The ECB have issued a legal opinion on Credit Institutions (Stabilisation) Bill 2010 (documents here). One highlight: “these emergency powers interfere significantly with the property rights of institutions’ shareholders and creditors. Thus it is important for any regime to properly balance these fundamental rights with the general interest in the financial system’s stability.”
83 replies on “ECB Opinion on Credit Institutions (Stabilisation) Bill 2010”
It is interesting that after banging on for two years that “Ireland will not default on its debts”, the best that Lenihan and the DoF can come up wit is this abrogation of property rights. Is there a method to this madness because I see none.
Could we actually be seeing the first traces of the Government developing a spine in its dealings with the ECB? It seems, from the ECB commentary, that the bill will allow the Government to return more financial responsibilty for the consequences of ECB blackmail back to the blackmailer. I don’t know yet about the bill as a whole, but I like that bit.
Ah come on, with a SF/Labour coalition more than a theoretical possibility in three months, how could the ECB lose sleep at the prospect of the 430-odd financial institutions in the IFSC, not to mention our domestic banking system, becoming legally subject to the nomination of special managers who can basically do as they will not to mention alter stock exchange rules (not just here but overseas?). That’s not a dig at Labour or SF but just illustrates that this Bill may be interpreted and enacted before its sunset at the end of 2012 in ways which Brian Lenihan doesn’t foresee.
Ah come on, with a SF/Labour coalition more than a theoretical possibility in three months, how could the ECB lose sleep at the prospect of the 430-odd financial institutions in the IFSC, not to mention our domestic banking system, becoming legally subject to the nomination of special managers who can basically do as they will not to mention alter stock exchange rules (not just here but overseas?). That’s not a dig at Labour or SF but just illustrates that this Bill may be interpreted and enacted before its sunset at the end of 2012 in ways which Brian Lenihan doesn’t foresee.
In looking at ECB criticisms of the bill, it is well to remember that the ECB’s interest is in ensuring that we do not have a workable bank resolution process. They explicitly want to prevent us from resolving banks, and there is a danger that once we put a workable process in place we will actually use it.
Opposing the principle of a bank resolution process is a bit like opposing “motherhood and apple pie” so the ECB would almst certainly like to see a Potemkin-style resolution process – visible and neat, but non-functional.
We should discount the ECB’s criticisms. If there’s anything worthy of attention in there, someone more credible will bring it up.
Wow. Relations between Ireland and ECB must be at an all-time low.
Brian Lenihan in the Dail this week:
The clearest statement yet on which parties prohibited any senior default. I do like the way that he asked the ECB for its opinion by Dec 17, knowing that the Bill would have been passed by the Oireachtas on Dec 16. I am sure there will be an official response saying that the ECB’s opinion has been “noted”.
FWIW here are some next steps that could be taken
1) Since the ESM will contain the same punitive interest rates as the EFSF, this will be harmful for Ireland. Bring a court action in the Irish Courts to try and force a referendum on the treaty change. In the world of normal logic, the mere fact that a treaty change is needed would imply that some new competence is being added to the Treaty, otherwise there would be no need for the treaty change in the first place. In the world of EU-logic however, the normal rules don’t apply.
2) Since the ECB have forced a sovereign government to assume private debts, I think this could warrant an action in the European Court of Justice saying this violates Treaty provisions. If nothing else this would put some political pressure on the ECB, who would then to have to take a very public stance favouring bondholders over taxpayers.
I wonder if SF’s legal team are up for both of these?
@Hugh Sheehy.
Agreed. It is the tone of the document that is interesting. Much more than tut tut. More like “How dare you, don’t you know your place”.
This is the Most Senior of Seniors putting a a well aimed warning shot across Ireland’ bow.
The ECB come straight to the point in Section 2.3
“The ECB would expect that nothing in this Act would affect operations, rights or entitlements of the Central Bank or the European Central Bank, or any other central banks within the ESCB.”
They don’t want the prospect of dealing with a Rabbitte or Quinn or God forbid Adams with a full armoury of Irish Law behind him. The resolution of any leagl matters would then be outside of their hands.
We should also ignore the first sentence “On 10 December 2010, the European Central Bank (ECB) received a request from the Irish Minister for Finance for an opinion on the Credit Institutions (Stabilisation) Bill 2010 (hereinafter the ‘draft law’).” A request! Really! Give us a break.
Note that the document is filled with references to the obligations of Ireland to consult and the rights of the ECB to give its opinion.
Finally, how come the ECB felt no obligation to issue a legal opinion on the passing of private bank debts onto the shoulders of ordinary citizens.
Surely the Irish government should now seek a legal opinion from the ECB on that particular matter. And refer that legal opinion to the European Court of Justice.
I hope the incoming government will do that. It would be good to see the ECB arguing the legal case for the socialization of private debts.
@ BeeCeeTee
I think you are right. This is rushed legislation, despite the government having years to work on it, but I think the EU criticism should be viewed positively.
@Bryan G
re: Since the ECB have forced a sovereign government to assume private debts, I think this could warrant an action in the European Court of Justice saying this violates Treaty provisions.
+1.
I expect SF would be up for it. Others too.
Now that the ECB have entered the world ogf wigs and gowns, this is the route to go.
@Rory O’Farrell.
re: but I think the EU criticism should be viewed positively.
Do you believe that the ECB is intervening at this point to protect Irish citizens interests or its own balance sheet interests?
In my humble opinion they are intervening in order to push the private debt of banks down the throats of Irish citizens and keep it there, using a cock and bull legal opinion or whatever other tools are at their disposal.
@Joseph Ryan
I think Rory’s point is that if the ECB don’t like it, it must be more in our interests than previous things they liked (since some of them proved to be so not in our interests).
Mind you, I would point out that the ECB demanded greater pricing granularity on the NAMA transfers.
