Today’s NAMA Announcements: The Good, The Bad and the Ugly
This post was written by Karl Whelan
There were things I liked in today’s announcements and things I disliked. More of the latter than the former.
The Good:
1. Capital Ratios: I had worried in the past that one of the ways the government would keep state ownership percentages down would be to only require low levels of capital. Today’s requirement of 7 percent equity ratio by year-end, however, indicates that this isn’t going to be case. I’d have preferred a slightly higher figure but, by and large, this shows that the new Central Bank team of Honohan and Elderfield are doing their job to safeguard the future stability of the system.
2. The Discount on the Initial Tranche: While still probably an overpayment, it’s less of an overpayment than one might have expected.
The Bad
1. What’s the Estimated Average Haircut? Today’s hide the ball strategy means that we still don’t know the answer to this question. The media will repeat the 47% discount ad nauseam but this is clearly not going to be the average discount. For instance, AIB is transferring €23 billion in book value assets to NAMA. The discount on its initial transfers is 43%. If this was applied to all of the transferred loans, you’d have €9.89 billion which exceeds the current total of AIB’s ordinary and preference share capital and would require more than the announced €7.4 billion recap requirement. Also, we’re told that the regulator’s capital requirement will take into account foreseeable future losses. So there’s no way to work backwards from the capital requirements to the actual prices NAMA will pay. I find this very frustrating.
2. AIB, Dead Bank Walking? As I understand it, the regulator is requiring the bank to have equity capital of €7.4 billion by the year end, without factoring in bank-shrinking mechanisms due to disposals. With risk-weighted assets of €120 billion at the end of last year, sending €23 billion into NAMA, it would have RWA of €97 billion. This would require ordinary shareholder capital of €6.8 billion. We’re told that the bank will need to raise €7.4 billion. These figures suggest that there is essentially no private equity capital left in this bank. However, the government are presenting the figures in such a way that nobody will ever hear about this. And we’re giving Colm Doherty a month to formulate a plan to save his neck.
3. Insolvency, Minister, Say it … Insolvency: Anglo is insolvent. AIB would be too if we weren’t insistent on denying it. Anglo owe about €2 billion in subordinated debt. AIB owe €4 billion. I do not believe that putting these banks into a resolution regime and negotiating with these bondholders will result in Ireland Inc being wound up. These are providers of risk capital, who lose money when the banks run out equity. Well these banks have run out of equity and the Irish government is still making sure that the sub-bond holders get all their money back. There’ll be some bottles of champagne getting popped in London and New York tonight, grateful that Minister Lenihan has come through for them.
4. Anglo Wind Up Comments: Discussing the cost of winding up Anglo by listing its total liabilities is, frankly, stupid. What the huge additional costs are that are associated with a slowish windup of the bank over a number of years, nobody knows. This stuff is scaremongering and not very convincing scaremongering at that.
5. Speed of Progress: The Minister rejected criticisms that the plan is being put into place too slowly on the grounds that “Crucial pieces of the jigsaw had to fall into place.” However, it was the government’s decision to formulate the problem as a one hundred piece jigsaw rather than a ten piece one. The fact is that essentially every other advanced country has put in place plans to recapitalise their banking systems, many of them over a year ago. We are putting in place the world’s slowest recapitalisation, and today’s announcements amounted to kicking the can down the road for another month or two. Meanwhile, we’re left with a zombie banking system.
6. Asset Disposal Stuff: The media gives the impression that much of the €7.4 billion will be obtained from “asset disposals.” However, despite what the Minister’s speech says and despite what you hear every day from financial journalists, banks don’t actually raise capital by selling assets. If a bank sells an asset and gets cash, it has changed the composition of its assets but it hasn’t raised capital. There are some technical issues to do with valuation of goodwill and other stuff, but the principal thing that selling Polish and US subcomponents does is shrink the size of the bank. It reduces RWA and so the capital ratio is raised.
I’ll let you guys decide what was ugly.
Tags: NAMA
March 30th, 2010 at 8:06 pm
I’m guessing Anglo is the ugly.
The very very ugly
March 30th, 2010 at 8:15 pm
Anglo is doubleplusunlovely, as Mr McWilliams would have us say now
March 30th, 2010 at 8:16 pm
Are you happy that what remains on the banks’ balance sheets are good? Can there be any confidence that their provisions on what remains is adequate? Todays discounts suggest poor levels of provisions. Makes you question the value of auditors.
March 30th, 2010 at 8:18 pm
Ugly - no update on NAMA business plan - LEV and loan default rates. No cost benefit analysis of recapping Anglo and letting it go to the wall. Anglo’s first tranche numbers look like snowflakes - perfectly formed but suspicious. No details on when we can start using one of the best parts of NAMA - spending €5bn on our construction industry without adding it to National Debt. Anglo’s recap needs doubling in one week. Effectively missing the March 31 deadline unless you count the piddly €370m to INBS and EBS as the “first tranche” which might be subject to EU clawback or valuation disputes.
Good - lending targets for AIB and BoI. Imprimatur of Germany and France and ECB for our plans. Regulator sticking it to Quinn. NAMA seemingly doing a good job. ILP confirmed as not participating in NAMA. Brendan McDonagh presenting himself to a news conference (anyone got a link?). No leaks from NAMA, NTMA since agreeing today’s announcements last night.
March 30th, 2010 at 8:26 pm
My mood is ugly.
You know what really annoys me? How many stupid county councillors have been appointed to the Seanad in the last year? PUT IN SOME EXPERTS and put them in the cabinet. We don’t need constitutional reform to get people who know what they’re doing into government.
I’m breaking my lenten fast and having a drink. In fairness, I think this calls for it.
sigh.
March 30th, 2010 at 8:28 pm
Fair play to you Sarah
Tis the night for whiskey!
March 30th, 2010 at 8:33 pm
The ugly Karl?
Anglo gets €4bn and the problem is solved.
Not nice but ugly is going too far.
Anglo gets another €9bn and the problem is solved.
Without doubt unattractive.
Anglo is promised €10bn to pay off the repo to Irish Central Bank.
Ugly on every count.
Doesn’t get uglier than that Karl.
Particularly when the Minister neglected to mention that the €10bn had already been spent.
Ugly Ugly Ugly.
March 30th, 2010 at 8:46 pm
Today we are numbed by shock.
It will look worse tomorrow.
God help us when Thursday comes because that is
“The Day After Tomorrow”.
March 30th, 2010 at 8:50 pm
@MOL, doesn’t Thursday also bring us 15 months of Anglo’s books?
March 30th, 2010 at 9:02 pm
Anglo is tomorrow
March 30th, 2010 at 9:03 pm
Brian Lenihan on primetime saying that the outside world says we are doing the right thing
March 30th, 2010 at 9:07 pm
BL says talking about repudiation is “very dangerous”. Fine Gael coming to power will result in “huge loss of confidence”.
March 30th, 2010 at 9:11 pm
BL says we have turned the corner on the economy, citing that motor car sales have increased. Well that’s ok so.
March 30th, 2010 at 9:13 pm
I had a Bailey’s and ice and feel much better. Recommend alcohol for all depressed IE commenters tonight. Cheers Karl Deeter
March 30th, 2010 at 9:16 pm
Only a Lenihan would have the brass neck to quote 2 months car sales based on a scrappage scheme, which benefits car manufacturers in UK and continental Europe but does nothing for Ireland, as evidence of green shoots.
No doubt about his paternity.
It is not just the hair that he shares with his late father.
March 30th, 2010 at 9:16 pm
Karl,
Is it not true to say that a disposal of the Polish business will, apart from lowering AIB’s RWA, raise actual cash? I’m certainly not one of the media who thinks most of AIB’s capital raising will come from disposals, but the impact goes beyond merely shrinking the balance sheet. Or am I totally misunderstanding something very simple?
March 30th, 2010 at 9:18 pm
Patrick Honohan has just state on primetime re the banking crisis “this time its different”…..
March 30th, 2010 at 9:18 pm
@Sarah Casey
BL will take the increased drink sales as evidence that the Irish people approve of his actions today.
He will also claim that the lengthening days also show that a force greater than all of us also approves of his actions.
March 30th, 2010 at 9:21 pm
Brian Lucey
From rte.ie
“21.43 Anglo Irish Bank will publish its financial report on Thursday and not tomorrow as previously expected.”
