124 thoughts on “Brian Lucey on the Bondholder Bailout”

  1. “This is exactly what was done in Sweden and what was urged by me and others in April 2009.”

    Regarding the Swedish experience. They also gave a blanket guarantee. Does this mean existing debt was guaranteed, or were subordinated bondholders less relevant then?

    I think AIB and BOI shareholders have been left off very lightly (which wouldn’t have happened in Sweden), but if we followed Sweden 100% would we still be paying the Anglo bondholders?

  2. On a related note the drop in Irish 10yr bond yields after Black Thursday which “vindicated” the Govts announcements is almost certainly thanks to our friends in Europe. Last week the ECBs Securities Markets Programme transactions amounted to €1.4bn…

  3. Thank you, John, for posting this. In principle – and not surprisingly – I agree with Brian (though these wealthy individuals vampire- sucking the public purse is a bit severe – the savings and pension funds of many ordinary voters in Ireland and throughout the EU are in this pot as well). But his case is predicated on the assumption that Ireland had, at the outset, and still retains some sovereignty to resolve this problem. It didn’t and it doesn’t.

    The Government’s strategy is locked into the political cycle of securing, retaining, occasionally losing and then regaining political power. This involves postponing reliance on the ESFS for as long as possible. And the political and institutional EU is even more keen to keep Ireland at arm’s-length as it, too, wishes to postpone for as long as possible to avoid confronting its own culpability.

    Every effort will be made to subborn the opposition into supporting the next budget. But politically it doesn’t matter if the Government falls on the budget, as a result of the 3 by-elections or just through exhaustion – once it falls before the NTMA is forced to re-enter the market. A contankerous and incompatible FG/Lab combo will pick up the baton just before the NTMA will have to re-enter the market. There is an extremely high probability it will be closed out and the next step will be the EFSF. FF will be able to crow from the opposition benches that if it had been allowed to remain in office such a calamity would not have descended. The NTMA is protected from the bond vigilantes and, over time, an EU-wide bank resilution process is developed and applied. The IMF might even get to tackle the reasons why Irish price levels remain stubbornly well above the EZ average. The restructuring pursued re-invigorates the economy but fractures the government. And a shiny new FF takes the helm again.

    QED

  4. this article may be correct economically, but it’s poor in communications terms. readers will be put off by the tone. that’s a real pity, because there’s lots to agree with in it.

  5. “IN 1968, Robert Conquest, the historian, published the first edition of a classic study of the purges under Stalin. Called The Great Terror, it was of course reviled by the Soviet state and its fellow travellers for its suggestions of tens of millions of innocents sent to the gulags.”

    I think that might have done it… tonally…

  6. Consaw
    the point is not the gulag, if you read it…its the slow realisation of the problem and the reaction of the various sides…

  7. Brian,

    I realise that. I was trying to get across some sarcasim, I proabably should have thrown in a 😉 or a lol…but thats for the cool kids…

    … 😉

  8. Brian,

    I realise that. I was trying to get across some sarcasim, I proabably should have thrown in a 😉 or a lol…but thats for the cool kids…

    … 😉

  9. @ Rory

    “I think AIB and BOI shareholders have been left off very lightly”

    AIB will soon be diluted to 7% ownership in a company which will be valued at roughly 25% of its peak – so basically wiped out to the tune of 98.25% of their peak wealth. Ok, they should have been wiped out in totality, but there are some reasonable reasons for not doing so.

    @ CM

    ECB buying only includes deal done up until Tuesday (as deals done after that settle for value this week), so next week’s figures will be more interesting as the yields only really dropped towards the end of the week. Anecdotally i didn’t hear of them coming in massively aggressively on Wed/Thur/Fri, though i did hear they were buying up bits and bobs.

  10. It was a well written article until the very end when the consiracy theory of a Government trying to protect rich individuals was thrown out there. Do you seriously believe that individuals own billions of euro worth of Irish bank bonds because some Russian Billionaire’s investment company invested in some sub debt?

  11. 1. We should welcome that €5m to €20m loans are being left with the banks as it is clear NAMA did not have the capacity to deal with them.

    2. BL: “Nama will have to complete due diligence and valuation of €19 billion worth of Anglo loans within one month.”

    It is factually incorrect to say that all due diligence is to be carried out by the end of October. The transfers are to take place by the end of October. The due diligence is to follow thereafter in accordance with EU approval and an adjustment will be made if necessary.

    Min for Finance: “…Anglo’s remaining eligible bank assets will be transferred to NAMA by the end of October and that bonds will issue to Anglo in return on the basis of NAMA’s current estimate of their value. These loans will then be subject to due diligence and valued by NAMA on a loan by loan basis. If any adjustment to their value is necessary, it will be made subsequently.”

    3. In effect, the Government is transferring loans from one State institution to another without detailed transfer valuation.
    Again, this is factually incorrects as pointed out above. The Government must follow the Commission approved valuation system until another system is approved. No alternative involving less detailed valuations has been approved as yet. We are probably better off with continuing detailed du diligence to prevent shady shenanigans as predicted by Morgan Kelly.

    4. BL: “It is important to realise that, had the State nationalised the banks, this would have happened only after it had forced them to recognise the true state of their losses.”
    It is NAMA, not nationalisation, that has forced Anglo to recognize its losses. Would AIB/BoI have been different?

    5. BL: Researchers have demonstrated clearly, over time and across countries, that it is public debt that drives spreads.
    No reference to deficits rather than aggregate debt – isn’t this a serious oversimplification at a time when people need to know the impact of deficits in bond spreads in order to be properly politically informed? Again talk of defaulting on bondholders without distinguishing between guaranteed debt and unguaranteed debt? If I recall correctly, there is approx €2.5bn unguaranteed senior debt in Anglo. That is approx 13% of the structural deficit. We will be cutting more than €4bn this year. Is it really advisable to default on such debt now?

  12. Enda F
    “Do you seriously believe that individuals own billions of euro worth of Irish bank bonds because some Russian Billionaire’s investment company invested in some sub debt?”
    No….I dont. Note what I actually said .
    “. While a resolution scheme may yet emerge from the slough of despond that is the Dáil, it will be too late to prevent the transfer of tens of billions of euro from taxpayers to wealthy private individuals, some of whom are certain to be domestic. We must find out why that is being allowed to happen and who benefits.” Note the DOMESTIC issue…

  13. @ Eoin

    Thanks, though it does seem strange to refer to operations based on settlement date. Anecdotally, i did hear they were very active on Thurs/Friday! Will be interesting to see the figures for next week alright

  14. BL’s article will please the conspiracy theorists with its vague accusations of ill faith. The possibility that our policy makers may be confronted by problems beyond their ken – and beyond the ken of their official advisers – is not admitted.

    But we all make mistakes. It does not have to be as a result of bad faith. Sean FitzPatrick may have broken the law at Anglo. But, as his personal bankruptcy shows, he genuinely believed in the property bubble he propagated.

    Dermot Gleeson, as chairman of AIB, did not break the law but he did spend €3m of his own money buying AIB shares right at the top of the market in the summer of 2007. He also invested heavily in many high-profile properties. Based on his actions, he too believed in the bubble.

    FF did preside over a collapse in the economy but they have taken steps which they think address the problem. That those steps will probably lead to their political destruction should cause us to at least question bad faith as an impugned motive for their behaviour.

