no reason to think that FG (”lower stamp duty now”, or “no worse than FF” as George Lee said recently) or Labour (”reduce income tax”) would have done better. what FG’s proposal shows us is that perhaps we are very lucky that FF got voted in to clean up their own mess and to take the public’s ire which they richly deserve.
May 15th, 2009 at 1:11 pm
FG’s plan is a welcome contribution to the debate. Why the “realist” - Merrion Street - Bacon nexus has to date been considered to be the only option available (hardly an option then) speaks volumes for the dearth of critical thinking that is just one further bonus resulting from the 15 year property binge.
Quite why all and sundry are prepared to accept our very own home grown solution as superior to the reasoned contributions of Buiter, Stiglitz, Morgan Kelly, Ferguson, Roubini and the practices of the FDIC, escapes me.
Actually, it doesn’t. The brashness and “self confidence” that has evolved is now hard wired into our decision making faculties. Why should we be open to other viewpoints? Why bother weighing up the alternatives? This is how we do things here and the sooner everyone understands that the sooner we can settle back into our old practices.
Look at the situation from the standpoint of the bondholder. He has to allocate capital. He observes a wild west property boom, opts to take a punt and thereby adds fuel to the fire. He knows that things will eventually go south but is content to reap equity like returns (and justify his bonus demands) while the music continues. Once it stops he can draw comfort from the fact that the authorities in Ireland will quake at the musings of bond traders like himself. So, all in all, a job well done. He correctly identified an instrument that pays a healthy premium for notionally sovereign risk (all somewhat redolent of the sub prime securitizations - although that is where the parallel stops - there is no constituency seeking to shore up the purchasers of those instruments).
The trouble is that in calling on the sovereign guarantee, our bond investor will weaken the whole edifice. Ultimately, the people will decide that, in fact, the bondholder’s interests are subordinate to the imperatives of educating their children, providing for their families and elderly parents and keeping the army of unemployed quiescent.
May 15th, 2009 at 1:26 pm
Colm hit the nail on the head when he says:
Ultimately, the people will decide that, in fact, the bondholder’s interests are subordinate to the imperatives of educating their children, providing for their families and elderly parents and keeping the army of unemployed quiescent.
There is no rational reason why shareholders are wiped out but these professionals get away scott free.
Nationalising Anglo-Irish has implicitly rescued their subordinated bondholders - about 5 billion. What benefit has the typical Irish person received from this piece of madness?
No wonder bondholders will be interested to know what the odds are on a July General Election.
May 15th, 2009 at 1:29 pm
It’s true that the FDIC tends to visit after hours but the idea of including a deadline has the advantage that it would concentrate the minds of all players beautifully and make them act in a way that will protect the taxpayers’ interests.
Shareholders and management will be forced to take their responsibilities in restructuring and shrinking their businesses. If the State were to overpay for the NAMA assets (which many appear to favour as a way for the government to recapitalise the banks instead of asking the NPRF for money which it no longer has – when I think of this for a while my mind starts to boggle) the businesses could largely continue on as before. AIB, for example, apparently has 31% of its assets outside the Irish State at the end of last year and yet the Irish taxpayer is bailing the bank out on its own, very reluctantly. Who knows whether the foreign entities of the different banks have positive net assets or not but, if they do, it would be a very fast way of reducing capital requirements. This is certainly far from the only manner in which the banks could restructure without reducing lending in Ireland.
Preference shareholders (unfortunately the State, but that’s another story) and subordinated debt holders will clearly be first in line to take the next haircut – hopefully not a No 1, and
Senior debt holders will attempt to put very significant pressure on management to ensure that they are not affected. They may also be willing to take haircuts in order to exit the banks on a voluntary basis.
I suppose it’s a little bit like being told that you’ve 16 months to live instead of that you’re going to die tomorrow. You get some time to put things right and hey, it might never happen!
May 15th, 2009 at 1:39 pm
@ Maurice
“There is no rational reason why shareholders are wiped out but these professionals get away scott free.”
The rational would be that at some stage down the line, assuming we don’t somehow magic up a capital account surplus, we’re going to need these same professional investors to reflate our economy and buy our government, bank and corporate debt. Like it or not, while debt got us into this sad sorry mess, debt, in some part and form, will be part of the solution to getting us out of it eventually. Burning subordinated bondholders without at least going through the ‘con’ side of the argument would be foolish and myopic in the extreme. Morality-based ideological arguments are all well and good, and possibly full of real merits, but the real world is where the other 99% of the population is forced to live.
May 15th, 2009 at 1:47 pm
Colm’s and Maurice’s contributions assume FG’s plan wil be successful in sticking it to the bondholders and not to the Irish economy.
The criticisms of FG’s plan are because it appears doomed to failure by reason ofits methods. If it succeeded it would be great. Similarly, if I were to win the Euromillions Lottery I would be rich.
May 15th, 2009 at 1:53 pm
The idea of getting risk capital to absorb risk is entirely appropriate. However, FG in their document have a table which I find hard to understand. It suggests that there is between 50 and 75b in risk capital in AIB and BOI.
From AIB annual reports their situation is as follows (excluding the recent govt recap) as of end December 2008.
AIB report is at http://www.aibgroup.com/servlet/ContentServer?pagename=AIB_Investor_Relations/AIB_Download/aib_d_download&c=AIB_Download&cid=1237536537595&channel=IRCP
t
AIB tier 1 €9.9b, Tier 2 €4.3b (p34 annual report)
Thats the total amount of Risk Capital they have. BOI is similar. So the total is not 50-75b, its closer to 30b. But they have to operate under a binding regulatory regime, so thatis not all available for absorbing losses (about 1/3 only I suspect) before the banks need more capital or cease trading or massively contract other risk assets (aka a credit crunch). The only source is the state.
