Anglo’s Plan to Save Subordinated Debt Holders
This post was written by Karl Whelan
It is now widely expected that the EU Commission will not approve Anglo’s Good Bank Bad Bank split and so there won’t be a good bank.
The media’s constant focus on whether the bank is being fully wound down or not has always been somewhat misplaced (I’ve been making this point for quite a while). Yes, the government would have to put extra money in to recapitalise the new bank but it wouldn’t be much (perhaps a billion or so) and, in theory, this investment could be earned back if the new bank was eventually sold off. In addition, the new bank would allow for the highest level of continuity for depositors and this could help restrict depositors leaving the bank which would complicate any adjustment to a new structure for Anglo.
In practice, there probably isn’t the basis there for a profitable new bank and there are other ways to deal with deposits, so I haven’t been a big fan of the split idea. However, this debate has been a distraction from the main issue affecting the cost of the bank to the Irish taxpayer, which is what the policy will be on the treatment of bondholders.
Now, however, a new reason has emerged to be against the new bank proposal. I had questioned here whether Anglo would have considered transferring subordinated debt liabilities to the New Bank. Now, Sunday Tribune journalist, Neil Callanan, informs us that Anglo’s management have informed him that their plan is to transfer some of the bank’s subordinated debt “to round out capital structure” (Thanks Neil.)
This is a bad idea on so many different levels. The idea about “rounding out the capital structure” sounds plausible but is, in fact, nonsense. International regulators have generally encouraged the issuance of subordinated debt because small numbers of professional bond investors may be better positioned to provide “market discipline” for the bank’s management than the shareholders, who tend to be poorly organized and easily deceived. The idea here is that the subdebt holders will lose all their money if the bank becomes insolvent, so they’ll pay close attention.
Now we have a bank which is insolvent and whose subdebt holders should get nothing. And the bank’s management wants to hive these bonds off into a new institution, fully capitalised at the expense of the Irish taxpayer, which would see the debt paid back in full.
One can only assume that Anglo’s management are aware that New Bank could “round out its capital structure” by issuing new subordinated debt, in return for which the state-owned bank would actually receive some money. But, for some reason, they would prefer to see the bank take on a legacy liability of Sean Fitzpatrick and co and pile it onto a new state-owned institution. The question is why they would want to do this.
The EU’s impending decision to prevent the new bank should stop all this. However, the planned subdebt transfer raises very serious questions about how exactly Mr. Aynsley and Mr. Dukes believe they are serving the Irish public with their plans for New Bank.
Tags: Anglo Irish Bank
September 6th, 2010 at 2:06 pm
@KW
‘Rounding out capital structure’ on the backs of Irish serfs! Just who do the present upper echelon in Anglo-Irish represent? Winds of sanity from Europe … for a while?
September 6th, 2010 at 2:40 pm
@KW Had seen the point in previous post on here so raised it. I think people have to be aware that Anglo feel they can’t say anything concrete on subbied bonds etc until a formal announcement is actually made. Questions about what will happen to the subordinated were just met with no comment with nothing beyond that. As for RTE today going on and on about a story that’s been known for months…
September 6th, 2010 at 2:42 pm
A good and worrying question.
This highlights why the good/bad bank idea is not a good one and why the immediate renegotiation of the guarantee and a negotiated default à la Brian Lucey may ultimately be the best decision.
For in Ireland, ideas that look good on paper, such as hiving off a good bank or an orderly wind-down over 10 years, often turn out to be disastrous. We all know that both of these options, and indeed NAMA itself, provide limitless opportunities for incompetence and cute-hoorism to make a bad situation infinitely worse.
Academics on this site may refer to this as an Agency problem and the classic skewed incentives that exist when a firm is in trouble are well studied, although they seem to be strangely ignored in most commentary on the future of Anglo.
However, the Irish public understands this automatically and, I believe, this is the main reason why the immediate closure of the bank is most favoured by the man on the street. Nobody believes losses will be capped at 25 bn and the longer it drags out the larger the losses will get.
Unfortunately, I rather doubt that Mr. Trichet and our masters on the continent see this or even care about it.
September 6th, 2010 at 2:53 pm
@ Karl
this doesn’t make a lick of sense at first glance. Governments and regulators like there to be a tiered capital structure to protect depositors and senior debt at least somewhat, but that could always (as you noted) be brought in at a later stage. Given that the good bank would be a complex spin-off, i’d imagine lee-way would be given in terms of fleshing out the capital structure after the split. It would actually make far more sense to try and persuade non-guaranteed senior debt to take a combination of fresh government guaranteed debt and new subordinated debt in the new structure, rather than try and save the existing subs.
September 6th, 2010 at 3:05 pm
I suspect there is something being picked up incorrectly because the “transfer” cannot in reality occur (noting the discount on the previous buyback) without discounting. eg for every €100 of subdebt in Anglo one might get, say, €15 of sub debt in Newbank.
September 6th, 2010 at 3:39 pm
@KW
I agree that this good/bad split is a red herring when it comes to whether we can torch subbies.
I am not a lawyer but I think the point is that subbies are creditors of the bank. Creditors who are defaulted on can push for liquidation of the bank. That is their great lever and that is where they are different from shareholders.
There are probably conditions which allow coupons to be suspended provided no shareholders divvies are being paid and I think that is happening, which explains the deep discount in their market value.
If it was legally possible to torch subbies without precipitating a disastrous liquidation no one would say boo, it would have no impact on credit ratings or the ability of Anglo to fund itself. But if we torch them through uniteral and retrospective changes in law (i.e. a resolution scheme) that would be a whole different ball game.
September 6th, 2010 at 3:46 pm
@ BWII
correct on subordinated coupons being withheld - same happening at AIB and BOI. Think the LT1 (what little is left) is a voluntary decision (you can always withhold them yourself, no legal issues, jusr reputational) but the T2 subs was an EU decision.
@ Karl
its possible that there is a legal angle here where they have to be seen to be keeping their options open and not prejudging the subs fate. Nothing else make sense really, they should get nothing via a liquidation, but may need some sort of lowish payoff if they have the ability to make things difficult legally speaking in the event of a good bank scenario.
September 6th, 2010 at 3:47 pm
Why is Brian Lenihan so adamant to cover every imaginable liability that he can possibly think of?
Is he getting commission as a debt collector from Anglos creditors?
An example of this is the figure the 2 Brian’s have recently released of 70bn to wind up Anglo (up from 40 origionally). They are bragging that there is currently over 80bn of deposits in Ireland. Considering Anglo was not a savings orientated bank, how much of the 70bn estimated to wind-down Anglo is for depositors?
September 6th, 2010 at 3:53 pm
[...] Karl Whelan; Anglo’s plan to save sub-ordinated debt holders. [...]
September 6th, 2010 at 4:00 pm
@ BW II Your point about subbies being able to seek to wind up the bank is a very interesting one. When does a subordinated debt became payable on demand? At the end of a fixed term?
The High Court has a discretion to refuse to wind up a company and might well refuse to wind up a bank where this could be shown to precipitate unnecessary losses and where the petitioning debtor, i.e. the subbie, is unlikely to recover anything in the winding up.
September 6th, 2010 at 4:03 pm
sorry, should read *petitioning creditor
September 6th, 2010 at 4:15 pm
@gadge
Great to have a legal expert on site and your comments are very interesting.
If Anglo subbies can be torched within the current legal framework without bringing down the house of cards, and my read of your post is that this may be the case, then I don’t think anyone would see any moral, reputational or other objection to that course of action.
Maybe I am naive but I do not think subbies are being spared by the Government from any ulterior motive (such as croney capitalism), I believe they are conscientiously weighing up the pros and cons from a taxpayer point of view.
It may be a situation, such as Eoin alludes to, that for the Government to be totally transparent about their true intentions towards subbies might of itself prejudice their options.
September 6th, 2010 at 4:36 pm
@ BWII
well im just thinking, if i was a creditor, of any entity, and was owed money in a few years time, and then i heard that entity saying “we’re thinking of having a restructure in the future, and this particular set of creditors will get nothing back at all if we proceed with it”, then i might have some avenue to move and protect my potential capital, right? Still odd that they mentioned it in a kinda off the record or informal chat with the Tribune guys. POGW may be right that it would transfer over at a steep discount to both provide a more rounded capital structure but more importantly avoid any legal roadblocks.