    The central factor behind the tentative response to the problem today is the interplay of politics and economics: the imperative in politics and officialdom is to avoid association with bad news, the result is a too slow recognition of bad news. TK Whitaker explained the phenomenon in a 1965 memorandum:

    “The economic situation is more serious than we have been admitting officially. We have deliberately not been too pessimistic in public for fear of undermining confidence and also in the hophe that as the months went by things would show a sufficient turn for the better. This hope is not being realised – indeed it was not soundly based – and we now have to increase the corrective measures. We should also, without being alarmist, be more forthright about the nature and extent of our problems. We would be deluding ourselves if we continued to make reassuring comments on thier temporary nature … There is a basic difficulty of a more lasting character and it is time we did something more effective about it”.

    The brutal reality is that we face prolonged debt-deflation. It will put our political system under unprecedented stress.

  15. Brian is spot on here!

    It is negligence beyond the normal sclerosis of the Irish political system that three years after the Northern Rock collapse, we do not have such a mechanism. The effect of this is to protect the subordinated and senior bondholders. One has to ask – why has such a mechanism not been put in place, and to whose benefit is it that it is not?

    I would dare to ask, negligence is evident, but was it negligence on purpose? That is the big question on my mind.

  16. BTW, I think the legal position of sub-debt owners in INBS is tenuous. I expect the Govt to legislate and then go head to head with them. Whereas the sub-debt instrument may not allow default if seniors are not in default, the Govt will most likely be able to enfrce losses through the new Anglo/INBS specific resolution scheme.

    Min for Finance:
    In keeping with this approach, my Department in conjunction with the Attorney General is working on resolution and reorganisation legislation, which will enable the implementation of reorganisation measures specific to Anglo Irish Bank and INBS which will address the issue of burden-sharing by subordinated bondholders. The legislation will be consistent with the requirements for the measures to be recognised as a re-organisation under the relevant EU Directive in other EU Member States.

  17. @Brian Lucy

    How has the absence of a bank resolution scheme led to the transfer of billions from the taxpayer to wealthy private individuals whether they be foreign or domestic.

  18. @Enda F
    If the banks were properly “resolved” then the bondholders and probably also depositors would have lost a large portion of their money, or all of it above some level like €100k.

    At the moment they are losing nothing. The guarantee means that they’ll get all their money. While some people with lesser wealth would have lost, many or most of the loss would accrue to “wealthy private individuals”, either directly or through investment holdings.

    The money to pay them is being taken from taxpayers.

  19. @ Zhou

    dead right, in my view, on the subs. Abramovich’s soon-to-be-liquidated (literally perhaps) portfolio manager’s letter to the Irish authorities was cringe-inducing in its amateurness. Post-guarnatee, if the State really wants to, they could legislate to wipe them out (in Anglo/IRNW). The only reason they may wish to not actually enact such legislation, and instead offer a very heavily discounted buyback, is that there could be negative repercussions from such legislation on senior debt pricing, though i suspect if the legislation was very carefully targetted on the issues pertaining to Anglo/IRNW this would be relatively bearable. But i don’t necessarily see the point in throwing the Abramovich into the mix in the IT article, when, as you noted, Lenihan has already started the ball rolling on getting legislation in place.

  20. @Hugh

    Actually they wouldn’t. Wealthy individuals do not leave large amounts of cash sitting in deposit accounts. They are managed by wealth mangers. The people who would have lost with your example would more likely to be retired people, small businesses, charities, sporting organisations, credit unions, corporations etc etc. Wealthy people have already lost any sharteholding they have had in the banks. Very few individuals would have bought bank debt for numerous reasons.

    So again, how is the Government transferring billions of euro of taxpayers money to wealthy individuals?

  21. maybe we should means-test the bond holders. then decide if they are more deserving of our taxes than children

  22. Enda F

    would it not be more correct to say that the Irish govt is transferring billions of euro of taxpayers money to German (inter alia) taxpayers who ultimately own the bonds or would be required to bail out there domestic financial institutions.

  23. The Roman Abramovich story seems strangely populist to me – It immediately raises my bullshit detector to extreme levels.
    Could we please have ALL names of the bondholders who are receiving this social welfare from the Irish state.
    They may be deserving respectable individuals ,but still they should pay a visit to their nearest dole office for a interview.

  24. @Tull

    True. But the same argument could be used to say they are transferring billions to Irish credit unions and Irish pension funds and to all the other ordinary organisations who had cash in the Irish Banking system.

    I just don’t like the implication that the Government is not defaulting on senior bonds to protect wealthy developers or something.

  25. @ Keith

    Individuals do not buy bonds generally. They are not tax efficient instruments as the interest gets charged at the higher rate and the returns are limited. There aren’t a load of people sitting around the Country with large portfolios of bank debt.

  26. @ Enda/Tull

    wealthy people are far more likely to be buying Bunds than ordinary people are, and they’re certainly likely to be a tad sharper about moving their deposits around the place….

  27. Eoin,

    Bonds are mostly bought by financial institutions for their own account or for funds managed by them on a discretionary basis. Thus, if there is a default the institutions bear the pain or the owner of units in the bond fund bears the same. Were a German institution to go belly up due to its holding of peripheral Sovereign it would be baile out by the German taxpayer just like Depfa or the unit linked owner would take a hit. Either way, the German taxpayer would just see his wealth diminshed by a reckless foreigner.

  28. @Enda F
    Name the company or investment houses then – I do not care if they are individuals or larger entities.
    The fact is that these instruments were taking higher interest payments during the good times for a reason.
    In the event of losses this capital is next in line to soak the excrement from the floor – that was and is their function.
    The fact that they are not doing this implies that they are receiving social welfare from the state.
    The least that can be asked of the peasantry that are paying for their malinvestment and poor stewardship of the credit providers in this state is the names of these entities.
    They may indeed be deserving of some charity.

  29. Those who invest in the type of funds that would purchase corporate bonds are by and large very wealthy people. They have to be just to qualify as viable investors. I think it’s the safest bet in the world to say we will never know who the bond holders are (be they institutions, funds, their individual investors etc). Because if we did, if it became common knowledge, the anger would be impossible for any govt to deal with.

  30. @Eoin,

    I’m surprised that the ECB is intervening so much in the secondary bond market. Getting Irish sov yields down is probably not a priority at the moment – even if it’s good for the optics the NTMA won’t be troubling the primary market for quite a while. Are some other fish being fried? Any thoughts?

  31. “The State will in effect pay billions for an asset worth millions, an asset that will moreover not likely recover in value for decades.”

    Basic accountancy. Put 3bn into a solvent company its NAV increases by 3bn. The government is not paying 1,000 times to much for its investment as the soundbyte implies. It is getting shares worth in face value what it is putting in. Actually the market is valuing AIB shares at 47c after the announcement so the market is anticipating a 6% haircut on the government’s investment. I would have thought that with this particular DMcW DSM well aired in this blog, Prof Lucey would have avoided repeating the error in print.

  32. Jarlath,
    Not neccessarily. Regular monthly premia from ordinary wage earners contributing to penions or regular saving plans go into these funds.

  33. @Tull
    Here we go again with this meme that is injected into the system about ordinary wage earners blah blah blah.
    As I said previously I do not care where these funds come from but the situation has now changed regarding privacy.
    The Chinese walls have now collapsed – these funds are receiving direct protection from the Irish state via the taxpayer.
    In this regard the figures and beneficiaries will have to be published not unlike the convential budgetary process.
    When a individual throws himself at the mercy of the state he generally losses much of his dignity – why are these entities allowed the illusion of independence and privacy – they are wards of the state after all.

