Moving Deposits

I am trying to get my head around the Anglo/Irish Nationwide “deposit sales”.   The collective wisdom of this blog might help set things straight.   (Useful reporting by Simon Carswell and Mary Carolan here and here.)

A few initial comments/questions:

First, I think term deposit sale (or selling the deposit book) creates a lot of confusion.   I think it is better to think of what is happening as asset sales, but where part of the price is taking on existing liabilities to depositors.   From the purchaser point of view, another perspective is that it is a purchase of assets that comes with a certain amount of pre-arranged funding (i.e. the deposits). 

Second, there seems to be a view that it is a good thing to retain the deposits in the Irish banking system.  But then there is also a view that Ireland needs to deleverage – essentially sell assets to reduce outstanding liabilities.   The ECB wants this to happen because it is afraid it will be further called on as lender of last resort if those deposits later flee.   What are your thoughts on selling the assets to (and retaining the deposits with) other Irish banks? 

Third, in terms of the total being exchanged for the deposits (mainly NAMA bonds and cash), what is the inference about how the bonds are being valued?   I’m sure someone has done these calculations.    Are the implied valuations related to the fact that the asset sales have been made to other Irish banks — one 92.8 percent State owned, the other privately owned?  

104 thoughts on “Moving Deposits”

  1. @ John

    the deposits will help to get the loan-to-deposit ratio’s down at both AIB and ILP, so this, essentially, helps to meet the deleveraging target rather than what would have happened if the deposits simply left Ireland altogether (ie didn’t naturally move to another Irish institution). If they can somehow figure out what to do with AIB’s tracker mortgage book (ie NAMA type vehicle?), then AIB’s deleveraging is actually more or less done, apparently (assuming they can retain all the Anglo deposits).

  2. I think you are right in your characterisations of the deposit sale. What I think makes the situation unusual is the assets that are being sold – NAMA bonds and cash. I would argue that only the Irish banks would see NAMA bonds as having 98.5% of book value. The other assets are likely to be similarly suspect.

    We know there has been a green shirt agenda in the ELG. Would Anglo, perhaps, have bought AIB bonds? And INBS bought PTSB bonds (between them even). Would a return of these bonds as part of the deposit transfer count as a cash payment? (i.e. the bonds are liabilities for the purchasing banks, so getting them back counts as a cash payment). If so, they could be retransferred at par value, not at market value (which, despite the ELG guarantee, is lower than par given the distressed nature of the guarantor).

  3. 1) How did we manage to ensure these desposits and Bonds went to AIB/IL&P if it was an aution?

    2) I see that in AIB’s case:

    New Assets + €12.2bn (bonds)
    New liabilities: + €8.6bn (deposits)

    Therefore it had too many new assets so had to give the difference in cash (€3.5bn) to INBS

    SC reckons this brings AIB’S LTD down to 150%

    I see in IL&P’s case:

    New Assets: + €3.7bn (bonds)
    New Liabilities: + €3.6bn (deposits)

    SC reckons it brings IL&P’s deposits ratio down to 200%.

    My question: Given the difference in the net position of the transfers for IL&P is only €0.1bn, why is it handing over €2.3bn in cash to INBS?

  4. @Eoin

    I take your point in terms of the target loan-to-deposit ratio. But I wonder if looking just at the narrow category of loans is a bit artificial. The holding of a NAMA bond is also a “loan” to the government. Maybe the distinction is that “securities” are more marketable than business or real estate loans. But how liquid are the NAMA bonds? I really don’t see such sales to other Irish banks as significantly furthering the real deleveraging of the Irish banking system. But maybe it is all about meeting targets now.

  5. Does anyone know if can expect more juggling of assets and liabilities before Monday’s deadline elapses – all being done, presumably, to get the remaining zombies into some shape to pass the slightly more arduous, but still poilitcially constrained, EZ stress tests later in the spring?

  6. The new (and likely more realistic) EU bank stress tests are coming next month. Irish banks need to improve their balance sheets in a hurry. The recent deposit flight has put them under considerable pressure in this regard.

    So the banks are currently cash hungry. Along with these deposit transfers, note also recent transactions such as AIB’s sale of its share in the polish bank Zachodni, and BoI’s sale of its Securities Services. I’m sure others can point to similar deals(Recent Nama sales anyone?).

    The Credit Institutions bill has allowed Ireland’s banks—via Minister Lenihan—to effectively cannibalise one another in order to stay alive. The weaker banks have thus been sacrificed to keep the others afloat for now, the deposit(fat) reserves transferred to AIB and ILP, giving them the energy to last a little longer in the current credit famine.

    Needless to say, this is not a sustainable strategy with the current number of banks and their current debts. However, may perhaps be feasible if the number of survivors is reduced to just one. Which brings us naturally to Fine Gael’s “retain BoI” strategy.

  7. At first glance, I don’t understand why AIB is making a cash payment of 3.5bn. Why would they buy excess NAMA bonds at close to face value?

  8. 8 banks are supposed to have made offers.
    Who are they and what were there offers?

    Transparency 0 Bankers 10.

    “The remaining 1,040 jobs at Anglo and 240 at INBS will reduce dramatically as the remaining €38 billion in loans at the combined bank are run down.”

    This comment contradicts Enda Kenny’s promise to have both Banks closed by the end of the year. Or is the Journo just presuming Enda will do what he is told?

