Anglo-INBS Loan Loss Assessments

The Central Bank of Ireland has released an addendum to its Financial Measures Programme report covering loan losses at Anglo and INBS.  It concludes the loan losses estimates that were produced last September are still satisfactory.

What does this mean for the remaining Anglo bondholders (€200 million paid out on last Friday)? The government’s policy on this issue is a little unclear to me at this point. The Irish Times reported in April

the head of financial regulation Matthew Elderfield said losses may be imposed on senior bondholders at Anglo Irish Bank and Irish Nationwide Building Society if the cost of the two failed institutions rises above the current €34 billion bill.

This wording also suggests the converse—that without evidence of higher losses than €34 billion, senior bondholders would be repaid in full. However, I doubt if policy on this issue is being set by Mr. Elderfield. In the week after the stress test announcements, government politicians continued to maintain that they wanted to see burden sharing with Anglo and INBS bondholders. For instance, listen to junior minister Brian Hayes discussing the issue here on the April 2nd edition of Saturday View (56 minutes in).

There isn’t really any need to base such a decision on whether the Central Bank announces combined losses of more than €34 billion. An amended version of the Credit Institutions bill could be introduced that allows the Minister to apply haircuts to all bonds issued by banks that required enormous support from the state, and perhaps this is what government politicians have in mind when they say they are still pushing for burden sharing.

Anyway, there has been no official response to this release from the Department of Finance, who have instead preferred to issue press releases on the subdebt buybacks proposed by BoI, EBS and ILP. My guess is that the government is hoping this issue will just fade away but, if asked, they will still claim that Anglo senior debt shouldn’t be paid out on but that they’re still “discussing the issue with their European partners”.

As a purely political matter, I’d guess that if and when Ireland gets a lower rate on its EU loans, that may prove to be the moment that they admit they had to give up on haircuts for Anglo bonds. Investors who bought these bonds at steep discounts over the past year (because so many people assumed the government would not pay out on them) will have obtained a fantastic rate of return.

18 thoughts on “Anglo-INBS Loan Loss Assessments”

  1. Investors who bought these bonds … will have obtained a fantastic rate of return.

    Ordinarily I’ve no grudge against punters who bet on rank outsiders and win big. But this strikes me as a situation where inside information surely played a significant role. Are there any safeguards whatever against the kind of shady trading which can result when a portfolio manager is a drinking buddy of an ECB official?

  2. @ Karl

    ‘As a purely political matter, I’d guess that if and when Ireland gets a lower rate on its EU loans, that may prove to be the moment that they admit they had to give up on haircuts for Anglo bonds’

    The entire issue is political surely, or at least heavily politicised. The position of our government is that the exposure of Irish taxpayers to private debt should be limited. That’s orthodox democratic politics at work.

    The limits of that politics are being exposed remorselessly, as the realpolitik of Irish and EZ banking sinks in. The politics of the ECB determine that core EZ banks, and the EZ banking system, must be protected from contagion. The ICB is ‘encouraged’ to play its part in moving toxic debt away from private stakeholders. That’s institutional politics at work. A different sort of power.

    I guess that the folk who bought the discounted Anglo debt ‘knew’ that the institutional politics would trump the domestic politics. Insofar as there is a free market, it would seem to be about competition for access to powerful insiders. Discretionary (arbitrary) decision making, assymetric information, power imbalance and moral hazard abound. So much for the fall of the Berlin Wall. and the End of History.

    ‘…if general welfare costs of firm closures, beyond the upset of banking panics, are taken into account, the field of consideration is substantially enlarged. It is immediately obvious that insolvent institutions can no longer be excluded from from an admission to Lender of Last Resort services on a priori grounds. In each case, the pros and cons have to be evaluated in a discretionary manner’.

    ‘Central bank and lender of last resort’ Knittel et al in A Handbook of Alternative Monetary Economics eds Arestis and Sawyer 2006. p 266

  3. @ Kevin

    “Are there any safeguards whatever against the kind of shady trading which can result when a portfolio manager is a drinking buddy of an ECB official?”

    To be fair, you hardly needed to be a drinking buddy of LBS or JCT to know what their stance was on this issue.

  4. “Investors who bought these bonds at steep discounts over the past year (because so many people assumed the government would not pay out on them) will have obtained a fantastic rate of return” while holders of sov bonds who assumed the government would pay out on them will be the ones ultimately getting the haircut.

  5. I still reckon the existing Central Bank itself will go bankrupt at some stage….leaving our zombies to deal directly with Frankfurt!

  6. @ Karl

    ‘To be fair, you hardly needed to be a drinking buddy of LBS or JCT to know what their stance was on this issue’

    We all know what they were saying publicly. The issue is who and what you would need to know to be able to be certain that they would still be saying it right up to the maturity date. Insider knowledge is about what the main players were saying privately, and what the various tacit constriants on thier actions are. That’s what makes the bet a good bet. It’s relatively risk free for those in the know.

  7. Was the same general methodology used for testing Anglo/INBS as per the recent PCAR/Blackrock exercise ? Were the same macroeconomic parameters used ? Was the same level of loan per loan diligence performed ? If 3 yes’s…then how come the figures haven’t changed ?