March 30th, 2010 at 9:23 pm
@KW
Agree with you on 1 and 2 on the good.
On the bad side
As regards AIB, is not the regulator saying that you need 7.4bn plus of equity capital for a 100bn RWA balance sheet. The govt will provide 2.5bn at least through conversion and maybe 3.5bn at a push. Now come back with your plan on the balance. This could involve selling UK at book value which raises no capital but lower RWA ii) selling MTB which raises capital but has no impact on RWA iii) selling Poland which does both iv) a rights issue v) subbies.
Subbies-game is not over yet. BOI has about 1bn of Tier 1 outside govt prefs. do not rule out a D-E swap. The other T2 stuff is only window dressing. What to do about the Anglo subbies?
Anglo-correct- Numbers are being thrown out like snuff at a wake but there is no spreadsheet backing them up. No discussion of hitting the remaining subbies. No discussion of the rationale for touching the seniors IN THIS CASE. If the MOF stood up and said he cant touch the seniors because the EU would not like it…then fine…its a valid reason. If he admitted that hurting seniors would not be a good idea in Anglo as we have a shed load of bank and sovereign debt to sell…that is pragmatic.
Speed of process-you could cut the Minister some slack here. We are behind the US, weeks behind the UK-LLOY exited the APS in 2010 and raised capital. RBS signed off on the APS in 2010. Where is the German banking plan? What is Spain going to do with its toxic Cajas? What will happen in Greece when the manure contacts the air conditioning.
Not sure you are correct about asset sales. Broadly speaking, if a bank sells the asset for above the carrying value in the balance sheet it is a capital gain and accretive to capital. Poland and M&T meet this crieteria. AIB would struggle to make book value for its UK subs. BOI would probably only realise 70-80c for its UK mortgage book so that is no good.
March 30th, 2010 at 9:34 pm
The arrogance of AIB is unbelievable.
For the second time in a generation they are on their knees.
And they are still able to bully a Minister into giving them more time to sort themselves out.
Now we know who runs the country and that explains many of their decisions.
MODERATORS - DON’T HAVE A SEIZURE:
Politically aware readers should look at how AIB staff in Dame Street facilitated Frank Dunlop in cashing cheques that were not made out to him, a matter of public record as anyone who is familiar with the Mahon tribunal transcripts will remember.
March 30th, 2010 at 9:37 pm
KW is on The Late Debate at the moment - RTE Radio 1.
Debunking among other things the conflation of bank bonds and sovereign debt.
March 30th, 2010 at 9:47 pm
@ gadge
“Brian Lenihan on primetime saying that the outside world says we are doing the right thing”
The only “outside world” that Brian Lenihan knows is the world that he and his party owe money to.
The debt collectors came a callin and Brian (the baby) Lenihan answered the door.
Brian shit his pants and paid up.
Maybe some day Brian will grow up and get a pair of balls.
I have now watched the News (thanks to the State Broadcaster) and Prime Time (thanks to the State Broadcaster).
Brian Lenihan will not grow a pair of balls.
He has already signed up for a sex change operation
I love Pravda.
March 30th, 2010 at 9:48 pm
@All
This is the reckless politics of craven fear and ineptitude. We are more than strong enough to wipe and negotiate Anglo_Irish debt over a medium term if we had an executive with an ounce of balls, a smidgin of moral authority, and a modicum of courage. We would not lose out on the reputation - the pureile spin - but would gain respect across the globe - if there are losses in Germany or France or UK so be it …….. the rest of the economy can recover it in time but not if we follow the present plan which is to drown us in such debt that we cannot recover. VOTE THIS DOWN.
The above posted in earlier thread after The Minister’s speech from the dock - looks like they didn’t. The list of craven shame includes every TD who voted for this ‘plan’. Our Executive has sold us into serfhood.
Today, the Music Died.
March 30th, 2010 at 9:50 pm
The language that Lenihen used on Prime Time is depressing. He believes the outside world believe we are doing the right thing; removing the spin this means the markets will be happy. Fianna Fail over the last twenty years reminds me of Pinochet in Chile and the juntas in Argentina in the 70s (without the human rights abuses) and just as in those cases the bill is handed to the state. Only difference is we freely elected this regime
March 30th, 2010 at 9:51 pm
@david
Ok simple questions
How great will the Anglo losses be? ..say 25bn
How much do the bond holders account for?
March 30th, 2010 at 9:52 pm
[...] Two quotes from Karl Whelan Irisheconomy that deserve to be repeated here: "Anglo is insolvent. AIB would be too if we weren
March 30th, 2010 at 10:05 pm
The CBI has published its forward-looking prudential capital requirements of certain of the Irish credit institutions here
http://www.centralbank.ie/data/NewsFiles/FINAL%20PCAR%20info%20-%20single%20doc.pdf
It states that “as the starting point for determining the stress capital requirement, the banks were provided with a specified macroeconomic scenario based on a hypothetical delayed economic recovery, involving negligible GDP growth in 2011 and 2012, persistent unemployment increasing to 14.7% in 2012, a further cumulative house price decline of 24.8% in the years 2010-2012 beyond the 31.5% decline reported and other parameters.”
These conditions don’t appear very stressful to me.
March 30th, 2010 at 10:10 pm
@ tull mcadoo
David can answer for himself.
I say that the price of Anglo is your freedom.
The bondholders can go feck.
Get free or get slave.
March 30th, 2010 at 10:11 pm
@Karl Whelan
ON both ‘Goods’ - Yes - Think 8% rather than 7%?
On others - some fools do not listen - blinded by fear, stupidity, external locus of control, lack of moral courage, and a disgrace to the so-called fighting Irish: they took the schilling and sold the children; and some of us will remember. They, the 83 who voted yes and any who abstained, have besmirched our real reputation. Irish sold out Irish - no one else.
March 30th, 2010 at 10:15 pm
Brian Lenihan on Prime time also reminded us all again that our crisis was triggered because Lehman Bros was allowed to collapse. He is correct of course, the spoilsports pricked our bubble before we could break the Guinness book of world bubble records.
He also confused bank with sovereign debt, as usual. Not picked up by Miriam but corrected clearly by Richard Bruton afterwards.
March 30th, 2010 at 10:16 pm
@ Greg
Ok fine but can you tell me what the bill would be reduced to from 25bn?
Clue …try 15bn …maybe 17bn
Still a start.
However, anyone who thinks zero is misleading themselves.
March 30th, 2010 at 10:38 pm
Oh Christ. Ryan is on VB justifying his stupid leaving the euro remarks before resorting to the Ultimate Talking Point - PatrickHonahanaPatrickHonahanPatrickHonahan (keep repeating til the ad break comes- phew!) That worked. Apply to all Sunday radio shows. Aaaagh!
March 30th, 2010 at 10:49 pm
The collective loan books for the banks were announced today but not the valuation of individual assets for each property developer because of the pretext of commercial sensitivity and the constitutional right to privacy.
The taxpayer will ultimately pay €43b to the banks.
In order to promote confidence in the integrity of a valuation process, the taxpayer should have access to this information through Freedom of Information Act, after a specified length of time, when the rationale for such confidentiality is no longer commercially sensitive.
A commitment that we will get to see this information for ourselves, since we are footing this bill, rather than be asked to blindly trust bankers, civil servants and politicans is not an unreasonable ask?
The loans transfered to Nama today very likely includes Seán Dunne, Ray Grehan, Seán Mulryan, Paddy Kelly, Gerry Gannon, Johnny Ronan and Séamus Ross, all prominent political donors to Fianna Fáil. The Standards Commission records show that property developers donated 40% of all disclosed donations to the Fianna Fail party from 1998-2008.
Trust?
March 30th, 2010 at 10:57 pm
oooh oooh headlines. Namageddon - (Daily Mail - very good) - but Daily Star over the line - Picture of FitzPatrick and Fingelton - “these two deserve to be shot”. Incitement to violence surely? Though subhead better “these two bastards cost us €26 billion”. That’s true.
March 30th, 2010 at 11:02 pm
@Sarah Carey
Have another drink on me.
Spoofer Ryan was completely humiliated by Richard Bruton on VB on TV3.
he didn’t like it.
Some insults just wash over one.
But being called a spoofer is one of the worst insult to someone of our generation.