So in the FG plan we end up with
* A good clean state bank, eventually, but taking how long? Meanwhile, we have
* undercapitalised zombie banks that as Karl said would be ran out of business instantato.
* resulting in no loans, good or bad, being made to then be transferred to the NRB.
Im not getting it Andrew…
PS: some clarification of the source of the data in the table , the 50-75b, would be welcome
May 15th, 2009 at 2:10 pm
@ Brian
i agree, risk capital (beyond common equity) ’should’ take the hits on the impaired asset values of the banks. However, govts accross the globe have long been assumed to backstop this sort of debt in most cases, particularly when it involves core banks like a BoI or an AIB. You can call it some sort of hidden subsidy for the financial system if you want, but we can’t deny it doesn’t exist. Whether we like it or not, thats generally been the implicit situation in this regard, more recently made explicit via the government guarantee. As many commentators said at the time, the Irish govt was simply “making explicit what was always implicit”.
Only in very specific non-systematic situations like WaMu and Lehmans have all the bondholders become toast, and in Lehmans situation the Fed and US Treasury now regrets having done that.
That said, most of the subordinated debt now trades at 20-30cents, or less, so its not accurate to say that bondholders have gotten away “scott free” from this situation. Many original purchasers have long since been forced to sell and crystalise large losses.
May 15th, 2009 at 2:14 pm
@Eoin
I perhaps should have said…”in principle” for you are entirely correct. I try to be pragmatic as much as possible, and pragmatic means not taking too high a moral tone and letting the banking system collapse.
May 15th, 2009 at 2:23 pm
Brian
The figures are drawn from the latest published accounts of both AIB and BofI and include shareholders’ funds (Tier 1), any perpetual stock (Tier 1), subordinated debt (mostly Tier 1 and some Tier 2), bonds whose maturity date is longer than 5 years (after 2014) and bonds whose maturity date is between 1 and 5 years (most of which cannot be redeemed before the end of the Guarantee period)
The point is that all of this capital and vast bulk of this long-term funding is locked into the banks until well after the end of the Guarantee date. It cannot make a run for the door. Unlike the prospect of nationalisation, the threat of a managed administration procedure gives the owners of these instruments a very good incentive to negotiate early retirement of the debt at very low prices (a sharp haircut). Most of it is already selling at low prices in anticipation that the authorities will eventually wake up and realise that the taxpayer cannot afford to save everyone and still pay for public services for the next generation!
Andrew
May 15th, 2009 at 2:38 pm
Question: How many people were calling for Anglo, or indeed other banks to close if they weren’t up to scratch?
If we had let anglo close - as it should have done - and instead rallied only behind banks that stood a chance of survival then it would be a different situation today I suspect. Having said that the survivors wouldn’t have been a great selection but at some stage bad investment has to be realised, and that’s really at the core of any plan - how to deal with bad investment in a timely and just manner.
FG’s plan is just another idea of the route to take, but the destination, irrespective of the plan is the same.
May 15th, 2009 at 2:40 pm
“with the zombiest banking system in the world” - I don’t think it’ll be so bad.
Currently, the bondholders seem to have little incentive to help the bank, because of FF’s presumed-infinite guarantee. But once the bondholders realise their debt will be converted to equity in 18 months, they might start immediate negotiations to convert sooner rather than later. The current shareholders would happily agree today to have 1% of a healthy bank than to have 0% of a zombie bank in 18 months. And the bondholders would surely want to get their hands on the tiller sooner rather than later? Within days of today, we could have the bondholders owning healthier banks. Win win situation all round?
May 15th, 2009 at 2:49 pm
Andrew
Two points
1) the 1-5y bonds are , mostly, for liquidity purposes and are not strictly sensu capital.
As of now, from Reuters, AIB have 17b total debt instruments outstanding. Of these teh subordinated notes (4b) are trading at 30-60c on teh euro. The 8b of Senior Debt is trading better but that is mostly coming from the guarantee as they are mostly within the guarantee and are mostly for liquidity purposes as I noted
2) how does the FG plan square the circle of undercapped banks (indeed, getting worse as the capital base absorbs the losses) which then have to contract their assets (loans) more and / or get extra capital with the desire to have them extend new loans to SME’s etc?
3) Starting a bank is a non-trivial administrative and legal task, unless its proposed to amend significantly the banking acts. It cannot, I submit, be done in 4-6 weeks indicated
4) What is to stop a run on the banks when this plan is put in place? People would, perhaps, be concerned that perhaps the equity and debt tier of bank liabilities would not be sufficient to absorb the lossses and the deposits would be in play. Is it proposed to leave in place the unlimited deposit guarantee? What provisions for the clearing, transmission and liquidity system are envisaged while the zombies wither away?
May 15th, 2009 at 2:54 pm
In response to Brian Lucey’s comment the data is based on the consolidated balance sheets of the two groups and the notes to their accounts. AIB’s consolidated balance sheet is on page 138 of their 31/12/2008 annual report. Bank of Ireland’s consolidated balance sheet is on page 34 of their interim financial statements at 30/9/08. Maturities of subordinated debt are indicated on page 217 of AIB’s 31/12/2008 financial statements and on page 139 of BOI’s 31/03/2008 financial statements. Maturities of debt securities in issue are included on page 160 of BOI’s 31/03/2008 financial statements and page 232 of AIB’s 31/12/2008 financial statements
May 15th, 2009 at 2:58 pm
OK : Im using Reuters, somewhat more up to date.
May 15th, 2009 at 3:29 pm
by the by, does there need to be a disclosure on this thread? I refer to my assumption that the Andrew McDowell posting here is the FG economic advisor and therefore im assuming one of the contributors to the FG plan. Not in any way suggesting that he wasn’t being upfront about that, but just that a lot of people many not realise that’s he’s commenting on his own plan.
