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.

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.

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.

the problem with the taxpayer subsidised loans (non recourse PPP’s basically) in the US was that they were primarily aimed at hedge funds and private equity, and they were launched at almost the same time as the govt suggested they were going to crack down on executive pay, trader bonuses etc. As such, most private equity and hedge funds figured it wasn’t worth getting into bed with the govt if that, and other govt intervention, was the price to pay. A good idea (govt support, private expertise) undone by a populist talking point.

@ Jesper

first off i have no major issue with shareholders getting wiped out. I draw a huge distinction between ‘true risk’ equity capital, ‘hybrid risk’ capital in the form of subordinated debt (although up until 2 yrs ago this was considered fairly low risk and yielded very moderately over senior), and long term funding capital (seniors).

My fear is that the only way to wipe out equity is via nationalisation. Your upside would be the state ownership of the banking franchise. However its debateable what franchise is really left over after a nationalisation - we’d all agree that the Anglo and Northern Rock brands are now virtually worthless right? As such you would have the destruction of whatever inherent intangible value was in these brands via nationalisation. Far more importantly, if you wished to make a zero cost nationalisation of the banking sector, you’d have to essentially declare the industry insolvent, and with it draw huge reputational contagion upon the sovereign rating of the country - if someone would like to give me examples of countries with near total banking sector nationalisations that didnt have major soveriegn debt issues, please feel free to suggest. Given the truly enourmous funding requirements of both the state and the banking sector for the next 5-10 yrs, this would represent a huge risk, one that could quite probably outweigh the benefits of nationalisation. Beyond this the only way to ’save’ money is to somehow enforce losses on the capital structure, starting with the subs. Again, this is a dangerous legal and reputational process to go down, and one with debatable real tangible savings (most of the AIB/BOI sub debt has been either bought back, or trades at sub 50 cents and could be bought back at this discount right now).

Secondly, i dont have a problem with people taking further losses on property right now. I just think that any further near term collapse in property, which would surely be caused by the events above occurring as i see them, would be too much for this country to handle right now.

So this brings us to the ‘buying’ of time. I have no idea how much NAMA will cost in nominal terms, but i do think there’s a real chance it’ll cost either nothing or end up even in a positive. However, if it did end up with a shortfall of 10bn i wouldnt consider it a disaster when you consider the time period we’re looking at (10yrs, maybe more). Look at the public sector wage bill, there’s two or three times as much money to be saved there. A huge one off collapse of the entire banking sector and maybe the sovereign itself, versus a relatively small amount of money (1bn per year) over a decade? While the theory of creative destruction sounds good on paper, very often collapsed economies never truly recover.

“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.

You should go into politics. I’m really impressed by your debating technique while I’m still less than impressed by your arguments.

We both want economic recovery.

You believe that current owners of property should not be allowed further losses. You believe that current owners of banks shares should not be allowed further losses. You believe that current holders of moderate risk bonds should not be allowed further losses. You believe it is possible to do all this while trying to restart the economy. You believe NAMA will accomplish this.

You say that NAMA will buy time. That phrase is appropriate as it implies NAMA will have a cost. No cost have been offered. I’m sure you’re not saying that NAMA is free? Can you make an estimate?

I believe the guarantee of bondholders have to be honored. I believe that the banks balance sheets will not be cleansed by parking some assets in an off balance sheet vehicle. I believe that saving the current bank shareholders will cost money. I believe that maintaining current property prices will damage the economy as money will be sucked out from the economy and instead of money going to investing and spending it will go to pay for the folly that is NAMA.

Temporary nationalisation is cheaper. The banks balance sheets will be cleansed. Economy will restart & it will restore faith in the quality of governance of the banks when they are back on the market.

And thanks you ever so much for the lecture about that banks will always lend for properties

Again for clarity: I believe the banking system has to be fixed to restart the economy. We’re all in agreement on that part. Temporary nationalisation is the cheapest option.

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 Gov. bond yields worlwide have come back recently with US 10yr at 3.29, something similar for Germany. We are still paying more than Greece, Mexico etc. The easing must be attributable to all the money sloshing about. A Bloomberg report states the the US has pledged, lent or committed 12 trillion to the rescue. The Fed and agencies have bought 700billion of mortgages. a sum that exceeds all new mortgages issued this past year.

Yet with all that money the data from the US in recent days has been disappointing. The Chicago purchasing managers index is down to recessionary levels again and 254k jobs are reporeted as lost for Sept.

