Rabobank executives will begin marketing a new form of contingent capital bond on Monday that could provide a template for other banks seeking to raise fresh funds from the markets.

The markets themselves have changed in what they want to buy, or don’t want to buy. I hope economists in Ireland can catch up with that fact soon. They aught to look at what is going on in telecommunications and mass media to see it. Chris Anderson’s book, The Long Tail, isn’t a bad reference. I hope this sort of innovation mentioned by Eoin continues to happen, (and we could do well in that space in Ireland) The Irish economists have failed to address problems in one crucial part of their ‘work out’ solution in my opinion. This notion we can ‘clean up the banks’ and sell them back to the markets. The banking system as we know it, will become more like the music industry and the Abbey Road recording studios, where the Beattles recorded their albums. A museum piece, with more of historial value than anything else. No one wants to own the large piece of central broadcasting (money, voice, media) infrastructure anymore. It is impossible to own any large significant piece of the network anymore. The capital is radically altered, it has dispersed to the very edges. (I can manage my own investment fund with Rabobank for as little as €100.00 - heck, most people spend more than that on eBay) A very good book references is Yochai Benkler, The Wealth of Networks, or Andrew L. Shapiro, The Control Revolution. We are witness today to a death battle on legal & economic arenas, to see if the old age company can maintain its control. The outcome is not decided. For the old to win out, it requires all sorts of extreme reinforcement to laws to do with intellectual property etc. Refer to online videos of Richard M. Stallman for some interesting lectures. BOH.

Most interesting to the non-expert on these Rabo (as distinct from Robo) type hybrids. Think we will be returning to this …….. sure you have a few ideas gestating away in the background …….

http://www.ft.com/cms/s/0/0e2cc458-2a20-11df-b940-00144feabdc0.html (story below)

http://ftalphaville.ft.com/blog/2010/03/10/169921/rabobanks-new-non-regulatory-capital/

***
Rabobank hybrid bonds offer new funding template
By Jennifer Hughes

Published: March 7 2010 22:45 | Last updated: March 7 2010 22:45

Rabobank executives will begin marketing a new form of contingent capital bond on Monday that could provide a template for other banks seeking to raise fresh funds from the markets.

Bankers are currently devising new forms of contingent capital – hybrids that contain features of both debt and equity – to meet the stricter criteria expected to come from the new Basle capital requirements after existing forms were discredited during the crisis.

The notes from Rabobank, the Dutch co-operative lender, would act exactly like normal bonds unless the bank breached pre-set ratios, at which point the value of the notes would be written down by 75 per cent and the remaining quarter returned to investors.

The bonds are particularly notable because Rabobank, a triple A-rated institution, is doing this from a position of strength.

“Given the events of the past couple of years, we wanted to be absolutely sure that even the unthinkable could be hedged or mitigated,” said Bert Bruggink, chief financial officer.

The deal is also the first to use this sort of write-down feature. Rabobank is a mutual organisation, so could not offer to convert the bonds into equity as the UK’s Lloyds Banking Group did with an offer of contingent convertible, or CoCo, notes last November.

The CoCos were designed to switch into equity at a pre-set level. That structure generated interest from regulators around the world, but was not considered a true test of the market since it was an exchange for existing, poorly performing bonds.

The Rabobank deal will raise fresh capital and executives are looking to issue at least €1bn ($1.4bn) of the new bonds.

Michael Gower, head of long-term funding at Rabobank, said: “Contingent capital is a new flavour for the markets. A bank of Rabobank’s standing is probably the appropriate name to take a leadership role in this sector.”

Investors have already shown strong interest and a team of bankers and executives will hold a series of meetings and presentations across Europe this week.

“This sort of structure can work for listed groups as well as mutuals like Rabo. Can it dictate the path of new products in this space? I think it can,” said Sandeep Agarwal, head of the financial institutions debt capital markets team at Credit Suisse, one of four banks working on the deal.

Marc Tempelman of the debt capital markets team at Bank of America Merrill Lynch, also on the deal, said that many executives were waiting for new regulations before addressing their own funding.

