Anglo Announcement: A Multiple Systems Failure

Anglo Irish Bank’s failure has become the single most costly fiscal problem in the history of the Irish Republic. The citizens of this state should at least expect to see evidence that the problem is now being managed in a competent manner and to be clearly informed about what is going on. Today’s announcement is a failure on so many levels that I can honestly say that, even by the low standards that have been set up to now by this government in its handling of the banking crisis, I fear we may have reached a new nadir.

Three issues are worth pointing out:

Communications Meltdown: The Department of Finance released a minimalist statement this afternoon on its website. However, much of the media discussion of today’s announcement has revolved around an FAQ document which, as of now (almost 11PM) the Department has not seen fit to release to the Irish public. On this site, we have been able to read the FAQ because anonymous commenter Eoin received it and posted it here (Thanks Eoin, much appreciated). I don’t think I’m giving away any secrets in saying that Eoin received this document because he works for a financial institution. Think for a moment about this as a communications strategy: Guys who work for banks get to read the answers to key questions but the taxpayers who have bankrolled this disaster don’t. For sheer tin ear, the Department officials deserve to be sent for three months compulsory service at the Terry Prone School for fake sincerity.

Mixed Messages to Depositors: The only, and really I mean this, the only advantage of the Good Bank\Bad Bank split was that it could reassure depositors that their deposits were going to be attached to a fully capitalised, fully functioning bank. Preventing a deposit flight from the bank is in everyone’s interest. That their deposits would not be attached to a fully functioning bank was clear from the DoF’s statement, which established that New Bank would not be making loans. However, the statement tried to reassure that “Depositors with the Funding Bank will be completely insulated from the future performance of the rest of the current Anglo Irish Bank loan book.” However, the FAQ (thanks again Eoin) informed us that

It is anticipated that the Asset Recovery bank will be funded by the Funding bank. Funding will be provided by the Funding Bank from normal sources. As the Recovery Bank reduces in size its funding requirements will also reduce.

In other words, if you have a deposit with Funding Bank, that bank’s assets are loans to the Asset Recovery bank, which (word has it) is insolvent. A statement that the deposits were being transferred to, for instance, Irish Life and Permanent (backed by NAMA bonds or other Anglo financial assets) might have been reassuring to depositers. Today’s messages to depositors were mixed and not reassuring.

Drawing a Line Under It/Message to Sovereign Bond Market: The sovereign bond market is crying out for some sign that we’ve got a final credible figure for the cost of Anglo Irish Bank. What did we get today? Assurances that more technical work would be done to figure out how much capital would be needed. Almost two years after Brian Lenihan talked about “going deep into the banks”, a year and a half since we were told that NAMA would provide clarity about losses and help us move on, over a year since new supposedly highly qualified management were put in place to preside over the bank, we’re being told that we need more time to look at the books? Give us a break.

Note that I haven’t even discussed any of our old bugbear issues of risk-sharing with bond holders (Lenihan indicated today that unguaranteed senior bond holder would be looked after.) The point is that even when judged against what the government wants to achieve, today’s announcement can only be judged as a complete failure.

98 replies on “Anglo Announcement: A Multiple Systems Failure”

And worst of all it makes no sense.

Unless the government is planning to actually default on the un-guaranteed senior bonds what advantage is there to the new structure?

As the most I can see happening is buy backs of subordinated debt and maybe senior debt, there will be no actual default. this could just as easily have happened in an un-split Anglo.

DoF are a joke.
I realise that this may sound like a cliche but the DoF has been shown up for what it is throughout this entire financial mess. From committing this country to penury on 29th Sept 2008, to this latest cockup as regards the splitting of Anglo and the cockup about what it says in FAQ document.

Is the confusing behaviour of the government and the Department of Finance due to its total powerlessness?

The EU are increasingly calling the shots as the government/Department of Finance have been unable to deal with the Anglo-Irish debacle.

It will be a tall order for any new government to sort this mess out but I think it is now time for a new approach to the problem.

@Aidan C
I don’t think so. It smacks more of not liking the answers they were getting from Europe and a culture prevalent in Ireland of pulling strokes.

“I don’t think so. It smacks more of not liking the answers they were getting from Europe and a culture prevalent in Ireland of pulling strokes.”

Pulling strokes eh? Guess which party would be good at that…

The problem is that although Mrs Murphy might believe them I don’t believe the markets will and then when you see quotes like this in the WSJ

“It’s déjà vu all over again — but this is different from Greece,” said Daniel Gros of the Center for European Policy Studies in Brussels. If Ireland’s banks “can’t refinance themselves, the numbers get very big very quickly,” he said.

Mr. Gros pointed out that loans to depleted Irish banks from the European Central Bank were about 40 percent of the country’s G.D.P., a dynamic that he contended was unsustainable and would ultimately lead to Ireland seeking assistance from Europe and the I.M.F.

“I think things are going to get worse,” he continued. “And over time, the E.C.B. will have to refinance a very large part of the Irish banking system.”

you think its only a matter of time now.

The Department officials deserve to be sent for three months compulsory service at the Terry Prone School for fake sincerity. GRINS! looking at the results her school produces, I do not think they are doing a good job there to start with.

I am really glad to see others here also emphasize the underlying timeframe we are confronted with. I started to think I might expect too much…. NOT!

By any standards, let’s look to our Yankee friends, they already, whatever we might think of their efficiency, had public hearings where Loyd Blankenfein was slowly roasted. Disgracefully, public hearing were refused to the Irish people, which on its own I had hoped to be enough reason for increased Kildarestreet population on a regular basis.

Iceland has a 2.000 pages public report on the banking crimes since months.

Here we are told by the handsomely, I think he is still 4th on the global list, paid leader of this country that an in depth technical blah blah is required to find the final numbers.