As you noted BWII, and as we saw in the “revoke or die” debate last week, i think we will require more legal analysis in the coming months on many different issues!
@ The Visitor
i think 28bn is total retail or corporate deposits. And the 70bn figure is a net liquidity cost, as opposed to a loss (i think). Its basically the total liabilities that’d have to be repaid, and ignores any assets that Anglo has.
September 6th, 2010 at 5:02 pm
@ Karl Whelan,
Thankyou for a very well worded comment on subordinated debt - which is especially interesting for those of us, who are far away from the business of bond trading in our day to day lives. You have filled in some gaps in my understanding of the mechanics of the business yet again. However, there is a clear sense in which subordinated debt holding as a process to provide market stability, could be easily sabbotaged by shrewd traders, who know how the system works. All you have to do is identify a city in the path of a hurricane (financial as opposed to natural) and get organised to do as much looting as you can.
I think there is a clear argument that in 2008, many of the debt holders of Irish banks were only lining up to take their share of the spoils. What makes it more concerning, is how widespread the knowledge of Anglo’s problems were in 2008. Given the fact the Irish government did not move following the St. Patrick’s day massacre - and that Seanie was busy going all over Dublin town, and possibly further afield - in search of a life raft to clutch onto. It is interesting how many institutions - which includes nearly all of the Irish lenders, were anxious to invite Seanie in to talk. But none were committed to helping the bank. I recall a part of Roger Lowenstein’s book, When Genius Failed, about LTCM.
I believe it was Goldman Sachs or one of the large banks that gained access to LTCM’s trading books, while purportedly offering a hand of assistance to the hedge fund in the final days. But behind the scenes, Goldman were still busy using the same information gathered to take profits out of LTCM’s misfortune - even while claiming to assist it. Some of the LTCM people felt very sore on that afterwards. I think there is evidence to suggest, a lot of the same happened with Anglo Irish bank. Which makes me think, the Irish government was far too slow in reacting. By the time of January 2009, it was too late to stop the looting that had ensued throughout 2008. Which the public purse in Ireland is now still paying for. BOH.
http://www.irisheconomy.ie/index.php/2010/09/04/no-really-we-did-have-a-huge-house-price-boom/#comment-70623
September 6th, 2010 at 5:07 pm
According to Section 214 of the Companies Act 1963, if a company does not pay a debt that is due and is not in dispute, the creditor is entitled to petition the High Court for the winding up of the company.
A bondholder is a creditor.
September 6th, 2010 at 5:07 pm
An interesting in Sunday Tribune piece on Anglo’s CFO van Eden:
http://www.tribune.ie/business/news/article/2010/sep/05/why-anglo-never-actually-understood-property-lendi/
September 6th, 2010 at 5:21 pm
@ Michael
what if you are going to restructure a company ahead of the due date of a creditor/bondholder? surely he has some theorethical right to petition the courts to stop the restructure?
September 6th, 2010 at 5:26 pm
I don’t believe (but stand to be corrected) that banks are subject to the Companies Act. They are subject to the Central Bank act and it is only the Central Bank that can petition for wind-up of a bank.
September 6th, 2010 at 5:28 pm
This recently posted on the Ft’s Alphaville. I think it argues we are fiddling while something is burning….
http://ftalphaville.ft.com/blog/2010/09/06/335131/more-anglo-irish-candour/
September 6th, 2010 at 6:30 pm
@BOH
“…Goldman were still busy using the same information gathered to take profits out of LTCM’s misfortune - while claiming to assist it,,”
briseann an dúchas tri shúile an “squid”. You don’t expect GS to deny it’s nature. GS skullduggery makes our crowd look like angels - don’t forget who was behind the Greek crisis in more recent times.
http://www.rollingstone.com/politics/news/12697/64796
September 6th, 2010 at 6:40 pm
@ AMcGrath
“don’t forget who was behind the Greek crisis in more recent times.”
Eh, tad bit of an exaggerhation there…
September 6th, 2010 at 7:22 pm
@ AMcGrath,
As far as I can tell, the 1998 LTCM hedge fund crisis was the first time someone’s misfortune was used to make profits, as far as I can tell. Many of the people at LTCM were seasoned traders from the Salomon days. They had seen it all, but even they were surprised at how their carcass was being picked, just days away from full insolvency proceedings.
At some point in the course of things, in Ireland and everywhere else, we have to face up to the fact that new techniques and ways to turn a dime are being discovered, the more we go through crisis after crisis. In fact, there could be evidence to suggest that disasters are becoming more numerous nowadays, because sections of the financial industry have realised that is the most profitable time of all. At some point we have to face up to it, that could be the reality we exist in today. We hear an awful lot of rhetoric from governments that we need a functioning financial system.
If my suspicion is anyways correct, and the modern financial system is designed to produce individuals such as Seanie, who get themselves into trouble and then have to flail around in desperation, while looking for some liveline to save them - then we could rightly question the appropriateness of the modern system of finance. Clearly the Irish government stood well back from the problem that was Anglo Irish bank in 2008. The markets would have been wise to this, and gathered around like piranha fish. They have been doing so since the 1990s, looking for some fresh prey to sustain them. They got an exceptionally fine meal as far as Ireland is concerned. Maybe it is time to remove the bait from the water? BOH.
September 6th, 2010 at 7:30 pm
Qualification: As far as I can tell, the 1998 LTCM hedge fund crisis was the first time someone’s misfortune was used to make profits - in a very large scale, organised and sophisticated way - assisted by digital trading methods and all that goes with it. Like some version of Death match for financial geeks. BOH.
September 6th, 2010 at 7:54 pm
@EB
“slight exagerration” only in the sense that they had willing collaborators in the Greek Government - but they were the “brains”, for want of a better word. I suspect you already know their role but ..
http://www.guardian.co.uk/business/2010/feb/25/markets-pressure-greece-cut-spending
@BOH
Read Matt Taibbis RS article I posted earlier - you will realise that Goldman is a past master at profiteering from others misfortune, much of that misfortune engineered in advance by GS
September 6th, 2010 at 7:57 pm
@ Eoin
Do not think that the holder of subordinated debt would have any say qua creditor on the proposed “restructuring” of Anglo. As I understand it, certain loans are to be hived off into a Newco, with the legacy bank running down the remaining loan book. The decisions in this regard are a matter for the board and shareholder i.e. Minister, subject always to State Aid rules. A creditor normally has no input into the running of a company, and would only have a right of action where for example a company attempts to remove assets from a company shortly before liquidation or engages in some sort of fraudulent preference. As Anglo is already insolvent, it would seem difficult for a subordinated debtor to make a case along these lines. Ultimately, it depends on the terms and conditions of the subordinated debt: for example, the debt might become payable immediately in the event of restructuring etc. This, in turn, might open the possibility of the subbie seeking to enforce his rights by threatening to wind up the company, but as per my earlier post I think a winding up petition wd be refused in the exercise of the court’s discretion in such circumstances.
September 6th, 2010 at 8:12 pm
Well, of course the govt would never do or countenance an action that preferred subbies over taxpayers, would they…..
September 6th, 2010 at 8:13 pm
@ AMcGrath
““slight exagerration” only in the sense that they had willing collaborators in the Greek Government - but they were the “brains”,
No, slight exaggeration in the sense that, as far as im aware, Goldman Sachs did not borrow $300bn on the sovereign debt markets, run the guts of 25 deficits in 28 years (roughly), or create such a disasterously set up economic structure that you can retire at 52, get paid for 14 months a year and pay virtually no tax regardless of your actual income. If you ignore those facts, then yeah, Goldies were the real culprit.
September 6th, 2010 at 8:13 pm
@gadge
More good stuff. But I have one quibble. Anglo is not insolvent. The State subventions are keeping it solvent.
September 6th, 2010 at 8:22 pm
BWII
So, by that metric, someone with no head who is on a heart lung machine is “not dead, the machine is keeping them alive”….ok so
September 6th, 2010 at 8:37 pm
@ Brian Lucey
i’d compare it more to someone who is brain-dead and who is only surviving on a ventilator and through a feeding tube. There is still a process to go through to legally pronounce them dead.
