Super Tuesday Leaks

Tomorrow we should finally see a resolution of much of the uncertainty that has been hanging over the Irish banking system. We are being told that the estimated prices for NAMA transfers will be announced, as well as the capital requirements set by the Central Bank and the new legal framework for the Central Bank and Financial Regulator.

With the news so soon to be released, there is little point in me speculating as to what is going to happen. What I would flag, however, is that there is something of a disconnect between two sets of statements doing the rounds in today’s media coverage.

First, there has clearly been widespread leaking that the NAMA loan transfers will see some banks taking considerably larger writedowns than had previously been expected. For instance, in the Irish Independent, Emmet Oliver writes that “AIB is set to be hit with a discount of up to 40pc”.

Second, much of the coverage mentions the idea of the state owning 70 percent of AIB and 40 percent of BoI. See, for instance, here and here. And note that Emmet Oliver’s full sentence is “AIB is set to be hit with a discount of up to 40pc, making majority State control all but inevitable” and he mentions the Minister’s “plan to take a 70pc stake in the lender.”

The disconnect is that these two sets of figures don’t seem to add up. There is nothing new about the idea of the state potentially owning 70 percent of AIB. Even based on previous expectations for NAMA discounts, this was always a possibility. For instance, I’m looking now at a Davy stockbrokers report from April of last year that projected a base case of the government owning 78% of AIB.

However, it is hard to reconcile the continuing circulation of the same ownership statistics as before with the new information (if such it is) on discounts and also on capital levels.

To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.) So that leaves €6 billion in private core equity capital. AIB is supposed to be transferring €24 billion in loans to NAMA. Forty percent of €24 billion is €9.6 billion.

So, do the math on this and you’d probably come to a different conclusion about ownership percentages than have been flagged by the media. One way or another, we’ll find out tomorrow, but today’s leaks are confusing, perhaps deliberately so.

Update: This post should have been clearer that AIB’s annual report already allows for €4.1 billion in provisions for losses on loans going into NAMA. So the calculations would involve an additional €5.5 billion in losses over and above that. With half a billion in equity capital and the need to get up to a core equity ratio of eight percent, the 70 percent state ownership doesn’t add up. Still, perhaps I’ll see tomorrow how it’s going to add up and still end up with the 70 percent outcome.

123 thoughts on “Super Tuesday Leaks”

  1. I don’t have their report to hand, but I don’t believe AIB claimed €9.5 bn. in core EQUITY capital..
    Also, everyone seems to assume those Preference shares are convertible…but ARE they?
    They came with a kicker in the form of warrants to purchase ordinary shares, exerciseable after some years,,,but that’s different to being convertible..
    And on NAMA, I hope Mr. Lenihan does the right thing and avoids majority ownership… In the national economy’s interest, the correct price for NAMA transfers is a penny or more less than that which will force the banks into government control (and, as happened in Anglo, consequent drainage of deposits).I expect Mr. Lenihan will see it that way, as I argue in my blog

  2. @Karl Whelan

    “Super” ????……….. how about “Black” or ” Red” ……. or from the serf perspective, “SOUPER Tuesday” which is what is in store for the ‘souper-sullivan’ (to borrow a phrase from the well bought senator EH) serfs.

  3. FF TD Ned O’Keefe just on News at One saying the Minister has taken too much advice from economists! Says Lenihan’s judgement on finance is not great and he’s taking too much advice from the Central Bank\Regulator.

    Apparently, the Minister is being too mean to AIB and should be giving them more time. Ned says he’s totally against nationalisation (though probably in favour of state guarantees) and that Brian Lenihan could destroy our whole banking system. Says he could name people who want to run our banking system into the ground but won’t.

    Also, AIB just announced they’re hiking their mortgage rates tomorrow.

  4. @KW
    It looks like the leaks are credible “Government sources” etc. You would have to wonder about management at AIB. The rates hike now is either two fingers to BL who will have to justify bailing these guys out with enormous sums of money or is a last attempt by them to assert authority. Time for change again?
    A double whammy for the citizen. How much more can we take?
    Ned is going to vote with the Government so why all the hot air -not a popular cause he is espousing. More time for AIB while the country gets further into the mire. Ned is not concerned about rate rises from AIB – One wonders.

  5. “I stopped reading this when I got to Ned O Keefe!!!

    +1, what does a pig farmer know about finance?? On the other hand……

  6. Was there any recent clarity given on the coupon of NAMA bonds (both standard and subordinated)? Even with all the bailouts, banks may still need to enhance their future interest income (which will be reduced by assets going to NAMA and a higher portion of the remainder being on trackers).

  7. I have a bad feeling about this.

    So NAMA results in a 40% ownership.

    Then there are new capital ratios required. This is a separate recapitalisation issue, so the taxpayer gets to dilute itself resulting in a subsequent ownership of 60%…

    Rinse and repeat each year…

  8. Karl
    a note on the sums as you referred to. Another variable is the amount of loans that will be transferred . For Bank of Ireland it now looks more like 10 billion than the originally touted 16 billion. This obviously reduces the Nama write down, though the regulator will also have to take a view on how to treat the bits not now being transferred.
    For AIB too there is speculation that the total will be less than the 24 billion. Again the regulator will have to take a view on what is left. Add in to the sums whatever the banks have written down already and the timing of new capital requirement and you have a lot of moving parts.
    I think the most interesting part of tomorrow will be how definitive the Minister is in relation to the likely state shareholding

  9. @ Cliff

    Agreed about the multiple moving parts. In relation to how many loans are transferred, it’s clear that the overall quality of the development loan portfolios are worse than envisaged last September. Transferring less loans to NAMA doesn’t in any way fix this problem.