  9. The argument about holding on the deposits being a good thing is all a function of the interest rate margin the bank can make. If the interest rate on these deposits is say 5% and the bank is loaning this cash out mainly to tracker mortgages at 3% then in means that we the taxpayer are subsidising the deposits by a tune of 2% per year as the banks liquidity will reduce by this amount every year and according to the golden rule of Irish banking all losses cost the taxpayer. If this is case it would better for the government to give the bank a NAMA bond or something with a harp on it if it has a liquidity problems so it can go off to the ECB and get funds at 1.5%

  10. “First, I think term deposit sale (or selling the deposit book) creates a lot of confusion.”

    Insincerity is the enemy of clear language.

  11. New Assets + €12.2bn (bonds)
    New liabilities: + €8.6bn (deposits)

    A deposit is a liability?

    Is accounting really a legitimate practice?

  12. Following the link provided by the CornerTurned blogger, one learns that the maturity date of the Nama bond in question is 01/03/2011.

  13. @John

    The objective of de-leveraging only refers to decreasing non-deposit liabilities such as foreign intebank borrowing and (recently) replacement ECB borrowing and increasing equity capital (which is also a liability) while shrinking assets correspondingly. There is no stated or implicit objective to decrease deposit liabilities.

  14. Greg,
    I agree that is the formal objective, and I should have been more explicit. But don’t you think that the ECB would like to see the balance sheets of the Irish banks shrink more generally?

  15. @al

    If you step back for a mo, this really is a bit deckchairs / titanic.

    @OMF

    In accounting “deposits” = “deposits of money the bank has taken in and is supposed, theoretically, to be liable to pay back out again – assuming only a few of the depositors want their money at any one time”

    Its a kind of shorthand. Also assists the banks’ marketing departments.

    Has been known to confuse some surprising victims.

    Deposits squared would be less ambiguous by eliminating the plus and minus thing.

    On the other hand square roots of deposits might introduce the concept of imaginary deposits. In fact there is a rumour this used to form an integral part of the Anglo business plan

  16. I presume all the individuals who own these deposits are free to walk and take their business elsewhere if they don’t like the idea of being moved from one Irish basket case to another Irish basket case.

    The flight hasn’t stopped yet.

  17. @ John McHale

    While the ECB does want to shrink the balance sheets of the Irish banks, I suspect it also wants them to improve the mix between deposit and external funding (i.e. the ECB today), which makes the banks appear more stable and increases the speed/likelihood that they will be able to get back to standing on their own two feet in the wholesale funding market.

    I think that from the ECB’s perspective, their primary objective is to get these Irish banks off of the books and draw a line under the current crisis before forcing the banks to shrink in order to prevent the next one.

  18. Mary Hannafin got grilled mercilessly (I had to watch it through my fingers)by Vincent Browne as to why an Anglo bond of €750m was repaid in January. This is presumably the senior unguaranteed bond previously referred to by Karl Whelan in this post:
    http://www.irisheconomy.ie/index.php/2011/01/28/anglo%e2%80%99s-january-31st-bond/

    Vincent Browne was incorrect in saying this was not on foot of EU/IMF deal insofar as there is rather public admission of a side deal on senior bank debt which is not included in the memorandum.

    However, the other issue was that to fail to pay the bond would have been an act of insolvency which would have triggered a winding up with depositors being treated parri-passu with the senior bond.

    Presumably, the idea of selling on the deposit books is to get them out of there so the senior unguaranteed bondholders cannot use depositors as a human shield and therefore they have less leverage over the Government.

    I don’t know if the Govt is anxious to have depositors in Irish Banks. I think the Govt is more anxious to have depositors out of Anglo and INBS. When you combine the pre-christmas legislation + the delay of the €10bn injection + the transfer of deposits by Court Order (important in context of Fir Tree action) then one begins to see a pattern which suggests that subbies and senior unguaranteed creditors of Anglo are in the cross-hairs notwithstanding all the chat about pressure from the ECB not to default on senior debt.

  19. @John McH

    “What are your thoughts on selling the assets to (and retaining the deposits with) other Irish banks?”

    What should have been done a long time ago was to expose the position of the senior bondholders, either by resolution, offering depositors a transfer with guarantee or compensation to a different bank. I’m bored of going on about this.

    The removal of deposits could be used as a pathetically belated way of leaning on the seniors in a way that makes them and their lobbyists’ positions look ridiculous to the public both in Ireland and the EU. Are FG capable of that?

  20. @ zhou_enlai

    I saw that too.

    With regards:

    “Vincent Browne was incorrect in saying this was not on foot of EU/IMF deal insofar as there is rather public admission of a side deal on senior bank debt which is not included in the memorandum.”

    The lack of clarity on the posited ‘side letter’ drives me crazy. It renders a lot of discussion moot, as it is like watching a developing chess game with certain areas of the board blanked out (or with invisible pieces in play). Not sure how it would be done, but ‘is there a side deal and what does it say’? would surely be a useful question to know the answer to. Any reason why we shouldn’t know it?

    On a technical sort of level I thought Vincent was correct, as until the government of whichever stripe clarifies the issue of the existance or otherwise of deals not in the public arena, then interviewers should go on asking why certain actions have not been taken, or we shall remain in the land of nods and winks.

  21. @Zhou

    Moving the deposits could itself be some kind of default event. Nothing has been tested in court yet but the media blackout was partly to prevent a bondholder getting to court before the deposits could be moved.

  22. @Zhou,

    I think you are right about the subbies and unguaranteed seniors being isolated in Anglo, but, noting grumpy’s justified exasperation, I think it is only happening now because Merkel/Sarkozy et al are finally coming to terms with the fact that they have banks in their own jurisdictions which are technically insolvent (though perhaps not as spectacularly so as Anglo) and that they will have to go after the bondholders in these in the same fashion to preserve their voters’ tax euros to recap some of their less dodgy banks.