Who on Earth would still believe this mambo jambo, after all the time that has passed with no results, but one PR stunt after the next?

I am certain, it is not only the credibility of the banks that is shattered to pieces on the international stage, but more important so the credibility of our political leaders.

This is the same department of Finance who put €4Bn of our cash into the INBS on Monday , half its loan book ( after the writeoff in the annual report in April).

I am sure they also intend to put half the current loan book into Anglo, what is that anyway , half of €70bn ??

And pay interest ad infimitum on the €23Bn of deposits too, sure why not.

Nothing is beyond the Dept of Finance any more 🙁

Smacks of Sept 2008 all over again. Spooked into action by the bond markets this time.

Minister Lenihan: “the level of interest that was being charged for Irish debt on the bond markets was troubling to the Government and had prompted it to bring forward the announcement of its decision on what to do with Anglo” and his department had looked at the Anglo management’s plan for a good bank but decided “that that wasn’t a viable option in the current climate”.

What’s more he said the European Commission’s views on State aid were not a decisive factor in the final decision arrived at by the Government.

“Resolution of this, our most distressed financial institution, is essential to the promotion of confidence and stability in our financial system,”

Sounds like we may have gone off-side again to prevent another run.

Couldn’t Anglo just have issued a government backed bond to itself like INBS, repo’d it with the ECB and used whatever cash needed to repay the depositors.

Almost two years after Brian Lenihan talked about “going deep into the banks”, a year and a half since we were told that NAMA would provide clarity about losses and help us move on, over a year since new supposedly highly qualified management were put in place to preside over the bank, we’re being told that we need more time to look at the books? Give us a break.

The key here to clearing up the confusion is the intertwinement of the fortunes of Anglo with those of a very substantial part of Fianna Fáil’s money base. Therefore the extreme lengths that this bunch are going to, and the glee with which FG propose winding Anglo up.

By keeping a bank, even better two banks, operating, the books and records will never be made available by means of a liquidation process.

It is all about keeping transactions under wraps!

It appears to be yet another manifestation of the cute whorism political culture of the last decade and a half.

I suppose what do we expect, these are, after all, the same guys who brought us classics like bench marking, e-voting, crazy property tax breaks, the cheapest bailout in the world (The Bank Guarntee), NAMA and now the 1to2 bank wind down.

Every developed country has a financial crisis from time to time. What gets to me is how simple and predictable ours was, how slow car crash like the aftermath has been and that for such a great and capable people we allow ourselves to be led in such a half assed manner.

Thus ends rant.

I can’t disagree with Karl about the communications strategy. One possible advantage of the confusion, however, is that all the details may not have hardened. There might still be a chance to improve the proposal, so it is worth looking for a best-case scenario for how it might work.

As I see it there are three main objectiives for the resolution:
1. To retain despositors as a (low-cost?) source of off-state balance sheet funding;
2. To maximise the recovery value of the Anglo assets; and
3. To share losses with non-depositor legacy creditors post guarantee.

The challenge facing the government is that the three objectives pull in different directions. The question is how the proposed balance sheet split might improve the underlying tradeoffs.

Taking some liberties given what we know, here’s how I think it might be made to work:

First, for the funding bank, I assume it receives the deposits (liabilities) and an equal value of assets that comprise NAMA bonds and an additional bond issued by the recovery bank. This bond would be guaranteed by the government. The depositors should then feel insulated from the fortunes of the recovery bank and are willing to keep their funds in the funding bank.

Second, the zero net asset transfer from the recovery bank to the funding bank should mean that the remaining bondholders in the former do not have a legitimate legal complaint. I assume that the claim of the funding bank via the bond ranks equally with the senior debt holders in the recovery bank.

Third, now assume that the recovery bank is insolvent (or will become insolvent). It should now be relatively straightforward to impose losses in reverse order of seniority on the shareholders and bondholders. Note that the State is bearing substantial losses both as the shareholder and as the guarantor of the bonds issued to the funding bank. Effectiively, the State is taking the depositors’ share of the losses, and so the senior debt holders should have no complaint.

One possible complication is that the insolvency interferes with the ability to maximise the recovery value of the assets, but this seems surmountable. I have also left aside the issue of how the existing capital of the bank is divided between the two entities and also the issue of the interest rate paid on the bond issued by the recovery bank. These again seem surmountable.

The bottom line is that I think this structure has some potential given the difficult undelying tradeoffs , but we just do not know enough to say whether the actual plan will make matters better or worse.

“now assume that the recovery bank is insolvent (or will become insolvent). It should now be relatively straightforward to impose losses in reverse order of seniority on the shareholders and bondholders. ”
or we could, much much easier two years ago have “now assume that Anglo Irish Bank is insolvent (or will become insolvent). It should now be relatively straightforward to impose losses in reverse order of seniority on the shareholders and bondholders. ”
John – f they didnt do it then, why do you think they would do it now?

Brian,

I think perceptions of the likely bond market reaction have changed. Exibit A: Ciaran O’Hagan’s post today.

@D_E
“Couldn’t Anglo just have issued a government backed bond to itself like INBS, repo’d it with the ECB and used whatever cash needed to repay the depositors.”
Yes, yes, yes. Or another promissory note.

At this stage the national debt doesn’t matter. What matters is the cost of resolution and the sustainability. Getting money from the ECB at 1%, with low haircuts on it and a guarantee that for distressed bank debt that has to continue long-term is what the state should be pushing for.

Since we haven’t set up our own SLS, we must use the ECB as one. Zombie banks have to be given time to write down their debts. That is the requirement to keep zombies at basic functioning level until either inflation brings a reduction in real prices or international purchasing power brings cash back into the Irish property market.

The alternative is to let prices fall and let the banks fall too.