  10. @Karl Whelan – “but today’s leaks are confusing, perhaps deliberately so.”

    You probably hit the nail on the head there – but I guess that’s what a lot of last sentences are for!

    @Cliff Taylor – you make some interesting points there and I would not be surprised to hear that the banks are not sending as much as was maybe thought would be going to NAMA. I can see the political ‘benefit’ of that but it’s a dangerous move if they get it wrong and underestimate… might put the danger back on the ‘long finger’ for a while though. Like until maybe after the next general election? There’s nothing quite like drawing out and drip-feeding bad news and both governments and banks are past masters at it.

  11. @Cliff Taylor
    You would have to wonder why the banks are transferring less loans to NAMA.

    Is it because they are no longer considered property or associated loans or more likely because they aren’t happy with the price.

  12. @D_E
    “Is it because they are no longer considered property or associated loans or more likely because they aren’t happy with the price.”
    Has to be the security, no? There’s nothing more than a promise of security to the underlying assets, so the loans are actually worthless. Not that the banks have to mark them as that…

  13. @ Dreaded_Estate

    “….. more likely because they aren’t happy with the price.”

    Or, someone in NAMA to a look at the loans and went as white as a sheet.

    There so bad NAMA can’t take them on?

  14. @yoganmahew
    If that is the case and the loans are near worthless. So whatever amount of loans aren’t transferred will mean at some future point the banks will have to recognise losses of the nearly the same amount.

    The key question now is will the regulator take this into account when stress testing the banks.

  15. @D_E
    “The key question now is will the regulator take this into account when stress testing the banks.”
    I’m not sure the regulator can. If the auditors are happy with the book valuation placed on the loans, then the regulator can’t really intervene? And there doesn’t seem to be any mechanism to examine each loan individually in the normal course of events. The insistence of the EU on this for NAMA has ‘revealed’ (i.e. revealed by implication) the state of the loan books in a way nothing else has done.

  16. reply to earlier comment:
    yes . I agree Karl. Transferring less doesn’t solve anything. One of the interesting bits will also be how the regulator deals with non Nama transferred loans in his new capital rules. He has promised to be tough but we will just have to wait and see.
    to dreaded estate — there are various reasons put forward for the changing Nama totals but to be honest none of them are entirely convincing. And if the discounts on what is transferred are so much bigger than earlier estimated either the banks did not know what was going on in their own loan books or they wern’t telling…..

  17. @ All & David O’Donnell

    Per your Irish Times link.

    The €3.5 billion already invested by the Government into each of AIB and Bank of Ireland does not count for core equity capital , so the Government could convert some preference shares to ordinary shares to boost capital.”

    99% of the proceeds of the preference share went directly to the Share Premium Account (in the case of Bank Of Ireland).

    Share Premium Accounts are according to the regulator.

    Anybody got evidence otherwise?

  18. If you take the figure Karl quoted – 24b reduce it by say 4b per cliff taylor and apply 40% then I make it they have minus 2b less the bits on buybacks. So they will need at least 8b to get to private core capital ratio of 8. So it would seem to fit with eamon ryan’s statement to his meeting on the extent of recapitalization needed -“even beyond what the markets expect”

  19. Opps, 😳

    Share Premium Accounts are Core Tier 1 according to the regulator.

    Anybody got evidence otherwise?

  20. @Greg

    I backed you at even_money with paddypower.com a while back. Pat Kenny put the house and some of the land on you having rediscovered your email of many many many moons ago (-;

    Looks like we might have a Regulator … at last. Positive news on a Monday.

  21. Re NAMA loans – as I understand it the gross total (including interest rollup) now is estimated at 80-82bn, up from 77bn last September 2009. Anglo is up by 8bn approx and AIB and BoI down by 4bn approx. After the London Times story yesterday about Derek Quinlan and NAMA I wonder whether third parties and indeed developers have been recently buying their loans at a discount before they come under the aegis of NAMA which is forbidden from selling the loan assets back to the developers who originally pledged them? Does this explain why BoI and AIB are down?

    Also why is Anglo up? The government must go back to the Dail if the LEV exceeds 54bn. Given the EU approval depressed LEV by 2bn or so, have the Govt encouraged Anglo to lump some other loans into NAMA which were excluded last September?

  22. @ David O’Donnell

    “Pat Kenny put the house and some of the land on you having rediscovered your email of many many many moons ago”

    Did the bold Pat mention that again?

  23. @ Cliff Taylor

    “And if the discounts on what is transferred are so much bigger than earlier estimated either the banks did not know what was going on in their own loan books or they wern’t telling…..”

    Alan Ahearne said in an article in the Irish Times last Sept: “Since information supplied by the banks indicates that borrowers typically provided about 25 per cent of the purchase price for the property and borrowed the other 75 per cent, €90 billion in loans would have purchased €120 billion worth of properties at the peak.”

    http://www.irishtimes.com/newspaper/opinion/2009/0905/1224253890855.html

    Several contributors here, were sceptical that cash of 25% was paid, in particular as the bubble was reaching a peak in the crazy year of 2006.
    We have already got signalls from the courts that the paperwork supporting some deals, was a bit dodgy.