  23. @Gavin

    Agreed. It is ludicrous that there is hints or spin that there is such an agreement – particularly given the form of the outgoing gov wrt being “economical with the actualité”.

    If there is an agreement it should be clear what it is, who the parties were and what the terms were.

  24. @Frank Galton

    Fir Tree got to Court but there action is against Anglo rather than the State afaik. The transfer was on foot of a Court Order. Hard to reverse that!

    @Gavin Kostick

    The side deal is interesting. It may be obscurity by design. We are told the ECB insisted on it as part of the deal but it is nowhere to be seen. Is it being hidden from the people or is it an illusion for consumption by bank creditors?

  25. On the other hand square roots of deposits might introduce the concept of imaginary deposits. In fact there is a rumour this used to form an integral part of the Anglo business plan

    Well, a 10% rate of imaginary simple interest on a principle of €12.2 billion would give a (negative) return of about €-8.3 billion as well as 8.9 billion imaginary euros, so I suppose the account numbers make sense in some number system.

  26. @zhou_enlai

    I think the EU and Ecb via this supposed side deal have got into a position analogous to the Fannie and Freddie “implicit guarantee” that caused so much turmoil a while ago. You may recall talking heads for months banging on about this guarantee during the credit crunch.

    It caused “inefficient pricing” on a whopping scale.

    When FG invite me into the relevant building with suitable emergency powers, I will have it sealed off by the army while a search is carried out to find this document. Then, probably a quick phone call to Trichet out of courtesy to let him know we are arranging viewings of it in the next few days by Reuters, Bloomberg and CNBC Europe. NTMA will by pure coincidence be big holders of European bank CDS at the time. 😉

  27. Why does all of this seem like something that would have been a good idea back on the dark night in 08?

    Whacking all the “grannys savings” into AIB and BOI and leaving the bond holders / unsub or not at the top of a burning building?

    Women and children last?

  28. Markets seem to be anticipating trouble with 10yr at 9.33% now. Remarkable that there is 250000 customers between the two at this stage in the game.

  29. I think we all owe BL (not BLTD) an apology. Yes we laughed at the deposit selling moment. But all he needed to say was that the bank be loaded up with government scrip (NAMA bonds) that someone would pay “cash” for and presto, the deposits can be sold.

  30. 250000 isn’t too remarkable to me as most probably have pretty small balances, up to former carpet bagger level in INBS, for example. For example, I’ve had no reason to move my money out of either institution, yet. There’s a government guarantee in place and they still paid good interest last time I looked. I do have less than 1 billion in my account, so I might not be important in the new economy but I’ll still shop around next time my bond matures.

  31. Jebus I have never seen as many people with so many hangups as here. This is straightforward stuff. The Government wants to downsize Anglo and INBS. It gets both of these to pass over cash equivalent of the deposits from customers they hold to AIB and PTSB. Now AIB and PTSB have liabilities to the same depositors and have cash in the bank (no pun) to fund their business going forward. The ignorance of some here that portrays all loans from banks as trackers at low rates is bull. The SMEs and Private Sector are paying 7,8,9% for facilities from the banks and some of these deosits are probably on call @ 1%. If AIB and PTSB can retain these deposits it is good business for them.

  32. how did the auction process work?

    Seems to put the dink in co-inky-dink that INLP and AIB got the goodies at the best poss price.

    triples all round.

  33. @Andrew S

    I was asked my view on whether an Irish bank might go under and whether deposits might be at risk back in mid summer 2008. My line was that they all were in theory but in reality the state would have to step in and nationalise or preferably liquidate and move the business on from AIB and BOI if they were stuffed because they were too important for the economy and had too many customers.

    My exact wording wrt Angllo was “Anglo though, who the feck needs Anglo? They will have to let that go under and the deposits could go with it.”

    The bonds didn’t even come up because they were obviously going to have to take a hit and anyway they were already out there and it was just pass-the-parcel.

    I am fairly cynial in general but was outdone here, because the reaction to my view was along the lines that although I might be right in theory, I just didn’t understand how small Dublin was and that it would all come down to who had money where.

    There has been a cadre of naive decision makers and advisers inolved in this farce from the very beginning, combined with the likely fact that they were all pulled from the constituency of “true believers” so they never really got round to the idea that they might have to do some off-consencus thinking. Some probably wouldn’t know how to.

  34. @grumpy
    “I think the EU and Ecb via this supposed side deal have got into a position analogous to the Fannie and Freddie “implicit guarantee” that caused so much turmoil a while ago.”
    Exactly. The Irish banking system and sovereign debt is now Somebody Else’s Problem. The IMF recognise this, I reckon, hence their nervousness. All we have to do is sit tight, keep applying for payment variations and wait for the court to come up with the right answer. What we need to do is ensure that all happens in our best interest, both in terms of ring-fencing our remaining NPRF cash and in getting our cost base right (both public and private).

  35. @TRP

    Except AIB and IL&P did not get cash in return for taking on the deposit liabilities; they got NAMA and “other” bonds. Indeed, they actually paid cash to Anglo and Nationwide as part of the deal.

    Eoin and Greg are right that the deal does help them meet the required 120 percent loan to deposit ratio, which could explain their (generous?) bids. Beyond that, depending on the real value of those NAMA bonds, it is not clear to me that the receiving banks are financially better off as a result of doing this deal.

    Zhou may well be right that there are further things in train re the final resolution of Anglo and Irish Nationwide. Things facilitated by getting the depositors off the balance sheet. More twists and turns to come yet.

  36. @ John

    actually this transaction creates (i think) 1.6bn in equity for AIB. Essentially the differences in the markings for NAMA bonds at Anglo (84 cents) and AIB (98.5 cents) resurrects the equity that was marked down in Anglo previously. Very clever. Very.