Excepting of course the size of his tackle.
But then FF chopped that off years ago.
March 30th, 2010 at 11:04 pm
@ Elaine Byrne
Great point, well said.
March 30th, 2010 at 11:05 pm
@MOL
So his meat became vegetable
Na Glasari
Good night
March 30th, 2010 at 11:11 pm
@Elaine Byrne
Welcome to Corporate Governance - Irish Style.
@Sarah Carey
Any freebies in the Star? One for every citizen in debt perhaps?
@All
1789.
March 30th, 2010 at 11:16 pm
@All
Given the silence of the opposition, the NAMA debate was for a long time Government/Bank Economists/Stockbroker Economists vs Some Academic Economists. Given that a small number of academic economists were their opponents there was a unique opportunity to have a clear, well informed, respectful, polite, honest, genuinely patriotic debate, however impassioned it might be, as befitted a €54 BILLION project in a country of 4 million. Instead the NAMA lobby alternated between terrorising and deceiving, while denying all possible information from the public.
Tonight on Prime Time we saw the NAMA lobby’s approach vividly illustrated by the minister:
1. the sky will fall if we wind down Anglo/Nationwide (no it won’t).
2. debts incurred by Anglo/Nationwide are exactly the same as the national debt (there is no legal basis or other decisive basis for this once the guarantee runs out).
3. Costs of closing Anglo/Nationwide excede the costs of keeping open - according to reports commissioned by the government which we aren’t allowed to see (and which will have told them what they wanted to hear anyway). We also aren’t given any details about Anglo/Nationwide unless they are statutorily oblidged to do so.
These institutions have ALREADY lost us between 7 BILLION plus (4+3/10) and 13 BILLION plus (4+9/10), with the “plus” being still a secret amount. Our government are our servants but they are behaving, as befits the vatican of West European democracies, like our bishops. They want us to nuke another 10 BILLION PLUS to keep these corrupt zombies afloat. And MORE BILLIONS to buy Anglo/Nationwide’s bad loans at a huge premium. Why? To protect Anglo/Nationwide’s investors, the megadevelopers who bankroll the government party, and to keep private the truth about the establishment’s corruption and culpability. They are doing all this without even releasing all the information on these banks, to allow a genuine debate to take place, and without allowing a truly impartial assessment of the options for Anglo/Nationwide, especially when the guarantee runs out.
This is a democracy. Brian Cowen and Brian Lenihan are our employees, not our masters. It’s time for civic society to shout stop.
March 30th, 2010 at 11:19 pm
@ Karl Whelan,
On the capital ratios point, I am reading that Alan Greenspan paper that Philip Lane featured in a recent blog entry here at the Irish Economy. I noticed a part of Greenspan’s paper today, which ties in with some relevance maybe. You have probably already read the AG paper. BOH.
Pre-crisis regulatory capital requirements based on decades of experience designated pools of self-amortizing home mortgages among the safest of private instruments. And a surprisingly, and unfortunately, large proportion of investment portfolio decisions were essentially subcontracted to the (mis-)judgments of credit rating agencies.
That regime is now moot. Capital and liquidity requirements mandated for individual lenders are now apparently adjusting to the upward revised market judgment that the negative tail of risk distribution was underestimated. Private markets accordingly now, as I noted earlier, are requiring economic capital and balance sheet liquidity well in
excess of, soon to be amended, Basel II.
[ Break ]
Moreover, capital has the regulatory advantage of not having to forecast which particular financial products are about to turn toxic. Certainly investors did not foresee the future of subprime securities or the myriad other broken products. Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.
http://www.irisheconomy.ie/index.php/2010/03/19/alan-greenspan-the-crisis/
March 30th, 2010 at 11:30 pm
All aboard the Hindenburg!
March 30th, 2010 at 11:32 pm
Long day!!
Some of us posting for over 14? hours
Time for sleep!
There will be plenty more bad news
See you then
March 30th, 2010 at 11:35 pm
@Greg
You’ve been having a go at a lot of commenters. Please desist.
March 30th, 2010 at 11:36 pm
@Sarah Carey
Ryan also made a curious comment about the Green’s awareness of an impending banking crisis prior to the guarantee of 30 Sept - something to the the effect that Gormley had drawn Cowen’s attention to a likely crisis. First I heard of this. Hopefully we’ll hear more. Presumably it is only a matter of time before the Greens claim credit for inventing language also.
On another note, the gulf between Lenihan’s 30bn and Dukes 20bn wind down costs needs exploring (they can’t both be right). If Dukes is correct, and he was adamant on RTE a week back, why isn’t wind down on the cards?
March 30th, 2010 at 11:39 pm
Unverified quote:
“Thomas Jefferson said, “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Night
March 30th, 2010 at 11:44 pm
@ All,
By the way, I would just like to take the opportunity here and now, to thank Karl Whelan, Philip Lane, Colm McCarthy and all the many other administrators here of the Irish Economy blog for taking the trouble to inform so many of news and updates over the past year and more. I know this was all done on a very voluntary basis. Thanks for all the effort. BOH.
March 30th, 2010 at 11:47 pm
For AIB, the sale proceeds of M&T, Poland, UK, et al will accrue to capital a/c.
Their various capital-raising options seem more than sufficient to meet the new equity capital ratio required of 7%.
They seem very likely to be set to avoid majority- even substantial minority - State ownership. Their shareholders should be quite happy to take over the preference shares (and warrants) on the same terms as the State got them originally, and repay the State “aid”…But I doubt that the State will walk away from this very good deal for the taxpayer.
As I argue in my blog, if I had the money I’d buy the shares. Maybe AIB will lend me the dough for that purpose. After all, that’s what many commentators expect them to do for the State- pass over their property, on loan, then sit back and wait for the State to buy them out !
March 30th, 2010 at 11:49 pm
@All
Excellent article about how deception has already replaced the Euro as the currency of our establishment:
http://thepost.ie/post/pages/p/wholestory.aspx-qqqt=DAVID%20MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp
Further comment on today here:
http://www.irishelection.com/2010/03/iresave/#more-10830
And here:
http://www.progressive-economy.ie/2010/03/moral-overload.html
http://www.progressive-economy.ie/2010/03/groundhog-day.html
March 30th, 2010 at 11:49 pm
@Brian O’Doherty
Can you outline exactly how you think AIB is going to raise €7.3bn in capital plus an additional €3.5bn to repay the preference shares in 30 days?
March 30th, 2010 at 11:57 pm
@ Brian O’Doherty
Honestly Brian, the main effect of selling the foreign units is to reduce risk-weighted assets. It doesn’t do much to raise capital, as defined in relation to banks.
In any case, the Minister says “It is probable that the State will have a majority shareholding in Allied Irish Bank” and he’s the guy in the know.
March 31st, 2010 at 12:08 am
Yo! people.
About €150bn of mortgages inclusing securitised mortgages of which €120bn is NOT securitised is lying around on the books. Very little of that lot is made up of only 5 years to go kinda stuff. The bulk is mid noughties super mega multiple dross.
How are we gonna sort that lot once we have sorted the developers and syndicates eh ????
March 31st, 2010 at 12:08 am
@ Dreaded_Estate
“Can you outline exactly how you think AIB is going to raise €7.3bn in capital plus an additional €3.5bn to repay the preference shares in 30 days?”
Please try to understand me.
I do not wish to be offensive.
AIB never intended repaying the preference shares.
I am sorry to say this Dreaded_Estate, I like your logic and language, but you must understand that the preference shares were designed NOT TO BE repaid.
If you can convince me otherwise, please provide evidence.
March 31st, 2010 at 12:10 am
@The Alchemist
Something tells me that Alan Dukes will come round to the minister’s POV and then go into hiding (in media terms). I believe that Anglo/Nationwide will be kept secret…er…open no matter what the public think - if the government can get away with it.
@Brian O’Hanlon
Seconded enthusiastically.
@Brian O’Doherty
How can AIB emerge with such small state ownership? Look at what happened in the UK:
“Taxpayers will own about 60% of RBS and 40% of the merged Lloyds TSB and HBOS”.
http://news.bbc.co.uk/2/hi/business/7666570.stm
http://en.wikipedia.org/wiki/NatWest#cite_note-25
http://www.guardian.co.uk/politics/2008/oct/13/alistairdarling-economy
http://en.wikipedia.org/wiki/HBOS
And this was presumably before any divestments but after anticipated gains from rationalisation. How is our chief property lender and second biggest bank in such a good position when our property market and our economy nosedived relative to the UK?
