Chelsea Billionaire Upset About Losing on INBS Subdebt

A regular source of debate on this website has been the question of who exactly holds the subdebt of insolvent Irish financial institutions. Widow and orphan funds? Credit unions?

How about Russian billionaires who own English football clubs?

Oct 1 (Reuters) – Russian billionaire Roman Abramovich may take legal action against the Irish government over its decision to make subordinated bondholders in Irish Nationwide (INBS) [IRNBS.UL] pay part of the bill for dealing with the building society’s huge property losses.

“We urge Irish authorities to re-consider their position on INBS subordinated bonds and come out with a detailed plan on what is going to happen to this institution,” a statement from Abramovich’s investment vehicle Millhouse said in a statement.

“In the meantime, we are fully prepared to vigorously defend our position using all possible legal means.”

I’m sure all right-thinking people will be wishing Roman well in his quest to take money from Irish taxpayers to free up extra funds for him to spend on Frank Lampard’s wages.

216 thoughts on “Chelsea Billionaire Upset About Losing on INBS Subdebt”

  1. Even if Credit Unions did own much of the debt they are already covered. Is it worth cutting state pensions to protect pension funds?

    But hey, maybe Chelsea will start to wear the green jersey.

  2. I can recall that Lenny said the senior bondholders comprised/included Irish credit unions, pensions funds etc. The former subsequently denied that they were (significant) holders.

    I hope that Roman knew more about English football than Irish properrty when he bought Anger bonds.

    So, what is going on? To help sort this out, can we have FOI extended to Anger (which we own) and its sister Nama (which we also own)? Why should we pay taxes to undentified (aside from Roman) bondholders?

    Why should we offfset Chelsea’s £142m losses http://www.mirrorfootball.co.uk/…/Manchester-City-have-announced-record-losses-of-121-3m-and-a-wage-bill-of-133-3m-article592495.html

  3. He’s perfectly entitled to expect all his money back if the terms under which losses can be assigned to his notes have not been triggered. Though it is a game of russian roulette.

  4. Maybe he will accept some “swaps” instead? Any Rovers or Bohs guys willing to step up to the mark for their country? After all Russian oligarchs must be protected at all costs.

  5. @ Brian E,

    I’d expect Roman bought recently at depressed prices. His gamble is to screw a couple more cent son gov with threat of forcing insolvency.

  6. Here we see KW stoking populist rage by playing on the visceral tribal loyalties of the Irish. He raises the spectre of our very own money keeping United from the Premier League trophy! 😉

  7. @ Bookworm

    Doesn’t sound like it is going to be straightforward…

    This is a good point, despite the bitter pill of having to compensate vulture investors.

    I made the point some weeks ago that a creditor could apply to the High Court to wind up Anglo under a clause in the 1963 Companies Act.

    I assume there is a similar provision in building society legislation.

    The ace the creditors have is that they know that the Government wants to keep these zombies on respirators.

  8. @finfacts

    Whatever one thinks about burning different classes of creditors, it seems to be inexcusably amateur-hour that the government is apparently still – or perhaps only now – working on a resolution law, leaving us more vulnerable to this kind of thing. They should have had one on their back pocket ready to rip for months now, even if they were hoping and expecting never to let it see the light of day. All they had to do was cog off the UK legislation, making the minimum, necessary changes. With the bill in hand they would have been able to push it through the Oireachtas on the Friday.

  9. @ anonym

    Maybe a state of emergency could head off action?

    Something is rotten in the state of Ireland and our engrained system of panic and slow-motion.

    @ Pat Donnelly

    If a local Chinese language newspaper in Ipoh, the former tin mining area city 200km north of Kuala Lumpur, puts the Irish banking crash on its front page, then you can bet it has got prominence in many places.

    The FT said on Friday that the rescue costs for Anglo Irish Bank represent 21% of Irish GDP – – more than the entire bill for sorting the Japanese banking crisis of 1997 and almost twice the cost of the Finnish crisis in the early 1990s.

  10. We shouldn’t mess with Roman – I read somewhere that his fleet is larger than the Irish Navel Service.

  11. Great to see everyone enjoying themselves. But there is a serious point here. The popular refrain for some time now from academics and media alike has been “torch the subbies, torch the seniors” with a chorus line of “they took the risk let them take the loss”. People like me have pointed out that we have a legal system. If we want to sweat out the 35bn of non NAMA loans in Anglo we have to keep it on life support and the consequence of that is that subbies and seniors continue to have legal protections.

    Our legal system has been Roman’s goalkeeper. It now looks like we are preparing to shoot the goalkeeper. Irish banks will never get subbies again on anything like the terms in the past but that’s probably no huge loss. Ironically the clear distinction that Lenny is making between seniors and juniors might act to actually strengthen banks’ ability to continue to tap the debt markets for funding albeit not for capital.

    BTW I never cared a hoot for subbies’ sensibilities, it was the knock on effects of retro legislation that worried me. I have to confess that, as a Chelsea supporter, there is at least one subbie-holder with whom I now have sympathy.

  12. Can I ask a basic question (and apologies if this has been dealt with before – I did a bit of searching on irisheconomy.ie but couldn’t see this exact point being dealt with). Bond law is not my thing either so forgive any ignorance.

    Yesterday the EC approved a Danish bank wind up scheme (see link to announcement at bottom). The announcement of the Decision includes the following:

    “burden-sharing is ensured by excluding shareholders and subordinated debt holders of the failed bank from any benefit from the aid.”

    It’s probably very obvious (and again my apologies for treading again on what might be old ground), but why are we paying *anything* to subbondholders?

    http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1266&format=HTML&aged=0&language=EN&guiLanguage=en

  13. @MH
    “The ace the creditors have is that they know that the Government wants to keep these zombies on respirators.”

    True, but isn’t the govt right to adopt this policy if it means that we get to pay for this debacle over a longer period? I would be worried about Anglo and INBS being put into default immediately if it means that it would trigger immediate payments that we can’t afford. I would prefer the long finger as regards paying for this.

    I have been a bit sceptical about the idea that we can force default on the bondholders considering the weak position that we are in and had thought that it might not be as feasible as people were saying. Also, if people have been buying these distressed bonds and the legal clauses required for default have not been triggered are they not legally entitled to get their money back? I don’t know that much about debt securities or debt markets though. Is it worth going to court (in England?) over this?

  14. @Jagdip
    I suspect it is because the bank in question is actually being wound down. Presumably Denmark has some sort of wind-down legislation. Presumably also, the bank will cease to exist.

    We have a situation where the government is belatedly trying to impose losses on subordinate bondholders, but, apparently, not as part of a wind-down process.

  15. @Jaqdip

    Good question. It seems the government are trying to avoid having to actually implement a retro Resolution Scheme but using that threat to negotiate with subbies. So why pay 20c/€ rather than Nil?

    Possibly Ireland would face a more tricky legal challenge than is the case in Denmark and Roman’s intervention suggests this might be the case.

    Another speculation on my part might be that the necessary legislation might have to extend to AIB (on constitutional grounds of fairness). I note that AIB’s subbies have been downgraded despite the massive State bail out and that AIB will continue as a viable entity.

  16. The subordinated debtholders are chancing their arm in the hope of making the govt overpay. I doubt they have very strong legal arguments in their favour, and simply have a small bit of grey area to cling to in the hope that the govt will not wish to test it. Unlike senior debt, subordinated debt has always been ‘risk’ capital, and does not rank equal to anything else, so there is no collateral damage like there would be with imposing losses on seniors. Further sub debt will be far less important in the capital structure after Basel III, so there should not be a fear of hurting sentiment. I would guess that the EU/ECB will have no issue with the govt enacting new legislation to make it easier to transfer losses onto subs. The Telegraph has had a couple of articles in in the last 48 hours bashing Ireland post-Thursday’s announcements, and i don’t think you need to be paranoid to spot the deliberate trend.

  17. @hogan

    Thanks for the response. Has this specific point been dealt with before on here and if so is there a link at all?

    Everything you say about Denmark might be true. But if I could quote from another part of the EU statement “It provides for an orderly winding up of the failing bank, transferring its assets and part of its liabilities to a bridge bank to be set up under the aegis of the Danish Financial Stability Company.”

    Isn’t what we are proposing an orderly winding up of Anglo with its assets being transferred to Asset Recovery Bank and liabilities to Funding Bank, both operating under the aegis of the Depart of Finance on behalf of the State.

    As I say this matter might have been done to death on here before but I am spurred to ask the question after the abuse aimed at the Minister by London hedge funds and the report today that although subordinate (or junior) debt in Anglo is today traded at 23-25 c in the euro the subbordinated debt owners are looking for 35-40c (see report below). Denmark appears to have permission from the EC to pay subordinated debt holders 0c in the euro.

    Any pointer gratefully received.

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8035645/Hedge-funds-hold-Ireland-to-ransom-over-Anglo-Irish-Bank-bail-out.html

  18. @ Jagdip
    “It’s probably very obvious (and again my apologies for treading again on what might be old ground), but why are we paying *anything* to subbondholders?”

    Good question. The answer is much too obvious for our smart ministers and advisers who appear to be spinning the idea of partial payment.

    @Brian W
    “The popular refrain for some time now from academics and media alike has been “torch the subbies, torch the seniors” with a chorus line of “they took the risk let them take the loss”. ”

    Shareholders took the risk and got burned. The alternative to burning bholders is to burn taxpayers.

    @All
    Surely a bank resolution scheme is long overdue.

  19. @Ahura Mazda – “Though it is a game of russian roulette.”

    And there was me thinking that it is a game of two halves.

    @Kevin Lyda – “Isn’t greed attractive?”

    Greed’s ladies are usually attractive. The WAGS.

    The government will kick this football down the road, etc.

  20. Ther is some precedent – I have not been able to discover if there has been a resolution to the B&B sub holders complaints:

    “The Government is not treating the bondholders of the subordinated debt of Bradford and Bingley bank equally to the bondholders of the subordinated debt of other banks caught up in the British banking crisis. ”

    http://www.uksa.org.uk/B&B_Subordinated_Bonds.htm

  21. the dof has dismissed the daily telegraph report saying the minister was heckled during a conference call.apparently background noise and smart remarks were directed at the way it was handled by citi

  22. From that same link above on the other banks/b.societys
    ” Halifax Bank of Scotland is to be merged into Lloyds bank and the bondholders’ investments will become part of Lloyds financing, where it will continue to pay interest. These bondholders’ investments are safe.

    Northern Rock has been nationalised and refinanced by the Government and continues its operations. Northern Rock was reducing its mortgage book prior to eventual sale (the most probable outcome) when the financial crisis is over. The Government has recently (March 2009) invested several billion in the bank to provide liquidity to the mortgage market. Bondholders’ investments continue to pay interest as usual and will go with the bank to a buyer in the future. “

  23. @ Bookworm

    True, but isn’t the govt right to adopt this policy if it means that we get to pay for this debacle over a longer period?

    I agree on that; for example, Quinn has some sustainable business units — Putting then into liquidation now would mean that there would be little chance of getting any reypayment of the €2.8bn

    @ All

    Have subordinated debtholders less rights than ordinary creditors (suppliers of goods and services) ? Some here seem to think so.

    Of course if that was agreed in the contract, it would be so. In the examinership process, a court can agree to a resturucting but groups with the same rights cannot be arbitrarily discriminated against.

    Keep in mind again that the Govt wants to keep Anglo from being liquidated.

    If it was the latter, it would be simple and there may be nothing for the revenue, staff or senior bondholders, never mind the rest.

  24. Just listened to David McWilliams on RTE. What a looney tune! More deposit selling moments than you could shake a stick at.

    1. The government are paying 3bn to buy AIB when they could have bought it for 0.5bn (its market cap). What a fool, the 3bn is the extra capital that is needed.

    2. US MNCs have 750bn trapped in the IFSC because they are afraid to repatriate it because of US tax. The government should charge them a measly 10% for this protection. The 75bn windfall would solve everything.

    3. Deposits should be guaranteed by simply buying an insurance policy. The problem then vanishes.

    4. Lenny is lying when he states that seniors are equal to depositors. He insisted there is no such law. What a fool. The legal basis of our economy is that creditors rank equally unless they are contractually subordinated or given priority by law e.g. the Revenue. Paddy the Plasterer who has just done a job for the branch ranks equally with bondholders and depositors.

    Rachel English asked DMcW why Lenny would mislead us like that. He stated it was because there was a cosy relationship between international bankers, elite interests and FF to preserve the status quo. Mary Hanafin rightly rounded on him for accusing Lenny of treason.

  25. … a bridge too far: there is only one response to Roman – a rerun of Dalymount Park and the Givens’ hat-trick in the upcoming match in Aviva: Commentary by Jimmy McGee and Philip Greene to the 1812 background: Ireland 3 – Russia Nil.

  26. @Brian Woods II

    “Mary Hanafin rightly rounded on him for accusing Lenny of treason.”

    Treason against whom? Against the newly declared Anglo Irish Republic?

  27. @Brian Woods II

    You will have to do better then that – this slurry spreading is becoming tiresome.
    Whether Lenihan is a knave or a fool is now irrelevant – this is simply a question of who gets our remaining smaller surpluses – the domestic economy or the financial centres.
    Choose your allegiances – I suspect you already have.

  28. I expect they will keep Mr Abramovich and his like happy with a few shares in the soon to be announced merger of the ‘good’ bits of AIB and Anglo. It can’t be far off happening.

