FT on Subdebt Writedowns

These shares were issued as part of previous and inadequate cash calls by the banks, back when both they and the government were in denial about the true losses facing the system and the need to burn bondholders.

So the FT accepts that there was a need to burn bondholders at the time the preference shares were ‘bought’. But now it seems to think that the sub-debt that was saved by the preference shares, should rank before the preference shares.
We know Paddy is the brightest bulb on the stage but surely the FT doesn’t think he is that dim.

A little like asking somebody who stood between you and a nasty bullet, to hold that position for a few more years, so that you can continue to make money.

Any clever cowboy would have long since skidaddled.

@Eoin Bond
Agree no one is going to have much sympathy for the subbies but it still makes the quasi protection of equity strange.

@ DE

quasi is the operative word. Equity has taken fairly large scale losses. That it exists is a theoretical anomaly rather than a substantive protection.

@Eoin
“Secondly, preference shares were never a true “investment”, they were only created to keep the banking system capitalised whilst not wanting to nationalise”

Isn’t this more evidence of the government attempting to protect equity?

@ DE

i dont think they were trying to “protect equity” as much as “prevent nationalisation”. There is a stigma involved with the latter.

@ Grumpy

i’m pretty sure you could only have enforced that element of losses on seniors via a liquidation, rather than the direction orders being used against subbies. I’m also pretty sure no one anywhere in either the Irish government or the ECB or the EU or the IMF is particularly keen on going down the liquidation route.

@ EB

“i dont think they were trying to “protect equity” as much as “prevent nationalisation”. There is a stigma involved with the latter.”

Interesting. Where on our list of current problems do you think you would place the stigma of a largely nationalised banking system?

Any thoughts these days on whether these nationalisation-avoidance-based policies were a mistake?

I think we’re getting to the stage where we’ll have to leave the events of late 2008 to the economic historians. But, in any event, whatever about Mr. Bond’s stigma fear, ‘nationalisation-avoidance-based’ policies were perhaps a useful ploy to force the banks to ‘fess-up’. Instead we got a huddling in denial until March of this year. Alphaville is correct in principle, but the outrage seems a bit confected. The real target should be the unforgiveable delay in tackling the banks’ insolvency. If this ‘going through a process of ‘partial’ liquidation and seeking to avoid the logical end-point by re-ordering creditor ranking’ had occurred in the last quarter of 2008, nobody would have batted an eye-lid. Doing it now, while most other EU non-peripheral banks are able to raise capital and funding in the normal way, is bound to raise some eyebrows – and might even have a knock-on effect on these banks’ funding activities.

@Colm McCarthy
Read the denationalisation of Money by Hayek.

This debacle follows a long tradition of powerful actors using the guts of a acedemic paper as a weapon to be used in their interests.

“Opposition to new system from established bankers

This necessity of all banks to develop wholly new practices
will undoubtedly be the cause of strong opposition to the
abolition of the government monopoly. It is unlikely that most
of the older bankers, brought up in the prevailing routine of
banking, will be capable of coping with those problems. I am
certain that many of the present leaders of the profession will
not be able to conceive how it could possibly work and therefore
will describe the whole system as impracticable and impossible.

Especially in countries where competition among banks
has for generations been restricted by cartel arrangements,
usually tolerated and even encouraged by governments, the
older generation of bankers would probably be completely
unable even to imagine how the new system would operate and
therefore be practically unanimous in rejecting it. But this
foreseeable opposition of the established practitioners ought not
to deter us. I am also convinced that if a new generation of
young bankers were given the opportunity they would rapidly
develop techniques to make the new forms of banking not only
safe and profitable but also much more beneficial to the whole
community than the existing one.”

The advantage of the Euro is that it has at least disturbed the monopoly of corrupt bankers under the protection of the sovergin – however bankers with a closer relationship with the new Quasi / corporate CB have simply skimmed the cream.
I was struck yesterday when a financial journalist stated that he did not know the postion and safety of post office bonds – we now really have competing currencies withen the euro area – if you consider bonds are money.
Given the fact that Goverment money is limited to 3% /60% deficit at least until private money is threatened – it seems that sovereigns will be eaten alive as local elites move from their formal parasitical relationship with the state towards the new completly supranational CB.

@Eoin
“i dont think they were trying to “protect equity” as much as “prevent nationalisation”. There is a stigma involved with the latter.”
*titter* No stigma in having a banking system in a persistent vegetative state with a zombie sovereign attached?

