Bloomberg Article on NAMA

http://www.independent.ie/business/commercial-property/retail-rental-market-now-close-to-collapse-1897898.html

I notice how in the article, people unnamed think Nama can rescue them! Others accuse the architect of the greatest ever disaster to be self inflicted as out of touch with the commercial rental market.

TARP is also suffering from a lack of transparency as the Fed is refusing to say where Govt money is going! Ron Paul’s attempt to audit the Fed is becoming successful?

If Madam President does not dissolve the Dail, once the Nama Bill passes, it will be obvious to many that there is an unbridgable gulf within Ireland.

The President’s power to dissolve the Dail is very limited, and does not arise in current circumstances. Briefly, she can only do so at the request of the Taoiseach, and her discretion is limited to the option of refusing that request if the Taoiseach no longer has a Dail majority.

“Ireland, like other countries, has to get over the notion that creditors are a sacred group who must be spared at all costs.”

Why does this government continue to bow to creditors? Have they dug themselves into a hole on this one? What is the view of Green Party supporters on this homage to creditors? You don’t need a Phd in Economics to feel deeply suspicious about handing a gift of at least €7bn to spare the banks and their investors/creditors of their gambling losses.

Yeah the shareholder reference seems odd. Surely shareholders have taken the brunt of the pain? Well, except those who bought back in at 10c and got out at €2. Damn – shoulda wagered €5k on that. Oh well….

@ Homer,

What the shareholders have to lose is the difference between REAL current market value (not the Minister’s shadowy estimate) and LTEV.

This is billions of Euros.

Comparing their current position to so bubble-inflation maximum share price makes about as much sense as comparing the LTEV loan prices with the equally fictional book values.

@ Sarah

you can’t, nor shouldn’t, look to see how much ‘punishment’ various shareholders have taken. No one can tell how many times an individual share has been traded, or how many different owners an individual share has had. All we can say is that the shares themselves were once valued at X, and even after the recent run up, they’re still only worth 15% of X. As such, the shares themselves have been punished to the tune of 85% of peak. To say that the shares have been bailed out is a rather debateable assertion. I’d describe it better as the shares and the banking system being subsidised somewhat.

While there is shareholder value there that should be first in line to absorb losses. Then sub debt. I agree that we cannot, alas and it seems, get senior debt into the game. But the rest should be treated as what it is – a reserve against losses. That simple fact seems to be lost in Merrion Square.

I think there are a number of differences in the Irish banking rescue that may favour a TARP style approach:

1. The Irish Government does not have the tools to carry out a credible “stress test”.

2. The Anglo/INBS scandals wounded the credibility of Irish banking to the extent where the AIB and BoI would not be trusted to come clean on their bad loans.
America had enough credible banks, enough banks going bust and vicious enough corporate governance laws to make their write-downs credible.

3. In relation to property development problems, Ireland is dealing with a discrete amount of borrowers most of whom have borrowed from a discrete number of banks. This creates problems and opportunities.

3.1 The problem is that a few hundred borrowers spread across a few institutions could lead to systemic failure if one institution moved to crystallise losses.

3.2 However, a bad bank could cure this ill by dealing with all of a borrowers loans to different institutions in a managed way without a race to liquidate everything for distressed prices.

4. Despite all of our serious worries about property values, property backed loans should be easier to value than complex financial products which could ultimately be worth nothing. That is not to say there is a risk but rather that there is a difference.

5. All Irish banks face a second wave of impaired assets as the real economy deteriorates following on from the collapse in employment in construction and spin-offs.

6. Ireland cannot engage in quantitative easing like the US can.

7. Ireland probably cannot afford to recapitalise its banks more than once, as may be required in the worst case scenario for the real economy. The USA can better afford to pump more money in and can be more discerning about who survives and who fails.

@Brian Lucey
I am not sure you are correct here.
There is a recognition that banks will need to be recapped post the NAMA transfer. It might not be as much as you or I might think is appropriate due to overpayment but it might be more than the banks claim.
In addition, there now seems to be a recognition on the part of DOF that the 4billion pumped into Anglo is gone to money heaven.

It seems that whatever we pay into Anglo is basically the net effect of the Guarantee being called in. We bought out subbies to improve capitalisation and thereby delay/avoid the need for a greater capitalisation pre-NAMA. NAMA payouts to Anglo are a funding mechanism for part of the money to be paid out as a result of the guarantee being called in. Do we have any estimates as to how much we will ultimately have to put in to pay off senior debt or to keep it going? One would hope that we will not have to buy back any more unguaranteed subbie bonds in the meantime.

If Anglo goes wallop pre-NAMA and the guarantee applies then we will be left with a big funding hole. There may be no valuation risk with Anglo but this doesn’t mean that the money paid to Anglo under NAMA is not important. It may be that the Govt may wish to get the payout to Anglo as high as possible and the other banks may be benefiting as a side effect.

@ Homer

I don’t understand the concept of shareholders having a ‘pain barrier’. Equity capital is risk capital. Simply really. If you cannot stand the losses then you sell your shares. If it were not for the Irish government backstopping the balance sheets of the Irish banks with the balance sheet of the state then the bank shareholders would have lost everything.

The sense of entitlement amongst Irish bank shareholders is a wonder to behold. They should thank the Irish taxpayer because they ‘only’ lost 85% of their investment when by rights they should have lost everything.

@Pat Donnelly
The constitution does have a provision for a type of consultative referendum in article 27. If a third of the Dáil and a majority of the Seanad petition the president on a bill of national importance before she signs it into law, at her discretion she can decide to put it to a referendum, whose result would be binding. It’s a provision which has never been used though. And it would be hard to see such a measure getting a majority in the Seanad.