  34. @tull,

    It seems that, regardless of how many times you express it – or vary the expression, the penny still has not dropped with some people that the Government lacks the sovereignty to tackle these problems comprehensively (it can only tinker around the edges) and that the savings pots and pension funds of ordinary citizens in Ireland and throughout the EU are at stake – and that these two factors are entwined.

    But the Government will never concede this and apply to the EFSF while there still might be some scope to negotiate the conditions attached.

  35. maybe so. but 1) we’ll never know for sure who they are either way. and 2) i think the type of funds that have many small investors would have steered clear of the likes of anglo over the last few years whereas the type of funds with a few large investors looking to take a punt with a spare million, as it were, probably did have a go at anglo. only an opinion though. would love to know where the billions are going, but know for certain we never will. very irritating.

  36. @PH

    Thanks. Not surprisingly, I agree with you. Not sure about the timing of accessing the ESF. I am pretty sure we go in early next year after an election, an austerity budget and when realisation dawns in Europe that there is a Europe wide problem. I am not sure that going in early is to our advantage. Is it better to wait for some companions..Portugal, Spain and perhaps Belgium?

  37. @Paul Hunt
    Many of us realise that the Goverment has lost its sovereignty – but the failure to express this creates a vacuum in the chain of command that is filled with criminality and corruption.
    We are in fact talking about private funds which have a direct effect on foregin treausuries solvency.
    Lets get it all out in the open as the irish state has nothing left to lose now

  38. @Enda F
    It depends on what you call “wealthy”. I do not draw the line somewhere below Mr. Abramovich’s level.

    In this context anyone with a large deposit account counts as wealthy if money is being taken from someone on median wage to protect the deposit account. Anyone with a pension fund that invested in Anglo or other bonds counts as wealthy compared to someone on median wage from whom money will be taken to protect the investment. A sports club or almost all of the other examples you offered counts as wealthy compared to someone on median wage.

    Ergo, money is being transferred directly from comparatively poor people to comparatively rich people. Again, this includes deposit accounts, bond investments (however held), etc. Wealthy does not only mean Dennis O’Brien and Roman Abramovich.

  39. section 87 (3) (b) of the NAMA Act getting a bit of roasting down the courts

    saying it implies NAMA can take an asset while leaving behind obligations the bank owes to the borrower, such as to give notice and therefore the act does more than step into the shoes of the bank.

    Also think they are saying it was agreed to take PK’s loans before NAMA act came into force.

  40. Let’s face it, the one thing this government is actually good at is spin. twisting circumstances and events to make them look as good as possible. So if this transfer of billions to bondholders, from us the taxpayers, was not in fact from the comparitively poor to the comparitively rich, then you can be absolutely certain this government would have found some way to make this known, regardless of privacy laws etc. the fact that it is not known where the money is destined for, nor ever will be, is proof enough that it is going from poor to rich. Were that not the case, rest assured, FF would have found a way to let us all know it.

  41. @Brian Lucey’s article
    “What is missing here is that in most modern states there is a banking resolution mechanism,…. It is negligence beyond the normal sclerosis of the Irish political system that three years after the Northern Rock collapse, we do not have such a mechanism. The effect of this is to protect the subordinated and senior bondholders. One has to ask – why has such a mechanism not been put in place, and to whose benefit is it that it is not?”

    Yes, indeed. It is also 13 years after what Patrick Honohan Jane Kelly (both were then in the ESRI) wrote about Resolving Ireland’s Worst Financial Crash, which took place 25 years ago
    “It was on the St Patrick’s Day weekend, 1985, that Ireland’s largest bank, Allied Irish Banks (AIB), disclosed the failure of its subsidiary Insurance Corporation of Ireland (ICI) in what was the bigger of the two most severe financial sector collapses ever experienced in Ireland and by far the largest involving the banking system.” see The Insurance Corporation Collapse: Resolving Ireland’s Worst Financial Crash Administration, vol. 45, no. 3 (Autumn 1997), p 67-77 ( For information only. This article is only available online if one has access to an IPA corporate membership account – which I, as a long-standing personal IPA member do not have.)

    Perhaps the investigation into the Department of Finance will throw some light on this inexcusable inertia on the bank resolution mechanism by government, both appointed and elected.

    While waiting for the report of this study, re-reading Simon Johnson “The Quiet Coup” might suggest an answer to who benefits from the absence of a bank resolution mechanism and associated matters. Philip Lane gave a link to article March 2009
    http://www.irisheconomy.ie/index.php/2009/03/27/the-imf-and-the-global-financial-system/

    The introduction gives the sense of Johnson’s thinking
    “The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.”
    http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

    A more localised and salient take on the same issues came from Niall Fitzgerald, in an interview with Fintan O’Toole in the Irish Times last March

    “Last summer, Niall Fitzgerald had dinner in Dublin with a group of old friends from the world of Irish business. …. His old friends in Ireland might have expected a convivial evening of mutual backslapping. Niall Fitzgerald is not that kind of man, however…… And so, at that dinner in Dublin,… he asked his friends a very awkward question. All of them, including himself – at Bank of Ireland during the 1990s – had served on the boards of Irish banks.

    “I said, ‘I want to confront you as a friend with a very difficult question’,” he recalls “Because unless we all – together and individually – learn from this, I’m not sure it has been of any great value. The question you have to ask yourselves is: did you know what the institution was doing and the full consequences of what it was doing? Because, if you did, you were complicit with the recklessness. Or if the answer is you didn’t know, then you cannot have been discharging your responsibility as a director of the company properly.”

    What followed, says Fitzgerald, was “a very ferocious conversation”. Some “reacted with real anger”. Fitzgerald pointed out that he was not trying to exempt himself from blame. “I said, ‘I’m not disassociating myself from this. I’m trying to get us all to understand that things went wrong here for which are all accountable. Unless we accept the accountability, nothing will get better’…. “I accept that financial institutions generally are complex, but frankly, if you are not confident that you have sufficient information and tools available to you to judge at a macro level the risk you are taking, then you shouldn’t be sitting there.” His argument, he reckons, “didn’t wash much with this group, but in time most of them privately would say that it was important to have that discussion”….
    http://www.irishtimes.com/newspaper/weekend/2010/0306/1224265692902.html

  42. I think they have mis interpreted the section

    I think it should/could be read as meaning any obligations and liabilities OWED TO THE BANK, that they are not taking. In other words it limits NAMA’s obligations to the bank after the transfer and doesnt change the obligations owed to the borrower

  43. @BWII
    “Basic accountancy. Put 3bn into a solvent company its NAV increases by 3bn. ”
    You still think AIB is solvent? 😯

  44. @Tull & Paul Hunt
    More agreeing than disagreeing; the government still has plenty of scope as to where and how to cut and to raise.

    It is to their discredit that they continue to approach the problem from sectional points of view.

  45. @tull,

    I agree. The Government will hold off until such time as a new government, and not it, will be forced to go cap-in-hand to the EFSF. Frau Merkel and M. Sarkozy will also need time to try and prepare their voters. Looking for someone with whom to hold hands on the journey to Luxembourg might be a good idea, but, apart from Greece (already in administration and very close to being a failed state prior to entry), we really are in a class of our own. Spain and Portugal, apart from some limited dodgy bank business, are suffering from common-or-garden fiscal incontinence and will be strongly encouraged to avoid the treatment room. Belgium is the EU’s long-standing indulgence and won’t be allowed near the EFSF.

    However, when push comes to shove the future political viability of FF will always trump any consideration of the public interest. So it was in the beginning, is now and ever will be. Amen.