@Joseph Ryan
I think there is a direct conflict of interest on this matter between the EU and Ireland. So what’s good for Ireland is bad for the EU (on this narrow issue).
The ECB opinion could make for interesting reading by the Council of State.
I think the ECB concern is with what a future minister might do…. I guess the ECB concerns are looking for their interests. they have figured out that a future minister would have too much freedom/discretion and might be prepared to try using it in unpredictable/dangerous ways.
The pattern of behaviour so far has been to address financial problems by giving more power to the minister and trying to write special rules/laws/standards for the minister and his agents. Standards/laws/rules that cannot be used by anyone else.
It is fundamentally wrong and is very worrying.
This opinion seems to suggest there is a palpable ECB fear that Ireland will go off on another solo run, similar to the blanket guarantee, and the ambulance fleet hasn’t yet been fully commssioned.
It might be comforting to view plucky little Ireland fighting its coner against these evil Grand Panjandrums of the EU, but I do not believe they have evil intent. The main objective is to resolve this problem and to hold the union together but they are constrained by grossly inadequate institutions and mechanisms and there are serious internal institutional and political conflicts.
Those calling for default, confrontation with the EU or legal challenges are putting Ireland in the position of a child with a soiled nappy screaming: ‘Change my nappy NOW or I’ll take it off and wave it around over my head’.
I wonder who wrote the ECB opinion. Is the Minister’s brother not one of the top legals in the bank? Should make for an interesting Christmas chez Lenny.
@ Bryan G
Hmmmm … the ECB didn’t ‘force’ Ireland’s sovereign government to do anything. It offered the government the option of a bailout under specified terms or no bailout at all.
I think it would take a highly imaginative legal expert to persuade the European Court of Justice that the ECB had actually coerced Ireland into accepting the terms and conditions of the bailout.
@ Paul Hunt
re: the soiled nappy metaphor
+1000
Trichet was very focused on talking about the ECB’s legal objectives recently. However, the ECB has no problem telling us that we need to take account of its operations rather than its objectives.
It also has no problem suggesting that our laws should not only take into account existing EU law but also ECB policy and future EU law. This is an unwarranted interference with our democratic processes.
Furthermore, the ECB has suggested that the EU/IMF deal be incorporated in national law by being referred to in the recitals to the act. This is over-stepping the mark. The EU/IMF stands on its own two feet and any Irish Government shall have the choice to abide by it or not. Requiring same to be factored into our legislation is to introduce handcuffs to the contract. This is inconsistent with a “loan facility” rather than a loan.
With that said, it appears relations are poor. The ECB claims it has not been given enought time to review the act. At the same time it says it reviewed previous drafts of the legislation, which drafts included additional protections for the ECB.
The ECB is entitled to its collateral but not to being made whole. Of course, one wonders if such security over such assets given by an insolvent company is enforceable.
Some of my favourite quotes:
even though the ECB welcomes this consultation request and understands the need for an accelerated legislative procedure, it would have appreciated being consulted by the authority preparing the draft legislation at an earlier stage.
the ECB emphasises that, when adopting measures to deal with the financial crisis, Member States should act in a coordinated manner in order to avoid significant differences in national implementation having a counter-productive effect, which may involve distortions in global banking markets.
The measures intended to safeguard financial stability should involve cooperation with the relevant Member State authorities, in line with Union legislation and the arrangements in place, such as the Memorandum of Understanding on cooperation between the financial supervisory authorities, central banks and finance ministries of the European Union on cross-border financial stability.
the Eurosystem has developed a number of guiding principles to: (i) safeguard financial stability and restore the provision of credit to the private sector while limiting moral hazard, (ii) ensure a level playing field within the single market to the extent possible, and (iii) contain the impact of possible asset support measures on public finances.
The ECB recommends referring to the Eurosystem’s ‘operations’ rather than to its ‘functions’…
The ECB also recommends reinserting the general provision with respect to the preservation of the operations, rights or
entitlement of the Central Bank, the ECB or any other central banks within the ESCB regarding the provisions of the draft law which was included in a previous version of the draft law, on which the ECB was consulted.
The Section needs to clarify this, in particular since the published Bill does not contain an Article 60 which appeared in a previous version of the draft law and which usefully stated that ‘nothing in this Act affects any function, right, or entitlement of the [Central] Bank or the European Central Bank’.
The ECB would welcome an amendment to the recital and confirmation that any action taken by the Minister under the draft law with respect to Anglo and INBS will be conditional on agreement by the IMF and the European Commission, in consultation with the ECB, and will relate to the State’s commitments under the agreement reached with the IMF and the European Commission, in liaison with the ECB.
@Paul
re :Change my nappy NOW or I’ll take it off and wave it around over my head’.
No harm in a bit of humour.
But it could be also argued that the ECB has already wrapped the soiled nappy around all our heads! The fact that it is a “green” nappy does not make it less unpleasant.
It has done this by forcing us to absorb bondholder losses.
@Paul H
I would not say that the ECB executive board have ‘evil intent’, however I would say that the interests of the ECB executive board and the interests of the government of Ireland are very different and in conflict. Look at what Trichet’s solution would involve, from a recent speech:
This would be a further erosion of sovereignty, removal of the possibility of a case-specific policy response and replacing it with some arbitrary formula dreamt up in Frankfurt, all without any mention of burden sharing with bondholders. This is absolutely not in the interest of Irish citizens and should be strongly countered at both the political and legal level.
Note that Trichet has had very public rows with both Sarkozy and Merkel, and has always resisted burden sharing as much as possible. While before my reading of things was that Merkel was protecting German banks and was the prime mover, I no longer think that. Instead I think that Trichet (with friends like Ackermann) are the prime movers in protecting the banks, since they have no obligation to consider the interests of taxpayers and citizens. This will lead to inevitable conflicts with political leaders. It is time for all the governments to take a much more hard-headed approach with the ECB, and to do the job they are paid to do, which is to represents the interests of their citizens.