March 31st, 2010 at 12:12 am
@ Brian Lucy
Rogoff and Reinhart
“Highly leveraged economies, (Ireland) particularly those in which continual rollover of short-term debt is sustained only by confidence (Ireland) in relatively illiquid underlying assets, (Ireland) seldom survive forever, particularly if leverage continues to grow unchecked. (Ireland). ( ) brackets obviously mine). Honohan, has gone native he is sounding more like a PR man for Lehihan.
We have not dealt with the problem only kicked the can down the road with IOU’s and faint hopes that there will be private investor equity injected into BoI or AIB. The guarantee prevented us from dealing with our problems. IT ie the guarantee IS the problem. When your minister for finance stands up in the Dail for half an hour, telling you how much of your money and your children’s money he intends giving away, it is mind blowing. Meanwhile, a camera pans to his audience and in particular to the prospective future leader of the country, he is yawning. Not a good portend. Is this the best we can do? A few months ago, Stiglitz, to Mark Little on RTE when told about our plans to sociaise the losses. “oh. that is criminal” I wish the Nobel prize winner, was around today to see our armageddon.
Meanwhile, there is soon going to be thousands of unemployed bankers around. But, it was only last week Alan Dukes was justifying increasing salaries of Anglo’s bankers, whom it seems, are a cut above the rest in terms of newly acquired qualifications and sheer effort. Dukes got in the retaliation first.
In Ireland it never is different but this time it is.
March 31st, 2010 at 12:20 am
@ 2 pack,
About €150bn of mortgages inclusing securitised mortgages of which €120bn is NOT securitised is lying around on the books. Very little of that lot is made up of only 5 years to go kinda stuff. The bulk is mid noughties super mega multiple dross. How are we gonna sort that lot once we have sorted the developers and syndicates eh ????
Only one way 2 pack. We need to start thinking creatively, and fast. We have to turn these awful Innovation taskforce reports into something real, but do it cheaply and effectively, and fast. Alan Barrett of the ESRI made a very useful contribution to the RTE Prime Time episode on March 20th 2010 about human capital. The point which I want to emphasise to Alan Barrett and others like him, is in order to get ‘the right stuff’ coming forward with the right business plans, which will become the investment opportunities of the future for Ireland, we need to provide something like I describe at university level. I would not mind sitting in front of a society debate evening, or whatever it takes to get the message out to as wide a group of young people as possible. If it were to assist Ireland’s opportunities in any way. David McWilliams wrote a very good article about the human resources management in Argentina after their big bang a no. of years back. Sunday Business Post on February 15, 2009, Turn crisis into opportunity.
http://designcomment.blogspot.com/2010/03/school-for-innovators.html
March 31st, 2010 at 12:41 am
@Brian O H
Brian,
We have a stultified semi literate morass of quongocracy sitting between Innovation and the Delivery and the Monetisation of knowledge in Ireland.
Sorry man, no can do. Not here. The quongocracy is set to kill innovation.
A huge amount of VC money and Mezzanine Finance in Ireland during the past 20 years was ultimately tied up with property developers who had the cop to diversify back when they DID have money.
You have no idea of the BS I have to put up with a personal project which is trying to fibre up a rather small and rather insignificant part of the state to modern standards before eircom inevitably collapses thereby substantially killing the means with which to integrate and transmit knowledge.
And if you are interested in Eircoms Next Generation Networks Strategy you need but look at who is called upon to launch them.
http://www.eircom.net/broadband/crystalSwing
“Innovation” my hole
March 31st, 2010 at 1:21 am
AIB as a concept: fine. But AIB represents a service to the country and it cannot perform that if it is unable to lend.
All the banks are still going to be insolvent and illiquid even after the “rescue”. When the requirement to mark to market comes around, there will be revealed a whole. Quelle shock! The private residential sector, the rock, will be in the hull. But the ship is quite unsinkable. No need to worry. We can borrow more money. Just so long as our reputation as rich idiots is intact, we can borrow as much as the fools will lend us. We’ll be on the pig’s back!
Or PIIGS back?
March 31st, 2010 at 1:36 am
@ 2Pack
Yo! people.
Love that.
How about Yo! 2Pack?
But that dosen’t work because Karl is on a mission.
Karl don’t want me to tell Yo! 2Pack anything.
“About €150bn of mortgages inclusing securitised mortgages of which €120bn is NOT securitised is lying around on the books.”
How right you are.
Happy Days.
March 31st, 2010 at 1:39 am
@ 2Pack
“before eircom inevitably collapses thereby”
I see you understand the smart economy better than most.
Bravo.
March 31st, 2010 at 1:51 am
@ Brian O Hanlon
This government have mistaken “human capital” for human camels. Loaded up to the gills with debt. In the middle east, they say better to steal a camel than a chicken.
March 31st, 2010 at 1:56 am
@ Pat Donnelly
But Ireland is sustained by confidence in relatively illiquid underlying assets.
You will be fine, now, just put on this life-jacket just to be sure to be sure.
March 31st, 2010 at 8:39 am
I didn’t sleep.
I think what’s required is co-ordination. One of the good things for the government is that because the issue is so complex they can be asked any one of 50 questions. I think the opposition and ourselves should focus dissent more precisely.
F’rinstance, what if everyone kept asking just ONE question (or one and a half)
WHO ARE THE BONDHOLDERS OF ANGLO AND HOW MUCH ARE THEY OWED?
If everytime a government spokesperson appeared in the media or in the Dail they were asked that, over and over and over, Paxman style, maybe we’d get an answer…..
March 31st, 2010 at 8:49 am
On Morning Ireland Leo Varadker said Fine Gael would engage in negotiations with senior bondholders. He says there are opinions that this will not cause the harm in terms of increased interest payments that others such as Patrick Honohan, Mathew Elderfield and Alan Dukes say it would cost.
Leo Varadker said the Government should not listen to anyone employed by the State(!) or by the banks. He said others such as Willem Buiter and Joseph Stiglitz should be listened to and that they essentially recommend default on senior bonds.
Varadker said depositors (including the ECB) would not lose any money under this proposal. This suggests that Leo Varadker thinks a clear legal distinction can be made between depositors and senior bondhlders.
Leo Varadker also opined that Credit Unions and pension funds would not incur losses because their deposits are covered by credit default swap instruments. Leo suggested that international insurance organisations would ultimately bear the loss. Can this be verified or is Leo Varadker talking through his elbow?
I think these are important statements on the FG position which appears to have changed since Richard Bruton retracted the his inadvertent suggestion that default on senior bonds should be considered.
March 31st, 2010 at 8:50 am
@Sarah
I know what you mean - but it is not that it is complex - just so many targets it’s hard to concentrate on one.
@Karl
Spaghetti westerns are a good analogy .. its not just “The Good the Bad, and the Ugly” what about the fistfuls of dollars and a few dollars more.
March 31st, 2010 at 8:52 am
@zhou
As has been pointed out countless times on this site. It would be possible to impose losses on senior bondholders while at the same time 100% protecting depositors.
March 31st, 2010 at 8:54 am
@Zhou
I would also add the question shouldn’t just whether negotiating with senior bondholders would increase our cost of borrowing. The real question is whether our cost of borrowing would increase by more than the losses we could impose on them
March 31st, 2010 at 8:55 am
@zhou
I’d be inclined to listen to Leo. I’m getting more impressed with him since he hit the nail on the head with his Garret Fitz comments last week. He doesn’t seem to respect sacred cows.
March 31st, 2010 at 9:02 am
I would be more impressed with FG if some of their councillors weren’t still engaged in dodgy planning applications:
http://www.irishtimes.com/newspaper/ireland/2010/0308/1224265794546.html
Retail plan shows developers have learnt nothing
March 31st, 2010 at 9:19 am
@Dreaded_Estate
“As has been pointed out countless times on this site. It would be possible to impose losses on senior bondholders while at the same time 100% protecting depositors.”
As I pointed out previously, it is not clear that the banks could treat bondholders and depositors unequally. If they paid each party €x this would affect bondholders worse because they would lose more money. However, the ECB and large depositors would also lose. I am not making an assertion on this point. I am merely saying that the position is not clear once you decide to provide protection beyond subsidising deposit insurance.