@ Brian Woods

agreed. Especially in regard to INBS. It was basically a commercial property hedge fund with a building society title above the door. I’d be somewhat in favour of using a small entity like INBS to show how we do still have some concept of moral hazard. Putting it into full liquidation post-blanket g’tee would i think be a useful example of this. It’d also be useful from a regulatory and legal perspective to show the mechanics of liquidating a bank, cos its not like it happens all that often. The only downside of this would be if we wanted to merge its deposit book into any forthcoming PTSB/EBS consolidation, although possibly we could bring that into the liquidation process as well?

Karl, re this, at some stage there should be a discussion of what we think the Irish banking system should look like (from both a hoped for as well as a practical perspective) in say 2 or 3 years time. ie how many Irish domiciled banks, what their market share should be, what the product offerings/mix should be, what element of government ownership/influence there should be, new regulatory and corporate governance measures etc etc etc.

@ Karl re OP

wouldnt equity infusion as per the TARP increase the chances of zombie banks over the NAMA-as-is proposals? ie they would never have to write down their assets by as much as the 30% that NAMA enforces on them, so they would err towards the lower end of the likely recapitalisation requirements?

@Eoin.
What do you think would be the negative consequences of AIB and BOI shareholders getting nothing?

@ Dreaded Estate

the only negative consequence of “AIB or BOI shareholders getting nothing”, would probably be a collapse in the shares of PTSB, but its the process of them “getting nothing” which is where i see the real negative consequences.

To enforce a zero payout to the shareholders you would have to firstly nationalise and seize ownership, and then later prove that zero was the fair compensation due to the shareholders. To do this you’d have to show that the bank was insolvent. Given that AIB and BOI, when added to Anglo, make up say 80% of the entire Irish financial system, we’d be basically admitting that the entire Irish financial system was bankrupt, and that therefore a fairly strong claim could be made that the sovereign State itself was also in a similar situation. Capital inflows stop, ECB/IMF rescue team suit up and prepare for battle. Not everyone agrees with this ‘fear mongering’ chain of events, but thats how i see it.

FWIW, i think the better course of action would have been to try and engineer a takeover of either BOI or AIB way back at the start of the year with the likes of BNP or Santander, giving shareholders a nominal payouf of a Euro or whatever (maybe even via an ultra-temporary nationalisation of a day or two, not sure about the legal mechanisms for this?). However, given the rather screwed up financial world at the time, its arguable whether they (BNP/Sant) would have been willing or able to do such a deal given the funding requirements etc.

@ Garo

wow. Such a nuanced and reasonable look at what im suggesting. You’re adding value and insight all the time…

@John Mul:
A better solution than the one you are proposing would have been to put the 7 billion in as straight equity. That would not have wiped existing shareholders but diluted them ten-fold based on the 600m market value at the time. Still the taxpayer/government would have had 90% ownership of the banks and an exchange listing along with any perceived advantages that brings. Moreover, it would have added capital to the banks.

@ John Mul

im actually not as much against your suggestion as people on here are making out. For starters, your market-friendly(ish) idea rules out insolvency, at least at the legal level, though this would therefore make it more or less impossible to enforce any losses on the sub-debt holders. You could also argue that shareholders who have this enforced on them could return later to argue in the courts for a higher payoff, but i wouldnt be too worried about that either way. However, we’d still have to recapitalise the banks wouldn’t we? Further, if we ever hoped to re-privatise them, wouldn’t we have to come up with some sort of bad-bank scheme to cleanse their balance sheets first? So wouldn’t we be faced with many of the same issues at the end of the day (albeit buying ourselves more time), at more or less the same outlay? The benefits from the taxpayer sharing in the upside would have to be weighed against any market stigma attached from the wholesale nationalisation. However, im far more in favour of this than the “the shareholders and the bondholders should get zero” idea which is still the core alternative to NAMA.

@ Sarah

apologies. Mis-read your initial post. For whatever reason known only to my caffeine-starved brain earlier on, i thought you were suggesting that we had bailed out the guys who bought BoI at 12 cents. My bad!

Greg,

I agree with you: It is economic insanity, and in years to come, a tribunal will no doubt admit as much.

The same people currently peddling the plan will shrug their shoulders and say, “ah well, at the time we did what was best for the country. Hindsight is 20/20.”

As the bloomberg article points out, we are the guinea pigs to a plan that will always hurt the taxpayer first and foremost.

The idea that admitting Ireland’s banking sector is bust is not a good idea – even when Ireland’s banking sector is bust – is just the sort of fuzzy thinking that lost Japan a decade of growth.

As usual, two of the most compelling reasons to nationalise – bringing the property market prices down to competitive levels and making current stakeholders pay teh price for their indiscretions – are lost in the Bloomberg article, buried under the current smokescreen.

A couple of questions:

1. If the banks are insolvent then the shareholders would lose nothing as the shares are worth nothing, how can then nationalisation cause them any damage?

2. The current shareholders should not get preferential treatment to future or past shareholders. If not, then why not give past shareholders who sold at the low a share of the profits the banks will make due to NAMA?

3. Why not reimburse all shareholders in all companies for the loss of value of their shares? Why limit it to the banks shareholders, other companies have become insolvent as well. Are those shareholders not to receive the same treatment? If not, why?

If the banks are insolvent, it is due to the owners action/inaction, not due to nationalisation. Temporary nationalisation isn’t punishing existing shareholders, it is merely assuring that the banking system will continue to work.

@simpleton

“C’mon guys, you haven’t faced up to the simple observation that the senior bondholders are being protected for two very clear reasons. First,… Second, they are a fire-break between the banks and the sovereign. Once you wipe the seniors, the next to go will be (a) Irelands CDS and other relevant spreads (b) the simple ability to sell the sheer volume of paper over the next few years.”