    Talking of AIB … I notice Colm Doherty will be waltzing off with a six-figure ‘stipend for lie’ – the media seem to have played that one down which is not like them. I wonder who’s been cracking the whip on that story?

  29. @Keith

    What do you think of DMcW’s suggestion that we should squeeze 75bn out of that 750bn which US MNCS have trapped here?

    What do you think of his suggestion that the government should simply insure the deposits with an international insurance company?

    What do you think of his observation that we could have bought up 100% of AIB for 0.5bn instead of paying 3bn to get a mere 90%?

    What do you think of his assertion that there is no explicit law making bondholders pari passu with depositors and therefore there is no problem in deeming them to be subordinate?

    Answers form others to these questions are also welcome.

  30. @brian woods ii
    what do you think of a government that has bankrupted the country.
    And please try not to use expletives or insults.
    You will find most people can communicate very well without them.

  31. @Brian Woods II.

    Fair enough Brian your dander is up – and I have no idea where the first couple of weird suggestions have come from and their practicality in this strange world we live in.
    Although I believe the corporate tax question is now no longer a question and it is no more then a matter of time before the Lemass experiment with international corporations is finished wether we remain in the euro after a gentleman’s agreement or a more chaotic Irish Punt / drop kick me Jesus through the goal posts of life experiment takes hold.
    But being a simple creature myself, why did/ do bond holders get a premium interest for their “risk”.
    Law is simply a monopoly of violence withen the state – law outside the state at least in the past was and perhaps still is a fiction.
    The so called sovergin merely comes to gentlemen’s agreements with other such entities in the hope we can all live happily ever after.
    In the event of the real world breaking up the party other such arrangements become a necessity.
    As regards the equity thingy which I believe is just a fig leaf to protect the bondholders interests and the subsequent real capital requirements that are needed………
    The banks can recapitalize relatively easily when they do not have to pay external interest.
    There is still a question of the identity of these bondholders – which is curious given the fact that the citizens are backing this bunch whether domestic or foreign without knowing their identity.
    The Chinese walls created in the past by the monetory authorities are clearly no longer present given that the fiscal mess is a direct result of monetory movements.
    In effect there is no easy answers – but to suck on our thumb and hope things will turn out for the best is no longer a option baby.
    Politicians are afraid that any actions they engage in independent of the monetory authorties will endanger their lives and their reputations – but to do nothing then allow this credit machine to start chewing through real flesh would be even worse although leaders can always claim it was not their fault, it was just the way of the world.
    As I have said previously this is a world event at least on the scale of the end of the Edwardian era – the so called normal rules no longer apply.

  32. @ Brian Woods II

    2. US MNCs have 750bn trapped in the IFSC because they are afraid to repatriate it because of US tax. The government should charge them a measly 10% for this protection. The 75bn windfall would solve everything.

    Comfort food for economic illiterates!

    Trapped?

    The IFSC is an offshore financial centre. So it’s hardly a surprise that it would have offshore funds.

    As for unrepatriated profit, these are companies with operations across the world and for example when Intel builds a plant in Dahlin, China, does it fund it from the US or use an inter-company loan from Dublin?

  33. The fact that bondholders and deposits would rank equally in a winding up is something of a red herring. It does not follow as a corollary that the Government can intervene OUTSIDE

  34. (continued)

    the Government can intervene OUTSIDE the context of a winding up to provide statutory compensation to depositors. This was the legal position prior to the guarantees in September, 2008. If a bank was wound up, the bondholders and depositors would have equal rights to a share of the “pot” remaining after other preferential or secured creditors had been paid. If a bank was hopelessly insolvent, then neither bondholder or depositors would receive anything from the pot. Depositors would however receive statutory compensation from the Government directly via the Deposit Guarantee Scheme. Initially this was capped at 30k per individual per institution, it has since been raised to 100k.

  35. From a purely legal perspective, a similar result could be achieved by legislation providing a Special Resolution Scheme for banks. Provided the depositors did not snaffle a larger share of the “pot” (if any) within the bank, there is no legal principle which would prevent the Government providing statutory compensation to the depositors over and above what they might receive from the liquidator. There is no legal principle of “fairness” which would require that a similar benefit to bondholders. (The bank guarantee of course is a separate issue). As I say, the legal position prior to September, 2008 was that the depositors had a privilege / right in terms of statutory compensation which was not available to bondholders. It is putting matters too far to suggest that bondholders and depositors must always be treated equally: any such principle is confined to the sharing of the pot of assets within the bank.

  36. @gadge

    I agree that depositors can be compensated post wind up. But the relative priority of depositors vs bondholders during wind up hugely influences how much will be needed for that compensation.

  37. DMcW did support his argument regarding bondholders & depositors by pointing out that when Anglo Irish Bank last went to the bondmarket in 2005(?), it was explicitly stated in the issue documents that bondholders would NOT rank pari passu with depositors.

  38. The more difficult question is whether losses can be visited on bondholder other than in the context of an actual winding up. As other posters have observed, a winding up causes all sorts of difficulties in terms of funding, e.g. a number of creditors would have to be paid up front, whereas the working out of the non NAMA loans will take years. The UK have introduced legislation which allows the possibility of losses being imposed on at least some classes of bondholders without the necessity of having to wind up the bank. We are told that the Attorney General is considering some form of special resolution scheme here. Had the Government known back in 2008 the full extent of the impaired loans, it might have given priority to this legislation rather than the NAMA legislation.

  39. @Michael Hennigan

    Oh dear! That McWilliams piece is cringemaking. Those were happier times when David and Lenny had late night garlic chewing sessions. Nothing worse than a lover spurned; now David is accusing Lenny of treason.

  40. @Gadge

    What do you think of BL’s comments on primetime to the effect that losses must be shared with depositors if losses are imposed on seniors?

    Do you think it would be possible to proceed by

    1 Failing to recognize the true extent of losses on non nama bound loans on anglo books

    2 use proceeds from realized assets to pay off depositors and thereby eliminate the need for anglo to carry an equity buffer

    3 when all depositors are paid off – admit to losses on remaining assets

    4 wind down the bank – wiping out al equity + subbies plus imposing losses on seniors and depositors

    5 Reimburse guaranteed seniors and depositiors – (i know there would be few if any unguaranteed seniors left at his stage but the subbies dont need to paid before 1014)

  41. @gadge

    Do u think there is scope to make special rules of court to allow for a speedy liquidation of banks pursuant to section 52 of the central bank act 1989? Have there ever been rules made pursuant to this section? If not why not?

  42. @ Keith Cunneen

    Whether Lenihan is a knave or a fool is now irrelevant

    As the father proved, that particular family have the capacity to be both.

  43. @Eureka

    I don’t care what McWilliams does or says in the privacy of his own blog. But when he is on prime time radio telling people there is a 75bn pot waiting to be taken from US MNCs, that the deposit guarantee could be solved by a simple insurance policy, that the Attorney General is lying when he says bondholders and depositors rank equally as creditors, that AIB could have been bought outright for one sixth of what we are going to pay to get 90% of it – then this man is dangerous and has become part of the problem.

    Actually we shouldn’t turn on McWilliams, after all what looney tune would turn down the opportunity to flaunt their egos on the national airwaves. RTE must take the blame. Also the opposition spokespersons on the show were also a disgrace, they did not want to contradict the looney tune as it was playing into their mantra. They should have supported Hanafin when she accused McWilliams of blaming Lenny of treason.

  44. Eureka,

    You don’t have to be a FFer to think DMcW is incorrect. He supported the guarantee at the start. In fact he took credit for designing it.

    Some of his suggestions are flat out dangerous:
    *skimming 10% off the alleged 750bn in cash which resides in Ireland. Two questions i) is it that much and ii) doyou think it would stay for longer than 30 secs.
    *insuring the deposit base with an insurance company- do you ring Comparethemeerkats.com & ask for a quote for 250bn?
    *buying AIB for 500m before putting in the capital-that is just ignorance of the process. Maybe he thinkg you just buy it and do not put in the capital.
    *the parri passu thingy-just denying reality

    I could add to that his advice that we default on the CB & the ECB. Whatever about the latter, rendering the Irish CB insolvent is not smart.

    I think his allegation that Lenihan is guilty of treason is without merit. Now if that accusation was levelled at Cowen for his refusal to nationalise and resolve Anglo on the night of the guarantee, I might find common ground.
    At worst Lenny is guilty of incompetance and poor judgement re Anglo.

    As to BW11 call for oppositon spokesmen to agree with Hanifin, well they should not be expected to grant him a blank cheque. I would say he started very badly but has played a bad hand of cards to the best of his ability.

  45. @all

    Haven’t we been over this before? I suggest:
    It’s not necessary to wind down a business in order to impose losses on the creditors, provided the legal framework is in place to do this. It’s not necessary to give depositors the same haircut as seniors, provided that the additional money to make the depositors whole comes from outside the bank’s balance sheet (eg. as a gift from the government): Irish depositors and seniors have equal claim in law on the bank’s money, not on any gifts to one or the other group from the taxpayer.

    Have I said anything wrong?

  46. @Tull

    I was wondering was I the only one seeing through this McWilliams self serving and dangerous nonsense. Glad there are some kindred spirits in this blog.

    @Eureka

    I’m a bit of a Norn Iron blow in down here, never really understood the FF vs FG thing. I only voted once – for Garret the Good and he is still good. But to answer your question I sure will be voting FF next time.

  47. BW II, Eureka,

    that is the dileema many of us face. We are in this mess bacause of FF and particularly Bertie and Biffo (who clearly was “asleep” at the wheel). Lenihan started slowly but since the turn of the year has done as well as any MOF could do. So do you punish or reward. I suspect that if Lenihan assumed the leadership & continued on the current course, they will survive in power.

    The opposition consists of Labour who do blame very well but do not have a clue on policy. This morning’s Marian Finucane programme illustrates the limitations of Gilmore. He scrapped Metro North to save 5bn and promised a recovery bank to borrow 20bn to pump into public works. Yet he claims to be fiscally responsible.

    Then there is FG who have not had a good crisis. They did point to some of the dangers of govt policy (especially benchmarking). RB was more alive to the solvency issues in the banks. But their solutions were unworkable. The leadership (or lack of) is also a big problem. In short they are not govt material unless they confront that issue.

    So one is tempted to vote FF until one realises that you would get Labour as well. Then one is tempted to vote FG until you realise it comes with Labour attached. Can we have a proper, adult, Centre right party please that is not too dominated by cronyism?

  48. @BWII
    You must also be posting under pseudonyms Eoin, Eoin Bond, David O Donnell etc etc if you think that.. Poor old DMcW is second only to Morgan Kelly and Brian Lucey in the ranks of Arch villains who caused this coutries economic meltdown in this blogs most prolific posters. I gather from the above posts he’s none too popular with Michael Hennigan either.

    Admittedly he’s a bit up his own **s, but in fairness his comment quoted by Michael above was in 2008 just after the guarantee, when based on the “facts” we were given at the time, most people thought it was a good idea.

    The difference between him and “most of us” was that he would have presumably known about such animals as senior and subordinate bondholders – but maybe not the full exposure.

  49. @tull
    “Can we have a proper, adult, Centre right party please that is not too dominated by cronyism?”

    Is it a New PDs you’re looking for?

  50. @Anon

    Agreed on all points. The supposed legal obstacles to imposing losses on (unguaranteed) bondholders are not insurmountable. The real difficulty is an economic one: the impact of the banks (and possibly the sovereign’s) ability to borrow on the international market in the future.

    I also agree we have been over this all before. It is topical again, however, given that it is now one of the Minister’s speaking points: it has joined Iceland, Patrick Honohan and the homely “bank manager” analogy, in his arsenal.

    It is also featured in his Dail Speech on Thursday:-

    “The position is that under Irish law senior debt obligations rank equally with deposits and other creditors. I have no plans to change this position. There is, therefore, no question of seeking to impose losses on holders of such senior debt in Anglo Irish Bank or indeed in any credit institution in the State through any legislative measures.

    Indeed the legal competence of this House to effect such changes is very much in doubt having regard to the provisions of the relevant EU directives which prohibit differentiation between creditors and the provisions of our own Constitution which protect vested rights. I am not saying on the record of this House that it is not legislatively competent to impose haircuts on creditors, but were we to impose haircuts on senior bond holders, equivalent haircuts would require to be imposed on depositors.”

  51. @ Christy

    The series of steps mooted by you in your post would probably be deemed to involve a form of fraudulent preference and the earlier payments to the deposit holders might be unravelled subsequently.

  52. Long post warning

    BW2
    Cool the invective will you? Your righteous indignation is palpable. If you want to argue with McWilliams points, and many are arguable, then do so. The best way IMHO is to coolly point out where he is wrong.
    Lets take a calm look at the points you raise

    1. The government are paying 3bn to buy AIB when they could have bought it for 0.5bn (its market cap). What a fool, the 3bn is the extra capital that is needed.

    ****
    No, hes not a fool. Even if he was, one of the great aspects of this blog over others is (or increasingly was) that it was a place for cool rational debate. FACT : AIB yday was worth c600m . FACT : It requires extra capital of some Xb which will come via the state in the form of the state purchasing shares (also known as ownership) in AIB. Tomatoe Tomaeto.