“It’s very significant because everyone could theoretically apply a structure of this type, but a number of possible candidates may want to see what happens with capital regulation first,” he said.

It is very interesting today, to observe the news media coverage of results released by AIB bank. Bear in mind, what the media has honed in upon, is only the payments to directors, and breakind down those numbers. Here is the thing, imagine there wasn’t a NAMA scheme. Imagine, that for the next 10 odd years in Ireland, we had to rely on these awful news media reports of information released from Irish banks, in relation to performance of troubled property loans. Bearing in mind, that a lot of build-er(s) had multiple lender(s). So on a particular day, we would all be trawling back through figures released about performance of loans from other lenders, and trying to extrapolate from that, the situation regarding build-er(s) and loans. Imagine the sheer time and effort required by that pathetic sort of exercise. At least with NAMA it cuts down an awful lot of the information processing load, with regards to results reporting of Irish banks - there is no one bad bank for all sizeable & troubled property related assets. NAMA is a reporting device, to enable better functioning of the financial market, vis-a-vis Irish banks. As Brian Lucey would say, either way the discussion is academic, the hold still exists to be filled. The only difference that NAMA makes I would argue, is we are destined to spend a lot less time actually speculating and listening to whispers and rumours. BOH.

I haven’t gotten around to reading Vince Cable’s book yet. But I understand from listening to an RTE podcast, that Cable has come up with a vision for financial markets in the future, which involves 2 no. layers. One layer below, which needs to work 100% all of the time, and cannot let people down. Then there is another layer, which sees to operate according to different regulations, but should not be entitled to support. If you lose, you lose, simple as that. If you look at most succesful pieces of engineering you see this strategy in evidence. The TCP/IP protocol which is the foundation of the internet, is a combination of a base layer, where speed and robustness is obtainable, with another set of devices on top, which address the more intricate needs of the network. The Unix operating system, and Linux operating system operate exactly along the same principles. It works basically. Banking is something like a network, like an OS, which should not go down. Brendan Keenan in the podcast also made the observation, we tried to make financial markets - i.e. markets for ‘money’ operate like markets to buy computers and beef - that was a big, big mistake. We cannot expect those markets to be exactly the same. BOH.

Off the Shelf 3 Oct. 09.
Mary Raftery, Alan Dukes and Brendan Keenan discuss “The Storm” by Vince Cable.

http://www.rte.ie/radio1/podcast/podcast_offtheshelf.xml

“I can only think of two reasons for the ongoing delay in progressing a bank resolution scheme:
1. A lack of DoF competency and/or capacity.
2. A fear that some elements of the bond markets might see a resolution scheme as a signal that Ireland is getting ready to default on senior bonds after the guarantee expires. That fear may be justified.”

On point 1 - there are no excuses - as above take a few them on a purposeful stroll thrugh the Dublin mountains with Eoin, Brian and Karl and a reasonably competent legal eagle or two - camp out for 2 nights (just to let the Dept types know what Blind Biddy is feeling now that she can’t afford that other bag of coal; you might consider Oliver in case you run into any wild-men or Captain Rockites; must be why the department of defence are in the market for 10million bullets!) ……. draft it up ……. and have it legislated in the Oireachtas within 24 hours. We are smart people - this is doable.

On point 2 - you certainly have a probably stong point - the political decision makers have been blinded by fear for the past 18 months or so - fear of the structural deficit(only question here is how), fear of sovereign debt and who they might upset who might lock the doors on sovereign credit[think ECB and bondholders] it is cripping them and it really shows in poor decision making - as any competent psychologist will tell you - it appears that they are in a fudge of denial and grasping at so called ‘revealed truths’ from those up the hierarchy who can (in their own interests, not ours) pat them on the back and tell them they are grand fellows/lassies etc. The ‘Solidrity Bond’ in Europe is holding - see Greece, and Sarkozy today - Angela is staying mum ’til after her local elections)They are wrong, because we are not that weak - we may be down but we are certainly not out ………. and the ECB, the bond-holders, and the hedge-shark cabal need to have it demonstrated. We can, and morally we should, wind down the toxic legacy of Shawnee, FIngers and co. And we will survive it. To clean up the other 2 (forget the socalled 3rd force for the mo - bit of board cleanout needed aside) we need a Dictatorial Transformation of the Big-2 - all present upper-echelons in boards and management must go [we can fund it] - there is an international labor market in banking expertise, cut reasonable deal with the bonds etc ………….. ruthlessly restructure, and when in order spread the risk on the equity market again. As this is going on we can kick-start an economy and save an entire generation. DOABLE.