  37. @Hogan

    “and in getting our cost base right (both public and private)”

    ….the missing link that will probably torpedo the strategy. How quickly could FG reasonably get out of election mode (has wasted months in this respect) and sell a different line to the public?

  38. Eoin,

    Sorry, you have to help me here. Why are the bonds marked differently at the two institutions? What value did AIB actually pay?

  39. @John mcHale
    We will know next week the criteria for the stress tests. As I understand it one of the components is a liquidity test so the extra deposits are a gift for AIB and il&p. However in the case of the latter the ratio is still 200% leaving them dependent on ebb. The 120% quoted would appear far too high.

  40. It all reminds me of this story (old now):

    It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted.
    Times are tough, everybody is in debt and everybody lives on credit. On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a 100 euro note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.
    The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the a 100 euro note and runs next door to pay his debt to the butcher.
    The butcher takes the a 100 euro note and runs down the street to repay his debt to the pig farmer.
    The pig farmer takes the a 100 euro note and heads off to pay his bill at the supplier of feed and fuel.
    The guy at the Farmers’ Co-op takes the a 100 euro note and runs to pay his drinks bill at the pub.
    The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit.
    The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the a 100 euro note.
    The hotel proprietor then places the a 100 euro note back on the counter so the rich traveler will not suspect anything.
    At that moment the traveler comes down the stairs, picks up the a 100 euro note, states that the rooms are not satisfactory, pockets the money and leaves town.
    No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

    Round and round we go!

  41. @bond eoin
    If you are correct then it will be interesting to see if this ruse will pass the stress testers. Another sham stress test would have dire consequences. I don’t believe our ECB paymasters will allow paddy to pull the wool.

  42. @ Grumpy/John

    its complicated. Took me, and some very smart other guys, a few hours to figure it out.

    Anglo has been marking the NAMA bonds at 84 cents on its book, included as part of its 2010 unaudited accounts. They have 12.2bn of these, with a MV @ 84 cents of 10.25bn. They are also giving AIB 1.7bn in ‘assets’ (assumed to be cash balances) from the IoM operation. So total assets going to AIB = 10.25+1.7 = 11.95. Anglo receive a cash payment of 3.6bn from AIB, which means the net outflow of assets from Anglo is 11.95-3.6 = 8.35bn. They are losing 8.6bn in liabilities, so the whole thing, ignoring some minor differences and roundings which im missing, is fairly neutral, right?

    The NAMA bonds are going to AIB as part of the deposit transfer, and AIB have put a value of 98.5 cents on them (what they get repo-ed at with ECB), so immediately AIB register a gain of 1.75bn. They have received 12bn in (their) MV NAMA assets, and 1.7bn in ‘assets’ (cash balances), so total assets of 13.7bn. They pay out 3.6bn in cash to Anglo, bringing net asset inflow of 13.7-3.6 = 10.1bn, against new liabilities of 8.6bn. Hence, 1.5bn capital gain.

  43. @ Colm

    hold to maturity rules for this type of debt is fairly standard. Valuing at par is the normal way all european banks would treat these. They are being done with all Irish govvies, for instance. Bigger question is why Anglo marked them down when there was no need to, but think that may have been their own particular ruse to make any eventual ‘good bank’ perform above expectations by eventually marking higher.

  44. Eoin, so it is a marking arbitrage, or if you like a accounting policy motivate swap, no?

    This surely just translates to one or other of AIB or Anglo marking these inappropriately (note: not illegally or unlawfully). My first reaction would be that marking to repo haircut here might be allowed but might not be realistic.

  45. @John

    I assumed that the NAMA Bonds are the cash equivalent. If there is a material negative difference surely it would not be a good deal for AIB and PTSB. Bond Eoin Bond is stating above there is a gain of €1.5 Billion to AIB.

  46. Thanks Eoin. That is very helpful. The lingering question, however, is what value the markets — debt and equity — put on the new NAMA assets on AIB’s books. Were the Anglo valuations closer to the mark, notwithstanding their motivation for the mark down? But what you say will certainly make financials look better.

  47. @ John et al

    Lest we forget, Nama has announced it is redeeming some of it’s bonds at par shortly, so it’s not a ‘crazy’ valuation per se. Anglo’s previous low marking seems too low and designed for future outperformance. If we look to burn bondholders eventually at Anglo, have we saved 1.5bn for the taxpayer today?

  48. @Eoin, I don’t know. Might depend on whether it could be described as a fraudulent conveyance.

    @JohnMcH
    There is a fair element of option pricing in Irish bank share valuations. Anything that looks like recap is smaller is obviously price positive and the time value element goes up if short term wipe out looks less likely.

  49. @ grumpy

    ‘I am fairly cynial in general but was outdone here, because the reaction to my view was along the lines that although I might be right in theory, I just didn’t understand how small Dublin was and that it would all come down to who had money where.

    There has been a cadre of naive decision makers and advisers inolved in this farce from the very beginning, combined with the likely fact that they were all pulled from the constituency of “true believers” so they never really got round to the idea that they might have to do some off-consencus thinking. Some probably wouldn’t know how to’

    + 1 Failte romhat. You don’t know how right you are. I refer to Richard Fedigan’s theme about the competence of folk who have not much experience in the big wide world. Also to Joe Lee’s theme of the core conflict betwen the possessor principle and the performer principle. The chickens have come home to roost.

  50. Loath tho I am to involve myself in anything around “those things” and “that kind of thing” it seems
    a) clever
    b) too clever by half.
    Im always worried when we need to find accounting arbitrage revaluations to boost the accounting capital base of the banks. One thing we do know – accounting NE economics.
    Over and out.