September 6th, 2010 at 8:44 pm
@ All,
I would dispense with the coma analogies altogether. And run with a more paranha-type lingo used by FG shadow minister for finance, Michael Noonan. Whatever we do with Anglo, it is going to cost us an arm and a leg. BOH.
September 6th, 2010 at 8:45 pm
@ BW II. A similar argument was made by the shareholders (not creditors) of Northern Rock who argued that they should receive statutory compensation for their shares by reference to the value of the bank with the benefit of government support. The Court of Appeal ruled against the shareholders, and held that the legislation which provided that the shares be valued on the assumption that financial assistance had not been provided by the Bank of England or the Treasury was proportionate.
The government does seem to step in to shore up Anglo’s books each time there is a further writedown, e.g. in the case of the second tranche of loans to NAMA. However, in a hypothetical scenario where the holder of subordinated debt sought to wind up Anglo, the government’s intervention would presumably take a different form. Rather than putting more money into the company itself, to be distributed by the liquidator, the government would presumably deal directly with persons relying on the guarantee?
September 6th, 2010 at 8:48 pm
Anglo would then be insolvent, and there would be little prospect of the subbies receiving anything after the preferential creditors. The High Court is likely to refuse to order a winding up in such circumstances, where there is little practical benefit to the subbie
September 6th, 2010 at 8:55 pm
@gadge
You seem to know what you are talking about on the legalities, but what you suggests sounds quite incredible. If such a thing were allowed, it would be a blatant form of tunnelling — moving assets to another company to get them away from creditors. I don’t see how losses can legitimately be imposed on creditors outside a bankruptcy or some other formal resolution procedure (to be enacted).
I am inclined to disagree with Karl on this one. If a good bank were to be carved out (a bad idea) it would be a strange rule of law if subordinated debt holders did not get an appropriate claim (agian outside of formal resolution). Surely they cannot be separated that way from the assets of the company.
September 6th, 2010 at 9:09 pm
@ John McHale
Most debt instruments contain some form of acceleration clause whereby the debt becomes immediately payable in the event of, inter alia, the restructuring of the company. The Anglo situation is highly unusual in that an insolvent company is being kept afloat by the injection of funds on an ad hoc basis by the Government. Technically, the bank continues to be “solvent”, and thus it might be argued that hiving off assets (in the form of good loans) to Newco, leaving the creditors stranded in a depleted bad bank is unfair.
September 6th, 2010 at 9:09 pm
@BL
Graphic metapor indeed. As one sqeamish of all things medical I am in a state of shock. Gadge’s analysis is very helpful, it shows how complicated the legals on this are. I repeat my (possibly naive) faith that the gubbermint is doing the best it can from the best of motives and with the best and most informed of advice, both legal and financial.
September 6th, 2010 at 9:09 pm
@ John McHale
can you not carve out the assets, but only by way of equal or fair transfer, ie you can remove Xbn in assets only if you also remove Xbn in liabilities. So lets assume they take the 28bn in deposits and say 14bn in senior debt (its something like that), and then they take 42bn of assets (at market value) off the balance sheet as well. Whatever is left over is there for the subs to do as they please, but the assumption is that there is then little or nothing left.
September 6th, 2010 at 9:11 pm
metapHor why can’t we edit??????????!!!!!!!!!!!!!!
September 6th, 2010 at 9:19 pm
@gadge That sounds like a much weaker statement. But I would think the issue is not fairness but legality.
@ Eoin A carve out that leaves suborindated debt holders with an equal valued claim would be defensible in my view. But wouldn’t it be more straightforward to give them an equal valued claim on the good bank, not that such things would be easy to value?
September 6th, 2010 at 9:26 pm
clearly the best option for the taxpayer is to enforce losses on any un’gteed senior or sub bond holders without triggering a wind up / liquidation of the bank. this is tricky to achieve (other than thru a voluntary buy back of debt or a voluntary exchange of debt). i always felt a split of the bank into a good and bad bank gave you the eventual long term way of deivering 100% principal losses on Lt2 sub debt by hiving them off into an ”asset managment” bad bank. keep current on the coupon (very low at the moment as all linked to 3mth libor) but eventually u can change the law or liquidate the asset management company. keep all options open gives u the flexibilty to enforce losses now (below market tender for debt) or losses in the future (hive off debt into asset management company). advantage of tender now is you create capital now by buying debt back below 100, disadvantage is that you pay non zero amount of cash back to sub holders. i’d say the bank is trying to keep open its options and would make business sense to be vague and non commital on its options.
September 6th, 2010 at 9:33 pm
@ John McHale. To use the cliche, we are in uncharted waters. If the government had not pumped funds into Anglo, the company would presumably have collapsed. In such a scenario, it seems unlikely that the holders of subordinated debt would have recovered anything in the winding up. The question which now arises is whether the subbies are entitled to benefit from the government’s intervention. The closest legal analogy I can think of is Northern Rock: it was nationalised, and the shareholders’ compensation was calculated on the basis of a legal fiction that the UK government had not in fact supported the bank. As flagged in an earlier post, the Court of Appeal ruled that it was legitimate to restrict compensation on this basis. If the same approach were adopted to the subbies in Anglo, they would not be entitled to anything.
September 6th, 2010 at 9:36 pm
@ tom
Have just seen your post now, and it addresses the timing / logistics of imposing losses on the subbies outside a winding up much more clearly than I could ever do.
September 6th, 2010 at 9:38 pm
on the balance sheet post sep 10 g’tee expiry there is E2.4bn of un’teed sub debt and E4.6bn of un g’teed senior. the rest of the liabilties are either deposits, govt g’ted elg or collaterisied liabilities due to the central bank system. there aint so many bond holders left to equitize..
September 6th, 2010 at 9:59 pm
again the problem with most traditional sub debt issuance for banks is that to enforce prin losses on bond holders u need to wind up the bank. anglo is by any measure the poster boy for how badly a bank can be run and regulated but the enforcement of bond losses on bond holders has being difficult in most previous banking blow ups outside of the USA (were the holdco/opco structure in banks gave u an entity specific level of subordination as opposed to different levels of capital within the same entity which is common in europe). the german horror show that is depfa along with the secondary pubic sector banks in austria and germany have yet to find a away to enforce ”bond holder losses” on bullet LT2 debt (let alone senior).
September 6th, 2010 at 10:02 pm
Very well explained tomc.
September 6th, 2010 at 10:23 pm
@EB
Not excusing the corrupt Greeks at all Eoin - are you saying they had no part in it? It is jardly a huge secret at this stage
http://www.youtube.com/watch?v=tCe80hsx-ig
September 6th, 2010 at 10:41 pm
@ AMcGrath
“are you saying they had no part in it?”
Finally something more realistic - yes of course GS had a part to play in it. I simply objected to the wording which seemed to make the Greeks themselves the bit part players and GS the masterminds - Greece simply collaborated and GS were the brains according to you. The shenanigans they got up to probably shrouded a per cent or so of the overall problems, the realisation of it was simply the straw that broke the camels back. Unfortunately the problems facing both Greece and the whole EU are more complex and wide ranging than some evil boogeyman investment bank.
@ All
good legal and technical contributions above. I know i’ve been saying this for quite a while, but it really is very very difficult to inflict losses down the capital structure of a bank outside of outright liquidation (never mind the political issues re EU).
September 6th, 2010 at 10:59 pm
@ Eoin
The alternative to a winding up would be an Examinership where the court cannot grant the order unless it is satisfied that there is a reasonable prospect of survival of the company and the whole or any part of its undertaking as a going concern.
I don’t believe that there is an Irish mechanism for banks such as the FDIC can use in the US; seize a bank on a Friday afternoon and open it under new ownership on a Monday morning.
The secured creditor may well object to an Examinership for fear of losing some of its rights.
The appoint of a liquidator would be the most likely outcome of a winding up petition as an unsecured creditor e.g. the supplier of computer services or a subbie would have the same right to make such as case if a payment is not forthcoming within 3 weeks after formally presenting the notice to petition the High Court.
September 6th, 2010 at 11:27 pm
@Eoin
I still believe they were the brains behind it - in fact every source I google on the subject seems to agree with me so far -
http://www.nytimes.com/2010/02/25/business/global/25swaps.html?_r=1&dbk
@all
soory for straying off the topic - the thread seemed quiet enough earlier - now there seems to be a lot of useful debate, maybe the outcome will save us all!