    @Hogan,

    “..sectional points of view..” They know no other way.

  46. @BWII
    “The stockmarket clearly thinks it is.”
    *titter*

    This would be the stock market that’s predicted nine out of the last three recoveries? Or the one that regularly predicts a bright future for companies that go bust a short time thereafter?

    It they are solvent, then they don’t need capital. Therefore we should remove the guarantee and give them no more money and see what happens. How’d’ya like them apples?

  47. @Brian Lucey

    Think ‘Darkness at Noon’ (Koestler) might have been a more apt metaphor than poor ol Stalin … but the ineptitude and craven servitude of the political class to the great ‘untouchables’ is visiting stalinist-type dislocations on the Irish serfs ………. to mention just one of the untouchables – A.N. Other Professor of Banking and Finance, Dr Michael Walsh of UCD, who Chaired INBS during its rush to glory in the pantheon of Harvard Case Studies …. [I have already suggested to Colm McCarthy that the Department of Justice be added to the list of an Bord Snip – I mean, can we really afford a department for ‘that which does not exist’: ] … the rabid free-market ideology of McDowell, McGreevy, Harney, and Newz-o-de-world has done us in ……….. and same forces prevented Nationalisation in late 2008 – as the Untouchables given moons and moons of time to re-allocate and hide whatever they could and what they couldn’t the serfs forced to dig the hidey-hole of NAMA – it is now hidden so they are back big-time with the right’s rabid version of Swift’s Modest Proposal …. [and there is more hidden – this black hole is from from being inactive] which over 4 years will downsize Ireland to ‘manage_able’ by the forces of The Untouchables ……

    We need a Serf Revolution asap in all fields of nationa endeavour – Patricia the Sovereign is presently in exile in an undisclosed location somewhere in the tora-burra islands off the west coast, and not only waiting for the call, but actively steengthening her forces …. where there is life, and intellect, and justice, and fight, there is hope: …

  48. @BW2
    I think Hogan has it nailed there….(equity, technically, is a call option on the liquidation value of the company…options are funny yokes…)

    @David O’D
    Im keeping Rubashov for later…

  49. @Hog

    “If they are solvent, then they don’t need capital.”

    Rather rudimentary misunderstanding there. Solvent = Assets>Liabilities. FR requires Assets>>Liabilities

    @BL

    “….(equity, technically, is a call option on the liquidation value of the company…options are funny yokes…)”

    Yes I agree that penny shares can have an optionality value (actually a PUT option, but lets not get all handbags about the technicals), even an insolvent company can have a positive share price as we saw in the terminal stages of Anglo.

    But with 3bn of new capital to come, AIB is not a penny share. Its share price represents much more closely its intrinsic value as opposed to its optionality. Look at BoI. Its market cap went from sumfin’ small to 3.5bn after the rights issue. Similarly the market is anticipating that AIB’s market cap will go to about 3.5bn afte the 3bn state injection.

  50. @BWII
    You still think AIB is solvent?”
    “The stockmarket clearly thinks it is.”

    Does the stock price of the banks have any relevance for true market sentiment while the restrictions in short selling are still in place??

  51. @BL

    The sale of assets is expected to yield €5bn in capital for AIB. You are sticking by your March argument that AIB should hold on to these assets, thus increasing the taxpayers’ investment in AIB by €5bn. WADR I think an investment of this size in US/UK/Polish banking is a luxury we can ill afford.

    Apologies if I am only making critical comments, I am sure there are some good points in the article but you will have enough people to applaud these without me joining in.

  52. BW2
    You never make but critical and worse comments on articles that challenge, no matter how mildly, the govts “plans”. So no surprise there.

  53. @zhou

    “It is factually incorrect to say that all due diligence is to be carried out by the end of October. The transfers are to take place by the end of October. The due diligence is to follow thereafter in accordance with EU approval and an adjustment will be made if necessary.”

    You are correct to point out that the EU Decision which approved the NAMA scheme (para 56 is what you’re looking for – link at bottom) provides for mandatory due diligence and valuation on the first 150 exposures but allows the remainder to transfer with estimates to be resolved in the subsequent 12 months.

    However when the Decision was made in Feb 2010, the understanding was that NAMA would apply a haircut of 30% approximately and that the experience of the first 150 exposures would allow reasonably accurate forecasting on remaining loans.

    What we have seen is haircuts by tranche/PI of 34-72%, a deterioration between T1 and T2, and a further deterioration between T2 and the forecast for the remaining tranches. NAMA has uncovered horror upon horror with loan documentation and security. A substantial number of loans has been transferred for zero consideration. And against this NAMA is proposing to transfer loans without proper valuations and due diligence?

    And for what? To give certainty to the cost of Anglo? On what planet does €19bn of loans of questionable real value on Anglo’s books give UNcertainty and yet when they are transferred without due diligence or loan-by-loan valuation to NAMA (who can then claw back, ie reduce antecedent payments, from Anglo) they provide certainty?

    http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_N725_2009

    @christy

    Thanks for your snippets from PMcK v NAMA! I’d add my support for a separate thread.

  54. @PMcG

    Fair enuff, stockmarket is somwhat distorted on that account but the prospects for this share have now become very long term and markets tend to be short termist so, all in all, I think the price may be understated.

    Some analysts use the following sort of calculation: in 5 years’ time if things settle down AIB will be a major player in a fairly uncompetitive domestic market, maybe making €0.7bn per annum. P/E of 10x means market cap of €7bn. Current market cap after state injection €3.5bn so that implies a doubling of the share price over 5 years. Good investment for the taxpayer but a bit too long to wait for your average day trader.

  55. @Brian Lucey

    Would you consider correcting the factual errors in the piece as pointed out in my first post, viz. your incorrect assertions (i) that all due diligence on NAMA loans is to be carried out by the end of the month, (ii) that only limited due diligence will be undertaken and (iii) that the Government has now decided to do what you originally recommended by deciding not to carry out detailed due diligence on Anglo loans?

  56. @ Brian Lucey

    just a quick follow up to BWII

    You state that keeping the foreign assets will “over the next number of years have provided valuable cash flow”.

    (a) as we are now no doubt aware, values of financial assets and their earning ability can go up as well as down. The foreign assets could as easily be worth less in t+5yrs as t.
    (b) market value today will take into account the future assumed cash flows, earnings and imputed value on these assets (although given the higher relative cost of capital for AIB vs Santander, doesn’t it mean that it is actually cheaper for AIB to sell now vs later?)
    (c) given a very basic p/e model of 10:1, and a dividend yield model of 3%, wouldn’t it in fact have taken somewhere between 10 and 30 years for the foreign assets to actually generate the same “cashflow” as they have done via an upfront sale?

  57. @Jagdip

    There is certainty insofar as the NAMA bonds are handed over. Did you notice the hugely increased estimate of the haircut on AIB’s remaining NAMA loans?:

    Min for Finance: “To date AIB has transferred just over €6bn. of loan assets to NAMA at an aggregate discount of 45 per cent. NAMA has reviewed the quality of loans still to transfer from AIB and has estimated discount to be applied to the remaining €13.5bn. of loans at 60 per cent.

  58. @BL

    I have another take on BZW sale. If you look back at AIB original proposition they would always state that BZW was core while M&T was an investment that could be sold at the right price. BZW gave them access to one of Europe’s fastest growing emerging banking markets. Ideally it should not be sold but such is the level of negligence and poor underwriting that it has to be sold. The alternative would be to keep it and grow the business. However, that would increase the cash call on the NPRF by the amount of the capital gain generated.