  51. Perhaps Anglo had no choice but to hold the NAMA bonds as marketable assets? Does a bank not require some proportion of their assets to be marked-to-market? (Tier 1?). In this case, the NAMA bonds would be in the “Assets available for sale” box of the Anglo balance sheet. AIB, however, have a deeper asset pool, so they can hold them as Tier 3 and say they are holding them to maturity.

    It is arbitrage, but it is not uncommon for one bank to take a long-term view of what another bank considers a short-term holding. No?

  52. Mr Brian Lucy
    If you are right and I suspect you are, who is policing this and where is the integrity in the system? Why, so many years on since the start of this crises, is this acceptable behaviour? Also why does the mainstream media not understand what is actually happening here? It is truly demoralising.

  53. It makes sense to get the women and children out of the way so that the marksman can get a clear shot at the bondholder target. We’re still a very long way from the order to fire however.

    In particular I’m having trouble filling in the missing piece in this conversation:

    Michael: “So you see Jean-Claude, we’ve no money and we’re not going to pay the bondholders”

    JC (stroking white cat): “Ah yes, you must be the new man. Didn’t Brian tell you
    about the little ‘arrangement’ we have?”

    Michael: “Brian? That spoofer, sure nobody can believe a word he says.”

    JC: “Let me fill you in. If you were to make the bad decision to hurt my friends, I would be very reluctantly forced to […]. So you see that for every Euro you would “save” it would cost you much more than that. Now do we understand each other?”

    Michael: “Right you are, JC.”

    JC: “My man-servant Lorenzo has kindly offered to drive you to the airport. He will explain how things work around here on the way. You will learn quickly I am sure.”

    Now the missing piece cannot be “stop bank funding for Irish banks”, as that would precipitate the crisis the ECB want to avoid. Perhaps it is to pull back a little on funding to force asset sales to meet fleeing deposits. This could trigger an immediate need for recapitalization, at direct cost to the taxpayer, at least up to the €35bn that the government has already agreed to pay. Any better ideas on what the missing piece is?

  54. @Barry T:

    That story is even more annoying at the second reading. Everybody owes somebody else in the town 100 euro. Everybody is also _owed_ 100 euro by somebody else in the town. Net debt of everybody in the town: 0 euro.

    As for nobody producing or earning anything? The butcher provided 100 euro worth of meat to the hotelier, and received 100 euro worth of meat from the pig farmer, who received 100 euro worth of feed and fuel from the supplier, who drank 100 euro worth of booze at the pub, and so on and so forth. Quite a lot was earned and produced, it was just earned and produced in the previous time period. If anything, it just goes to show how important credit is. Any chance AIB will loosen the purse strings a bit more, or is their LTD still too high? Are we just running to stand still?

  55. All financial instruments need to be fair valued when brought on balance sheet. It has nothing to do with the category AFS, etc. Ask 100 Market valuation specialists to value the bonds and 99 will value them at a significant discount to par. The nama bonds are term bonds. Their expected maturity is on average 7 to 10 years ie the expected life of the related property loans. The yield on government guaranteed debt for this duration is say 9%. Tell me why would someone buy a nama bond paying 6 month euribor say max 2% as opposed to a Irish govi paying 9%. The only way they would buy nama bonds is if they paid a significant discount upfront say 80%. Is this so complicated?

  56. What banking Licence are the deposits covered under? Anglos or AIBs.

    If somebody had their savings split between the top so that neither was above €100,000 – if this transfer results in them having over €100K with AIB are they till covered as if the deposits were in different instiutions?

  57. @Niall
    They will now be AIB.

    No, you will now have 200k on deposit at AIB… (assuming 100k in each previously).

  58. Niall, don’t think so.

    Brian G, suggest you hunt down the Buiter, Citi note on ECB powers if NCBs go native. Very interesting. About 2 weeks ago. The problem is in my view more likely to come from the EU IMF credit line providers in combination with the Crokies because there would be no real need for the facility without them.

  59. @Other movers, emigrants, migrants, footlosse fun-lovin

    FG tops poll in virtual ballot
    Fine Gael is on course to lead the next Government, according to the first count of a poll conducted among Irish emigrants.
    The poll was carried out over ten days on [www.ballotbox.ie]
    5,580 Irish emigrants in 124 different countries voted in the poll. IP technology was used to block voters in Ireland, and passport information was used to discourage non-Irish people from voting. This is the first time such a poll has been attempted.

    The aim was to highlight that Irish emigrants are immediately disenfranchised upon leaving the country. This is in stark contrast to many other democracies, including the United States, the UK, Australia, Canada, and most EU countries.

    In the poll, Enda Kenny’s party won 30 per cent of first preference votes, with the Labour party on 25 per cent. Independents form the next largest group with 18 per cent of first preference votes. Sinn Féin is on 13 per cent, with Fianna Fáil and the Greens tied in last position at 8 per cent.

    http://www.irishtimes.com/newspaper/breaking/2011/0225/breaking56.html

  60. @ hoganmanhew

    “They will now be AIB”

    Where is the government advice to these savers (small section of population) to spread their risk?

  61. @ David O’ Donnell

    As a non resident I don’t think I should have a vote in General Election. Why should I have a say on tax/cut that will not affect me directly. I think if they want to sread the vote non-residents could get it for presidential or senate elections. Another option would be for non-residents to vote on the list system (even though I personally would not aggree with this).

    Worryingly, I haven’t lived in Ireland for 10 years yet a polling card was sent to my home – this must open the door to potential fraud.

  62. Niall,

    a) the gov line is the ELG makes the 100k redundant anyway
    b) do you think the civil service should be expanded to take in the likes of Eoin, Hogan etc so everyone can get free proper investment advice?

