Issuance of BoI Shares

Today’s media coverage of the Bank of Ireland share issuance contained a number of inaccuracies, which to be fair, probably isn’t too surprising given the complexities of the issues.

On RTE’s Drivetime show, its reporter said that the share issuance occurred because the European Commission was preventing banks from paying dividends on the preference shares. Technically, this isn’t correct. The Commission is preventing banks from paying coupons on subordinated bonds. These bonds, in turn, have dividend stopper clauses and it is these clauses that prevented the payment of the cash dividends.

This is perhaps a technical distinction and it may be difficult to get across the true picture in a short space of time. More misleadingly, however, when I appeared on The Last Word today, I heard Fianna Fail TD Frank Fahey state that the Commission had merely put a hold on cash dividend payments to the government while it is assessing BoI and AIB’s restructuring plans. Fahey thus asserted that in a few months time, AIB’s business plan would have been approved and the government would be receiving the cash dividend from AIB in May.

However, as I noted last week, the coupon stopper is in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements.” It seems likely that AIB will still be reliant on state support in May so by that reasoning the coupon stopper is likely to still be in place.

I’ve been a little surprised that there has been no coverage of the fact that the shares were paid out despite the NTMA CEO John Corrigan and the Minister for Finance both stating in public last week that they could wait to collect the cash dividend. It appears, however, that Bank of Ireland’s own bylaws required it to pay out the shares on the deadline day (see this report by the Independent’s Emmet Oliver). It seems a little strange that Mister Corrigan and the Minister were not aware that the shares were going to be issued.

Governor Honohan’s characterisation of the whole affair as “untidy” seems about right (comments reported on the Six-One TV news). He is, of course, also correct that this payment is small beer compared with the amount of recapitalisation that the banks are going to need after the NAMA transfers. With AIB transferring €24 billion to NAMA, and BoI transferring €15.5 and mooted discounts of about a third, recapitalisation requirements will be a lot more than €250 million. But the fact that €250 million acquires 15.7% of BoI tells us that a far more serious dilution of ownership is on its way.

92 thoughts on “Issuance of BoI Shares”

  1. @ Paul,

    It might be embarrassing.

    They’re already worth 12.5% less than we paid for them.

    And if they tried to sell them they wouldn’t get a second hand wind turbine.

    They would melt the banks to zero in 5 seconds.

  2. @Paul
    It would be completely self-defeating Paul.

    15.7% is a massive shareholding and with the short-sale ban still in place this would be by far the biggest chunk of stock to hit the market in the last 2 years.

    By the time the stake was sold the price would be significantly down from current levels. I think we would be lucky to get most of it away above €0.70.

    When the next round of recapitalization comes in a few weeks, the €2bn needed would represent an even larger percentage of the banks market cap. So we would probably end up with an even larger shareholding than if we just kept the dividend stake!

  3. If we shredded the shares and used them to insulate houses, it could keep the greens on board for nama?
    It. Would be a win win!
    Night
    alan

  4. Why, oh why do they consistently send out Frank Fahey to bat for the government on economic issues? It’s bad enough that economic illiteracy got us into this mess, but there’s no need to rub our noses in it.

  5. @ Dreaded_Estate

    “I think we would be lucky to get most of it away above €0.70.”

    By the time Fianna Fail and the Green Party have finished with all of the “tough decisions they have to make for the good of the country” we’ll be lucky to get €0.70 for Bank Of Ireland.

  6. @ Paul

    Still, it’s comforting to know that (I keep hearing this) we “own” 25% of BofI thanks to our purchase of Preference Shares for €3,500,000,000.

    Ya just have to pinch yourself knowing that at current market capitalisation we “own” 25% of a company that the market values at €1.265bn.

    Hmmm, that should be “worth” €0.316bn.

    Nice. :mrgreen:

    We get that just so long as we pay another €0.124bn to exercise the Warrants.

    Anyway. Why quibble. That’s €0.192bn in the bank (so to say).

    Only one problem.

    We can’t exercise the Warrant for another four years.

  7. @ Paul

    I wonder, if after a €450,000,000,000 guarantee (with no demonstrable return), and €100,000,000,000 additional Sovereign NAMA Debt, and (what? pick a number) €25,000,000,000 of “recapitalisation”?

    I wonder, in four years time, if all that hasn’t worked what is the value of the Warrant?

  8. @ Paul,

    Maybe the Warrant is worth nothing.

    Just like Anglo Irish Bank. We put €4,000,000,000 into it and it is worth?

    It’s worth MINUS €6,000,000,000.

    That’s the minimum amount of money that has to be put into Anglo Irish Bank just to make it worth exactly ZERO.

    But hey, welcome to the smart economy.

  9. The issues are very complicated, meaning its difficult to get popular support.

    I think the whole NAMA issue can be simplified to should the shareholders pay or should the tax payer pay. Presented like this I think the anti-NAMA people would get a lot more support from the public.

  10. @Dreaded_Estate – “and with the short-sale ban still in place “.

    For my info – I honestly thought that must have been lifted by now. Am I right in thinking that it was lifted in the UK/USA? Do you know when they intend to review that ban in Ireland?

    @KW

    This is a really good piece.

    “Fahey thus asserted ” – and Deputies will keep on asserting if journalists can’t question them properly (i.e. poor interviewing).