Personally, I think the latter option is, in the long term, the best one, but we are two years into the path of zombie banks. If we are to have zombie banks and a stagnant deflation in the property market, for goodness sake, do it properly. Secure the financing. Recap by promissory note. Take over the banks and have done with it.

John
Hmm. So, in essence, are we now saying is maybe seniors are in play? Gosh, wouldnt that be brave for someone to come out with….

@ Karl (& all)

i didnt even receive that directly btw, i got that from a broker (Davys), so the only people who received it were probably primary dealers/main irish banks n brokers/key business journalists.

The EC statement is available at the link below. Sr Almunia says “I welcome the clarification by the Irish Finance Minister on what would now be the Irish preferred option regarding Anglo-Irish. I view this new option positively as it would deal better with the distortions of competition. However, a number of important aspects still need to be clarified, and a new notification received, before the Commission is in a position to finalise its assessment and to take a decision”

In other words the restructuring plan submitted in May 2010 is rejected, an option tangentially referred to in that plan is now the new preferred option following Brian Lenihan’s meeting with Commissioner Almunia on Monday/Tuesday this week and the Irish government has now to produce a restructuring plan (Version 3.0) to submit to the EC for consideration (third time’s a charm!).

http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/395&format=HTML&aged=0&language=EN&guiLanguage=en

Eoin
RTE nor TodayFM had the Q&A, as of lst night at six pm. Its actually quite depressing that they are so awful at their jobs.

@Karl

Rather overplayed indignation and surprise, surprise, the fan club are loving it. (That opener should ensure this post has a very short life.)

The main clarification that is needed is what is meant by “depositors are completely immune from Anglo’s assets”? This statement may force John McHale’s suggestion, if it was not already the intention, that the loan to ARB will be government guaranteed, let’s wait and see.

Standing back from the communication aspects, I am surprised that there is not a welcome in this space for what is in effect a Resolution Scheme. If things get much worse, the option does now realistically open up of renegotiating the rights of ARB’s creditors, it even opens up the possibility of liquidating ARB. The difficulties of either course in the existing situation have been well discussed here and they are definitely reduced by this innovative restructuring.

What exactly will cause the champagne corks to pop round these parts? A feneral pyre of bondholders?

@BWII
“What exactly will cause the champagne corks to pop round these parts? A feneral pyre of bondholders?”
Costings…

Detailed, honest attempts at costings even Hogan. A set of estimates that are not obviously prima facia wrong.

The most depressing aspect of government banking policy – beside the obvious and much-referred-to bailing out of bond holders – is the paralysing effect it has had on the property market in Ireland.

Rents are the only element of our domestic cost base over which we have any real control.

Despite a low population density, net emigration and a sickening surplus of new housing languishing empty, rents in Ireland have actually stabilised and may even be on the rise.

Worryingly, the latest CBRE index of office rents shows no Q2 decrease in Dublin office rents. The same data set puts Dublin , at € 376 p sq m, ahead of all German cities except Frankfurt, as well as Brussels, Amsterdam, Copenhagen.

http://www.cbre.eu/portal/pls/portal/CBWEB.utils_news_public.show_image?id=5136&field=doc1&trans=n

The same bad news from Daft, which shows rents stabilising on residential property.

http://www.daft.ie/report/Daft-Rental-Report-Q2-2010.pdf

This is not good news. It does not reflect the underlying economic conditions, but rather a deliberate and wrong-headed policy to shore up the housing market via Nama and zombie-bankism.

Yeah, it’d also be jolly nice to have a detailed plan for balancing the deficit. Bring some confidence that government spending is going to be X next year (with savings and taxes made here), Y the year after (with savings and taxes made there) and Z the year after that (with savings and taxes made there). Instead we’re waiting for the fairies to deliver world economic growth that will let us export our way to freedom. Somebody else dig for victory, will ya?

Imagine you are an Anglo un-guaranteed bondholder this morning. Up to now you have been part of the greatest rescue mission undertaken by this state. Now you hear there are plans to move the women and children off on to a new ship. You are uncomfortably aware that of the men left on the sinking ship most have a secure helicopter lift in case the ship goes down. Get the picture? No wonder Anglo bond yields jumped 80bp on this announcement.

What we are seeing is a renegotiation but by subtler and less contagious methods. For what else is a buy back of debt at a discounted price other than renegotiating your face obligation to pay pack in full.

Clever, very clever.

The reason why Davy’s etc had the FAQ is quite simple.
They probably wrote it.
Afterall, they as bond peddlers have called the shots throughout the last 24 months, protecting their clients, and the government has just done as it was told.

@ BW II Do you read Brian Lenihan’s comments that “Some of the bond holders are guaranteed, some of the bond holders are not guaranteed. Those who are not guaranteed will have their position guaranteed in due course” as meaning that unguaranteed bondholders will be offered the chance to swap existing bonds for ELG bonds with a lesser face value? (As Hoganmew has speculated)?

From a legal viewpoint, I am not convinced that the split avoids the much voiced concern that depositors and bondholders rank pari passu on a wind up. If bondholders and depositors do rank pari passu then the bondholders have a claim to their share of NAMA bonds on a winding up. However, the split seems to involve taking valuable assets out of the bank e.g. NAMA bonds, and this is being done for the benefit of the depositors. If you strip out valuable assets from an insolvent company in a blatant attempt to favour one class of creditor, you run the risk of legal challenge based on fraudulent preference. If the Government genuinely intended to impose pain on unguaranteed bondholders, it seems that further legislation is required: under existing law the split is open to challenge.

The penny has dropped, it all falls into place. The key is Q10 of the Q&A. ARB is NAMA II. What do we know about NAMA funding? Its bonds are government guaranteeed and repo-able. So too will be NAMA II bonds. The DOF statement contains no sleight of hand.

Why can’t people in this blog acknowledge that a terrible beauty has been born?

