You might explain, step by step, how you proposed last year to force guaranteed bondholders in nationalised banks to absorb losses before recapitalisation of the institutions? As Anglo demonstrated, beyond voluntary debt buy-backs, there was simply no legal mechanism available to force losses on bond-holders before the State recapitalises.

This was always the dilemma posed by early nationalisation of AIB and BofI, as Karl Whelan acknowledges at the very beginning of this thread when he writes:

“One shift in my thinking since last Spring is that the size of loan losses is now clearly large enough to warrant putting the banks through a resolution process and negotiating with bondholders prior to using state funds to recapitalise.”

It is not possible to put banks through effective resolution and negotiate with bondholders until the Guarantee expired,or at least is close to expiring. This is what Fine Gael and Richard Bruton recognised from the beginning of 2009, when the scale of the solvency problems faced by the banks was becoming clearer.

It is true that our threat of putting banks through resolution at the end of the Guarantee period if they remained critically under-capitalised would have given them every incentive to shrink their loan books - perhaps by even more than they are doing now.

That is why we proposed the establishment of a temporary, wholesale National Recovery Bank to allow the banks to move new lending to businesses and households off their own balance sheets and onto the balance sheet of a state-backed entity, which could in turn draw funding from both the ECB and wholesale funding markets. This is similar to what the French did with their “French Economy Financing Corporation (SFEC)” which they established in November 2008 in a matter of weeks.

I agree that the lack of an agreed alternative between opposition parties and independent commentators gave NAMA and Government a fair wind. I would point out, however, that Fine Gael set out its stall on banking as early as February 2009 (see Oped in Irish Times by Richard Bruton on Feb. 11, 2009), long before either the Government announced NAMA or independent economists and Labour were calling for nationalisation.

Everything that has happened since has confirmed by belief in the merits of the approach we advocated.

Andrew

http://www.news.com.au/couriermail/story/0,23739,26653674-953,00.html

Is this the start of a worrying trend? Shou;d we make money off of asylum for Trillionaires? We have the vacant Hotels?

“As an investor, if I have a lucky escape, I’m not going to wade back in and expect another lucky escape.”

As an investor, i think i’d be more willing to invest again if i got all my money back this time, as opposed to if i suffer a loss. And that appears to be how the bond markets are reacting right now.

I disagree with your analysis. If the state can share losses, it’s future credit strength is greater. The idea that covering Irish bank losses will ensure future participation is bizarre. As an investor, if I have a lucky escape, I’m not going to wade back in and expect another lucky escape. Especially if the ones who saved me are looking weak.

To clarify my point on Snrs - I’m not saying they should be hit, but looked at. If the country’s finances are a lot worse than acknowledged, it might be a least worst option.

At the risk of further trying your patience, how could all risk capital providers be forced to absorb losses before the state recapitalised without the time pressure of the guarantee running out?

Would they have lost everything in your plan?

As we approach 300 days since Lenihan proposed NAMA, what signs of life suggest that AIB and BoI are not in a zombie state?

And like the original Haiti zombies, their property pertfolios lie in rubble about them.

Did you support nationalisation so that the state could then hand the banks over to the bondholders?

If yes, then why not just provide the legislative format under special resolution regime for this to happen directly without the state takeover.

If no, why did you want to let the bond holders off the hook?”

Maurice
Not sure where you were the last year, but thats a pretty rank misrepresentation of my position. I argued, forcefully and often, in print, electronic, radio and TV that ALL (yes, that includes bondholders of the non-senior variety) risk capital should be forced to absorb losses BEFORE the state recapitalizes. So the bondholders would far from being of the hook be right on it wriggling.
Maybe you were so enraptured by FG’s plan for mass zombification that you missed that bit?

The Irish banks are actually in a better position for this resolution process given their low deposit:loan ratio, many of the US banks were operated under far lower leverage and with far higher deposit:loan ratios.

which FDIC example are you referring to? Almost all depo/bondholder splits have come from overnight/weekend collapses. The idea is you are taking emergency action to save the depositors from a run. Seems more or less legally impossible from the point of view of a stable (but potentially insolvent) nationalised bank like Anglo.

Parri passu?

So legislate special resolution schemes around it… it works for the FDIC…

Temporary Nationalisation - a tempting concept - but no one explained what tidying up you were going to do during those few years.

Did you support nationalisation so that the state could then hand the banks over to the bondholders?

If yes, then why not just provide the legislative format under special resolution regime for this to happen directly without the state takeover.

If no, why did you want to let the bond holders off the hook?

I dont have total recall but the following is my recollection.