@ Paul Hunt
[quote]The main objective is to resolve this problem and to hold the union together[/quote]
What is this problem? Ireland’s problem is insolvency. The ECB’s problem is the stability of the Euro.
They are related, but the are not the same problem.
There is a general point that the systemic importance of our banks was a European problem and that is why the ECB stepped in to provide extraordinary liquididty.
If the ECB acted outside its functions then that is the ECB’s problem (I am not clear on that). We did not agree to underwrite the ECB acting ouside its functions. If the collateral security received by the ECB is insufficient or is ineffective then that is the ECB’s problem. Whilst we should not lessen the value of their collateral security through new laws, we should also not strengthen their collateral security.
I would like to fully understand the basis for the ECB deposits and repo operations to date.
How much of the assets repo’d were NAMA bonds, government bonds, other assets?
What is the nature of the security? Are the bonds/security documents physically delivered to the Central Bank?
Are all the ECB deposits attributable to these operations?
@CG
I do not believe that the €85bn bailout loan agreement per se involves the ECB. That agreement is with the EU Commission/IMF. I do believe that the ECB threatened to withdraw liquidity funding for Irish banks if seniors were hit. The legal question is whether the ECB have the right to make continued funding dependent on such a condition, or whether they acted outside the terms of their charter in doing so.
@ Bryan G
Clearly you’re a pro – chapeau. Yet all this business of hauling the ECB before the courts seems pretty speculative at this stage of the end game.
Wasn’t there a tribe called the Big Feet? Are there descendants drawing up legislation for Lenihan?
The bank guarantee first, now this dictatorial act.
One way to proceed would be to offer deeply discounted buy backs right now, before the legislation passes, so that the matter is essentially a fait accompli.
The stick of justice is clearly in the background now and so long as the buy backs are cheap enough it might avoid having to actually exercise the discretion granted by the act.
In terms of teh ECB opinion I think they are right to be annoyed about how late they were consulted. I mean the bill has passed both houses and the president cant amend it. changes recommended would have to be incorporated by amendment.
ECB was I think given 10 days to study it and to respond.
Dail Eireann was told to pass it all in 1 day with little or no debate.
Surely our esteemed AG could post draft legislation on his website so that interested parties can see what is coming down the line.
@CG
I do think there is a need to define and perhaps redefine, what actions are in scope and what are out of scope for the ECB to take. If I had my way I would redefine the charter to be more like that of the Federal Reserve, which requires that growth and unemployment be taken into consideration in its decision-making – this can be used, for example, to justify QE. I think any legal action could be considered as just a part of a larger process to put pressure on the ECB to move away from the no-bondholder-left-behind policy they currently have.
While I’m at it I’ll also add a third ‘next step’ …
3) Use last week’s newly-heralded “EU Citizens’ Initiative” to gather 1,000,000 signatures for the purpose of redefining the charter of the ECB. Somehow I don’t think that’s what they had in mind when they created the Citizens Initiative!!!
@Bryan G, Rory O’F and others),
The ‘problem’ is that the EU, confronting varying mixes of bank and sovereign insolvency, does not have the mechanisms and institutions capable of dealing with it – and there are conflicts between the goals and missions of some of the institutions.
Zhou, as usual, makes some valid points. Without ECB support the ATMs would have long ceased operating in Ireland. And there is no doubt that the ECB is riven internally as it has operated at the edge of its legal capability – and may, on occasion, have drifted beyond this.
Tolstoy’s observation on happy and unhappy families may be relevant. All well-governed countries are well-governed in similar ways; all badly-governed countries have their own peculiarities of misgoverenance.
This is coming down to a conflict between well-goverend countries in the core EZ plus new entrants from the east (e.g., Slovenia, Slovakia and Estonia) and closely aligned countries such as Denmark and Sweden lined up against demonstrably badly governed countries in the periphery (and the core EU’s tradtional indulgence of Belgium and Italy may be tested).
This crisis is providing the core EU with an opportunity to impose some good governance on the pathologically misgoverend and to provide effective incentives to encourage the domestic production of better governance. We should see this as an opportunity rather than a threat, but the vested interests which come out ahead even in times of economic hardship are too well entrenched.
@Bryan G: I had thought of the European Citizens’ Initiative myself, but more in the context of trying to create a cleavage between EU taxpayers in general and bank creditors — since the alternative, a cleavage between core and periphery taxpayers, seems so destructive.
But then I was told that the legislation to implement the ECI had not yet been passed; hence my interest in your comment. Do you have a link?
@Kevin O’Rourke,
Your desire “to create a cleavage between EU taxpayers in general and bank creditors” is laudable, but, unfortunately, the reality is that many of these bank creditors invested the savings pots of many ordinary taxpayers in the core EZ countries unwisely in banks and sovereigns in the periphery. The “cleavage between core and periphery taxpayers” is real and is the hook on which politicians in the core EZ countries, fumbling towards reform of the EU’s institutions and mechanisms to deal with this crisis, are impaled.
The comment from ‘cloggy’ on your earlier Colm McCarthy-related thread may or may be for real, but it echoes sentiments I continue to encounter.
This doesn’t need ‘citizens’ inititaives’. It simply requires the election of parliamentarians and governments empowered to act in a co-ordinated manner to bring the forces of financial capitalism to heel. The core EU countries have this goverenance; the periphery demonstrably does not.
The ECB’s concern is very clear in this quote from an FT story today.
“The euro’s monetary guardian has “serious concerns” that flaws in the Irish bail-out legislation would usurp the ECB’s rights over the collateral proffered as security for liquidity, according to a position paper posted on the ECB’s website.”