    “I’ve been a little surprised that there has been no coverage of the fact that the shares were paid out despite the NTMA CEO John Corrigan and the Minister for Finance both stating in public last week that they could wait to collect the cash dividend.” – – –
    —– I am already looking into this – it surprised me too. Not much movement in getting people to talk at the moment but I will continue. If anything comes of it I will post an update back to here.

  11. @ Joseph

    Yes the ban is still in place. I imagine that it will remain in place until such time as loans have been transferred to NAMA and subsequent recapitalisations have taken place. The short-selling ban is apparently under ‘continuous review’.

    Yesterday just over €4m worth of BOI shares traded in London – a miserly amount given the significance of yesterday’s news. I really do not think that the market cares about the Irish banks any more.

  12. @rubensni:
    “Why, oh why do they consistently send out Frank Fahey to bat for the government on economic issues?”

    Does Mr Fahey comment on economic issues or on property issues? On the first, he might be said to be lost at sea, whereas on the second he can claim some expertise.

    http://en.wikipedia.org/wiki/Frank_Fahey

    bjg

  13. @John Mul.,

    “I really do not think that the market cares about the Irish banks any more.”

    You may have summed it up. I’m not even sure why the existing shareholders are hanging in. If a quarter billion equity for dividend swap can dilute the shares so much, the required recap is going to dilute them to homeopathic remedy levels.

    Although Governor Honohan has indicated that he believes the required recap is “manageable”, I suspect the bond markets will form its own view. And I also suspect this may be coloured by how the existing bondholders are treated as the blanket guarantee period draws to a close.

    I suppose we might as well face it: zombies in majority state ownership for an extended period.

  14. Rory
    I agree that a simple point should be made, but this is economics and if it was simple we might realize that economists, are less tha a zero sum game. Morgan Kelly et al including one or two on this site, are capable of both seeing and saying. The others lack one or the other…..

    I notice a subtle change on NAMA. Have you?

  15. @Karl. Good post explaining the strange decision to accept the dividends in the form of shares rather than wait for the cash. I know which id prefer.

    I keep thinking of the family guy episode where Peter has the choice of winning a boat or taking “whats in the box”.

    He opts for the box explaining his decision by saying “A boats a boat but a box could be anything ! It could even be a boat !”

  16. @Rory,

    I think you mistate the question. The shareholder has already paid in the sense that his equity is all but worthless. Some of the subbies have made a contribution. The alternatives to NAMA seem to boil down to the wish that somebody else pay “for the sake of the children”.

  17. @Paul
    “I’m not even sure why the existing shareholders are hanging in.”

    Many of the small investors have held the shares for years. The time to get out was a couple of years ago. I know people for whom bank shares were 25% of their income and for others it was their children’s educational fund or their pensions. They’re just hoping for the best.

    When people talk gleefully about shareholders taking all the hit remember there are many many “small” people who trusted the banks and those who regulated them who are now going to see nothing at all.

    PS I’m not one of them in case you assume an ulterior motive.

  18. Why are we even debating whether it was shares or cash?

    Simple fact is BOI and AIB are going to require at least 9 billion in a recap.

    The bulk of this money is going to come from Govt. If 250 million bought 16% of the shares, a 2 billion recap will buy 128% giving us a 169% shareholding in the Bank. A 4 billion recap will…… well

    Any of the economic experts on this site see the discrepancy?

  19. @ Joe

    It’s my understanding that at the turn of the year AIB had €1.6 billion outstanding in lower tier 2 securities and that BoI had €3.6 billion.

    BoI has now swapped some of these bonds as follows:

    “The securities exchanged have a nominal value equivalent to €1.62 billion. These securities will be exchanged at a discount into the following new securities

    * €978 million, 10% coupon, maturity 12 February 2020
    * £197 million, 10% coupon, maturity 12 February 2020”

    http://www.bankofireland.com/press_room/latest_releases/2010/General_Content_1000565.html

    So, by my reckoning, BoI still have €3.2 billion outstanding in lower tier 2.

    Would I be right then in saying that between the two main banks there is €4.8 billion in lower tier 2? And that Anglo has about €4 billion in same?

    Is it crazy to ask these guys to pay for the sake of the children?

  20. @Greg
    I was just using KW post above mine

    “Would I be right then in saying that between the two main banks there is €4.8 billion in lower tier 2? And that Anglo has about €4 billion in same?”

  21. @ Dreaded_Estate

    Sorry. Should have gone to Specsavers.

    I’d like to know what the coupon was on the original debt.

    Converting to a 10% seems expensive.

    What are the cash flows? Do they have similar NPV?

    Is this just bookkeeping?

  22. I don’t understand why Bank of Ireland didn’t get permission from the regulator to lend non-recourse to a few of its clients so that they could buy the Government’s shares.

    There is precedent.

  23. I agree that selling these shares on the open market would be a big mistake, but what about upstairs-market placing of the share block with some acquisition-hungry foreign bank? That might perk up the BOI market share price as well.

  24. @ Gregory

    I can think of a few reasons why your suggestion might not work.

    For a start, what foreign bank would want a stake in an Irish bank that is probably facing a severe equity dilution in the near term?

    Secondly, I would imagine that the government would have difficulty explaining to taxpeyers why 15% of the bank was offered to a non-domestic bank for such a relatively small amount of money whilst the taxpayer has already forked over €3.5bn to the same institution.