  63. @J

    If I was thinking of buying them the actual redemption date of each one would be quite important. However, have you seen the 2 yr yeild on the vanilla sov bond…….?

  64. @grumpy
    “a) the gov line is the ELG makes the 100k redundant anyway”
    Well that depends on a couple of things. Whether you have a fixed rate (so likely a fixed term) deposit and when you put the money in – after the institution joined the ELG guarantee:
    http://www.jillkerby.ie/blog?month=9&year=2010
    (A bit dated, but gives a flavour of the complications of ELG).

  65. Hogan, Niall

    Basically (do not construe as investment advice) unless the funds are in a rather old, fixed term deposit, they are covered under the ELG until it runs out in June. If there is the vaguest semblance of Irish sov bond respectability and no fall-out with the EU then that will be extended again for another 6 mnths.

    All demand or current accounts are covered under ELG no matter when they were opened. Anyone with a very long fixed term deposit must be a true believer.

  66. @ Prof Lucey

    Gosh, they followed your advice after all, 10 months after you called for Anglo deposits to be sold.

    @ Anybody who understands these things.

    What was the ECB ins and outs on this? I understand it that Anglo’s NAMA bonds had to be withdrawn as collateral pending their packaging off to AIB. Instead “overnight” ECB assistance was given to Anglo.

    Now the deal is complete the ECB expect their collateral back and to withdraw the overnight facility.

    So does that mean that AIB now borrow from the ECB using NAMA bonds as collateral and then lend the money to Anglo? We really need diagrams with all this balance sheet engineering.

  67. @ Bw2

    Anglo uses Nama bonds as collateral at ECB o/n window until last Thursday, when title changes to Aib. Transaction cannot be completed in time for Aib to use o/n facility, so they use Central Bank of Ireland ELA on Thursday night instead. They then use ECB o/n facility, with Nama bonds as collateral on Friday, and again until next weekly repo held next Wednesday. No one lends Anglo anything, they no longer have liabilities that require funding.

  68. @ B_E_B

    I am really struggling here. Anglo owed the ECB money. They posted NAMA bonds as collateral. Anglo transfer deposits + NAMA bonds to AIB. Why do they not still have a liability to the ECB? How was that liability repaid?

  69. @BW 2

    Try thinking of it as Anglo sold the bonds to the ECB each day, buying them back the next – all the time keeping the liability of the deposits. Then the liability disappeared – to AIB – so when Anglo returned the money to ECB they got the bonds and passed them hot potato like, to AIB. Aib then sell them to the ECB the next day to get money….etc, for a few days until the next, much cheaper week long sale and repurchase window is open etc, etc…..

    Would you consider stopping taking the piss out of Brian Lucey bearing in mind how fecking complicated it is?!!

  70. @Brian & grumpy

    I would second what grumpy says about refraining from taking the piss out of anyone making the effort to try to think through all of this. We need people to be willing to make mistakes and say the odd thing they later regret.

    So here goes something that will no doubt reveal my ignorance. It seems to me Brian raises a valid question. The ECB/CBI borrowing was not “funding the deposits”, but replacing the previous deposits/maturing bonds that had fled. A key part of the collateral came from the NAMA bonds. Now that remaining deposits have been moved, the original need to borrow from the ECB/CBI does not appear to have gone away, but the collateral that was (partially) supporting that borrowing is no longer there. Given that Anglo and Nationwide still have loan assets on their books, they still need funding, no?

    @all
    Thanks for contributing to a helpful thread on a complex subject.

  71. @ Grumpy, John et al

    Ok I will promise to be good in future, but that Prof keeps attacking me!

    Grumpy, you say Anglo got rid of the liabilities, but they also got rid of corresponding assets. That still leaves them owing the ECB a lotta dosh. John seem to also see it this way. This is not rocket science and yet the inability to get complete clarity is frightening.

  72. Well, I think if you look at a balance of assets and deposits as being net neutral, but allowing liquidity, that neutrality has passed to AIB, allowing them more liquidity. What will Anglo do for liquidity? Well, in theory it has no more need for it as its deposits are gone. Has it used all its capital to do this? Probably, but it is in wind-down, so what does it matter? It is an ex-bank…

  73. BW2, John,

    Welcome to the absurdity of fractional reserve banking! It only works in one direction. You are supposed to keep a faction of deposits at the CB just in case some idiot wants their money back, so to be a regulated bank they have to do this. If they have some short assets and lots of long ones – like fields with road frontage – and the short assets want out (and they still claim to have assets bigger than liabilities) they end up having to effectively get a depositor of last resort to replace the money that goes after the liquidity buffer has gone. You can end up with perma-repo. In theory the Nama bonds could be sold and the money repaid but……

    If Anglo can get rid of all the deposits and short liabilities and stop being a bank, then as long as they can claim with a straight face the assets left on the balance sheet match the longer liabilities they can hang around and wind it down. Er, what would that make the bonds worth then???

    The whole arrangement is a farce because it is almost designed to fail in deleveraging – hence the serial bubbles.

  74. @ Brian woods 11

    It’s designed that way. You are not allowed clarity.
    Just watched enda say he will tell us exactly how bad things are. He didn’t know now and is waiting for the stress tests.
    Have they not told him?

  75. I don’t think the issue is liquidity — Anglo still owes the ECB/CBI.

    Looking back now the answer is probably in the Simon Carswell article.

    “The strategy would appear to be to leave the bad banks on ELA and help the other banks reduce their ELA exposure by giving them more ECB-eligible assets.”