The ECB has shown great irresponsibility in extending huge repo facilities to banks which may be insolvent. It did so to avoid confronting the solvency question when the crisis first erupted. Over the past months its interventions have really been to cover up the mess it created for itself and have had not been in the interests of Ireland.
As so often when central bankers mess up, everyone else pays and they sail on into honoured and lavishly pensioned retirement.
1. Remember the ECB insisted on haircuts for accepting collaterat down to bbb-. If you apply a haicut then you have taken a view on risk and are not an innocent. Trichet should look up the word “risk” to remind himself what it means.
2. GF’s patronisation of the international bond markets continues to resonate. There could be two of them, but see if you can spot the JTO (clone?) in todays comments here:
http://ftalphaville.ft.com/blog/2010/12/17/441401/irelands-threat-to-the-imf/#comments
Is the government now all at sea on this – the Bill is to be discussed by the Council of State tomorrow which might result in a referral to the Supreme Court (50:50 I would have said). Separately the ECB seems to be calling for amendments which would presumably need to come before the Dail (Christmas day at Leinster House lads?!). Meanwhile AIB say it has transferred a major minitranche (€9.3bn with 59% haircut) this lunctime. Although AIB is not technically insolvent it must surely be in breach of capital adequacy rules unless there has been a secret recapitalisation.
http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/AIB_Press_Releas/aib_d_press_releases&cid=1291806233459&c=AIB_Press_Releas&channel=IRHP&position=first
John Dizard writes about this in the FT:
http://www.ft.com/cms/s/0/9efd1f66-0b78-11e0-a313-00144feabdc0.html?ftcamp=rss#axzz18Zb0FzGt
Basically, there is some disquiet at the idea that subordinates might take a hit before shareholders…
@hoganmahew
“The Irish state and its European friends could have avoided this by injecting public money into an insolvent banking system after losses were fully recognised. Or they could have recapped the banks with senior paper. But they didn’t.”
How do you re cap a bank with senior paper? Is that not one of the key problems here – that you cant do that – a bank must have equity to hold deposits
It is oh so ironic when the Government, with the best of intentions, exercises its extreme executive dominance – which it and its predecessors have exercised so carelessly previously to create this mess – to ram legislation through the Oireachtas to effect some remedy, only to find that reasoned legal, consititutional, institutional and commercial opinion – both at home and abroad – appears to be against it.
How much better things would be now if such potential restraints had surfaced during the last decade. But then, I suppose, the noses were in the trough seeking to snaffle the unearned spoils; now we’re talking about the allocation of losses.
@ Jagdip,
I’m puzzled by the logic of lowering the minimum loan balance going to NAMA. At this point, it is of dubious value. These banks will still be frozen out of debt markets regardless of removing developer debt from their balance sheets. The only party that seems to benefit is the ECB. So who do you think is pushing for this and why?
Anything on NAMA’s ‘project finance’ fundraising?
Though not NAMA-related, it would be good to get some info on the proposal to sell some bank assets to reduce the dependence on the ECB. The taxpayer could take a massive hit here.
@christy
“How do you re cap a bank with senior paper?”
Yes, you are right, you can’t do that, short of NAMA style paper swapped for assets. It would make sense if the bank was busted and then recapped with issued sovereign bonds (like the Swedes did with Nordea), but that is not the sense, I believe, that Mr. Dizard is using it in.
The attempt to recap with subordinate debt (preference shares) was a disaster. All attempts to avoid 100% ownership have been a disaster, both for the state and arguably for the banks involved (though not for the current owners and particularly management…).
@ Hog
“The attempt to recap with subordinate debt (preference shares) was a disaster.”
Actually this is one of the bright lights of this escapade for the taxpayer. If they had injected equity it would have been (in AIB’s case) at about €2.50 per share. As it transpires the taxpayer has not only received coupons but is now converting to equity at 50c.
Have you ever paused to question why it is you and others find every single step taken by the government is a terrible mistake. I generally support the official line but I can recognise that they have made mistakes. Perhaps their biggest mistake is this stabiliser legislation. They definitely should have consulted the ECB. Considerable damage has been done here. If the ECB are getting nervous about their security what chance the rest of us. No wonder Irish yields spiked today.
Another mistake was the petty and futile effort to stop the AIB bonuses. Lenny has been fairly surefooted until now but I sense an element of panic as he succumbs to populism ahead of the GE but more importantlyy ahead of the election for the next FF leader.
@BW2
“They definitely should have consulted the ECB.”
my information is that they did consult the ECB and gave them the full bill in the first week of December after showing heads to them in November. The ECB are aghast at the lack of clarity and preperation that was done pre the arrival of the Bailout team. And this is from the govt that told us for a year that it was working on this bill. I suspect the truth is that it wasnt
“If the ECB are getting nervous about their security what chance the rest of us”
Lets see what the ECB say …http://blog.cornerturned.com/2010/12/20/this-time-is-for-real/, examining two crisis wargames from the ECB. Bottom line : if they think a bank is insolvent (and oh, look, heres Jagdip earlier musing that the other A bank is heading that way) then dont give it emergency liquidity. Of course a swift ten billion or so will sort it out until Q2 2011 when the remaining NAMA loans come in and then theres the SME/mortgages losses. Happy days eh..
NAMA still hasn’t done due diligence on 40 percent of loans.
@KO’R
Some info on the latest status of the ECI can be found here.
@BW11
re Another mistake was the petty and futile effort to stop the AIB bonuses.
I once worked for a multinational whose CFO had a sign on the wall, just like Bertie had PH Pearse for inspiration!. The sign read
“People who work hard get to keep their jobs”.
I never noticed any signs about bonus payments.
There is nothing petty about the bonus issue. Not to people who have lost jobs, lost businesses, lost family homes, lost family members as a result of the actions and inactions of people who are still getting bonus payments.