    2. US MNCs have 750bn trapped in the IFSC because they are afraid to repatriate it because of US tax. The government should charge them a measly 10% for this protection. The 75bn windfall would solve everything.
    Not sure that this is even remotely the right figure but theres a kernel of an idea here. One of maccers abilities is that he can identify the kernel of an idea. Maybe shaky on execution but theres an idea here. There are retained profits here, a large part of which are “trapped” for want of a better word due to tax considerations, and there may be a way of providing them with a way to be used other than sitting in deposits. It cant be any worse a plan than magicing up X hundred k jobs via glossy brochure.

    3. Deposits should be guaranteed by simply buying an insurance policy. The problem then vanishes.
    Well, there is a long and interesting debate, of which I suspect you (and Tull the imaginary) are not appraised, in the banking literature on the design, costing and structuring of deposit insurance schemae. At one level they can be modelled as options. And options are tradable. One of my first academic papers was on this , way back when. In principle there is nothing wrong with this – could Munich Re do the job of the state in backstopping deposits in irish banks? Maybe. Its worth thinking about. Have a look at Ed Kane’s 1995 article in particular. I have Ed Kane’s phone number if you want to ring him up to abuse him…. Meanwhile, read these for some recent and some classics on the issue.

    Hwang, D. -., Shie, F. -., Wang, K., & Lin, J. -. (2009). The pricing of deposit insurance considering bankruptcy costs and closure policies. Journal of Banking and Finance, 33(10), 1909-1919.
    Sealey, C. W. (2008). Can delegating bank regulation to market forces really work? Research in Finance 24, pp. 27-56
    Laeven, L. (2002). International evidence on the value of deposit insurance. Quarterly Review of Economics and Finance, 42(4), 721-732.
    Demirgüç-Kunt, A., & Detragiache, E. (2002). Does deposit insurance increase banking system stability? an emperical investigation. Journal of Monetary Economics, 49(7), 1373-1406.
    Kane, E. J. (1995). Three paradigms for the role of capitalization requirements in insured financial institutions. Journal of Banking and Finance, 19(3-4), 431-459.

    4. Lenny is lying when he states that seniors are equal to depositors. He insisted there is no such law. What a fool. The legal basis of our economy is that creditors rank equally unless they are contractually subordinated or given priority by law e.g. the Revenue. Paddy the Plasterer who has just done a job for the branch ranks equally with bondholders and depositors. Rachel English asked DMcW why Lenny would mislead us like that. He stated it was because there was a cosy relationship between international bankers, elite interests and FF to preserve the status quo. Mary Hanafin rightly rounded on him for accusing Lenny of treason

    Time and again people have asked for the specific legal evidence that equates senior bonds with deposits. If there is some then the minister for finance needs to stop his argument from authority and start arguing from evidence. If theres case law, common law, whatever, show it to all of us and I for one will be perfectly happy to accept same. If there is no law, then who is the fool – he who claim or he who challenges? The debate on how seniors should bear the cost is one that conflates two issues – legal and practical. It seems that there are no insurmountable legal / legislative issues that cannot be overcome. There may well be severe practical ones. But again, where is the law? In any case contractual issues can be in effect overwritten by others. Lenihan also stated, on Thursday, that it was (and this is my paraphrase) “constitutionally impossible, advised by the AG, to distinguish between creditors of a bank”. So what then is the effect of the deposit guarantee? Is that now not legal? Gadge has pointed out that a resolution scheme (which mysteriously hasn’t yet emerged – ciu bono?) would have the same effect.

    FACT: Mary Hanafin stated that in her opinion what McWilliams was stating was Treason. He didn’t raise it. Now, I have long given up hope that our present leaders read anything but I would have hoped that at least they might have glanced at Bunreacht na hEireann. In case they haven’t, lets see what it says on Treason . Its in Art 39, all by its lonesome “Treason shall consist only in levying war against the State, or assisting any State or person or inciting or conspiring with any person to levy war against the State, or attempting by force of arms or other violent means to overthrow the organs of government established by this Constitution, or taking part or being concerned in or inciting or conspiring with any person to make or to take part or be concerned in any such attempt.” It says nothing about suggesting that FF are in cahoots with a cosy cabal, and perhaps that’s just as well….

    In your other comment you state , “then this man is dangerous and has become part of the problem.” . Channeling Patsy McArdle at Kenmare is not going to win friends anywhere. And then you state “hat looney tune would turn down the opportunity to flaunt their egos on the national airwaves.”. Well, perhaps I note a hint of the green eyed monster there, but one cant but notice that the most prominent voices on the airwaves over the last few days on the national broadcaster were the government and its spokespersons.

  53. @BWII, Tull
    It’s a quandry alright. Don’t think that we should be spewing our vitriol on McWilliams though. He gets some things wrong, he gets some things right. When people are getting the boat and uprooting their families I don’t think that it will be him they’ll be blaming.
    Fact is we’re running out of options – as the “options man” – he has to put forward something.
    I was googling this pari passu and bond holders stuff (shows you what an amateur I am) and it’s far from clear. Are depositors and bond holders to be treated the same in insolvency?
    Logically it doesn’t make sense that they would – why are the interest rates for the two different? Why are the terms for the two different? When I deposit money in a bank I am entering a contract with them to hold my money. It is logical to expect that I would get my money back. It is not a loan in that I never relinquish the ownership of the money to them. In a loan I would temporarily relinquish claim on that money in the understanding that it would be repaid with interest. It seems a completely different transaction to deposit money and to loan money. So I don’t understand how pari passu would apply and how it would not actually be in breach of the contract entered into by the depositors.
    Surely there would be a legitimate expectation (not sure if this is the right term) on the part of depositors to expect that there money would be paid back to them if it was there (as it is their money). Not so for lenders.
    Fascinating stuff.
    And then there’s the other question – if the difficulty now is reneging on depositors why were so many people encouraged to deposit money in Anglo even after default seemed very likely?
    This is strange stuff that doesn’t seem right (and I don’t mean that morally I mean it logically).

  54. Lets step back here and look at who has been on the money from the start, that is 2006. Morgan Kelly. What does he suggest?, Negotiate. Who runs him down covertly at every opporuntity, Leeny. Refered to as a Geramia(what ever that means) in the RTE program, FREEFALL. If Lenny is as honourable as he is made out to be, he should be knocking on Morgan,s door looking for advise and get over the character slagging which Morgan seems to dish. I suspect he can dish the dirt as he knows what he is taking about and does,nt dash out to get coverage on every program. To me, that speaks of confidence. The man is amazing, he has made Brendan Keenan look like a fool at this stage.

  55. Ah Brian,
    How we have missed you. DmcW deserves much credit just as MK, PM for spotting the debacle before most of us. However some of the solution proposed lack specificity.
    As regards the 750bn idea. We have no idea whether it is on depo here or even if he is saying its here. It is certainly not on the B/S of the major Irish banks. If it were here would it stay here if we proposed a 10% windfall tax. I presume it would go quicker than you could say “sub prime mortgage”

    As regards, privately insuring a book of deposits. I suppose it could be done. i have never heard of any nation do it. i am sceptical as regards the capacity, the willingness, or the price. One outcome of the crisis should be a European FDIC…how about that for an idea.

    As regards the parri passu issue. There is a huge literature on this site on whether or not this exists. You seem unconvinced. In any event, since the EU/ ECB seems unwilling to countenace haircuts on senior debt thus far, one may conclude there is an obstacle. The fact that both B&B & NRK did not haircut seniors also points at certain reluctance on the part of the BOE. I could add in Depfa as well. It seems not to be a feature unless liqudiation is entertained (ref the example Danish bank). So are you now calling for the immediate liquidation of all Irish banks.

    I don’t think DMcW is dangerous. Nor should he be silenced. Some of his solutions are crackpot though.

  56. @ Tull
    “It seems not to be a feature unless liqudiation is entertained (ref the example Danish bank). So are you now calling for the immediate liquidation of all Irish banks”

    Forgive the potential stupidity of this question but can we not just liquidate one – Anglo?

  57. @BL

    “No, hes not a fool. Even if he was, one of the great aspects of this blog over others is (or increasingly was) that it was a place for cool rational debate. FACT : AIB yday was worth c600m . FACT : It requires extra capital of some Xb which will come via the state in the form of the state purchasing shares (also known as ownership) in AIB. Tomatoe Tomaeto.”

    WTF has this to do with tomatoes. The FR has stated that AIB needs an extra 3bn captial. State is the only taker and hence owns 90% of AIB. McWilliams seems to suggest that we could have simply nationalised the company for 500M, its market cap. Where would the FR’s 3bn extra cap have come from? It was a deposit selling moment on behalf of McWilliams. Doddammit are we facing a soladirity of deposit selling momenters?

  58. @Brian Lucey

    Art 39: “Treason shall consist only in levying war against the State, or assisting any State or person or inciting or conspiring with any person to levy war against the State, or attempting by force of arms or other violent means to overthrow the organs of government established by this Constitution, or taking part or being concerned in or inciting or conspiring with any person to make or to take part or be concerned in any such attempt.”

    The serfs have a case; and, the citizenry has a case. Doesn’t take 39 steps to figure it out either …

  59. Watching Mcwilliams and Matthews the other other night it is hard to escape the view that they are the more patrician wing of the wider banking community cast out into the abyss for speaking strange tongues from a banking perspective that quite clearly lost all capacity for rational thought.

    The monetory priesthood have been drunk with power for many years and cannot comprehend a power framework that would encompass interests beyond their peers.
    Although I would disagree somewhat with mcwilliams liberal Keynesian views on money and its role and Matthews conservative banking views I could imagine a world where we could all manage to get along given like most people I desire a quiet life.
    But if somebody wants to come into my house and bugger me senseless I may be forced to take a more forceful and radical response although it seems looking at some people they appreciate more then a little of the rough stuff.

  60. Excelent debate

    ‘The monetary priesthood have been drunk with power for many years and cannot comprehend a power framework that would encompass interests beyond their peers’

    @ Keith C has a thing about fiat money, but his instincts are sound. Notwithstanding the excellent points made by @ Tull, BW2 and others on this topic, we are NOT dealing with reasonable folk here. As the various EC governments will find out ere long.

    http://www.nakedcapitalism.com/2010/09/satyajit-das-a-cdo-cure-for-europe.html

  61. BW2
    Calm calm….youll rupture some vital part.

    “”TF has this to do with tomatoes The FR has stated that AIB needs an extra 3bn captial. State is the only taker and hence owns 90% of AIB. McWilliams seems to suggest that we could have simply nationalised the company for 500M, its market cap. Where would the FR’s 3bn extra cap have come from? It was a deposit selling moment on behalf of McWilliams. Doddammit are we facing a soladirity of deposit selling momenters?”

    ok…on the last part, I refer you back to your nice polite email to me….
    I presume that you have never heard the expression “you say tomatoe, I say tomato”….DMW knows well that the state is the only taker. His logic, I surmise, is similar to that of the 20 letter on April 2009. But, continue to fulminate and fluster if you want, I cant be bothered monitoring your blood pressure. I presume that you are directing your energies equally to the people who brought us here as to the people who are trying to see a way out without it involving 2.5b in the hole per annum before the state raises a penny.
    Have a glass of wine, relax, watch celine dion on the tv (or not..)

  62. 1) David McWilliams was implying that paying 0.5 billion to shareholders would obviate the necessity to recapitalise AIB with the extra billions. At the least his statement was disingenuous.

    2) Leaving aside the amounts involved I don’t know how charging 10% of 750 billion trapped in the IFSC can result in the US companies avoiding the payment of US taxes when the money is eventually repatriated.

    3) On insurance he seems to be saying that the way to avoid the deposit liabilities is to get an international insurance company to underwrite them. Why would an insurance company even consider giving insurance, the purpose of which is to allow the government to torch the depositors.

    In the case of Anglo’s deposits it would be like a pyromaniac asking for fire insurance. The very act of looking for insurance would be a declaration of intent.

    The premiums in this case could only equal the value of the liabilities, which kind of defeats the purpose of the insurance.

    4) Regarding bondholders ranking pari passu with depositors, I’ll leave that to the legal experts on this site.

  63. John Martin: wouldn’t just saying “+1” to BW2 have been easier ?
    Btw- he was,I think, suggesting getting 10% to invest not sequestering it.

  64. “The premiums in this case could only equal the value of the liabilities, which kind of defeats the purpose of the insurance.”
    No,fail. Read mertons 1977 article on di. Or not.

  65. @BL

    On point 3: If what McWilliams was actually saying was that we should have bought some kind of reinsurance for our banks’ deposits at some point before October 2008, then that seems like it might have been a good idea. Of course in a world financial crisis there’s no guarantee that we’d actually get the insurance money when we called on it. In any case it’s surely academic for us at present: the only good reason for us to spend money reinsuring bank deposits just now is if we fully intend to call it in, and no-one’s likely to sell us reinsurance under those circumstances.

    On point 4:

    Time and again people have asked for the specific legal evidence that equates senior bonds with deposits

    I happen to have to hand a VoxEU column:

    For example, in the U.S. system the order of priority for debts is the following: (1) administrative expense of liquidation; (2) secured claims up to the value of collateral; (3) domestic deposits (both insured and uninsured); (4) foreign deposits and other general creditor claims; (5) subordinated creditor claims; and (6) equity investors. Recently issued subordinated debt has been guaranteed by the government, which would therefore take any loss on those securities in a reorganisation. (The UK prioritisation is a little different; in particular, it does not make domestic deposits senior to foreign deposits or other general creditors).

    and a BoE paper on the UK’s post-2009 resolution regime:

    The US SRR [Special Resolution Regime] does also feature a version of the no creditor
    worse off safeguard, which was adopted in 1989. But its
    relevance was greatly reduced when the United States
    introduced depositor preference in 1993, under which
    depositors rank ahead of other unsecured creditors in an
    insolvency.

