Pension Reserve Fund Set to Make €1.8 billion Loss on AIB Shares

NAMAWineLake blog performs yet another valuable public service and points out that Brian Lenihan’s statement of October 30 told us that “AIB’s upcoming €5.4 billion will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share.”  Unfortunately, the shares closed on Friday at €0.337.

This means the Pension Reserve Fund looks set to make an instant loss of €1.8 billion when it purchases these shares. There is, of course, an alternative. Cancel the underwriting, nationalise the bank and appoint an assessor to value the shares. If, for instance, the shares were valued at their closing price on Friday, this would cost us €364 million. Which sounds better? Losing €1.8 billion or losing €364 million. Is it worth €1.4 billion to retain a tiny private ownership share?

It is also worth raising the question of whether the current process we are going through with AIB is the right one. Rather than being so sure that the bank just needs another €5.4 billion to fix it, why not remove the current upper management immediately, introduce new management charged with fully assessing the bank’s loan book and then decide what to do with it?

If AIB is deemed to be deeply insolvent at that point, we are already (albeit slowly) developing a template for dealing with banks of this kind. This would involve splitting AIB into a good bank and a bad bank, leaving the €4.5 billion in subordinated debt in the bad bank and perhaps negotiating with with the holders of these securities to reduce the amount of public funds required to cover the losses.

If the losses at AIB are larger than the authorities currently envisage, then there are strong arguments against continually putting taxpayers money in to protect other providers of risk capital.

91 thoughts on “Pension Reserve Fund Set to Make €1.8 billion Loss on AIB Shares”

  1. Karl

    The “good bank: bad bank” template for dealing with critically under-capitalised banks in a way that best protected the State’s balance sheet was published Fine Gael almost 18 months. It was, of course, rubbished by the usual “there is no alternative” to NAMA apostles, some of whom (e.g. Alan Dukes) then went on to apply to template to Anglo.

    As you know, the original idea was the leave the difficult-to-value developer loans with the “bad banks” or asset recovery vehicles. With most of those now sold to NAMA, what categories of assets would you leave with the bad bank of AIB?

    Andrew

  2. Thanks for tip Karl but what I don’t understand is why the State does not take AIB into 100% public ownership as it did with Anglo in early 2009 and not have this ludicrous 95%+ State control jiggery pokery with the planned €5.4bn injection. And why should AIB’s €4bn+ subordinated debt holders escape whilst the State’s pension fund is being deliberately used in a way which from day one will yield a €1.8bn loss (and I wouldn’t hold out much hope of the €5.4bn investment delivering super yields either).

    This goes beyond the general scope of NAMA but I am flabbergasted that the State’s pension fund that is to be used to pay the ordinary pensions of our citizens is being used to bail out AIB shareholders and subordinated debt holders.

    It is – and this is a word I don’t often use at all – immoral. And perhaps just as bad there doesn’t seem to be any economic justification. Is it just national vanity that we keep two “Irish” banks and to blazes with pensioners?

  3. Part of the unintended comedy is that the Minister repeatedly cites the size of NPRF as an offset to the public debt, yet he hasn’t told “the markets” how he’s dissipating so much of those assets in lousy bank transactions.

  4. Great minds! I was puzzling this myself in recent days. There is a mistake in your math but more of that later. The 50c was meant to be at a discount to the market price which would normally be expected by an underwriter. 50c is now at a 50% premium. Who would underwrite that? Is the minister’s statement irrevocable?

    Now for that mistake. The government has to stomp up 5.4bn come what may. What is at stake is how much of the bank it will own. At 50c it will own c.90%; at 33c it would own c.94%. So by pitching it at 50c instead of 33c it is shortchanging itself by c. 4% of the recapped bank. That recapped bank would be worth at today’s market prices c. 4bn so the 50c/33c differential is worth c. 160M. On a full nationalisation with no compensation the NPRF would be 360M better off than what it is proposing.

    So you are right that it is facing a 1.8bn loss but the most that it can reduce that by is 360M unless you are suggesting it should not after all recap AIB.

  5. @BWII

    I suggest that to start with, it haircuts the €4bn subordinated debt by €1.8bn which will give you a profit which will be added to the P&L reserve (which is part of Tier 1 isn’t it?)

    It also burns the ordinary shareholders because without State intervention, AIB won’t have a banking licence. And by burning, I mean the bank is taken into 100% State ownership.

    All of which should avoid a €1.8bn loss to our pension fund.

  6. Is it not astounding that a full two years after the crisis broke and knowing full well that the guarantees would run out there is still no resolution regime whereby the State could provide capital and protect itself?

    Why can the State not provide “Super Senior” debt with rights placing current senior debt behind the State? That is, a take it or leave it scenario.

    AIB is insolvent. Everybody knows this.

    The capital rules should be overridden to reflect the State bailout.

    If the Minister believes that taking up the rights issue (providing capital) will see AIB back to health then the capital should be provided in a manner which ensures that on a return to health (which may take some time) the State recovers all of its capital plus interest and warrants.

    Otherwise nationalise and be damned.

    Any further support to AIB on terms that favour the shareholders and bondholders over the interests on the Citizens of the State and knowing what is now known can only be seen as treasonous.

    There simply is no other word for it.

  7. None of the pension fund trustees I have come across take a comedic view of fiduciary duties. Funny thing is though, even a few years ago, if asked to name five countries in which that might occur, Ireland would have been on my list.

    For that same reason I don’t find it surprising that there are few if any, wholesale clearouts of the sort you suggest. Years ago it was part of the country’s charm to overseas visitors that people, officials, bus drivers, publicans more or less did their own thing and there just weren’t consequences. It was kind of querky and relaxing.

    It is part of the culture which is unhelpful though in the current situation.

  8. @Brian Woods.
    I am not convinced of your methodology. The straightforward loss as calculated by the difference in share price is more convincing to me. To me the government is underwriting the full loss. The fact that is “has to” stump up 5.4 billion anyway is not the issue. It could for instance pay current market price for the shares and ask AIB to issue a special govt guaranteed bond for difference between underwriting price and actual price. I need more time with this. Have to go now.

  9. @ Jagdip

    Well yeah. Take 1.4bn off subbies and don’t give 0.4bn to shareholders (I accept that any current shareholder value appears to be a State gift).

    We’re in a bit of a reductio ad absurdum on the rights price. Drop it now to 30c and the share price will fall to 20c etc. The only rational outcome is nationalisation with nil compensation.

    But surely there is a value to keeping AIB as a normal listed company for ease of exit if nothing else. That must be worth something.

    As a shareholder myself I couldn’t care less at this stage if they did follow the nationalisation course, but I do think the continued listing is worth something. 360M? It’s a judgement call. I suspect that anything deep in the nineties by way of State ownership would start to eliminate some of the benefits of that public listing.

    There is also a bit of an argument that the current market price may be itself irrational. It is clear now that with the heavy State dilution it will be some considerable time before there is any upside on the price. Stockmarkets are very short termist, they may not be giving proper value to future potential.

    I wouldn’t be at all sure that if we followed Karl’s suggestion and appointed an assessor that she wouldn’t after all come up with a compensation price in and around the level before the State dropped this latest bombshell.

  10. @ Karl

    ‘If the losses at AIB are larger than the authorities currently envisage, then there are strong arguments against continually putting taxpayers money in to protect other providers of risk capital’

    It will be a surprise if that is not the case. Our governement has colluded with the banks in concealing the scale of the banking losses until the losses have been socialised to the fullest possible extent.

    Certain kinds of risk capital would seem to have had (tacitly agreed) political protection at all times. That begs a question as to whether the so-called risk capital was ever really at risk ? Political economy indeed.

