Going, going, still here?

Rte reports that private investors will put €1.123 billion into Bank of Ireland in exchange for a large(ish) stake in the company, given the size of their investments. The Department of Finance press release is here. Is this a good deal for the taxpayer? Non-Nazi related comments most welcome.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

114 replies on “Going, going, still here?”

I think we need further information before judging whether or not this is a good deal for the “Irish taxpayer” eg final profit from bond buybacks, take-up of rights issue this week.

But what you can say is that just because BoI is to receive a maximum of €1.1bn of new external (international) investment is not sufficient to form a judgment.

If I have a company that is worth €1,000 and my regulator has told me I must raise another €250 to keep my licence, then if some external (international) investor offers me €250 for 50% of the company, is that a good deal?

@ Jagdip

well, they’re paying 1.1bn for a potentially maximum 37% stake. So its valuing the business at 3bn or so, and this is a business which will be paying around 300mn a year to the government via preference shares and contingent capital coupons. It doesn’t seem a bizarrely advantageous deal for the investors, does it? Probably on the cheap side from a long term perspective, but someone coming in with capital at this stage of the cycle, with a lot of uncertainty still around, generally expects to at least get it on the ‘bid’ side of the price. It’s a leveraged option on an Irish recovery – in normal times the bank could probably generate 1bn a year and be worth 10bn, so thats probably their 2016 or so price target.

@Eoin:
And exactly how much equity has the government put in, in exchange for it’s now soon to be 60% stake?

And the nation didn’t even get back its old Parliament building. How fitting.

This is nothing short of a complete and utter, unconscionable, and outrageous disgrace. Having pumped billions into Bank of Ireland, the state now sells it for a song, forgoing all the future profits and windfalls that Minister after Minister assured us we would recoup for all our troubles closing hospitals to cover the banks gambling debts.

Bank of Ireland–the so called pillar bank–and all the rest should remain as part of the Irish State for the next three generations, and every cent of profit they generate should go to the State as revenue. Since every cent of their losses fell on the state, there is no other logical alternative. I do not accept that outdated, Cold War economic ideologies should dictate modern Irish Government policy in this matter. And I certainly do not accept that the ECB, having forced Ireland to pay for these banks, should now force her to sell off the very same at a substantial loss.

With this sale, the entirety of the Irish Banking crisis becomes nothing more than an grandly orchestrated highway robbery of the Irish taxpayers. Forced under duress to empty their pockets, collect together their belonging, and then hand everything over everything including the family jewels, their only payment being the continued existence of the highwaymen and their way of life.

I am incensed!!

This is wrong. It may the historically taken road in banking crises–privatized profits and socialized losses–but like feudalism, genocide, and World Wars, that does not make it the right road.

@Eoin

Having studied the stress test results, the 2010 annual report, the results of the sub buybacks and present market cap today and the information provided in the Minister’s statement I can, with some certainty, say that I still can’t assess if this is a steal, a reasonable transaction given the present environment or Wilbur having another rare overpaying moment.

I suppose if / when we get back to where ever is considered economically normal these days these bozos will provide more credit to build more houses.
The credit supply will rise again , we will feel happy and carefree until we realise these investments are net energy negative.
We bail out the “risk takers” and we are back to the beginning again.

In most normal societies a depression is not repeated until the guys who remember the last depression are all dead but Ireland is far from normal in so many ways.
If theres cheap oil about we will burn the fecking thing on something completly useless – we know nothing else as we are modern day spud monoculture experts.
I can see more white picket fences enclosing mini south forks……… sweet Jesus.

EB,
if funding costs & bad debt charges normalise the bank might be capable of one day earning about 800m after tax (1 pct return on assets). At a p/e of 10 that gives you a back of the fag packet value of 8bn. That is divided by 31bn shares , I gather or 30 cent in round numbers. Now how far out is normal and what discount rate do you use to PV the 30c value.
I think these guys are buying in on the basis that come normality some else will buy BOI in due course. Effectively the state is laying off some of it’s banking bet. As to whether or not this is a good idea-that for someone else to judge. We are still long of other assets.

@Jagdip/ @Bond. Eoin Bond.

I agree that we do not have adequate information to work all this out. But in these cases you try to start with the known facts without complications.
That is the BOI annual 2010 report published in April 2011.

On my estimation this deal is a 60% approx haircut on the State’s book value of BOI. The State is now about to crystalise this loss by selling to private interest at a knockdown price. As I have posted some detail working on the previous thread, it would be unfair to bore you with the detail again.

And it is the book value that is important to the State. It is after all the value of the funds so recently put into the banks by the State. The current market value of shares is irrevelant in this regard.

If my figures are even close to correct, and I would welcome a detail correction, then what are the implications for the next (this week’s) recapitalization of €19 billion of all banks. Are we already set to lose 60% of this too. In other words sell the banks or State shareholding in them for 40% of book value in a year’s time.
Well, Ireland has really lost the plot both literally and metaphorically.
It looks like Ireland is incapable of learning anything.