    There is no depositor preference in the UK SRR

    In the absence of anything to the contrary, and in the light of what Minister Lenihan has said, especially to the Dáil, I think we have to assume that Irish law matches UK law and US law prior to 1993 in this respect. Obviously one really needs proper information from an appropriately qualified lawyer citing specific law to be sure, but I don’t have the fees handy. 🙂 What is, apparently, quite misleading is the impression that money coming in from (say) the taxpayer, as opposed to money coming out of the bank’s assets, has to be distributed evenly between depositors and any class of bondholders in an imposed resolution (wind-up or not). The BoE document (for example) appears to very clearly imply that there’s no moral or EU-law basis for that. There’s also the Irish constitution in our case, but I’m fairly sure its protections are basically equivalent to those of EU law in this matter.

  66. @Brian
    If it is not sequestered and is a voluntary arrangement, why would such companies invest voluntarily in Irish bonds/Irish banks? If they wanted to postpone repatriating the funds to the USA there are plenty of other investments all around the world that they could put their money in.

    Did Mertons consider the case of providing insurance for deposits in a State owned bank whose sole owner (the State) had declared before the purchase of the insurance that the bank would be wound down?

    The McWilliams suggestion, as far as I remember, was in the context of a discussion about torching bond holders and deposit holders. No commercial insurance company would consider giving insurance to the State if that was its declared aim.

  67. First George Bush had neutral Ireland pracrically operating an air forcce base in Shannon, more recently the American Chamber of Commerce is reminding the Irish government to tell Euorpe that Ireland is still sovereign, and now a Russian Oligarch is telling the DoF what to do.
    Next week the Queen will be ordering a copy of Peig. It’s truly getting very wierd.

  68. @gadge

    In what sense would it be a fraudulent preference?

    First, depositors rank above subbies – so the fraud preference could only be committed against seniors?

    Second, deposits would be paid as they fall due! Anglo would simply stop taking new deposits and it is their their entitlement to do so?

    Third, senior debt would also be paid as it fell due, but it would be rolled over. The funding profile of the bank would be increasingly reliant on guaranteed senior debt as opposed to deposits.

    I see that at least for the moment that would be a very expensive way of funding the bank – if even possible.

    I suppose a key problem could be finding a way to allow anglo to avoid writing down its assets – but given that they have managed to avoid doing it for this long I don’t see why it would be impossible to continue – perhaps on some shady hold to maturity long term economic value basis bull sh*t

  69. @Sarah Casey

    Could you or one of your journalist colleagues ask the department of finance to explain its undertanding of how a deposit insurance scheme works?

    Specifically could they explain why he believes that losses would need to be imposed on depositors as well as seniors in the event of a liquidation if only one is guaarnteed.

    Could it be possible that the minister still doesn’t understand why the scope of the guarantee is relevant?

  70. @Brian Lucy

    I would speculate that it is not common law or statute that makes senior and deposits rank pp – instead i would say that it is the terms of the contracts themselves – ie the terms on which deposits and senior debt are given

  71. Really well said Eureka & Brian, MCW is not a prophet, but he is certainly not a fool. Think about his audience when he is speaking in such general terms, providing the kernel of an idea is all he can possibly hope to do. He is speaking to a lay audience, not economists. So to lambast him on here is ridiculus. There are other options and paths, & he is showing people like myself, with no background that there are alternatives. The fact that he is not providing any details is not something you can criticise him for. The really dangerous path is to attack decent & alternative views. Thats what got us into the mess we are in. So who is the fool here?

  72. @Christy

    It might just be easier to ask: WTF haven’t you introduced a special resolution regime?

    I’m terribly bad tempered about the whole thing now because its all too late and shoulda been done two years ago.

    The jig is up. I think I’ll write about knitting next week. Just like Lenny asked.

  73. @Sarah Carey
    Its never too late to do the right thing.
    We are all still here using IOUs to buy stuff so therefore the system is still operational.

    This spin that it is too late to do anything baffles me – why

  74. Perhaps we can soften the blow to the poor man.

    Mr. Abramovich would seem to be an ideal purchaser of the firesale assets that Tol and associated NeoCons would sell off. After all, similar practices in Russia made him a very rich man.

    And Cowen is made for the Yeltsin role.

  75. @gadge

    Indeed the legal competence of this House to effect such changes is very much in doubt having regard to the provisions of the relevant EU directives which prohibit differentiation between creditors and the provisions of our own Constitution which protect vested rights.

    So I took another glimpse at our own Constitution, and: check out Article 43, section 2! I should never have doubted aul’ Dev’s genius for avoiding rigid commitments. Now, I still think there are a number of reasons why we probably shouldn’t simply reorder seniors below depositors by force of law; but our constitution isn’t one of them. Again, this isn’t very surprising given that under Irish examinership law employees apparently rank above bondholders!

  76. 1: We reported in 2009 that the effective corporate tax rate in the US in 2007 was 22.2% compared with the headline rate of 35%.

    The windfall tax proposal would make for a good headline in the Wall Street Journal at a time when it’s a struggle to attract significant FDI.

    2. It must all be very confusing to the general public: remove the one key remaining incentive for MNCs, declare a siege economy with a new confetti currency and default on the national debt — and then produce the begging bowl?

    It’s well to remember, the people who generally appear on and present national radio programmes are from the well-off; the misery of the unemployed is likely very remote to most of them; where is the hope for these victims?

    It’s also rare to find anyone with business experience involved – – Sarah Carey being a rare exception.

    3. I mentioned recently that a small number of property-cheerleading economists had free rein during the boom and there was plenty loot to also go around the market for other economists with ‘economic assessment’ reports to accompany planning applications at up to €10k a pop.

    Then as now, in the small society, there’s a reluctance to rain on another’s racket.

    4. During the crisis, Ireland was the first of only 2 countries to guarantee existing bank debt.

    The move foreclosed on options for Anglo before it was nationalised in Jan 2009.

    Contrast that with what was done with the floundering General Motors in the US.

    The Obama auto industry taskforce pushed GM into bankruptcy in June 2009, wiping out common stockholders and squeezing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM.

    Bondholders also got warrants to buy more stock in a New GM if its future value exceeds $15bn, and again if it exceeds $30bn.

    That old bond debt, along with old lawsuits, contracts and other trash, was dumped into Old GM, or Motors Liquidation as it is called.

    All this happened in “the land of the free.”

    Given the ferocity of McWilliams’ criticism of Lenihan now, it is surely legitimate to raise the issue that the former had wished to be seen as one of the architects of this flawed guarantee?

    Morgan Kelly’s analysis of the banking situation on Sept 30 2008 was uncannily accurate; Three and a half months later, when it was proposed to nationalise Anglo, absent the State guarantee of the debts, Lenihan would hardly have rejected a debt for equity swap.

  77. South of Dub
    I have answered your questions before but not received thanks. This may be the last time.

    They do not want control passing out of the hands of the annointed. If it did there would have to be prosecutions, OK? This is what happens in a kleptocracy when things go so wrong that those stealing the most may lose control of the books.

    No evidence, no prosecution!

    Not even the Gardai could avoid following through on what has been happening! The Golden circle unwinds and lives literally would end.

  78. Keith Cunneen

    The shills say iot is too late, TINA etc because they are directly lying to thoise who might enter whatever market still exists. Fiat money requires one thing only: confidence!

    The art of the con requires lying to all by a select few, the higher up they appear, the fewer needed!

  79. Can I propose a variant of godwins law? Whenever a thread on any economic topic goes over 50 comments the probability of someone decrying the existence of fiat money rises towards unity.

  80. @Brian L
    Why so surprised? Mainstream DSGE economists can’t find any reasons for money of any kind, let alone fiat. If it can’t exist in theory…..mind you, I don’t suppose there are many on this thread that know what DSGE stands for….waddayer think they are implicitly proposing as an alternative, barter or autarky?

  81. @finfacts

    I’m not exactly an uncritical fan of McWilliams, but it’s fair to point out that even Morgan Kelly has rethought his position on the banks over time. In that clip from Black September I he’s calling for the Swedish model to be applied to the Big Two, which implies that the taxpayer recapitalisations will take the place of (extensive) bondholder loss-sharing. By January 2009 his position seems to be unchanged: the haircuts are only for Anglo bondholders (at least in the case of seniors) and the money saved is (at least partly) to go into AIB and BoI. By May of this year he’s come to explicitly reject recapitalisations (at least without creditor loss-sharing too) for any of the banks, and calls for haircuts all round. Presumably Kelly’s underlying projections for the banks turned a lot worse during ’09 to early ’10. This is absolutely not to do down Kelly in the slightest, or to let McWilliams off scot-free. But I think it provides some mitigating perspective.

  82. @ Michael H

    All sound points as usual. There’s fair bit of consensus on how we have come to this pass, but not much on how we might get out of it. Or even what or who the ‘we’ is. Our collective blindness is manifesting itself politically as well as economically.

    The bonds outstanding in GM were far smaller relative to US GDP, and the mix of stakeholder interests was very different. The episode has to be read as more more chapter in the decline of US manufacturing, and the shift of political power away from the old industrial heartlands.

    The big action in the US was, and is, about property, derivatives and the ongoing mega bailout of the banking sector. The land of the free(dom from accountability for financiers).

  83. @ Michael
    Great post.
    Is the problem here not related to our political system. Morgan Kelly will never hold the reins of power because he will never be elected. Those who are elected choose advisors in a very opaque hit-and-miss way.
    I’m still struggling to find some kind if solution to all this. Doesn’t take a whizz to know the next budget will banjax the economy.
    We need to do two things – reduce the debt burden and grow (the growth is almost more important).

  84. (Off-topic griping: it’s a drag to watch one in every two or three linkified comments disappear into moderation seemingly at random. I mean, I hope it’s at least clear by now that I’m not selling leather handbags leather handbags)

  85. @ Brian Lucey

    1. the parri passu thing is obviously contentious. I thought Zhou back in the day posted a link to the relevant legislation which seemed to clear it up (you there dude?). However, of the few FACTS which people seem to forget is this (and Christy noted it above) – the banks themselves have contractually signed up to a bond issue that places senior debt as equal in rank to all other unsecured creditors (ie deposits) – it says it very clearly in the documentation. As such, it would seem that the banks themselves believe that deposits and seniors rank parri passu. Our government clearly believe this is a basic contractual law, and to be frank, none of our opposition parties seem to disagree with this (at least not that i’ve heard?). As such, its seems to be a case that you want categoric proof of what seems to be an obvious-ish situation (fair enough), but surely then the burden of proof rests on the “they’re not parri passu” camp rather than on the “they are parri passu”? And simply saying “lets liquidate Anglo and find out” is not a reasoned suggestion for, as above, seems to be an argument that you are on the wrong side of given the current facts.

    2. McWilliams comments are getting odder by the day. Imposing losses on our own central bank, buying AIB for 500mm, forcing US MNC’s to cough up 75bn (this is by far the weirdest and most dangerous suggestion – how do you reckon the US would react???) – this is all deeply flawed and strange stuff. I’m not entirely sure what planet he’s operating from with this, and at best you could argue that his ideas have some tiny sliver of theoretical interest but not a single cent of practical or realistic enactibility. Its far easier to argue that they’re insane rather than they are “good” ideas or additions to the debate.

  86. @ Prof Lucey

    You are right. By the end of that RTE program, I was in need of sedation. Sorry for taking it out on the good folk in this blog. I missed Celine but I have had a good night’s sleep and am in a position to address your post calmly.

    But first of all I want to say something nice about you. You originally railed that the banks’ indication of the value of its property loans to NAMA was way OTT, I think you said it was 30bn versus 50bn. On that you have been proven more correct than not. So there, how fair minded do you want me to be?

    On your points:

    1) We are paying 6 times too much for AIB. I and others have already explained this error. Some have suggested that Maccers was being sly and meant that we could have bought AIB and then not capitalised it as required by the FR. Personally I wouldn’t give Maccers this benefit, it was a DSM.

    2) 750bn trapped. I note you see some merit in the argument. Given the cross party insistence that we will never increase CT above 12.5% we’ll just have to disagree on this. In any event, to suggest there is a 75bn windfall here is a DSM.

    3) Insure the deposits. John Martin has exploded this one better than me. Here is how the conversation went: Maccers: we should let Anglo go Rachel: what about the depositors? Maccers: we can take out an insurance policy to cover that. Yep as JM metaphorises: “I’m going to burn my house, can I take out insurance please?”. A DSM.

    4) “Show me the law that says depositors and bondholders are equal.” I say show me the law that says the ESB, Bord Gas, my bank manager etc. rank equally. There is no such explicit statement. Without such statement they must be equal. Anyway the AG confirms this and despite the grand conspiracy theory I think the AG is better qualified than Maccers to pronounce on this matter.

    As a point of clarity, you are right, Maccers did not accuse his former garlic chewing chum of treason, it was Mary who accused him of accusing Lenny, if you know what I mean.

  87. I seem to recall Willeim Buiter making the point that the ECB was capable of shouldering much higher losses.
    While I unsure of the Byzantine nature of the monetory arrangements between the localised central banks and the relatively new uber- central bank – it is worth exploring.
    The European treasuries are certainly unable to deliver a surplus – certainly in the case of Ireland.
    In extremes a central bank with the interests of the Treasuries at heart would begin to bid up the price of Gold to protect the core tresuries of Germany and France as it seems inevitable that they will suffer massive losses from interest bearing vehicles at the periphery.
    Buitler did not go into detail regarding the above but he did mention that is a option but prefered less arcane but more complex banking practises that would transfer the losses to the central bank.
    I suspect Mcwilliams is gnawing on a bone with a huge amount of marrow inside.