  8. @2pack – “I still reckon the existing Central Bank itself will go bankrupt at some stage”

    But surely not…. after all, they have had ‘formal comfort’ from none other than Mr Noonan himself. That must be worth the paper it’s written on……. oh dear…. maybe it wasn’t actually written down (if you’ll pardon the pun in these days of losses and austerity).

  9. Note that there wasn’t a peep out of the government about Anglo bondholders yesterday. And not a mention on RTE about Anglo bondholders.

    Even this thread didn’t attract much attention. I guess people don’t care anymore.

  10. @Karl Whelan

    It’s the silent ‘conflationist bug’, the WMD of the ECB captured by the financial class, … as deadly as Stuxnet … worse than The Matrix … where the immaterial anglo-inbs dead continue to extract blood and promissory notes from the living ….

    Yet ‘The State’ has the power, and the right, right now, to drive a stake through their dead hearts – which would certainly sort out that little fiscal issue with 2013 that you were on about recently, and restore some semblance of ‘reputation’ that this admin is ‘allegedly’ all about.

  11. Investors who bought these bonds at steep discounts over the past year (because so many people assumed the government would not pay out on them) will have obtained a fantastic rate of return.

    John Terry’s wages dont pay themselves Karl

    It does look that the people who own Anglo Bonds are not the sort of people that you can default on. Where as we seem to have gotten permission for 5 billion worth of junior bondholder burden sharing.

    Why has there been no follow up on the Timothy Guitner revelations?
    ( I was away last week so might have missed something)
    I still haven’t seen conformation or denial or further investigation from Irish investigative journalists on this matter?

  12. @Karl Whelan
    There’s an obsession here and elsewhere with fairness. As if the moral arguments are primary. Having paid back previous Anglo bondholders, it wouldn’t be ‘fair’ to haircut now.

    It’s a mostly bogus argument. It is like the argument over affordability versus value for money during the bubble. Value for money should always be an issue. That something can be afforded is a poor reason for doing it.

    Currently we have a dichotomy between fairness and necessity. That something would be unfair is a poor reason for not doing it if it is necessary. There are a lot of necessary actions that need to be taken, fairness is a minor consideration.

  13. @ Karl

    in fairness, there’s not all that much surprising in this release. Enda and Noonan have said a few times in recent months that as long as the capital req’s didn’t go up, there wouldn’t be any haircuts. And in the last few weeks, there’s been a few comments that “we don’t expect the stress tests to show any increase/surprise”, so the market/media have been well prepared for a fairly non-event release.

  14. To be fair, you hardly needed to be a drinking buddy of LBS or JCT to know what their stance was on this issue.

    Okay, I’m describing a complicated state of affairs in an over-simple way. But I don’t think you will deny that Colm MCarthy’s description is pretty accurate:

    The flawed design of the euro system cannot fairly be blamed on ECB officials, but their dysfunctional communications strategy has gone on far too long. There is no other central bank in the world that would tolerate uncoordinated public musings about market-sensitive issues from its non-executive directors and full-time executives. The ECB appears to have somewhere between 20 and 30 spokespersons on policy questions, free apparently to disagree in public.

    Capitalism is inevitably rough at the best of times, but it degenerates into something worse when the way to get rich is to figure out which of a bunch of squabbling bureaucrats is really calling the shots. How many people knew that Axel Weber was feeling isolated until he actually quit? Even Merkel was taken by surprise.

  15. Here are some links to articles on recent developments in Spain’s efforts to address their banking issues. The first link suggests the Spanish have learned some lessons from Ireland on how not to do things. The other articles give some detail on Good/Bad bank structures being proposed. It’s not detailed enough on the capital and funding for the bad banks or if the assets going to the good banks will be sound.

    http://www.forexyard.com/en/news/ANALYSIS-Spain-shies-away-from-Irish-style-bad-bank-2011-05-17T103348Z

    http://7marketspot.com/archives/7532

    http://online.wsj.com/article/SB10001424052748703922504576272841237728946.html

  16. The loss projections on INBS’s residential mortgage book are startling.

    Lifetime loss projection as %age of portfolio:

    CB Sept 2010: 18.1%
    Blackrock base case: 21.5%
    Blackrock adverse case: 29.3%

    These are quite staggering. Especially so, given this is against the whole mortgage loan book. Although I don’t have a breakdown by year of origination or LTV, it’s reasonable to expect a good portion of the book originated pre2003 and that not all mortgages were 95%+ LTV.

    If we assume a 60% loss severity, this suggests foreclosure rates of 30%, 36% and 49% respectively (for the scenarios above).

    This begs the question, what on earth were INBS up to? It certainly seems that some explanation should be given as to why the INBS resi mortgage book is so much worse than other lenders. Are there single borrower concentrations (i.e. developers converting their loans to resi mortgages)? Given the taxpayer is picking up the bill, it doesn’t seem too rude to expect a more detailed explanation. Otherwise we should question if the lower loss projections for other lenders are sufficient.

  17. @ BEB

    “Enda and Noonan have said a few times in recent months that as long as the capital req’s didn’t go up, there wouldn’t be any haircuts.”

    Have they? I don’t know about that — Mathew Elderfield has said that but I’m not sure Enda or Noonan have.

    Brian Hayes was quite emphatic with me when I asked him about this in April. Maybe he was just pulling a Leo.

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