    I would also guess that the Polish regulator is happier to have Santander running BZW now. The new parent is better capitalised & (i think) has an existing consumer finance business in Poland. The Polish authorities would be more fearful that AIB would treat Poland as a cash cow and just upstream the retained earnings to the Irish parent rather than growth in the local economy.

    Be under no illusion (& you are not) that selling BZW is a good thing but gamblers sometimes run out of options.

  59. @Jagdip Singh

    Astute observation on reasoning re ‘BoI keeping the bits in’ from 5 million to 20 million so as to ‘probably’ keep NATIONALISATION discourse away from said bank – (in the IT comments on BL piece) –

    Just how dodgy is this 5-20 segment – re AIB? re BOI?

    @Brian Lucey

    No ‘trials’ around here for the NO_NAMES Untouchables – [unlike Ms Joly’s report on Iceland; Patricia the Sovereign in exile is in touch with Joly] which is written into all terms of reference by political diktat ……… methinks you might be fairly grey by the time we get any ‘SHOW trials’ …

  60. @zhou,

    Certainly NAMA bonds are being handed over but they are subject to claw back. If I give you a cheque for €5bn today but tell you I might need to get a few billion back (3% change in the haircut = €0.5bn on €19bn of loans) in the next 12 months does that provide financial certainty?

    Regarding the haircuts indeed I did notice that increase in AIB’s final tranche haicut estimate (up 33% in relative terms from 45% weighted in T1 + 2 to 60%). It’s not as big as the 58% increase in EBS of course from 38-60%. However what really struck me was the BoI increase of 16% from 36-42%. INBS and Anglo have lowish increases but they’re starting off at 58-65%.

    Gosh, isn’t BoI performing well. And presumably the BBC report of BoI’s loans to McDaid with 85% losses (link below) is the exception. Sorry, the sarcasm is probably not coming across well – BoI just looks suspicious to me. And with 36.5% State ownership it can’t afford to crystallise too many losses, otherwise that will mean all NAMA banks are effectively State banks.

    http://www.bbc.co.uk/news/uk-northern-ireland-11413864

  61. @Jagdip

    The “certainty” is a bit limited but the fact that the haircuts are increasing probably makes them look stable.

    Also, the various state bodies say they are confident in these estimates. This is in contrast to previous haircut estimates which they [rightly] never took ownership of and were always subject to what NAMA would find.

    It also means there are liquid assets there immediately to meet immediate demands. This was important in terms of crisis.

    Furthermore, whereas €5m-€20m loans will be left with the bank the markets have reasonable figures to extrapolate from and the banks will have the capacity manage them.

  62. @zhou

    “the various state bodies say they are confident in these estimates.”

    I really thought that NAMA would have issued a statement last Thursday as it is that agency that is key at this stage. And whilst NAMA may have had justification in blaming the banks for some of its former estimates, who had NAMA to blame for getting their own operating cost estimates 40% out?

    Given the anecdotes I have heard and regard as credible, I’m afraid that I wouldn’t share your confidence in the stability of the estimates (either the remaining NAMA tranches or the residual non-NAMA loans at the banks). I wonder what lenders to the State and ratings agencies will make of it when the dust has died down.

  63. @Zhou, Jagdip, All

    OK – hit me with an estimate on the ‘reality’ of the €5-20 billion segments in AIB and BOI …..

    How Big? What % Dead?

  64. @ Jagdip

    the obvious counter to your no doubt common anecdotes about loan losses is Derek Quinlans house being sold at a profit for NAMA last week apparently (Sunday Times, so can’t link, but the headline was a wonderful “Bongo buys up Quinlan property”).

  65. @BWII

    The presence of a positive stock market price only indicates that the market believes that there is a possiblity that government will continue to act in a way that will give a return to the shareholders.

    If you want a good example, look at the trading in Anglo-Irish ADRs last year on the NYSE.

  66. There seems to be some convention that the AG can’t be criticised.

    He is a very able person who works all the hours that God gives to avoid making a mistake.
    In other times he would be the very model of an old-fashioned attorney general.
    But he is also a deeply conservative person.
    He would have been totally at home in the administration of President Hoover 1929-1933.

    Based on recent remarks by the Minister of Finance,it appears that the AG has advised that bank resolution legislation that would allow losses to be imposed on the senior bondholders separate from the depositors would be unconstitutional here. But this is possible under UK legislation though in the case of Bradford and Bingley the UK authorities have not chosen to do so. More significantly, my understanding is that this also happens in the US whose constitutional proprieties must be similar to our own.

    The AG is a formidable figure and dominates the inner workings of the government.
    This is the AG who told the government they needed to legislate for blasphemy.
    For all his massive personal commitment, he has in this regard made the greatest legal blunder in the history of the state.

    And yet, because of his special position it seems to be impossible to criticise him.
    Even to mention him by name would be blasphemy.

  67. @Eoin

    Ali Ben Bongo Ondimba is the President of Gabon. A snip at €30 million ….

    New York, Shrewsbury Road, and a few others also available ….. and the views in Lausanne are wonderful …

  68. @BL

    “You never make but critical comments on articles that challenge, no matter how mildly, the govts “plans”. So no surprise there.”

    That is true. With the overwhelming zeitgeist to see everything of the Official Line as either incompetent, conspiratorial or downrightt corrupt, I try to have an alternative take. It is not that I do not have criticisms of FF e.g the Galway tent, the tax break fuelled bubble, the bubble fuelled benchmarking of public service pensions and pay and social welfare, the failure to nationalise Anger earlier, the silly toying with the concept of any part of Anglo as a good bank, the foolish Croke Park deal; all these have ample critics and I don’t see any point in adding to the clamour.

    In your case not only is everything you say a criticism of the OL but everything they do you criticise. I am just an ‘umble troll but I thought a more exacting standard of balance and objectivity would be appropriate for a leading academic who has gained much public exposure on these matters.

  69. @ Maurice O’Leary

    i think the Anglo ADR was a function of short positioning need to “buy” to crystalise profits, not of a belief that the shareholders would actually get anything.

  70. “Based on recent remarks by the Minister of Finance,it appears that the AG has advised that bank resolution legislation that would allow losses to be imposed on the senior bondholders separate from the depositors would be unconstitutional here.”

    I haven’t seen any coverage that goes this far is that explicit – are u going on BL on primetime?

  71. @Eoin

    Many of the Top 10, indeed probably 50 NAMA developers have some good quality associated loan property. And indeed there is speculation that other Quinlan property in the UK which had been for sale has in fact sold yielding a profit for Mr Quinlan which may be used to pay off not-so-good loans. However, once you get down to the more or less 100% land and development loans in the later tranches, my understanding is that the Irish loans are dreadful and putting aside poor documentation etc, the values have dropped 75%-98% from peak (and given the way loans were funded with top-ups when prices appreciated, oftentimes you are talking about peaks).

    However, the bottom line is I don’t have an aggregated understanding of the remaining NAMA loans. NAMA will have a better understanding but it is far from complete. Ultimately it is the views of others that will be important. I wish it were different as we could do with some better news.

    @DO’D

    McDaid had GBP42m of loans from BoI and the BBC reported that losses of 85% were expected. Once you get to the smaller loans you appear to be talking about land and development. Land has dropped 75-90% from peak according to Savills (and anecdotally there are 98% losses). If some estates have to be demolished (€40k a property a pop apparently) then the loans might have negative value and NAMA can refuse them. So in answer to your question I have in mind is around 70-80% haircuts.