This looks alot like argument by assertion – you say that these will be the consequences of imposing losses on senior debt but you dont explain why (at least not in this particular post!).

Then you suggest that this argument needs to be dealt with by people who argue for losses to be imposed on senior debt.

A clear response might be that if the government reduces the extent to which it is on the hook for bank debts it improves its own solvency. So from first principles this should make accessing funds easier on soverign debt markets not tougher.

Maybe pension and insurance fund mangers are a very emotional lot who will hold it against us, despite the improvement in our solvency, but that seems a little odd

@Eoin

We would reimburse depositors on the basis that the government, for public policy reasons, has decided to. As we have clearly seen, the government has the power to guarentee depositors when and if it sees fit.

I dont see how senior debt holders could have a legitmate complaint with this. Their losses would not be increased as a result of such a guarentee

@Eoin

Actually, thinking about it now, it could be argued that such a guarentee helps senior debt holders by increasing the amount of deposits in the bank. The more depositors the more dilution on the losses suffered by senior debt holders.

@ Christy

I agree with your analysis. But such a move would immediately trigger quite a massive call on the deposit guarantee. At least with NAMA there is some chance the taxpayer might not finish out of pocket.

Eoin Says:
September 28th, 2009 at 6:20 pm

“so if i lose money in a particular sort of investment, that has no bearing on any future allocations into similar investments?”

You will I presume use the same expert analysis you previously used, though the numbers will have changed. Some of the “playas” got burned. So what?

“Not even on the risk premia you’re going to apply to that investment?”

“Not even on the maximum amount of your portfolio you’re going to allocate for that investment?”

The market, not any individual participant will determine the risk premium. If unsustainable obligations have been removed the market will take that into account.

“Not even on whether my CIO might say “No investing in Irish financial assets”?”

No offence Eoin, your CIO is not the market. He can take the hump if he wants to but that would be his/her decision.

“Do you think some German pension fund manager is going to get sacked this year because he was underweight or even completely out of Irish bank stocks while they rallied? No one ‘needs’ Ireland in their portfolio right now as things stand…”

No German pension fund manager would have lost his/her job if they never had exposure to Irish bank stocks. Irish banks, exciting as they were for a time would have very little weighting in a balanced European portfolio.

“… and there’s going to be even less need for us if we nationalise the entire banking sector or seek to destroy the capital of senior bondholders just for the hell of it.”

I don’t think anybody suggested destroying the capital of senior bond holders “just for the hell of it”. In fact, I can’t recall any commentator suggesting “destroying” the senior bond holders. Could be wrong.

“We’re not talking about US Treasury’s here….”

Indeed. I am however looking forward to observing the effect of the emerging dollar carry trade.

“At the moment we need to make us look as attractive as possible….”

What colour of lipstick do you suggest?

it appears that here are different views on the reaction of the market if Ireland did not guarantee the bondholders. As a general comment, I don’t see the point in railing about the necessity of having to consider the reaction of the bond market as the unfortunate fact is that we are going to need to borrow a shedload of money to finance our day to day spending for the next few years from the bond market so its reaction has to be taken into account. We are not the US and even the UK had a debt auction failure this year (or maybe last year?) although the markets seem to have stabilised since then although they are still fragile. Personally, I have not been convinced by the argument that all will be fine and that bondholders will lend to us anyway if we wipe them out and I can see how a Minister for Finance might be reluctant to take that chance given the position the country is in. However, I do sympathise with the moral hazard argument and my initial reaction when Lehman was let go was that it was for the best as it does not make sense to let shareholders take the profits and then to socialise the losses. However, post-Lehman, governments worldwide, for better or worse, decided to support banks and I think that it is difficult for Ireland not to follow a similar approach.

In relation to the treatment of bondholders, I found Bo Lundgren’s comments to the Oireachtas Committee this summer http://debates.oireachtas.ie/DDebate.aspxF=FIJ20090707.XML&Ex=All&Page=1
interesting as he is the Head of the Swedish Debt Office so should have some insight into the realities of government borrowing, which i do not possess. His views on the necessity for a blanket guarantee to include bondholders is not a view that finds a lot of favour on this site as he supported the Irish guarantee at the time and I saw an article at the time in a British newspaper where he suggested that the UK should implement a similar guarantee. As he deals with the question of whether the sovereign could borrow if the bondholders were made take a hit, I have quoted his views below. Its a bit long as I copied in a good bit of the text but I think relevant.