  88. Just hearing about Lenno’s conference call. Confirms what Ive always thought about these bond trading monkeys.
    Time to play serious hardball.
    Do you really want your school/hospital to close because of these immature baboons?

  89. @ Eureka

    Is the problem here not related to our political system.

    The failed political system of course is a big issue and if after the next GE, an understandably triumphant Labour Party coalesces with a beaten, demoralised Fine Gael, fighting about who should be Tánaiste, what a start that would be to an new administration facing huge challenges.

  90. @ BW 2
    Very cogently argued, but:

    Point 2
    Cross-party insistence notwithstanding, the clock is surely ticking on the corporation tax incentive one way or another.
    Points 3/4
    It would seem to follow that the bondholders have benefited from a comfort which was provided to Anglo depositors. Given that Anglo was a non-systemic bank, its liquidation would not have crippled our economy directly.

    Big Anglo depositors had to be rescued, because they were politically systemic. They knew too much about Ireland.

    How many were:
    * property Ponzi schemers ?
    * execs from our other banks ?
    * elite professionals who couldn’t resist a slice of the property action ?
    * families and friends of leading politicians ?

    Looks like 50bn is the price of silence so far.

  91. @ Simpleton

    Chelsea? Where on earth do you come up with such a scurrilous suggestion? I’m Utd all the way…(which gives me an additional reason to want subbies to take some losses!)

    @ Paul Quigley

    depositors were not protected for the sake of protecting depositors, they were protected for the sake of preserving their funding within the banking system, and of maintaining some semblance of order within the wider economy, given that they are, by and large, “call” liabilities which can easily be withdrawn, potentially to another juristdiction. Deposits are also one of the fundamental stores of the societal wealth of a nation (property typically, and not incidentally for our situation, being one of the other main ones). You could easily get around the problems of parri passu by telling all depositors to withdraw their cash tomorrow and let bondholders take all the pain – the problem is that you then wouldnt have a banking system, or probably a functioning economy, left to worry about.

  92. @Paul Quigley

    Thank you. The “Anglo is systemic” thing was never terribly convincing to me. It wasn’t part of our money transmission system. It provided credit to the economy but we now see that is not the sort of credit we need. To me it was a rich man’s casino and that included its depositors. But I have to accept the bona fides of those in authority that to let Anglo go would have collapsed the whole banking system and so it became systemic.

    @ B.EB

    Deposits 70
    Bonds 30

    Liquid assets 50

    After a run on deposits 50 get paid out and the remaining 20 plus the bonds get torched. But I see your point.

  93. @Bond Eoin Bond.

    We no longer have a banking system in the modern sense.
    They are no longer capable of creating credit so therefore the money supply will decline as debts are defaulted or paid off.
    It is still functioning as a store of wealth for citizens in a liquid form and therefore we still have a means of exchange.
    But but what is the point of equity or so called risk capital in banks that cannot grow.
    The banking system as designed in its present form is a anachronism – it serves no complex function and could be reconstructed in a much simpler form that would merely store the credit money until it disappears completly when all debt is paid off or defaulted.
    The fiscal problems are merely a symptom of a lack of equilibrium withen the system as the now smaller surplus is being extracted by higher interest bearing vehicles at the expense of depositors and taxpayers.

  94. @ BW 11

    Fair enough but

    ‘I have to accept the bona fides of those in authority…’

    One doesn’t have to, but one can choose to. Even if one does, one doesn’t have to go on doing so if suficient evidence to the contrary accumulates.
    A strategy based on concealment and drip feed is always liable to raise suspicion. That is what we have had.

    @ BEB

    ‘Deposits are also one of the fundamental stores of the societal wealth of a nation (property typically, and not incidentally for our situation, being one of the other main ones)’

    I thought we had long since accepted that most bank credit is created de novo, rather than simply being the deposits lent out. If the modern global economy demonstrates anything, it is that wealth is increasingly ‘fungible’, diffuse and dynamic. Anyone’s wealth can be extracted by the right financial/political engineering. That was achieved here by pumping up a rogue institution, and so infecting the mainsteam banks of the state.

    A flood of liquidity was let loose here, and it was predictably destructive in its ultimate effects. The big eurobanks have consciously exploited our leprechaun regulatory ‘regime’. The fact that various local parties jumped on board does not absolve those responsible.

    Now that they are in the soup over derivative positions, the periphery has to hang. They knew exactly what they were doing, and just to play it their way going forward seems like the biggest mistake of all.

  95. Simpleton,

    How much of DmcW solution do yu think is capable of being implemented? I don’t support Chelsea BTW?

  96. @Tull Ambromovich

    McWilliams subtlety, lost on all you hedgies, is that he is simply promoting a set of policies as absurd as the ones actually being followed by Lenny. And you all go and fall for it by pretending that McWilliams is a serious commentator and Lennie is not a neophyte Finance minister. gimme a break

  97. @Eureka

    “When I deposit money in a bank I am entering a contract with them to hold my money. It is logical to expect that I would get my money back. It is not a loan in that I never relinquish the ownership of the money to them.”

    Afraid the above is wrong. You do transfer ownership. You merely have a chose in action to get it back, in other words -sue.

    The case is Foley v Hill 1848 House of Lords where the Lord Chancellor notably stated-
    “The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

    “That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor.”

    Apt in present circumstances?

  98. @ All

    Here’s some wishful/stupid thinking, is there a money reparations time frame set out in the gaurantee legislation? i.e. in the case of a default are monies owed immediately or could we say ‘we didn’t mention when we’d pay it all back’? Allowing our old friend inflation a chance to work his magic.

  99. @ podubhlain
    thanks for that. At the risk of exposing my ignorance again – shouldn’t interest rates for bond holders and depositors be the same if pari passu applies?

  100. Eureka,
    Interest rates for depositors are not even the same. They vary according to term, size and whether or not yo wish to b able to get your money back when you want it.

  101. Ok – take that back – I understand about different terms of deposit etc. – should they not be similar. IE offer Irish people fixed term deposits for similar rates to bond holders.
    Suing is intersting – the division comes first. But the compensation for depositors would come second.

  102. @Tull
    Eureka’s point is a good one: if, when adjusted for liquidity, term and size, senior bond yields compensate for something else, then all that’s left is risk? Does such a premium exist?

  103. @Eureka, Simpleton

    Deposit rates at the moment are somewhere around 3% (larger deposits) for 3 months. Not sure what a 3month bond/bill is paying but I think somewhat less. So the (inferior)position of the depositor is reflected in the higher rate.

    The UK have a bill before Parliament on bank deposit law. We need one here, as the depositor in in a very vunerable position. This archaic position in law for depositors is untenable in the current climate.

    How this impacts on the parri passu argument is unclear.

  104. @podubhlain.
    That’s really clear. As you say a bit worrying. Not worth the standard deposit account rate to put money in the bank with that risk.
    If this vulnerability becomes widely known about it could bring about that run on deposits. Slightly scary stuff.

  105. @Paul Quigley (12.36pm post)

    Bank credit is not created “de novo”.

    Just as in Newtonian physics every action has to have an equal and opposite reaction, in the banking system every asset has to have a liability (or to be more precise assets must equal liabilities). Bank credit cannot be created out of thin air. In order to lend the Irish banks had to borrow. For the first time in history they had access to an enormous amount of money from abroad that was facilitated by the single currency. It was this that enabled them to extend credit in this country.

    The immediate cause of the problems in our banking system was not the liabilities but the assets. The loans that the banks have extended were not fully collectable. Again, the principle of assets equalling liabilities applies. The value of loans (the banks assets) was reduced. Therefore there was a corresponding reduction in the amount the company owed to shareholders. Therefore the shareholder funds (a company liability) had to be reduced.

    The problem was that the shareholders’ funds had been transformed into an “asset” (debit reserves) in the sense that the shareholders “owed” the bank money rather than the bank owing shareholders. But of course the laws of limited liability say that shareholders cannot be obliged to put in more money than their original stake. Also, a more immediate problem was that the bank’s capital ratios had fallen below the required level.

    This is why the recapitalisation was necessary.

    The last 2 years have shown how fragile the banking system is. If the idea becomes prevalent that senior debt and deposits are not safe in a bank this has grave implications for the future of the banking system. Banks will not be able to extend credit in the absence of access to funds (also the banks’ problems have inhibited the State from accessing funds, which loose talk has exacerbated). I don’t accept that reneging on company bonds (even to a company like GM) has the same systemic implications as reneging on senior debt in a bank.

    As I’ve said bank credit cannot be created out of nothing and in Ireland, unfortunately, we have made ourselves dependent on credit from the outside world without which credit cannot be extended here.

  106. @simpleton

    “McWilliams subtlety is that he is simply promoting a set of policies as absurd as the ones actually being followed by Lenny.”

    That is an interesting line of thought. They say Maccers is a very clever economist. Therefore he must actually know that these riffs about 75bn goin’ abegging in the IFSC, we can buy AIB for a sixth of what is required, we can dump Anglo and sort out the depositors with an insurance policy, we can default on the CB, we can leave the euro etc. etc. are pure madness.

    And the penny drops when I read the Sunday Times. Maccers is now in the entertainment business. He along with Prof “sell the deposits” Lucey, Gurdiev, Fintan O’Toole and others are hosting a economics fest in Kilkenny later this month. As the Sunday Times quips “spot the comedians”.

    But this isn’t funny. People are hopping mad. Many are suffering. It is totally irresponsible for RTE to allow these jokers a platform to poke fun at us and promote their entertainment careers.

  107. @podubhlain
    Thanks for the previous clarifications. Can I pick your brains again please?
    Is this what happens if Ango liquidated?
    1 bond holders and depositors get treated equally and get pretty much nothing.
    2 Depositors can sue for breach of contract after liquidation and have a pretty clear-cut case
    3 Senior bond holders can sue too. But have they got as strong a case for breach of contract? Does their contract not end at the point of liquidation when they must get treated the same as everybody else (which they have at the point of liquidation). What happens after liquidation (i.e. compensation fo depositors) has no bearing on their contract?

  108. @ Eureka

    “get pretty much nothing”? – assuming we put the capital in we have already promised (19bn promissory note), seniors and depositors (and other senior unsecured creditors) would get paid out around 81 cents. Even without the promissory note, they’d get paid out 41 cents (estimates from BNP a couple of weeks ago).

    Also, who do you think the depositors are sueing? It’d be the liquidated Anglo Irish Bank, correct? So where exactly is the cash going to come from?

  109. @Bond, Eoin Bond
    the depositors would sue the state. And bond holders could their get 41 cents? (and take their chances getting more)

  110. @ Eureka

    why would the depositors be able to sue the state? Anglo, despite nationalisation, is a private limited company. Limited liability should still hold for the shareholders (ie the State), no?

  111. @Eureka
    It would seem that as things stand the depositors would, in the event of liquidation, rank as an ordinary creditor and be paid whatever dividend that arises from the disposal of assets. However, as the State has guaranteed them until December, the State would be obliged to make good the deposits in the event of liquidation pre December 31st and the claims in liquidation would be assigned to the State.

  112. @podubhlain, Eureka
    the Deposit Guarantee Scheme (DGS) covers retail depositors 100% up to 100,000 – there is no termination date. I guess that would be satisfactory for most reatil deposits

    see this FAQ (on ELG) on the NTMA site:

    “What guarantee applies for deposits of up to €100,000?
    B. Deposits
    Most retail (consumer) deposits will continue to be guaranteed under the existing statutory €100,000 Deposit Guarantee Scheme (the “DGS”) which covers 100% of retail deposits with all credit institutions authorised in Ireland (including credit unions) up to a maximum of €100,000 per qualifying depositor per institution. The DGS guarantee does not have an end-date.”
    http://www.ntma.ie/Publications/2009/FAQELGscheme.pdf

  113. Ah I give up. Looks like we’d be ok if we had just nationalized Anglo – it’s the guarantee that has us. And there’s no way out of that.
    Ah well – cest la vie. Almost became an Arsenal supporter today.

  114. @Eureka
    Just to clarify your scenario – in the event of bank liquidation:

    1. bond holders and depositors get treated equally and get pretty much nothing.
    2. retail depositors invoke the DGS and get their deposits back – to the max specified no need to sue anybody.

  115. @ AMcGrath

    people need to realise the there is in fact a good bit of assets to distribute to seniors and depositors – this suggestion that they’d get “nothing” is very mistaken (and infects all the debates about how we could/should negotiate with senior ung’teed bondholders). BNP reckon its 41 cents even WITHOUT the promissory note.

  116. BW2
    your getting hysterical, and (Karl/Philip take note) immoderate.
    This is a very interesting thread – most people here, (even Tull….:) ) seem to evolve and learn and share their views. You on the other hand have a real bee in the ass about McWilliams in particular, then the rest of the pantheon of hate. Cool it, before you say something not just stupid but worse. Try, try, checking some facts before you put your keyboard in gear. McWilliams is organizing Kilkenomics – not I nor Dr G nor FoT. We merely appear, in my case for promises of beer….FoT probably a good burgandy. As an example. Youv already accused him of accusing someone of treason, and had to row back.