  11. Whats the point of all this – the goverment is either illogical dunces led by special interest groups or treasonous self aware cretins –
    There is no option for citizens then to default on mortgages in mass and buy real money.
    Remember what happened to Russia when it was enveloped by locusts……..
    Brian Cowen is our own version of Boris Yeltsin – getting pissed while his country is devoured by monetory maggots.
    Protect yourself from this pestilence.

  12. Whats the point of all this – the goverment is either illogical dunces led by special interest groups or treasonous self aware cretins –
    There is no option for citizens then to default on mortgages in mass and buy real money.
    Remember what happened to Russia when it was enveloped by locusts……..
    Brian Cowen is our own version of Boris Yeltsin – getting pissed while his country is devoured by monetory maggots.
    Protect yourself from this pestilence.

  13. “With this in mind, the Commission is developing and implementing a Responsible Investment policy in a manner to be consistent with the Fund’s statutory investment policy as set out in Section 19 of the National Pensions Reserve Fund Act 2000, which is to secure the optimal total financial return provided the level of risk to the moneys held or invested is acceptable to the Commission.” extract from NPRF published investment policy.
    How can the NPRF Commission members take a direction from the MoF that appears to breech its Investment Policy

  14. @BWII

    A stock exchange quote as a means of exit is a reasonable argument. Why not issue shares at 5p , 10p or any price in that vicinity. there is no practical differnce between owning 90% and 99%.

  15. @BWII
    “As a shareholder myself I couldn’t care less at this stage if they did follow the nationalisation course, but I do think the continued listing is worth something. 360M? It’s a judgement call. I suspect that anything deep in the nineties by way of State ownership would start to eliminate some of the benefits of that public listing.”

    We could just give the subs a 10% to 20% stake and the shareholders nothing.

  16. @Andrew McDowell

    I distinctly remember, back when the NAMA legislation was still before the Dáil, a junior minister on the radio assuring us that Richard Bruton’s good bank idea was unfeasible because the “fantasy bank” would require several billion in capital from the government and take a whole year to set up.

  17. @ tull

    Good question. I think 99.999999% ownership would scarcely add any added dimension to full nationalisation. But 90% does. Is 99% the same as 90%? I don’t know.

  18. It has been a while since I was close to this but doesn’t the ISE have a minimum free float for a listed company?

    I think if was 25% public shares but could be wrong.

  19. At this stage, can anybody be surprised at any cockamamy cockup this government will make regarding banks? The surprise would be if they did something right. Sorry, thats caustic but its how I feel.
    As BWII im a shareholder – and as a shareholder and a citizen, just get on with it.

  20. Karl,
    I work for these muppets. AIB should be nationalised fully and a new management team insterted without delay. The overpaid spoofers that currently occupy senior management roles have been merely moved to other posts on the same salaries. These clowns have destroyed (what was a great institution) and pocketed huge bonuses and salaries in the process. Quite how they have the brass neck to still occupy their lofty perch is beyond comprehension. This all started with former CEO Michael Buckley- paragon of virtue that he is- and to think he still draws a monthly pension from AIB is quite sickening. He should hang his head in shame and relinquish his undeserved pension. Why has nobody been held accountable for this mess???

  21. At the very least, this is another €1-2bn which should be added to the total confirmed cost of the bank bailouts, yes?

  22. A reader points out that this issue was raised in the Dail by Joan Burton on October 14:

    Joan Burton (Dublin West, Labour)

    Question 64: To ask the Minister for Finance if the National Pension Reserve Fund will participate in and underwrite the Allied Irish Banks rights issue at a fixed price of 50 cent per share irrespective of its prevailing market price at the time of the rights issue; and if he will make a statement on the matter.

    Brian Lenihan Jnr (Minister, Department of Finance; Dublin West, Fianna Fail)

    In my statement on banking on the 30th September last I indicated that AIB is to raise €5.4bn of capital through a placing and open offer to shareholders of AIB. The transaction is to be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. I am advised that it is the normal practice in underwritten transactions that the underwriting price is fixed at announcement.

    http://www.kildarestreet.com/wrans/?id=2010-10-14.622.0&s=section%3Awrans+speaker%3A49#g623.0.q

  23. @ DE

    not sure about the free float, but there is an issue around minority interests i think, hence why the government will only actually take a 75% voting rights (i think).

    I also completely agree with BWII’s maths on this – the price for the share issue doesn’t really make all that much difference whether its 50 cents or 33 cents, we’d still have to make the same capital infusion. Its a meaningless argument if you assume we’re not just going to outright nationalise (which, in fairness to Karl, is the point he makes). But We’re not “losing” 1.8bn purely because of how the share price now is 16 cents lower than the issue price. Essentially you could argue that the market reckons our overall investment is worth 1.8bn less than it would be if the share price remained at 50 cents after the issuance, but we’re going to be subject to that issue every day, and its questionable that there is a true functioning price discovery mechanism going on with AIB shares right now given the quasi nationalisation that’s occurring at the moment.

  24. I see the financial times is again suggesting some scorching of seniors. Gosh, it seems like only 2 September -http://www.irisheconomy.ie/index.php/2010/09/02/lucey-on-anglo-loss-sharing/ – that this was the height of heresy.
    The ft comments are here.

  25. The ft comments are here
    http://www.ft.com/cms/s/0/971c7582-e529-11df-8e0d-00144feabdc0.html
    Now all we need is Tull and eoin2 to give some abuse and it’s early autumn again.
    The paragraph of most interest is “Senior debt ranks equal to deposits under insolvency rules. But a government can selectively bail out depositors of an insolvent bank in exchange for their pari passu claims on its estate, as the UK did with Icesave depositors. The equivalence of private and sovereign debt is a creature of Dublin’s imagination – though increasingly one of its making: the government has far too promiscuously expanded its legal guarantees of bank liabilities.”

  26. @ Karl

    i dont think there’s much difference between the 93% holding and outright nationalisation. I suppose there is an argument that once you nationalise in full, there is an implicit (though i completely agree NOT explicit) government backing for ALL liabilities and obligations of the nationalised entity, and you’re going to have more trouble dealing with unions etc in the event of restructuring (who doesn’t believe the unions would ask for a stake in re-floated company?). But we’ve kinda been doing this anyway in terms of the guaranteeing of liabilities, and the union issue is not insurmountable. But either way, we’re talking about saving a few hundred million at most, not 1.8bn. Im open to either suggestion, but reckon its not a massive sum to keep the arms length ownership in place on both liabilities and unions/other working & operational practices.

    @ Brian Lucey

    i read the article to be generally positive of the Irish govts efforts to force losses on debtholders, albeit urging it to do more?

    Im not 100% expert on the Icesave issue, and have no idea how it could interact with Irish and EU law given our particular circumstances and respect for property rights. Im not sure whether we would, for instance, need to enact new anti-terrorism laws like the ones the UK used in their dealings with Icesave. Further, the UK is still trying to force, via the IMF, the State of Iceland into paying for the Icesave losses, essentially asking a sovereign nation to pay up for its private banking sector losses, right? Couldn’t Germany or France do the same thing with us, denying us access to the EFSF, should it be required, until we paid their bondholders back? Actually, haven’t a few of us on here kinda made that point that you could only default on seniors when there is a small or zero deficit??

    Btw, think this link is better if ur not an FT subscriber/registered

    http://www.ft.com/cms/s/0/971c7582-e529-11df-8e0d-00144feabdc0.html?ftcamp=rss

  27. @ Brian Lucey

    btw, on your article from early Sept – i believe the biggest issue people had was that you suggested revoking a government guarantee and/or defaulting on guaranteed bank debt. Very little of the near-400 comments dealt with the basic premise of non-guaranteed senior debt, which the FT exclusively deals with (along with subs). The FT is NOT suggesting either a guarantee revocation or a default on sovereign debt, so we can assume that it does not agree with your opinion on that.