FG supported the guarantee but I dont recall the issue of subordinated debt being raised at the time - my memory is that Lenihan was given powers to introduce regulations and that he then included subordinated bonds into the guarantee.

To me the most important date in the chronology is December 2008 when Lenihan offered preference shares to AIB, BoI and Anglo. FG opposed any “investment” in Anglo and called for it to be wound up over a 5-7 year time frame, a timeframe in which dated subordinated bond holders would lose the advantage of the guarantee.

As regards the divergence between the Labour and FG plans in the spring of 2009, the LP is an independent party and is entitled to pursue its own agenda which no doubt they sincerely believe to be in the long term interests of the Irish people. They showed absolutely no interest in cooperating with FG to prevent the introduction of NAMA. To my mind this was a repeat of the Spring/Finlay decision to rubbish FG in 1992 - the only difference is that their decision in this case has cost us all probably 10s of billions.

FG equally were not prepared to support Nationalisation of AIB/BoI as this had already proven to be disasterous in the case of Anglo.

The experience of the last year and a half has shown that a determined government can exercise power in this state in the manner of an elected dictatorship on a scale we would never have imagined 18 months ago.

already done. What happens to all the Irish corporate or pension fund money?

“We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer.”

“Furthermore, we explicitly recommend nationalisation only as a temporary measure. Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.”

“We can summarise our arguments in favour of nationalisation, and against the Government’s current approach of limited recapitalisation and the introduction of an asset management agency, under four headings. We consider that nationalisation will better protect taxpayers’ interests, produce a more efficient and longer lasting solution to our banking problems, be more transparent in relation to pricing of distressed assets, and be far more likely to produce a banking system free from the toxic reputation that our current financial institutions have deservedly earned.”

And where are we now, a year on?

The FG plan was fine in theory but as KW notes it did give lots of hostages to fortune via the timeline.

Lets revisit 19 May 2009 wherein I noted

“However, as Karl Whelan points out on irisheconomy.ie: “The FDIC arrive secretly on a Friday afternoon – they don’t signal 16 months beforehand that they’ll be shutting a bank down.”

The reason for this is that a time period between announcement and effect allows for significant problems to emerge.

The Fine Gael plan would create a system which, at least for a while, is populated by undercapitalised or zombie banks, banks which are not be able to carry out their normal role in the economy. As well as undercapitalisation, the banks would be illiquid. As a consequence of the announced end of the guarantee, banks would not be able to source any funds that extended beyond September 2010 (when the guarantee ends) and so would be forced to rely only on the sluggish interbank markets, with the certainty that as the end of the guarantee looms, they would only be able to source short-term expensive funding.”

Question maurice and andrew : would FG not have been better off in terms of serving the country if they agreed with the inevitable consequences, and suggested that they agreed with the implications that this would require the state to take the banks into care ; they could then state clearly that they disagreed with the second round decision, they favouring a bad/good split asap, Lab favouring whatever they favoured? As it was FG and LAB came across as having good, incoherent and wildly divergent plans while FF came across as having a bad, coherent and agreed plan.

you can’t leave the deposits in Good and senior debt in Bad, they both have to remain in the same place and be treated the same…

Swap your debt or we’ll do a good bank/bad bank split and you’ll be left in the bad bank…. and then we’ll liquidate it.

The reaction was that if Garret Fitzgerald and Alan Dukes were backing Brian Lenihan over their own party FG, then Lenihans plan must indeed be the best.

They forgot that both were entirely compromised.

my recollection, as a non partisan and reasonably close watching independent, was that FG came out with their NRB idea, talked about it for a few weeks, and then never mentioned it again. If you guys don’t believe in it, why should i?

Also, swsn’t one of the problems with the FG plan due the fact that they said “we wont extend the guarantee, and we’ll wind down insolvent banks at that point”, at which point someone put their hand up and said “eh, won’t all the depositors run for the hills on (or before) Sept 29th, causing a collapse of the banking system”?

@ YM

re BoI d-for-e: whats your pitch to the senior debtholders - swap your debt or we’ll liquidate? Not exactly a strong bargaining position. At least with the subs they have an incentive to crystalise their losses given the lack of a coupon anymore.

@ DE

your idea is certainly a decent one for the future of banking. Unfortunately we’re still trying to sort out the current mess and the previous bad decisions from all parties involved.

Where, though, do you stand on the guarantee?

The only debt to equity swap that makes sense is one for senior unsecured debt.