May 15th, 2009 at 3:31 pm
No, I am spartacus….
Seriously, I think thats a good point that we say when we have skin in the game
May 15th, 2009 at 3:50 pm
“1) the 1-5y bonds are , mostly, for liquidity purposes and are not strictly sensu capital”
Not now they aren’t They are about the longest the market will refi at.
May 15th, 2009 at 4:17 pm
I think it’s fair to say the principle of the FG plan is right, it’s just how to go about it really. The long and short of it is that we would be insane not to ensure that share capital and bondholder capital are not written off against losses before taxpayer money is put in.
Nouriel Roubini has put forward 3 potential solutions to the problem in the US as follows:
http://www.rgemonitor.com/roubini-monitor/256694/ten_reasons_why_the_stress_tests_are_schmess_tests_and_why_the_current_muddle-through_approach_to_the_banking_crisis_may_not_succeed
“One option would be a temporary nationalization of such near insolvent large banks: take them over, wipe out common and preferred shareholders, have unsecured creditors take some of the losses (haircuts on their claims and/or conversion of their claims into equity), separate good and bad assets and sell a clean-up bank – possible after breaking it up to create smaller pieces that are not too big to fail – as fast as possible to the private sector. This was the strategy followed for Indy Mac that was taken over last summer by the FDIC and sold back to a group of private investors in about six months. Such temporary nationalization option is feasible and orderly even for systemically important banks as long as Congress is willing to pass soon the new insolvency regime for large financial institutions.
A second option would be the approach favored by a number of economists of separating each troubled bank into a good bank and a bad bank and placing bad assets and unsecured claims into the bad bank while providing significant equity into the good bank to the unsecured creditors that would have losses on their bad bank claims. This solution combines separating good and bad assets and converting unsecured claims into equity and it minimizes the fiscal costs of a distressed bank resolution.
A third option would be to induce unsecured creditors – under the threat of a receivership that becomes credible once a special insolvency regime for too-big-to –fail banks is implemented – to convert their claims into equity. Then, the bad assets of the bank can be taken off the balance sheet of the bank via the PPIP program or a number of other alternative ways to separate good and toxic assets”.
May 15th, 2009 at 4:38 pm
Well, 1 has been well ventilated. The problem with 2 and 3 is that they work great if there are other banks to take the slack while the restructuring is being done. We here have to deal with systemic failure.
May 15th, 2009 at 5:35 pm
One aspect of the to nationalize or not debate puzzles me. Why does the commentariat assume that the nationalization of Anglo resulted in the conversion of Anglo’s status from a limited liability company to an unlimited one?
In other words, Fitzpatrick, Quinn et. al. never accepted that they would be on the hook for all future losses. They invested in the equity and, in the event that losses wiped out that investment, they could and did walk away.
Ireland Inc. nationalizes Anglo and suddenly the calculus changes. The country has to make good any future losses. Has any consideration been given to the option of allowing an entity, in which the Irish state holds a majority shareholding, default? If the price tag is 5 billion, perhaps this merits consideration.
By what mechanism did the state’s acquisition of a majority shareholding in Anglo result in the provision of a guarantee over all of Anglo’s liabilities?
I suspect the arguments that will be advanced will centre on the impact that such a decision would have on the market for Irish sovereign debt. But are these obligations not qualitatively different?
If so, then the next line of defence for the Anglo bondholders widows and orphans fund must be the shock that such an action would cause in the markets - the fairly senior bond trader cited above for example. But these are the same people that live by the mantra of shareholder value, that watch dragon’s den etc. If an investment isn’t working out you do not throw good money after bad. Obviously, I’m missing something. Doubtless someone can enlighten me.
May 15th, 2009 at 6:28 pm
@Colm
I dont think, technically, anglo is an unlimited company. The politics are at work here, not the governance structure
May 15th, 2009 at 8:34 pm
@ Brian and Colm
The point is actually legal, if not formally so.
The Irish government controls Anglo so it is extremely difficult for it to maintain that Anglo’s assets and liabilities are not government assets and liabilities. It’s essentially a semi-state.
Brian Lenihan made two statements in the Dail this week in response to Joan Burton’s comments which essentially accepted this “de facto” status:
“There are so many assumptions in the Deputy’s questions that I wonder where to begin. NAMA is being established under the aegis of the National Treasury Management Agency. In bailing out Anglo Irish Bank it is bailing out the taxpayer, because the taxpayer now owns Anglo Irish Bank”
“What I was pointing out clearly, when Deputy Burton used the word “bailout”, was that Anglo Irish Bank is now owned by the State - the taxpayers. The valuation procedure as between NAMA and Anglo Irish Bank carries no risk for the taxpayer whatsoever.”
I imagine, as a barrister, that he would not have made such clearcut statements if he thought there was any wriggle room whatsoever (?).
This ties up with his assurances to all Anglo creditors (including bondholders) that he made on January 15th last.
It is the single biggest risk with nationalisation
May 15th, 2009 at 8:42 pm
It’s not a matter of either nationalise or privatise in fact.
The assumption is that NAMA has to be some kind of company, when in fact the protocol used for NAMA as a Corporate body can be anything at all. In particular, NAMA could be constituted as a corporate “NAMA Partnership” and used as a framework for a NAMA ‘Rental Pool’ as follows.
Step One: all distressed properties would be transferred to Custodian members of the NAMA Partnership, probably local councils;
Step Two: an affordable property rental would be set and index-linked , and the properties let;
Step Three: the resulting pool of index-linked rentals would then be shared proportionally between a management consortium/network, and an investor consortium, which Day One would be those with claims over the properties. ie the owners and the banks.