“On the question on the moral hazard, I read an article a couple of days ago in The Irish Times by Professor Morgan Kelly, since I went through the web to see what the debate was in Ireland. There was one mistake in the article. He said the Swedish bank had only deposits, no bond financing. Of course, Sweden had bond financing as well.
 Deputy Joan Burton:    Were there guarantees for the bonds?
 Mr. Bo Lundgren:  Yes. All creditors, except shareholders and perpetuals which are said to be similar to equity. What Professor Morgan said in his article was that bond holders should take responsibility since they have high interest and should be able to take a blow if the bank goes bust, so they have to lose money. That is not feasible. If there is a systemic crisis one has to guarantee all creditors. It is out of the question that anyone should lose. Let us look at Northern Rock where people stood in line, it was the modern time bank run. There may even be Internet bank runs and we had some in Sweden with Lehman as well. I have always proposed that deposit insurance schemes should have 90% compensation because one should take a 10% risk. Over a certain limit, in the British system, one had 90% compensation and obviously that was enough to have many people standing in line waiting to get money out. The experience of Lehman and Northern Rock shows the need to have this guarantee for all creditors. Everyone, including Germany, knows there is an implicit guarantee that is 99% sure but making it explicit gives another percentage and that is a vital percentage. That is a good way of handling the situation.
Obviously bond investors should be able to analyse a bank, think and then invest. The economy will not suffer as much from the problem of moral hazard on the account of the bond holders in a bank compared to what is happening in the real economy. On the other hand I see another moral hazard question, that is, that if shareholders are bailed out and can recover their value later, they can make the same mistakes again because they were bailed out. Management in banks, boards in banks and shareholders must learn the tough lessons. ……
 Deputy Richard Bruton: 
Mr. Lundgren has acknowledged our crisis is deeper than that of Sweden. There is a debate as to whether the taxpayer can save everyone. In its model, Sweden drew the line and provided that everyone, bondholders and depositors, would all be guaranteed and protected. We have not given a guarantee to bondholders unless they are within the dated area. The Swedish model would have extended that guarantee further than we have gone. On reflection, the Swedish model worked at the time but, perhaps, other countries were not in a liquidity crisis as they are now. Sweden could manage its liquidity within a world that was not entirely stressed out. If it was trying to do that now against a background of stressed markets everywhere, what would be the stress points in the Swedish model that might have to be tweaked and can Mr. Lundgren offer any advice to others who are looking at the process in a much more stressed international environment?
 Mr. Bo Lundgren:  It is difficult. The Bank Support Authority is looking at what might happen in Sweden. I will elaborate. If one does not guarantee bond holders — I can see reasons for not doing it — will that investor invest in banks again? Probably not, it will take some time. They will ask for more security or higher interest to invest. Given the total volume of the problem, Ireland cannot do it. If the losses are so great that it cannot be done, it takes longer to revive the economy. I am in no position to give any advice on that issue but I dare say one has to think about it. If Ireland does not have a blanket guarantee that covers all bond holders then it might have a problem in furnishing the liquidity mentioned, because liquidity is needed not only from central banks and the government communities around the world, it is also needed for the private investor in the long term. It is a difficult question to which I have no answer.”
“In terms of the problem with liquidity for private investors, we are not talking about central banks. We are talking about private investors furnishing liquidity to banks. They do not want to lose money. That is why I said that guarantees must cover bond investors, otherwise they probably will not invest in banks. If banks are nationalised, the government has to furnish liquidity. That is one of the costs if it nationalises. If it does not nationalise and there is a risk, it might have a problem finding liquidity anyway. It is difficult for me to know about the position here. The members will have to do the analysis on the basis of the information that exists here in Ireland. It is very difficult for me to do that.
We could have managed without nationalisation to some extent but we would have had to guarantee Gota Bank’s creditors. To let Gota Bank go into uncontrolled liquidation with many losses, not only for shareholders but also for depositors, and we had no deposit insurance at that time, and for bond investors, would have resulted in grave difficulties in getting financing liquidity to other banks as well. We had to handle the position. We could have said we will guarantee it, liquidate the bank and do nothing about it but we would have lost value. If we took over the bank we could see what were the long-term viable parts, what we could put in to Nordbanken and what we could sell. It was easier to nationalise but it was not a necessity to do that. On the other hand, in terms of wanting an upside for the taxpayer in the long run, I am a conservative. I believe in market economy and market economy dictates that if we put in capital we should have the kind of influence and ownership that goes with the capital.”

@ Dreaded_Estate

I agree your opinion.

I would make it plain.

Remove the horseshit and lies about “bond holders”, cut the crap, call a spade a spade and the bond market will not be found lacking.

The ECB will not be found lacking. That good old boy Jean Claude doesn’t want to see the Euro go up in flames.

And when the ECB is not found lacking, which it has not been to date, the “bond market” will eat Irish debt like there’s no tomorrow.

Fianna Fail & the Green Party cannot be trusted to negotiate with the ECB.

Need you look beyond the Fianna Fail & Green Party negotiations with Rody Molloy?

christy Says:
September 28th, 2009 at 11:30 pm

“Why is imposing losses on senior bondholders “bonkers” if the losses at the business are such that they are exposed?”

Exactly the point christy.

Why has everything sacred to the “market” been thrown under a bus when it should be that Anglo Irish and Irish Nationwide should be thrown under that bus?

The bond holders, including those who bought bonds on the cheap looking to make a quick killing, should take their losses.

Anything less is communism.

At this stage I’m looking forward to an environmentally friendly prison cell in Siberia just because I don’t parrot the Green Party (bond holder) line.

The Green Party should be ashamed for even contemplating this abortion of economics. For Fianna Fail it is of course all just in a days work.

So Independent News & Media can renegotiate its bond obligations but not Irish banks.

Curioser and curioser cried Alice.

http://www.irishtimes.com/newspaper/finance/2009/0929/1224255443505.html

Bring on the Mad Hatter.

Finbar
Thanks!
I note you do not decry the Article 13 dissolution of the Dail? There is no case on this. Australia provides a precedent, not on the Constitution, but on the power to dissolve by the Governor-General (Kerr by name Cur by pronunciation!), when Whitlam was prime minister and rather against it!

The President! God Bless her! Will she save us?

@Greg&al

There seems to be a suggestion that we are going easy on senior bondholders for its (or their) own sake. Thus we get really silly comments like “if you take pity on bank seniors why not the same for INM etc. etc.”.

The reason senior bondholders are “sacrocanct”, to quote the article, is that any process which defaults on them has dire collateral implications. For example, as Christy points out, if we default on seniors they are legally entitled to the “dilution” of their pari passu depositors and defaulting on these latter would trigger immediate and irrecoverable massive calls on the government guarantee scheme.

Dogmatists will of course regard any State interference as “communism”. Well on that basis last September’s guarantee announcement would make Lenin proud as would the various US, UK etc. etc. interventions. So what? Better being a bit communist and surviving than letting the market take its course and accepting a plunge into the economic middle ages. That’s the beauty of our Western culture. We believe in capitalism when it works but are not so dogmatic as to not fix it when it breaks.