  25. @M.B.
    “The bulk of this money is going to come from Govt. If 250 million bought 16% of the shares, a 2 billion recap will buy 128% giving us a 169% shareholding in the Bank. A 4 billion recap will…… well”
    You are missing something, I think. The value of shares in existence will always equal 100% of the value, so if a recap of 2 bn at a price which would value the existing shares at 1 bn, there will be 200% of existing shares (in numbers) issued. So the new money will own 2/3rds and the existing shareholders 1/3rd.

    You’ll never wipe out existing shareholders by recapping. As Paul Hunt puts it (rather well, I thought), they gradually become homeopathic in their ownership proportion.

  26. @Karl,

    The answer to your question depends on whether you can do it in a manner that is both legal and avoids raising the issue of a default. I guess you have to negotiate with them. Eoin Bond would be your expert on the feasibility. I would imagine if you formally nationalise the banks, thier obligations become sovereign (?) and then if you don’t pay the lower T2, the bond vigilantes will be coming to get you. Are we talking about the law of unintended consequence here.

  27. @Jon Mul.

    Future equity dilution associated with additional equity shares received by the government could be included in the “the deal”. Find a foreign acquisition-hungry bank, sell them the current share block along with a right of first refusal (at contemporaneous market price) for any additional shares received by the government. A foreign bank essentially agrees to take long-term control of BOI by injecting equity, at a reasonable price relative to typical corporate takeover prices, and the Irish taxpayer gets out of the bank share-investment business. Owning bank shares (except for short periods during restructuring activities) is a bad long-term use of Irish government resources.

  28. Selling BoI to a foreign bank is a great idea, once Ireland holds all the equity.

    But to get a buyer at a decent price (indeed, at any price), we would need to clean up the assets. Also, that buyer would want control of the board, in order to kick out the incompetents who ran the bank into the ground. And in order to avoid jacking up the share price via cleaning up the assets, we should buy the shares first, via a swift recap, then clean up the toxic waste.

    So, nationalise, run NAMA and refloat, hoping Deutsche Bank or BNP Paribas or someone chomps at the bit.

    Hold on, wasn’t this what anti-Nama peopple were saying last summer…before we pumped 3.5 bn into it to allow it to zombie walk us deeper into recession?

  29. @joe
    Implicit in your good wishes is the assumption that the banks have no intrinsic value. And that must be because you think them completely insolvent. Which part of NAMA, which you so enthusiastically defend against the NAMA + nationalistaion view, resolves any of this?

  30. @simpleton
    Indeed. That is why those of us who argue a debt-to-equity swap as the only solution do so – the banks have negative net worth, the only way to resolve this is to bung them some more assets or reduce their debts. The EU is saying bunging them more assets must get equity in return – the scale of recap required is huge. Too huge, some of us argue, for a return to be made on it. Which scuppers voluntary private sector involvement. So enforced involvement is about all there is…

  31. @ Joe/Karl

    you can’t enforce a debt-for-equity swap without it becoming a technical default. It has to be via negotiation. So obviously you have to have something to negotiate with. And what does BoI have to negotiate with?

    1. cant stop paying coupons on LT2
    2. losses can only be involuntarily enforced via liquidation – are we about to liquidate BoI??
    3. losses can voluntarily be crystalised via buy backs, but there’s not too many fans of those on here!
    4. you could suggest a very nice d-for-e swap with the subbies, but then the existing shareholders probably aren’t going to agree to it.

    Also, nationalisation would not solve any of these problems. The simple facts are that unless we are actually willing to consider outright liquidation, and convince the subdebt holders that we are actually considering this, it is very very difficult to enforce losses on this category of debt holder. Buy backs have proven successful, while d-for-e is both more difficult and less common. So while im not against d-for-e in theory, and never have been, and i think BoI will try one in the coming months, i still contend that they are very difficult to push through. But i wish them all the best of luck with it.

  32. Wowza, two huge stories just breaking….

    *IRISH JUNIOR MINISTER TREVOR SARGENT TENDERS RESIGNATION

    and even more importantly…

    *Cheryl Cole to split from husband – Popstar Cheryl Cole is separating from her husband Ashley Cole, her spokesman said today.

    😀 😀 😀

  33. I wonder how much capital value Frank Fahey has lost from his property holdings in the last few years, I bet (and hope) a lot.

  34. Purchase price of shares = €1.36

    Current value = €1.12

    Current unrealised loss = 18%

    AIB @ 1.02

    It’s getting interesting.

  35. @Eoin

    good post. So you nationalise the two banks and then enforce a debt equity swap to recap them. It is a technical default by a nationalised entity. The L-D of the banking system is 100% plus post NAMA while the exchequer deficit is 20billion. What happens next?

  36. @Greg – “Maybe the Fitch downgrade of the Greek banks is having an impact”

    An interesting development. I’m kind of suprised it took them so long to formally recognise they are in the junk category. Can’t be long until AIB and BOI get some more attention from them? Surely?

    Greece is going to be an interesting space to watch in the next few weeks. I was talking to a philosopher today (a good one). He sees Europe as some place about to unravel as individual national interests (I think he used the word ‘identities’) come to the fore. He wasn’t too complimentary about the German psyche that’s for sure.

    @Eoin – “and even more importantly…”

    I know. I just turned Sky News on (I was bored waiting for C4 at 7 and some decent news reporting) and saw the Cole headline. Is that what passes for headline news in Murdochland?