@gadge

But is it not relevant that an even higher value of liabilities is moving with the NAMA bonds? Of course, a new liability – the bond issued by the ARB – is being created as well. Isn’t the situation different with no net change in the value of the bank on which the bondholders have a claim.

@gadge

Not sure what the MoF intends for the unguaranteed stuff, I suppose he has to be circumspect.

The little legal knowledge which I have picked up from yourself certainly underpins the rest of your comments. The bondholders have been stuffed. But it seems that ARB will be capitalised at least to be consistent with the current book value of the assets. I would be interested in your opinion but it would seem difficult for the bondholders to argue that they have been stuffed. The key thing is that the markets do not seem to be viewing this as a betrayal and the impact on sovereign yields has been positive.

Of course if the assets deteriorate significantly the spectre of liquidation and a true stuffing/toasting looms.

A terrible beauty has been born.

I listened to Alan Dukes on P.Kenny.
As a Joe Public, I am still very disoriented as to what is really going on in this merry dance/workout between the 2 legally separated banking entities.

Our public interest director brought the quotient of so-called “performing loans” into the equation for the ARB.

Weren’t they originally booked to NAMA as part of providing its positive cashflow ?

Am I cynical or is this just robbing Peter to pay Paul ?
More accounting doo-doo and three card tricks?

And, in any case, we are back to what is meant by a “performing loan”.
The estimate of what were performing sounded very optimistic to a sceptical but somewhat informed member of the public.

@BWII
Welcome to loonsville. You may dream, but it is not likely.

The structure and the accompanying spin are attempts to prevent a run on deposits during wind-down. There is nothing beautiful about crystallising losses, but this is something that should have been done shortly after Anglo was nationalised.

As gadge points out, existing unguaranteed bondholders will be protected, probably to avoid any looting claims. Almost certainly the ARB will look to issue debt in the market, so ‘stuffing’ its current funding is not likely. As I say, the best we can hope for is that there is a small haircut as old bonds are swapped for new. Maybe we can hope for CoCos or some such, but I doubt it.

As we will now have two banks where before there was one, there will be an increased capital requirement (to ensure both banks are capitalised). This will happen whatever value are put on the assets of ARB. In part, it will depend on the FR – what level of capital do two wind-down banks need?

If we get some numbers, and Mr. Dukes on TodayPK said they would be conservative, we can at least have a line drawn under it.

I am a little perplexed that no residual value will be sought from the banking franchise – a small bank sold quickly out of the remains of Anglo in a trade sale would surely both offer some return to the taxpayer and a new entrant into the Irish market. This is not to say that Anglo should have been permitted to continue under a new guise, just that there is some value, however small, that will now be liquidated.

@ John McHale

It is difficult to say until we know what exactly is going into the new bank. But for the sake of argument, lets take an oversimplified example and assume that X bn worth of deposits (liability) and x worth of NAMA bonds. At first blush, there would appear to be no net loss to the ARB in that an equal balance of assets and liabilities have been taken out. But its the selection of the creditors that is the problem: the bondholders have an equal claim to the assets of the existing company as the depositors. The effect of the scenario above is to allocate the benefit of the NAMA bonds to the sole benefit of the deposit holders. There must a legal doubt as to whether it is legal to prefer one class of supposedly equal creditors in this way.

From a purely legal perspective, I am not convinced that we are any further down the road of imposing losses on un’g debt. (It is a matter for others to argue whether to impose such losses makes sense economically, given adverse market reaction).

Why are we/they so concerned about saving Anglo depositors. Its not as if this bank ever had any “normal” depositors, who were likely to for a queue in the street to withdraw their few pounds.
BTW just caught the tail end of Pat Kennys chat with Alan Dukes. He claims to have been enlightened by the discussion.
Is the next item a similar split in AIB or can the two new banks be split still further:
Big fleas have little fleas,
Upon their backs to bite ’em,
And little fleas have lesser fleas,
and so, ad infinitum.

Hey who gets to live in the fancy new HQ, (or will they just get the chinese in to build another wall), and who will get all the new CEO etc jobs thus created

If things get much worse, the option does now realistically open up of renegotiating the rights of ARB’s creditors, it even opens up the possibility of liquidating ARB. The difficulties of either course in the existing situation have been well discussed here and they are definitely reduced by this innovative restructuring.

I’m with BWII on this one, I think. It does seem that restructuring the (non-depositor) creditors would be easier under the new arrangement, and that this may be part of the intention behind the reorganisation. The government is apparently still indicating that it doesn’t intend to restructure the Anglo creditors, but there are two ways to reconcile the government’s words with the idea that the reorganisation is intended to make it easier to do just that. The first is tactics: Lady Bracknell teaches us that a restructuring should come upon a bank bondholder as a surprise. The second is that the government hasn’t in fact decided on a restructuring, but it wants to have the option open as a Plan B. In fact, I think it quite likely that the civil servants and ministers are now saying to each other “aah, let’s give it another year” (or maybe another two years, or another two quarters) “to see if the global recovery takes off, or the property market firms up a bit, or something” (maybe an expanded EU bank digout?) “turns up, and if not then we’ll think about facing into a restructuring.” Of course after two quarters (or whatever) go by and nothing very good turns up they’d then be tempted to postpone the evil day by waiting and seeing for another two quarters, but so it goes. Another possibility is that they’re planning to act in the event of a Spanish bank or sovereign restructuring, at which point the EU pressure not to restructure Anglo would be largely gone and the markets will assume the worst about us anyway. A really cynical possibility is that the politicians involved are happy to shift the task of restructuring Anglo onto the backs of the next government.

Of course, doing something which (intentionally or not) eases the possibility of a restructuring has its risks. If guaranteeing Anglo and piling it full of deposits had the effect of burning the State’s bridges, then the current actions partly repair them, and you can expect the soldiers in both armies to notice.