“I would also add the question shouldn’t just whether negotiating with senior bondholders would increase our cost of borrowing. The real question is whether our cost of borrowing would increase by more than the losses we could impose on them.”
Indeed, that was the point made by Eamonn Ryan. He said the advice was that the increased cost of borrowing on bank debt and sovereign debt would outweigh the cost of honouring the bonds. Leo disagreed.
March 31st, 2010 at 9:23 am
@Aidan
Leo Varadker’s style (incluing his lack of esteem for a former leader who has criticised all parties for colluding in the pump priming of the bubble economy prior to the bubble) does not influence me on these matters. Leo Varadker is making a very serious policy statement on behalf of FG that deserves substantive analysis.
March 31st, 2010 at 9:28 am
Here is the FT today in its editorial:
This is just the first chunk of what will ultimately be a bad loan book with a nominal value of €81bn. To take on such a debt mountain was always going to be a huge risk. The sum, after all, represents a frightening 47 per cent of Ireland’s 2009 GDP. Such a risk is only worth taking if the cost to taxpayers has been minimised and the assistance provided genuinely draws a line under the bank’s losses. Unfortunately, in this case, neither of these conditions has clearly been met. The government might have done more…
Unfortunately, the resulting losses will not be shared beyond the equity holders. Until September, the debt holders will continue to be guaranteed. This means the state will have to underwrite any equity injections needed to recapitalise the banks.
A second flaw is that Nama does not truly draw a line under the losses. Although Ireland’s finance minister, Brian Lenihan, promised a “once and for all” solution, the deal leaves open the possibility of a subsequent levy on the banks if Nama itself makes a loss. The whole point of a bad bank is to provide certainty about bank balance sheets. There is little point to one that does not absorb all the risk and reassure private investors that the institution is clean.
(The editorial also praises the fact that the haircut was higher than expected, and that banks can be legally obliged to dispose of assets. I didn’t want to cut and paste the whole article here. But I did want people to see that the FT regards the fact that losses will not be shared beyond equity holders as a flaw. Once again, outsiders are prepared to call it more accurately than Irish government ministers.)
March 31st, 2010 at 9:32 am
@zhou_enlai
“As I pointed out previously, it is not clear that the banks could treat bondholders and depositors unequally. If they paid each party €x this would affect bondholders worse because they would lose more money. However, the ECB and large depositors would also lose. I am not making an assertion on this point. I am merely saying that the position is not clear once you decide to provide protection beyond subsidising deposit insurance.”
Why do you think it isn’t possible.
Close the bank down. Let depositors and the central bank know they will get 100% of their money back.
Wind down the bank, see what the assets realize over a number of years. Give the bondholders whatever is left.
Alternatively, simply suggest this approach watch the bond prices fall and then buy back the bonds on the market.
What are the flaws in this approach?
March 31st, 2010 at 9:35 am
@D_E
We have recently seen the UK and the Netherlands take action against the Icelandic state, on foot of rights assigned to them by depositors with Icelandic banks, on the basis that some depositors were treated unequally. Isn’t it possible that bondholders could do the same if some depositors were to be repaid billions while they are left with nothing?
March 31st, 2010 at 9:36 am
now - heres a conundrum. The depositors in INBS/EBS are the shareholders. And the value of their shares , the residual claim on the assets, is now diluted to a fairthewell……
So. are some depositors more saveworthy than others? …..
March 31st, 2010 at 9:39 am
@Sarah Carey
Good point. Perhaps we should also ask canvass view of senior bondholders. Miriam O’Callaghan may have missed an opportunity when she had Ciarán O’Hagan (fixed income strategy, Société Générale, Paris) on last night. O’Hagan made the point on this blog a year ago that “Part of the concern about NAMA stems from the fear that, unfortunately, the outlook for the economy and public finances offers not the slightest room to show generosity to any particular interest group. And least of all, to pamper the fortuned……Foreign investors in Irish sovereign debt share much the same interest as the Irish taxpayer. They want to see the government extricate itself from liability for the banks, rapidly…. So if it is credibility of the sovereign you are talking about (the proponent of NAMA love to fudge this notion by the way) then we need more penny pinching policies. Policies more on the lines of what Fine Gael propose go in this direction. If instead you want to be everybody’s best friend (the quintessential trait of the Irishman in foreign company), and you want to try to keep everybody happy (somewhat), at the risk of sinking the whole boat, … than sure, dole out money like there is no tomorrow (or as if on tap from the ECB ad vitam eternam). ” See his post from August 2009.
http://www.irisheconomy.ie/index.php/2009/08/31/guest-post-international-credibility-does-not-need-nama-it-needs-determination/
March 31st, 2010 at 9:41 am
@zhou_enlai
I don’t believe so, as the government is entitled to guarantee who ever they choose.
There has been deposit guarantees in countries all over the world, which gives depositors greater protection from the state than bondholders and it has never been challenged.
March 31st, 2010 at 9:42 am
@ Zhou
@ Zhou
“Can this be verified or is Leo Varadker talking through his elbow?”
So Leo reckons the Irish Credit Union movement is buying CDS contracts on Irish bank debt? The notion that small credit unions would buy extremely complicated financial derivatives like these has always seemed bizarre to me. But lets get some hard facts to back this up - from the ILCU annual report…
“The Group prohibits the use of derivatives.”
“Credit risk in relation to exposure to corporate bonds is managed through the Group’s investment policy”
“Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. If the Group were to sell other than an insignificant amount of held to maturity financial assets, the whole category would be tainted and reclassified as available for sale.”
This would indicate that everything is still being valued at par on their balance sheets (as i suggested before about many holders of Irish bank debt).
This would seem to blow Leo’s claim out of the water right from the get-go.
March 31st, 2010 at 9:44 am
@KO’R
If the “debt holders” did have to share in the losses then the solution would indeed be cleaner. However, could we have do that without forcing the banks to write down all their impaired loans? Also, what would the cost of borrowing for the state and our banks be in the future? Would increases in borrowing costs likely to retard economic recovery even more be incurred?
I am not sure that saving senior bondholders is the way to go myself. We have had such a large banking crisis that it is unlikely to happen again for a long time so risk must be lower once the system has been cleaned up. Furthermore, the risk of sovereign default may impose an equal if not greater cost if we don’t avoid it.
On the other hand, it makes perfect sense to me that the bond markets should be capricious and should bear grudges. Nevertheless, perhaps there should be some churning in the bond markets. If the current guys stick with us all the time then perhaps they are getting too good a deal!
March 31st, 2010 at 9:47 am
@D_E
There is a link to a legal opinion submitted by the UK to Iceland on one of the Icelend threads if you care to glance over it. Would link if I had the time; I am not confident I could summarize it correctly off the top of my head.
March 31st, 2010 at 9:49 am
@Eoin
That fact of bank bonds being held at par on other balance sheets could be the hidden cost of banks being “systemic” to the economy. The case of Quinn Insurance illustrates the kind of effect reclassification of a company’s assets can have.
March 31st, 2010 at 9:56 am
I have updated my estimates of the direct cost of the banking crisis to read €22.8 billion (best case), €45.0 billion (worst case) and €33.9 (most likely). The “most likely” cost has increased by about 50% and my previous “worst” case estimate has effectively become the “most likely”. Details at blog.
March 31st, 2010 at 10:01 am
I’m wondering if someone can answer these questions for me.
1. What will be Ireland’s sovereign debt/GDP ratio once this 40 billion or so is added onto the books?
2. Is this number above the Reinhart/Rogoff tipping point?
3. If yes, is sovereign default now inevitable? Note that R&R say that is doesn’t have to happen tomorrow or even next year but at some point down the line with the timing more or less unpredictable.
4. It is clear that this figure of 40 billion is not the end. Any estimates as to what else might be coming down the line?
5. Nobody seems to be talking of residential mortgage defaults. With an unemployment rate above 12% they are coming. What will that do to the bank balance sheets? Are we going to need another NAMA then? Will we be able to afford it?
6. Interest rates are at the bottom of the cycle. What happens when ECB raises rates to say oh about 2%? Will Ireland be able to afford to pay 6.5-7% interest?