Is there any strategic value in having a bank network run by indigenous companies?

For the immediate future, certain parts of the banking sector are destined to suffer a miserable, profit-less existence. For a whole variety of reasons, not least of which is, we simply don’t know how the Irish banking system is meant to plug into Europe, and ensure compatibility with the larger system. I would say, allow the Irish government to sponsor development of a basic infrastructure, until such time as we everything figure out. The reason I mentione George Lee above, is because since 2002, our banking network in Ireland which is part of a larger Europe wide network. Your part of that overall system has been mal-functioning in all sorts of ways we do not understand. The old banking management were not able to deal with the problems experienced. (They didn’t have to be brilliant trouble shooters previous to 2002, because banking hadn’t altered in fundamental ways) It is now up to the Irish as a people to understand, why our reception (to employ the phone network analogy) has been so awful since 2002. The best way to conduct the de-bugging exercise, is to impose state control over all of the basic levels of banking infrastructure. That erases any unnecessary boundaries that might get in the way of investigators doing their work. Unless we figure out how Ireland can operate at the edge of this new banking super-grid of Europe, it is pointless making very ambitious plans.

George Lee is right, in that we can afford to push for a better deal with Europe. Until such time as we apply the best, legal/economic coordinated technical resources to the problem in Ireland. We needed a €440 billion guarantee scheme to simply hold onto our deposits. Yeah, I would say, a large portion of our banking infrastructure (and thinking) is ready to go into the dustbin. The truth is, as George Lee described it I think. It is up to the Irish to communicate back to Europe, what exactly are the problems we are experiencing here on the periphery. What do we need to implement solutions. Only then can we see how the markets feel about Irish bank(s) as investments. People often say we are lucky to have Europe, or else we would be hosed. That is missing the point a bit. We plugged ourselves into this single currency gadget, like plugging an old out-of-date appliance into a modern power socket. We short-ed out on this end basically. BOH.

On senior debt, given that the 3 banks plus Nationwide are all insolvent shouldn’t investors just get back the face value of their bonds less any interest they have received or are still due? That would seem fair?

That would confine us dealing with future crisis’
A bank resolution regime may allow us to spread the losses from the current mess.

As a scientist I can say that this made me spurt some coffee out my nose. I suspect these guys are conflating basic maths and stats with science. Just because you have a formula does not mean you are right. And as far as “scientific” econ models go:
Recipe for Disaster: The Formula That Killed Wall Street
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

was pretty damn scientific.

Chase down that ’scientific’ model, equation or whatever it is being called. It has some fairly mega_implications for Joe, Joan, and their offspring. If anyone else around here can track it down - and open it up to ‘peer review’, supported by most on this blog, it might be illuminating.

Why can’t we let 2 banks that weathered the crisis well(say, BNP Paribas and HSBC) take over AIBs and BOIs deposit base and branch network. They can give a small chunk of their equity to the bondholders in a debt equity swap. Some form of vehicle should be set up to sell off the property portfolios should be set up and any money made passed back to banks/government/bondholders.

Is there any strategic value in having a bank network run by indigenous companies?

It would be good if there could be analysis of the NAMA valuation regs which were published on Wednesday last:
http://www.nama.ie/Publications/2010/NAMALongTermEconomicValueRegulation.pdf

I note the Regs refer to the “relevant period” for determining long term trends as from 1/1/1985 to 31/12/2005. That means a huge chunk of bubble uplift is included in determining what is supposed to be a historical norm. Never mind that 1/1/1985 is not long ago.