  76. Where Anglo was pretending to buy back the Nama bonds each week or each day, it is now AIB.

    If you let the liquid liabilities get out, the liquidity buffer is gone, it is illiquid. Anything at the ECB on repo is collateral at a haircut they determine – so in theory they are prepared to just keep it instead of getting euros back. You then ask the second question, is it solvent. The answer to that tells you what the unsecured bonds are worth.

  77. Does this have anything to do with the surge in emergency borrowing from the ECB? I feel we still have not got to the bottom of that. Switching to a higher interest rate and overnight maturity clearly fits in with the ECB plan. Maybe this is happening to facilitate that rather than the other way round, which I think is what the original explanation implies.

  78. Simon Carswell explanation helps. I think this is what happened. AIB acquired 12.bn NAMA bonds. These were in effect funded 8.6bn by deposits and 3.6bn by ECB repo/whatever. So the 3.6bn cash given to Anglo was used to pay back the ECB. In turn AIB used or will use the NAMA bonds to get the ECB to give it back the 3.6bn of cash it had to fork out. Or something like that.

  79. @BL – “now we are told the march stress tests will tell all…..”

    I’m sure that before then, we will get the rousing speech from out new T-shock, Endof Terrace, to tell us just how bad it is now he’s ‘lifted the lid’ and how we’re all going to pay for it (but dressed up as ‘we’re all in this together/ask not what your country can do for you/every one of us must put our shoulders to the…./etc.’).

    After that, normal BS service will resume as soon as possible, and that includes covering up what’s really been going on/is currently going on in those banks.

    Plus ça change, plus c’est la même chose.

  80. Joe : what im hearing its gonna cost a whole lot more. At least with the truth commission we will eventually find out what on earth the cabinet were thinking. But that will be after a messy battle with our european “partners”. Thanks Bert and the Two Brians….

  81. @all – on other ‘movers’

    Blind Biddy (via Twitter from Kingstown): The X-Minister’s methods were strange – they caused us real surprise – to make us see the light – she threw bleed1n dust in all our eyes. Bye-Bye!

  82. @KW, JMcH, PL etc.

    Could I suggest one of you starts a thread on the following:

    http://www.irishtimes.com/newspaper/finance/2011/0228/1224291007008.html

    You might consider within that the extract:

    “Senior bank debt, like deposits, is not risk capital, and does not share in the profits (or losses) of banking operations. Risk capital resides further down the balance sheet in the form of subordinated debt, preference shares and common equity.”

    ….and perhaps pose the question of why then, government bond yields are almost always lower?

    I think it is appropriate also to reference this “form”:

    http://www.irishtimes.com/newspaper/opinion/2010/0413/1224268226001.html

  83. @grumpy

    I found that Buiter note here. It is a very interesting paper – it shows how the recent CBI action is effectively shifting the burden of bank funding away from the ECB to the Irish sovereign, but since at the end of the day the Irish government won’t be able to pay back everything the risk will return to the Eurosystem.

    I’m still not clear on the measures the ECB are threatening if seniors are hit however. itting Anglo/INBS seniors would be effectively lobbing some missiles over the border into ECB-land. Now they could retaliate with a nuclear strike but the fallout would hurt them too much for that to be considered. The financial threat has to be the equivalent of sending in the army, occupying a few villages, taking lots of prisoners and generally making life miserable. The main characteristic of the threat here is that pain is only felt by the country firing the missiles – there is minimal impact on the citizens of ECB-land itself.

    I just looked at a Vincent Browne election special where Peter Mathews said that the ever-growing liabilities of the State to the ECB as a result of paying back the senior bondholders (€60bn in the last nine months) was “wrong” and needed to be addressed urgently. At some point in the near future FG are either going to have to call the ECB’s bluff, or else fold.

  84. @Brian Lucey
    “…regime change takes time”

    Certainly does in this country – where our most radical form of revolution seems to involve replacing tweedldum with tweedledee..

    Tweedledum and Tweedledee
    Agreed to have a battle;
    For Tweedledum said Tweedledee
    Had spoiled his nice new rattle.

    Just then flew down a monstrous crow,
    As black as a tar-barrel;
    Which frightened both the heroes so,
    They quite forgot their quarrel

    Our electorate is easily spooked by imaginary “monstous crows” as per DO’Ms column. Any hope our elected leaders are less jumpy?

  85. Regarding the €1.6bn gain for AIB,

    If Anglo held €12.2bn in Nama bonds (valued at 0.84c) then they haled them at a value of €10.248bn

    AIB values €12.2bn worth of Nama bonds at 0.985c so €12.017bn is what will appear on their books.

    €12.017-€10.248bn = €1.769bn

    Is that right or have I made a miscalculation?

  86. @ Brian Woods II Says / @ Rob S

    Brian / Rob, Simon Carswell’s explanation is on a net basis. It is likely that for the accounting and tax issues to be minimised, the transaction components would have been settled on a gross basis in multiple currencies. i.e. Carswell’s explanation obscures some of the finer details and issues.