    (PS – you can get the FT story by googling “ireland steps back into the ring” and clicking on the FT link)

  28. This is unbelievable. We are heading for an uncontrollable situation.

    The country cannot afford chaos. Elites can.
    Fianna Fail and its associated elites have destroyed our fiscal sovereignity. It is up to us to protect what remains of the sovereignity of our society and its capacity to develop.

    The Fianna Fail party has bound itself into the elite system of the country and considers that it is appropriate that it should be part of the country’s process for correcting the fiscal crisis which it caused. By engaging with it , the opposition parties are clouding the issue of the elimination of the present elite system with the need to correct the fiscal system. The two issues need to be firmly seperated.

    Collins and Griffith came into a country that was destroyed by war, with reparations and land annuities that were a higher proportion of GDP than post-armistice Germany was subject to , faced into a civil war that eliminated a large number of able people from being available for the task of rebuilding and an intelligentsia that stayed above the fray. Now , thats a challenge, and one which they did not shirk.
    I would add to them two more groups that built a civic culture. The group around Horace Plunkett who built the agricultural cooperative movement, and the group in the fifties around Nora Herlihy, Sean Forde and Seamus P. McEoin who built the Credit Union movement.
    Those two groups are important not for how they used the physical resources of their area, but for the competencies in community organising and self reliance that they instilled in their members. The present elite largely ignored these community groups. It was probably fortunate.

    According to Simon Johnson formerly of the IMF, a fiscal solution is always obtainable: but it is only successful if the elites that caused the problem are removed from the solution.
    I have recently posted on this site on the lines that the fiscal plan’s that we will be enduring are not the major issue: it is the social and political plans to eliminate the existing elites that matter.
    http://www.irisheconomy.ie/index.php/2010/10/12/fairness-and-fiscal-strategy/#comment-83169
    http://www.irisheconomy.ie/index.php/2010/10/12/fairness-and-fiscal-strategy/#comment-83716

    Our elites had a way of using the resources of the country to produce a financial foam that maintained their position, -and ours, and which hid the real structure of our resources. Through our own negligence and ignorance we allowed them to damage and waste the physical resources of our country. Those resources will have to be reconstructed. By us. The present elites must be eliminated from the process of reconstruction.

    We need to develop a system of governance in a way that grows the capacity of our resources. The resource with the least damage and the most potential is our ability to network and form communities, whether those be social or commercial. The development of our physical resources is dependant on the success of that.

    Neither of the two main opposition parties have the resources to deal at the same time with a system re-organisation and with the fiscal crisis : indeed, they could be under pressure to just produce a comprehensive plan. They have genuine conflicting views on the correct fiscal solutions, but fewer conflicts on what constitutes good governance. This seems to reflect the views of the electorate.

    What is to be done?
    Bypass Fianna Fail immediately. Withdraw consent to be governed by their system.
    Force an election within three weeks and let Fine Gael and Labour contest it on the basis of their plans. A clear mandate for a plan is more important than the precise details of the plan.
    Immediately set up a program of Citizens Forums headed by Mary Robinson. She has been in very nearly every corner of this country. Get agreement from the opposition parties that they will support its recommendations whether or not they are in power: a Tallaght strategy for eliminating the present elite system. The government and opposition can then concentrate on the fiscal solution and whichever party is in opposition can hold the governments feet to the fire if they diminish the citizens wishes.

    The process of system re-organisation has to be seperate from the present state structure if it is to resist being suborned by it. Imagine the impact of a few no-nonsense local activists on the waffle spinners.
    Use the organisation skills and networks of the Credit Unions and the local communities to provide the volunteers and premises for the citizens forums. Use the process to develop the community skills of disempowered areas.

    Use the skills of people such as Bernie Goldbach in Tipperary Institute to pull the IT communication platforms together. Get people aware of how those platforms like Twitter can enhance their power and also enhance their businsess’s. Make them hungry enough to lift their IT game.
    Get a loan from a Soros type philanthropist, or start a Michael Collins type National Loan to fund the process. Or both.
    But pay it back: no more “Other People’s Money”

    Install a full publicly accessible IASB accounting system from the outset. It will take our Public Service at least ten years to accomplish that.

    Start now. Force a decision on an election within 3 weeks. Get it over by Christmas. Have a result from the Citizens forums within three months.
    At this stage it is actions that count not ideas. Make sure that it is our actions that are driving the process.

  29. This is unbelievable. We are heading for an uncontrollable situation.

    The country cannot afford chaos. Elites can.
    Fianna Fail and its associated elites have destroyed our fiscal sovereignity. It is up to us to protect what remains of the sovereignity of our society and its capacity to develop.

    The Fianna Fail party has bound itself into the elite system of the country and considers that it is appropriate that it should be part of the country’s process for correcting the fiscal crisis which it caused. By engaging with it , the opposition parties are clouding the issue of the elimination of the present elite system with the need to correct the fiscal system. The two issues need to be firmly seperated.

    Collins and Griffith came into a country that was destroyed by war, with reparations and land annuities that were a higher proportion of GDP than post-armistice Germany was subject to , faced into a civil war that eliminated a large number of able people from being available for the task of rebuilding and an intelligentsia that stayed above the fray. Now , thats a challenge, and one which they did not shirk.
    I would add to them two more groups that built a civic culture. The group around Horace Plunkett who built the agricultural cooperative movement, and the group in the fifties around Nora Herlihy, Sean Forde and Seamus P. McEoin who built the Credit Union movement.
    Those two groups are important not for how they used the physical resources of their area, but for the competencies in community organising and self reliance that they instilled in their members. The present elite largely ignored these community groups. It was probably fortunate.

    According to Simon Johnson formerly of the IMF, a fiscal solution is always obtainable: but it is only successful if the elites that caused the problem are removed from the solution.
    I have recently posted on this site on the lines that the fiscal plan’s that we will be enduring are not the major issue: it is the social and political plans to eliminate the existing elites that matter.
    http://www.irisheconomy.ie/index.php/2010/10/12/fairness-and-fiscal-strategy/#comment-83169
    http://www.irisheconomy.ie/index.php/2010/10/12/fairness-and-fiscal-strategy/#comment-83716

    Our elites had a way of using the resources of the country to produce a financial foam that maintained their position, -and ours, and which hid the real structure of our resources. Through our own negligence and ignorance we allowed them to damage and waste the physical resources of our country. Those resources will have to be reconstructed. By us. The present elites must be eliminated from the process of reconstruction.

    We need to develop a system of governance in a way that grows the capacity of our resources. The resource with the least damage and the most potential is our ability to network and form communities, whether those be social or commercial. The development of our physical resources is dependant on the success of that.

    Neither of the two main opposition parties have the resources to deal at the same time with a system re-organisation and with the fiscal crisis : indeed, they could be under pressure to just produce a comprehensive plan. They have genuine conflicting views on the correct fiscal solutions, but fewer conflicts on what constitutes good governance. This seems to reflect the views of the electorate.

    What is to be done?
    Bypass Fianna Fail immediately. Withdraw consent to be governed by their system.
    Force an election within three weeks and let Fine Gael and Labour contest it on the basis of their plans. A clear mandate for a plan is more important than the precise details of the plan.
    Immediately set up a program of Citizens Forums headed by Mary Robinson. She has been in very nearly every corner of this country. Get agreement from the opposition parties that they will support its recommendations whether or not they are in power: a Tallaght strategy for eliminating the present elite system. The government and opposition can then concentrate on the fiscal solution and whichever party is in opposition can hold the governments feet to the fire if they diminish the citizens wishes.