I also understand from my attendance at the NAMA legal conference on Saturday that a model for valuing LTEV has been settled upon and has been circulated to the banks. The banks are using this model to determine recapitalisation costs. The word model was not used but it was said that the methodology for detrmining LTEV was highly scientific, had been developed over a long period and that if one fed certain inputs into the methodology then one got a specific answer at the other end. This was in answer to an accusation that the methodology was anything but scientific.

If there is a model then where is it and why have the public and the Oireachtas not been afforded the opportunity to scrutinise same?

I tidied up my comments above, into a blog entry, Jim Gray on Telco’s. When we get past the loan valuations stage, move the toxic assets, and have no option except majority state ownership, (you cannot be a bit pregnant, everyone outside will see Irish banks as national-ised) there is still the fact the banking business model itself is insolvent.

(This is a problem that exists above the European level problem which Kevin O’Rourke/George Lee are trying to tackle)

I refer to Jim Gray’s observations of Telco’s in the US, in my blog entry. The new global banking business model does have implications for how we think about market capitalisation of banking infrastructure. We cannot think in the old fashioned way any more. BOH.

http://designcomment.blogspot.com/2010/03/jim-gray-on-telcos.html

I’ve been calling for it for two years. It isn’t an original thought. This site is a day late and a dollar short in getting to the implications of a property bubble which results in a banking crisis. A resolution regime is always required for a successful resolution. Acting pre-emptively is also always required, otherwise you end up with dead losses like the nationalisation of Anglo (the worst examples and the worst losses nationalised).

As Maurice O’Leary points out, we didn’t even have to think it up.

We could have cut and pasted UK legislation and passed it on a Saturday morning anytime since the UK brought in their legislation which was between Northern Rock and Brandford & Bingley.

But our clever and ever so politically cute Minister for Finance wanted to do it the way he was told by the big money boys.

To whose benefit?

That would only work if you could require all banks in all jurisdictions to include such clauses in bonds. That is why such reform requires huge international co-operation. Otherwise, we would place our banks at a competitive disavantage in the bonds market at a time when that is the last thing we want.

you could actually sidestep the entire resolution process altogether (or at least to a large extent) by insisting that banks have to issue debt (at any level) with contingent capital clauses in them where they convert or get written down if capital buffers go below a certain level.

Rabo apparently have a senior issue about to come to market that knocks you out if they blow thru 7% equity capital (currently 12%), you get written down to 25% (not mtm, full and real writedown).

Eugene McErlean, made a similar point when interviewed about the banking inquiry, about the international view of Ireland Inc. This ties in with my point in relation to economics and the George Lee/Kevin O’Rourke resolution strategy I mention above.

We need to see how NAMA stands as a solution, in context with suggestions from Colm McCarthy, Karl Whelan, George Lee, Kevin O’Rourke, the behavioural economists, myself and Jack the Ripper. BOH.

Look at the different strands, in evidence, on the Irish Economy blog site. Karl Whelan has been a wonderful asset to the Irish Economy blog for one reason - he is the only one able to pick up on the psychology of the Irish government. Karl Whelan is able to read people, in a way that I or few others can do. (Must be a poker players talent I think) It all begins with Dr. Peter Bacon last April, setting himself against the idea of nationalisation. How would nationalisation help us with a half finished shopping centre outside Athlone or Mullingar. Karl Whelan has been able to to track the government’s psychology as it developed since then. He rightly points out, we are at a stage in the debate where frogs and locusts, are about to descend upon us. That is the view at cabinet level. In terms of political economics. Karl is correct, it is a great pity it got to that stage without being checked by an informed economist’s point of view.

Colm McCarthy brings a whole new set of observations to bear, in terms of how we identify problem(s) going forward, and how our early response/resolution system can adjust to cope with future challenges facing our financial system(s). An early warning response mechanism, to deal with collapses in institutions other than banks, stock markets and so forth. He mentions insurance companies also, which may expose the taxpayer to large liabilities. From yesterday’s SBP article.

Failing banks tend to signal the fact through liquidity problems, but insurers get paid premiums in advance, and can be liquid, as well as insolvent. The next costly failure in Ireland does not have to be a bank.

