Brian Lucey on the Bondholder Bailout

“the slough of despond that is the Dáil”

I love it.

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…

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.

“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…

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…

… 😉

@ 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.

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?

@ 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

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.

@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.

@ 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.

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

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.

@ 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.

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.

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.

“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.

@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.

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.

@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

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.

@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

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

any chance of a thread on the PK challenge to NAMA?

@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.

@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: …

@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.

@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.

@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.

@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?

@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.“

@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’ …

@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.

@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?

@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.

@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 …

@ 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.

@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.

@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.

@DoD
6.6 bn in loans from about 650 borrowers, IIRC, so 10.15 mn each on average.

@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.

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

@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.

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.

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.

@Tull
Is the interest on government bonds not also subject to full income tax?

@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.

@ 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.

@ 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???

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!!!

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?

@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

@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.

@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?”.

@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.

@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).

@ Brian Lucey

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

@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?

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.

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

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