    The process of system re-organisation has to be seperate from the present state structure if it is to resist being suborned by it.
    Use the organisation skills and networks of the Credit Unions and the local communities to provide the volunteers and premises for the citizens forums. Use the process to develop the community skills of disempowered areas. Imagine the impact of a few no-nonsense local activists on the waffle spinners.

    Use the skills of people such as Bernie Goldbach in Tipperary Institute to pull the IT communication platforms together. Get people aware of how those platforms like Twitter can enhance their power and also enhance their businsess’s. Make them hungry enough to lift their IT game.
    Get a loan from a Soros type philanthropist, or start a Michael Collins type National Loan to fund the process. Or both.
    But pay it back: no more “Other People’s Money”

    Install a full publicly accessible IASB accounting system from the outset. It will take our Public Service at least ten years to accomplish that.

    Start now. Force a decision on an election within 3 weeks. Get it over by Christmas. Have a result from the Citizens forums within three months.
    At this stage it is actions that count not ideas. Make sure that the actions driving the process are ours.

  30. Dreaded_Estate

    “It has been a while since I was close to this but doesn’t the ISE have a minimum free float for a listed company?

    I think if was 25% public shares but could be wrong.”

    Is free float not relevant only to the construction of indices, such as the ISEQ Overall / ISEQ Financial?

    So if the State “owns” 50%/90%/95%/99% of AIB this holding will be excluded.

    Directors’ holdings are not included.

    Holdings above 5% are not included.

    There is good reason for this. They don’t trade and are therefore irrelevant to price discovery.

    Free float is about the liquidity of the stock. Of course by liquidity I don’t mean the amount of cash available. It is simply about how much of the stock is traded. If significant chunks of a stock do not trade the index should not be diluted or concentrated by the inclusion of the element that does not trade.

    This is from the ISE website.

    http://www.ise.ie/index.asp?docID=456

    “In the calculation of free-float, two types of shareholding are excluded; firstly shares held by interested parties and secondly long term, strategic shareholdings of a significant portion of the issued shares.”

    “Governments: Shares owned by governments and affiliated entities where the investment objective indicates that it is strategic should not be included in free-float (e.g. the Government’s 20% holding in Aer Lingus Plc).

    Government agencies and government-related investment funds: The investment objective of the agency / fund will determine whether the shareholding is strategic and therefore not included in free-float.”

    So it is clear Government or Agency holdings are not included in the free float.

    Free-float methodology was implemented by the ISE on 18th June 2007.

    “On June 18th 2007, the Exchange will implement a free-float based methodology when calculating its ISEQ® indices. This represents a change to the current methodology which (except for the ISEQ®20 index) utilises the entire issued share capital of ISEQ index constituents. This date has been selected for consistency with the standard European index rebalancing calendar (i.e. third Friday of the last month in each quarter). It is also consistent with the ISEQ®20 rebalancing in June, 2007.”

    “This represents a change to the current methodology which utilises the entire issued share capital of ISEQ index constituents.

    So it is about the construction of indices. Concentrated holdings are excluded as the index would be corrupted.

    The weight methodology used is AIB Free-float value / Total Free-float value.

  31. “I also completely agree with BWII’s maths on this – the price for the share issue doesn’t really make all that much difference whether its 50 cents or 33 cents, we’d still have to make the same capital infusion.”

    Of course “the price for the share issue doesn’t really make all that much difference”.

    AIB is insolvent. The “market price” is a fiction.

    Yes AIB needs capital.

    The terms on which the capital is provided is the issue not some Mickey Mouse stock price.

    Fianna Fail and its advisers have avoided putting in place a resolution regime which would protect the State and the Citizen.

    AIB isn’t worth One Euro Cent.

    If the bondholders of Anglo Irish can be wiped out by not “taking an offer they can’t refuse” then so for AIB bondholders. Oh and yes I do mean the seniors.

    If some fictional liquidation can force a hit on the subs the same can be used to make the seniors in AIB take a 50% hit. There is no getting away from this.

    And if it is a matter of law, all Fianna Fail and the Green Party have to do is make law.

    They refuse to do it.

    Why?

  32. Nothing to do with the political and legal heavyweights who had sizable AIB holdings?

    Contrast the fate of two Anglo groups. AIB holders get to hang on to something in the interests of restoring the bank to its ‘former greatness’, whatever that means, according to Lenihan; while Anglo share holders get nothing, despite the ‘erroneous’ data in annual reports, etc. And as I write Lenihan still has not appointed an assessor after nearly two years. How can a business be worth €35billion in debt ‘management’ yet be worthless as a retail equity. The ‘former greatness’ of Anglo, what is that worth?

  33. Good money after bad.

    A great lil country!

    These people cannot be trusted to operate a pub, but we allow them to throw away real capital?

    Where is the rage? Any spleen? Normal so: “nothing to see here”?

    Taxes at 88% people! There is always a reckoning! Save the anger for the remedy, not the illness? Save it for the collapse of the bubble, not for the bubble itself? Consistent!!!!!

    This is no longer a tragedy! Comedy for foreigners! I have already suggested what has been and is going on. It continues. The treason is that there has not been enough deaths of Td’s, defections, votes of confidence etc that an election has to be called.

    Tax rates of 90%? The UK had a rate of 98% that prompted the Beatles to move abroad. 98% people!!!!! History. History!!!!!

    Will it repeat?
    How can it not repeat?

    I laugh at you, the confused and befuddled!

  34. Unlike the banking guarantee that has been enacted into law, the statement by the Minister on 30th of September committing the NPRF to underwrite the AIB share issue at €0.50 a share is not law. The Minister can change his mind without legal ramifications, as far as I can see.

    If he does change his mind and declines AIB any further support, then AIB will not meet the PCAR requirements and lose its banking licence. The State will be on the hook for some guaranteed liabilities. I am at a loss as to why we don’t therefore do what we did with Anglo in 2009. Do we need reminding of the statement on 15th January, 2009 “The Government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc (“Anglo”), to take steps that will enable the Bank to be taken into public ownership. This decision has been taken after consultation with the Central Bank and the Financial Regulator which has confirmed that Anglo Irish Bank remains solvent. Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland. Anglo has a balance sheet of some €100bn with a substantial deposit base which the State is determined to safeguard. The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate Government support as necessary. All Anglo employees remain employed by the company.” Just search and replace “Anglo Irish Bank” with “Allied Irish Banks” and make the balance sheet value €150bn and the statement is practically drafted. I don’t mean to be flip but am flabbergasted by the notion of using pensioners’ funds knowing we will make a loss from the start.

  35. According to the most recent AIB report and accounts for the six months to June 2010 (Note 32 on page 87) there were €4bn+ of subordinate debt holders. These are no longer guaranteed. Anglo is apparently seeking to redeem their subbies at 20c in the euro. AIB had capital of €9.5bn at the end of June 2010 (when it was using a 26% provision for losses on NAMA). At a 60% provision for losses they will have a hit of €4bn in the second half. They are keeping €4.4bn of €5-20m NAMA loans and these should see an additional €1.5bn of provisions. They have €70bn of other commercial property and lending and in my view if these were properly provisioned then the remainder of Anglo’s capital would be wiped out. AIB is in my mind insolvent, its true liabilities exceed its assets.

  36. http://www.independent.ie/business/irish/nama-to-reveal-number-of-its-loans-in-arrearseuro40bn-2402108.html

    Ooooooh!