The outcome is that the banks and owners would exchange their properties and secured debts for proportional Units eg billionths in an index-linked Pool of “affordable” rentals, which by definition are likely to be paid.
The result is a Debt/Equity swap. It’s just that the equity in a NAMA constituted as a partnership framework wouldn’t be equity as we know it. NAMA Units wipe the floor with debt financially because there is no obligation to repay.
Such a NAMA Partnership would not own anything, do anything, employ anyone or contract with anyone. It would simply be a framework agreement. The requirement for legislation and bureaucracy would be minimal.
Occupiers could acquire Units (and hence a form of equity) by paying more than the affordable rental, either in € or in sweat equity of maintenance, or both.
The Banks need not take a write down immediately - since there need be no sale transaction - and could sell their Units to long term investors either in Ireland or from overseas (eg the Middle East, since this partnership happens to be Islamically sound).
A market rental offering an initial 2.5% return would enable Units to be sold at 40 times the rental flow; at 3.3% it would be 30 times; and so on.
Such Unitisation would go a long way to repaying the debt, and way further than any restructuring which is based upon debt.
It’s not Rocket Science: it’s just not Debt or Equity as we know it.
May 15th, 2009 at 9:00 pm
Chris : the concept of local authorities, whose flagrant disregard for the basics of planning was itself a major part of the underlying dynamic of the bubble, being involved in any way in the governance or worse the ownership of these assets is to my mind horrific.
you also assume that there is rental yield to be gotten from these assets. What for example is the rental yield to be generated from the Irish glass bottle site (400m plus) or the foundations ofthe chicago spire (700m). Much of the asset base is simply worthless.
May 15th, 2009 at 9:09 pm
Brian
In response to your earlier questions:
(1) Yes, many of the bonds are not strictly capital - I don’t think we ever actually referred to them as such. But they are, for the most part, unsecured creditors. But when capital gets wiped out in a business, it is usually the unsecured creditors that then absorb losses.
(2) The idea is that the banks would recapitalise over the next 16 months through (a) sales of performing loans (to the National Recovery Bank) - this shrinks their asset base and the banks’ capital requiremnts (albeit by a modest amount given the low risk-weighting attached to these assets); (b) sales of non-core assets e.g. foreign subsidiaries; (c) early retirement of debt and sub-debt at distressed prices (would have to be given Regulatory approval) (d) conversion to debt, sub-debt and preference share capital into core equity; (e) perhaps even private share placements if (a) to (d) generated sufficient confidence in the capital position of the bank.
Remember, the whole idea is to give owners of non-equity capital and other long-term funding a strong incentive to play ball and absorb some of the losses for fear of ending up in administration and run-off.
(3) The new “National Recovery Bank” initially requires no more than a 100 sq. mtr. open plan office, a few laptops with Internet connnections, a telephone line, 10 bankers and lawyers with experience in asset covered security placements, registration as a counter-party for ECB liquidity operations and Government capital of €2 billion. I’m sure you could put that together in 4 weeks!
(4) What is to stop a run when this policy is announced? (1) Commitment to honour the guarantee; (2) well-communicated commitment that in the (hopefully unlikely) event that banks must be put into administration, all short-term liabilities (exact maturity to be determined long in advance) will be transferred to the well-capitalised, nationalised, good bank.
Clearly, there is a danger that the duration of funding for the banks would shorten dangerously as the end of the Guarantee approaches. That is why the document promises to consider further guarantees of particular issues of term funding by the banks over the next 16 months. These guaranteed liabilities would then also have to be transferred to the good bank in the event of administration.
Eoin - yes, fair point. I am, for my sin’s, FG’s economic adviser. I had indicated as much on an earlier thread.
May 15th, 2009 at 9:31 pm
@Chris Cook. I don’t want you to think I’m knocking your idea at every turn, but I do think it is better suited to oil and gas in the ground ( Which is how you originally proposed the idea? ).
To try to adapt a securitisation idea to rental income, or unitisation of land based on it’s current, or possible future income stream is very fraught, and to my mind not the ideal place to introduce your unitisation idea.
New ideas need time to before the become accepted, so it is important to pick their introduction point. Oil, gas etc. may be a better bet for you, as you are removing some of risk involved in dealing with the human factor to supply the cash flow to/from the units.
May 15th, 2009 at 9:37 pm
Looks like we are going to have a single issue election next month!
May 15th, 2009 at 10:13 pm
@Andrew : have you synthesised what the good bank and bad bank balance sheets will look like once the two major deleveraging transactions are complete - sales of performing loans and shifting what’s left minus bad loans into the new banks - once these transactions are carried out could it be there’s only a need for one big good bank and not two ? Also any idea of how the three outliers EBS, IL&P and INBS fit into the proposal?
May 15th, 2009 at 11:27 pm
It seems to me that FG realise that the Bank Guarantee scheme was a bad idea.
What they are now suggesting is that the day after it runs out we should allow the banks to fail, as they would in a free market. Thus letting the burden of the lost debt fall on shareholders and those who invested in the banks or any institution that lent them money.
For me this is a far better outcome than the Irish taxpayer being held to account for generations.
I realise that it would have severe dissaproval from institutions that lent to the banks(they may never lend to Irish banks again) . I also realise we would have zombie banks for the next 18 months, however it is a far better outcome.
Especially if a new bank is set up to loan to keep profitable businesses going.
May 16th, 2009 at 9:30 am
Karl,
There is a fascinating debate being wages on the German NAMA, with key State Minister Presidents from the CDU, as well as from SPD backbenchers, coming out against the plan. Many of the arguments seem to mirror the Irish debate.
This is probably worth a blog entry?