It does seem that restructuring the (non-depositor) creditors would be easier under the new arrangement

Okay, I certainly wouldn’t bet my life on this. But for all I know it may, or it may at least seem to someone in government that it would.

@ BW II. Again, the devil is in the detail, but if as appears to be intended the ARB is fully capitalised at least at book values, then any complaint by the bondholders that the depositors have stolen a march on them cd be resisted on that basis. I do think, however, that you might be giving the Government too much credit in suggesting that the split is a clever answer to the absence of a proper bank resolution regime. IMO new legislation is still required.

I am going to keep well away from your “NAMA II is beautiful” argument: I suspect it wont go down well in these parts 🙂

@gadge

I don’t want to put too much emphasis on my hypothetical case outlined earlier in the thread. But I assumed there would be a bond would make up the difference between the loss of deposits and the NAMA bounds. The holders of this bond would also be available for loss sharing with the existing bondholders. The holder is of course the funding bank, but I have assumed that it is government guaranteed. I don’t know the legal niceties, but I can’t see how the bondholders would have substantive ground for complaint.

Any legal method of extracting something from senior unsecured short of default would be welcome but it will not contribute much. There is less than 5bn available to haircut. Undoubtedly some will have escaped before the split is up and running.

We are still facing a loss of 30bn plus in total offset by perhaps 2-4bn from subbies and seniors. To achieve more than that involves defaulting on state guaranteed debt (the Lucey solution) or on obligations to the ECB/CBI (the Mc Williams solution). So in essence, this proposal does not mive the situation on a whole lot.

There is still precious little debate on the option facing us with AIB. Some progres on asset sales/ NAMA transfers is needed please. In addition as Ciaran O’Hagan eloquently argues on another thread, a credible fiscal strategy needs to be re-iterated. This will involve default on other state obligations- quangos/salaries/transfers/manning levels and more taxes.

@gadge

I think you are right this needs new legislation just as nationalisation needed legislation in the first place. But it should be relatively uncontentious. If I was a bondholder I would be feeling sore, see above my “women and children being evacuated” metaphor, but I would look around and see no public or market sympathy for my plight.

Carswell of the Times reporting that the funding bank ‘may’ provide some loans to ‘existing’ customers if it increases value to the bank.

Not entirely sure where the basis for that came from.

@ tull

I agree with that analysis. It doesn’t move us on a lot but it is the beginning of a “line in the sand”.

It also means FB can operate without a government deposit guarantee, ironically for moreso than AIB/BoI/ILP etc.. That is because its assets will be government guaranteed. Clever eh? Guaranteeing the assets is a long term solution whilst guaranteeing the liabilities needs constant rollover and EU blessing.

@tull
“There is still precious little debate on the option facing us with AIB. Some progres on asset sales/ NAMA transfers is needed please. In addition as Ciaran O’Hagan eloquently argues on another thread, a credible fiscal strategy needs to be re-iterated. This will involve default on other state obligations- quangos/salaries/transfers/manning levels and more taxes.”
Precisely. This is the sort of certainty that is required not only for the international markets, but for the domestic economy aswell. You’d have to be mad to start up a business currently (luckily most genuine entrepreneurs are), because there is no visibility on tax rates, salary levels, office rents, regulation etc. etc.

The changes don’t all need to be made now. Taking a conservative view means that some of the later dated ones might not need to be made (e.g. tax raises) or might be reversed (e.g. spending cuts) earlier. Or that money will be available for some class of stimulus spending in a couple of years.

But three years in and not even no end in sight, but no end of the beginning is a poor show.

Although the practical problems of imposing losses on seniors are reduced by this re organisation, i cant see how the legal hurdle has been lowered.

On what basis can the state re designate priority?

@Hogan

agree

@ BW II

any thought on what a state sponored if not guaranteed banks would pay for deposits, what it would earn on the asset side & what the capital standards would be. What would be the incentive to stay with FBK unless you were being paid handsomely.

in turn, what implications do all of the above have for the other banks-what do they have to pay for depos, earn on the asset side and what returns on assets will htey make.

It strikes me that this is being made up as we go along. It also strikes me that the head honchos in Anglo have not bought into this. It is likely that the mgmt will be off soon, with ample severance packages. A politically asute, safe pair of hands with the ability to juggle figures will be needed to bring this home.

Ivor Callely has no future in the Senate, he fits the bill.

A couple of observations (some general):

1. On Tuesday evening Anglo entertained some forty TDs and presented their good bank/ bad bank plan. The following day the government knocks this plan on its head. It suggests Wednesday’s announcement may have been hasty.
2. Given where we are, the announced split seems fine. There is some value in trying to retain customer deposits. Though the real meat is who picks up the losses and what are the losses likely to be. These weren’t answered in yesterday’s new plan.
3. Although I said the split seems fine, that comes with the caveat that the details are workable. For example, how will the ARB’s bonds be valued on the deposit bank’s balance sheet. As a depositor, would I be happy that the deposit bank is holding bonds that don’t necessarily entitle them to evaluate the underlying collateral?
4. A positive for the government is it gives them another board of directors to stuff 🙂
5. After the initial capital injection, will further government support be required?
6. As we are painfully aware, the guarantee implemented by the government was wrong. This has increased sovereign risk by more than was necessary. Events may overtake government plans for Anglo. When Irish banks try to roll over maturing guaranteed debt later this month, it’s important to remember that the ‘insurer’s’ credit strength has gone from AAA to AA- (negative outlook). If the banks funding costs soar, the markets may form the opinion that Irish banks can’t generate adequate income to cover costs.
7. The markets want certainty? This is true to an extent, but I’m a little wary that people assume that more detail on Anglo will deliver a desired outcome. Greater information may lead some investors to conclude the risks are too great.
8. Will markets begin to ponder how far the outliers (Anglo & INBS losses) are from the other banks?
9. When reporting on NTMA bond auctions, would the local media kindly focus on the amount of debt and the rate at which we’re having to raise debt. Then move on to the cost and coverage ratios. Focusing on cost of borrowing and coverage ratios is like a shopaholic transfixed on credit limits/minimum repayments of their credit card portfolio and ignoring the size and rate at which their debt is increasing. Successful bond auctions seem to be cheered by the media rather than lamenting the fact that the state is borrowing like crazy.