    Trevor Sargant? Doesn’t he run the canteen for the government? Food? No great loss. But hey, don’t ministerial resignations come in threes? Who’s running a book on the third one to go? I know who I would bet on……. and his first name begins with a ‘B’. The rumour mills are warming up faster than the derivatives death star.

  37. @Eoin
    “unless we are actually willing to consider outright liquidation, and convince the subdebt holders that we are actually considering this, it is very very difficult to enforce losses on this category of debt holder.”
    Precisely. And that is why we should have been rumbling in Yorkshire accents “eh up, come the end of tit guarantee-like, ee knows what’ll happen ee” for the past year and a bit.

    Perhaps the rumbling have been going on in the background, but I doubt it. For me the simplest threat is the good bank/bad bank split. A legacy asset management company with all the senior bond debt and as much of the C&D ABS and CDO of the mezzanine RMBS parts, with the senior RMBS portions in the good bank along with depositors and firm assets. As I keep saying, the depositors form such a small proportion of the liabilities that it is relatively easy to do here (relative to somewhere else, not relative to knitting an aran jumper when you have no hands, no eyes, no needles and no wool…).

  38. @ DE/YM

    re split – i think it’d be extremely difficult to do it now. No way debt holders are just gonna stick to the sidelines and let you rip out the deposit book. EU has also stressed over the last year that all creditors of similar level have to be treated the same (ie you can’t screw senior debt through some clever structuring). If you were ever gonna do it, it would have been during the chaos of this time last year when you could claim everything was toast anyway and keeping depositors whole was the only issue (though the outright nationalisation of the banking sector then could’ve frozen all funding pretty easily anyway). Maybe it wouldn’t have stood up in court anyway, but far better chance than now. And the liquidation or splitting of a rather broad and complex entity like BoI is going to be a lot more difficult than say with Anglo or INBS. You’re also obviously gonna have to right off in totality the 3.5bn in prefs (they still obviously have some reasonable intrinsic value).

    re liquidation – i just think its a truly awful idea to liquidate 30% of the irish banking sector (or 60-70% if you include AIB). It’d have huge, like biblical huge, negative ramifications for the whole economy. For one, you’d be looking at 20-30k highly paid job losses overnight.

    @ Joe

    the only way i think it works is if we get a combined govt capital + private equity capital & expertise + subordinated debt for equity swap, all at the same time as NAMA.

  39. @ Joe and Eoin

    1. In relation to the technical default by a nationalised entity, let’s not pretend that this is the same thing as a sovereign default. And let’s remember that the crazy radical now known as Governor Honohan suggested negotiations with Anglo sub bondholders after their nationalisation, so this is not an extreme or strange position to hold.

    http://www.irisheconomy.ie/index.php/2009/05/29/anglo-irish-bank-dealing-with-risk-investors/

    2. The “L word” (the other one). You could also say that the liquidation of GM and Chrysler was unthinkable because it would have triggered huge job losses. And that’s fair enough. Indeed, the US government decided not to let the firms go under. But that didn’t stop the government forcing an acknowledgement of their insolvency, the firms being put into Chapter 11 and negotiations taking place with creditors prior to the US government putting in wads of taxpayer money. The same process could be done here with the banks though it likely requires passing a resolution regime bill. And they could emerge intact with everyone apart from suppliers of risk capital (equity, subs) having taken a hit. And the world would go on. Let’s calm down with the “biblical huge” stuff.

    3. “The only way i think it works is if we get a combined govt capital + private equity capital & expertise + subordinated debt for equity swap, all at the same time as NAMA.”

    Sounds really good Eoin. What do reckon are the chances of the government pulling this off?

  40. “It’d have huge, like biblical huge, negative ramifications for the whole economy.”
    Why? And empirical evidence shows that going the current route will only postpone the day of reckoning but make it a lot worse when the inevitable sovereign default comes. Look at the IMF paper from Sept. 2008 on this.

    And the good bank/bad bank split is not that hard. Look at WaMu. And I’m sure this government can rush through emergency legislation overnight if they really wanted to. They have form. And if there are constitutional difficulties, I’m sure a referendum can be organized. Not too many citizens will oppose a good/bad split that doesn’t burden the taxpayer with generations of debt.

    “For one, you’d be looking at 20-30k highly paid job losses overnight.”

    It’s not like there haven’t been job losses in other sectors. And given that much of the upheaval was caused by irresponsible bankers it is only inevitable that these 20-30k in the sector responsible for the problems take the hit. Though admittedly very few of these 20-30k were actually responsible for the crisis but that reasoning hasn’t saved jobs in retail or construction.

    And sure they can just emigrate. But if they do leave the shores of the country they should not forget Ireland and think about returning in 1-2 years because it gets hard after that.

  41. @Eoin & KW
    3. “The only way i think it works is if we get a combined govt capital + private equity capital & expertise + subordinated debt for equity swap, all at the same time as NAMA.”
    I agree that is about the best we could do now.

    Zero chance of it being pulled off, I think. Mostly because NAMA is the wrong type of bad bank. The NAMA bonds will put Ireland in the position of Greece – with massive off-balance liabilities that have a non-trivial probability of blowing up (making year on year losses). So the government isn’t able to fund its side of the recapitalisation with anything that will provide stability.