March 31st, 2010 at 10:09 am
Sort of related to Garo’s post
http://www.ntma.ie/Publications/2009/std_poors_ireland_rating_june09.pdf
S&P had estimated that the total banking losses would be about €25bn. We look to be putting nearly that much into Anglo and INBS alone.
“Taking these factors and NAMA’s likely borrowings into account,
along with our revised estimate of recapitalization costs to the government of €20-€25 billion (compared with our previous estimate of €15-€20 billion), we now believe that Ireland’s net general government debt could exceed 100% of GDP over the medium term-–a level that is higher than for Ireland’s ‘AA’ rated Euro-zone sovereign peers.”
What are the chances of a downgrade in the next few weeks?
March 31st, 2010 at 10:22 am
@ Garo
Eurostat has ruled that NAMA related debt need not be included in General Government Debt - - it’s an investment.
Debt/GDP ratios do not always tell the full story and for example, Japan’s gross debt ratio of more than 200% looks prettier when pensions funds are netted against it. Of course those funds will deplete soon enough.
Last week Deutsche Bank forecast that the Irish ratio will be 118% in 2020; Italy will be similar to today;
In Australia, Denmark, Sweden and Belgium, debt-to-GDP ratios are forecast to decline.
http://www.finfacts.com/irishfinancenews/article_1019320.shtml
March 31st, 2010 at 10:22 am
@Garo
Good idea. I would like to see pro forma balance sheet for Ire Inc.
Any idea how this promissory note issuance will affect debt/GDP. Cowen on about promissory notes in Dail. It gets more bizarre.
March 31st, 2010 at 10:25 am
[...] are two aspects of interest to the public from yesterday’s announcements, which are being discussed in detail by Karl Whelan and others on irisheconomy.ie. The first is how much we as taxpayers are paying for these loans, which [...]
March 31st, 2010 at 10:28 am
@eoin
I note you chose to correctly debunk Leo Veradkar claim that Credit Unions would have CDS protection on Bank Bonds.
You did not adress the issue that banks, insurance cos and asset managers might have some protection
You chose not to address the issue of whether unsecured seniors might not be amenable to negotiate on Anglo especially if the govt threatened to put into run off.
That said nobody is adressing the issue that such action is addressing what this achieves since it can only be donepost the guarantee and by then most of the bond holders will be out of Dodge.
Leo has made the stock FG contribution to the debate but the substance of his argument was not addressed. The outlandish claim was.
March 31st, 2010 at 10:32 am
@Michael Hennigan:
I suspect you would agree 100% with me when I say that opinions from experts should not be an excuse to not do our own thinking. I really don’t care what Eurostat says because at the end of the day, the Irish taxpayer is liable for this. So we should include this in the sovereign debt/GDP ratio. Reinhart and Rogoff’s analysis strips out this cooking of the books and they look at “real” ratios when calculating the tipping point.
Japan is an unusual case in that most of their debt is funded from within the country. But as you say, those funds will deplete soon.
I think it is important to take the debt/GDP ratios in context. If the world economy was on the cusp of explosive growth and Ireland was experience significant inward migration, a ratio of 118% might be doable. But here we have a decidedly ambiguous world recovery and a slow but sure outward emigration of the most productive citizens. And we have a clueless political system that hasn’t come up with any meaningful steps to promote recovery. And the highest deficit in the Euro zone.
March 31st, 2010 at 10:37 am
@ Garo/Michael Hennigan
if you want to really take this a proper step further, you would also have to include unfunded liabilities for healthcare, pensions etc which most most countries have not pre-funded in any meaningful way, either privately or publicly. In Greece’s case, there is virtually no pre-funding of any pensions in either the public OR private sector, hence the sentiment towards them on the markets. If you include these sorts of liabilities, which Ireland is actually better than average on given our demographic make-up, then lots of countries have debt/gdp ratio’s way way way higher than 100%.
March 31st, 2010 at 10:42 am
This morning on Morning Ireland: RTE Radio 1. the interviewer (Gavin Jennings?) is talking to Leo Varadker and Eamonn Ryan. Eamonn Ryan says that ‘experts’ including Alan Dukes think that bailing out Anglo is a good idea. Varadker demurs - says he wouldn’t necessarily trust the experts on this and that there are other experts one might pay attention to. Jennings challenges Varadker saying something like ‘So, you’re having another go at a former senior member of Fine Gael’. Varadker denies this and says that he’s not doing this at all.
Now it seems to me that the Irish are simply missing chromasomes. What should have happened is:
1) Eamonn Ryan offers alan Dukes as an authority:
2) Leo asks in reply ‘Does insulting our intelligence come free with destroying wealth? What’s the matter with you? Dukes is Chairman of Anglo-Irish Bank - you idiot.
What passes for RTE’s scrutiny of this matter would do credit to Turkmenistan.
March 31st, 2010 at 10:44 am
We have spent so long trying not to seem ‘like Iceland’. By the time this is over we’re going to be emigrating to Iceland.
March 31st, 2010 at 10:47 am
Some interesting new material on nama.ie this morning. It includes a table setting out current market value and long-term economic value of the property underlying the first tranche of loans. Unless I am missing something, it suggests than Anglo’s loans are being purchsed for a figure which is less than that of the underlying security, even on its current market value. Presumably this is because the purchase price for the loans has been discounted by reference to the standard discount under the 2010 regulations?
March 31st, 2010 at 10:50 am
Yo! People More Namas required here
1. Around €20bn-€30bn of mortgages secured on crumbling cardboard boxes in Cabinteely and Cabra will go bad to some extent. Generally they will go very bad not just a little. How to fund this shortfall ???? Don’t tell me thy are insured either, no insurance reserve can handle that.
2. At least 2 large pension schemes containing about 3 Dáil quotas worth of members will semicollapse as surely as Waterford Wedgewoods did , they are eircon and aer lingus. How to fund them or their shortfalls ????
March 31st, 2010 at 10:51 am
Ok so we should take all of the following into account:
1. Official Debt/GDP
2. Off balance sheet shenanigans
3. Pension fund surpluses.
4. Unfunded future liabilities
Of these, number 4 has the greatest uncertainty as the cost of future unfunded liabilities can vary wildly based on a wide range of factors such as emigration, life expectancy, preventive health measures, change of govt. policy etc. etc. Moreover, while the others are owed now, number 4 is spread out over a long period of time and we must use the appropriate discounting mechanisms.
I do not recall 4 as being part of the Reinhart/Rogoff analysis.
March 31st, 2010 at 10:54 am
I am encouraged by podubhlain’s call for a pro forma state balance sheet. I’ve already made the case for this on the succeeding thread. I expect I’m not the only one who’s heartily fed up with stocks and flows being mixed and bandied about in unsubstantiated (and possibly unsubstantiable) assertions. We need a frame of reference that would address the liabilities that Eoin has identified as well as the just announced “investments” in the banks and is separate from the narrative being spun by the DoF and the Government. This is necessary to avoid the distortion and manipulation of the Government spin machine - ably aided and abetted by the general ineptitude (with some notable and honourable exceptions) of the Fourth Estate.
I know some work is being done on this, but we need something now - however crude and rudimentary it might be. I just happen to believe it is the duty of competent economists - and not just those on this board (even if they are among the most competent in this context) - to place these telephone numbers in a proper framework for a confused and stunned populace.
March 31st, 2010 at 10:54 am
Alternatively, could the discrepancy between the value of the property backing the loan and the purchase price paid for the loan itself be explained by the fact that there are doubts about the enforceability of the security and this was led to the loan being given a value lower than the underlying security?
March 31st, 2010 at 11:00 am
@Karl and Dreaded Estate.Thanks for your comments and response…Maybe I was a little over-optimistic for AIB in my short comment last night…it was rather late… one hour later than the time given here, actually, as Karl seems not to have adjusted this blog for summer time…anyway I need to look at the figures.. I’m really busy now…The calculations may be too long to provide here, so I’ll put them in my blog..but I’ll send a summary here anyway…In fact, my preliminary summary is this:
AIB must target equity of c. €17 billion in the next 9 months…10 for NAMA and 7 to end up the year with…At the start of the year they have 6…So, where to get the €11 bn?…So, who wants to be creative?…its do-able… with the State a minority shareholder at most…(I think..)…Did BL say the State will be a majority shareholder?…Where? (please point me to where he said that, as I’m under work pressure now, but will tackle this later today..)