    As this is a step within a sector restructure, the economics of the transaction is only one parameter. A better way to examine the rationale for the structure is to look at how many policy objectives are satisfied by the move of NAMA bonds and deposits from Anglo. A non-exhaustive list is suggested below:
    (a) Political (and governmental) desire to “obliterate” Anglo and INBS;
    (b) NTMA objective of securing a stable funding platform for NAMA bond issuance;
    (c) CBFSAI objective of financial stability through the re-capitalisation of the “continuing” banking sector to international standards;
    (d) CBFSAI objective of improving the liquidity profile in the “continuing” banking sector;
    (e) NTMA objective of ensuring that the transfer establish an observable price validating the AIB and BoI NAMA bond valuations to avoid a demand for incremental capital of c.€6-7bn and rising in the banking sector;
    (f) DGCompetition objective to ensure that State subsidies for failed banks does not lead to inappropriate competition;
    (g) ECB / CBFSAI objective of reduction in non-continuing banks (Anglo and INBS) access to euro-zone monetary operations;
    (h) ECB policy objective of reducing “persistent bidders” in euro-zone monetary operations. This is a precursor step to re-introducing competitive tendering;
    (i) CBFSAI/DGCompetition objective of ensuring the BIS “weak” banks policy is implemented;
    (j) NTMA/DOF/CBFSAI objective of reducing the scale of the non-continuing banking sector and its contagion effects.

    To achieve all these objectives in a single transaction, the Anglo assets put up for sale were the €12.3 NAMA bonds valued at 98.5% and the Anglo IOM subsidiary valued at NAV. The consideration paid was the receipt of c.€7.3bn equivalent of deposits in UK and RoI and a net cash payment of c.€3.2bn for the difference in value. [Source: AIB RNS 24/02 and Anglo RNS 24/02, 25/02]

    Minimising tax liability in UK ad RoI would mean gross payments in the currency of asset or liability in the relevant geography.

    Key observations here are:

    (a) the last annual and interim reports for the Irish banks show a difference between Anglo’s approach to valuation of NAMA bonds (recognised as long-term instrument due to the rollover option and held as loans & receivables i.e. @c.85%) as compared with the approach taken by AIB and Bank of Ireland. (who seem to ignore the rollover option in valuing the bonds and recognised the bonds as short-term instruments). This means that AIB value the same bonds at c.€12.0bn and Anglo at c.€10.5bn. By paying Anglo consideration equivalent to the carrying value, Anglo is roughly capital neutral and AIB has a windfall capital gain. The only conclusion you can get to from this observation is that one or other bank has been mispricing these bonds. An inference might be that the Irish Authorities think that Anglo mis-priced the bonds and unnecessarily overcapitalised itself at the taxpayer’s expense. Hence both AIB and Anglo will show a profit on the bonds as the provision is released;
    (b) The IoM transfer is clearly around c.NAV;
    (c) The issues arising from gross settlement are interesting. Carswell has previously suggested that Irish banks (including Anglo) funded NAMA bonds through MLO/LTRO. Presumably given Anglo’s dependence on ELA the valuation discount and ECB haircut of 1.5% funded was through ELA. The week before, the ECB disclosed an increase in MLF from 1.2bn on 15/2 to 15.8bn on 16/2 [Source: Bloomberg ECBLMARG] which was primarily attributed by the papers to Anglo moving its bonds out of MLO (1 week basis) to MLF (o/n basis). On the date of the transfer, Anglo will have had to un-encumber the bonds by drawing on ELA (an increase of c.€12bn) to deliver them to AIB for which Anglo would be paid €12bn cash. An interesting question is where would Anglo get the collateral to do this?

    The source of funds for gross settlement of this transaction through Euroclear is also unclear. There are two possibilities. If settlement was DVP then CBFSAI facilitated €24bn intra-day payments with ELA financing. If settlement of the bonds was “free” delivery then Anglo bore €12bn intra-day settlement risk until AIB used the bonds as collateral and settled with cash. As €12bn of cash is tricky to find at short notice at the best of times, the simplest answer would be that AIB accessed intra-day MLF until the rest of the cash from settlement of deposits occurred and was swapped to reduce the gross demand to €3.2bn.

    Once the bonds were settled the deposits flows would also be settled and routine funding of the currency balance sheets then commence.

    There is little evidence that the bonds are now financed through ECB on an ongoing basis as the ECB financial statements show that MLF fell by c.€13bn on 24/02, and that MLO and LTRO did not change by a similar quantum. Whether AIB is funding the net €3.2bn from other financial resources such as deposits (unlikely), through the bi-lateral repo market (expensive and/or not possible) or a CBFSAI facility such as ELA (possible) is not yet clear (the curse of publication lags);
    (d) As this is an economics blog, a comment on the impact of the transaction on the economics of the banking system. The immediate impact of the previous paragraph is negative. Essentially €12bn financed at the ECB repo rate is now financed at either a private sector rate or an ELA rate. If so, the cost to the Irish banking sector rises by c.2% (=ELA rate – ECB repo rate) on €12bn giving an incremental cost of c.€240million p.a. (amortising). This is likely an upper bound as the transaction reduces the size of the “non-continuing” banks and the hope must be that the contagion effect on the continuing banks and the sovereign recedes. There is some evidence that this is starting to happen as AIB and sovereign CDS improved as a result of the news. So if yields are down from where they currently are when AIB and NTMA next issue, the economy more than benefits from lower funding costs. For example the National Debt is c.€93bn so every 1% improvement as the market starts to believe the policy-makers are getting on top of the bank restructuring will lower the costs to RoI c. €900million pa from where they currently are.

    This is a cleverly constructed transaction that achieves multiple policy objectives. I take my hat off to the structuring team – it’s well thought through and balances the objectives of a wide range of stakeholders.

    DottyD

  87. @DottyD, Eoin, et al.
    thanks for the explanation. excellent excellent resource.

    Can we now perform this double-sided-arb again with more and yet more attractively priced (destination specified) bond issuance to bump numbers to any institution we please? Is this not what QE is?

    What’s stopping everyone doing this? Or is this rather more mundane than it seems and ‘how its done’?
    What if 3rd parties (i.e. other banks / BOI /HSBC eg.) want in on the magical capital appreciation transfer mark to market system.

    ringing bells of Lehman repos… the old month end switcheroo.

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