    Karl Whelan covered the issue here:
    http://www.irisheconomy.ie/index.php/2009/08/27/loan-to-value-ratios/

  24. @ Karl,

    “To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.)”

    When you say that “this isn’t core equity in my book” do you mean from a “market” perspective?

    “All the institutions may redeem the preference shares within 5 years at the issue price or after 5 years at 125% of the issue price. The preference shares are non-convertible and will be treated as core tier 1 capital by the Financial Regulator and are replaceable only with other core/equity tier 1 capital.”

    http://www.finance.gov.ie/viewdoc.asp?DocID=5609

  25. @All

    Ned O’Keeffe here:

    http://www.irishtimes.com/newspaper/breaking/2010/0329/breaking46.html

    As a private sector man, and opposed to nationalisation in any form, Ned is handing back all the CAP(common agricultural policy) PIIG grants that he has received from Brussels over the past thirty years and presenting them (millions) to AIB as a gesture of solidarity with its beleagured board – thus ‘doing his bit’ to assist in bringing the Tier_1 ratio up to 8. However, in common with most of his piigs, who have had the er .. snip .. Ned will still be voting with FF as distinct from …er… showing his b**** by crossing the floor to vote against the arch_bolshevik nationalizing Minister L. Give us a break Ned!

  26. @ DOD

    You have to give the man credit for sticking his neck out.

    No other politician would side with the banks at the moment for fear of people remembering it at the ballot box, which may be sooner rather than later…

    Things must be different down there…

    Al

  27. @ yoganmahew Has to be the security, no? There’s nothing more than a promise of security to the underlying assets, so the loans are actually worthless. Not that the banks have to mark them as that…

    Not as black and white as that. The promise – a solicitor’s undertaking – was either to hold the title deeds to the order of the lender or to perfect a legal charge which is a stronger form of security. Title deeds were dematerialised (made electronic) from 31/12/09 so if the lender couldn’t find them or never had them then the security is indeed worthless. Maybe this is now showing up at NAMA. Some of the bigger clients in trouble knew this was coming down the tracks and stalled until 31/12 so they’re off the hook.

    Secondly if the lender never followed up on the legal charge, which seems to be very common, only option is to go after the solicitor’s PI this will bankrupt the solicitor in a lot of cases and there are ongoing issues about funding the PI recently.

    The lending model since around 2005 was write the loan, move on to the next one, get the bonus, worry about the paperwork/security later. Not looking so smart now.

  28. @JH
    Thanks for the clarification – yes, I was totally reducing, but not to absurdity I hope. As you say, it is not simple, except maybe in effect – there is not clear title to the underlying assets, so NAMA cannot value them as such. If the loan is already not performing, perhaps this is the extra kick in the head, as there is not indication of ‘willingness to pay’ and nothing to extract with a sharp legal stick.

  29. AIB statement.

    “AIB confirms that it is in discussions with the Financial Regulator in order to agree its capital requirements and will update the market with a further announcement once these discussions have been completed.”

    Confirmation that they are taking it to the wire?

    I wonder what their bargaining position is?

    http://www.aibgroup.com/servlet/ContentServer?pagename=PressOffice/AIB_Press_Releas/aib_po_d_press_releases-0_08&cid=1269619087111&poSection=AR&poSubSection=paDA&position=first&rank=top&year=2010&month=3

  30. @ Greg

    I hope the Minister realises that these types of negogiations and discussions can be carnal in nature with the roles of the participants being active and passive.
    And should he continue to remain in the passive position, it is not just himself, but all the people of Ireland that will feel the pain…

  31. @Greg

    “I wonder what their bargaining position is?” Ned’s piigs, I assume (-; …. of maybe Ned could convince a few of his agri-mated TDs to cross the floor … we own AIB: fact.

    And Euro_bond market, and rating agencies, have assumed it for some time – and they have no worries with the sovereign as they trust The Governor, as I do.

  32. 3.1.1 Core Tier-1 Capital (“Core Original Own Funds”)

    Core Tier-1 Capital shall be composed of:

    i. Fully paid-up equity capital;

    ii. Subject to the approval of the FSR, certain items issued by a Building Society under the Building Societies Act 1989 and amendments2;

    iii. Share Premium Account;

    iv. Disclosed revenue and capital reserves but excluding revaluation reserves;

    v. Interim profits, net of foreseeable charges or dividends, may be included only where the amounts have been verified for external audit purposes, subject to the approval of the FSR.

    http://www.financialregulator.ie/industry-sectors/credit-institutions/Documents/Alternative%20Capital%20Instruments%20%20Eligibility%20as%20Tier%201%20Capital%20%20BSD%20S%201%2004.pdf

    In the case of Bank of Ireland (latest accounts page 104) 99% of the proceeds of the issue of the Preference Shares were taken to the Stock Premium Account. See also Note 42 (page 181).

    http://www.bankofireland.com/includes/investor/pdfs/annual_report_2009.pdf

    Looking for AIB’s treatment.

  33. @Greg

    Souper tuesday revisited – circa 1847.