  72. @Jagdip
    “with 36.5% State ownership it can’t afford to crystallise too many losses, otherwise that will mean all NAMA banks are effectively State banks.”
    Yup. And with rumours flying that PTSB will merge with EBS and be recapitalised with the state taking a 50% shareholding, it is not just NAMA discounts that are problematic.

  73. @Tull & @Brian Lucey
    “I have another take on BZW sale.”
    I too… Poland hasn’t happened yet… sell your assets while the market for them is rising.

  74. @Jagdip Singh

    Thank you. Let’s say 75% ……… which is plausible based on what has been drip-fed to the serfs …

    Now – can anyone enlighten (sic) us on the plausibly estimated size of the €5-20 million ‘property’ segments in both AIB and BOI? Are we into the realm of the amateur ‘professional’ syndicates here ……. the closed-shop professional classes in other words who swarmed for a ‘piece of the action’ …

  75. @hoganmahew

    Thank you. Gettin closer, with any reasonble estimate on <€5m losses, to dat 15% which says the pauperised serfs own BOI! … 700+ days late

  76. @Jagdip Singh

    “Given the anecdotes I have heard and regard as credible, I’m afraid that I wouldn’t share your confidence in the stability of the estimates (either the remaining NAMA tranches or the residual non-NAMA loans at the banks). I wonder what lenders to the State and ratings agencies will make of it when the dust has died down.”

    Unfortunately you don’t have to wait too long with media comments on the Moody warning such as –

    “Five months after a debt crisis, and rescue, in Greece caused huge strains in the eurozone to the point of raising questions about its survival, markets are again highly nervous about the state of public finances in some eurozone countries, notably Ireland, Spain and Portugal. The latest credit warning is yet another humiliation for Ireland which until two years ago was basking in a decade of astonishing growth.”

    With bond yields widening again today we really need some positive news.

  77. @Eoin
    Thanks for explanation on the Anglo ADR question as it was puzzling me for the last 15 months.
    It is a pity that we couldn’t flog our old Anglo share certs to those nice people.
    😉

  78. Why doesn’t someone get a clarification on relevant law from a colleague in their Law Dept?

    We have had this refrain about burning subbies for months but it’s not possible to arbitrarily pick on creditors within a particular class and say PFO, we’re not paying you while we are paying others – – unless that’s part of their contract.

    As regards a banking resolution mechanism, and changing the terms, can that be applied retroactively including taking away existing rights to petition for a winding-up?

    @ Maurice O’Leary

    We do have a written constitution, inconveneint or not some provisions may be

  79. Can’t the constitution be changed by referendum?

    Clause 2010/1 “The people of Ireland can do whatever the feck they want to senior bondholders”. 95% pro vote, I would guess.

  80. @Michael Hennigan
    Te United States also has a written constitution and a robust Supreme Court to defend it, hence my reference to the US, and yet it doesn’t prevent them from have a special resolution regine for banks.

    Which shows that the problems are not insurmountable.

    I can’t see how the constitutional defence of private property would be any weaker in the land of the free than in our own benighted country.

    Where there is a will, there is a way.
    Where people are steeped in the status quo, obstacles abound.

  81. The legal debate appears to be going around in circles.

    There is no reality to a subordinated successfully petitioning the High Court to wind up a bank. The High Court has a broad discretion as to whether to grant a winding up order and a judge will almost certainly refuse to wind up a company at the suit of a subordinated bondholder who has no prospect of recovering anything in a winding up. The court would recognize that there would be no practical benefit to the sub bondholder in a winding up, and that the application was vexatious.

    The potential difficulties in applying legislation “retrospectively” has also been raised by a number of posters. Any concerns could only ever apply to changes in the substantive position of a party: changes in procedural rules are legitimate. A subordinated bondholder, by the terms of his contract, expressly agrees to give preference to all other creditors. This is the reason he receives a risk premium. Even on the most optimistic forecast there are no sufficient funds in Anglo to pay off senior debt, and thus the holder of subordinated debt is not entitled to recover anything. His substantive rights are not interfered with in any way of this process is accelerated, i.e. his debt is extinguished now under new resolution legislation, rather than in 5 or 10 years when Anglo is finally wound up.

    Legislation is amended all the time, and it is only in the most exceptional circumstances e.g. the creation of a new criminal offence that the amendments can only have prospective effect.

  82. Am not sure if I missed this earlier why would it not be better for current savers to buy government bonds rather than tax their deposit income?
    They seem about as safe and would keep the money owed in the country.

  83. Eureka,

    I can think of three reasons i) you & others have suggested default ii) most govt bonds are over one year in maturity and pay fixed coupons. So if interest rates rise you suffer a capital loss iii)difficult to deal in small size

  84. @Eureka
    Well, if DIRT goes up again, then the NTMA/An Post bonds become even more attractive (though they are durationally challenged). As it is, in a situation where deposit interest is taxed at marginal rate (with a credit for DIRT), the annual equivalent rate for a higher rate taxpayer is 4something% I believe (if I remember what “Pill” told me!).

  85. @Tull
    You’ll be glad to know that I’ve been persuaded against all out default.
    Chance of interest rise is small and we could pool them or something.
    If there is income tax we could eliminate it for irish govt bonds bond investments.

  86. @ Michael Hennigan re bondholders etc
    Try telegraph.co.uk/finance – ‘Hedge funds hold Ireland to ransom over bail-out’ – Sat Oct 20 2010…
    Some interesting stuff from London.

  87. @hogan

    “I too… Poland hasn’t happened yet… sell your assets while the market for them is rising.”

    You know what hogie, you might be right. Selling a bank at 2.5x book value might not be bad biz. The loan book has doubled over 3 years..sound familiar. That said the Botins do not make many mistakes.

  88. @ Hoggie

    “I too… Poland hasn’t happened yet… sell your assets while the market for them is rising.”

    I tend to agree. We’d need good management, lots of spare captial, and an expansionary plan to get the most out of the Polish arm and add value to its current intrinsic worth. I’m relatively sure we are all agreed we have basically zero of the above right now. Further, im relatively sure that both BoI and AIB have had some rather mixed results from their overseas forays in recent years – AllFirst and Bristol&West spring to mind (as well as AIB’s other disasterous Eastern European adventure, the Bulgarian-American Credit Bank). Quite why we think it’d be fundamentally different this time is rather bizarre. And quite why we think we’d get more out of the Polish ops than Banco Santander may be able to is even more bizarre – do we somehow think that we’re super at banking???

  89. @tull
    “That said the Botins do not make many mistakes.”
    They just haven’t been found out yet. They see themselves, I believe, as some sort of vulture fund hoovering up distressed assets that their superior management ability will turn around. Reminds me of the advice McKinsey gave Swissair on their buying spree that bust them…

    @Eoin
    +1

  90. Just saw a piece by Soros on Germany.
    This crisis is summed up by this:
    Germans are too tight to buy other peoples goods (the normal way of giving other people money)
    Therefore any trade union with Germany at it’s core will always have Germany exporting too many products and facilitating the purchase of those products through the provision of credit instead of importing from the other countries.
    We need a union where the biggest producer has an appropriate appetite for the goods of others.
    So. – Irelands failure is really a failure if the European experiment.
    Therefore it requires a European solution or a European dissolution.
    The only empire that had Germany at its core was the Holy Roman Empire which was crap (could be really wrong with that assertion). They’re a great industrious people appetites are too repressed to drive production in other countries.
    Now if Ireland had the steel and coal….that would be just perfect!!!