Homer Says:
September 29th, 2009 at 9:03 am

Better Red than Dead Homer?

Of course negotiations can be undertaken with senior bondholders.

Scaring the horses seems to be the last defence of the indefensible.

Fianna Fail cannot be trusted to negotiate. That’s the real problem.

“The pact also gives the Minister ultimate power over all of Anglo’s material actions in respect of commencing, defending, conducting or settling legal actions “to which a director or former director or any connected persons of a director is a party”.”

http://www.irishtimes.com/newspaper/frontpage/2009/0929/1224255444316.html

@Eoin

Thanks for keeping us up to date on the bond issues.

I guess I’m missing something though. Doesn’t everyone know that the government is going to extend the guarantee and that it will cover these issues? So isn’t the non-guaranteed thing a bit of a red herring?

@ Karl

from Colm Doherty, managing director of AIB’s Capital Markets division last week:

“This deal represents a very significant step towards the normalization of the international credit markets stance towards Irish banks and bodes well for future unguarantee issuance from the Irish financial system”.

Also, from AIB’s official stock exchange release:

“Allied Irish Banks, p.l.c. (“AIB”) [NYSE: AIB] today closed a €1 billion 3 year Senior Unsecured Unguaranteed Bond Issue. Significantly, this was the first Senior Unsecured Unguaranteed Bond Issue from any Irish bank since the Government Guarantee was introduced in September 2008.”

@ Karl

its a fair argument. Can only assume they felt that they had to enforce the credibility of explicit govt support for existing debt, but that if new debt was issued outside of the g’tee, well its not like you didn’t know that the banking system was now in a bit of trouble, and hopefully it should be appropriately priced etc. In many ways are we owning up, as a State, to the debt of the past, but not necessarily to the debt of the future? It’s a good statement to make to private capital in my opinion.

Re other state g’tees – if you look at them, almost no one is issuing within the g’tees apart from a few very particular cases. They’re all issuing off their own backs, and again, having Irish banks fall back into this now normal market is a strong sign of an eventual return to recovery.

@ All

Irish 5yr CDS @ 132bps now from 158bps the day before NAMA. At the same time other Eurozone countries are broadly unchanged over that period. Obviously the Irish taxpayer is bailing out the, eh, Irish taxpayer via NAMA….

Yes, its only a small improvement. But alongside other encouraging indicators from BOI and AIB bond sales and equity prices, i think we have extremely encouraging signs coming from our financial system, for the first time in a long long time.

@ Karl

its a combination. We’re righting our banking system. It looks like we’re gonna pass Lisbon (fingers crossed). We appear to be ready to deal with our huge public expenditure. Investors like what we’re doing, so they’re willing to buy new non-g’tee bank debt. This improves confidence further. It’s a self perpetuating and self healing recovery process.

My myopic view of it being all-NAMA is probably matched by yours at it being non-NAMA! But the fact that this move has happened in the 2wks directly following the NAMA details has to at least be recognised.

@Eoin
“But the fact that this move has happened in the 2wks directly following the NAMA details has to at least be recognised.”

It could be said that there are 50,000,000000 reasons for the improved perception by the markets of the risk the Irish taxpayer is being lumbered with.

@ Christy

moral hazard, in its truest form, is toast for the current cycle. But was it ever truly alive in the previous cycle, at least at an overall systematic level? Individual bank risk was probably always hypothetically at risk, but once it reached systematic levels (ie lets say 25%+ of a banking sector) i think it’s debateable whether any government was ever actually willing to let them go to the wall. Look at the evidence before us – a couple of very minor (in the grander scheme of things) banking collapses (WaMu, Lehmans), but in every other case there was significant government support and subsidy at some level on the debt ladder. This isn’t just an Irish thing.

@ DE

well, at what stage would we ever get past the g’tee on that basis? At least now we’re actually replacing existing g’teed bonds with non-g’teed bonds, and it doesnt appear that the banks, as things stand, are having problems raising finance.

@”Homer”

I’m afraid that if you view the guarantee from the point of view of the taxpayer rather than the point of view of a banker (something that I now wonder whether you are capable of) you would see that a full guarantee of all liabilities does not “amount to the same thing” as a guarantee of only new issues.

A guarantee of new bonds allows a bank to raise funds even if there are concerns from investors about it being insolvent. Note that the existence of a guarantee does not change the underlying solvency of the bank and even with a state guarantee on new funding, the bank could still end up in administration with existing non-guaranteed bond holders failing to get their money back.

If the bank may end up being insolvent, there is a world of difference to the taxpayer between guaranteeing all bonds and guaranteeing new issues. And this is why other countries have limited their guarantees — not because they are less clever than you.

Finally, particularly since you seem keen to launch personal attacks here, (“Yet another example of how you pick holes in every single aspect of how we are addressing this crisis”) can I ask that you respect Informal Blog Rule Number 8, as proposed by Richard Tol? “Don’t try to lend credibility to your argument by pretenting you are a crowd.”

See here http://www.irisheconomy.ie/index.php/2009/09/04/this-blog-operational-issues/

And I’ll keep picking holes as I see fit because this stuff is, you know, important.

@ Karl

im not going to go as far as what Homer said, but doesn’t he have a point? On the AIB and BOI bond issues, i’ve been met with either denial that this has anything to do with the continuing and now more detailed progression of NAMA (you, Garo), or a false assertation that these bonds will be covered by the new guarantee (you, DE) and so dont mean anything (if someone wants to read the draft proposals on the new g’tee and prove me incorrect, then please do). I got other suggestions that as there was now non-g’teed issuance, why even have a g’tee, which i think is somewhat akin to seeing a patient breathing again after being on life support and then trying to kick him out of the hospital. Can’t there be some admission on here that the NAMA has turned out to be so far (NB) at least materially encouraging for the recovery of the Irish financial system?