    But this time, the serfs own banks – serfs can’t eat banks either – sigh ; pigs might be better. Being astute, I managed to lease two acres of development land on a bartering agreement with Naa_Maa – pristine – and have set it to spuds, and hope to buy back some of Ned’s AIB piigs at a substantial discount/hair_cut. Can’t beat a bit o human capital when times are rough (-;

  34. @ David O’Donnell

    “Pat Kenny put the house and some of the land on you having rediscovered your email of many many many moons ago”

    Did the bold Pat mention that again?

    Like recently?

  35. Joe Higgins now on Drivetime.

    Nothing like a sensible argument for Nationalisation.

    Well done RTE.

    Democractic Ownership?

  36. @ David O’Donnell,

    Souper tuesday revisited – circa 1847.

    If I change my religion do I get a cushy directorship at a bank along with the soup?

  37. Ned can test his mettle at the FF Parliamentary Party meeting on Tuesday. Just after all the announcements.

    I’d like to be a fly on the wall for that.

  38. “and I would not be surprised to hear that the banks are not sending as much as was maybe thought would be going to NAMA.”

    In theory, it is NAMA who directs the banks as to which loans are to be transferred. The banks can argue that a loan should be removed but they do not have a veto.

  39. After NAMA transfers, will the AIB and BOI be allowed pay dividends, if they have any operating profit that is. If that matter isn’t cleared up by the Minister and Regulator tomorrow, bank shares will be in even worse trouble on Wednesday.

  40. @zhou
    “In theory, it is NAMA who directs the banks as to which loans are to be transferred. The banks can argue that a loan should be removed but they do not have a veto.”
    That’s a very interesting point. It will be instructive to see what is sent – as far as I can see either C&D loans > 5 mn have to be sent or written off (i.e. they are already in default so NAMA won’t take them).

    There have been some high-profile collapses/frauds/defaults recently, so that may account for some, but if borrowers are not moved in their entirety and the banks do not have cleaned up loan books then the whole exercise is entirely pointless (according to its original aims)…

  41. @ The Alchemist

    They can only pay dividends on ordinary shares out of distributable reserves.

    With all the write downs they are taking (though the capital hole will be filled by the State) they will (I think) have “negative” distributable reserves for years to come. They cannot use the State injection to start paying dividends as soon as they make a profit. They must recover the losses first.

    Could be wrong.

    If I’m right the State won’t be getting a dividend for a long time.

    Again, if I’m right this makes the conversion of the preference shares very suspicious.

    Where a cash dividend in not paid on the preference shares the State (NPRF) is entitled to Shares In Lieu.

    Bye bye shares in lieu.

    Correct?

  42. @Greg
    I think you are right. Its going to take a long time to get the distributable reserves back to black. So if the prefs are converted to equity we can kiss goodbye to the 8% return on the prefs – thought it was too good to be true.
    Now that is some investment strategy – 0% roi guaranteed (state)

    Fortune are carrying a story to day headed – So much for the luck of the Irish
    and comments we are doubling down on our already “supersized” banking bailout. Is it the biggest gamble of all time or at least since the Hunt brothers tried to corner the silver market?

  43. @ The Alchemist

    On other hand.

    They also must maintain capital at the levels set out by the Regulator and the write downs for the purposes of NAMA are not the full extent write downs.

    AIB have an accumulated P&L of €5,268m and Reserves €592m at 30th June 2009. Total €5,797.

    So, depending on the level of write downs, they may have scope to pay a dividend. But I wouldn’t hold my breath. They have yet to take write downs on sub €5m loans, residential mortgages, credit cards motor loans etc.

  44. AIB cant pay a dividend lets get clear. They will have losses that will erode their capital base and be 75%+ owned by the state. Try selling the idea that your half percent mortgage rise is going to the NTMA to pay for bailing out Anglo…..even FF would quake at that (yes, i know, its how it will be spun).

    As for those losses – if its less than 8b its not realistic ; more than that is good for NAMA.

  45. @ podubhlain

    In my view, and no one has challenged it (I don’t mind being wrong), the conversion of the preference shares to ordinaries does not improve Core Tier 1 Capital.

    It saves AIB and BofI having to pay out a dividend to the state of €280m per annum.

    The State also loses the ability to exercise the Warrants for 25% (undiluted) of the ordinary share capital after the fifth anniversary of the issue of the preference shares.

    The State also loses the 25% penalty payable where the preference shares are not repaid prior to the fifth anniversary of issue.

    If they do this it is nothing more or less than a complete stitch up of the Citizen/Taxpayer.

    Still, all will be made good.

    Anglo Irish Bank (the Good Anglo Irish Bank that is) is going to make loads of money.

    So that’s alright then.

  46. @Greg
    On the face of it you seem to be correct – its a swap within the Tier One. this is why there is additional capital going in on top f the 3.5b.

  47. @ Brian Lucey

    Thanks for that.

    So if they do it, it is for other reasons.

    To make the bank more attractive for external investors (sell the State stake at some future date) without the overhang of the preference shares and their attendant financing costs?

    But they could have held the preference shares and pumped in more capital. They are going to have to pump in more because Core Tier 1 is not improved.

    They would have ended up with both prefs and ordinaries.

    They could have sold packages of prefs and ordinaries at a future date.

    Very attractive proposition for a purchaser I would have thought, particularly given the Warrants attached.