    Bad news!!!!!

    I am SHOCKED!!!!

    Who said this would happen? Only the vast majority of those commenting here, apart from shills. What is the betting that the actual results are vastly worse? What is the intrinsic value of vacant land, without builders rubble, when there is a depression raging and the EU cease all CAP payments?

    All answers of more than 1000 Euro will score zero……

  37. @ Pat

    “Notice who side-tracked the point of the article by discussing share prices.”

    Eh, Karl’s a shill now? Are share prices not central to this article?

  38. I believe Jagdip is correct. The NPRF will make an immediate mark to market loss of 17c on every share that it purchases. That much, I believe, is not at issue. What is at issue is how many shares will be purchased, no?

  39. What a mess. The fallout from the property boom is a cancer which has effectively destroyed the country’s banks and now it is working on the sovereign. The scale of the disaster is bigger than the capacity of the Government’s balance sheet to contain it.

    What is worrying generally is the refusal of the bond holders to share in the clean up costs. Sure it was legal but was it the right move? The Anglo debt fiasco may have made short term financial sense to the bondwallahs but it does look like an Aughrim moment in the bigger picture and that won’t be good for anyone.

    I saw Trichet and Sarko had a bust up over this on Friday. It’s very hard to see interest rates staying low if risk has to be repriced to take account of loss sharing. So more woe for the Government. Things are going to get a lot worse before they get worse.

  40. @BL & Eoin

    That FT article is flawed. The main exhibit is that the government swapped “Guarantees for the pari passu entitlements” of Icesave depositors. What does that mean? The government honoured the deposits but in return it is entitled to the divi up after any liquidation process of Icesave. This is exactly within the law and is available to us. There is no selective torching of bondholders here. The big difference with the Irish situation is that the UK didn’t give a damn about the future of Icesave or whether it was liquidated. But a liquidation of AIB, even Anglo, would be utter disaster for this country.

    There has been no selective torching of seniors against their pari passu rights throughout the EU including the UK. No skin of the FT’s nose to make inaccurate accusations of us paddies and certainly no problem to them if we chose to be bleeding edge in such a development.

  41. @Karl

    Interesting exchange in the Dail. Fair play to La Burton. We haven’t broken any rules/etiquette yet so with at most 300M at stake I don’t see any backtracking on the 50c. Mind you the headline “Government buys 5.4bn (or is it 3bn) of AIB shares at a premium of 50% to current market prices” will need some explaining.

    I agree with Eoin that the current share price is kinda meaningless. For a start it CANNOT exceed 50c because there is an effective Call Option for the market to fill its boots at this price in the next month. Thus the price cannot exceed 50c less value of Call Option. Furthermore the very thoughts expressed in this interesting thread must be really overhanging the price and the lower it goes the more nervous markets will be.

    My guess, but please folk to not speculate on the basis of it, is that when the shares are issued and a more balanced assessment of its long term future becomes relevant again the share price will rise significantly above current levels though not much above 50c.

    Finally, given this assessment of the instability and possible irrelevance of the current price, I would be slow to extrapolate that AIB is inherently insolvent.

  42. As I read it, Karl Whelan’s core point is that the state should consider nationalising AIB and splitting it with a view to making a saving on AIB subordinated debt, thereby limiting the cost of the bailout.

    The queston arises as to the pros and cons.

    Colm McCarthy’s stomach churning article in one of the sunday papers suggests that we should do nothing dramatic on the banks until we see if we get a substantial bond issue away in Jan/Feb and if our banks can return to the market and obtain funding. Those are the two juggernauts bearing down on us, after which our national debate may be rendered somewhat superfluous as matters are ultimately decided abroad.

    Karl Whelan’s question should be considered now but not implemented until February at the earliest I suppose. In the meantime, the NPRF is on the hook, but we don’t yet know how much they are on the hook for.

  43. @ Zhou

    The Sunday independent is fascinating. Probably the leading media organ of the boom it is now reduced to page after page of supermarkets advertising deflation with a particular focus on cheap meat. The arse seems to have fallen out of the market for write-ups of modeling starlets which was its other key product. Only the sports news provides consistency with the boom years .

  44. Re Paddy McKillen, I hope that NAMA now moves with all expediency to transfer these loans. Given that there is a planning application to add 40 rooms onto the 203-room 5-star Claridges in London, I was puzzled by Paddy’s legal case because NAMA might have been one of the few funders available to develop the asset profitably. Paddy has successfully kept NAMA away from his affairs for 7/8 months – NAMA must now act with speed.

  45. @Jagdip

    What have NAMA funded to date??

    @Seafoid

    I suppose Colm McCarthy is trying to reach the same people that newspaper has been talking to for the past few years. Does that make him the archetypal Z-list recession-celebrity? In the meantime, somebody has to talk sense to people who are still stupid enough to buy that publication but old enough to vote.

  46. @ Jagdip

    has the court judgement been released on a link yet – tried the courts.ie website but couldnt see it (not that i plan on reading ALL 147 pages!!)?

  47. @Zhou,

    I see you have your eye on the NTMA getting a substantial issue away in Jan/Feb. Eoin has been flagging this up for some time. But do you not agree that, should the NTMA be successful, this will just be the start of a roller-coaster ride with the bond market with increasingly whitened knuckles and greater demand for intestinal fortitude everyone time there is a bond auction or attempt to structure a syndicated issue?

    The vehicle should be taken off the road, as it will do serious damage to the occupants, but it won’t happen until the NTMA fails the next time or at some time after. Any governing faction on whose watch this happens knows that it could fail to survive as a viable political entity. This is what is driving the FF/Greens and maintaining backbench discipline – particularly as we are in the run up to 100th aniversary of 1916.

    Everyone is expected to don the Green Jersey and take the pain – with Colm McCarthy feeling compelled to lead the chorus. But surely it would be better for all to get this car into the EFSF bodyshop and repair political governance (which continues to fail) and economic performance (absmal in some key sectors) away from the fury of the bond market.

  48. @zhou_enlai

    To the best of my knowledge NAMA hasn’t funded anything belonging to Paddy yet. NAMA is reported to have spent €40m in Q2 on various developers (Treasury and the IGB site are two I have heard referred to but that is just speculation). NAMA is reported to have *agreed* €250m funding so far. The Top 10 developers are reported to have asked for €1.5bn. There will be better clarity when the Q2 accounts are released hopefully this week – they have been on DoF’s desks for some time now.

    @Eoin Bond
    Not available electronically yet and you might be waiting weeks on courts.ie. It was handed down in paper format and I am hoping to get a scanned copy later on. Given the personalities of the judges there will be be some worthwhile phraseology therein!

  49. @Zhou

    I wouldn’t class Colm Mac as a z list celebrity, far from it. Someone has to spell it out to Sunday Indo man and woman. I saw a quote from Paul Gillespie on the Lisbon treaty. He spoke about the arrogance and ignorance of the boom years. Typified by the Sindo.

  50. It begins…

    *IRISH HEALTH MINISTRY OFFERS VOLUNTARY RETIREMENT/SEVERANCE
    *IRELAND SETS ASIDE EU400M FOR HEALTH SEVERANCE PLAN

  51. @Jagdip

    I am not aware of NAMA funding any further development or business activities. It is possible they are spending a few bob to weatherproof works (or at least one would hope they are). However, I have not read anywhere that they have actually provided a new loan facility to anyone.

  52. @Paul Hunt

    “But surely it would be better for all to get this car into the EFSF bodyshop and repair political governance (which continues to fail) and economic performance (absmal in some key sectors) away from the fury of the bond market.”