Here is an excerpt from a Spiegel ONline interview with leading German economist Henrik Enderlein (the Karl Whelan of Deutschland?) concerning the issue of Nationalisation (my translation from this source):
SPIEGEL ONLINE: But doesn’t nationalisation mean that the taxpayers ends up carrying all the risks. Is that really what you want?
Enderlein: Hold on. The taxpayer would also get a part of the profits. If you own a bank, you don’t just own the bad assets, but also the good ones. And many banks are making profit at the moment. (Nationalisation)would mean the taxpayer would profit from that. One of the central problems with Steinbrucks plan is the uncertainty concerning how these profits can be related to the losses arising from the Bad-bank. At the moment the idea is to do it through dividends payments. But the private banks themselves gets to decide on the dividend payments.
May 16th, 2009 at 12:16 pm
@ Eamonn Moran
The FG proposal does not contradict their support for the September 29th guarantee. That guarantee covered depositors and iinter-bank lending. It did not cover shareholders of subordinated bondholders.
The FG position is that shareholders and subordinated bondholders should lose their investment before the state has to start paying up.
FG opposed the recapitalisation of Anglo Irish with preference shares which the government offered last December. They proposed that Anglo Irish be wound up in an orderly process over say 5-7 years. This would have ensured that shareholders and bondholders lost their money before the state was called on to honour the guarantee.
The nationalisation in January wiped out the shreholders but the decision to continue operating the bank as a going concern guaranteed that the state would provide capital - therefore the bondholders would not lose their money which was a nice gift of 5.7 billion from the Irish taxpayers.
The current development relaunch of the FG plan is thankfully receiving more attention as NAMA unravels faster than a Lenihan budget. It is a consumation devoutly to be wished that we have a general election in July before NAMA madness is legislated.
May 16th, 2009 at 12:26 pm
Maurice: The guarantee did cover most of the subordinated debt of the covered banks. Only “undated” subordinated debt (these perpetual instruments are effectively a form of equity). Going through the various bond issues of the banks, the undated stuff is only a small minority of the sub debt. The wording of the legislation is very clear about this, so I’m a bit surprised that there so much confusion on this issue.
See the act here http://www.finance.gov.ie/documents/publications/statutoryinstruments/2008/si4112008.pdf
Go to page 5:
10. The covered liabilities are those liabilities existing from 30 September
2008 or at any time thereafter up to and including 29 September 2010, in respect of the following:
10.1 all retail and corporate deposits (to the extent not covered by existing
deposit protection schemes in the State or any other jurisdiction);
10.2 interbank deposits;
10.3 senior unsecured debt;
10.4 asset covered securities; and
10.5 dated subordinated debt (Lower Tier 2),
excluding any intra-group borrowing and any debt due to the European Central Bank arising from Eurosystem monetary operations.
May 16th, 2009 at 12:37 pm
@andrew mcdowell: I have re-read this and I’m just not convinced….
A bank will sell assets (presumably at a new valuation, not at what they bought at) and with the new money coming in pay off debtors and shrink their balance sheet and the money that goes out will pay off debtors and be lent to SME’s simultaneously?
If banks are geared up 20:1 then it would be something like this - [the ratio doesn't even matter, its the flow of money when these debts are passed to the NRB that I'm curious about]
you had an asset that was 100, and your obligations were 2000 you sell that loan/asset to the NRB (with a markdown I assume?) at 80, now you pay that off your debt leaving you with 1920 owed, a good asset comes off the balance sheet and lots of land based loans still sitting there? Where does the SME money come from? and in the process paying off debt holders at distressed levels and you do all of this without shattering confidence in the countries other banks?
Could you give some basic numbers behind this plan? It seems to contradict itself? (at least to me, am I alone on that folks?)
May 16th, 2009 at 1:56 pm
@ Brian Lucey (no relation)
in support of your point….
I’ve recently made two sizable deposits in Irish banks. I’ve read the FG plan. What should I do with this money?
a. leave deposit 1 in anglo for now and move deposit 2 to a foreign owned bank
or
b. nothing
The way I see it, should the FG plan be put into action, the following will happen: depositors (me) will be put on notice that the guarantee will run out in 16 months. The bank will not get its act together within 16 months and therefore will be put into administration. I will have to apply to get my money out (I’m a sore victim of Morroghs).I will eventually get some of my money but a significant portion will be retained to pay for the costs associated with administration etc., etc.
Of course, in practice, the efforts of the bank to get its act together within the 16 month timeframe will be severly hammered as depositors like me, will withdraw our deposits within a week of the plan being put into action.
The objectives of the FG plan may be laudable. The trouble is I’m not willing to put my hard-earned cash at risk to support it.
If there is something in the FG plan which will guarantee that events won’t play out as I outline above please let me know. I don’t see it.
May 16th, 2009 at 2:08 pm
To respond to some of the issues raised:
Karl W: Yes, the Guarantee does indeed cover the vast majority of the banks’ liabilities, including most sub-debt. Our point is that all undated and long-dated liabilities (equity, preferences shares, sub-debt, long bonds) will remain locked into the banks come September 2010 (when the Guarantee expires). In the (hopefully unlikely) event that the banks have not cleaned up the mess by then, this should be available to absorb losses as the banks are put into administration and the “good” parts split from the “bad”.
Karl D: selling existing performing assets (at or close to book value) supports capital adequacy and the paying down of non-deposit short-term liabilities. The banks also enter into an agreement with the National Recovery Bank to sell on new lending to enterprise to facilitate credit availability (this had no or little effect on their balance sheets) while they themselves shrink their balance sheets.
Bill H and Karl D: the plan is based on principles and process. It is impossible to put detailed numbers when, like everybody else, we have no idea what the size of the hole in the banks’ balance sheet will turn out to be. The whole idea is that we need a plan that caters to the possibility (again, hopefully unlikely) that the losses are much greater than currently anticipated in a way that would sink the public finances if we acquired these assets either through NAMA or nationalisation. The three outlier banks should be put through the same process.