  91. @podubhlain

    New Earth is only 20 light years away. Now, doesn’t that cheer you up (-;

    Fact. Right gravity, etc and not a bondholder or a bank in sight …..

    … only problem at the mo is that we have yet to design a Special Purpose Vehicle to get there ….

  92. The article seems WTO wonder why not allow the transfer of BoI loans but it seems obvious that this is because the whole banking system is completely bankrupt, to an extent that is well beyond both reserves and equity values. They need to be either allowed to fail or the government bails them out.

    I don’t understand why, in the event that the AG is correct and selective default is impossible, the government can’t allow failure and then use a beefed up deposit guarantee scheme to compensate depositors? Also if it is true that government can’t interfere with these contracts, then is it legal to interfere at all? Have any of these measures been tested in the supreme court?

  93. @Eureka
    If you want to put a country with an appetite for imported goods at the centre of our currency union, we need to invite the USA to join.

  94. @gadge

    “The legal debate appears to be going around in circles.

    There is no reality to a subordinated successfully petitioning the High Court to wind up a bank. The High Court has a broad discretion as to whether to grant a winding up order and a judge will almost certainly refuse to wind up a company at the suit of a subordinated bondholder who has no prospect of recovering anything in a winding up. The court would recognize that there would be no practical benefit to the sub bondholder in a winding up, and that the application was vexatious.”

    The point is that after the state has injected equity into the bank, and absorbed all losses, (in order to allow it hold deposits it must have equity) the bank is/will be able to repay subbies. you can’t have it both ways – ie the bank cant at the same time hold deposits AND say it has no equity and can’t repay subbies

    “The potential difficulties in applying legislation “retrospectively” has also been raised by a number of posters. Any concerns could only ever apply to changes in the substantive position of a party: changes in procedural rules are legitimate. A subordinated bondholder, by the terms of his contract, expressly agrees to give preference to all other creditors. This is the reason he receives a risk premium. Even on the most optimistic forecast there are no sufficient funds in Anglo to pay off senior debt, and thus the holder of subordinated debt is not entitled to recover anything. His substantive rights are not interfered with in any way of this process is accelerated, i.e. his debt is extinguished now under new resolution legislation, rather than in 5 or 10 years when Anglo is finally wound up.

    Legislation is amended all the time, and it is only in the most exceptional circumstances e.g. the creation of a new criminal offence that the amendments can only have prospective effect.”

    The FT told us how to apply such a scheme – it is simple – just stop guaranteeing new debt issues – when that happens the bank cant fund itself – and then it falls within the ambit of a prospective resolution scheme – no need for retrospective anything

  95. @MF

    “Why doesn’t someone get a clarification on relevant law from a colleague in their Law Dept?

    We have had this refrain about burning subbies for months but it’s not possible to arbitrarily pick on creditors within a particular class and say PFO, we’re not paying you while we are paying others – – unless that’s part of their contract.

    As regards a banking resolution mechanism, and changing the terms, can that be applied retroactively including taking away existing rights to petition for a winding-up?”

    See above – it need not be retrospective – once a bank can’t fund itself it is placed into the scheme – that’s the beauty of the resolution mechanism.

    While there may be economic/financial arguments aginst introducing such a scheme – see Bond’s post on the Abramovich thread – I cant see any legal obstacles

  96. @David O’Donnell
    “… only problem at the mo is that we have yet to design a Special Purpose Vehicle to get there ….
    We have – its called the infinity machine commonly known as iou.

  97. @podubhlain

    Naw …infinity ious are a joke; 7_of_9 has an SPV capable of getting us there … oliver vandt, greg, and e65billionandnoextralending are already on board … jto is touting for a ticket … but the BORG are adamant that they will allow no paddies or patricias to cross their space ……. they are terrified that the PDs and FF and their free(sic)-mawrkeeting handlers might infiltrate the collective … as you can imagine, 7_of_9 is a little touchy re the Borg at the mo …. but is getting on really well with Patricia The Sovereign …. in exile.

  98. @Donal O’Brolchain, Keith Cuneen
    “While waiting for the report of this study, re-reading Simon Johnson “The Quiet Coup” might suggest an answer to who benefits from the absence of a bank resolution mechanism ”

    Johnsons article is an insightful reminder of the too cosy relationships between the financial industry and governments in pricular what he described as ” the flow of individuals between Wall Street and Washington.”

    Brian Lucey has repeatedly asked the “who benefits” question in recent weeks. The answer from some insiders on the blog is pension funds etc. normal stuff – the implication being that by defaulting we woukd in effect be shooting ourselves. What undermines this answer though is the sudden explosion of the value of these bonds in the last 10 years – coinciding of course with the housing bubble here and the related subprime bubble in the US. It has repeatedly been stressed that ours is a homegrown crisis, but it stretches credibility that the bank credit is unrelated to the subprime crisis and the dodgy derivatives which that crisis gave rise to.

    I agree with Keith – identities must be published – only when this trail is followed will we know the answer to BLs question “cui bono?”.

  99. @ Christy

    The point is that after the state has injected equity into the bank, and absorbed all losses, (in order to allow it hold deposits it must have equity) the bank is/will be able to repay subbies. you can’t have it both ways – ie the bank cant at the same time hold deposits AND say it has no equity and can’t repay subbies

    Interesting point. I do think, however, that the precise wording of the promissory note is this regard will be critical. Presumably, one of the principal objectives of the Minister in employing a promissory note, rather than some other method of funding, is to spread payments over as long a period as possible. For the same reason, the Minister is anxious to avoid an immediate winding up, which would trigger immediate liabilities.

    In the unlikely event that the holder of subordinated debt managed to persuade the High Court to wind up Anglo now, the Minister might well decide not to make open ended payments into the bank. Instead, he might decide simply to “top up” the shortfall in what creditors recover in the liquidation. (This is how the original 1995 Deposit Guarantee Scheme would operate, i.e. with the State making payments outside the liquidation process. The Minister could thus bring about a situation whereby there are insufficient assets in the liquidation to pay off the senior debt in full: this would mean that the subbies would have no right to recover anything (by definition, they rank after senior debt). The Minister could then “rescue” the senior bondholders by paying them outside the context of the liquidation.

    As I say, it all depends on the terms of the promissory note, but I would be very surprised in the promissory note did not address the contingency of a winding up e.g. a winding up might release the Minister from his obligations.

  100. @Christy

    The FT told us how to apply such a scheme – it is simple – just stop guaranteeing new debt issues – when that happens the bank cant fund itself – and then it falls within the ambit of a prospective resolution scheme – no need for retrospective anything

    Not sure I fully understand the FT’s suggestion. Under the law as it stands today, losses can only be inflicted in the context of a winding up. The State is anxious to avoid an immediate winding up (which triggers large scale liabilities) and the subordinated debtors are trying to exploit this reluctance and to use it as leverage. One solution to the impasse would be to bring in a special resolution scheme for banks. The subbies answer to this is to say “no can do, retrospective legislation is unconstitutional etc.” I personally to not think that is a great argument. However, I do not understand how the FT’s solution advances matters. The height of the subbies’ argument is that when they signed up it was under a particular legal regime, i.e. losses only being imposed in a winding up. It is the change if the legal regime e.g. the introduction of a special resolution scheme which allows them to be extinguished outside a winding up that they object to. If we follow the FT route, and bring about a situation where the bank is insolvent (withdrawing guarantee), the subbies can still argue that the next step must be a winding up, not some new fangled resolution scheme.