  48. @ Brian Lucey

    “its a swap within the Tier One”.

    And can do nothing other than damage the Citizen/Taxpayer.

    Qui Bono.

  49. Here is my prediction:
    AIB transfers 21bn to NAMA with a writedown of 40%
    that is 8.4bn hit to capital less the 4.2bn already reserved-net writedown of 4.2bn
    Core equity tier 1 goes from 6.1bn to 1.9bn or 2% RWA

  50. @Greg
    Why would we lose the warrants. In the US the Gov.kept the warrants when the loot was paid back -did we do it the Irish way

  51. Add back 1bn from debt buybacks executed and pending-this takes core equity tier 1 to 3%.
    4bn equity raise required -of which 3bn comes from NPRF at least with a further 1bn to come from market if anybody intersted. New shares issued at 1 euros
    State shareholding is to be in range 58-78%
    M&T stake and UK to be sold quick smart and proceeds to go into bulking up rerserve on rest of book
    Equity tier 1 is then 7%.

  52. @Greg
    ” the conversion of the preference shares to ordinaries does not improve Core Tier 1 Capital. ”
    Not under Basel II, although it does improve the “preferred” measure of equity tier 1 capital or tier 1 equity capital or equine bovine spongiform capital B.

    Anyway, I think under Basel III preference shares are not permitted to be called equity capital, as Basel III currently stands. Lots of other things that the banks have counting towards capital (like money they owe, for example to their pension) count as do minority stakes in other companies. According to first draft, Basel III will exclude them and more from equity capital which will be composed of, eh, money. No more lint, half-eaten chewing gum and fag butts…

    Still, that’s probably 2011 or 2012’s recapitalisation…

  53. @ Greg and YM

    My comments about prefs not being core equity (in contrast to what the Irish banks and the government claim) were based on a “forward-looking” notion of what’s going to considered acceptable core equity capital by Basle 3 and also on what markets view as a reasonable estimate of a “core equity” ratio.

    For instance, a JP Morgan report on capital needs of various European banks recently discussed the idea of a core equity target and they started from the conversion of the prefs as the first step for the Irish banks.

  54. @ podubhlain

    “Why would we lose the warrants. In the US the Gov.kept the warrants when the loot was paid back -did we do it the Irish way”

    My understanding is that in the US the Warrants were separate, certainly in the case of Buffet’s $5bn investment in Goldman Sachs.

    We would lose them because they are attached to the preference shares.

    If “We” agree to swap the prefs for ordinaries we would have to give up all rights attaching to the Warrants.

  55. @All

    Breaking not_really news

    AIB said it was in discussions with the Financial Regulator to agree its capital requirements and would issue an update when the talks were completed. “The combination of factors could see Government owning 40 per cent of Bank of Ireland and over 70 per cent of AIB as the Government converts preference shares to bolster the capital strength of both banks, according to reports,” Bloxham stockbrokers said in a research note.

    http://www.irishtimes.com/newspaper/breaking/2010/0329/breaking15.html

  56. @ Greg.
    If you are correct then it was another lousy deal. Warrants are regularly traded but went out of fashion some time ago. Who in their right mind would accept warrants that could be extinguished if the underlying security was redeemed or converted?

  57. @Greg

    PaddyPower.com has paid out on the even money, and has suspended betting on your predictions re the prefereance shares. Now have the seed capital to set the two acres of spuds.

    In the revised version of EH’s Souper_Sullivan, unlike the original metaphysical mental reservations variety, the serfs and their masters are required to sign off on all fundamentalist free_mawrkeering ideologies, of whatever ilk, in order to qualify for the soup. The serfs are so hungry they don’t care – but the masters are straining strenuously at the bit.

  58. @ podubhlain

    If “We” agree to swap the prefs for ordinaries we would have to give up all rights attaching to the Warrants.

    Should be,

    If “We” agree to swap the prefs for ordinaries we would have to give up all rights attaching to the Preference Sahres.

    I believe I am right, but open to contradiction.

  59. If the prefs are core tier 1 currently, why would we give up the dividend and lose the warrants by converting at this time. If there is a need to convert then stringent conditions could be attached including the retention of warrants. exercisable in the future. Will BL be has hard-nosed as he is indicating. This is obviously the case where they need more State funds in equity capital. If Warren Buffet can extract value from Golden Sacks then surely our mandarins can negotiate a real deal for the State at this time.

  60. @ yoganmahew

    If Lenihan uses Basle accords as an excuse to write off an income stream of €560m per annum and Warrants for 25% of the equity capital of the two biggest banks in the country and €1.75bn of potential penalty after five years he has some explaining to do.

    He cannot possibly say that he was unaware of current capital requirements or potential changes to those requirements.

    If he claims he was unaware he is incompetent.

    If he was aware and went ahead with prefs over ordinaries he misled the Dail as to the quality of the investment he was making on the Nations behalf.

    I need to go back and look at what he said.

    I am not accepting for one moment that a swap of the prefs for ordinaries at this stage is anything other than damaging to the State and its Treasury.

    You cannot seriously suggest (apologies for the stridency here) that Lenihan, with the Central Bank, the Regulator, The Department of Finance and various highly paid professional advisers and investment banks was unaware of changes to capital regulations right on the horizon.

    I am not a happy bunny.