@Karl
Let me spell it out with a diagram. The XYX Widget company goes hopelessly bust. But the State steps in and says “XYZ, you can borrow whatever you want, we will guarantee it”. Ergo XYZ is made solvent, in the liquidity sense. This is practically the same thing as the State guaranteeing XYZ’s existing creditors. The only difference is that XYZ out of some irrational petulance might say “no thank you I want to go bust”.

Back off this one Karl, there is no difference between this guarantee and its “reverse”.

Homer Says:
September 29th, 2009 at 9:03 am

“The reason senior bondholders are “sacrocanct”, to quote the article…”

You quote from here? The sacred group?

“Recapitalizations that make creditors and shareholders share in the pain, such as debt-for-equity swaps, should be an option. Ireland, like other countries, has to get over the notion that creditors are a sacred group who must be spared at all costs.”

You take the use of the word sacred and turn it on its head.

Has bondholding become a religion?

Spare the worshipers of the Bond God and sacrifice the children (or anything else convenient) at their altar.

Homer,

I’m confused. You say this.

“There seems to be a suggestion that we are going easy on senior bondholders for its (or their) own sake. Thus we get really silly comments like “if you take pity on bank seniors why not the same for INM etc. etc.”.”

“that we are going easy”

Sorry Homer, who exactly is the “we” that are being accused of “going easy”. Did I miss the memo? Am I not in the club? Don’t fret Homer; I know I’m not in the club. Homer, who the fk is “we” that are being accused? Are you part of “we”?

Homer,

You just keep doing this. You keep messing with my mind. Here you go again, you sound absolutely reasonable.

“For example, as Christy points out, if we default on seniors they are legally entitled to the “dilution” of their pari passu depositors and defaulting on these latter would trigger immediate and irrecoverable massive calls on the government guarantee scheme.”

“Legally entitled”, Homer, now I’m really scared. “Pari Passu”, Homer. Well Holy God. Nobody is going to mess with “parri passu”. Them’s heavy Latin words.

Of course as you well know, senior bond holders do not rank parri passu with deposits.

The State can chose to protect deposits if it sees fit. The State, Homer, can protect anything it chooses to protect.

Maybe there’s something you don’t understand about the State, Homer. Maybe you worship your Bond God too much.

Senior bond holders are not widows and orphans Homer. They are sophisticated investors. They can handle it, they know how to take the pain, and if they are good at what they do, they will have taken out insurance.

Homer,

When you say,

“would trigger immediate and irrecoverable massive calls”

Is that the “We” speaking or is that just you personal opinion? Sounds like a threat to me.

Homer,

Again with the threats,

“Better being a bit communist and surviving than letting the market take its course and accepting a plunge into the economic middle ages.”

If we don’t worship at the altar of your Bond God, your God will destroy the Nation.

Homer,

I am tired of your threats and your God is suffering from the madness that syphilis brings.

Enjoy your worship, and go to the hell your God has prepared for you.

@Greg

Hope you have chilled out this morning. Just a couple of comments. The “We” is us, Ireland, we are in this together, you know.

Seniors do rank pari passu with depositors on a winding up. So, presuming we are not going to act illegally (I agree the State has that “right”) if one of our banks defaults on it seniors the liquidation process will spread the deficit equally between seniors and depositors. The State can of course, legally, decide to subsequently reimburse the depositors. Can’t you see that defaulting on seniors precipitates an immediate catastrophe with irrecoverable pain for the taxpayer?

@Karl

If you say it quickly they do sound a lot different. But in substance they amount to the same thing. Maybe come next September, the Government should go into “reverse” and claim that it has replaced a 400Bn risk with no immediate risk. My guess is you wouldn’t let them away with that claim.

Eoin Says:
September 30th, 2009 at 7:36 am

“seriously man, you accuse me of losing it? That was just bizarre.”

Glad you liked it Eoin.

“It went well beyond the point of intelligent debate and turned into some sort of deranged rant.”

Sorry Eoin, I wasn’t aware the was anything intelligent about bailing out the incompetent and corrupt.

That wasn’t a “deranged rant” Eoin. It was moral outrage, which of course is different to moral hazard.

“The deposit guarantee is a wholly seperate device which would only be enforced after the full winding up and liquidation of the assets of the bank.”

As I have pointed out to Homer, senior debt holders ranked above depositors prior to Fianna Fail & the Green Party providing the ridiculous guarantee.

“Of course they are related issues, but you simplify the situation far far too much.”

Simplify Eoin? The situation is very simple Eoin. Everybody gets screwed except for the connected.

Did you get a chance to see the powers that our great and beloved Minister of Finance appropriated to himself?

http://www.irishtimes.com/newspaper/frontpage/2009/0929/1224255444316.html

“The pact also gives the Minister ultimate power over all of Anglo’s material actions in respect of commencing, defending, conducting or settling legal actions “to which a director or former director or any connected persons of a director is a party”.”

There is no law Eoin, they’re making it up as they go along and all of it seems to favour the failed. I would call it corrupt, but then that would be an opinion based on morality. Not much of that exists on the Government benches. Just an opinion.

The bond traders might be doing better but whether or not it is benefiting the economy as much as they seem to think is debatable.

The reality is that most businesses are more reliant on overdraft facilities and invoice factoring or invoice discounting as a source of credit. Bond markets is the market place of the banks.

True, bond traders are now making more trades. It will be good for their employers, it will be good for the traders themselves and maybe, just maybe, some of this will drip down to businesses that are producing more value for money.

I see this as a form of drip down economy and therefore I don’t have high hopes of this indicating a return to economic growth.

@Eoin

The news presented are good news for the banking sector but if an economy can’t be based on building and selling homes, then an economy surely cannot be based on sending money between different banks either?