I wrote the other day: The trouble with the 2008 crash was, there wasn’t any one outstanding event to mark it. With a stock market crash, like 2001 dot.com for instance, it is simple. The NASDAQ is worth ‘X’ times less than yesterday, the writing is on the wall, and there is no argument. No so with property & credit collapse unfortunately. Trying to get people to re-evaluate prices downwards after a property bubble is like pulling teeth without an anesthetic.

George Lee, makes the point we are now in un-chartered economic territory. (I think Kevin O’Rourke has picked up on George’s line of thinking also) There are no rules for dealing with our current circumstance in Ireland. There is no text book procedure. No other economy has ever had to deal with this problem, we are in. George Lee’s analogy is like that of a line technician, out on a telegram pole somewhere, who has to do real inquiry into the problem, and then inform headquarters what exactly is wrong. Hence the need for a bank inquiry as a crucial component of resolution.

http://www.irisheconomy.ie/index.php/2010/03/08/scary-graph/#comment-39039

I haven’t included the behavioural economists, Liam Delaney etc, but their suggestions for resolution are also present as a thread on the Irish Economy blog.

I myself, Brian O’ Hanlon am making the point, to enable us to cope with future challenges facing all financial system(s), we need to look at the architecture. This is where Ireland can become a fore-runner, in terms of integration of legal and economic resolution strategies. I referred to the example of the AT&T communications network in the US, in my blog entry The Rise of Dumb Bank-ing. It was a paradigm shift for the US comms network. In the past the intellligence was built in at network level - the data was dumb - it was told what to do. The network was proprietary, the good bit, the market that floated on the stock market. In the future the network is dumb - the intelligence is built into the data - the data becomes proprietary, (and therefore of value) the network is just infrastructure (requiring support of lower-risk capital to work). BOH.

The resolution scheme has long been part of the debate. I think that some contributors to the national debate, such as Constantin Gurgdiev, did not perhaps appreciate the size of the administrative obstacle posed by the lack of such a scheme at times. Certainly Prof Honohan, Karl Whelan, Colm McCarthy and [I think] Philip Lane have all alluded to the importance of a bank resolution scheme form time to time.

I can only think of two reasons for the ongoing delay in progressing a bank resolution scheme:
1. A lack of DoF competency and/or capacity.
2. A fear that some elements of the bond markets might see a resolution scheme as a signal that Ireland is getting ready to default on senior bonds after the guarantee expires. That fear may be justified.

Bushwells?

Think Tora_Bora and the Dublin Mountains for a few days more appropriate - then come back down (-;

Sound like a plan. I’ll get on to the animal welfare groups, the socialist workers party, people before profit, the alliance of lone anti-nama protestors, and the family protesting about their council house to try and avoid a clash.

Any suggestions as to what we can paint on the placards to represent the pre-emptive nature of the required scheme?

ok, apologies on not noting these three contributions, but you’ll also forgive me for pointing out that this represents 3 threads over the space of 10 months. I’m guessing that loss-sharing/enforcements and nationalisation have had maybe 10-20 times that in terms of discussion space (and 100 times that in terms of comments), despite the fact that neither of them are particularly effective without the resolution regime in place to start with. Most discussions on nationalisation etc generally don’t even have a mention of the concept of a resolution regime. I have on dozens of occasions raised this point by asking “how do we impose losses on the subbies?”, and very very very rarely has the response been “by first bringing in a new resolution regime”. It generally ends up being “tell ‘em we’ll pull the g’tee”, and then peters out after that.

At some point you need to leave the sanctury of the Arts block, lumber up to Roebuck and see what the legal eagles there think about how we do this.

… and back to the concept of TIME …….. and prioritisation of actions, and an Executive that appears crippled by blind hope in the ‘fullness of time’ …… there is more than sufficient brainpower around to get things done reasonably quickly … legislated, and acted on …. and the cost of inaction is not about wiping out shareholders or bondholders (who will negotiate) but about wiping out an entire Irish generation …