September 6th, 2010 at 11:39 pm
Eoin says:
It’s time to talk to a fisherman I think, who really knows about the behaviour of the piranha species. Basically, the longer we leave Anglo Irish Bank over the side of our small dingy, which has a hole and has lost it’s oar - the longer the same Anglo Irish Bank will encourage a resident population of flocking predatorial fish to form around our craft.
The longer that same flock of predators are hanging around the dingy, interested by the chum that is Anglo Irish Bank, the more likely they will develop an appetite for what is trying to stay dry inside the dingy also. Rather than cut lose of the bait and allow it to drift downstream as has been most suggested at the Irish Economy blog. I advise that we yank it out of the water altogether, and then observe the behaviour of the piranha fish as they look to each other for their next meal. Translated, I mean that Anglo needs to default on its liabilities period.
You will see how quickly the fish lose interest in our craft and that will give us the time to hopefully scramble to the safety of a nearby shore. Whatever course of action we decide to take, I hope it is one that involves us detaching from the bait that is the dead bank right away. Maybe the good bank/bad bank solution represents that. I am sure those in Anglo at the moment are much better piranha fisherman that I am. BOH.
September 6th, 2010 at 11:54 pm
@ A McGrath
“brains behind it”
Whats “it” - the swaps they did or the crisis? Earlier you said “the crisis”. Thats my point. The swaps hid a few billion. Greece’s crisis is 300 large, and counting.
September 7th, 2010 at 12:49 am
@Eoin
You must be right - those swarthy mongrels thought they could steal from the master race and get away with it
http://www.youtube.com/watch?v=88GSGb-ny3I&feature=related
September 7th, 2010 at 1:07 am
@ John McHale
“I am inclined to disagree with Karl on this one. If a good bank were to be carved out (a bad idea) it would be a strange rule of law if subordinated debt holders did not get an appropriate claim (agian outside of formal resolution). Surely they cannot be separated that way from the assets of the company.”
There is precedent for this. As I wrote about here
http://www.irisheconomy.ie/index.php/2010/04/19/anglo%E2%80%99s-northern-rock-strategy/
Northern Rock was split into a good bank and asset runoff company and the sub debt was all kept as a liability of the asset runoff company.
As long as the liabilities transferred to the good bank are all senior to those of the subdebt, then I don’t see how they could have a legal complaint about not getting to become liabilities of the new bank.
September 7th, 2010 at 6:06 am
It is all about information.
Ireland used to have many banks. It even had a fictitious bank: Ansbacher (Cayman)! None of the real banks “disappeared”. They amalgamated. Their BOOKS and RECORDS became the private property of the new institution.
No one got to see them except those obliged to keep their mouths shut. Anglo has informationa bout the political and business leadership of this great lil country. It must be kept secret, for the sake of those who have participated. The public must never see what went on! Even if it costs the public billions of Euro …….
Masters remain masterly because no one can see how the illusions work.
Politics and business.
Liquidation means that a person is appointed who might feel obligated to pursue all of the assets of the bank, including those provided unlawfully to others. They have an obligation to all the creditors, not to management, as management has ceased to exist…….
September 7th, 2010 at 6:07 am
By having a good bank there would be protection for those books and records. Copies of extracts would be relevant to the bad bank….
Nothing to see here! Move along!
September 7th, 2010 at 6:23 am
Continuing, open ended, no matter how many billions it takes commitment to Anglo
means that any creditor would be foolish to try to get debt back by court action, let alone liquidation.
Once that stops, the court actions begin. What company will they sue? The creditors including the taxpyer, will have to agree to the division of assets and liabilities in the bad bank. Else the actions will never stop until all assets have gone.
Except no one will actually protect the public good. Where do the books and records go?
September 7th, 2010 at 6:30 am
Not even the Companies’ Acts apply to the Bank of Ireland.
It has a Charter!
September 7th, 2010 at 6:38 am
@Karl
Thanks for that. The earlier post is very helpful. Most of my objectiion disappears if the value of senior liabilities transferred is equal to the value of assets transferred. This preserves the value of the original bank and presumably the remaining claims on that bank. Of course, this means that the new good bank would have to be capitalised separately. I note in your example in the earlier post the new bank is capitalised by “underpaying” in terms of liabilities transferred: €27 billion of assets but only €25 billion of liabilities. This gets dangerously close to tunnelling, but is fixed easily enough by the requirement of value-preserving transfers.
I would also note that the Northern split took place under the new UK resolution regime. Would special legislation be required for the proposed Anglo split assuming the values of existing claims are maintained? If yes, I would prefer to see a proper regime put in place rather than an ad hoc response to the Anglo case. But time may not allow this given the lack of priority the government appear to have given to the legislation.
Nice job on VB last night . . . a better explanation of the real tragedy of the guarantee than the entire Freefall programme.
September 7th, 2010 at 7:52 am
http://www.nakedcapitalism.com/2010/09/bill-black-%e2%80%9ccontrol-fraud%e2%80%9d-crushes-kabul-and-the-new-york-times-needs-to-correct-its-correction.html
Clearly, hic!….., not relevant to Ireland.
September 7th, 2010 at 8:26 am
One of the more illuminating threads on this subject relatively free of the macho “let’s torch them all” brigade.
One thing that is clear to me is that the two year guarantee of subbies, now about to expire, cost nothing in practical terms. I know Honohan criticised this aspect but I think he was just glad to have something to underscore his independence.
But it was a theoretical criticism which was seized on by the likes of Gene Kerrigan as evidence of high treason by the two Brians.
September 7th, 2010 at 8:32 am
BWII
Like the guarantee itself being the cheapest rescue in history eh?
Ciaran O’Hagan (you know, the bond guy that works for a large european bank, one that isnt on the govt fiscal teat here, that fella) was on morning ireland suggesting that some degree of if not burning then light toasting of bondies would a) not be a bad idea from a fiscal perspective and b) would not result in a “nuclear winter”.
But, im sure our soi-disant bond market participants here, the ones so proud of their analyses they hide behind noms de blog, will be along to poo-poo him soon.
September 7th, 2010 at 8:50 am
@Karl
I wish to refer Professor Lucey to the Inquisition for possible breach of your new catechism.
(Joke)
September 7th, 2010 at 8:52 am
BWII
Which sin? All mine are venal. Meanwhile, the greater sin of allowing even a penny of taxpayers money go unrecouped is being perpetrated by a fearful and imho captured government.
September 7th, 2010 at 9:35 am
While advising those who have no intentiojn of listening is a real kick to me and to many others, perhaps it is best to skip to the end game, their exit strategy?
When the world has been crippled with sovereign debt, owed to banks etc, but actually the assets of baby boomers hoping to retire, the only way to repay all this created debt is obvious. Just like all the other created aka fiat money, debt to you is money to me, it will be necessary to destroy the value of the money. From 1913 to now the US$ has lost 95% of value or more on certain scales.
So they will have to ramp up inflation. My question is: how?
September 7th, 2010 at 9:49 am
@ Brian Woods II
“One thing that is clear to me is that the two year guarantee of subbies, now about to expire, cost nothing in practical terms. “
If there had been no guarantee of debt, Anglo could have been restructured with all bondholders including the senior ones having few cards to play before the State took control. General Motors is an example of what could have been done.
Now it’s a different story.
@ Brian Lucey
Ciaran and colleagues at Société Générale, must know what it’s like to feel like toast!
Let’s not mention the war or Jérôme Kerviel!
It does get confusing though.
Wonder why Fintan O’Toole believes that Trichet wants to see Anglo kept open?
September 7th, 2010 at 9:49 am
Help is at hand.
EU Seeks Stronger Euro-Area Management Amid Fresh German Doubts
“We agree on the need to have credible sanctions,” EU Economic and Monetary Affairs Commissioner Olli Rehn said. “It’s a bit like a football game. It won’t work if the players start to discuss and argue the rules of the game with the referee every time they commit a foul.”
While euro rules foresee fines for countries that overstep the deficit limits, no country has ever been penalized. Rehn said he will issue proposals on Sept. 29 that would make it harder for deficit violators to escape punishment by forcing them to cobble together a majority to defeat a sanctions proposal.