    There is no evidence that the EFSF is a bodyshop. It appears to be something more akin to a site for controlled explosions. There is no reason to think that the EFSF will assist us in repairing political governance or economic performance. There is every reason to think that resorting to EFSF will damage economic performance.

  53. @BW II
    My understanding is that UK legislation allows for senopr bond holders to be treated differently but that the UK authorities chose not to do so in the case of Bradford & Bingley.

    It is of course blasphemous in Ireland to question the absece of bank resolution regime legislation – given the importance governments attach to the IFSC and traded financial services, it should have been put in place long before it was needed. Its continued absence defies belief.

    But at least we have blasphemy well closed off.

  54. @KW
    You didn’t react to the invitation set out in the first comment by Andrew McDowell to comment on how long it has taken the slow learners to accept FG policy as develeoped by him and Richard Bruton.

    Even the controversial FG policy of stinging senior bondholders is, as I have pointed out above, a part of UK legislation published in autumn 2008 and passed in early 2009.

    There are plenty of slow learners, but some people will never learn.

  55. @Zhou,

    “There is no reason to think that the EFSF will assist us in repairing political governance or economic performance. There is every reason to think that resorting to EFSF will damage economic performance.”

    Repairing political governance is for the Irish people, but they need some space in which to do it, rather than being ground down by this continuous sequence of crisis management being pursued by the current Government. The EC/ECB will do no more than is being done/proposed in terms of fiscal adjustment and bank system support – but, within the EFSF, it could be done without atracting the continuous attention of the bond market using Ireland as a tool to test the EU’s resolve. And the IMF will be able to get to grips with the dysfunctional economic sectors that are dragging the economy down (as it is in Greece) and which this Government – and any likely successor – has neither the guts nor gumption to tackle.

    You say there is every reason to think that resorting to the EFSF would damage economic performance; I am not aware of any. perhaps you could enlighten me, please?

  56. @ Maurice

    isnt FG policy as-is to not sting senior bondholders?

    Btw, the UK bank resolution regime does not treat bondholders differently per se, it simply allows for a carve out of depositors ahead of any liquidation. BUT safeguards are also in place so that senior bondholders are not treated any worse than in a standard insolvency, so essentially all that is happening is that depositors are being made whole on the side by the government. From the SRR:

    “(7) Creditors left behind in the BAP in a PPT will be compensated so that they are no worse off than they would have been in an insolvency proceeding into which the whole bank might have been placed had the PPT and BAP not been used (the ‘no creditor worse off’ (NCWO) safeguard).”

  57. @Eoin

    Well done. You have to be up early in the morning to be able to dismiss the level of misinformation that is thrown around in these parts.

  58. @Paul Hunt

    There have been numerous articles in the FT charting the attitude of EU leaders to the crisis. Their primary concern is the Euro and their own taxpayers. Merkel and her finance minister have spoken of orderly bankruptcy for countries (one of the reasons our bonds spread has widened).

    There is also the reasonable suggestion, made by Colm McCarthy, that we will likely lose our corporation tax rate in any bailout.

    Any government implementing an EFSF deal will be in a continual crisis dealing with them (which includes the IMF) and, like Greece, we may up with a far greater debt and a no healthier economy down the line. The EFSF does not create breathing space. It is an isolation chamber to protect the other EMU inhabitants.

  59. @Bond, Eoin Bond.
    I haven’t heard Noonan reverse policy as enunciated by Richard Bruton last year which was that senior bond holders should share the pain.

    I didn’t want to get too bogged down in the legalities of how the UK can sting the senior bond holders by directly compensating the depositors. I dare say that that is how the US FDIC also operates. The net effect is the same. And surely, if it is possible under the US constitution and all its defences of private property, our constitution would not prevent our government doing exactly the same.

    So again, why do we have no bank special resolution regime legislation.
    Where there is a will there is a way as exemplified by the USA and the UK.
    Where there is no will, as exemplified by our government and its advisers, Sean Taxpayers pays for everyone.

  60. @ Maurice

    you need to update your reading list.

    “By Joe Brennan
    Oct. 8 (Bloomberg) — Anglo Irish Bank Corp. senior bondholders would be repaid in full by an Irish government led by Fine Gael, the country’s biggest opposition party, finance spokesman Michael Noonan said.
    Last month, the Dublin-based party demanded Finance Minister Brian Lenihan sought negotiations on all Anglo Irish bonds, including 4 billion euros ($5.5 billion) which lost the government guarantee on Sept. 30. Noonan said yesterday that “circumstances had changed.”
    “The advice I got was you might get half a billion euros out of it on a negotiation,” Noonan, 67, said in an interview in the parliament in Dublin. “Now, I don’t think we should risk the reputation of the country for the sake of a half billion.”

    As regards the legalities, trust me, im with you in not wanting to get bogged down in them, but lets not take this to extremus and simply ignore the legalities altogether! The UK SRR is a good example of how, even with brand spanking new legislation, it is difficult to inflict losses on bondholders without inflicting them on depositors. It actually copperfastens the idea of parri passu via the NCWO compensation provision, and essentially amounts to a depositor-compensation plan, by making them whole on day one, rather than a bondholder loss plan, even though the optics of it may seem the reverse. But its actually a good model for the type of SRR we should ultimately bring in, i agree with you on that.

  61. @Zhou,

    Thank you for your response. I suspect we will have to agree to disagree. I am probably much more sanguine about the prospects of the wealth-generating private sector parts of the Irish economy than I would be regarding their counterparts in Greece. My primary focus is on removing the burden that a dysfunctional public sector, semi-states and private sheltered sectors impose on these sectors and on the economy generally.

    You say that a government dealing with the EFSF would be in continual crisis, but that is how the Government with its continual crisis-management, like the two Bush Administrations keeping the US on a permanent war-footing, is keeping its grip on office and squashing dissent. We now have ‘keep AIB afloat’ followed by the 4-year programme, the Budget, the NTMA re-enters the market, the NTMA has to re-enter the market the following month and so on – all under the eye of the bond market. It doesn’t have the time or political capital to tackle any other issues effectively.

    The corporation tax rate is over due review in any event. Tax competition is fine, but it’s being used excessively innovatively – and generating no net gain to Ireland (except, perhaps, some reputational damage with the ‘double Irish’) – to deprive other jurisdictions of legitimate tax revenue.

    We need protection from the Government which is more intent on preserving the current governing factions as viable political entities than on doing what’s right for the country.

  62. @Eoin & Maurice”

    From todays judgment –

    ” nother general consideration concerns the extent to which regulatory or other similar changes can, of themselves, be said to effect property rights simply because the changes concerned might effect property values. Costello J., in Hempenstall v. The Minister of the Environment [1994] 2 IR 20, observed the following:-

    “. . . a change in law which has the effect of reducing property values cannot in itself amount to an infringement of constitutionally protected property rights. There are many instances in which legal changes may adversely affect property values (for example, new zoning regulations in the planning code and new legislation relating to the issue of intoxicating liquor licences) and such changes cannot be impugned as being constitutionally invalid unless some invalidity can be shown to exist apart form the resulting property value diminution.”
    7.15 Comments of a like variety are to be found in Energy Reserves Group, Inc. v. Kansas Power & Light Company 459 U.S., 400 where the court took into account the fact that the complaining party in that case operated in a heavily regulated environment in assessing whether there had been any impairment of that party’s rights. It is clear that in US law the threshold enquiry before constitutional rights may be invoked, is that a relevant measure has operated “as a substantial impairment of a contractual relationship”. While the Irish jurisprudence may not go that far it does seem to the court that any impairment must be at least material and that in assessing any impairment the court is entitled to have regard to the fact, as identified by Costello J. in Hempenstall, that a party can have no expectation that a regulatory regime will remain the same even where changes in that regulatory regime may interfere with the value of property.”