@ Hogan/Karl

would nationalisation have actually solved anything? Doesn’t appear to have done much with Anglo even though we got our feet behind the head desk 3 months after the guarantee. Relatively sure i also didn’t suggest that non-nationalisation has left us any better off, simply that it was a rational plan which the previous government hoped would work, so titter away all you like.

@ Gavin

mixed feelings. Most feel that senior debt being protected was a fundamentally important step to regain confidence and stability in the financial markets post-Lehman, but that it should never have been pursued to the extent that it imperiled a previously safe sovereign. So, subsidy yes, default-transference no. And while some senior debt holders were undoubtedly lucky, others bought in on the original collapse on the basis that no advanced economy would ever let their banking sector go bust. Iceland aside, they have been proven correct, and to the victors go the spoils.

@Bond Eoin Bond

Bit of thread: Are Irish industrials (real economy) able to access bond market at the mo?

“i dont think they were trying to “protect equity” as much as “prevent nationalisation”.

It is like the Maginot line and the nature of unintended consequences . As Colm Mc says the holders of sovs have been most badly hit but this extends to any Irish corporate trying to raise money on the markets. Everything has been contaminated.

If it was a play it could be a comedy about a man running affairs with 15 different women and promising the world to each and then his wife finds out.

@Bond Eoin Bond

Ta for that.

@Bond Eoin Bond – I assume you accept that Senior bank bonds are now a competing money withen the Eurozone – much like Goverment bonds of old once a CB guarantees this paper – it becomes money.
Strange how a commercial bank liability can morph into a supranational rent isn’t it.
The ECB is now using Bank bonds to control inflation , much like tradional CBs use Goverment bonds.
Therefore mortgage payments are no longer paid to a private company in many ways but through a Governmental agency , although be it a international/ corporate one.
Truly shocking and yet Kevin O’ Rourke waits in Hope – hope for what?
Full blown Fascism !!!

@grumpy

We simply need to figure out how to dump €50 billion or so of vichy-banking system debt on the ECB before ESM cuts genuine sovereign bonds – pay back time for saving the ‘financial class’ in the core – and let the ECB ‘socialize it on the EZ banking system’ itself, not on the EU serfs. Simple! Otherwise a ward of ESM for a decade or so and a local wasteland.

Nothing to stop us starting today with Anglo/INBS – give 2_of_7 a moment’s notice. And the Greeks a break … and Lorenzo a financial seizure … might as well put Axel in the IMF as well while we are at it and win a few more friends in Washington (-;

@Colm McCarthy

“..If the Irish banks had been normal listed companies, would the stock exchange not have de-listed them long since, to avoid false markets in both equity and debt?..”

It must be remembered that the prevention on shorting of Irish bank shares was instigated 19th Sept 2008 following moves in the US and elsewhere. If memory servers this came following a review from the Regulators office after the Lehman’s collapse and saw Anglo’s share price rise c125% on the announcement.

One could argue that a false market has actually existed in the banks equity before the 29th Sept 2008 guarantee. If the market had been allowed to function normally no doubt the equity values would have been wiped possibly before 29th Sept but as ever Govt (through the ‘independent’ Regulators office) saw fit to obstruct the normal market functions and as a consequence this has no doubt ensured that the subsequent events were never likely to have been correctly analysed.

I have my doubts that the Stock Exchange would have moved to delist the banks in any event – rightly or wrongly – but the fact that the equity valuations were being artificially inflated for a number of days prior to the Guarantee gave all stakeholders a bum steer on the night of 29th Sept 2008. This surely elevates the notion of ‘unintended consequences’ to a new high.

@Colm McCarthy

The FT’s Lex today has a slightly different take from the Alphaville piece. No sympathy for subbies here and as to unguaranteed seniors: ‘It might be their turn next’.

Good.

And now would be a good time to do it. Madame Legarde would be in a difficult position to come out all guns blazing in favour of bondholders and that would leave the ECB with only one not completely convinced supporter (Germany).

@ Joseph/Colm

whats funny, aside from the internal FT disagreement over subdebt treatment, is that neither of them seem to ‘get’ whats going on with the Irish banks. Lex reckons that seniors could be haircut without even a passing acknowledgement of either (a) subbies getting a non-zero return and (b) the ECB quid pro quo on funding/liquidity being now concretley enshrined, while Alphaville reckons that prefs are real investments and that subbies have been hard done by despite the clear insolvent nature of the banks without the State involvement. It’s odd that a paper of the FT’s stature seems to miss most of the actual realities of the Irish situation.