Regarding the ultimate size and numbers of good banks, I suspect most of us would agree that it will be better in future to keep bank balance sheets smaller until some type of EU regulatory and fiscal support system is in place. I had read somewhere that there is no evidence of economies of scale in retail banking beyond balance sheets of €80-€100 billion.
Andrew
May 16th, 2009 at 2:50 pm
Should Ireland have an FDIC style body to protect its interests in guaranteeing depositors?
May 16th, 2009 at 5:24 pm
@ M Lucey
All of the Irish-owned banks covered by the guarantee scheme have total assets which are either twice or more the amount of their deposits (customer accounts) per their most recent published financial statements (a total of approximately 250 billion euros of customer accounts for 570 billion euros of total assets). These deposits are currently guaranteed and I believe that the Fine Gael plan states that all deposits would transfer to the good banks.
May 16th, 2009 at 6:01 pm
I think the whole point here is Fine Gael messed up when they supported the Deposit Guarantee Scheme and our now trying to hide the fact. Only one party voted against the guarantee (The Labour Party),as their spokesperson saw the likely developments that would follow from that decision. Fine Gael followed the Govt. meekly, led of course by the bank shareholder Richard Bruton.
I withdraw my (Civil Service) salary each f’night and retain it in cash and have done so for many months. I was recently surprised by how many of my colleagues do the same. I would not leave more than a few hundred euro with any Irish bank. The reason being in over 30 years in the Civil Service have never seen such incompetent ministers and Secretaries General, almost all of whom (the SGs) are closely associated with one party.
Finally, the level of losses on the banks’ mortgage books will be huge and has not been factored in. They will fall into two groups, those who have speculated using their home as the source of deposit for their fast depreciating speculations in Ireland & abroad. The second group are those losing their jobs, who cannot pay their mortgages and now find their houses are worth perhaps 50-60% of the mortgage. Losses here may exceed those of the developers/speculators.
In the next week or so, we are looking at the Irish Independent Group & Danniger going into receivership to bring a degree of reality to the discussion. As Martin Turner put it back in the 1980s “Say goodnight Dick”
May 16th, 2009 at 6:07 pm
@Andrew Mc. : If the banks are on-sellers of credit - who wears the risk? You mentioned skin in the game - who establishes credit policy for example - a state owned wholesale bank would not have the competence to dictate credit policy unless it operates as a commercial retail bank with others acting as appointed agents. Is it suggested that NRB makes available targetted enterprise funding the banks as agents are expected to direct at the correct targets -in which case once again an overarching credit policy is required. Could it be the targets are intended to be job creation enterprises who will be financed by the NRB via new banks(agents) with the NRB wearing most of the risk?
I asked the question on synthesising as the FG plan implies the new banks may not have the “where with all” to lend off their own balance sheets - if they are expected to then what type of lending is being proposed?
May 16th, 2009 at 8:21 pm
@MLucey (gotta be a relative…)
Thats classic rational individual leadign to irrational aggregate behaviour. Cant blame you indeed.
@Joe : indeed, but as Mlucey says, its how long it would take to work out enough for the depositors would be key.
Maybe we would all do well to read Antoin Murphy;s classic 1978 “money in an economy without banks” on the 1976 bank strike.
May 17th, 2009 at 1:04 pm
I have sorted the queasy feeling noted in a previous paper. Another bromide in the IT tomorrow…
May 17th, 2009 at 7:51 pm
@Mark Dowling - we have a scheme, its called the ‘deposit guarantee scheme’ and to cover the billions on deposit there is a mere 527m in the scheme in total to cover everything. the issue is (and always has been) that there isn’t enough money to save even one banks depositors if one of the big ones went, it would only help stem the bleed.
May 17th, 2009 at 7:59 pm
@Andrew McDowell: So you ‘don’t’ mark down performing assets? In a mark to market world that will be translated as ‘overpaying’ for them.
Separately - what would bond holders or depositors do if you start to strip out the good assets [even if you did over pay] and leave the junk? Is that not asset stripping a company of the only good parts it has? It kind of inevitably means they’ll go bang.
In the same plan you say to settle up debts at ‘distressed prices’ while taking out any of the good assets…. do you really reckon that would end well?
May 18th, 2009 at 12:14 am
@LorcanRK
In fact I do distinguish between distressed properties which are complete (and therefore lower risk) and undeveloped land.
I made the distinction quite clear in Dublin last November here
http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-credit-crash-presentation
Renting out completed property at affordable rents and then unitising the rental pool is straightforward and possible within a NAMA framework.
My proposal was put forward recently in Ireland by James Pike,
http://www.nationalhousingconference.ie/pdf/2009/James-Pike.pdf
who attended my lecture and a subsequent meeting.
To be fair, numbers were crunched in Ireland, but it would have been nice to have more than a throwaway and opaque credit for several years work.
Not impressed.
May 18th, 2009 at 7:39 am
@Chris Cook
Well, as an academic “a throwaway and paque credit for several years work” is more or less what one gets.
However, my problem wit your approach is that it presumes that there is an identifiable yield. In many cases there isnt. So what to do with these?
May 18th, 2009 at 7:45 am
@karl - I know we have a guarantee scheme, my query was more about how the scheme was administered and specifically whether the administrators would have FDIC style powers to seize banks in bad times and raise funds for the guarantee pot in good times rather than waiting for the disaster and rushing legislation through the Oireachtas.
May 18th, 2009 at 7:53 am
MArk D
They dont, at present. Part of the problem is that we dont have good structures for ealing with failing banks. the other is that most of the solutions given are great, if we are dealing with a few even large banks in the system; but we here are in new territory, a failed system in toto.