.
http://www.bloomberg.com/news/2010-09-06/eu-seeks-to-strengthen-euro-area-management-amid-fresh-doubts-from-germany.html
.
September 7th, 2010 at 10:02 am
@ Brian lucey. Yawn at the attempts to drag this thread back into a slanging match. Did ciaran go into details about how bondholders are to be made take a hit? Can he show us in Europe where it has been done? That’s all most of us want to know. How to you intend to do it? This thread has already made a good effort at discussing many of the difficulties involved. Why don’t you stick to discussing some of the well made points on this thread. To be honest, you will be glad to know that I am no longer going to comment on this site. It has become as bad as politics.ie.
September 7th, 2010 at 10:08 am
Question:
Is subordinated debt issued under the ELG between Dec 2009 - Sept 2010 covered after September? Or does the limited extension merely mean they won’t be covering the issuance of ‘new’ subordinated debt?
September 7th, 2010 at 10:12 am
@ Karl
i agree with BWII - this detente only works as long as everyone plays by the same rules. Questioning the courage of people to quote behind anonymous names (again and again and again ad nauseum…), which should be for ridiculously easy to understand reasons (the protection of tenure does not exist in the real, sorry, non-academic world), is only going to result in tit-for-tat name calling. As BWII & Gavin noted, this was a very level headed debate up until that point.
@ Brian Lucey
im not against inflicting losses down the capital structure where (a) its possible and (b) it makes sense in the bigger picture on a cost benefit analysis. Legally speaking its very difficult outside of liquidation, cost/benefit wise there is a large debate.
I’ve simply noted three things (one of which you have had to do a complete 180 on in recent days) - 1. we cannot inflict losses on guaranteed debt or revoke the guarantee (something O’Hagan agrees with), 2. its only possible via liquidation, something which has implications for funding, 3. there is a very large political element here that needs to be accepted, and 4. the amount of ’savings’ from this is far smaller than has been suggested by the likes of yourself in the media (which effects the cost/benefit payoff - we could wipe out 70%+ of the subbies tomorrow via buyback) and we need to be honest about this rather than suggesting fantastical amounts we can toast the evil bondholders for.
Im also willing to accept that now it may be easier to inflict losses on some holders of senior debt than it previously was. This is a recognition of the movement in our position from serious to critical (we could not have inflicted losses if we appeared stable, we may be able to do so if we seem in a lot more jepoardy, although it will still be very difficult given our still relative prosperity), and also as a result of the guarantee itself coming to an end shortly (it was pointless talking about it a year ago). That O’Hagan is being vocal on this issue in recent days also suggests that he has only recently changed his mind on the issue and was not a believer in loss-infliction in practical terms previously (if he’s reading he may wish to clarify).
I’ll finish by noting two things, one which Gavin above allued to above - this would be the first senior debt loss in the current crisis in the Eurozone, and this will create a major political issue in Germany from holders of this debt, with big implications for cross-EU sovereign support mechanisms.
September 7th, 2010 at 10:14 am
@ Rob
subs are only covered by the old original g’tee, so its not covered at all after Sept 29.
September 7th, 2010 at 10:28 am
@ BW II. Do we know how much, if any, subordinated debt matured during the two years of guarantee? If some of the subbies “got out” during the two years, they have avoided the risk (such as it is) of being torched now?
(I accept of course that the actual logistics of repudiating subordinated debt other than in the context of a winding up are complicated, and it may well that it cannot be done in the absence of a special resolution scheme for banks.)
September 7th, 2010 at 10:31 am
@ Eoin
I didn’t realise that. I thought that initally the ELG covered new issuances of sub debt and that it was only going to change after September.
Thanks for that.
September 7th, 2010 at 10:34 am
@ Rob
sub debt was specifically left out of the ELG after the EU review of the original all-encompassing guarantee. This review also left out interbank deposits and short term (< 3mths) corporate deposits.
September 7th, 2010 at 10:42 am
The Times reports today that €25bn will need to be refinanced by Irish banks this month.
Didn’t this ‘wall of worry’ used to be €70bn+?
Apart from money given via Nama bons, what else has reduced this figure?
September 7th, 2010 at 10:43 am
@ Brian Lucey
The bond market participants provide a viewpoint that it just as valid as your own. Do you just want to hear your own view repeated ? Additonal colour from other areas benefits the overall discussion, a good example is on this thread from those from a legal background.
Also, criticising people for using nom de plume on an internet based discussion is an archaic objection. Some people comment because their area of business / expertise is involved and they just want to provide a viewpoint. Not all of us have a drum to beat in the media to boost our profile.
September 7th, 2010 at 10:45 am
While I have you ear Eoin, did the blanket guarantee of 2008 cover debt issued between the time of its enactment and the arrival of the ELG?
(i.e. between September 2008 and December 2009).
September 7th, 2010 at 10:55 am
@Cedar Room
Indeed. Its merely interestign to note that just as there are different and perhaps even equally valid approaches and views in academia, so too there are in teh bond markets. And a view from outside the small pond that is ireland is always refreshing.
Bond yields at 6.07, my reuters tells me…
September 7th, 2010 at 10:59 am
@ Rob S
the “wall of worry” has been massively overstated. Essentially the banks have already refinanced much of that money and have been running long of cash for the last few months. Davys put out a note this morning estimating that maybe 12bn would need to be refinanced this month (of which 4bn seems to have been done via a short term note by Irish N’wide yesterday). Even if this is not refinanced this month, the banks could just use the ECB repo window a bit more until they can issue govt g’teed bonds under the ELG in the next few months.
re g’tee - the blanket guarantee covered (with some small exceptions) all liabilities held by the banks before Sept 2008, as well as any new liabilities taken on by the banks between Sept 2008 and Sept 2010 (even new sub debt if the banks had decided to issue such, which they did not), but only UNTIL Sept 2010 (nb short term corporate deposits). In essence, many liabilities have been ‘doubled covered’ by the both the 2008 g’tee and the ELG, but this will stop after Sept 29 2010 when only “new” debt issued after Dec 2009 and qualifying for the ELG will be covered.
September 7th, 2010 at 11:09 am
So in essence, Irish banks could issue sub debt between December 2009 and September 2010 as well? I always though the ELG replaced much of the CIFs cover rather than duplicated.
Have many Irish banks issued sub debt on the CIFs since the ELG was introduced?
Apologies for stealing your time btw, it is appreciated!
September 7th, 2010 at 11:17 am
@ Rob
no, no sub debt was issued between then and now, there was simply no point as (a) its far more expensive than senior debt and (b) as it would not be g’teed after Sept 2010 there was no real point in issuing it (sub debt is generally issued to keep senior debtholders happy, and so is usually longer term in nature - if you issued sub debt with short term maturity, it would only make sense if you thought you were gonna go bust by then!).
September 7th, 2010 at 11:30 am
@ Brian Lucey
My Bloomberg tells me Greece’s 10 year bond is 11.65% so take comfort that we’re just over half as screwed as they are
September 7th, 2010 at 11:31 am
@Eoin,
“I’ll finish by noting two things, one which Gavin above allued to above - this would be the first senior debt loss in the current crisis in the Eurozone, and this will create a major political issue in Germany from holders of this debt, with big implications for cross-EU sovereign support mechanisms.”
I’m pleased and a little surprised
that you’re factoring some key politcial issues into your inevitably cogent analysis. While the option of an Anglo ‘good bank/bad bank’ was in play, the institutional EU could keep Anglo in DG COMP’s in-tray and the rest of the institutions could keep their distance. M. Trichet was at it again very recently. If Anglo goes into pure wind-down mode, that separation becomes unsustainable and the rest of the institutions have to become involved more directly. I’m not saying they haven’t been up to now, but a fiction has been maintained that now seems to be evaporating.
Obviously the bond market requires certainty on how much dead cash will be transferred into Anglo/INBS over the next decade - and how much more recap the other zombies will require. Presumably DG COMP’s decision later this month will clarify the first and the second will also become clearer. I suspect the markets will then become concerned about Ireland’s ability to service the additional debt-financing these will require on top of continued fiscal adjustment to meet the GS&P target. The institutional EU will have to come up with some mechanism to ease the burden on Ireland that will convince the bond markets as the alternative is EU Stability Fund protection.