As for the employment data; various commentators here have suggested that emigration and increases in public sector employment have impacted on the numbers. GDP is mostly impacted by pharma. the real economy contracted.

“How else to interpret the price movements?” Simple - Gambling with OPM.
Who in their right mind would buy unguaranteed bonds of an insolvent bank when they can get the same yield from Barclays or BH. Given the unstable political situation it is difficult to understand the reasoning behind these decisions.

As you say the bonds would collapse if NAMA falls or the Gov. loses their majority.

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

1. Yes
2. Yes

Is availability of credit to unproductive parts of an economy a driver of a bubble?
Is availability of credit an enabler of economic recovery?

Are the banks currently choosing to make credit available to an unproductive part of the economy?

Why do you think NAMA will make the banks change their current behaviour of pumping more money into lending for purchasing of properties at prices artificially increased by the NAMA financed price-floor?

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.

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.

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?

way to read what i said and jump 5 steps beyond what i actually said!

“i know guys who run very low risk funds”, it should be fairly obvious that these guys are buying very low risk assets (government or government guaranteed). There is a middle ground between this low risk approach and a high risk approach. I believe it may be called medium/moderate risk, but i could be wrong. Possibly even balanced risk. Please note the implicit sarcasm here. Or does it need to be explicit?

So, to answer your question, which i thought i kinda did, the guys buying AIB/BOI bonds would appear to be at least somewhat similar guys to those buying Barclays Bank bonds. Or KBC Bank. Or Berkshire Hathaway. Or Carlsberg. Or BT bonds. Or ArcelorMittal. Or Xerox. Or Ladbrokes. Or Xstrata. Or Lufthansa. Cos these bonds trade in the same broad world as AIB’s bonds. Do you consider all these guys to be high risk investments?

The banks have the ability to lend. I know this as my bank I’ve used for 10 years called me a month ago and wanted me to take a mortgage. It is the first time they’ve done so in the 10 years I’ve been with them. It is an Irish bank which will benefit greatly if NAMA passes.

The willingness to lend can be discussed:

Either the business plans presented to the banks are too weak and then credit shouldn’t be extended or the business plans are good but the banks do not want to lend.

If the banks have money to lend for mortgages, then they have the money to lend to business. More money to the banks would, based on their current behaviour, first put more money into construction business by extending more mortgages and then later maybe some of the left-overs would come out to the more productive parts of the economy.

Again, the availability of credit is not a driver of an economy. It is an enabler.

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…..

Inclined to agree with you. Watched BL on Prime Time and when questioned by Mark Little as to how much money the banks still required he replied enough to make them solvent and resume lending. Or somethimg to that effect.
Now what kind of bond trader would buy unguaranteed bonds in insolvent banks even with 250bp insurance. Are these the guys investing our pension money or are they just simply prepared to take on any risk - given that no legislation has been passed and may not pass.
One possible explanation (aside from the implicit guarantee) is that the spread of risk was to something like 120 institutions (I think) so the individual exposure might be just the high risk element of a particular portfolio. Maybe Eoin has some thoughts on this.

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.

hence why i didnt mention economic growth in my comments!

Lads, this is getting silly. Almost any piece of positive news in terms of the banking sector has been either shot down on the basis of spurious or false assertations, or else some negative spin has been attached which is wholly seperate from my comment itself. This is despite the fact that ive generally attached a ‘cautious/gentle steps’ type caveat to my comments? I’m not exactly asking people to crack open the champers here!

Can we not agree that a key driver of economic recovery will be a return to health of the banking sector, and as such, these developments have at least brought us closer to the point of economic recovery?

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.

Two developments in the interbank money markets over the past couple of days should be seen as encouraging v-a-v the continued recovery of the banking sector around Europe

3mth Euribor stretches over year end as of yesterday. Typically this would, even in a ‘normal’ year, see a bump up in Euribor rates, but they barely moved yesterday and today (+1bps). Obviously liquidity is still quite ample in the markets.

Also, ECB just announced the results of their 1yr repo tender this morning. Amount alloted at 1% was 75bn, well down from the 442bn they allotted last time. Further indication that banks are weaning themselves off the emergency measures being supplied by the ECB.

Taken alongside the continued bond issuance by most major banks outside of government g’tee programs, now including our own banks, i think this again underscores the strong recovery, albeit in small and cautious steps, that we’ve seen in the financial system since the start of the Summer. The only downside of this is that we’ll likely see Euribor rates start to move up off their current all-time lows in the coming weeks, albeit also at a slow and cautious pace.

“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.