March 31st, 2010 at 11:06 am
@ Brian Flanagan
1. BL did indeed say that the state may end up as majority shareholder in AIB
2. almost all the broker reports i’ve seen today suggest a 60% minimum stake, with some scenarios going over 80%.
3. the brokers are much more optimistic on BoI v-a-v state shareholding. 35-45% seems to be the consensus, though its not completely impossible that they’ll actually keep state involvement to something closer to 30%.
This is very much a Lloyds vs RBS situation in how its unfolding. BOI is the clear ‘winner’ ala Lloyds and AIB is the clear loser (no inverted commas required!!), like RBS was in the UK resolution.
From Davys this morning…
“Table 2 shows that of ALBK’s €7.4bn capital-raise requirement, the equity-raise requirement could be limited to €2.5bn… [click to enlarge:]
Capital of €4.93bn can be generated by the following:
- Disposal of BZWBK at a 20% premium to the current market price, added to RWA relief, would contribute €2.65bn;
- Disposal of MTB at a 10% discount to the current market price would contribute €800m;
- Disposal of the UK business at a 20% discount to its current book value would result in capital relief of €1bn;
- We expect further liability management of €200m;
- It is expected that the coupon due in May on the government preference shares will be issued in shares, resulting in €280m.
In comparison, we estimate that BKIR can generate c€600m from further liability management. This would leave it with an equity-raise requirement of €2.1bn, which is in line with our expectations.”
March 31st, 2010 at 11:07 am
sorry, that should be @ Brian O’Doherty….too many Brians in here….
March 31st, 2010 at 11:16 am
http://www.nama.ie/Publications/2010/NAMATranche1.pdf
The additional information shows the following:
Discount from LTEV_Prop to Consideration Paid in respect of the various insititutions is as follows:
AIB BOI EBS INBS Anglo* TOTAL
-7.8% -10.6% -10% -31.7% -23.7% -19%
It is hard to imagine what the mark down from Anglo LTEV reflects unless it is because (a) their security is weaker or (b) the enforcement costs recovered from the banks had to be a minimum aggregate so this has largely been put on Anglo to help the other banks.
Adjustment from CMV_Prop to Consideration Paid in respect of the various insititutions is as follows:
AIB BOI EBS INBS Anglo* TOTAL
+0.5% 0 -10% -22.2% -14.5% -9.9%
It looks like we are paying less for the loans than CMV underlying property as at Nov 2009!
March 31st, 2010 at 11:25 am
I had the misfortune of seeing Ryan on TV “helping” the government to sell the country. He is like Mary Poppins without the umbrella. I expected him at any minute to burst out singing “Just a spoonful of sugar helps the medicine go down…”
March 31st, 2010 at 11:27 am
@ 2Pack
Yo! People More Namas required here
without question - and it’s a nettle ‘they’ wont grasp. Some form of mortgage forgiveness in limited circumstances for those out of work in areas that will never recover is needed. The banks need to realise that, as in the case of commercial loans albeit on a smaller scale, some loans are just not capable of being repaid. The moratorium on repossessions only pushes out the problem of write downs in the residential loan books. People reject this citing moral hazzard, but if I’ve to bail out the banks & builders, why not my neighbour?
March 31st, 2010 at 11:33 am
Reality
“Factory gate prices fall 2.6%” “unemployment numbers rise” “lending continues to fall” a sample of the indicators today. Recovery??????
Greek bonds look dodgy- Stuff issued on Monday down 2.3%-spread widens to 6.58 on 10yr. Now they are going to try to sell dollar bonds.
Anyone know how our bonds are reacting
March 31st, 2010 at 11:37 am
NAMA debt won’t be the Eurostat numbers, courtesy of the SPV, but what about BL’s promissory notes?
March 31st, 2010 at 11:58 am
@ podubhlain
“Anyone know how our bonds are reacting”
flat to better actually, essentially in line with the rest of the market ex Greece
March 31st, 2010 at 11:59 am
I note the additional infr refers to “upfront recovery of costs on total portfolio” of €2.788bn.
This could be hugely skewing the figures for the first Tranche, i.e. we could be seeing the “standard discount” for the entire portflio being taken out of the first tranche.
If you add the €2.788 onto the total consideration being paid for the loans then you get an aggregate haircut of 29.5% before the costs are applied.
Including the €2.788bn in the aggregate consideration paid to the banks also gives an aggregate consideration for the loans which is 7.5% greater than the aggregate LEV of the underlying assets!
March 31st, 2010 at 12:37 pm
Thanks Eoin
found a number - 139bp
March 31st, 2010 at 1:02 pm
Questions on Promissory Notes & SPV:
Is anyone surprised that “connected” parties (i.e. BOI, AIB) are the purchasers of the 51% stake in the SPV?
Given Govt may end up with control of AIB and/or BOI, will that mean the EU shall recognise Govt’s stake is 50%+ and the NAMA debt is then accounted for in the national debt figures?
Surely the Promissory Notes will only count as Tier 1 Capital, if there are no “escape-clauses”? If so, won’t they be counted as liabilities immediately?
March 31st, 2010 at 1:14 pm
@Eoin
Based on the Davy’s data you provided–thanks !- it seems AIB does not have a problem much greater than BOI’s..? Equity-raise target of €2.bn. v. €2.1bn. for BOI… Is that all there is?, as the song says…Is that all there is, my friend…then keep on dancing..
So, why are AIB shares down a little today and BOI’s up 25%? The “herd” is so influenced by careless commentators, that’s why
So, BL said that AIB MAY come in to state ownership…Of course !…if they cannot raise private capital…But of course they can raise €2.5 bn., ..even a rights issue could raise that…The real issue, in my opinion, is whether they can retain private sector control while also holding on to Poland..I suspect they can…But, anyway, I’ll deal with it later
March 31st, 2010 at 1:16 pm
@ Garo
The investment in AIB and BoI is likely to turn a profit.
NAMA - - on a discounted cash flow basis, probably not but may eventually show positive returns on a nominal basis but a real loss.
€25bn+ on Anglo Irish? — most likely down a sinkhole.
To be successful as a ‘business bank’ assumes that AIB/BoI are stupid enough to allow them develop in that niche.
The French have an expression on killing the chicken in the egg in dealing with competition.
The Anglo case again illustrates why journalists and politicians who have no experience of the business world are unable to forensically challenge the likes of Alan Dukes.
March 31st, 2010 at 1:29 pm
@ Brian O’Doherty
“But of course they can raise €2.5 bn., ..even a rights issue could raise that”
Isn’t that a rather aggressive statement when their existing market cap is only €1.1bn?
Is there a single bulge bracket investment bank that would underwrite even a small part of such a transaction?
March 31st, 2010 at 1:32 pm
Anyone else wonder at the wording of the EU statement on Anglo? Sounds to me like the current business plan has been rejected and they’ve been told to go back and redo it, but in the interim a payment can be made.
March 31st, 2010 at 1:37 pm
@ Brian
“influenced by careless commentators”
AIB is being asked to gut itself of its key profitable assets, while BoI is going to more or less keep itself whole. Thats the difference in why AIB will struggle to raise equity finance from private investors and BOI is apparently not. You may consider them “the herd”, but everyone else considers that “the market”.
March 31st, 2010 at 1:43 pm
@yoganmahew
I am coming to the same conclusion.
March 31st, 2010 at 1:47 pm
Exactly Eoin, quite obvious i would of thought why BoI is outperforming AIB.
on one hand you have a bank that is able to raise capital privately, and on the other you have a bank which is relying on the sale of banking assets, which is pretty optimistic in this market….
perhaps you have been reading too much of Papandreous, and not enough of market commentators…
March 31st, 2010 at 1:48 pm
@D_E
The results appear to have been delayed for a day too, maybe to rewrite the certain forward looking statements?
The whole promissory notes thing seems like a stopgap to me, I can’t see that being consistent with a bank standing on its own two feet without market-distorting assistance - up to 2 bn a year for the next 10-15 years?
March 31st, 2010 at 1:49 pm
Anlgo is dead from the neck down - yet its head still thinks its a bank.