  61. @ David O’Donnell

    ” – but the masters are straining strenuously at the bit.”

    Let them eat soup I say.

  62. @ podubhlain

    As you can see Karl & yoganmahew offer the explanation that potential rule changes would exclude Prefs from Core Tier 1.

    I’ll take that as read. (for the moment no offence)

    But as you can also see I am of the belief that Lenihan was either incompetent or misled the Dáil as to the true Long Term Economic Value of the prefs.

    I have continually said that these Preference Shares were designed to fail.

    I repeat I am not a happy bunny.

  63. I am open to correction but I think Northern Rock in the UK hasn’t paid a dividend in almost 3 years. If this is a yardstick for Irish banks, it is hard to see how AIB shares can avoid being classified as junk grade. It will be hair-raising to learn tomorrow how the government eventually plans to sell its stake in AIB, viz. the conditions under which it believes it can sell and make a return. I know this is off the point but can the market sustain so many semi-nationalized banks???

  64. @Greg
    “You cannot seriously suggest (apologies for the stridency here) that Lenihan, with the Central Bank, the Regulator, The Department of Finance and various highly paid professional advisers and investment banks was unaware of changes to capital regulations right on the horizon.”

    Yup, it came as a bit of a shock to the markets quite how stringent the new requirements were. They were sort of expecting more window dressing. As it is, you haven’t heard anything about huge share price collapses because the markets seem to expect the new rules to be watered down or delayed ad infinitum.

    “He cannot possibly say that he was unaware of current capital requirements or potential changes to those requirements.”

    To be fair, the document hadn’t been published.

    “I am not accepting for one moment that a swap of the prefs for ordinaries at this stage is anything other than damaging to the State and its Treasury.”

    Ah, now here we agree. But this is how it was intended all along. It was supposed to be a bailout, not an investment. That’s why the coupon is lower than the British government got in the UK banks or why Mr. Buffet got in Goldman Sachs. It is money down the drain we will be pumping. The banks will never give us this money back and eventually they’ll be sold off at a loss to the state for ideological reasons (the state is not in the business of running banks). It won’t even take the IMF to do it, but that might help.

    We will lose our shirts and then we will pay someone to rent it back from them. We will lose it again and find we are now liable for the cost of our shirt that we’ve lost twice and we still have to pay rent on it. Welcome to Namaland… mines a 99, justified and ancient, make sure you don’t skimp on the raspberry sauce.

  65. @Karl Whelan
    “My comments about prefs not being core equity (in contrast to what the Irish banks and the government claim) were based on a “forward-looking” notion of what’s going to considered acceptable core equity capital by Basle 3 and also on what markets view as a reasonable estimate of a “core equity” ratio.”
    I know! Hence my post just above yours!

    Some deconstruction of the Basel III proposal from December: http://www.thepropertypin.com/viewtopic.php?f=19&t=27122

    “a JP Morgan report”
    Haven’t found that one, but I have found the Morgan Stanley one that covers the same ground – AIB&BoI: no dividends for three years after 2009 and :
    “As set out in “Uncertainties Clearing; Post Potential Recap We
    Prefer AIB (OW) to BOI (EW)” (14 January 2010), we identified
    a capital deficit of €5.0bn (€1.5bn with govt prefs) for AIB and
    €4.1bn (€0.6bn with govt prefs) for BOI before management
    actions and with a 7.9% equity Tier 1 target. This was pre Basel
    III. We set out a range of measures to reduce this over time
    and identified that the government preference shares should
    be grandfathered under Basel III. As a sensitivity, we showed
    that in the unlikely event the Basel III implications are
    implemented in full it will reduce equity Tier 1 materially (up to
    5%). Therefore the capital deficits identified using a consistent
    European approach show significantly higher capital deficits
    using post Basel III figures. However, as we set out, we believe
    the eventual Basel III adjustments will be less severe and for
    the Irish banks will also be materially lower by 2012 due to
    company specific issues. We also expect the Irish banks will
    have addressed any capital deficit and be generating profits by
    the time Basel III is eventually implemented.”
    http://ftalphaville.ft.com/blog/2010/01/27/135506/european-banks-need-e83bn/

  66. @ yoganmahew

    “Ah, now here we agree. But this is how it was intended all along. It was supposed to be a bailout, not an investment.”

    So we agree thah Lenihan misled the Dail?

    Got a link for Bals III?

    Extra rasberry sauce?

  67. @Greg
    Link is awaiting moderation – go to the propertypin one for a link and a breakdown.

    Nobody could have forseen that the preference shares would prove to be worthless. Unfortunately, Nobody was on long-term sick leave that day and Noone thought to ask him. Noone is to blame. Who’s on third base…

    We’re justified and we’re ancient and we’re driving ice-cream vans… I want raspberry sauce on my 99…
    “They’re Justified, and they’re Ancient,
    And they drive an ice cream van.

    They’re Justified and they’re Ancient,
    With still no master plan.

    The last train left an hour ago,
    They were singing “All aboard”
    All bound for Mu Mu, eh, NAMA Land.

