earliest maturity on the dated capital of 2.112 billion is 2014, four years after the expiry date of 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.

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.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSLI41462120090519

Excellent, succinct and clear.

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.

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.

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

@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)…

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)

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.

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?