    On the point, as you dragged us here, what, exactly, is your problem with an event trying to explain WTF happened to the people? Do you think we should sit in our ivory towers (4th floor Aras an Phairsaigh, to be exact) or, y’know, profess…? Just wondering.

    Anyhow – moderators, take note. BW2 is imho (and iv done it so i know it…) dragging the tone and tenor of the debate down. I suppose its the flipside of a lightly moderated blog but most people manage to both stay on topic and get their digs in en-route without overly personalising it. Time for tea…

  117. @Bond

    If it is says that they rank pp in the contract documentation then that is all that is required. i presumed there was some sort of argument about what would happen if that wasn’t the case, and whether there was some sort of statutory measure to ensure that this relationship was always maintained (which there may be – i dont know). however, if it says that deposits and seniors rank pp in the contracts then that is all that is required.

  118. @Eureka
    “it’s the guarantee that has us. And there’s no way out of that.”

    At this point there are three separate but intertwined guarantees:
    – The DGS which cover retail depositors – as I described
    – The orignal blanket guarantee under the CIFS act 2008 (the CIFS scheme)
    – The extension to that – alled the eligible liabilities guarantee (the ELG scheme)

    The first one was needed to prevent a Northern Rock type run on the retail banks. The others are a bit of a mystery. It seems that 4bn of interbank deposits (not covered under DGS) were withdrawn from Anglo in September 08 – so this was partly the reason although there is a bit of closing the stable door after the horse is gone about it.

    The 2nd (and 3rd) ones are largely responsible for transferring what was a bankig problem into what is now a sovereign problem.

  119. @ Christy

    i cant say that ALL bond issuances contained the term PP in them, but it seems like it is a standard clause in this sort of documentation. It doesn’t say “this debt will rank PP to depositors”, but says (paraphrasing) “this debt will rank PP with other unsecured senior creditors” – this is the classification that deposits, amongst other debts, has, so it would seem to be a fairly straightforward legally binding clause.

  120. @ AMcGrath

    true that wasn’t what you were specifically getting at, but i just think its important to understand that senior debt isn’t nearly as “distressed” as we might like to think it is, and this therefore affects how much we can “save” even if we decided to hit seniors for losses.

    Also, re the ELG – it was designed to ensure that the banks could still conduct term funding while they were recapitalising/during the NAMA process. Yes, it has transferred a lot of risk onto the sovereign, but it does actually make a decent bit of sense to enable the banks to term fund at a time of major problems. If we were doing it all again (ignoring the Anglo aspect of things, and using a massive amount of 20/20 hindsight) we probably would’ve brought in a 100% deposit guarantee AND an ELG, but no blanket guarantee of other bond liabilities (senior or sub).

  121. @AMmcGrath
    Should have referred to the DGS scheme but I was thinking of the larger deposits, both corporate and retail. These are the ones that are liable to move at the first sign of trouble. And they did when Mr Anysley admitted losing 5b of deposits in September. It was the very late announcement of the extension that I believe caused this as corporate and other depositors had funds maturing at end of August and faced no cover beyond September.
    As for depositors getting nothing I think this is unlikely.

  122. @BW2

    You know, not everyone knows ‘exactly’ what the Hell hit them, and like it or not, the level of substantial knowledge on this financial heist in the public is shocking low.

    Apart from that, I consider Ireland to be LUCKY to have people like DmcW, Dr. G, Brian L., Morgan K., last not least Karl Whelan, forgive me if I forgot a few. Spitting vitriol on those who stick their necks out since long and make an effort to inform the public is not acceptable.

    I for one learned a helluva lot from all of them in a very short amount of time, and you know what’s the most important lesson I learned?

    THINK FOR YOURSELF!

    Seriously dude, your post reminds me to a statement of politician extraordinaire Alan Dukes this summer, calling the public a psychotic hysterical.

    Time for a beer.

  123. @Brian Woods II:
    “It is totally irresponsible for RTE to allow these jokers a platform to poke fun at us […].”

    Who is this “us” whereof you speak?

    bjg

  124. One question about all the deposit guarantee schemes seems relevant; does it provide for a timely repayment or ultimately on resolution?

  125. @ Simpleton
    “Eureka’s point is a good one: if, when adjusted for liquidity, term and size, senior bond yields compensate for something else, then all that’s left is risk? Does such a premium exist?”

    my guess is that legacy senior bonds had very little credit risk premium due to “parri passu”, the T&C in the prospectus and the ECB implict “no senior bond holder left behind”. Seriously though, you can play the jesuitical game over and over again but there are certain facts on the ground you need to take a/c of. These are:
    i) seniors have legal, contractual and constitutional protection (according to our AG). if you do not agree , hire an SC & go to the 4 Goldmines.
    ii) Seniors have protection from the ECB implicit policy. Find me an example where SBHs have been burned in a sytemically important bank in the EZ. BTW the Old Lady seems to share this view as well-witness NRK and B&B.
    iii) defaulting on seniors or to use the cuddly pharase “sharing risk” at a time when we are running an LDR>100% is not smart. I love the idea of turning around and tapping the guys you have just defaulted on.

    Now just to show I am evolving, I will make this prediction. Senior debt in future will be closer to risk bearing in certain circumstances than it is now. Thus, it will be scarecer and more expensive. Irish bank balance sheets will be smaller and credit will be more expensive. As a result, by wishing for bondholders to be risk bearing you will have contributed to a credit crunch.

  126. @Prof Lucey

    Karl started this thread. He has a strict but fair rules of engagement. He has not seen fit to censor me as you request. Read back the posts, it was you who engaged in the personalising – monitor my blood pressure, split a vital organ, have a glass of wine, watch Celine etc. etc.

    You have by and large supported all of DMcW’s ridiculous suggestions whilst most posters have seen his nonsense for what it is. Even one DMcW supporter was embarrassed enough to suggest that DMcW is pulling our leg for effect.

    I’ll go to the Kilkenny fest, I will be the one with the false beard and moustache.

  127. @Tull
    “Senior debt in future will be closer to risk bearing in certain circumstances than it is now.”
    Agree, but it may not be more expensive. It would seem that we will have to put depositor protection on a long term statutory basis if the system is to retain funding. With all the upheaval and last weeks news on AIB I predict that it will be impossible for the Gov to withdraw deposit protection at the end of December. This could have a beneficial effect.

  128. @Bond Eoin
    Thanks.
    That seems to cover the DGS but I wonder about the other two and particularly the ELG.

  129. @ podubhlain

    CIFS and ELG both have “timely payments” as the clause in question (just checked)

  130. @ pod. Agree re depo protection. This also raises issue of a fund & it’s financing…. Insurance!

  131. @Bond Eoin
    Thanks.
    “timely payments”
    Now for the legal definition of “timely payments” (only kidding)

  132. @Tull
    Do you think Bono should negotiate with the bondholders to effect debt relief on our behalf?

  133. @Mr. Bond

    why would the depositors be able to sue the state? Anglo, despite nationalisation, is a private limited company. Limited liability should still hold for the shareholders (ie the State), no?

    You won’t get any disagreement from me over that last sentence! But I’m sure that intentionally causing a run on a bank you own yourself would produce lawsuits for malfeasance, end-running the insolvency process etc. from bondholders as well as depositors. Of course you weren’t seriously proposing it at all, but it’s something I’d thought about. 🙂

    @all

    I had an earlier pari-passu-post at 10:30 pm yesterday which was held up for a good while, so you may have missed it.

  134. @BJG

    ““It is totally irresponsible for RTE to allow these jokers a platform to poke fun at us […].”

    Who is this “us” whereof you speak?”

    I meant “us”

  135. SImpleton, we need more than Bono. Somebody who can make the impossible possible. The shade of Cardinal Newman perhaps. He needs a miracle to get sainthood

  136. @Niall
    The FAQ I linked above is informative :

    “B. Deposits
    3
    Most retail (consumer) deposits will continue to be guaranteed under the existing statutory €100,000 Deposit Guarantee Scheme (the “DGS”) which covers 100% of retail deposits with all credit institutions authorised in Ireland (including credit unions) up to a maximum of €100,000 per qualifying depositor per institution. The DGS guarantee does not have an end-date.
    The ELG Scheme (only guarantees the balance of retail deposits in the participating institutions (see Q3 above) over
    A private individual with a deposit of less than €100,000 is guaranteed solely under the DGS. If, however, the same individual has a deposit of over €100,000, the first €100,000 will be guaranteed under the DGS and the balance that exceeds €100,000 will be guaranteed under the ELG Scheme. the €100,000 limit of the DGS.
    5. What guarantee applies for deposits in excess of €100,000?
    As noted above, the ELG Scheme only guarantees the balance of deposits over
    The balance in on demand accounts or current accounts in an ELG Scheme participating institution (see list above at Q3) in excess of €100,000 will be guaranteed until 31 December 2010 regardless of the date the account was opened. the €100,000 limit of the DGS (or deposits that do not qualify for DGS protection).
    The balance on fixed term deposits in excess of €100,000 opened with a participating institution during a period from the date the participating institution joined the ELG Scheme up to 31 December 2010 will be guaranteed for the full term of the deposit, up to a maximum deposit term of five years.
    For example, a two year fixed term deposit of €150,000 opened with a participating institution on 1 May 2010 is guaranteed for the full two years of the term i.e. until 30 April 2012.
    The balance on fixed term deposits in excess of €100,000 opened before the date the participating institution joined the ELG Scheme would have been guaranteed under the 2008 CIFS Scheme until 29 September 2010 but are no longer guaranteed.
    The guarantee for notice accounts is similar to that for on demand accounts, except that the guarantee will also last for any notice period if notice of withdrawal is made before 31 December 2010.
    As described in Q4 above, qualifying deposits of up to €100,000 will remain protected under the DGS and the ELG Scheme will only apply to deposit balances over €100,000 or in relation to deposits where the DGS does not apply at all.”

  137. @John Martin

    On the contary banks can and do create credit out of nothing.

    The capital requirements were supposed to be a buffer for any losses suffered and for that risk the providers of this capital in either equity or bonds took most of the surplus during the good times.
    Unfortunetly this theortical framework has been distorted by power dynamics so therefore the owners of bank capital do not have to manage the creation of capital as they belived that any bad loans would be covered by the taxpayer.

  138. @Tull
    I respect your greater knowledge and understanding but my gut (and it’s a fairly substantial one) thinks that these seem to be unchartered waters. Our crisis has the potential to destabilize Europe (only potential).
    About 100 million Europeans have been placed at the mercy of the bond market. How will they react?
    One solution for this is a low interest fund for troubled regions wedded to proper structural reform in those regions. But that won’t happen. The Germans might never do that.
    There’s a helluva lot in this. This is an indulgence but it only took one bullet on that guy in Serbia in 1914 to destabilize a continent, Anglo has the potential to set in motion something that could seriously jeopardize monetary union and all the presumptions that go with it.
    We could use that to our advantage at the political level. We need some hard assed negotiators now.

  139. @ John Martin

    Thanks for the detailed post.

    ‘Bank credit cannot be created out of thin air’

    Isn’t that one of the main functions of central banks ? We can’t do it in Ireland now, but the ECB can. What is quantitative easing ?

    ‘In order to lend the Irish banks had to borrow. For the first time in history they had access to an enormous amount of money from abroad that was facilitated by the single currency’

    Think development economics. Our banks became conduits for a toxic credit flow. Their poor track record in supporting indigenous enterprise, and their historic preoccupation with ‘safe’ property, was bound to lead to a destructive bust. Contrary to the MoF’s assertion, their past has been far from glorious.

    The big Euro banks had freedom to engage, through their peripheral clients, in activities which would have attracted much more scrutiny at home. Would the German regulators have sat on its hands if the German banks had concentrated lending into a single German sector ?

    It was OK for them to do it here, perhaps because
    * it was being done at arms length
    * the periphery doesn’t matter

    Or so they think perhaps.

    Look behind the single currency towards the dynamics of credit flow. Our banks transformed themselves into clients of larger European banks. Channels for distributing the liquidity franchise which Big Brother wanted to disperse. Anglo infected our mainsteam lenders with the ‘cheap’ credit disorder, and our local system crashed.

    I refer to The Volatility Machine by Michael Pettis in which he discusses the Kindleberger liquidity model

    . in most LDCs , the banking system is the most important component of the capital structure.. p 129

    ‘ there is a hierarchy of markets from the centre to the periphery, and changes in the centre can be ampliofied as they move to the periphery..’
    p 193

    ‘the investment decision is mostly affected by liquidity conditions in the rich country financial centres, rather than the more conventional models that look at domestic factors within the the less developed country to explain capital inflow’ (xviii)

    When Frankfurt sneeezes, we get pneumonia.

  140. Why was it ever considered necessary to guarantee existing bondholders?

    It is clear, and not just with hindsight, that this involved an extra element of risk. What I can’t see is what benefit did it bring to offset this risk. Perhaps, I could understand the decision better if I could see a weighing up pro’s and con’s exercise and the gov came down on the side of a blanket guarantee, but I cant see any real pro’s to offset the con’s

  141. @Christy
    that’s the problem with this whole fiasco – the pros just couldn’t keep up with the cons.

  142. @Paul Quigley.

    I am open to correction here but I was under the impression that banks can create credit and central banks have the ability to create high powered money.
    The capital requirements of the bank have no real role in the credit creation process – they do however buffer the banks potential losses and are rewarded for that risk via high interest charges.
    As regard a certain deposit ratio to loans – these deposits were created in some other bank credit creation construct and while they seem to be linked to the amount loaned in a individual bank – collectively it is nearly all credit money.
    I believe Steve Keen has wrote extensively on the subject and is far more qualified them myself to explain this strange process.