May 18th, 2009 at 8:03 am
One thing i have been wondering. What is the difference between the notional and market value of the Irish Banks bonds?
May 18th, 2009 at 8:44 am
@mark dowling
in that case we have the worst of both worlds, neither FDIC style powers, nor the actual money to do the job with for even a single major Irish bank.
€527m would save an institution for about a week (depending on the size of the run - if institutional depositors started to flee [as happened or was about to with Anglo] it wouldn’t cover a day)
May 18th, 2009 at 8:54 am
@Mark D: The Irish DGS is a bare mimimum DI scheme: a classic paybox administered by the central bank. Ex-post its fund is small with a reconstitution provision where a bank fails. Rceent draft legislation adds litte to the bare minimum approach although risk based pricing is included for.
Contrast with the FDIC and a prompt corrective action regime and you’ll find a hell of a lot of constructive ambiguity within the Irish financial safety net. Such was this ambiguity that it’s clear the sytem failed to understand and respond to the systemic risks posed by individual banks behaviour and bank collective bursting of the balance sheet. What would have been the response of an independent DI system having proper oversight of bank risk on behalf of unsophisticated depositors, powers to price in risk for its guarantee provisions and early stage intervention provisions?
The latest proposal is to locate the three major financial safety net components LOLR, DI and Prudential Regulation within one body -something that needs careful assessment as there are inherent conflicts between their differing mandates.
May 18th, 2009 at 8:55 am
@PJ Fitzpatrick
Many of hte longer dated bonds in the two main banks are trading at 30-50% of face value. Only ones that are holding up are the ones covered by the guarantee
May 18th, 2009 at 9:08 am
@ Brian Lucey
In Euro terms would you know what the overall amount would be approximately?
May 18th, 2009 at 9:11 am
As people reading earlier parts of the thread may have guessed, I’m a (42 year old) accountant and not an economist. I hope you don’t mind me squatting! I’ve tried to prepare a preliminary personal estimate of the costs of the different approaches being proposed. My only problem is that it contains a table (it’s in Word). Can anybody tell me how I could post it on this thread?
May 18th, 2009 at 9:15 am
@Joe
You could go to google docs upload it and then publish it(if you have a googlemail). That will give you a url that you can link to.
May 18th, 2009 at 9:18 am
@Joe
oh, costs…go look here for costs…
http://trueeconomics.blogspot.com/2009/05/economics-16052009-nama-week-irish.html
@PJ Fitzpatric
In the region of about 10b trading at around 40% and around 16b trading at more. Note tht that is capital, not the liquidity bonds that FG are thinking is capital (its working capital)…
May 18th, 2009 at 9:52 am
@ PJ
Thanks for the tip. I’ve just very belatedly joined the world of bloggers at
http://escapefromnama.blogspot.com/
@ Brian
Constantin’s article is excellent and his conclusions as to the black hole that NAMA would be are, I think, shared by almost everyone on this thread.
He makes one key assumption though which I think is incorrect. Even Davy’s discount of 15% is impossible as this would take 13 billion of capital from the banks. 20% to 25% would take respectively 18 billion and 22 billion (because the government would have to recapitalise). They only have about 8 billion (assuming 15-7, though they may have borrowed some of the 7 billion) left in the NPRF kitty and some of this is bound to be illiquid. The only way they can buy the NAMA assets is by overpaying.
While figures in any estimate of losses under the different possible approaches are necessarily subjective because of lack of information, I’d be very interested in any thoughts you had on the categories of losses that the taxpayer will incur under the different scenarios
May 18th, 2009 at 11:52 am
FG keep saying that the sub-ordinated debt holders should take some of the hit - this can be done fairly simply right now by having the banks go into the market and buy back their own heavily discounted bonds (which as Brian said trade as low as 20-30cents, though the banks would probably have to tender in 40-50c territory). They then get to book these gains as fresh capital on their balance sheets. In fact, this is exactly what a lot of analysts expect them to do in the next few weeks.
May 18th, 2009 at 12:58 pm
Eoin, that assumes that the those tendering purchased at par. If the bonds are currently trading at 20-30, it seems fair to conclude that some proportion of the current holders purchased the bonds at 30 or below. For those holders, redeeming at 40-50, rather than taking a large hit, would, in contrast, earn rather a nice return particularly when they may only have held the paper for a few months.
Given the parlous state of the banks and the uncertainties over future loan losses, it would be irresponsible to use whatever liquidity they have to take out the bondholders. Also, I wonder whether the government would be amused to see the funds it injected into the banks being applied to take out the bondholders.
Granted, it may shore up book solvency, however, future access to the capital markets cannot be taken for granted. In this environment, liquidity trumps solvency. The bondholders should be forced to stick it out and accept whatever economic interest their claim on a book of (declining) assets entitles them to. No doubt, the financial engineers currently advising the banks would disagree with this. After all, they need to justify their 7 figure consulting fees.
May 18th, 2009 at 1:32 pm
@ Colm
why do we care what some current bondholders bought at? I thought the argument was that the original purchasers of this hybrid debt mis-priced it by only getting a yield of 5-6% on what was essentially equity in many regards? Those buying at 30c, and so 20%+ yields, made no such mistake, or at least that would be one argument. Those bondholders who bought at 100c and sold it to the current holders at 30c (and some of this stuff has traded as low as 10-15cents) have already taken a rather large hit, so why should we care if someone else has managed to buy them down at those ultra-depressed levels and managed to make a profit?
The purpose of this exercise would not be to ‘punish’ the debt holders, but to ‘punish’ the debt itself, by retiring it at a fairly steep discount to par, and therefore improving the capital positions of the banks themselves. As long as the banks and the government feel the price paid to retire the debt is a fair one, then whats the problem? For the record, RBS and Barclays, among others, have already undertaken such tenders, and their tenders were greeted with much applause from the debt markets.