As usual I expect some glorious piece of fudge, but will it convince the markets?
September 7th, 2010 at 11:32 am
10 year yields and spreads now at record highs.
September 7th, 2010 at 11:33 am
@Cedar Room
“My Bloomberg tells me Greece’s 10 year bond is 11.65% so take comfort that we’re just over half as screwed as they are”
Except the Greeks are borrowing at 5% from the IMF/EU
September 7th, 2010 at 11:36 am
Another corner turned,
10-year yields now at 6.05, opened at 5.74, low was 5.72
http://www.bloomberg.com/apps/quote?ticker=GIGB10YR:IND
September 7th, 2010 at 11:45 am
I thought that only the daily average was used when calculating whether or not a yield is at a “record” high.
September 7th, 2010 at 11:47 am
Does the NTMA need to go the market to close out funding for this year? Or can it squeeze enough out of short-term funding? If yes, it’s ’squeaky bum’ time (pace Sir Alex Ferguson) until the start of next year; if not, pray for some EU fudge because EU Stability Fund, here we come.
September 7th, 2010 at 11:53 am
@ Dreaded Estate
But we’re 80% funded for the year with a cushion built in, so quotign the current yield is, in the short term, a market perception indicator rather than a fundign issue, hence the Greek yield comparison.
September 7th, 2010 at 11:55 am
@Cedar Room
And how much do the Irish banks have to raise?
September 7th, 2010 at 11:55 am
http://www.politics.ie/current-affairs/137541-has-run-ireland-begun.html
September 7th, 2010 at 11:55 am
@ Cedar Room
99% funded according to the NTMA’s PR following August’s auction.
September 7th, 2010 at 11:56 am
@ Paul Hunt
NTMA has enough cash on hand to get through to Q2 2011 - no “need” to go to the markets for cash, though obviously they will not want to run down cash balances too much if they dont have too (ie they’d prefer to pay a higher yield, within reason).
You have always been way more cogniscent than most, if not all, of the political issues at play here, i think its only in recent months that i’ve given them the credit they deserve. However some people don’t seem to credit these dynamics at all, which i think misses half the trick we are trying to pull here. There’s been a huge PR battle going on behind all the fundamentals, one which we were clearly winning in the first half of the year, but which we have lost control of in recent months thanks to the uncertainty and lack of action (one way or the other) over Anglo. We need to get rid of the Anglo issue once and for all, and re-concentrate our actions on the recap of AIB and then the budget. Solid wins on these issues could yet steady the ship, but can only be addressed after Anglo has been put to bed to the Market’s satisfaction.
September 7th, 2010 at 11:58 am
Just a thought on the legal difficulty of repudiating subordinated debt other than in the context of a winding up. In theory at least, legislation could be introduced with the effect of transferring subordinated debt to the ownership of the Minister, with provision made for the payment of compensation to the affected creditors. The legislation could then specify a number of “disregard” rules for the assessment of compensation, e.g. compensation to be assessed on the assumption that there was no (further) State support for Anglo.
A similar approach was adopted to shareholders under the Anglo Irish Corporation Act, 2009: their interests were expropriated and transferred to the Minister, leaving them with a right to statutory compensation. The compensation was to be assessed by reference to various “assumptions” or legal fictions.
I am open to correction, but it occurs to me that a similar approach to the holders of subordinated debt would not fall foul on any rule against retrospectivity, provided that the rules for assessing compensation were robust and took into account the value which the debt would have ABSENT any further government support.
September 7th, 2010 at 11:59 am
@ Cedar/DE
i reckon, per the Davys note ref above, that 8bn is required for refinancing by the Irish banks this month, but the ECB window could always be used to refinance anyway. Of more importance is the deposit book post guarantee.
September 7th, 2010 at 12:00 pm
@ Deaded Estate
€26bn to be refinaced, not sure how much to be raise with prefunding, ECG repo eligibility and balance sheet shrinkage to factor in.
Do you think it won’;t be completed ?
@ Rob S
Thanks, I quoted from an older source
September 7th, 2010 at 12:02 pm
FYI…Thursday is the day to watch…
*IRELAND TO SELL UP TO EU600 MLN TREASURY BILLS ON SEPT. 9
September 7th, 2010 at 12:02 pm
@Gadge,
The 2009 accounts indicate that Anglo bought back sub debt with a carrying value of 2.571bn euro. The price it was bought for was 819m giving a profit of 1.752bn or a discount of 68%.
No sub debt was bought back in the 6 months to June 2010.
September 7th, 2010 at 12:04 pm
@ Eoin
Theres a good case for saying that the yield is drifting higher due to a lack of clarity on the anglo cost rather than a change in overall sentiment. The S&P figures have driven the market view over the last few weeks so addressing that issue and providing substance to the future of Anglo could see Ireland drift tighter ( at least relative to peers)
September 7th, 2010 at 12:07 pm
@ John Martin
Thanks for that.
This may be a stupid question, but does subordinated debt usually have a maturity date (or is it only repayable in certain contingencies), and, if so, do we know was any sub. debt redeemed at face value during the two years of the guarantee?
September 7th, 2010 at 12:11 pm
@gadge,
Not my area of expertise. But my understanding is that there is dated and undated sub. debt. The dated (i.e. having a maturity date) was covered by the guarantee; the undated was not. Presumably, Anglo has been buying the undated sub. debt.
September 7th, 2010 at 12:25 pm
@ Gadge
different levels of subordination typcially have different features around maturity/callability. You usually have either a true perpetual, a perpetual with a callable feature and then a longer term maturity with a callable feature.
September 7th, 2010 at 12:25 pm
@ John Martin
Anglo appear to have €694m undated sub debt and €1.6bn dated sub debt, undated trades in a range of 7-20c in the € and the dated at around 25-35c in the €
September 7th, 2010 at 12:38 pm
@Eoin,
Many thanks for the info on the financing space the NTMA has prudently provided. It looks like any passing frenzies in the bond markets will only become real sometime early next year - and I agree that the there is a huge PR battle that must be won to prevent a frenzy erupting then. A clear decision on Anglo and on AIB recap - plus some reasonably convincing EU fudge - and a strong government declaration on its budget framework might allow the MoF to hit the road in Oct. or Nov. (Despite the often frenzied debate on this board, I have always felt there was little Ireland could do with the banks unilaterally without throwing itself on the mercy of the institutional EU - which, at the time, was ill-prepared to cope (and is now not much better geared.) The report of the State Asset Review Group - provided the Government signals an intention to follow-through - should also help.
My concern is, even if all this is done, that serious inefficiencies in the atate and semi-state sectors and a lack of genuine and consumer-benefiting competition in the private sheltered sectors are imposing huge deadweight costs on citizens and businesses and imposing a major drag on the economy and its ability to respond to service the huge debt burden.
Any energy the Government has is being sapped in fighting the PR battles on the bank and fiscal fronts and it has none left to tackle these problems. Muscular support in tackling these problems is the principal benefit Greece is getting from EC/ECB/IMF administration - it’s getting nothing on debt-restructuring from the EU for the same reasons Ireland won’t on its bank debt.
These problems need to be tackled in Ireland or the economy will really struggle to recover. There is only so far this can may be kicked down the road until the bond markets take a serious interest in why Ireland’s economy, haven taken its fiscal and bank medicine, isn’t recovering as it should.
September 7th, 2010 at 12:40 pm
Eoin says:
I think that we need to gain a little bit of perspective on all of this. I have been studying some matters to do with policy in renewable energy generation in the United States lately. It is a massive continent, and it very hard for the federal government over there to devise policies which suit all of the different climate zones concerned. Some very dumb policies have been implemented, with apparently well meaning intentions. On TV yesterday we heard Labour day announcements from Obama telling us about the thousands of miles of new infrastructure he will build. On RTE’s Today with Pat Kenny, radio show this morning, Pat interviewed a very interesting author on the subject of cost and benefit analysis, of investment in the 2020 carbon dioxide emission reductions in the EU. What the author has concluded in his book, that we are getting terrible value for money in how we invest in the moment. The Germans are in fact one of the main offenders in this department. There is all out war going on at the moment, between the best brains on boths sides of the Atlantic as to how policy should be structured to deal with the 2020 targets. It is not good, and we do need more light and less heat in this debate. I spoke to some people in Airtricity not so long ago, about the kinds of subsidisation that Germany is allowing for solar power generation. It is trully frightening. In terms of money going into climate change policies in Europe at the moment, the author on the Pat Kenny show, mentioned a figure of €250bn per annum. The trouble I find most often with the EU zones, is the core members seem to have some very poor policies in place, and are pretty stubborn in terms of defending them. We will begin to realise over the course of the next decade 2010-20, that more than the peripheral states in Europe are going to find the fiscal net tighten around them. Ireland may not turn out to be the poster child, basket case, everyone paints it as at the moment. BOH.