No one would have believed, in the last years of the
20th century, that Irish affairs were being watched from the timeless void
of finance.

No one could have dreamed we were being scrutinized, as someone with a microscope
studies creatures that swarm and multiply in a drop of water. Few men even considered
the possibility of powerful non state actors on other countries and yet, across the gulf of the sea, minds
immeasurably superior to ours regarded this country with envious eyes, and slowly and
surely, they drew their plans against us.
http://www.youtube.com/watch?v=W8JLqsbK5V0

Some of the valuation is option value. There is an enormous amount of uncertainty and that element of equity valuations is flattered as uncertainty increases. Bonds should sort of work the other way around – when the market isn’t rigged.

If you think you are confident you know the answer to this one, just remember that Buffet’s dabble in Irish banks was very badly judged.

I suspect this is a bit of a punt to spice up portfolios more than deviously calculated carpet-bagging.

Is it not Honohans plan & ECB doctrine to have banks operating that are completly divorced from the sovergin ?
Thats why we had Bank of Scotland for example competing to provide credit which if you think about is the most absurd concept imaginable.

What can one say.
Its best to retreat from civilisation now as it has become addicted to a powerful opiate – its a very dangerous animal now.

@Grumpy

If you think you are confident you know the answer to this one..

Think of all the work, the money, the consultants, the fees that went into working out the haircut on bank loans. Was it all unnecessay and irrelevant?
Would it not be reasonable for the government to give us a detailed working of the haircut on the State’s BOI investment? It is not reasonable to assume that they should know what it is?
And given that the purpose of investments into the banks was to keep them alive and nurse them back to health, why when one them appears close to getting out of its sick bed should it be sold off at a haircut.

To my mind this is akin to selling the farm to keep the flat broke owner in drink for a year or two.
It is a more supine decision than that of the bank guarantee. At least that decision was made with no information or false information and in extremis.
There is no such excuse now.

Really really off-topic – but real classic bear-turd-found-in-arboretum stuff, and a must read for John McH now he has returned from the international space station.

http://ftalphaville.ft.com/blog/2011/07/25/633496/what-the-united-states-could-learn-from-chile/

Every one will be shocked, shocked! by just this one paragraph:

“Republican OMBs overestimate inflation while Democratic OMBs overestimate unemployment. Italy is the most optimistic forecaster in the eurozone — though the corresponding paper was written without knowledge of Greek statistical practices. The UK, Finland and Sweden on average exhibit pessimistic bias. The UK and Sweden, of course, were not trying to get into the euro.)”

“Unsurprisingly, optimism bias is more pronounced during boom times. But Frankel also found that it is present during busts, too. ”Evidently official forecasters… over-estimate the permanence of the booms and the transitoriness of the busts.”

“We’d also add that bureaucracies aren’t free of ideologies or perverse incentives. A desire to please a boss or a bout of analytical groupthink may also lead to optimism bias. In this, it helps to have strong think tanks such as the UK’s Institute for Fiscal Studies for challenge and accountability functions.”

Its almost as if being cynical, isn’t.

@joseph R

The spreadsheet I would think should be published is the one that the March publication was based on – or at least a limited version of it.

It would be interesting to know how much information withheld from the public, has been given to the bidders. Have they been assisted to choose their own assumptions rather than use those published?

The flip side of the option valuation is that the uncertainty comes off the government bond yield – so theoretically, even a cheap sale, should boost gilt prices. Look at today’s cds moves early on to illustrate. They can therefore argue there is a gain somewhere else.

One of the US buyers is apparently Wilbur Ross, the same man who tried to buy EBS early this year for €600 million and who was refused by Minister Noonan. Presumably, his €1123 million offer for the significantly larger and more important BoI was more tempting to the Minister. Maybe they just wanted more cash?

The only possible consolation to this is that Mr. Ross may decide to sack the entire cadre of genius who ran BoI into the ground. I rather doubt it though. If his offer was anything like his EBS one, Mr. Ross will probably just plans to take BoIs remaining deposits and leg it.

@ Joseph
“And given that the purpose of investments into the banks was to keep them alive and nurse them back to health, why when one them appears close to getting out of its sick bed should it be sold off at a haircut.”

I seem to remember that line from the late Brian…we needed banks to provide credit in the economy. The “pillar” strategy was supposed to do the same. So we pump countless billions into them and then sell out a very large (controlling?) stake in BOI for 1.1billion euro. We have 70 billion into the banking system and in return we have 2 dead banks, 1 pillar which the State will own outright and I pillar which we seem to be gifting to the best known vulture investor in the US. He puts in an initial 241million and may put in more. Then again he may not if things take a turn for the worse.
In addition we have ILP about to be taken into State ownership by force.