    Goin’ forward like…”

  68. To Greg

    My understanding from talking to market people on the pref transfer is that there is a belief that the markets will look at ordinary equity as the key issue when assessing core tier 1 — as it is clearly available to absorb losses. There will be a bigger risk for the state in future as an ordinary shareholder and no 8 per cent etc. Though I think we may retain the warrants.
    However, if one bit of capital is being swopped for another the overall ratio will not rise as required. Maybe more cash from the NPRF ? The banks can do some capital boosting by disposals but this will be limited given the accounting treatment. Suppose tomorrow will tell the tale. The way they deal with the bag of money into angloand inbs will also be interesting..to say the least. v painful for the taxpayer whatever way it falls

  69. @Cliff Taylor
    “Maybe more cash from the NPRF ?”
    It’s not a bottomless pit!

    The fund ended 2009 with a value of 22.3 bn
    7 bn of this is the preference shares
    63% of the fund is in equities – it is not clear whether the preference shares are categorised as equities…

    The NPRF, with the addition of 250 euro of BoI stock from the BoI preference dividend, is extraordinarily over-exposed to the Irish banking sector. Suggesting more investment (which I don’t doubt will be the government’s plan) is a recipe for the NPRF to turn into a paper tiger – all paper assets and no bite.

  70. yogan
    agree completely
    disaster in using a nest egg designed for something else

    and the opportunity cost of the anglo/inbs money , which presumably will come from the exchequer, will be enormous, however it is structured.

  71. @ Cliff Taylor

    “My understanding from talking to market people on the pref transfer is that there is a belief that the markets will look at ordinary equity as the key issue when assessing core tier 1 — as it is clearly available to absorb losses.”

    Sorry to be curt Cliff.

    The Minister knew that at the time yet he “sold” the Preference Shares as a “great deal” for the State.

    I am not disputing that Ordinary Capital represents a better buffer (it is available to absorb losses) to creditors it is the manner in which the Minister “sold” the use of €7bn of the State purse. He led the Dáil and the People to believe that not only was the money safe but that it would provided exceptional returns.

  72. and im not defending him !!
    just trying to understand what they might be up to now — though i suppose
    we will see soon enough.

    one of the things that bothers me is that the government has not been upfront
    about the risks involved in what it was doing all along. all the stuff about nama making a profit and, as you say, the pref shares. I hope they are not going to try to persuade us tomorrow that they are “investing” in anglo

  73. @Cliff
    “I hope they are not going to try to persuade us tomorrow that they are “investing” in anglo”
    By their annual reports shall ye know them… yes, if they have EU approval, it will be for one of two things: wind-down or investment.

    Investment will not appear in the budget deficit.

    So Mr. Fitzgerald will be able to tell Mr. Lucey he is being irresponsible with his numbers because the GGB does not include investments… you see, it doesn’t matter that we have to borrow to pay for these things, it is how they are accounted for. It is all about optics, you know.

  74. @ Cliff Taylor,

    Apologies Cliff.

    I didn’t think you were.

    “what they might be up to now ”

    Finishing off the Citizen/Taxpayer?

  75. It will be interesting but the timetable for the announcements will be after the stock exchange closes? That would be the European stock markets? As BOI and AIB have ADRs in the US, those exchanges will be open. Every other big announcement regarding UK banks (and European banks that I am aware of) were made at 7am BEFORE the stock exchanges opened. These included co-ordinated releases from HM Treasury, the FSA, the banks themselves etc and the resultant series of press conferences and analyst calls.

    7am releases would have been before the European and US exchanges were open and as they are not quoted in Asia would have been the logical time.

    Not so in Ireland. No, sure you couldn’t be getting up that early. Says it all really.

  76. So no surprizes!
    FUBAR?
    Time for a good bank, setting one up just requires a licence. Last I looked, when IB was thinking of prosecuting a bank for accomplice to evasion, it cost a million. Punts.
    Banks do not do well in Kondratieff winters.
    Nearly all the world’s banks depend upon their country of registration for solvency and liquidity. That is why fiat currencies are devaluing. That is why inflation will be picking up for food etc.

    Welcome to the new world order. Deflation of big ticket items, lack of capital and rising prices. Economies that without the FIRE section, will be 1980 in size. 1980. If we are lucky. It can get worse than that. But I do not wish to depress you. Make lifestyle plans according to what you really think will be happeneing over the next twenty to thirty years. Japan is still deflating, twenty years on. Critics may say Japan is different. But they are wrong. They were merely the first casualty of the banking weapon. Most of the biggest companies in the world used to be banks. Imagine a world where there is no lending at all. No new credit. All existing credit is “renewed” because otherwise, capital is impaired. Existing companies have to compete with start ups, funded by profits, while the existing companies have to pay interest. At normal interest rates, which are twice the current level. This is our world, once the Basle accords apply with more conservative reserve requirements. Decades of that.

    Lifestyle choices?

  77. @Pat Donnelly – “As BOI and AIB have ADRs in the US, those exchanges will be open”

    I’m sure this is not an accident (the timing of the announcements)> It is to someone’s benefit. Who?

  78. The whole business of insider trading is brought to bear when it is obvious, even to a gombeen, (that the state acting as the true shareholder in respect of everything that it says, yet not clearing it with ISE or London) affects the share price.

    An analysis of the trading may reveal some “hidden” accounts. Follow the money!

    But the precise timing matters little in a world where everyone but Ireland has true broadband…….