“The sovereign bond market is crying out for some sign that we’ve got a final credible figure for the cost of Anglo Irish Bank.” from Karls initial post.

We have credible figures on the cost of Anglo. We have them from various economists, finance experts and a ratings Agency. Its between 35-40 Billion.
These figures are based on reasonable expectations on property values that still have some way to fall.
The fact that Nama and the banks are preventing us from allowing the market to find the floor as outlined by karl deeter in his blog this week, means that any figure that comes out from Anglo themselves or the DOF will not take any future property price reductions into account and will be an underestimate.

Expect phrases in anything we get in October to be similar to the waffle that accompanied the last Budget.
My favorite phrase was when it said that there was ‘a greater possibility for downside than upside’ in their income estimates.
In other words, in an act of desperation we are going to optimistic rather than realistic and throw out the accounting concept of prudence.

How can we or the market investors expect to get a ‘credible’ number on the Anglo losses in this context?

What will happen is that they will split the difference between 24 billion (their estimate) and 35 (S and P’s estimate), so about 30 billion and work back from there in the hope enough people believe them.

Apropos the communication failures at DoF, it seems that NAMA has a €2.5bn commercial paper programme (remember that’s to support its €5bn development pot). The Independent below report the programme is govt guaranteed. The NAMA Act (s50) says the Minister *may* guarantee this debt. So two questions,

1. If we’re being put on the hook for another €2.5-5bn of debt (which has risk attached) shouldn’t we be told
2. Will S&P raise their estimate of the total bank rescue from €90bn to €95bn (or specifically the NAMA component from €40bn to €45bn)

http://www.independent.ie/business/irish/nama-to-raise-euro25bn-to-finance-itself-as-it-seeks-loans-clawback-2331000.html

@Tull

“any thought on what a state sponored if not guaranteed banks would pay for deposits, what it would earn on the asset side & what the capital standards would be. What would be the incentive to stay with FBK unless you were being paid handsomely. ”

The interest rate on deposits? Never thought of that. With NAMA bonds paying Euribor and NAMA II bonds paying (?) it is difficult to see current deposit rates being sustained. Looks like it will start life with a negative interest margin and therefore loss making.

Capital is calculated by relation to the assets, the so called Risk Weighted Asset calculation. If all the assets of FB are government guaranteed then the capital requirements should be light. Of course ARB’s capital requirements will be correspondingly heavy.

I think Brian Woods is right and John’s comment says a lot

“Third, now assume that the recovery bank is insolvent (or will become insolvent). It should now be relatively straightforward to impose losses in reverse order of seniority on the shareholders and bondholders. Note that the State is bearing substantial losses both as the shareholder and as the guarantor of the bonds issued to the funding bank. Effectiively, the State is taking the depositors’ share of the losses, and so the senior debt holders should have no complaint. ”

I’ve thought, over on the previous post too, that some of you aren’t giving enough credence to the issue that the depositors have been split from the bondholders. I think that’s a real signal of what the intent is here and as the jump in bond yields reflects that.

The hiving off of good assets, namely NAMA bonds, from Anglo to the Funding Bank for the benefit of one class of creditors, namely depositors, would appear to be put the bondholders at a disadvantage. As pointed out by other commentators, however, the Asset Recovery Bank is likely to be properly funded (at least in the first instance), so the bondholders may not have legitimate grounds for complaint. This presents a paradox: the only way of exposing the un-guaranteed bondholders to losses is to leave them in an undercapitalised / insolvent entity; in order to avoid legal proceedings however the ARB will have to be properly recapitalised by the Government. How are the un’g at any real risk in such a scenario?

Is a more plausible explanation for the change from a Good (Lending) Bank a Funding Bank that the EU Commission was making it clear that it would not authorise a Good (Lending) Bank under State Aid rules. The Government may have decided to go with Funding Bank because of what it perceives to be advantages in terms of keeping funding costs off-books?

@ people running the numbers and chances of seniors being hit

if funding from FB to ARB is done on a secured basis (as opposed to unsecured), this would place them higher in the pecking order than senior bondolders, correct? Is this significant? I just read a BNP piece where they reckon this would see the shortfall via liquidation to senior bonds as significantly increased if this secured basis were to occur.

@gadge

One small point: The use of the word “funding” may be leading to some confusion. To say the recovery bankis being funded by the funding bank here means that it is being saddled with a liability to that bank. They don’t get any dosh. Maybe the PR department wern’t all asleep.

@ BW 11

why does FBK need to pay up for deposits, could it not just REPO NAMA I & II bonds straight to the ECB and run down the portfolio as the bad banks run off. QE Irish style.

Then deposit costs in Ireland would drift down as irrational competition abates, margins returns on AIB/BOI would drift up and the state would make a ton of money in a few years. The other banks could reduce their reliance on ECB & wholesale funding.

I am sure Mr Weber and Stark might turn a blind eye, if the quid pro quo was “no default”.

@ Tull

well its not about keeping FBK funded per se, its actually about keeping Ireland Financil System funded. If the deposits simply went back to another Irish bank, then it’d be ok to lose them, but i suppose the danger is that some of the lost deposits will go overseas.