Your notion of not wanting to ‘reward’ current bondholders smacks of biting your nose off to spite your face. You seem to want to punish debtholders more than you want to get the banking system working again. In an equally poor argument, this would imply that nationalising the banks at their current share price (as touted by many many commentators) would somehow amount to bailing out anyone who bought in below that level.
May 18th, 2009 at 5:15 pm
@ Eoin
“The purpose of this exercise would not be to ‘punish’ the debt holders, but to ‘punish’ the debt itself, by retiring it at a fairly steep discount to par, and therefore improving the capital positions of the banks themselves”
Excellent, succinct and clear.
May 18th, 2009 at 10:58 pm
Hmmm… Eoin’s argument makes sense to me. The argument about when bondholders purchased could equally be levelled at shareholders in a straight nationalisation context. Either way some bottom feeders are going to make some money, but the system is going to ensure that happens for somebody in any scenario that doesn’t involve liquidating the banks, because sometimes we need people to gamble on the upside.
May 19th, 2009 at 7:14 am
Far be it for me to say i told you so…tendering to buy back 75% of outstanding tier 1 debt, 40/45 cents seems the likely tender price on these….
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLI41462120090519
May 19th, 2009 at 9:32 pm
Eoin, your point about the irrelevance of the level at which a secondary purchaser acquired the paper to the taxpayers’ interest is well taken. I mentioned it solely to add context to your claim that purchasing the paper at a discount will result in a haircut to the bondholders. A haircut to the original bondholder yes, but not necessarily to the bottom feeders.
Whether intentionally or not, you chose to ignore the second and more important point. In tendering for the bonds, there is a very real risk of overpayment. Doubtless, many will scoff at the notion that at 40-50 the debt is overpriced. This would imply that there is no value in the equity and that 50-60% of the debt is underwater. However, it is not all that long ago that those who questioned the notion that house prices could only go up were lampooned.
I do not have the data to validate this line of argument, however, I understand that there are different classes of debt (subordinate, unsecured, senior).
Accordingly, I would expect the subordinate tranche to be the first to take a hit. Given the level of uncertainty as to the value of the bank assets, I do not believe that it is a stretch to posit a scenario where the subordinate debt is worth less than 30. You only have to examine the impact that house price declines are having on bank solvency in the US to grasp the magnitude of the risk
(as support for this assertion I recommend the attached article and more broadly its parent website
http://www.levy.org/pubs/pn_09_03.pdf
Ireland’s house price appreciation is in a different league to the US so it is not unreasonable to anticipate that a more drastic decline in house prices and development land banks will result here. Couple this with the risk posed by the economic contraction to the banks’ business, credit card and personal loan books and their forays into Bulgarian real estate etc.
As and when the default rate on all of these assets crests over the next few years, I expect substantial further write downs to bank assets. With such a scenario currently unfolding, to advocate the buyback of debt at the 40-50 level strikes me as the epitome of hope over experience. Once those funds have been transferred to the insurance companies, hedge funds etc. (who, as I mentioned earlier, may well profit from such an action), they cannot be recouped. The banks will have reduced whatever liquidity cushion they currently possess. These same institutions, scarcely believing their luck, will, rather than looking favorably on the banks with a view toward additional fixed income investment, judge them at best incompetent stewards.
So to summarise and address your point directly, I for one would care if a speculator was taken out by taxpayer provided funds at 40, if the true value of the assets supporting the debt was less than 40. If I understand your argument, you seem to be advocating that the banks purchase this debt at a premium to its true value in order to placate the markets and ingratiate themselves to the fixed income decision makers.
You suggest that the banks and the government would set a fair price for the paper. Neither of these constituencies have impressed in the arena of price discovery to date.
On a separate note, I see that interest in this thread is dwindling. At the same time, the fact that no-one picked up on this second point leads me to conclude that (a) it doesn’t hold water (which is always a possibility and one that I am open to persuasion by cogent argument) or (b) that if a response is sufficiently robust and bombastic people will assume that it is right and opt not to give the matter any further consideration. Sadly, I feel that the latter impulse is on display here.
I cannot conclude without addressing your suggestion that I have no interest in a functioning banking system. I am attempting to provide a counterargument to the orthodox view that banks should be saved whatever the cost. Ireland simply does not have the resources to pursue that path. My hope is that sanity prevails and that whatever resources the population can devote to this problem are targeted on getting credit flowing again through the establishment of a Buiter style good bank (which is also discussed in the paper referenced above).
The contractual rights of those who hold claims on the bank’s assets should be honored by ensuring that the bondholders receive the value of their subordinate/unsecured/senior claim on those assets either through a debt for equity swap or whatever other mechanism the insolvency laws deem apposite. The value of the bondholders’ claims should in no circumstances be enhanced by a taxpayer funded bailout.
May 21st, 2009 at 6:43 pm
irish gov. want to go the argentine way? just look, what happend to them …
May 22nd, 2009 at 1:41 pm
@ Karl Whelan
Thank you for the clarification on the guarantee.
In the case of Anglo Irish bank, the notes to their 2008 accounts show
2.836 billion in undated loan capital.
A not inconsiderable sum.
Furthermore, the earliest maturity on the dated capital of 2.112 billion is 2114, four years after the expiry date of the guarantee.
So there was a total 4.948 billion available.
And that is why I am so angry at the nationalisation of anglo Irish Bank and Minister Lenihan refusal to liquidate that bank.
May 22nd, 2009 at 4:13 pm
Correction
earliest maturity on the dated capital of 2.112 billion is 2014, four years after the expiry date of the guarantee.
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