    In addition to this, it is mainly Anglo that is being cleaned up by NAMA. The amounts that BoI and AIB are putting in are quite small relative to the rest of their loan books. The rest of their loan books also have a non-trivial chance of underperforming, particularly if the banks are not permitted to resolve them through some namby-pamby NAMA for the people movement…. 😉

    I find it sometimes a little difficult to take that people who were arguing that we couldn’t possibly have ended the world eighteen months ago are now saying we missed our chance 😀

  42. @ Karl

    From Honohan:

    “This could take the form of of a deeply-discounted buy-back (as indeed is already suggested in the Government’s statement)”

    Haven’t i been suggesting this since god knows when, and haven’t people on here been giving out about this since around the same time? If you’re saying that the Governor is on my side in this, well all i can say thats very kind of you to say…

    @ Garo

    “Look at WaMu”

    If someone mentions WaMu again in the context of splitting a bank good/bad, there is a decent chance i will actually scream.

    WaMU – two seperate companies, one had the bonds and one had the deposits. Discussed on here in depth at least 3 or 4 times.

  43. @Kw

    Apologies for the drafting error. I was trying to pose a question. Would a default by a nationalised entity taint the sovereign? I agree with Eoin’s view that buybacks are debt/equity swaps by another name, although whether the last buyback was really a D/E is open to question. I also think you have to approach this matter carefully given our dependence on debt financing at both the bank and the sovereign level.

    Anglo is a sep isue from the systemically important banks.However, how much sub debt does Anglo really have?

  44. @ Eoin

    Comment 1 was more directed at Joe than your good self.

    But, while we’re at it, I’m not sure you’re in total agreement with De Guv. He’s all for deeply-discounted buy backs while you say it’s “very very difficult to enforce losses on this category of debt holder” suggesting an absence of deep discounts. I also suspect the people who “give out to you” have been complaining about what they see as unnecessarily good deals for our subbie friends rather than blaming you for them. We know it’s not your all your fault!

    My only point on this is that while Joe can say folks are whinging about “someone else paying” there’s €8.8 billion here in “someone else’s money” that, as far as I’m concerned, is fair game since the banks are insolvent without state help. The exact mechanics of how we give these guys as little as possible are not my area of expertise but I’d hope we have people studying this issue very closely (more closely for instance than the same people were studying the legal issues surrounding BoI’s preference shares …)

  45. Ok then take Indymac. Or all the S&Ls in the 1990s. Yes there was the RTC but you also had 500 indictments. Or as Karl points out GM and Chrysler. They are probably a much better comparison.

    By the way, how deeply discounted was the buyback? Wasn’t much if I remember correctly. They paid significantly more than what the bonds were trading at when the buyback was announced.

    Thing is, the government tried as hard as possible to get into a really weak negotiating position before any talks with the bond holders. They utterly failed in their fiduciary duty to taxpayers. Massively so in the case of Anglo.

  46. @ Garo

    This is where Eoin tells us that the GM and Chrysler bond-holders were treated very shabbily and that it’s a damn shame since, paraphrasing Father Sean, every country should be judged by how it treats it’s bond-fund-owning golfing classes. But that while the United States might be able to get away with this kind of thing, little old Ireland can’t because … well, just because, ok.

    Eoin — remember we’re laughing with you not at you. 😆

  47. @Gregory Connor

    Lets find that ‘foreign’ Bank. Any fairly quickly if a case can be made – how is beyond me. Canada looking for any trans-national co-operation anyone?

  48. @ Karl

    “you say it’s “very very difficult to enforce losses on this category of debt holder” suggesting an absence of deep discounts.”

    The key word here is “enforce”. By this i mean you need the debtholder’s agreement unless you go down the liquidation route. Continually people ask why we cant make these people take the losses. As i keep responding, via what method are you going to do it? I think you’ll agree that most people (not all) still do consider liquidation to be a very very bad idea.

    And so the deep discount, and my suggestion of an absense there of? No so. From your link, me commenting at the time…

    “Current pricing is (or rather was before the announcement) between 10-35 cents depending on the T&C’s of each issue, so lets put an average of 23 cents. Buy them all back in at 35 cents. Current holders get a kick of 50% of current marked-to-market, sub-debt itself is wiped out by 65%, and profit in between gets booked as profit and so capital.

    This is an open and transperent market operation, avoids the liquidation route, and sees sub-debt take a fairly significant loss, but at the same time still gives the debt holders an exit route in terms of price and also liquidity. It seems the best and most market friendly route to take if thats one of the chief concerns of the govt.”

    As such i was openly touting 65% discounts, which i think constitutes deep, even though i also said it was pretty market friendly. Others on here wanted to know why we were paying any more than 5 cents? As i said then and again now, why would anyone accept 5 cents if they knew there was very little real possibility of liquidation? This has always been one of the key issues – we were never going to liquidate (because of both the guarantee and also because of the fundamental economic and funding problems that would be endangered by this). Unfortunately paying somewhat over the odds is the cost of getting rid of the problem.

    @ Garo

    “They are probably a much better comparison.”