  143. @ christy

    Why was it ever considered necessary to guarantee existing bondholders?

    It wasn’t necessary to do it and the system would have very likely stabilised on Sept 30, 2008 without it. After all it was 13 months since the ECB had begun a massive program of funding Eurozone banks.

    People seem to be more interested in arguing about nitty-gritty of banking funding rather than viewing what has happened as the symptoms of a failed governance system.

    There is no constituency for significant reform of the failed system of governance and of course, the sale of Shane Ross’ book showed that the banks are the red meat for the masses.

    The pattern of panic and slow-motion over the past 2 years in dealing with the banking crisis is not an aberration.

    That is the way governments have operated in Ireland for decades.

    Respond to a serious issue only when it has become a dire crisis.

    The comfortable across the spectrum from left to right as represented by vested interests do not want significant reform as they risk losing by upending the bountiful applecart which has kept them in clover.

  144. the nursing home charges debacle may be worth noting. people may recall that the state had been illegally levying nursing home charges for decades on certain patients.

    in 2004 the Dail and Seanad passed legislation which removed retrospectively the right of those who had paid such charges to seek their money back. The Bill was referred by the President to the Supreme Court – and found to be unconstitutional.

    the supreme court found that the right to sue to recover an illegally levied charge was a property right protected by the constitution. the abolition of that right by legislation was unconstitutional.

    the state tried to justify the abolition of the right on the basis that it would be expensive to pay back all the money that had been illegally levied.

    in arriving at its decision, the supreme court accepted that the cost might be substantial, but it was not catastrophic or beyond the scope of ordinary financial management.

    the supreme court also highlighted that the persons affected were of modest means.

    the supreme court went on to say:

    “132 Where a statutory measure abrogates a property right, as this Bill does, and the State seeks to justify it by reference to the interests of the common good or those of general public policy involving matters of finance alone, such a measure, if capable of justification, could only be justified as an objective imperative for the purpose of avoiding an extreme financial crisis or a fundamental disequilibrium in public finances.

    133 Having regard to the terms of the Bill and taking into account all of the submissions of counsel, nothing has emerged in the course of the reference from which the court could conclude that the abrogation of the property rights in question is an imperative for the avoidance of an extreme financial crisis or a fundamental disequilibrium in public finances.”

    See Re Health (Amendment) Bill 2004 [2005] 1 IR 105.

    Are we not facing a fundamental disequilibrium in public finances now?

  145. I think that imposing losses on bondholders is becoming less and less of an option.

    Unless we pass a resolution scheme, the only method of imposing losses on the holders of Anglo subordinated or senior debt is to wind up/ liquidate the bank. As the bank is to be wound down, examinership is not an option.

    Liquidating Anglo would force us to write off the equity injections the State has made up to this point although this will be lost in any event.

    Liquidating Anglo would allow us to wipe out Anglo’s subordinated debt.

    Liquidating Anglo would allow us to impose losses on senior creditors of Anglo. There are three types of senior Anglo obligations, deposits, guaranteed senior bonds and unguaranteed senior bonds. Losses would need to be spread evenly across each of these creditors as they rank pari passu. It has been estimated that each of these creditors would receive approx 80c on the euro in such a scenario.

    The State has guaranteed the obligations of two of the three classes of senior creditors, namely depositors and guaranteed seniors (under the ELG and deposit guarantee schemes). These guarantees are irrevocable and a failure to honour them would constitute a sovereign or quasi sovereign default. Therefore, Anglo’s obligations to these creditors would need to be met by the State. Losses on unguaranteed seniors would not need to be met by the State.

    I’m not sure when the State’s obligation to meet these guaranteed creditor’s debts would fall due. On the one hand it may be the case that a three month deposit or a guaranteed senior bond would only need to be repaid when it fell due. However, I would expect that the contracts that ground these loans have an accelerator clause to the effect that the entire amount falls due when the bank becomes insolvent. In any event, liquidating the bank would result in a substantial and at least partially immediate call on the guarantee. It is likely that the State would have severe, perhaps insurmountable, difficulties in meeting such an immediate call.

    The majority of Anglo’s senior creditors are either depositors or guaranteed senior debt. This substantially reduces the amount of savings that are possible. The total savings possible by liquidating Anglo is the sum of the banks outstanding subordinated debt and approximately 20 percent of the outstanding stock of unguaranteed senior debt.

    Leaving aside the difficulties in meeting an immediate call on the guarantee there are further related risks involved in liquidating Anglo. As investors and depositors would doubt the State’s ability to meet the immediate call that it necessitates some investors would likely believe that there was a real and substantial risk of an imminent default on the guarantee, and therefore a real, substantial and imminent risk of a sovereign default. In such a scenario some investors and depositors may feel that the guarantee that exists over the deposits and debt of the other banks provided less protection than was consistent with them bearing the risk of holding these assets. Even if some investors were willing to believe that the Sate could meet its obligations they would also be aware that other investors may not feel the same way. In short, a run on the Irish financial system would be a possible, perhaps likely, outcome.

    Therefore, in my view in order to impose losses on either subordinated or senior debt holders we would need to pass a resolution scheme, stop guaranteeing new debt issues for Anglo, place it into the scheme, recommence guaranteeing new issues, perhaps on a super senior basis, and hope that any disruption caused imposed a smaller cost on the State then the amount saved by imposing losses on subordinated and, more controversially, senior unguaranteed debt holders.

    If we are not willing to impose losses on seniors then the risk involved in passing a scheme and running the bank through it be borne solely to impose losses on subordinated debt. Given that this debt could likely be bought back at 30 cents on the euro, the extent to which this risk would be worth running is debatable.

    I think there is a price at which Anglo sub debt is a good buy

  146. Wolfgang Münchau says in the FT today: “You cannot simply apply a haircut on a bond unless the issuer has formally declared bankruptcy. Dublin is now preparing legislation that would allow it to apply a haircut to the subordinate debt. First, coming two years after the beginning of the crisis, this is absurdly late. More importantly, it is just peanut-sized symbolism, especially as no haircut will be applied to holders of senior debt.”

    I have been making that point about the liquidation process and relevant law for some time.

    As Colm McCarthy says, anger isn’t a strategy.

    Anglo had over €14bn in issued debt securities in March 2009. Add in INBS debt and absent the State guarantee, these private institutions could have been put through an examinership type process and as they were both insolvent, there would have been billions of euros of tax funds saved through agreements with the bondholders, including the seniors.

    Two years later, we are scrambling to recover something from a disastrous decision.

  147. @ Christy

    “The total savings possible by liquidating Anglo is the sum of the banks outstanding subordinated debt and approximately 20 percent of the outstanding stock of unguaranteed senior debt.”

    For those interested in what these savings may ultimately amount to, its 2.4bn of sub plus 20% * 4.2bn in senior = 2.4 + .85 = 3.25bn give or take. However, we can/will probably make around 1.8bn of these savings even without a resolution regime via a tender buyback at a discounted price. So the resolution by itself save approx 1.4-1.5bn.

    However, some of these ‘gains’ could be nullified by a faster firesale of Anglo’s assets via liquidation rather than via a longer wind-down, plus whatever debateable negative impact from defaulting on seniors may create.

  148. @Michael H.

    I had this discussion on the weekend. When Anglo ‘broke new grounds’ http://bit.ly/9HVgJf with Euro 2 bln debut UK covered bond, this was surely a unusual event that was known to DoF.

    It happened short before Northern Rock and Bear Sterns, and in this light, one would have expected to change law when the banking guarantee was given to allow for bankruptcy of banks. I do not think this to be unreasonable at all, at the very latest after Northern Rock later in September, this should have been accommodated for.

    Why did this not happen? Cui Bono?

    I think Muenchau is right, welcome to Absurdistan!

  149. http://ftalphaville.ft.com/blog/2010/10/04/359346/abramovich-vs-ireland/

    Abramovich’s letter to the Irish govt – it reads more like a begging letter, is bizarrely amateurish in its arguments and contains a lot of factual inaccuracies. Clearly they were behind the Telegraph article on “5 or 6 hedge funds threatening legal action on Ireland”. I’d actually guess they are the only hedge fund involved and the entire story has been placed by them with the Telepgraph/market. Its very odd and something no serious hedgie would try and do.

  150. @eoin
    Nice one – your description of Ambromovich’s letter is accurate. It also reads like a long whinge. Dictated by the man himself to a sub(ordinate)?

  151. @ Eoin

    Eoin,

    What would the ballpark estimate of the savings on the debt have been if in Jan 2009, Anglo like GM was in the private sector without a state guarantee and subject to restructuring?

    The issue of liquidation or threat of, doesn’t arise now because it has been officially ruled out.

  152. What percentage of its total assets has INBS lost?

    Is it one of the most insolvent BS/banks ever? It must be close.

    subbies are looking for money back from it – i can handle that – they have a negotiating position – but the indignant attitude – the whining – it would make you sick

  153. @ Christy

    5.4bn taxpayer cost vs 13.3bn total balance sheet i think (2009), but that includes capital reserves of 1.2bn which have been burnt through, so total loss is therefore 6.6bn vs 13.3bn, right? Probably generated a couple of hundred million via subordinated liability management last year, so round it up towards 6.8bn. It’s impressive in its destruction of capital, and remember, 2bn of assets were residential and so only very marginally impaired. So 6.7bn in losses on 11.3bn of assets, of which a billion or so are interbank loans or liquid assets. Sooooooo, on the commercial loan book it basically amounts to 6.7bn in losses on 9bn or so of assets. Wow.

    I reckon a PhD or three will be handed out with a working title of “INBS – WTF?”.

  154. @Eoin

    tut-tut Eoin:

    ‘Dr Michael Walsh said that it “isn’t true” to say Irish Nationwide did not have an effective board.

    A former professor of banking and finance at UCD, Dr Walsh joined the board of Irish Nationwide in 2001 and was in charge of the board of the building society over the period when it lent heavily to a small group of property developers and investors. He resigned as chairman in February 2009 two months after it emerged that the chairman of Anglo Irish Bank, Seán FitzPatrick, had hidden loans of more than €100 million using short-term borrowings from Irish Nationwide over Anglo’s year-end accounting date over eight years.

    Dr Walsh is a director of International Investment and Underwriting (IIU), the Dublin-based private equity firm owned by financier Dermot Desmond.’

    http://www.irishtimes.com/newspaper/finance/2010/1004/1224280310716.html

    INBS-WTF? +1

  155. @ David O’Donnell

    Fingleton ran a one-man-show operation since he first took over this society in the 1970s.

    The Irish Industrial Benefit Building Society, forerunner of Irish Nationwide, began in October, 1873, when it was set up in a small room at 4 Harmony Row, off Fenian Street, Dublin 2, by “a small group of far-sighted working-class men.”

    The notion that the board was ‘efective’ or had any role other than as a rubber-stamping operation, is a joke.

    Why was Fingleton so eager to get Cowen to change a clause in the Building Society Act 1989 to make a trade sale more palatable rather than
    a floatation which would have involved washing the dirty linen in public?

  156. @Michael Hennigan

    V. informative as usual.

    CorpGov pre-crisis = CorpGov now; stat sig 99%

    Directors on various bank boards still swanning around ……. 90 billion in dirty linen dumped on the great unwashed …… who have yet to sense the enormity of this treasonous crime …

  157. From JPM today…

    “Dated subordinated debt usually ranks equal in terms of coupons and maturity with the senior debt, however, in the event of default the recovery is subordinated to senior debt. Furthermore, the instruments generally cannot trigger a cross default according to the EMTN programs under which they were issued, although a default on any Lower Tier 2 instrument would trigger a default event for the credit derivatives.

    We believe that any legislation would be designed to target ANGIRI and IRNWID subordinated debt specifically. Broader legislation which could serve as a general template for distressed banks would likely be counterproductive at this time as it would have a negative effect on the pricing of other Irish institutions’ subordinated debt (including AIB, IPBS and BKIR). Even legislation specifically focused on Anglo Irish Bank and Irish Nationwide could potentially set a dangerous precedent, which we believe is already weighing on the pricing of AIB LT2 subordinated debt, as this is perceived by the market to be the next weakest bank in Ireland. We note that an analogous situation, where the UK government unilaterally changed the terms of Bradford & Bingley’s Lower Tier 2 bonds had long lasting negative repercussions for UK lower tier 2 bonds in general.

    Given the current discussions by regulators through the Basel committee of bail-ins, we believe that broader ‘burden sharing’ legislation may ultimately be introduced more widely across several jurisdictions (see ‘The Ins and Outs of Bail-Ins’, 6th September), however in the near term we do not believe that Ireland would benefit from pioneering such legislation on its own.

    Given the clear line that the Finance Minister’s statement was drawing between the continuing institutions and the run-off institutions we believe any legislation will be targeted specifically. Furthermore, we also note that this legislation may never have to be presented formally, as long as the mere prospect of it ensures a virtually universal uptake of any liability management exercises.”

  158. @ All

    btw – was out for lunch (ok, whatever, watching the golf…) with someone earlier who was on that Lenihan/Citi conference call – said there was a foul up with the conference provider but no heckling, and described the call overall as very good, said the Telegraph story was complete b*ll*x. Its clear in recent days that they are using Ireland to further their anti-Euro bias.