BIAM for instance is still paying bonus payments. Check their performance over 10 years.
When the banks arrived into Govt buildings they should have been told to bring 500 signed resignations dated from that date. They should have been told to add a further 500 each time the amount of cash support increased. That would have taken their minds off bonus matters.
As for consulting the ECB, the outcome of the last consultation was not exactly in Ireland’s favour. Consultation is a two way street.
When you back a rat into a corner he will eventually fight. Even an Irish rat.
@JR
I said “petty and futile”. Let’s take the latter description first. There is no way this ban can be made to stick except maybe against the small fry who can’t risk taking it to court. Lenny knows this gimmick won’t work and yet he proceeded to assuage the populace, now that’s petty.
It’s good news that the bill has gone to the Council of State, and it will be even better news if the President refers it to the Supreme Court. If it passes muster with the Supreme Court up front, that creates a high level of legal certainty, because it can no longer be found to be unconstitutional.
If there’s one thing that all of us want on this it’s legal certainty. Even the ECB says it’s keen on it, although its concept of what this means seems to be limited to defrauding other holders of Irish Government debt by making its holdings senior to those of everyone else.
@Ahura Mazda
“I’m puzzled by the logic of lowering the minimum loan balance going to NAMA. At this point, it is of dubious value. These banks will still be frozen out of debt markets regardless of removing developer debt from their balance sheets. The only party that seems to benefit is the ECB. So who do you think is pushing for this and why?”
Remember that INBS and EBS were always transferring all land and development lending (no minimum exposure threshold). Anglo’s threshold has always been €5m and remains so which is what I find most bizarre. However I get the impression that the ECB want BoI/AIB cleansed as soon as possible of all toxic lending so that recapitalisation can take place on a firm foundation. I get the impression that our banking sector of the future will gravitate around these two organisations.
“Anything on NAMA’s ‘project finance’ fundraising?”
Absolutely nothing but the feedback from most developers is that NAMA is not interested in major development expenditure at this stage. The €2.5bn short terma and €2.5bn medium term programmes seem to have stalled. But no there is no official update from NAMA.
The agreement between the Irish Gov’t and the ECB/IMF is now open and must be renegotiated. Unfortunately our gov’t has displayed for all to see a lack of competence as they stumble from one mistake to the next. All negotiations should be frozen until 30 days after a national election. The people have to be given an opportunity to elect a competent gov’t. We will be walking into the next election with our eyes wide open and if our brains are not engaged in the voting booth we will have nobody to blame but ourselves.
@ BW 11
‘If the ECB are getting nervous about their security what chance the rest of us’
Is that ‘us’ the Irish taxpayer, us the Irish bank depositor, us the Irish bank bondholder, or some other ‘us’ ?
@ PQ
All those us’s
Most comment on here holds that the government is standing up to the ECB in Ireland’s interests. It could be though:
1. That the government is about to make another disastrous unilateral error. Note, I don’t disagree in the least bit with unilateralism, just I fear they may get it wrong again. AND/OR
2. They are trying to keep what went on at Anglo and ECB confidential.
From politicalworld.org:
On unilateralism (don’t know if this is true):
“Government was forced by the EU to back track when they tried to take on similar powers in relation to the Bank Guarantee and I think NAMA. At each stage told them after the event or gave virtually no time for consultation.
At this stage, the fury is palpable.”
On keeping it confidential:
“Thats interesting CF- looks to me like the ECB loan in summary was agreed on condition that Gov wind up the two ‘non-viable’ banks and FF are starting to wriggle (because they were hoping to shove) yet more loan money into dead banks presumably in the hope of getting to a point where the funds will obscure some of the well-connected holes in their balance sheets.
Gov is now trying to con the ECB over INBS and Anglo. The fear in Fianna Fail that there will be an open investigation on transactions and loan books in these two dead ducks is almost palpable.
I’d say the death of FF for good lies in those books and at every turn the Gov like some mad old pooch has been trying to scrape an expensive shower of publicly funded soil over it. Looks like the ECB have indeed taken a slap at Gov and told them to stop scrabbling with their money.”
Hard to make out the truth in, as Von Clausewitz might have put it, the fog of cute hoors.
@BWII
“Actually this is one of the bright lights of this escapade for the taxpayer. If they had injected equity it would have been (in AIB’s case) at about €2.50 per share. As it transpires the taxpayer has not only received coupons but is now converting to equity at 50c. ”
Eh, okay. What about converting in BoI at 1.80 and then immediately diluting that in the second round equity raise? (making the effective cost of the shareholding much higher?). What about trading the warrants to 25% of BoI for far, far, less than 25%? What about the fact that the only coupons we’ve received so far have been in shares? That have since been (in the case of BoI) or are about to be (in the case of AIB) massively diluted to the point of becoming worthless?
And still the two banks are bust? And we have nothing to show for it.
“Have you ever paused to question why it is you and others find every single step taken by the government is a terrible mistake.”
Oh yes, I’ve wondered if I have been mad. Same as I wondered if I was mad to think that the property ‘boom’ was a bubble; same as I wondered if I was mad to sell up in Dublin in 2005…
The answer is that pretty much everything that has been done has been a mistake. Name a single policy that has been successful on its own terms? There is no credit flowing, the banks are not secure, a floor has not been put under asset prices, small businesses are not receiving credit, contagion has not been contained, there has not been a new broom at board and senior management level, the systemic risk has not been removed, the state is now bust. I’d call that a pretty good catalogue of failure.
And it was oh so predictable.
I think the RTE program on NAMA tonight tells us all that we need to know. This legislation is motivated by the “keeping it confidential” agenda. Interesting post from thepropertypin quoted on another blog:
“Thu Apr 08, 2010
OK. This time is the last.