    Glad we’re agreed, because WaMu is a truely awful comparison. Can anyone tell me why they didn’t threaten Citigroup with liquidation, or with a full-on good/bad split? Would it have anything to do with the fact that they make up a rather large portion of the entire US banking system? Indymac, for all its undoubted stature, would make up i guess around 0.1% of total US banking assets, vs 30% or so each for AIB and BoI. Chrysler and GM also appear low down the list of US banking assets, though given that they are in fact car manufacturing companies, i wouldn’t hold this against them. While the bond negotiations at both are worthy of debate, i think there’s also a rather important difference between GM shutting down for a few weeks and Bank of Ireland doing so…

    …and @ Karl, your smartalick quips aside :L , because the US can print Treasuries until the end of time, that is why it can bully bondholders but lil aul Ireland cant…

  49. @ Eoin

    I don’t think anyone’s suggesting that AIB or BoI would “shut down for a couple of weeks.” The comparison relates to debt restructuring but doesn’t extend to other aspects.

  50. Moving away from the unresolvable debate, I would argue that a big problem in Ireland is the size of the banking and financial services sector. These are unproductive leeches on the “real” economy at least after a certain point when they start doing more than providing credit to worthy businesses and individuals.

    So say Peter Boone and Simon Johnson

    http://www.voxeu.org/index.php?q=node/4659

  51. @ Garo

    if you add the bloated public sector to as you say

    “big problem in Ireland is the size of the banking and financial services sector. These are unproductive leeches on the “real” economy”

    it does not leave very many people in the “real” economy does it?

  52. @KW

    Is there still 9bn of “somebody elses money” in the subbie a/c for the big banks post all the recent activity?
    Does the most recent BOI buyback actually constuitute a debt equity swap, buying back low coupn debt and issuing higher coupon debt. Sure it generates a capital gain now but what impact does it have on operating profits in future?
    The Guvnor recommends “negotiating” with the Anglo subbies. “Sell or get burned”. Did he say anything about the two big guys. In fact, is the Regulator really on board with these buybacks. Should he not be worried about the erosion of total capital in the two big banks.

    I doubt whether there really is “someone else” who can pay for the mess we collectively created. We did after all elect the current govt. Maybe those of us who can prove we did not vote FF in the last election should be let off. It may be that Sov default and exit from the Euro is the only option.

  53. @ Joe

    Yep, the €8.8 billion is my count of what’s left even after the recent activity. But it’s difficult to keep track of this stuff and I’m not on the Bloomberg machine keeping a daily watch on this. I’m happy to be corrected by someone who’s confident they have a better or more up-to-date count.

    On burning our subbie friends, I’m not going to play at “what did Patrick really think” as I can think for myself — I was merely pointing out that some people worth respecting share the idea of a nationalised bank negotiating with subordinated bondholders after it had blown through it’s equity.

    As for “It may be that Sov default and exit from the Euro is the only option” I suspect that entering into our horrible jesuitical subbie debates (we do this every few weeks just for fun) has depressed you unnecessarily. You’ll feel better in the morning.

  54. @joe
    “It may be that Sov default and exit from the Euro is the only option.”
    Why do we have to do both? If we go through the dislocation of a sovereign default, we don’t actually have to go through the dislocation of a currency one too.

    Or perhaps we don’t need to do either? Perhaps we could just tear up the guarantee and sue PWC? It might get sticky for a while to issue sovereign debt, but the NTMA are smart chaps and being forewarned could stock up on t-bills to get us through the next six months.

    Were it not for the banks, Ireland’s fiscal position would be more manageable – either longer could be taken or capital spending could be maintained while current spending declined (to reduce the structural element) and tax revenue increased. (Much and all as I think much of what has been considered as ‘capital’ spending has been disguised current spending…).

  55. @ YM

    “Were it not for the banks, Ireland’s fiscal position would be more manageable”

    Equally, if we weren’t running a combined budget deficit of roughly 40% of GDP between 2008-2011 we could probably have taken a harder line against the banks….

  56. TOD: I think there is a big difference between the public sector which while admittedly bloated includes among other doctors and nurses, police officers, teachers and university lecturers. The part of the financial services sector that I complain about and that Boone and Johnson refer to, primarily consists of people who move OPM from one place to another and are actually not very good at it if you look at the 10-year returns on most funds in Ireland.

  57. @Eoin,

    “…if we weren’t running a combined budget deficit of roughly 40% of GDP between 2008-2011 we could probably have taken a harder line against the banks….”

    Many thanks for putting the bank resolution issue in its proper context – and in the broader policy-making context. As we approach the final 6 months of the blanket guarantee period it seems all that remains is speculation about the nature of the end-game – and a hope that the powers-that-be have worked out some sort of damage-limiting end-game. We won’t know what this will be until it happens – if ever.

    We might as well face it: we are living under an elective dictatorship. All this means is that we have periodic opportunities to select who governs during sequential, but, more often, extended, periods of tyranny. A government that can marshal the lobby fodder in the Dail and with the full machinery of government at its disposal can do, more or less, as it wishes without let or hindrance. The only risk it runs is the flakiness of a coalition partner or of backbenchers in response to Macmillan’s “events, dear boy, events”.

    This is the way the banking debacle has been tackled. Decisions are made at a high level by a small number of people without transparency or scrutiny, the spin machine goes into over-drive, any dissenting views are squashed and the decisions are rammed through the Oireachtas. It may all work out well in the end – and I am not alleging any malign intent, but this is the nature of governance that created this financial and economic debacle.

    Until enough people take an interest in pushing for major reform of the system of democratic governance, we are doomed to experience a protracted and painful exit from this mess and run the risk of future repetitions. In the meantime all comment and speculation on the process of governance is futile and ineffective – even if, on occasion, it can generate some entertainment.