    I don’t think u can get a clearer green light for a resolution scheme without getting an actual yes. Then again, I never saw why it raised an issue in the first place

  63. Reuters are reporting that new AIB executive chairman, HSBC veteran banker David Hodgkinson has today said that the sale of AIB’s UK operations is on hold. So that means that if AIB had to raise €10.4bn by the end of the year and Bank Zachodni is contributing €2.5bn to that capital (from a €3.1bn sale which is yet to receive approval) and M&T raises €0.9bn then that means the State needs inject €7bn.

    AIB is in my opinion insolvent (even on the Minister’s own final NAMA haircut of 60% the bank’s capital will drop to below €4bn) and the State should be pursuing a restructure of that bank (sorry BWII for your loss as you had the right to expect more from a blue chip investment in AIB) before selling what remains to a Santander/Deutsche Bank or operating it itself as a commercial concern before privatising it. Is it just the same Aer Lingus vanity operating again? If so fine but they should not be putting citizen’s money up to support that vanity.

    http://www.reuters.com/article/idUSWLA675520101101

  64. @jadhip

    “Discussion on Contractual or Similar Rights

    7.23 That leads to the question of whether there has been any interference with Mr. McKillen’s contractual or quasi contractual entitlements. There is no doubt but that contractual rights can amount to property rights which have constitutional protection. See Southern Industrial Trust Ltd v. AG 94 ILTR 161 and Chestvale Properties Ltd v. Glacken [1992] ILRM 221. Subject again to the question of the additional statutory powers conferred on NAMA, the Court is not satisfied that there is any material alteration in Mr. McKillen’s contractual position as a result of his loans being acquired by NAMA. NAMA has the same right vis-à-vis any individual loan or set of loans as the bank from whom the loan was acquired previously had. In that regard the Court agrees with the views expressed by McMahon J. in J&J Haire & Company Ltd & Ors v. Minister for Health and Children [2009 IEHC 562, where, at pp. 39-40 the following was said:-

    “The plaintiffs’ property rights in this instance are no more and no less than those rights which are accorded to him in the Contract. Either the Minister is entitled to make the changes under the Contract or she is not. If she is entitled to do so, then she is not in breach of the Contract; if she is not entitled to do so, she is first and foremost in breach of the Contract and the plaintiff’s primary remedies are in contract. Bearing in mind the terms of the Contract in this case, and particularly clause 12(1) which allows the Minister to change unilaterally the rate of remuneration, admittedly after consultation, there is little doubt that had the Minister chosen to effect the rate changes by following the procedure provided for in clause 12(1) of the Contract, the plaintiffs could not complain. There would have been no breach of the Contract and there would have been no infringement of a constitutional right which, by definition, is no greater than the plaintiffs’ contractual right. A close look at the Contract between the pharmacists and the HSE, does not disclose that the pharmacists have any right or entitlement for the rates of remuneration to continue indefinitely into the future.

    The so called right claimed by the pharmacists under the Contract is not in fact a right at all. At most it is merely a spes, a hope that the present rates will continue. Whether they do, however, is not a matter which is to be determined by the pharmacists. It is a matter exclusively for the Minister. From this analysis it can be seen that this is the height of the pharmacists’ entitlement under the Contract.”

    7.24 It follows that in determining whether a constitutionally protected property right in the form of a contractual entitlement can be said to have been interfered with, it is necessary to analyse the contract involved to determine whether, in fact, the contractual position of the party asserting an infringement has in truth been materially altered by the legislative or administrative measure under challenge. In the same regard, it is also important to note that the contractual entitlements of borrowers faced with a proposal on the part of a bank from whom they have borrowed money to transfer the bank’s side of that credit arrangement to a third party, are, as a matter of law, limited. In Argo Fund Ltd v. Essar Steel Ltd [2006] 2 All E.R. (Comm) 104, Auld L.J. stated the following:-

    “In my judgment, the Judge correctly concluded that the term ‘other financial institution’ in the expression ‘bank or other financial institution’ need not be a bank or even akin to a bank. Clearly, the disjunctive form of the contractual expression, ‘bank or other financial institution’, allowed for a financial institution that was not a bank, certainly not in the narrow conventional sense of lending money and/or accepting deposits for investment. However, given the use of that expression in a loan agreement allowing the transfer of the rights and obligations of the contract loan to a financial institution other than a bank, the assignment of its rights to anyone, and the known existence of a secondary market in such loans, I can see no basis for the Judge’s starting point that one of the characteristics of such an institution was that it had to be a lender, whether in the primary market or otherwise. It is equally beside the point whether a potential transferee is technically a lender as an established trader in loans in the secondary market or, indeed that it would become a lender, if not otherwise qualifying as such, on becoming a transferee under the Agreement.”

    7.25 While the terms of the McKillen loans vary to some extent, none are in terms which preclude an assignment by the bank concerned and none are in terms which preclude an assignment only to another bank. If follows that any of Mr. McKillen’s banks would have been entitled to assign to another institution (not necessarily itself a bank) the benefit of any of the McKillen loans without requiring Mr. McKillen’s agreement and, in most cases, without even consulting him. As against that it was argued on behalf of Mr. McKillen that some recognition should be given to what were said to be rights deriving from his existing long standing banking relationships.”

  65. against that it was argued on behalf of Mr. McKillen that some recognition should be given to what were said to be rights deriving from his existing long standing banking relationships. A number of points, therefore, need to be made about that contention.

    7.26 First, it is difficult to see how any such rights can be described as contractual rights per se. Mr. McKillen has entered into a series of contracts for loans with his banks. Those contracts were freely negotiated. The respective rights of Mr. McKillen and his banks are determined from the terms of the facilities letters concerned and any other relevant banking documentation. It would appear that each of the loans in question allow the relevant bank to assign the loan concerned. In most cases that can be done, as a matter of contract, without reference to Mr. McKillen. In a small number of cases consultation is required, but in no case is Mr. McKillen’s agreement required. The starting point for a consideration of Mr. McKillen’s contractual entitlements must, therefore, be that he has no contractual entitlement to ensure that his loans are not assigned by his existing banks to some third party. Leaving aside for the moment the question of the extent to which it might be said that NAMA is different from an ordinary commercial bank, it is difficult to see how, in the context of the fact that his loans can be assigned, Mr. McKillen can be said to have any real rights in respect of his relationship with his existing banks for those banks could, if they wished, assign his loans to some other bank with whom he would need to forge a new relationship. While it is true that NAMA is not a bank it should be noted that NAMA does have the power to extend credit to those whose loans it may acquire (s. 12). While NAMA is not, therefore, in the position of a commercial bank it does at least have the facility to provide credit in circumstances where it appears prudent to provide that credit within the significant resource available to it in that regard.