@ All

here’s a breakdown of the relevant figs per BNP, as at 30.6.10

LIQUIDATION WATERFALL

Amount available for distribution to creditors INCLUDING the promissory note (PN) from the Irish gov’t 69,086

*
Senior Secured Creditors

Sale and repurchase agreement – central banks 26,259
Sale and repurchase agreement – banks 5,089
Covered bonds 170
Retirement benefit liabilities 9
Restructuring costs 500
Deferred taxation 4

Total senior secured 32,031

Senior secured recovery 100%

*

Amount available for distribution to senior unsecured creditors 37,055

Senior unsecured liabilities

Repayable on demand 27
Other deposits by banks with agreed maturity dates 1,926
Retail 11,656
Corporate 11,500
Derivative financial instruments 1,537
MTN program 14,639 (incl g’tee and ung’tee)
Commercial paper 1,605
Certificates of deposit 104
Liabilities to customers under investment contracts 366
Other liabilities 193
Accruals and deferred income 114

Total senior unsecured 43,667

Senior unsecured recovery 85%

*

Amount available for distribution to subordinated LT2 creditors 0

@ sarah, Eoin
looks like yields are tightening now – bloomberg reporting 5.936 versus times over 6.
so, are the markets responding positively or are the ecb intervening again.

@Eoin
I doubt that the derivative liability is unsecured. I am sure some of the cash set aside as collateral will cover it. ISDA agreements mean that this is effectively held in escrow in any liquidation, so you can probably take it that it is preferred preferred…

@Eoin
“well its not about keeping FBK funded per se, its actually about keeping Ireland Financil System funded. If the deposits simply went back to another Irish bank, then it’d be ok to lose them, but i suppose the danger is that some of the lost deposits will go overseas.”

I don’t understand the necessity to retain the deposits when they could just be replaced with other more secure forms of funding.

If an unsplit Anglo has the same capacity to issue government guaranteed bonds and repo them with the ECB like INBS has just done, then if there was ever a flight of deposits they could be replaced very quickly with funding through the ECB in this way.

Even better would be to transfer the deposits with the assets going to the funding bank to AIB, BOI or ILP. At least this way the deposits could be used to increase lending capacity in the economy.
The ARB could then issue bonds to itself and repo with the ECB to replace the funding.

@Eoin
We would basically we replacing the government guaranteed deposits with government guaranteed government bonds. At least the bonds are a more secure form of funding than very mobile deposits.

@Dreaded,

I find this uncomfortable given past disagreements but I think we agree. If Anglo= NAMA2 and the NAMA 2 bonds are govt guaranteed, why not use the ECB. It is cheaper than deposits. The presumption is that the ECB would be willing to accept another 30billion NAMA bonds.

The domestic sourced deposits will then migrate to the other banks.

@D_E & @Eoin
It is also cheaper – ECB repo at 1% or deposits at 3.5%… you make the call.

It makes you wonder why the NTMA bothers with all this auction nonsense…

@ DE

yes. But i think we should be trying to keep the deposits first, and fall back on the bonds later. At some stage the ECB may get a bit queasy with providing such a huge level of what amounts to mini-QE via this type of transaction. And if we ever did decide to consider the big D, i’d prefer to be doing it on foreign private investors rather than the ECB itself.

Per Irish Times

“In a speech in Riga, Ms Merkel said that debt-laden governments must stick to their deficit- cutting programs because Germany won’t agree to have the euro fund turned into a permanent facility to provide aid.

‘The crisis mechanisms now in place are temporary,’ she said in the Latvian capital. ‘Germany won’t agree to an indefinite prolongation. Otherwise, people would say ‘we’ve got such a nice rescue package in place that this can go on forever.” ”

Might not be safe to work on the assumption that ECB will allow repo by Irish banks on a long term basis.

@Eoin

That is a valid point.

The first option should be to sell guaranteed bonds on the market. But this other “stroke” would allow us to access instant funding if there was a run on deposits.

I’m still not sure what the I understand the importance of keeping the deposits in Anglo. They seem to be adding to the fragility of the system and are expensive.

@Eoin
“And if we ever did decide to consider the big D, i’d prefer to be doing it on foreign private investors rather than the ECB itself.”

At this point I have given up on us defaulting on senior bonds, I just don’t think it is going to happen.

But if they were government guaranteed we wouldn’t be defaulting, would we?

@ DE

“But if they were government guaranteed we wouldn’t be defaulting, would we?”

huh? Do you mean we wouldn’t default on govt g’teed ones?

@ DE

i know! Its possible im just completely misreading, or missing the context, of your quote:

“But if they were government guaranteed we wouldn’t be defaulting, would we?”

Possibly you were just stating the obvious rather than asking a question. Anyways, what i was suggesting in my original “big D” comment was that if we did decide to renege on a government obligation (guarantee or general debt) than i’d rather it was a private investor rather than the ECB we were doing it to. But purely a hypotethical question, not something im suggesting or expecting.

@Eoin
I probably shouldn’t have put that “?” there

But hardly makes sense to plan for something we are highly unlikely to do.

I still think this new Anglo construct makes very little sense. Has the DoF released any additional info yet

@Eoin

Guaranteeing the NAMA II bonds does not weaken the position of the creditors of ARB. The way I see it, in a liquidation, ARB would pay x/€ to both NAMA II holders and seniors but the gubbermint would then make good the NAMA II bonds in the hands of FB, just like the deposit guarantee would work.

@DE

Drop the “INBS can print money” theme, it is a NON issue.

You make it seem like INBS could write let’s say a billion, billion I.O.Me’s and then repo them all at ECB and divvie the lot out to the populace and we would all live happily ever after. The I.O.Me’s are a deft bridge until INBS is over this funding hump and gets its NAMA bonds. It is done totally at the permission of the European and Irish authorities. It is not a money printing machine delivered to Fingers’ successors.