@seafóid

Yes – have checked out her CV – and she has a bit of local ‘form’. IF she is appointed might I humbly suggest a cut of 0.5% on our corporate tax rate to coincide with her appointment.
p.s. she certainly was in Brian Lenihan’s … er … back pocket! and ours!

@Gavin

Is feidir leo! (-;

@ Seafoid/DoD

she actually headed up the law firm that the Ton Hanks film Philadelphia was based on, and which had unfortunate media exposure in recent years after a senior partner tried to force his secretary to pay him £4 for the tomato-ketchup-spill-induced dry cleaning bill…

@grumpy

You are correct re the share scheme – however insofar as it was shares being bought at a price on the market its very difficult to argue that the price was right or wrong – who really knew what they were worth at that time ? – hindsight is fantastic in circumstances such as these.

The bigger issue regarding the scheme, it seems to me, is that the loan losses, because of the crazy loan agreements, are now being covered by the citizens.

I can remember all the Irish banks gladly lending money to normal Joe’s to invest in the Eircom floatation. The fact that the share price went wallop shortly afterwards didn’t cause too many to cry foul in relation to the loan losses suffered. Why? Because the ownership of the losses on such loans (and I know there were many) vested with the shareholders of the banks at the time – not the citizens. So its the owership of the losses rather than the underlying practice which I believe is causing the current outcry. Not suggesting that the practice is in any way acceptable but it happened before albeit on a significantly smaller scale.

The key difference with regards to the shorting prevention and the above was the fact that certain types of transactions were not allowed to occur i.e. the price could only ever be artifical following this intervention under the scheme we’ll never know.

@Eoin
“would nationalisation have actually solved anything?”
Eh, you may forget that I argued that nationalisation would put us in exactly the position we now appear to be in – liable for all the debts of the banks. The current position is worse in that we do not stand to benefit from any of the advantages of full ownership.

Your response to grumpy:
“you somewhat assume that we’ll have an independent indigenous banking sector going forward.”
is coming closer to my position as it has been since October 2008 – liquidate the banks. Take what losses are required, impose some and pony up for some, and move on.

@Hugh Sheehy

Re you list: If it is meant to have a preferentail order you will need to revisit it.
In my humble opinion depositors are not at all as elevated as you think. Even the €100,000 would only come courtesy of a willing and capable State consequent to bankrupt banks.

What to do.

1. The first and most immediate issue should be to place depositors above all other parties including ECB/ICB. It should have been done three years ago, around the time Bertie was doing his lap of honour.

The ECB can hardly object to it. If the ECB did object it would make for the biggest bank run the world has even seen.

2. Ignore the ratings agencies. They only give us a exam result that we know we deserve.

3. Live within the means of teh citizens of the country.

It is simple when you think about it.

@ Paul quigley

“One of the ways that dominant groups operate, is that they continually alter the rules of the game. As he puts it, they ‘maintain their position by continually changing their stance’.”

Wall St is going to be underwater by the end of the century.

“the most compelling reason for reforming our system is that the system is in no one’s interest. It is a suicide machine.”

— Ronald Wright (A Short History of Progress)

@ Paul Quigley

A very useful reply and in conjunction with Eoin Bond’s “and while some senior debt holders were undoubtedly lucky, others bought in on the original collapse on the basis that no advanced economy would ever let their banking sector go bust.”, gave food for thought on my morning stroll in from sunny Phibsboro.

Briefly.

(1) It may be that winners and losers are being created on quite large scales, who think that their winning and losing is a result of their own actions (confirmation bias), but are actually largely the accidental by-products of other groups winning and losing on higher scales.

(2) It might be worth articulating what a ‘winning’ scenario is for Ireland, the citizens of the Euro-zone, and the wider world. I don’t hear to much ‘vision’ in our current direction of travel. If all the world is a game then we need to know what a good result is.

(3) In return for your Pierre Bourdieu, may I offer you my favourite French thinker, the medievalist Georges Duby. He has a particularly fine short work on the life of William Marshall, who is known in these parts as the man who married Isabel, daughter of Strongbow and Aoife. He is particularly good on the social roots of Romance and Chivalry, in a way that seems similar to the thinking of Bourdieu.

@Joseph Ryan
I suppose the list is in roughly my perceived order of “seniority”, but it’s not necessary to have it that way.

My only intention was to make a list and solicit recommendations per specific type of creditor. We seem to have many many long discussions but with a fairly low ratio of specificity per word.