September 7th, 2010 at 12:42 pm
@ All,
Smart Solutions to Climate Change: Comparing Costs and Benefits
Author: Bjorn Lomberg
Publisher: Cambridge University Press
All you financial heads should add this to your reading list. Just a thought. BOH.
September 7th, 2010 at 1:05 pm
@B O’H,
I think the issues you raise are being debated here:
http://www.irisheconomy.ie/index.php/2010/09/06/renewable-heat-and-the-cost-of-capital/
It is easy to be critical of the EU, but it is one of the most remarkable and beneficial political and economic achievements in the history of mankind, where sovereign nations - often with a long history of bloody warfare - pool their sovereignty in their common interest. I just wish there were less fudge and more democratic consent underpinning what it does.
September 7th, 2010 at 1:33 pm
Has anyone any ideas as to why more of the subbies have not been bought back by Anglo given the enormous discounts as outlined by Cedar Room above?
September 7th, 2010 at 1:49 pm
@ Paul Hunt,
At some stage on the Irish Economy blog, the climate change, energy generation debate - and the EU financial debate will have to merge to some degree. The amounts of money involved in climate change are get so big at this stage, they are impossible to ignore from the financial perspective. There are vasts amounts of the global economy becoming consumed in the climate change policies. It really wouldn’t want to turn out to be a hoax. We need to start having joined up thinking on the issue, or risk finding ourselves in a permanent state of financial collapse.
Yeah, I agree, the EU is a huge achievement by any yardstick. But all the more reason its climate change policies need to evolve too, to avoid massive funding headaches, and un-controllable expenditures. No matter what we do, the spending is going to be high. Mr. Lomberg appears to have a good handle on the figures and timescales. His perspective was interesting - that we spend enough up front on the research side of things, to save us a lot of wasted investment in the long run. We have to try to get those financial channels opened up soon. I do hope the EU is equal to the challenge. BOH.
September 7th, 2010 at 2:01 pm
@ John Martin
There has already been a liability management exercise with Anglo sub debt.
I assume they are waiting on the on EU judgment on Anglo and posssibly the expiry of the guarantee on dated sub debt before cleaning up the rest of the debt, whether thats an LM exercise or “torching” them well thats another issue
September 7th, 2010 at 2:09 pm
@ gadge
“I am open to correction, but it occurs to me that a similar approach to the holders of subordinated debt would not fall foul on any rule against retrospectivity…”
It would be arbitrarily putting ordinary creditors e.g. the amount due to the landlord of the office building - - above debt to bondholders.
These sometimes inconvenient laws are the bulwark of the modern economy.
September 7th, 2010 at 2:19 pm
@Eoin
“NTMA has enough cash on hand to get through to Q2 2011 - no “need” to go to the markets for cash, though obviously they will not want to run down cash balances too much if they dont have too (ie they’d prefer to pay a higher yield, within reason).”
I’m not convinced by this from the NTMA. http://www.ntma.ie/NationalDebt/compInstruments.php
As at 30 June 2010, there was 20.5 bn in cash on hand, as they say enough to finance the deficit through to Q2 2011. However, 8 bn of that is short-term. It can’t all be nine month or above duration. So there is a refinancing requirement to maintain existing cash balances.
Note that the deficit excludes any cash payments required by the banks (other than promissory notes, NAMA bonds), and top-up NAMA needs to pay its coupons, any spend in the capital program…
September 7th, 2010 at 2:34 pm
@B O’H,
It is connected in the sense that all things are connected, but, even with EU-wide targets on GHG emissions and tighter EU-wide fiscal governance in the future, individual member-states will continue to have discretion as to how they finance - or facilitate the financing of - emission reductions. This will involve a shift from the taxation of productive labour (a ‘good’) to the taxation of land (where rents are earned) and that of carbon emissions (a ‘bad’). And yes, what the EU is driving is wrong-headed and likely to be expensive and ineffective, but this is separate from the issues being discussed here.
September 7th, 2010 at 2:42 pm
BOI doing an op on their subbies, extending the maturity and coupon ahead of the call date (23/9/10)
*BANK OF IRELAND OFFER FOR CANADIAN DOLLAR LOWER TIER 2 NOTES
September 7th, 2010 at 2:46 pm
@Eoin
Can’t access the Davy note due to a paywall but did it (or anyone else) do a breakdown on what is owed before Sept on a bank / debt type basis?
All I know is Irish banks have €26bn due but not a per institution breakdown.
Also, Anglo apparantly have €2.5bn worth of Sub Debt due but not sure how much is due from the other banks.
September 7th, 2010 at 2:53 pm
Also, breaking headlines, unconfirmed but decent enough to hit Bloomberg, that EU has approved extention of Irish g’tee to cover all short term interbank and corporate deposits until 31 Dec 2010.
@ Hogan
you can either believe the NTMA or not, your call. Obviously a cash situation cannot take account of any currently unscheduled cash requirements, as that would basically amounting to guessing, which is never a great basis to form an opinion.
September 7th, 2010 at 3:04 pm
@ Rob
its in a graph as opposed to a table, but here’s what it looks like (didn’t print it off and crack out the ruler!)
INBS 4bn (refinanced yesterday apparently)
ANGL 6.25bn
EBS 1.25bn
ILPM 3.5bn
BOI 4.5bn
ALBK 7bn
Dont think any of it is sub (not 100% sure on that though, certainly doesn’t look like AIB, BOI or ANGL have).
September 7th, 2010 at 3:07 pm
@Eoin
“you can either believe the NTMA or not, your call. Obviously a cash situation cannot take account of any currently unscheduled cash requirements, as that would basically amounting to guessing, which is never a great basis to form an opinion.”
Eyes wide shut?
Well, the capital program is not unscheduled.
The rollover of short-term debt is not unscheduled (except in the fact that a date hasn’t been set).
NAMA must have some idea of whether it will make its coupon payments from cash-flow - it operated under the aegis of the NTMA, so I don’t see how it should come as a surprise there either.
As to guessing, it has been a great basis on which to operate for the last three years or more. Guesses are malleable, open to the facts, arguable. Opinions, generally are not.
So it is not my opinion that the NTMA are not telling the truth, therefore belief/disbelief doesn’t come into it. I’m guessing they’re operating under the same pressures as the rest of the state, viz. the need to put a positive glas on any statements they make and refute the tone of any negative statements that others make.
September 7th, 2010 at 3:35 pm
Now that the government has all but admitted that Anglo is being “thrown to the wolves” we will now observe the process of transition to majority public ownership of the larger similarly named bank .
Ironically the Pontius Pilate like behaviour, last week, by Mr Trichet regarding Anglo may also, IMHO, turn out to be a blessing in disguise.
By placing placing the “Anglo problem” firmly in the domestic Governmentś court the ECB may have offered the opportunity to Ireland to argue for an extension of the public finance deficit reduction period out to 2016.
September 7th, 2010 at 3:45 pm
@ Paul Hunt,
The other general point that Lomberg seems to return to time and again - and it is a very similar point to take made in relation to banking bailouts in Ireland - is that climate change only represents a percentage of the total problems facing the globe in 2010 and far beyond. I suppose that is another very useful part of Lomberg’s new book, which might interest many of the Irish Economy commentators here. How do we deal with a situation in which one particular issue - be it climate change, or a financial meltdown - monopolises all of the attention and resources of a society? I heard a comment last weekend for instance, that unless the media had the banking crisis, what would they talk about? One of Lomberg’s examples was a citizen who was willing to donate €10 to help combat climate change. Say about €2 worth of the €10 actually ends up being spent to achieve something useful - would it not be more worthwhile spending €10 to combat some problem facing the world - where we could get €10 worth of return? I think the same argument applies to the banking crisis in Ireland. And because politically, or economically, solving the banking crisis makes us feel good about ourselves, or whatever - how much value out of that €10 are we lightly to get? BOH.