  101. @gadge

    As far as I understand it, in order to act as capital/equity the promissory note must be irrevocable – the government can’t at a later date just stop paying in order to reduce its losses. As far as i understand it that would be a sovereign default.

    The special resolution scheme point is that you don’t have a seize/nationalize a bank in the way Anglo was.

    You simply wait until the bank is approaching a situation where it can’t pay its debts as they fall due – and then run it through the resolution scheme.

    you’re not saying something like “you guys used to be /were in the past insolvent – we bailed you out – now we want to go back on that – and impose losses on creditors even though we didn’t at the time when you were insolvent, and even though right now you are solvent – (or at least that is what your books and the regulator says.)

    So a resolution scheme would allow us to run BofI and AIB through it if we wanted, because they couldn’t function without a gov guarantee.

    Also, we are not rewriting the terms of the contracts that ground the liabilities of the bank this way – the bank would have been on the verge of and inevitably about to experience a default in the absence of the scheme – been put in the resolution scheme is a default event just as a liquidation is. this implies that terms of the subbie contract that says losses can only be imposed when senior debt is in default kick in.

    Furthermore, as far as I can see it all capital holders are in as good or a better position as a result of the scheme then they would be in liquidation.

    equity was gone without it and although it maybe wiped out anyway in the scheme it is at least as well off – no worse off.

    senior avoids deposit flight and fire sale of assets

    depositors avoid disorderly wind down of the bank with no access to their funds a la lehman.

    subbies in particular, but all creditors in general, also benefit by

    1 At least the bank has not lost its banking license

    2 The whole structure that is the bank doesn’t just stop – damage to the franchise value has been reduced.

    3 fire sales of assets (a la lehman) reduced

    I would submit that the fact that creditors in reality lose out, because the government would have bailed them out rather than put them into liquidation in the absence of a resolution scheme, is not a relevant consideration from a legal perspective.

  102. @Christy

    As far as I understand it, in order to act as capital/equity the promissory note must be irrevocable – the government can’t at a later date just stop paying in order to reduce its losses. As far as i understand it that would be a sovereign default.

    I readily admit that I do not know how the promissory note operates, and it may well be that your summary is spot on. The only point I would make is that monies under the promissory note are being paid out (or released) in tranches: this might indicate that there is a requirement under the note for the Minister to take some formal step before monies are actually made available to the bank. There might also be some cap on the note in that I seem to recall it being fixed at a sum of 23 billion or thereabouts. If this is the position, then in the unlikely event of a creditor obtaining an order for the winding up of the company, the Minister would not have an open ended liability in the context of the liquidation (as opposed to under the ELG, or the implicit guarantee to see senior bondholders right).

  103. @ Christy

    This is from Anglo’s interim report for H1.

    On 31 March 2010 the Bank received an initial promissory note to the value of €8.3bn from the Minister for Finance. The promissory note provided for the issuance of adjustment instruments which could amend the original principal amount of the note. In this regard, the Minister increased the principal amount of the promissory note by €2.0bn to €10.3bn on 28 May 2010. On 30 June 2010 the Minister wrote to the Chairman to once again confirm his commitment to increase the principal amount of the promissory note to ensure the Bank had sufficient capital to continue to meet its regulatory capital requirements as at 30 June 2010. Subsequently on 23 August 2010 the Minister fulfilled his June 2010 commitment by increasing the principal amount of the promissory note by €8.58bn to €18.88bn.

  104. @ Brian Lucey

    on further reflection, are you suggesting we should have held out for the LTEV of AIB’s Polish assets???

  105. @gadge

    A creditor subbie couldnt get an order to wind up Anglo, not because he wouldnt receive anything in the liquidation, but becasue Anglo is solvent!

    I agree that the promissory note is not an open ended commitment by itself. However, the state has injected equity into the bank and will continue to do so up to the point that all losses are absorbed and the bank has an equity cushion that enables it to hold deposits. The alterntive, ie a liquidation, would imply a vast and instant call on the guarantee in order to repay guaarnteed deposits and guarnteed senior debt. This is is not a realistic option so although the promissory note by itself is not an open ended commitment, the fact that the state needs those anglo deposits to stay where they are implies that the state must continue to inject equity if needs be above the amount of the promissory note – not as a legal commitment – but as a policy imperitive

  106. @Brian Lucey

    In order to make holding onto Back Zachodni WBK a worthwhile exercise one would need stock prices to recover. However, stock prices have lost much of their previous recovery over the last few months.

    Do you know something the rest of the world doesn’t know? Will you make a lot of money from that knowledge a la Maynard Keynes?

  107. @zhou
    “In order to make holding onto Back Zachodni WBK a worthwhile exercise one would need stock prices to recover. ”
    I don’t believe this is true. The income from the shareholding would have to stay constant or grow in euro terms – i.e. the underlying performance of the bank would have to be good. The asset value is a balance sheet issue, not an income issue. BZW was held at a relatively low level on the AIB balance sheet (hence the gain from selling it). The Irish banks need income to rebuild their balance sheets. The question, therefore, is whether the benefit of the cash from the sale would be outweighed by the long-run cash earned on the shareholding.

    I don’t believe this is a sustainable belief going forward for banks in general and probably for Poland in particular. I believe that banks in the future will earn less than they have in the past and that the increase in polish borrowing is unsustainable.

    So I would say that AIB, probably despite themselves, have achieved near peak value for BZW.

  108. http://www.irishtimes.com/newspaper/breaking/2010/1007/breaking37.html

    A statement issued by the National Treasury Management Agency today said the Minister wished to “clarify” the position.

    It said it issued the clarification following what it says is “uncertainty among market observers and participants about the intended treatment of subordinated debt in issue from Irish banks.”

    “In order to clarify the position the Minister has advised that prospective resolution and reorganisation legislation, insofar as it affects subordinated debt in issue, will apply only to such debt in issue from institutions which are not listed on a recognised stock exchange, are in 100 per cent State control and cannot survive in the absence of total State support,” the statement said.

    It looks as if (as predicted by Eoin & Ors) that it is exclusively the subordinated bonds in Anglo which is to be targeted in any new resolution scheme.

  109. This question will put my ignorance regarding these lofty finanical matters on full display. So to all of you I apologise in advance. However, here goes…

    It seems to be widely accepted the the Irish regulator was “not doing his job” during the 2002- 2008 period, i.e. the banks were not being forced to adhere to the regulations pertaining during this time. The Irish State (via the Regulator) was negligent in this regard. Consequently would the bondholders, senior or sub, have a case against the State in the event that there is a decision to force them to take losses on investments that they made during this period?

    Mary

  110. So now the regulator and FG have both stated that senior bondholders should be paid in full. Are we finally reaching the end of this ridiculous debate? Or are they in on the conspiracy to save wealthy private individuals at the expense of the taxpayer?

  111. AIB just d/graded to BBB+ by S&P, and outlook still negative

    *ALLIED IRISH BANKS PLC CUT TO BBB+ FROM A- BY S&P
    *ALLIED IRISH BANKS PLC OUTLOOK NEGATIVE BY S&P

    Thought this last line was a bit harsh (if fair!):

    *AIB ABILITY TO RETURN TO `A’ SACP UNLIKELY FOR NO. OF YRS: S&P

  112. @Enda F

    In the final analysis – they do what they are told to do.
    Ireland may be some sort of battlefield where the interests of Europe and the US clash and we are getting torn apart.

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