The financial sector is not a driver of economic growth, it is at best an enabler of economic growth and at worst it is allocating capital incorrectly and in its worst it is therefore damaging the economy.

The news about banks selling bonds with an implicit guarantee by the Irish state (& that is the message NAMA is conveying) is at best neutral.

@ Jesper & podubhlain

is the inability/unwillingness of the banks to lend to the productive parts of our economy hindering economic recovery? I’m going to assume “Yes it is” is the answer most people would at least broadly agree with.

is the ability of our banking sector to source funds on the private markets, outside of an explicit government g’tee, likely to increase or decrease the ability/willingness of the banks to lend to the productive parts of the economy? I think its extremely difficult to come up with a “No” as your answer to this. Will it help a lot? Dunno, difficult to say, lots of dyanamics in play here. But will it at least help a little? Yes. Does it have the potential, combined with other factors, to help in a material way? Yes.

As for the number of buyers, well surely the larger the number of buyers the better? Doesnt that mean that there’s a more broad based consensus as to the security/safety/value in the bond? Would you be more impressed if there was only 2 buyers? And a bank bond paying L+250 wouldnt really be categorised as ‘high risk’ would it?? Barclays Bank issued some USD bonds a couple of weeks ago at T+200bps.

The implicit g’tee explanation doesn’t really work either. If it has an explicit g’tee, the bond will be rated on par with the Irish sovereign (Aa1/AA), and be treated as similar in their books. If its only an implicit g’tee in place, then the bond would be rated as per the bank itself (A1/A-) and will be treated as far less valuable than the government bond. You can;t just say “Ah sure it probably has an implicit g’tee…”. Trust me – i know guys who run very low risk funds and they are only buying bonds with explicit g’tees, they don’t care about implicit stuff.

Keep the excuses coming lads….. 🙂

@Eoin
“Trust me – i know guys who run very low risk funds and they are only buying bonds with explicit g’tees, they don’t care about implicit stuff.”
Meant to include the above.
So implicitly only dealers in high risk bonds are buying our insolvent banks unguaranteed bonds.

@Jesper
Some of them may be lending for mortgages for the probable reason that they can get rid of them via securitised bonds – like BOI.
But the latest report from IT says otherwise -“Residential mortgage lending fell by €84 million in August in what was the fifth consecutive month of decline,”

@ Jesper and podubhlain

im doing my best to answer your questions, but you’re both doing your best to not answer mine.

is the inability/unwillingness of the banks to lend to the productive parts of our economy hindering economic recovery?

is the ability of our banking sector to source funds on the private markets, outside of an explicit government g’tee, likely to increase or decrease to some degree the ability/willingness of the banks to lend to the productive parts of the economy?

@ Podubhlain

i’m equating them on where their bonds are yielding. However, on further inspection the BH comparison isn’t really fair as it’s wholly owned subsidiaries, rather than the full holding company, which has the bonds outstanding at similar levels. I withdraw it as a comparison, but my point still holds that a bond yielding L+250 is not considered high yield. As a further example, BH’s 5yr CDS is 135bps (on the full holding company), and AIB’s got to 168bps on Monday. Not exactly poles apart.

@ podubhlain

the bonds would collapse. No question. Hence the reason why i think NAMA is so hugely important to the revival of the banking sector. But then someone might say, “well why not give the banks even more cash and their bonds will be even easier/cheaper to issue?”. Of course they would, but this would obviously impare the sovereign rating/risk. The other key factor we have seen in the last few weeks has been a huge improvement in the Irish govt yields/CDS. So we’ve seen the yields on Irish govt debt fall at the same time as Irish bank debt has fallen/become easier and cheaper to issue outside of the g’tee.

As such, i would describe the NAMA details as providing a “Goldilocks” scenario for the banks vs taxpayer debate – not too much bank capital destroyed, not too much taxpayer money committed, the mix was just right. How else to interpret the price movements? As i keep saying, small but critical steps on the road to recovery. Add in the positive GDP data last week, add in the almost flat unemployment data today. Throw in a Yes in the Lisbon vote and a further adjustment in spending via the budget, and where will we be then? Are there not serious indicators of a cautious recovery taking place across various strands of our economy? There’s lots of follow through actions required for sure, but you need to make a start somewhere.

As for what the traders are playing at, well the sum of the markets pricing/knowledge has put a fairly reasonable price on these bonds at L+250. First with AIB, then with BOI. Whether they make up a large or a small portion of a portfolio is somewhat irrelevant. At the moment i imagine diversification is a huge feature in every portfolio, whether it includes Irish banks or not. I would imagine BL is playing his cards somewhat close to his chest at the moment, as i imagine he’s as surprised at the early success of the AIB and BOI bond issues as anyone.

Do the ‘inbetweeners’ who are not trading in no-risk bonds and are not trading in high risk bonds acknowledge they have any risk? If not, shouldn’t we ask for them to give us the price of the no-risk bonds?

I can’t see the sense of paying a risk premium if there is no risk.

@ Jesper

of course they ackowledge they have risk. Hence it would be described as moderate risk, and hence why they get a fairly small risk premium. I’m not sure what you’re trying to suggest? I would imagine the sort of funds that would be investing in AIB/BOI bonds would either be higher yielding fixed income, broad FI index trackers, financial market recovery themes, simple bank debt funds, broad based Euro debt funds etc etc. All of these would clearly have an inherent risk that would be described as something in the middle of the range. I would admit that including the likes of AIB in their fund may be as a way of bumping up the yield a small bit, but if the holdings are going to be miniscule, then its hardly going to have too much effect, and again this wouldn’t fit with a high risk-high reward strategy?