On the contrary, I think it makes perfect sense for us to now play the autistic –
ECB says “save the banks” – we pump in billions in repoable promissory notes, NAMAbananas and nigerian bank bonds.
ECB says “no depositor gets hurt” – we pay them off with ECB liquidity
ECB says “no bondholder left behind” – we pay *them* off with ECB liquidity

So the national debt becomes 400% of GDP.

And all of it is sitting at the ECB costing us 1% (it doesn’t mean we can only charge the banks that…).

Does that make us systemic? Too Big To Fail?

What ECB is going to be able to take the loss by withdrawing facilities on us?

Game on boys, game on. It’s time to go postal on this one.

@Hog

Your sarcasm proves my point. NAMA hasn’t a money printing machine. INBS hasn’t a mpm. These innovative devices for providing liquidity are totally at the gift of the EU authorities both in their design and in their quantum.

@BWII
You misunderstand me. I am not being sarcastic, I am being serious.

We are at the stage of clambering over women and children to get into the boat.

@BWII
We could also get rid of the deposits and replace them with ordinary government guaranteed bank bonds.
The pm would only be needed if there was a run on deposits.

Do you think we have pre approved this with the ECB? And if we have how do you know we couldn’t use it in other cases.

I agree with hoganmahew, I think we are very close to the point with our debt doesn’t look “manageable” despite some opinions to the contrary.

The economist has an interesting projection of our debt ratio.
You can probably deduct another few percentage to allow for less losses on NAMA but IMO the growth rates are very optimistic and the net costs for the banks looks low.

And that is before the 120% of GDP is converted to 140% of GNP!

@Hog

The fact that you actually believe that the INBS facility gives us the opportunity to raid the ECB vaults for 400bn proves you have got that wrong.

I told this would be a NON issue. Kenny is out today predictably criticising the Anglo split but not a whimper about Finger’s Baby having an unlimited Money Printing Machine.

There are interesting aspects to this proposal-chiefly the creation of Nama v 2.0 bonds. If these are goby guaranteed & ECB eligible, it might allow Anglo to wind down its depo competition. This wd be good for the other banks, good for the NPRF & good for the economy

@Brian Woods II
“I told this would be a NON issue. Kenny is out today predictably criticising the Anglo split but not a whimper about Finger’s Baby having an unlimited Money Printing Machine.”

What has Kenny got to do with anything?

I don’t think anyone is suggesting that INBS have unlimited ability to do this. But I see no reason why we couldn’t use it to fund Anglo.
Do you have any evidence to suggest otherwise.

@DE

“I don’t think anyone is suggesting that INBS have unlimited ability to do this.”

Maybe you haven’t been following the plot but Hog thinks precisely this. I thought at first it was sarcasm of a lesser wit than is usual of that genre. But she assured me that no, she meant it.

@BWII
Who said anything about INBS?

@Tull
“it might allow Anglo to wind down its depo competition. This wd be good for the other banks, good for the NPRF & good for the economy”
Yes, that would be the primary advantage. The depositors costs are crystallised (retail and non-retail and from other banks). The ARB is then over-capitalised which should leave us with the position that anything the ARB can do should reduce the cost. It would also be good for the ARB as it would be paying a lower cost of capital. It would be good for operating costs since only one bank would be operating

I reckon about 29 bn in deposits of this type. Since it is being done for the depositors and we are operating a “no bondholder left behind” system, I don’t see any reason not to do that to bondholders too. So another 17-19 bn. So we’re probably talking about 50 bn between depositors and bondholders with NAMA bonds, promissory already/in future making up about 30 bn of that. Hence another 20 bn required.

50 bn is at the top end of even the most pessimistic estimates (sorry Mr. Mathews!), personally I reckon 35 bn (and have done so for some 2 years) as the LTEC (long-term economic cost) of the Anglo loan book. I have no idea what the derivatives book will cost in the wind-down process. I doubt anyone else does either! An 8% loss on the trading book would bring us up to 50bn, so we would not see anything back.

As I say, I still reckon it is possible to sell off the existing banky bits of Anglo to a foreign buyer. Might be worth a few hundred million? Selling the deposit book and the cash behind it might be worth a few hundred million on its own.

Largely, though, I see no reason to maintain a competitive funding bank at a time when, as you say, competition for deposits is fierce.

@Hog

“Who said anything about INBS?” Are you now saying that Finger’s Baby does not have unrestricted access to the MPM? If so why are you so exercised by what happened? Nobody else, except maybe DE, gives a fig about this mere bridging exercise.

I am going to veer totally of track here and talk about the reality to an average person in relation to Anglo. I lost my job three months ago I am doing my best to keep payments up etc, but by god am I mad, im raging on many fronts, the injustice of it all, carers losing money as bondholders get paid, good friends in business going to the wall who cant get credit while bankers get paid bonus after bonus, im as stated sick of it all, and in general this site is excellent for analysis, but i got vomit inducing vile in my throat when i see some of the pr hacks on here, ye know who ye are, i will tell ye this in years to come when we are still paying for this mess, my kids, they will ask me did anybody speak out and do you know what i will say: ” yes brave people like morgan kelly, David McWilliams, Brian Lucy and Peter Mathews told us like it was and is, it gives me some solace as we go down the plughole as a people as a country and as a fighting nation… needless to say to quote eamon dunphy “the spivs” will not last long in the history that will be wrote

Fair play Sickofitall

I’ve spent twenty years in senior manufacturing and development roles, actually MAKING something and generating real revenue; these bankers are essentially parasites feeding on an otherwise decent society. Our government of self-inflated teachers, publicans and solicitors are criminally liable for what they’re doing if you ask me – damn them all and theior flagrant disregard for their citizens – are there any politicians with MORAL authority anymore, or just expedient hacks? Fv@k the bondholders – welcome to capitalism guys – you placed your money and took yer chances – my family don’t underwrite your business dealings Goddammit!!!!!!!!!!

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