I was a high level technical adviser for a group of powerful people, one of whom jokingly referred to the group as the Eye of The Tiger, like the quiet at the centre of a storm.
Some of them are household names in Ireland and the UK, some you have never heard of. The group does not officially exist, they are a nebulous oligarchy of about 300 people who meet and network together in certain golf clubs, restaurants and holiday resorts. Money is exchanged through the same informal network and a complex series of russian doll corporations.
They run the country and have done since Charlie Haughey left office. They don’t interfere with the day to day small decisions, but the big decisions (NAMA, who gets the land banks, tax policy) are all decided informally and implemented slowly by their political puppet dynasties in power. They do not move fast and prefer to stay under the radar. The public has seen some of their work (in 2004 the whole thing nearly surfaced in the papers).
Individually these people love their children and are the same as anybody else. Collectively they are depraved and psychopathic. They seek to destroy the country to maintain their wealth and influence. Collectively they do not care about you or your children. They will sell the country out from under you.
I live abroad now – Ireland is not safe for me. I have been reporting the various rumours that I hear through my contacts. Some of these predictions did not come true, but the substantial gist is correct. The basic thing to know is that public opinion is manipulated and controlled quite efficiently to allow the real work to get done.
At the moment, the Irish public need a fall guy and now they have several. A split has developed in the Eye of The Tiger over this as they do not like skating so close to their own members. But many of the group are desperate and now desperate measures are being taken. Some of the members in the UK and elsewhere who are still doing well feel that those who came too close to the limelight should be cut loose. This makes for interesting times ahead.
A scapegoat / diversion is being manufactured as I write. The real news is what has happened to the money that has been pumped into the banks and NAMA. If you read the small print around the SPV you might be amused. The money is already gone by the way via the Isle of Man and the UK and a generation of Irish people are now owned by the Eye of The Tiger. The next thing they intend doing is privatising everything. This will be the job of the next government. The group has already decided that the current incumbents are soiled and they will be paid off and let go. I expect that the government will fall pretty soon.
The interesting thing is that one or two of the group are now desperate. There are rumours circling of a usb key with some very interesting documents on it. Think of this as the story inside the story of Anglo. Extortion for a share of the privatisation pie is the price of silence.
Why tell this now? Because I am never coming back to Ireland. I left clues when I could that some journalists were able to piece together to ask the right questions. I have no proof, just what I hear.
A final puzzle…
The night that the banks collapsed and the guarantee was put in place was the master stroke that allowed the Eye of The Tiger to create their financial coup. This plan was suggested by one of the more junior (and poker playing) members and some of the older members were very surprised that their puppets in the Dail pulled it off quite so well. If you can figure out the connections between that night, the NAMA SPV and movements in the markets you might be surprised and delighted. Follow the money as always and watch the other hand. It is complicated, just look for the green threads.
And watch out for that USB key.
DT”
Prime Time show on the developers is here (from politics.ie)
http://www.rte.ie/news/player.html?primetimeinvestigates#programme=Prime%20Time%20Investigates
@ Hog
I am not sure I fully understand your point on dilution. You seem to infer that dilution means a transfer of value from existing shareholders to the new. If so, since the beneficiaries of this value transfer are the taxpayer, what’s your problem? Dilution does not necessarily mean a transfer of value from old to new, it depends on the price. If the next AIB dilution takes pace at 50c it will represent a slight transfer of value to the existing shareholders. Of course, by definition, dilution does mean a transfer of ownership from old to new but again the new is the taxpayer so what’s your gripe?
You are making the mistake of judging the government on the outcome of its decisions (I’m not joking, read on). That outcome has been unremittingly southward. But the real criterion for judgement is against what would have happened if a different course was followed. For example, can you imagine the economic winter we would now be enduring if we had followed some purists and let the private banking sector suffer the full impact of free market forces.
@BWII
“You are making the mistake of judging the government on the outcome of its decisions (I’m not joking, read on). That outcome has been unremittingly southward. But the real criterion for judgement is against what would have happened if a different course was followed. For example, can you imagine the economic winter we would now be enduring if we had followed some purists and let the private banking sector suffer the full impact of free market forces.”
That is only true if the current outcomes weren’t entirely predictable and predicted when the government choose their course of action.
They were plenty of options in between the selected course of actions and an “economic winter”
And on a clear day, you can still see “ICELAND!”
BW2
your devotion to the two brians is touching. but touched. Give it up, sure they dont even believe their own propeganda any more.
@ BL
Do you subscribe to the Kilkenomics thesis that there are too many Brians and not enuff Brains in this world? Happy Xmas
@all
Good to see the Council of State getting in a little practice. Let’s hope the next version of such legislation is a little more senior and substantive.
D-E/BL
“They were plenty of options in between the selected course of actions and an “economic winter”
True in theory. Transferring losses to various parts of the liability side of the bank balance sheet above equity were theoretically possible and indeed advised by many as the proper course of action.
. However, we know with the benefit of hindsight that they were never going to be pursued by this govt so long as it remained in close contact with its collegues in the EU or as some might say “in cahoots”.
That is what the academics missed …the political economy of it all. Bailing in taxpayers has been the policy of choice rather than bailing in bondholders.
@tull
Transferring losses was not the only possibility. Specific issues to address liquidity and solvency were required. The policies that we got remained on the liquidity side without addressing solvency, indeed NAMA in particular made solvency a more acute issue.
Guaranteeing seniors and subs put the solvency of the state, never mind its liquidity, at risk. That should have been an overwhelming priority to protect. If you go down the road of once guaranteeing existing debt, it doesn’t matter if the guarantee expires, you have said it was once inconceivable that it could be impaired, so you are stuck with that view. The Swedes found this to their cost – their guarantee lasted nearly ten years. They were lucky they could devalue and find buyers for their krona assets.