  79. “Irish banks are resilient and have good shock absorption capacity to cope with the current situation” – – Patrick Neary, Chief Executive, Irish Financial Regulator,  September 19, 2008: – two days after the collapse of US investment bank Lehman Brothers.

    Just a bit of history….

    Historians John Paul McCarthy and Tomás O’Riordan have written that in the early year of the State’s existence that contacts between the  Irish Banks Standing Committee and the Department of Finance were abrasive.

    At a meeting in 1923, members of the committee questioned the ability of Bandon native and Cambridge graduate Joseph Brennan (then 36), Department Secretary and his Assistant Secretary, James J. McElligott (then 30), a native of Tralee, wondering “if the two young gentlemen who waited on them spoke with authority.”

    The banks initially hesitated underwriting government loans without a British Treasury guarantee, a politically insensitive demand they later stopped insisting upon.

    The Free State Government had however managed to raise the first national loan of £10 million without much assistance from the banks.

  80. I despair i really do, here we have some great people, intelligent and people who deal with economics and all we can do is post blogs, im not giving out us here have tried our best, but meanwhile at animal farm Snowball and his ilk are in power, how did we get tot this?

  81. @Cliff Taylor
    “Maybe more cash from the NPRF ?”

    Bear in mind, that the NPRF’s cash is borrowed money or cash that could be used to reduce the national debt. So, its not free money, costs about 4.5% p.a.

  82. @ yoganmahew

    “Justified and Ancient, Ancient and a-justified,
    Rocking to the rhythm in their ice cream van
    with the plan and the key to enter into Mu Mu
    Vibes from the tribes of the Jams”

    Grianna Fail been listening to too much KFL and decided to burn €100bn then.

    Happy days.

  83. @All

    I suppose Timing is Everything ….

    High Court appoints administrators to Quinn Insurance companies
    The High Court has this morning appointed provisional administrators to Quinn Insurance, owner of Quinn Direct and Quinn Healthcare, on an application by the Financial Regulator.

    Mr Justice John Cooke installed Paul McCann and Michael McAteer of Dublin accountancy firm Grant Thornton to the company in the High Court this morning after the Financial Regulator expressed grave concerns about the finances of the company and how it was being managed. This in effect means that the State through the Central Bank, through the Financial Regulator, has taken control of the country’s largest insurance company.

    http://www.irishtimes.com/newspaper/breaking/2010/0330/breaking32.html

  84. @ David O’Donnell

    Oh dear.

    What about the derivatives positions held by Quinn.

    I don’t think this was in the script.

    How do you spell Armageddon.

  85. “Lawyers for the regulator told the court it had been discovered that subsidiaries of the company had made guarantees in relation to the group’s assets in 2005 which has reduced the value of the assets by €448 million. Some directors of Quinn Insurance were unaware of the guarantees, lawyers for the regulator said.”

    Don’t want to be too flippant here but do the directors of any quoted company in Ireland “know what’s going on”?

  86. “A spokesman for Quinn Group, the owner of Quinn Insurance, said that the company had no comment to make.”

    Hardly surprising. What can you say when your company has just been put into administration.

  87. How much does Quinn owe Anglo Irish?

    We’re not talking land and development here. NAMA can’t help.

  88. Did the Minister know about this?

    Is that why they’re trying to do everything in one go?

    How much of the €9bn into Anglo will be swallowed up by the Quinn position?

    “Jesus wept and felt abandoned”

  89. “Lawyers for the regulator”

    Opps. 😳

    The Minister did know.

    Now how can anybody take Grianna Fail’s management of the crisis seriously.

  90. Who said it could’nt get worster
    State now in the insurance business. what next – no prize for this.
    interestingly, life ins. not included according to rte.

  91. @ podubhlain

    “interestingly, life ins. not included according to rte.”

    We’ve been drip feed information all along the garden path.

    RTE are reading from a script.

    Can’t go freighting the horses don’t you know.

    Equitable Life !!!

    Insurance Corporation of Ireland !!!

  92. @Greg -The horses are beyond fright.
    moves seems to be well choreographed. Regulator on site
    ceasing uk business.

  93. @All

    It appears that directors on Irish boards of directors know nothing, see nothing, hear nothing, feel nothing, smell nothing, sense nothing, are accountable for nothing, do nothing, get paid for doing nothing, and when time to move to A. N. Other board, get a fat bonus for nothing. Corporate Governance Irish Style.

  94. @Pat Donnelly/All – “An analysis of the trading may reveal some “hidden” accounts. Follow the money!”.

    Does anyone on this blog have access to this kind of information tonight (i.e. who is buying and selling AIB and BoI on the NYSE after the various announcements this afternoon when our stock market has closed)??

    Please help. I suspect there’s something in this.

    p.s. can you sell banks short on the NYSE these days?

  95. @ Joseph

    I wouldn’t worry too much about it, they’re too illiquid to be able to make any serious money from insider trading. If people are going to act on inside knowledge they will be doing it in the dublin/london market. The ADR’s are covered by the short selling ban afaik.

  96. Joseph
    There really is no point. There will be no accountability. We merely allow those of a certain level of intelligence and curiosity, a glimpse of the likeliest truth and an alternative to the spin and outright lies.

    The world goes on. Money is made and spent. This is life and long may it continue! Not everything that I say should be taken as Gospel. Just pass on the wisdom of what you are learning to others. A wiser society is a good society.

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