    7.27 Second, it seems to the Court that significant regard needs to be paid to the reality of what has happened in Ireland over the last two or so years. The CIFS Act gave to the Minister significant powers to control the lending practises of any bank availing of the guarantee provided under the terms of that Act. It hardly needs to be emphasised that part of the underlying problem which beset Irish financial institutions, and which required significant state intervention, was the overexposure of the banking sector as a whole to property related loans and, it appears from much of the materials before the Court, the overgenerous terms on which such loans were provided. The idea that an existing banking relationship could survive unaffected by that situation is, in the Court’s view, fanciful. But of even greater importance is the fact that the very institutions with whom Mr. McKillen had built up the banking relationship which he so values would themselves have found it very difficult to survive without some form of State support. The position in respect of Anglo cannot be doubted. If it were not for the extraordinary level of state support, Anglo would not now exist. Mr. McKillen would, therefore, have no continuing relationship with Anglo from which he could benefit. In the Court’s view, it flies in the face of reason to assert that Mr. McKillen has a right which is constitutionally protected to continue his relationship with Anglo in circumstances where that bank would not exist were it not for substantial state intervention. While the position is not so clear cut in the case of BOI, it remains the case that it seems unlikely that BOI could have continued to trade in the absence of the guarantee given under the CIFS Act or some variation on that measure and in the absence of a significant capital injection by the State to enable BOI to meet the legitimate requirements of the financial regulator as to the capitalisation of all financial institutions. While not as stark a case as Anglo, it remains the case that it is unlikely that Mr. McKillen would be able to have any relationship with BOI were it not for state intervention or, at least, would not be in a position to have any normal banking relationship without such intervention for it can hardly be doubted that, in the absence of state intervention, the ability of BOI to continue business in anything remotely resembling a normal fashion, would have been limited if not non-existent.

    7.28 For all of those reasons it does not seem to the Court that it can be said that Mr. McKillen has any constitutionally protected right to whatever expectation he might previously have entertained concerning his banking relationship with both Anglo and BOI. The Court does not doubt the expert evidence tendered on behalf of Mr. McKillen which was to the effect that a banking relationship is an important aspect of any long term business project. Neither does the Court doubt but that a borrower who has maintained a long standing and good relationship with his banks, might reasonably expect to be able to roll over banking facilities as they become due and, in an appropriate case, be able to renegotiate the terms of loans which may be in default of covenants such as loan to value and interest cover covenants. However, the Court very much doubts if any such rights could be elevated to the status of legal rights, even in normal circumstances. That is not to say there might not be some circumstances in which a course of dealing between a bank and its customer might give rise to some form of legal entitlement that went beyond the strict contractual terms of the parties’ relationship. However, even to the extent that any such legal entitlement might be asserted, it does not seem to the Court that it could have any relevance in current circumstances where the banks’ position would undoubtedly have been significantly altered by recent events.

  66. @Jagdip

    You say AIB is insolvent but has 4bn capital. Have you raised the bar of insolvency to mean being unable to meet regulatory requirements, or am I misunderstanding your point? The UK operations were never going to raise much capital but they were going to reduce the regulatory requirement.

    Restructuring? What do you have in mind?

  67. @Christy

    Am still making my way through the judgment but from recollection your own view was very much in line with what the judges decided above, whereas I had entertained something along the lines that Paddy argued in court – that he had expectations from the operation of the contract which, although not explicit in the contract, should be given weight.

    So it seems Paddy hadn’t a hope in hell or as the judges would say a spes in Hades!

  68. @BWII

    Taking the NAMA losses which we know about (ie using a 60% haircut) they’re left with €4bn of capital and my claim is that a realistic provision on the non-NAMA loanbook would result in losses which would wipe out that €4bn. I can’t evidence that but suggest that AIB had a 26% provision for NAMA losses in the June accounts which will turn out at c60% and that the non-NAMA loans are similarly underprovisioned. Insolvency = Liabilities > Assets.

    Restructuring would involve nationalising the bank and negotiating with creditors (particularly thinking of subordinated bondholders). After achieving the best deal then the rump could be recapitalised by the State or sold off to another bank. So the losses which make AIB insolvent would be borne by shareholders (again, sorry! and I’m not being flip) and subordinated bondholders.

  69. It seems that NAMA’s draconian powers are proportionate given the state of the banking crisis. At least that is how I read the judgment. Probably should be an appendix in any future editions of Kafka’s works.

    Re the retirement scheme for HSE surplus staff. I confess to gulping when I heard how generous the payoffs would. Full pension with full lumps sum for most of the senior staff category. Here you have an overstaffed bureaucratically heavy dysfunctional organization. To trim unnecessary staff, a few thousand, the trick is to give each of them a lottery win. Is it any wonder that the domestic private sector, let alone Europeans in the Commission, look on in stupefied wonder and exasperation?

    And bond yields are still roaring ahead.

    Will paint manufacturers see a rise in orders in the run up until the IMF come in?

  70. @ Jagdip

    Okay, it is an argument and I agree the accountancy treatment of provisions leaves me cold, and you have rightly drawn attention to it before.

    However, it is IMHO too early to follow such a drastic course on the suspicion that non-NAMA loans are as badly underprovisioned as their NAMA cousins.

    Subbies can wait. The position of AIB is at worst marginal and at best the accountants might have it right this time. A few years with core domestic operating profits, some sort of recovery in the national economy, and it is not wholly implausible that it will be a valuable asset again and easily offloaded to the markets at a tidy profit to the taxpayer.

    Too early and too risky to be contemplating open heart surgery. Plenty of exercise and healthy living and the patient could return to rudimentary good health, if not quite the super athlete of old.

  71. @ All

    Pity that a McKillen thread was not opened separately as he has somewhat polluted what was otherwise an interesting little debate.

  72. @ Jagdip,

    “Reuters are reporting that new AIB executive chairman, HSBC veteran banker David Hodgkinson has today said that the sale of AIB’s UK operations is on hold. So that means that if AIB had to raise €10.4bn by the end of the year …”

    Let’s hope the UK book doesn’t require more capital. If the €10.4bn assumed getting rid of an under-capitalised unit, then keeping it would have implications. Did the sale process get as far as a due diligence with an interested party?

  73. @Ahura

    “Did the sale process get as far as a due diligence with an interested party?”

    I don’t know but at the start of August 2010 with the release of the H2 report, AIB said (see link below) that they expected to conclude the UK sale in September 2010, so I’m guessing that talks were at an advanced stage then and I wouldn’t be surprised if there had been due diligence. But I don’t positively know the answer.

    http://www.irishtimes.com/newspaper/breaking/2010/0804/breaking5.html

  74. @BW II

    “The position of AIB is at worst marginal and at best the accountants might have it right this time.”

    Not sure I’d agree. At H2, 2010 AIB had €81bn of non-NAMA loans and a provision of €2.6bn – page 21 of their presentation
    http://www.aib.ie/servlet/BlobServer/document.pdf?blobkey=id&blobwhere=1280161330233&blobcol=urlfile&blobtable=AIB_Download&blobheader=application/pdf&blobheadername1=Content-Disposition&blobheadervalue1=document.pdf

    In my view there could easily be €10bn+ of additional non-NAMA losses, such is the level of fantasy deployed in their accounting for NAMA. Is €5bn+ insolvency marginal?

  75. Brian Woods II

    “Too early and too risky to be contemplating open heart surgery.”

    Yeah. Let’s just wait ’till the patient has a heart attack.

    Clear ………

    Clear ………

    Clear ………

    Opps patient dead. GP suffers malpractice suit.

  76. @ Brian Woods
    Don’t panic…although I understand the stress can be great. (Causing suicides, according to reports at the recent AIB EGM)
    Does anyone know when NAMA will redeem its bonds–i.e. when the banks receive MONEY for their property?
    Take a look at the Term Sheets…These are short term bonds…redeemable for…What? ECB only lends short term, so…what will the banks do for money when ECB loans are called in?
    We all know the reality is that NAMA/Exchequer cannot redeem billions of short term Notes for cash…So..? Is this why the markets are avoiding both Irish banks and the Irish sovereign? A botch has been made of the NAMA scheme…as I argue in http://brianodoherty.ie/wp/featured/2010/11/nama-cant-afford-to-redeem-its-own-bonds/
    Please tell me I’m wrong…I’m also a shareholder ! (Hey !..Shane Ross and Peter Matthews attended the EGM, too )

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