March 31st, 2010 at 1:50 pm
Some more worrying figures:
If one assumes that the €2.788bn enforcement costs for the entire portfolio is discounted after the assessment of the LTEV of the loans then the following can be interpolated:
(T1_Consideration + Total_Enf) = LTEV_T1_Loans
LTEV_T1_Loans = 119.7% T1_Prop_CMV
LTEV_T1_Loans = 107.5% LTEV_T1_Prop
Haircut from BookVal_T1_Loans to LTEV_T1_Loan is 29.5%
These figures raise serious questions having regard to
- the uncertainty surrounding the application of the standard discount rate,
- the unexplained dfifference between LTEV loans and LTEV property,
- the long-standing fears of an artificial 30% haircut,
- the assurances that the LTEV for portfolios would be capped at the outside at 20% greater than market value.
We are not given the market values of the loans [which appears to have no bearing on the amount paid]. We are not given the LTEV of the loans.
It appears the long term economic value of loans may exceed the long term economic value of the underlying property. Therefore the 20% cap on uplift of property LTEV is less of a protection than one might have thought.
March 31st, 2010 at 2:05 pm
Tell a lie, Anglo’s results seem to be out:
14:59 *ANGLO IRISH 15-MNTH NET INTEREST INCOME EU1.5 BLN
14:59 *ANGLO IRISH TO TRANSFER EU35.6 BLN OF LOANS TO NAMA
14:58 *ANGLO IRISH BANK SAYS EU10.1 BLN OF CHARGE RELATES TO NAMA
14:58 *ANGLO IRISH BANK IMPAIRMENT CHARGE EU15.1 BLN
14:58 *ANGLO IRISH BANK 15-MONTH LOSS EU12.7 BLN
Courtesy of verbatim on thepropertypin
March 31st, 2010 at 2:14 pm
http://www.rns-pdf.londonstockexchange.com/rns/5412J_1-2010-3-31.pdf
March 31st, 2010 at 2:15 pm
@Michael Hennigan:
Alright then, we can exclude AIB, BOI and even EBS from sovereign debt. But surely, Anglo and INBS should be counted in sovereign debt when gauging default risk.
March 31st, 2010 at 2:18 pm
@ALL
The defining feature of the ExecutiveGov-Citizen relation in the past 18 months has been ‘Obfuscation’ & ‘Deflection’ - in terms of ’spin’, misinformation, secrecy, hidden data and information, fear-mongering by Ministers, and so on ……. aided and abetted by well connected upper-echelon leaders who got us into this mess in first place and 95% still in situ, and perhaps most surprisingly - by a generally fawning 4th estate - RTE & Indo Group in particular - 95% of whom appear to be incapable of substantively challenging the spin:
The foundation of this ExecutiveGov strategy appears to be a recognition that the best way to keep a supine citizenry (and backbench Gov TDs) supine is to keep them ignorant as long as possible and to dismiss the [lets be realistic] ‘tiny’ informed opposition with loud fear-mongering mantras … and spins to deflect attention onto the international crisis, when the roots of the Irish crisis are 95% home-grown.
After 18 months of so called deliberation, what do they do? They surrender unconditionally to an abstract ideological equation and put up the children and grandchildren of the nation as collateral. They socialized cowboy debt, for which they bear a significant responsibility, 100% on the backs of Irish citizens - present and future. Craven Capitulation to the Cowboys, Contempt for the Citizenry, total reversal of the logic of republicanism which places the interests of the citizenry before that of dominant cliques who ‘fumble in the greasy till’, and our international reputation as ‘thinking people’ who can ’stand up for ourselves’ in tatters - shredded.
March 31st, 2010 at 2:20 pm
http://www.angloirishbank.com/About-Us/Reports/
Anglo results are out.
Happy reading, to one and all.
March 31st, 2010 at 3:35 pm
[...] and Bank of Ireland if those banks were able to sell assets. The very sane Karl Whelan dissents on (see his point 6) [...]
March 31st, 2010 at 7:52 pm
The Anglo results are out, so I go and have a look. Anglo tell us that Drury Communications PR Consultants are the people to contact, so off I go to their PR web site which we are all paying for too, and find.
“The essence of Drury is us. We, the people who work here, and you, the people we work for. We believe in strategic partnership and rock-solid relationships. We give with our hands on heart and hearts on sleeves. We don’t subscribe to nodding-dog, yes-man syndrome. We don’t compromise to be popular.”
That first sentence should have read “The essence of Drury is us. We, the people who work here, and you, the people who word for us.”
March 31st, 2010 at 10:01 pm
Belatedly, but as promised, I detailed the reasons why AIB are in a much stronger position than the media is suggesting, in my blog just now. A rather- very- long post, not suitable as a comment, but the bottom line is that their options include *starting capital 6 bn, * provisions , * 2010 profits, * sale of overseas busineses, * fewer transfers to NAMA or/and better than 43% discount, * transfers over two accounting years, * new IASB acccounting rules, * rights issue and/or strategic private investor, with these sales accompanied by substantially increased share price, * finally, agreed conversion of some preference shares, though hardly needed.
It may be that they can do it without selling Poland.
April 1st, 2010 at 12:09 am
@Brian O’Doherty
AIB is insolvent. Get real.
April 1st, 2010 at 12:30 am
@All & Brian Lucey
New York Times
Ireland Lays Out a Plan to Help Banks
“The Irish banking sector is now effectively nationalized,” said Brian Lucey, an associate professor of finance at Trinity College Dublin. “This was the inevitable outcome, but why has it taken a year to get to this?” “It will take years to unwind,” Mr. Lucey said.
http://www.nytimes.com/2010/03/31/business/global/31punt.html?ref=todayspaper
@Brian Lucey
Now Brian - How about the front page of the Star - If you won’t do the tatoo I’ll live with 3 1/2 articulated trucks full of €100 Euro notes (-;
April 1st, 2010 at 1:55 am
@ Brian O’Doherty
“It may be that they can do it without selling Poland.”
Yes, Brian but they certainly can not do it without selling Ireland.
April 1st, 2010 at 10:28 am
@ Brian O’Doherty
Are you registered to provide investment advise? What if someone took your advice and lost money?
April 1st, 2010 at 11:09 am
@ JL
sorry, only saw your response to me this morning.
First off, i dont see it as my duty to go through Leo Varadkar’s (or anyone else’s) opinion line by line. I simply noted that a very strong statement that he made contained a completely incorrect element he was calling a fact. It therefore questions the reliability of the rest of his statement, much of which is unproveable one way or the other. I dont think the default position should be to simply accept everything he says as being correct unless otherwise proven incorrect. At the end of the day, lots of information is unattainable. At the very least he should be caveating his statements with “i think” or “i would suggest” rather than something far more factual.
Secondly, i’ve said it before on here, but i believe many holders of Irish bonds are still holding their debt unhedged in terms of CDS and at par on their balance sheets, much like the credit unions. If nothing else, a CDS is anything but a cheap or easy transaction to make on an Irish bank at the moment, and hasn’t been for a couple of years now. Buying the CDS on a distressed credit involves paying a fairly chunky premium for the life of the bond, and could easily wipe out the actual yield on the bond in certain circumstances. Most holders are unwilling to do this. Certainly, the total volume of CDS trades conducted by non-trading desks (ie pension funds, insurance companies, bank investment books) is nowhere near the outstanding volume of underlying bonds. Having talked to a few sellers of CDS this morning, they reckon the percentage of Irish holders of Irish bank debt that are hedged via CDS is probably something like 10-20% max.
April 1st, 2010 at 4:03 pm
@Eoin
Surely the message from Gov to ‘external’ Bond_holders is - no need to bother - we cover all. Is this nearly correct? & are the local 10-20 simply wasting their money?
Is this the message?
April 1st, 2010 at 6:55 pm
@ London_Reader
Certainly I’m not registered. Nor am I advising anyone to do anything…I’m merely expressing my own opinion.
If you’re an investor and the sort that seeks professional advice on what to buy/sell, then please do listen to someone who’s registered to give such advice and ignore my opinion.
@ Robert_Browne
There could be the seed of a good idea there…”selling Ireland”… I mean, that’s the bit / division of AIB which, if sold, could benefit shareholders more than anything else…Do you know anyone who might be interested….?…
April 4th, 2010 at 11:29 pm
[...] might appear to wipe out its equity capital. However, it’s been brought to my attention that my earlier comments on this issue neglected the fact that the bank will be able to get some tax back after it declares [...]