As for your questions:

1. yes
2. yes
3. yes – though far less than during the bubble. And i don’t think you can describe all property related lending as ‘unproductive’. Less productive or inefficiently productive would be better descriptions. I assume you’re not advocating a complete and total freeze on all property based lending at the moment?

Banks everywhere, throughout history, have always lent against property. It’s one of the near-universal features of banking. It, in itself, is not the problem. The level of lending, the LTV’s, the pricing of risk, fixed vs floating, the stress testing, the added safety measures such as mortgage repayment insurance etc are the keys to making sure that property based lending is appropriate and sustainable. So i expect them to continue to have some element of property lending going forward, and hopefully it’ll be conducted much more appropriately both in terms of the amount they lend as well as the conditions surrounding both its pricing and its approval.

There clearly needs to be a re-focus from the banks on lending to other MORE productive parts of the economy, ones that are sustainable and create both value, profit and employment for both the banks and the borrowers. Clearly many banks saw property lending as an easy cash cow to milk during the boom. However, i dont think NAMA is designed to change this directly, it simply buys time for the banking system to adjust, stabilise, recapitalise and hopefully refocus its attention on other parts of the economy. As discussed, debated, disected and disagreed with by many, i believe that a NAMA-process which either wiped out the capital in the banking sector or sought to apply losses against senior debtors would only see even more capital leave the country and leave what was left of the banking system, if anything, even more unable to re-focus their attention on the parts of the economy that were worthy of credit extention.

The IMF in its Global Financial Stability Report raises some issues that could be relevent to our present banking crisis –

“It estimated that banks in the 16-nation euro zone still needed to raise $380 billion to put their Tier 1 capital ratio, a measure of bank reserves, at 10 percent. U.S. banks, by contrast, would need about $80 billion.
In Europe, “banks exceed minimum capital levels, but would benefit from additional tangible capital to better absorb impending losses and revive lending,” the I.M.F. wrote.”

We seem to be aiming for 5% Tier 1 which would appear to be insufficient to deal with upcoming losses (apart from nama) and to resume lending into the real economy.

“The I.M.F. criticized the pace of efforts on both sides of the Atlantic to clear bank balance sheets of bad assets. In the United States, a system by which private investors buy bad assets at a discount with government-backed loans has yet to attract any takers, while European programs are either incomplete or inadequate, the fund said.”

If private investors won’t take loans subsidised by the US taxpayer to buy the toxic stuff then it seems that government intervention is the only way to cleanse our banks. But the price must be right.

@Eoin

Brand names have value and I suppose that a brand can even have a negative value. Anglo is in my mind linked with a Mr FitzPatrick and until his name is either cleared or any accusation against him has been dealt with by the courts the Anglo brand is not worth much to me.

Anglo can either try to show it is a sound business with good corporate governance by clearing up some lingering uncertainties with Mr FitzPatrick (& others) or their brand might not be associated with good corporate governance for some time.

The Irish banks may or may not have a good reputation for good governance. I know what my opinion is. I know what I think of the work of their board of directors over the past couple of years. Temporary nationalisation will not tarnish their reputation in any way to me.

If the banks are insolvent and it is not dealt with in the proper way (temporary nationalisation) then I believe Ireland will suffer huge reputational damage. Any bank operating in Ireland will know that risks can be taken and the losses can be passed on the the Irish government. Any bank operating in Ireland will have to underprice risk to remain competitive. Underprice risk and there will be a crash.

The banking sector is not nationalised in its entirety. The foreign banks are not touched. The domestic banks are only nationalised if they are insolvent and whether or not they are insolvent is decided bank by bank.

NAMA buying time is a critical point. What is the price? How long time is gotten? What will be done with the time that is bought?

If the cost of NAMA can be amortised over time, then then the cost of temporary nationalisation can be amortised over time. Amortising a lower cost is better than amortising a higher cost.

The populist is offering a no cost solution. The realist is saying that there are costs in resolving the banking crisis. NAMA is being presented as a no cost solution.

@ podubhlain

the difference between me and David Beggs is that my suggestion is designed to underpin the stability of the financial system, while David Beggs’ is to underpin the unreal expectations of the public sector. Private sector workers lose their jobs, their pensions and some of their wages all the time, so why can’t public sector workers handle such an adjustment? In comparison to the banking sector/financial system, i’d question whether it can handle the ‘adjustment’ of seeing all private ownership, equity and a rather sizeable portion of its entire capital base wiped out in a very short space of time. For the record, i have absolutely no problem with taxing the hell out of the banking sector for the next 20yrs to make sure we get back whatever we put in to this process. Its the “right now” endeavour to maintain a private capital involvement in the sector that i think is important. If public sector workers agree to a legally binding process where pensions switch to defined contribution, and reduce numbers down by 20% over the next decade, i wouldnt have too much issue with maintaining wages and numbers right now. The problem is that they won’t do this – Beggs wants us to delay action right now and hope that people forget about it when the economy revives.

Re insolvent. Well, i’d question just how insolvent the banks are post-NAMA. There’s an implicit loan/subsidy in there of 7bn (or more if you think the mkt values are too high). Its this subsidy, along with likely capital raisings in the next few months from either private or public sector, which is attracting in the fresh private capital we’ve seen in the past few weeks.

@ podubhlain

the current provisions/book values of the loans on AIB/BoI would probably still be valued above where they are going to be transferred to NAMA. So you have 3 versions of reality – the regulatory one which is per AIB’s accounts and is solvent (this is the current situation), the alleged one without NAMA and with full writedowns which indicates something very close to insolvency (this is the potential situation), and the assumed one post both NAMA and recapitalisation (this is the soon-to-be situation).

The bonds are being sold on the basis of no. 1 soon turning into no. 3. With NAMA now seemingly a 95% certainty, people are willing to buy in on this. Previously all you had was the options of 1 or 2.