  159. I agree with Brian Woods 11 in regard to David McWilliams. While people are generally entitled to express views, McW’s views are not just ridiculous but are actually dangerous insofar as they risk sending extremely damaging signals to international investors on whom Ireland is depending, not just for the funds to pay the salaries of public servants, but for the inward investment from the US and elsewhere to create the many jobs on which our young people are depending.
    To DMcW and his supporters I would say, while all this publicity may be an ego-trip and great fun for you, you also have a responsibility as journalists and as academics (i.e. people to whom the public look up) to be sure that you are not damaging the interests of Ireland Inc. with irresponsible commentary.

  160. @Eoin

    ‘…spose its safe at this stage to nominate Monty for the board of the Banking Commission –

    De Telegraf in Dutch is far superior to the high tory version ………..

  161. “Broader legislation which could serve as a general template for distressed banks would likely be counterproductive at this time as it would have a negative effect on the pricing of other Irish institutions’ subordinated debt (including AIB, IPBS and BKIR)”

    Why would lower prices for aib and bof i subdebt be counter productive – surely it would enable cheaper buy backs?

    Does the market price of sub ordinated debt affect the extent to which it serves as tier two capital?

    If so, this might help explain why they guaranteed it in the first place

  162. @David O’ D

    It’s off topic I know, but I wouldn’t have ranked De Telegraaf as much of a serious paper either.

    @Brian
    Re the nursing home decision, I read the Supreme court as saying that such a seizure of property could only be justified in the context of avoiding a financial crisis……which might imply that any similar measure both could be justified and would have to be justified.

    Now, this might mean that a challenge to the constitutionality of levying taxes on innocent parties to pay for the banking crisis could well fail because there is an extreme financial crisis, but does this also imply that a retrospective tax could be constitutionally justified in Ireland? e.g. a tax on property sales, on land sales, on banking bonuses etc, from the period of the boom could be applied in order to (i) avoid an extreme financial crisis and (ii) to impose the costs on people who were involved rather than on innocents.

    Might Vincent Browne be right after all?

  163. Michael
    “I agree with Brian Woods 11 in regard to David McWilliams. While people are generally entitled to express views, McW’s views are not just ridiculous but are actually dangerous insofar as they risk sending extremely damaging signals to international investors on whom Ireland is depending, not just for the funds to pay the salaries of public servants, but for the inward investment from the US and elsewhere to create the many jobs on which our young people are depending.
    To DMcW and his supporters I would say, while all this publicity may be an ego-trip and great fun for you, you also have a responsibility as journalists and as academics (i.e. people to whom the public look up) to be sure that you are not damaging the interests of Ireland Inc. with irresponsible commentary.”

    So : If people generally have the right to speak, where do YOU draw the line? At someone goin “green jersey, no thanks?” What would cause you to say that the person has gone over the line? Would you agree with Pat McA that Morgan Kelly was out of line?

    And do you think David McW musing is more or less damaging than, say, a massive 50b debt around the neck of the taxpayer? Just wondering….

  164. @ Christy

    actually agree with you re who cares about secondary market pricing of sub debt, as i dont think its value affects its use as capital.

    The only issues would be the following: 1. if AIB or BOI ever wanted to raise sub debt again in the future, it’d be either impossible or very very expensive, or 2. whether this would have a knock on effect for senior ung’teed debt, ie if investors figured these would also potentially come into the firing line.

    In fairness, at the end it does note that merely the threat of such legislation would indeed make it cheaper for buybacks.

  165. DmcW (and his ilk) is merely seeking to respond (presumably lucratively) to the demand for his views. There is a multitude of shell-shocked voters out there willing to entertain any possible solution – however crackpot – that might ease the burden with which they are confronted. And the leaders of the political factions – whom people elect to address these problems – are just jostling and posturing to be the leader of the biggest faction at the next time of asking.

    Let the ire be directed where it should, but also recognise that they, too, are pawns of the permanent government and their ilk in Brussels, Frankfurt, Paris and Berlin. All they know is how to acquire and retain the semblance of power – and they can’t publicly admit they’ve even lost that.

  166. @Hugh

    I think the Supreme Court decision on nursing home charges may become relevant in the context of the position of bondholders, in that it seems to me that the case would allow a downgrading of the position of bondholders so that for example they would fare less well than depositors and share a greater burden of risk, in circumstances where there was a fundamental disequilibrium in the state’s finances even if this involved a retrospective loss of rights. It may, however, be that it does not even involve a retrospective loss of rights. My point is simply that if it does, it may still be constitutional.

  167. @ Eoin

    Those figures from BNP re: what creditors might be recovered in a wind up situation are very interesting. Do you have a view as to how robust they are? Does the figure of 41 cent in the euro (leaving aside the promissory note) sound about right given a general NAMA haircut of approx 60%.

    An interesting legal question arises as to whether the bondholders have a right to a share of the Government’s injection of up to 23 billion. A similar issue arose in the North Rock litigation, with the English Court of Appeal ruling that the shareholders could legitimately confined to compensation assessed on the legal fiction that the Gov had not, in fact, intervened to save the bank. This case will presumably end up in the ECtHR yet. As pointed about (by John McHale I think?) the legal rights of shareholders is different from bondholders in that just as shareholders benefit from the good times, they are clearly as “risk” in investing in a company. The role of a bondholder is more pedestrian.

  168. @ Brian

    I agree with you assessment of the (theoretical) significance of the Nursing Home case. The Supreme Ct were prepared to accept in principle that retrospective legislation might be justified in extreme circumstances.

    Whether it would be permissible to apply a newly introduced resolution scheme to Anglo is a difficult question. One view, one might say that but for the Government intervention, Anglo have failed in September, 2008 and the bondholders and other unsecured creditors would only have recovered a fraction of their debt. (I am not sure whether this figure would be anywhere close to the recent BNP figure of 41 cent in the euro. If nothing else, a firesale of the loan book in 2008 would presumably have produced greater losses than even the NAMA haircuts). If one then argues, a la Norther Rock litigation, that the bondholders are not entitled to any legal benefit arising from the Gov’s intervention, one could then argue that any resolution scheme legislation does not in fact put the bondholders in any worse of position. I accept that it is a very convoluted argument, and that it is much more attractive to say “we are where we are” and the fact that it was the Government who put monies into the bank is irrelevant: those monies are now in the “pot” and have to be shared equally between the unsecured creditors. I merely want to flag that the position is not as clear-cut, and that reference to the bondholders having constitutional rights tends to oversimplify the issue.

  169. Brian,

    My concerns re DMcW relate mainly to his views on “burning the bondholders” and on his suggestion of an arbitrary 10% levy on the Irish funds of US MNCs. It may be that a deal may be possible with bondholders in due course… I don’t know… but if it is, it won’t be facilitated by public threats to burn them at this stage… remember that we can hardly afford to antagonise these people….we are borrowing from them to pay 40% of public spending (your salary, my pension). Similarly, we can hardly afford to antagonise US MNCs who provide lots of employment in Ireland and for whose business we are competing with lots of other tax jurisdictions.

    I don’t have strong views on the Pat McA / Morgan Kelly matter as I am not familiar enough with the facts.

    I’m just as p’eed off about the 50bn debt and about bankers and regulators and politicians as everybody else but I’m just asking for some restraint in public commentary to avoid making the problem any worse than it already is.

  170. @Eoin
    The only issues would be the following: 1. if AIB or BOI ever wanted to raise sub debt again in the future, it’d be either impossible or very very expensive, or 2. whether this would have a knock on effect for senior ung’teed debt, ie if investors figured these would also potentially come into the firing line.
    I agree with you that those are the risks, but there are some mitigations to them.
    1. If sub debt is not going to be capable of bearing losses, then there is no point in paying the higher coupon that typically attaches to it. Central Banks should cease counting it for regulatory capital purposes and banks should not be able to capital raise using it. This is surely a worse outcome?
    2. A clear line between sub debt and senior debt would have the effect of raising the price of sub debt and, potentially, lowering the price of senior debt. Contrary to some commentators suggestions, I think raising debt in the bond market at appropriate rates and durations is the ideal mechanism for banks to fund-raise. It provides durational certainty, it smooths interest rate fluctuations (in theory forcing banks to charge a smoother rate of interest) and it should accurately reflect both the BFSR and the medium term cost of capital. Were our banks not so reliant on deposits for funding, we wouldn’t have quite the problem we do have with capital flight…

  171. @ Gadge

    BNP have put the total of secured creditors as 32bn, and total of unsecured senior creditors (depo, bond, other) as 43.6bn. They estimate that the total recoverable asset value, excluding the 19bn promissory note, is 50.1bn. So therefore 18.1bn available to the unsecured senior debt.

    To get to 50.1bn i think BNP went more or less as follows (im using the Anglo interim statement):

    35.6bn in NAMA loans at 60% discount = 14.25bn recoverable

    37bn in remaining loans at 50% discount = 18.5bn recoverable

    8bn in interbank assets at 0% discount = 8bn recoverable

    4.6bn in other financial assets held for sale (govt, corp and financial) at 0% discount = 4.6bn available

    Derivatives and investment property/investment contracts and miscellaneous come to another 4.25bn or so

    So in total you have 14.25 + 18.5 + 8 + 4.6 + 4.25 = 49bn, so not a million miles off the 51bn, and they could have been a bit more nuanced about the remaining loan book or any other assets i’ve missed out on there.

  172. @ Hoggie

    re point 1: Basel III seems to be going down that route actually anyway

    re point 2: i actually had a somewhat similar discussion with someone earlier today where i kinda made the same point, but the counter argument was that any efforts to make it easier to impose losses on bondholders, even if subordinated, will make bond financing more expensive in general due to the perceived risks increasing. For example, I believe Tull is of the opinion that eventually the EU will make moves to make it easier to impose losses on seniors as well, and i think this will at least be a serious discussion, though maybe not an enacted policy, over the next couple of years as regulators eventually move to reshape bank balance sheets.

  173. @Eoin
    Yeah, I meant to put in about Basel III.

    I understand that the move is to make deposits be the be-all and end-all of banking, but without an FDIC-like mechanism Europe-wide to pay for the immediate transitioning of deposits, it is madness. The UK at least has started on the process of building the living will with a central part of this being an electronic transfer mechanism of bank accounts.

    The risk involved in deposits and insolvency/resolution is the sudden stop in the movement of money for accounts, particularly, but not exceptionally current accounts. At the moment, the big retail banks are systemic for this reason. Given the trans-national nature of many of the european banks, a eurozone-wide mechanism is, I believe, required.

    Until then, senior bonds remain a more secure form of funding and one that is less subject to short-term confidence-based capital flows. As you say, a high risk-weighting would damage the capability of senior bonds to fund banking systems, particularly for smaller banks. It would embed the systemic-ness of larger banks. Which I don’t think would be a good thing.

    Whether that is relevant to the Irish situation is a separate point, I think. The pyramid-scheme that was Irish property was very much contained within these shores. The banks didn’t, that we have been told of, sup of other asset classes that have gone south. Their sub-prime was contained… to Irish sub-prime. It should have been evident to bond-holders that did any due diligence that theirs was not a sustainable model. It was evident to the loons…

  174. @gadge

    I’d argue the difference with the n rock decision is more fundamental than that

    The state injected equity into n rock – and then in effect treated the new equity as a type of senior equity. In the US they do the same with senior debt sometimes – ie super senior debt – also like the euro bail out fund i think too

    basically the new capital is senior to existing capital of the same rank

    But ive never heard of someone injecting equity and then making it senior to any type of existing debt – it would be outrageous

  175. @gadge

    the ft told us how to solve the problem of introducing the resolution scheme retrospectively

    just stop guaranteeing new bond issues – the bank cant fund itself – put it into the scheme

  176. It’s time we got things straight – RTE tonight lead with Brian Lenihan saying tax takes in line with expectations. The poor Polish guy killed in Coolock relegated to third.
    Economics is never as important as people. It just allows them live better.
    A very twisted morality has taken hold in this country. You are what you do.
    Liquidate Anglo. Prosecute it’s directors for reckless trading and at least then we can regain some sense of morality.
    I know this seems off topic but we really have begun to value percentage points on bond markets higher than the lives of our people. That is the greatest bankruptcy of all. It feels so wrong making a political point out of this but old people will die without dignity on trolleys tonight because of these new twisted values.
    The death of that man is more important than our bungling buffoon of a minister trying to emulate outdo his dad.
    Ar dheis de go raibh a anam.

  177. @Eureka
    Economics is people. If the line “Man is the measure of all things” applies anywhere then it’s in areas like economics.

    Economics, and political economy, is about people. Money is simply exchangable promises between people. People.

    The current economic situation has been, is and will continue to be causing misery and probably even death on a very widespread scale. Suicides, people dying for lack of home heat or hospital beds or perhaps simply the zebra crossing that was going to be installed near the school but now won’t be, people leaving the country (again in many instances), jobs that will never exist that might have, happy family houses that will never be bought, happy retirements that will never be enjoyed, etc.

    I thought the Coolock murder/assault was dreadful news, but it’s not obviously more important than the economic news.

  178. To my shame, I’ve only just received my copy of Something Rotten: Irish Banking Scandals by Simon Carswell today. It was published in 2006, so imagine my surprise when I opened it and saw a colour photograph of Roman Abramovich! (It’s on the first colour plate after p. 82.) However it seems that the photo is pretty gratuitous, because Abramovich only has a walk-on role in Something Rotten: as the guy who bought Chelsea from … Ken Bates, natch. (The two have not been friends lately.)

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