September 7th, 2010 at 3:52 pm
@Livonian,
Excellent idea. We could use the 1916 centenary jolly to celebrate the full transfer of monetary and fiscal sovereignty and much of economic sovereignty to the institutional EU.
September 7th, 2010 at 4:03 pm
@B O’H,
I haven’t read Lomburg’s latest opus, but there has been considerable media coverage. He is correct about the huge global challenges that exist in addition to climate change, but he may be banging on about these to cover/justify his change of view that climate change should be higher up the list of priorities than he thought previously. He is a bit too ‘top-down’ for my liking and I’m not clear how the resources (though not huge when compared to global GDP) he reckons are required would be marshalled and applied.
I’m more for ensuring ordinary citizens have access to resources and are empowered to make choices. If they mess up, they’ll learn.
September 7th, 2010 at 4:10 pm
@ Micheal Hennigan
“It would be arbitrarily putting ordinary creditors e.g. the amount due to the landlord of the office building - - above debt to bondholders.”
Not necessarily so. Surely the more appropriate comparator for the treatment of the holders of sub debt is the position of the shareholders, not trade creditors. The mooted legislative amended would value sub debt on the assumption / legal fiction that no further government support would be forthcoming. Anglo would be insolvent without the constant injection of funds by the government, and in such a scenario the statutory compensation would be nil. The fact that Anglo might have paid other trade creditors day-to-day expenses, e.g. rent, could be justified on the basis that same were necessary payments to keep the bank running. Certainly it would be difficult to argue that such payments constituted a “fraudulent preference”.
September 7th, 2010 at 4:28 pm
A Eoin Says:
[Quote]
Also, breaking headlines, unconfirmed but decent enough to hit Bloomberg, that EU has approved extention of Irish g’tee to cover all short term interbank and corporate deposits until 31 Dec 2010.
[/Quote]
Revealed in Tribune last week, along with the O’Hagan stuff:
It is understood finance minister Brian Lenihan is leaning towards extending the original bank guarantee to the end of the year for debt and deposits not covered by the ELG.
This would keep vulnerable short-term corporate deposits and senior unsecured debt under state protection – and buy the government time to bring its two guarantee policies into alignment from January.
September 7th, 2010 at 4:32 pm
Now press released:
Minister announces extension of the short term guarantee
The Minister for Finance, Mr Brian Lenihan, TD today announced that the Government guarantee for short term bank liabilities, including corporate and interbank deposits as well as debt securities would be extended from its current expiry date of 29 September to 31 December 2010.
A State guarantee will therefore be available for both short- and long-term liabilities up to the end of the year. This is an important support to the Irish banking system facilitating their access to both short- and longer-term funding to help maintain the overall stability of the banking sector and complements the broad Government Strategy to restore fully the banking system and maximise its contribution to overall economic recovery.
This modification to the Guarantee was recommended to the Minister by both the Governor of the Central Bank, the Financial Regulator and the NTMA. As is customary the Department will be liaising with the European Central Bank on this measure. An approval by the European Commission under the State aid rules needs to be secured before the guarantee can be extended.
Following the Minister’s meeting with Commissioner Almunia yesterday he is satisfied that Commissioner Almunia is aware of the Irish situation. It is intended that some technical details relating to the implementation of this modification will be agreed with the European Commission in coming days.
September 7th, 2010 at 4:33 pm
Paul Hunt says:
Speaking about top down, I was very interested to listen to Conor Shekan’s views, head of the school of spatial planning in DIT, on a webcast recorded back in 2009. His view was that we have received an opportunity in Ireland to re-organise ourselves to provide for a better society and plan accordingly, due to the recesssion. His argument in the webcast makes a lot of sense. I was interested to see his argument, that we need to drive decisions from the regional back down through the smaller levels, and finally back down to the level of urban councils. Skehan argued that in eastern region of Ireland at the moment, it operates the other way around. Clearly, in light of the arguments about the Poolbeg situation etc, what we do see clearly is a city council driving decisions which will affect an entire region’s development over an extended period of time. Conor Skehan’s talk is only about 30 mins in three parts and is well worth a listen. BOH.
http://www.thefuturesacademy.ie/videos
September 7th, 2010 at 4:41 pm
@BOH
What we have is a minister desperately hoping to be re-elected and making decisions based on that. Witness his inaction on the DDDA until forced to.
September 7th, 2010 at 4:45 pm
@ Neil
So now we have a guarantee on short-term interbank deposits but not for longer-term ones?
I mean none (of any length) were going to be guaranteed after Sept but now we have approved an extension for short-term ones???
Have I read that wrong or are interbank desposits now guaranteed the same as senior debt?
September 7th, 2010 at 4:47 pm
Also, where is the link for this hiding?
September 7th, 2010 at 4:49 pm
@ Neil,
Instead of hi-jacking KW’s thread any further, I decide to hi-jack on Richard Tol’s for a little while instead! BOH.
http://www.irisheconomy.ie/index.php/2010/09/07/hot-air-over-poolbeg/#comment-71233
September 7th, 2010 at 4:54 pm
@ Rob S
http://finance.gov.ie/documents/pressreleases/2010/notesfored.pdf
September 7th, 2010 at 4:59 pm
http://finance.gov.ie/viewdoc.asp?DocID=6481&CatID=1&StartDate=01+January+2010&m=
September 7th, 2010 at 6:28 pm
The way this might be panning out is that the ECB will buy bonds if they look like they’re hitting 5.9/6.0
Will probably buy on Thursday too. I wonder if what we’re really looking at is a credit stream at a slightly higher rate but one which is less politically sensitive for all parties than tapping into the IMF:Ec bailout fund.
September 7th, 2010 at 7:00 pm
@gavin s
‘as bad as politics.ie’
Politics.ie is a good website and a shockingly open forum on this benighted isle. So where to next for you? Dusty journals? The internet stratosphere?
September 7th, 2010 at 9:43 pm
I still can’t understand if long-term (i.e. in this case longer than 3 months in duration) interbank deposits are covered under this new announcement or is it just the short-term ones.
September 7th, 2010 at 10:09 pm
@ Rob
No, long term interbank deposits are not covered.
September 8th, 2010 at 1:08 am
[...] Now, however, a new reason has emerged to be against the new bank proposal. I had questioned here whether Anglo would have considered transferring subordinated debt liabilities to the New Bank. Now, Sunday Tribune journalist, Neil Callanan, informs us that Anglo’s management have informed him that their plan is to transfer some of the bank’s subordinated debt “to round out capital structure” (Thanks Neil.) This is a bad idea on so many different levels. The idea about “rounding out the capital structure” sounds plausible but is, in fact, nonsense. International regulators have generally encouraged the issuance of subordinated debt because small numbers of professional bond investors may be better positioned to provide “market discipline” for the bank’s management than the shareholders, who tend to be poorly organized and easily deceived. The idea here is that the subdebt holders will lose all their money if the bank becomes insolvent, so they’ll pay close attention. Now we have a bank which is insolvent and whose subdebt holders should get nothing. And the bank’s management wants to hive these bonds off into a new institution, fully capitalised at the expense of the Irish taxpayer, which would see the debt paid back in full. One can only assume that Anglo’s management are aware that New Bank could “round out its capital structure” by issuing new subordinated debt, in return for which the state-owned bank would actually receive some money. But, for some reason, they would prefer to see the bank take on a legacy liability of Sean Fitzpatrick and co and pile it onto a new state-owned institution. The question is why they would want to do this. The Irish Economy Blog Archive Anglo?s Plan to Save Subordinated Debt Holders [...]
September 8th, 2010 at 10:08 am
So even deposits (corporate only I guess) that were lodged prior to ELG, hell prior to the Original Blanket ban are now covered?
But all debt liabilities (bar deposits) covered post September 29th still have to have been issued during the ELG?
September 8th, 2010 at 10:36 am
@ Eoin Bond
Just off the phone with the DOF there who assure me that long-term interbank deposits ARE also covered under the announcement yesterday.
Really difficult to get that from the announcement though.