  58. No one will invest money in a bank like BoI without some form of government guarantee. There is just too much uncertainty there to throw in more money. This is what makes the whole thing so tricky.

    Michael Soden has talked about how some assets could be stripped out of the banks (http://www.eire.com/2010/02/23/what-are-we-going-to-do-about-bank-of-ireland/). If the State owned the bank, it could carve up the bank(s) in this way, and then sell the bank for a premium, but with a bank guarantee. The State would have cash up front, and any losses from bad debts would fall to the taxpayer over a couple of years rather than all at once (which is what happens if you liquidate the banks and trigger all the guarantees).

    However the State can only legally drive this if it wholly owns the bank(s). That is why the bank(s) need to be nationalized. It is the first essential step to fundamental restructuring.

  59. This is slightly off-thread, but can anyone direct me to a discussion of the fact that extent by which the long-term economic value of a parcel of land can exceed its (current) market value has been fixed at one quarter. e.g. the LTEV cannot be more than 25% higher than the (current) market value. The figure was set by Brian Lenihan in the 2009 Regulations. It was suggested to the Dail however in September that the appropriate uplift was between 15 to 18%. Why the change now?

  60. @gadge

    Pick any old number – none have any objective validity whatsoever – policy on the hoof …….. gizza number.

    @joe
    re sov default & euro exit! Take a good rest Joe – NaaMaa does this to people … if it continues try the Naa-Maa recovery groups.

    @Gregory Connor
    Any update on making the case for a ‘foreign bank’ to come in and take over the mess? We would all be eternally grateful to anyone who could construct such a case.

    @Padraigh Harrington

    A minor matter – I’ll stick with the majors.

    @All
    Nationalisation anyone?

  61. @Greg

    Not the ‘COWBOY’ Ferengi. Big Naa-Maa supporters these CowBoy Ferengi & their first cousins – The Cowboy Ferengi Bankers, ShawnEee an’ Fingers Louty ………. other two are amateur ferengi – and it really shows at the mo.

    Things must be really bad when we wish for the REAL FERENGI – they would have liquidated on the spot, sold the prinicipals into slavery in the kryptonite mines on Nirvana, shut up the shop, and headed for pastures greener at warp-9 (-;

    p.s. Seven_of_ Nine says Hi! She enjoyed the fling (-;

  62. @ David O’Donnell

    “p.s. Seven_of_ Nine says Hi! She enjoyed the fling (-;”

    And she said she was only going out to buy some sugar because the Replicator was on the blink.

  63. Purchase price of shares = €1.36

    Current value = €1.07

    Current unrealised loss = 21%

    AIB @ €0.99

    From the Irish Independent Saturday November 22 2008.

    http://www.independent.ie/national-news/bertie-goes-off-track-with-bank-of-ireland-shares-tip-1549316.html

    “Bank of Ireland shares are €3.80 today. Now if I meet you here next year, or the year after, do you seriously think Bank of Ireland shares will be €3.80? I’d go out and buy Bank of Ireland shares . . . that’s what I’d do,” he said.

    I hope Brian Lenihan didn’t take his advice.

  64. I bought around €20,000 worth of B of I Pref shares in 1992, which
    have yielded 6% on my original investment until this month.

    If I was offered 30 cents on the Euro of nominal capital as suggested
    earlier, I would presumably get only 30% of €10,000, say three years’
    dividend  (as these shares yielded 12% when originally issued long
    ago,  I assume that the nominal issue value of the shares was €10,000
    since I paid €20,000 and got 6%).

    So I’ll stick with my old packet of Daz, thank you, as the lady said
    in the ad.

    Even if I were offered the deal which the Lloyds Bank Pref.
    shareholders got, i.e., they got an option of converting to bonds
    yielding one or two per cent more, for periods of 10 or 20 years, but
    converting to ordinary shares if bank core capital falls below 5%
    (see “bondvigilantes” blog of the 12th of November 2009 for further
    details and comment)

    Might be worth a gamble, depending on what you paid for for your
    shares and what yield you were getting, but the risk of the core
    capital of Bank of Ireland falling below 5% will still be very high,
    even after  NAMA, as demonstrated by Morgan Kelly in his “Irish
    credit bubble” paper of December last .

    Better to be patient, and hold on to my Prefs for say five years,
    when they might start paying me 6% again (even the ordinary shares
    must start paying out some time, which means the Prefs will get paid
    first)?

    But you have to balance that against the eventual risk of a
    Resolution enforced by the IMF or the EU, as mooted and advocated by
    Morgan Kelly in the paper mentioned above.  Which might be even less
    than 30 cents on the Euro.

    Back to paragraph 2 above and start again.

    Such are the thoughts that go round and round in the heads of  bond –
    owning  folk.

  65. @Greg

    Yes – Seven_of_Nine does that at times – those borg tendencies haven’t gone away you know – spotted her reading The Examiner yesterday and she went out a few minutes ago – think she said – ‘Lee, you later’ – strange …

    “An economist is like a man who knows a hundred ways to make love but doesn’t know any woman.” [George Lee, 22-02-2010 Irish Examiner, p. 6. during a speech in Borisokane]

  66. @davldc
    Yeah CoCos seem to raise as many problems as they solve. They are like low-yield dated subordinate debt – no upside, but no real downside protection.