Differentiation between the banks might have helped too “these are bad and cannot be saved, these are not so bad and might be”.
Mind you, it looks as though there was not much that was “not so bad”. This was a view that was common enough among the hurlers, but it is apparently not one that the organs subscribed to. Instead, the organs tried to save all and retained the opinion that the biggest were the best and did not require more than a dig out.
So far, so bad. And that is not just hindsight.
@ Jagdip Singh,
“However I get the impression that the ECB want BoI/AIB cleansed as soon as possible of all toxic lending so that recapitalisation can take place on a firm foundation”
I agree that the ECB are the most likely ones pushing this. From their point of view, it writes-off a large portion of the risk upfront and then stamps it with a sovereign guarantee. That’s much better than directly accepting bank assets.
It’s worth considering the events changing the risk profile (/value) of NAMA bonds since this project was announced.
1. On credit quality: Initially they had a strong sovereign guarantee (AAA). Then (the EU?) forced larger discounts which enhanced the support offered by the collateral. Now Irish sov risk has deteriorated significantly (currently BBB+).
2. On coupon: Initially the sovereign guarantee should have implied a reasonably low coupon – something a little lower than 200bps spread over 3m euribor may have made them tradable. Though this depended on the sovereign guarantee being strong. When they were issued, these bonds offered 6m euribor. They could never be sold at face value. They would have to remain on the banks balance sheets and used as repo collateral with the ECB. Given EU input on NAMA, who was involved agreeing to the 6m euribor coupon decision?
We really need to know what the ECB will commit to in terms of supporting Irish banks – the duration, the amount, & the price. Hell, if the ECB accepts unlimited amounts of NAMA bonds, the state should raise mortgages on its property portfolio and use the funds to buy up existing Irish bonds! Alternatively (and more realistically), they want Irish bank assets sold to 3rd parties (which will only happen at large discounts).
Hogan,
I disagree with the view that the guarantee was the cause of the insolvency and ultimate loss of sovereignty. If we had no guarantee, things would probably have worked out the same as ultimately burning bondholders was verboten in a European context. Particularly so, if you needed to maintain acess to markets. The guarantee was a mere act of hubris that did little to alter the end result.
The ultimate seeds of our destruction was to eschew any form of financial regulation at the end of the 20th Century and to allow a crazy inflation of bank balance sheets reliant on wholesale funding, coupled with over concentration on the most volatile of asset classes.
@ Ahura Mazda
its not clear that the NAMA bonds were ever worth anything. The sov guaranteed the bonds, but what did the bonds offer/promise? The redemption date is fudged. Alternatively, if the holder should assume that the maturity date – 6 or 12 months- would be when he would receive his money back then he also knew that that was an impossible promise for the cashless issuer to make. You must read the Term Sheet. There being no possibility of redemption at maturity, then either the buyer is a fool or the issuer is a trickster.
Presumably, M. Trichet realised a few months ago that his job was to keep rolling over NAMA bonds until office blocks were built on cow fields, 10 or 20 years hence. Considering that he could never have agreed to that in advance, he had either been fooled into supporting the NAMA scheme originally , as the funder of the scheme, or he never actually supported it, in spite of statements to the effect that our bright boys had specially negotiated the scheme with the ECB when they set it up. (It was a great scheme if ECB was going to go along with it; and an appalling disaster, especially for the banks and their shareholders, if ECB was not, in fact, on board)
NAMA has been issuing bonds that it has no possibility of being able to redeem at maturity. In fact, it doesn’t even have a firm date by which it returns the realised value of property to the banks’ shareholders. Its a scam. (And should now be unwound, as funding has been provided through EU-IMF)
@ Tull
+1
@ Hog
I am not letting you off the hook on your preference share moment. The peference shares didn’t work i.e. they did not solve the problem. Your non sequitur is that ergo they were a terrible mistake. Au contraire, they bought time. As that time progressed the equity of AIB/BoI tumbled alarmingly further, by definition the prefs were unscathed. An exercise worth doing is comparing the injection of €7bn prefs versus €7bn equity at then prices. I hazard that the taxpayer savings conferred by this particular can kicking exercise was about €4bn, far and away greater than any loss that may or may not have been incurred by having a “blanket ” guarantee.
@ Hog
Put another way, if the prefs had worked AIB/BoI shares would have bounced off the bottom and with hindsight it would have been much better to have subscribed equity, and the academic classes would bewail the transfer of value to private shareholders. And I am sure you would have been at the vanguard of that particular hindsight. See what I mean, no matter what the government do it is heads they are wrong tails you are right.
@tull
“I disagree with the view that the guarantee was the cause of the insolvency and ultimate loss of sovereignty. If we had no guarantee, things would probably have worked out the same as ultimately burning bondholders was verboten in a European context. Particularly so, if you needed to maintain acess to markets. The guarantee was a mere act of hubris that did little to alter the end result.”
Well, we might have been able to differentiate between, say, Anglo and INBS bondholders and BoI and AIB bondholders. As such, while the perception of risk of the sovereign may have changed for the worse, the rating might not have. Having 30 bn more to play with at this stage might be the difference…
“The ultimate seeds of our destruction was to eschew any form of financial regulation at the end of the 20th Century and to allow a crazy inflation of bank balance sheets reliant on wholesale funding, coupled with over concentration on the most volatile of asset classes.”
No argument from me on that. We are fighting over crumbs, but when there are only crumbs left on the table…
@BWII
“The peference shares didn’t work i.e. they did not solve the problem. Your non sequitur is that ergo they were a terrible mistake. Au contraire, they bought time”
Time for what? What has been done with the time since? Bondholders have been paid back, subordinates got more than nothing, there was a bounce that shareholders were free to sell into to the greater fools.
