@LorcanRK
there is no celebration for shareholders or taxpayers. the irony is in the reaction of those who confuse economic commentary with conspiracy theorising! m2m assets per nama good, m2m liabilities through buy back crony capitalism.

If their position had been sound they would not have been able to buy their bonds at such a discount. They can only celebrate the strengthening of their capital position because it had become so weak.

The guarantee was going to expire in September 2010 but now the Minister can, if he chooses, extend the guarantee in its current form if he feels like it.

we do not agree on risk to tax payer which to my simple mind is not evident. ironically the bank is behaving as explicitly incentivised by the govt!

A couple of points.

1. I don’t have any problem with the banks doing a debt exchange of this sort. I am just pointing out that it has some implications that I didn’t see reported elsewhere.

2. Dated subordinated debt is covered by the current guarantee. Look at page 5 http://www.finance.gov.ie/documents/publications/statutoryinstruments/2008/si4112008.pdf

The government can choose to extend the guarantee to cover a smaller class of assets. However, the recent bill that passed the Dail allows the guarantee in its current form to be extended. It does not mean they have to do so and I think they should not.

3. I am aware that Sheehy and some others are going but there are other people in AIB management who have a very strong incentive to come up with the €1.5 billion in core equity capital requested by the Minister. Strong enough incentive that perhaps the swap isn’t really such a great deal and also has some risks to the taxpayer.

As far as I am aware subordinated debt is not covered by the government guarantee and certainly no issue beyond sept 2010 (which excludes the current aib issue) is covered by the guarantee. that why the coupon is 12.5% and not 120bps above the risk free rate which is the rate on issues covered by govt.

it appears kw’s analysis is incorrect. the bank’s have raised additional capital to negate the state’s option to purchase an additional 25% in bank capital for a couple of cents. In aib’s case the three most senior managers have announced their retirements and the management team in the irish business has been completely changed. Kw’s assertions are incorrect its not about retaining managements position/jobs.

Thanks for confirming what I intuitively saw as a bad deal from my French campsite.

The driving force behind the deal is a desire by existing AIB management to retain their jobs. As you point out, the way they have booked this increase in equity for AIB bank is by beggaring us as taxpayers.

I would love to know what proportion of our major two stockbrokers incomes come from commission on marketing bonds to investors. They are remarkably good at putting the wind up Minister Lenihan and defending professional bondholders interests.

These self same gentlemen were not so considerate of their less sophisticated clients when the regulators forced them to buy back perpetual bonds which they had sold to credit unions.

@ Sean O’
It is less of a secret now for sure! It is worth repeating as otherwise people may cling to false hopes that the banks are solvent. Their lives are slipping away when they could be elsewhere starting again. The last desperate acts of those engaged in offloading worthless stocks onto pension funds require that the hope be kept alive for a few more months. Most cannot escape. But some still can, albeit at a loss. By staying they are being bled dry.

Section 10.4 of the legislation says it will cover “Asset covered securities”.

Also known as covered bonds. The same thing that the ECB are spending billions buying at the moment. It is a badly kept secret that the banks are buying government debt and refinancing their purchases through the ECB.

So, we are now in the situation where the government are potentially guaranteeing their own debt. If (and remember. I said this is merely speculation) a bank was to default on one of these covered bonds (whether to the ECB or some other investor) the government would then have to pick up the tab for the bond, while at the same time having to pay the underlying debt…

Speculation out of the way, if your figures are correct Karl, AIB will be paying €325m in coupons on the new debt annually for the next ten years. This will certainly make it more difficult for the bank to grow its core tier 1 through ‘retained profits’.

This story is a long way from over yet.

However it does show another ugly side to this guarantee with the addition of this buyback debt on the taxpayers back.

I cant help feeling there are other forces operating here.
Remember last september when the son of then chief of Irish nationwide,Mr. Fingleton sent e mails round London brokers hawking business because the banks now had a State guarantee.

Recently,too ,Citibank was involved in large buybacks of its bonds at very low prices and was able to book a profit on the strength of it while the American taxpayer was guaranteeing its debt.

The following is an extract from April 9th of Charting Stocks which explains:

………”It was only a month ago when Citigroup CEO Vikram Pandit assured the public that his troubled bank was “Profitable” for the first 2 months of 2009. The news sparked an immediate rally which lifted the oversold stock market from its March lows. We, at Charting Stocks, did not share in the new found optimism (See: Fool Me Twice: Citigroup CEO Shouldn’t be Trusted) because we’ve heard these assurances before from Mr. Pandit (Which proved to be false). It came as no surprise when Citigroup announced an $0.18/share loss (about $10 billion) yesterday. Keep that in mind for the next time Vikram tells you things are going swell.

Sure, the media has touted the results as positive and even echoed the company’s talking points in which the claim that the bank was actually profitable for the quarter if you exclude the payments made on preffered shares. Is that accurate? Well, yes it is but it excludes a very important fact which was not advertised in the banks press release - More than half of Citi’s reported fixed income revenue came from a $2.5 billion write-UP, thanks to an accounting rule tied to credit default swap positions on Citis own debt.

Morgan Housel in a recent Motley Fool article explains “The rule exploits the notion that a company could buy back its own besieged bonds on the cheap, leading — however bewilderingly — to profit.

In other words, Citigroup was able to book a massive profit because investors are betting that’s it’s still on a road to bankruptcy. ”

I have some magic beans, I wonder if Mr Lenihan would be interested. Imagine those green shoots, Brian, make me an offer.