Secured debt could also be told to take its security, thanks very much for your time, goodbye, but I think this would be genuinely risky…

More accounting trickery to appease bondholders that they can just ignore? Indeed, that they have been told to ignore? It is bad enough that they bought back subordinate bonds they didn’t need to…

FG avoided using the word nationalisation because they didn’t want the Anglo fiasco repeated. The FG policy has been the only consistent one insisting that risk capital gets burnt. At least now Brussels is (as usual) partially rescuing us from some of our idiotic policy decisions which were driven by big money and not the national interest.

To think that Richard Bruton would dream up a populist policy that simply appeared to be clever and moderate rather than being actually radical in a time of total national catastrophe is to totally underestimate RB and FG. Never has there been a more important time to put the interests of the Irish people/taxpayers ahead of big money.

Our alternative National Recovery Bank, far from being a distraction, addressed the core issue which nationalisation/NAMA has so far failed to address.

Lenihan is his father’s son and he was always going to succeed in getting his own way over NAMA when so many people ran down the blind alley of nationalisation. The vacuous Pavlovian response of the Labour Party approach, supported by all the usual suspects as well as by people who should have known better, gave FF-friendly columnists every opportunity to portray the opposition as divided.

It is disappointing that the LP came up with so little meaningful reasoned opposition to the debate. The LP was simply not interested in presenting a joint approach with FG. They were far more concerned about presenting Gilmore as Taoiseach in waiting and Burton behaved like a 15 year old who has just been kissed for the first time in all her encounters with Lenihan.

So yes, you are right, NAMA was probably inevitable.
But no one can say that it was FG who handed it to them on a plate.

I completely understand your position. But remember that I could just as easily argue that there was some momentum building last Spring for nationalise/recapitalise/privatise as an alternative to the government’s approach that “the pointless debate on the merits of the FG National Recovery Bank proved a perfect distraction.”

My suspicion was that FG figured they appeared clever and moderate by putting forward a plan that didn’t use the phrase “nationalisation”. In fact, the plan was quite a bit more radical than anything I had proposed, for instance.

If the nationalise/recapitalise/privatise approach had common opposition support, then there was room to go further and discuss the more extreme elements in the FG plan involving bondholders. As it was, the spin merchants were able to paint the opposition as being totally at odds — with the incorrect impression always given that Labour’s plan was the more radical. The FG plan gave FF-friendly columnists all the opportunity they needed to write rubbish about only games in town and only credible plans.

But, look, there’s no point in engaging in sour grapes. Reasoned opposition was never going to get in the way of the NAMA train.

I have suggested this before but I think we should force the banks to offer every liability/deposit/bond in a guaranteed and a non guaranteed form.
For everything that is guaranteed the banks would pay fully commercial rates plus a margin to the state for the privilege.
The guaranteed stuff would have a much a lower yield to take account of the extra costs for the banks.

That could be no complaints in the future under any circumstances IMO. If you buy the guaranteed stuff you are guaranteed if you didn’t then you went for the extra yield knowing full well the additional risks you were taking on in return.

im with Joe. I’d love a world where everything was very clear and explicit, nothing was implicit, and there was never any moral hazard situation like this. However that perfect world only exists in textbooks.

Maybe the current situation is serious enough that we will finally try to create that textbook world for the future, with explicit situations and rules, but we’re nowhere near it right now. And no matter how clear and explicit the rules are going forward, sometime, somewhere there will be a situation where something implicit or serious enough will create a reasoned argument for breaking those rules. Such is politics, economics and life.

Re senior debt guarantees going forward, i think some form of guarantee may be required if we want credit to start flowing again in the short to medium term. Longer term i think the entire structure of financing needs to change so that debt guarantees simply aren’t required. But this will also involve all sorts of implications on balance sheet size, TBTF, leverage ratios, capital requirements and the policy of wanting cheap credit as a means of nominal economic growth. Its not as simple as yes or no.

@ Ahura

we’ve been down this road before when discussing “what would happen if we burnt snr debtholders”.

The Irish state needs to borrow a huge amount of money for the deficit. The Irish banking system also requires a huge amount of money for ongoing funding requirements. Although one is corporate risk and the other is sovereign risk, they generally get bought by the same people - other banks, pension funds, asset managers etc. As such, if we accept that the Irish banking sector was/is in a systematic crisis (as opposed to individual), and the Irish State was also suffering from a deficit crisis last year, if we decided to burn one of these risk categories (corporate) do you not see a decent chance of major contagion into the other risk category (sovereign)? Is a sudden funding stop not possible? Does this not become even more of an issue when many people across Europe see our banking problems as a quasi-sovereign issue? Again, legal and technical considerations be damned, this is a purely practical issue to consider.