Meanwhile, same as usual management at the banks, secret bonuses, pension top-ups, golden handshakes, no deleveraging, no bank resolution, three Anglo plans…
The preference shares were wrong because they were either:
1. Underpriced assuming a liquidity problem.
2. Not the solution to a solvency problem…
@ Hog
The prefs were clearly intended to address a capital problem. Are you saying that it would have been better to have subscribed equity instead at the then prices?
@BWII
I’m saying now what I was saying then – resolution was and is the only solution. It would have a capital requirement, but there would also be burden sharing at least down to subordinate level in the cases of BoI and AIB and possibly even to senior level in the case of Anglo and INBS.
@ Hog
ok, so you would have burnt AIB/BoI subbies even though they still had equity and a credible market capitalisation!? Somehow I don’t think Hog style resolution is going to catch on. But let us say that was what was done. The effect would have been to increase the equity in the company and the share price i.e. it would have favoured existing shareholders. If then the government topped up this equity it would have done so at an inflated price and lost even more on the subsequent collapse.
@Ahura
With respect to your original question and my reply which included “Anglo’s threshold has always been €5m and remains so which is what I find most bizarre. ”
According to Laura Noonan in today’s Irish Times, Anglo’s threshold is under review and may be removed in the New Year which would make sense on so many levels (consistency, increase cheap NAMA bonds finance etc)
http://www.independent.ie/business/irish/anglo-loans-under-euro5m-set-for-transfer-2472042.html
Oops, of course Laura writes for the Independent…
@BWII
No, you incorrigible twister of words to meet your own preconceptions of strawmen. Shareholders first then subs as required. For Anglo and INBS, move on to seniors. Resolution/liquidation is not nationalisation.
Capital would be put in with the government acting as Debtor in Possession…
So tell me, do you support the new 9.1 bn being put into Anglo and INBS? Do you think that’s a good idea? Cheapest guarantee ever, isn’t it BWII…
@ Hog
I was merely pointing out your preference share moment. Can you at least concede that prefs worked out better than equity which was the mianstream counter proposal.
Shareholders first?? But at that stage shareholders still had substantial equity in AIB/BoI. Are you saying that with the wisdom of Hog they should have moved in and written down all assets?
Anglo/INBS? Anglo they say is systemic, I do not know enuff to contradict that. INBS isn’t systemic but to have benefitted from letting INBS go belly up one would have to be prepared to let its depositors get torched, that seems to be beyond most peoples’ limits but perhaps you would have let both Anglo’s and INBS’ depositors sink.
@ Jagdip,
The NAMA ‘process’ is more expensive than the NAMA ‘bonds’ and this needs to be factored in to the cost of funds. If a 60% discount is applied and the taxpayer has to borrow this money at 5.9%, it mightn’t be great value. A while back I suggested that it made more sense that NAMA overpays for Anglo and INBS assets.
The ‘NAMA’ bonds rely on a compliant ECB. Given they seemed to pull the plug on our fund-sucking banks, it would be good to know exactly what level of long term support is on offer from the ECB.
@ Brian O’Doherty,
You’re correct on the terms of the bonds. I was encompassing some of the heresay before the details (/termsheets) emerged. The ‘rollover’ nature of the bonds would be negative and require a larger coupon. The zero spread over 6m euribor was a real surprise. These features could only work if the ECB were willing to provide liquidity.
@BWII
“Can you at least concede that prefs worked out better than equity which was the mianstream counter proposal.”
No. Equity would have given ownership. Ownership would have brought control of out of control management.
And it wasn’t the mainstream counter-proposal. Nationalisation was the mainstream counter-proposal. Nationalisation was also better than preference shares.
“Shareholders first?? But at that stage shareholders still had substantial equity in AIB/BoI.”
If this was the case, then no funding was required at all. Funding was required, ergo… a liquidity run is a solvency run on a bank. The market price of a substantial proportion of bank assets had already collapsed by late 2008 (C&D and commercial). The rest was predictible. There was no equity. There were insolvent and illiquid banks. That a ticking bomb has not yet blown up does not mean it is not a bomb.
You seem to be implying that I am invoking some sort of biblical prescience as being required. None was. Credible commentators thought the banks probably bust. More credibly, serious equity holders thought the banks bust. Tell me this, how much had each bank’s share price fallen from peak by early September 2008?
“one would have to be prepared to let its depositors get torched, that seems to be beyond most peoples’ limits but perhaps you would have let both Anglo’s and INBS’ depositors sink.”
No. This is not about saving all the capital that has been put in; successive rounds of capital have been put in, but to see that being used to pay risk capital off is foolish.
@Hog
“No. Equity would have given ownership. Ownership would have brought control of out of control management.”
Yesterday the MOF bought a lorry load of AIB shares at 33c. Better than the €2.50 back at the time of the prefs. I don’t think a change of management two years ago wuda made much difference, the damage was done. Your clutching. Happy Xmas
@BWII
Me clutching? You must be kidding. I said it would end badly, that the banks were insolvent more than two years ago (based on forseeable losses from the bursting of other property bubbles) and that the government would end up owning all of them.
So far, I am disappointed to be proved entirely right.
You, however, have cheered every government mis-step, denied that there is anything wrong and pilloried any alternatives.
Happy Christmas to you too. I hope you have fun…
http://www.nakedcapitalism.com/2010/12/guest-post-underneath-the-happy-talk-is-this-as-bad-as-the-great-depression.html
This is only beginning. Ireland was set up and eagerly the regulators obliged. This is continuing in the IFSC. The explosion there will dwarf that of Anglo et al.
The Euro “crisis” is designed to devalue the currency to inflate away debt. A traditional and sometimes faulty approach. “We” are agreed on that. So “we” hang together!
Save what capital you have left! Sell all paper assets now. Sell the house also. If you have no net assets, then of course, do no such thing!
May God have mercy on you all.