  67. @KW

    decided to do a bit of digging around today.
    *there is about 13billion in total on subbies in the whole system with about 9bn in the 2 biggies so you are correct. Some of it is newly minted I think as it is already the result of previous debt buybacks. Most seems to be lower T2.
    *I stand to be corrected on this but this is less risk bearing than the T1 stuff i.e coupons can’t be stopped. Eoin will clarify, I am sure.
    * Who owns this stuff? Some of the experts will help hear but the suspicion is that most is owned by banks and not marked to market. So does this mean if you torch it in A it makes the whole bigger in B.
    *as regard the stuff in AIB/BOI which are the systemically important banks well lets just say the owners would not be happy if you hurt them. They might not take kindly to somebody with a lot of sovereign and bank paper to sell. This is our Clint Eastwood moment and I suspect we are looking at the wrong end of the gun.
    *Anglo is probably a different case and here the Northern Rock approach should be tried.

    In summary, the IMF estimate of the the cost of clean up at 35billion is probably realistic -about 10% of the AIB/Anglo/BOI loan book. A third will be absorbed by the equity owners. Another third could be distributed between the subbies, asset sales and future profits. That leaves a third at least to be met by someone else. At the moment it is either a) through a combo of the NPRF/NAMA/Central Exchequer spread over a generation or b) NPRF/Exchequer spread over a generation.

    I struggle to see where a foreigner would come from. The UK are leaving. The Danes and the Benelux would like to leave. The Spanish have fingers and toes crossed. BNP is looking at Soc Gen. HSBC is looking at Asia. The Canadians wanted M&T not AIB.

    Moreover as Cormac Lucey points out growth in this economy is going to be sub par for a decade so why would a white knight appear.

    At this stage the two big banks end largely up in state control, Anglo is in state control. The Third force is a runt. The proeprty market is in State Conrol and to cap it all we look like a one party state. We might as well leave the EZ and reconstitute the Warsaw Pact. This debate on the pros and cons of NAMA is now as sterile as a Lilliputian on the right way to open a boiled egg.

  68. @joe lawlor
    I don’t disagree with any of your analysis except this bit:
    “In summary, the IMF estimate of the the cost of clean up at 35billion is probably realistic -about 10% of the AIB/Anglo/BOI loan book. ”

    The average loss of a property bust and financial crisis is about 12% of total banking assets. You can’t only count the banks that are in trouble, you have to count all assets, so while you have more equity to play with, the losses are asynchronous (the players with the equity are not necessarily those with the losses). So overall losses to the system will, I reckon, be about 50 bn on a baseline (average) case. On that case 3-4% of PTSB’s PPR residential book will go bad. The same for INBS. Then add in a bit for RIL (which has a higher default rate, maybe 5-6%) and EBS’s commercial (about 12%) and C&D (about 20%). These are the best two, because they have the lowest exposure to the stuff that will go really bad.

    You for sure have to include INBS in the basket case category.

    Of course, we could be having a worse than average property bust and financial crisis…

  69. @yoganmahew
    €50bn sounds about right. Although the Irish property bust is anything but average and if we have a “non-average” bust we could be looking at even higher losses.

  70. @Yogan

    What is 15billion when you are at that level. So instead of the state (you and me) facing a bill of 15billion it will be closer to 30billion. Moreover at the end we will still have a leveraged banking system. Therefore, we will still need the bond markets. So therefore, burning senior bond holders is a gamble and burning some subbies might have unintended consequences. This applies to AIB/BOI alone. Anglo is different.

  71. @joe lawlor

    that was some rest! Good work & keep it up …..

    Yes – ‘Anglo is different’ – deserves the ferengi-treatment.

  72. @joe lawlor
    15 bn is a years budget deficit. It might even be two years of the tail of it. Or it might be a few years jobs stimulus in the capital budget.

    We are kidding ourselves if we think we can resolve this without knowing how much the final cost will be and how we will pay it. We will end up like all the half-finished estates round the country – built on hope and hot air. Hope has been dealt with; unless you are in a balloon, hot air is not a strategy either.

  73. @yoganmahew

    The importance of time, and timely action, and getting relevant information on time, is central to crisis managment ………. we’ve now been waiting about three quarters of a million minutes is all ……….. ~750,000 minutes is all – shur what’s the rush – won’t it all work out in the end! or a bl**dy €billion a second is all – ~50 billion seconds and €50 billion into the black-hole. HOW DO I SCREAM ON A BLOG?

  74. SLIGHT ERROR OF JUDGMENT – 50 MILLION SECS ~ 50 BILLION EURO ……………… and revisions to company ‘may be ready’ in another 50 million seconds or so, as mentioned by Tanaiste in the Dail today.

    **&&%$$$**&&^%$^&zzzzzzzzzzzzzzzzzzz

  75. @ All (I know nobody’s reading, but just for an on-the-record clarification)

    Above I wrote “It’s my understanding that at the turn of the year AIB had €1.6 billion outstanding in lower tier 2 securities and that BoI had €3.6 billion … And that Anglo has about €4 billion in same?”

    I looked at the information I had on this today and realised that I had gotten by two AIBs — Anglo and Allied confused. The figures I was looking at actually showed that at turn of year, it was Allied 4.3bn, BoI 3.6 and Anglo 1.6. I just typed them in hear wrongly. Implications for totals outstanding are the same.

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