So for 241 million euro we give away the one bank that had a chance of redeeming itself, some banking strategy.
Despair……

@ObsessiveMathsFreak

Wilbur is involved in 3 US banks…they all are fairly small. His specialty is DIP financing (debtor in possession). This is how he got the mortgage servicing business..he put in 50 million dollars of DIP and eventually got control. Then he moved all the servicing to India.
He has a lot of ties to India and is on the board of Mittal. I presume this stems from his involvement in the steel industry bankruptcy.

It could be vely interesting.

Looks like a repeat of his strategy in the year 2000. Get the Government to spend the money to clean the bank up and then give it to Wilbur so he can make a profit.

“Mr. Ross’s fund, the Asia Recovery Fund, will pay 35 billion yen, or about $331 million at current exchange rates, for Tokyo Sowa, the second Japanese bank it has bought. Last month, the government sold the failed Kofuku Bank, which operates mainly in Osaka, to the fund.

Tokyo Sowa is the third bank the government has sold to foreigners and the sixth nationalized bank it has returned to the private sector since it began overhauling the country’s shaky financial system two years ago. By the time it hands Tokyo Sowa over to Mr. Ross, the government will have spent 70 billion yen, or about $673 million, cleaning it up.”

This is an abysmal deal for the taxpayer. A deal being done in desperation so that all six financial institutions do not end up in state control. We have shoveled 54 billion into these banks and stand to shovel another 19bn of bailout money into the twin styrofoam pillars of the Irish banking system this week, which is another major gaff by the government. They will take an immediate loss of more than 10bn on this 19bn. As if that is not bad enough and stupid enough, Elderfield is now telling us we need to get rid of the cap on bankers salaries. Presumably so we can recruit people of the calibre we were getting before the crisis started, is he serious? He pines for the days when we were giving them 2 and 3 million a year and the banking system was powering ahead. What is the governor of the central bank earning? Talk about paying peanuts and getting monkeys? I can see where Mr. Elderfield is coming from but do not agree with any cap being lifted? This is a gross insult to the Irish people who are paying his salary.

There is no need for bank credit when there is no excess energy – they only blow bubbles and yet we spend tens of billions of energy credits to insure a fiction can continue !!!
The Fiction must be more powerfull then the fact.
To be honest I think the absurdity is refreshingly brilliant.
We should have more & bigger crisis.
More pay for bankers – give them everything now so that they live under the misty mountains with the fishes.
http://www.youtube.com/watch?v=-qTA6ndc51w

@ OMF

The return of the old parliament building would have been a big plus for the city.

As for the deal, there must be some additional value in having an investment from international investors even if it’s to provide some more trust in depositing funds at the bank.

It looks like Wilbur is not the only one invited to the party….

“The bank said it had been informed that each of the investors would manage their own shareholding independently.

The investors will initially purchase €241 million of the State’s shareholding and up to €882 million more after regulatory approval has been obtained.

The investors will purchase a total of 4.2 billion ordinary shares.+..IT

@MH
“As for the deal, there must be some additional value in having an investment from international investors even if it’s to provide some more trust in depositing funds at the bank.”

They are still depending on the kindness of strangers….ECB/JCT

Points 8 & 9 from the European Agreement

“Stabilization tools:

“8. To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to increase their flexibility linked to appropriate conditionality, allowing them to:

– act on the basis of a precautionary programme;

– finance recapitalisation of financial institutions through loans to governments including in non programme countries ;

– intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion. We will initiate the necessary procedures for the implementation of these decisions as soon as possible.

“9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising to euro area Member States from their guarantees to the EFSF.”

Would anyone care to parse the above a bit?

Wolfgang Munchau in yesterdays ‘Irish Times’ notes:

“Like the International Monetary Fund, it [EFSF] will have a flexible credit line. It will be able to purchase bonds on secondary markets, and it will be able to recapitalise banks. It can do all of these for any euro zone country, even those that are not part of an ordinary EFSF programme.”

I get that point 8 is potentially dangerous for the member states, as the EFSF can recapitalise a bank in that state at will (“a precautionary programme”), via forcing the government to take a loan to do same. Government says, ‘let Anglo go bust’, EFSF, says, ‘not so fast matey.’

Point 9, seems to want to cover that risk, but “where appropriate” is opaque to me (who decides), and the collateral – going from the bank to the state in return for support presumably(?), may not be all it’s cracked up to be. Also, and I’m flailing a bit, does this have any impact on the State’s ability to take shares in a bank, with the money loaned to it by the EFSF?

The relevance to this thread may be that the new system means that banks get saved by a formula with the taxpayer picking up the tab, so, for example BofI, is now doomed to live forever, so it is worth looking at investing.

“financial institutions” – is there a list of these anywhere?

@ grumpy

Great paper

@ ObsessiveMathsFreak

Agree: money put in by state to save banking system must come back to the state.

I love that people both think that the banks are worthless zombies and should be allowed to fail, and that the banks are valuable long-term assets that the government is selling cheaply like family silver.

In the long run (we’re all dead) there has to be a place for a non-state run bank in Ireland. That’s Wilbur’s bet. How he gets there will be messy

@Jagdip

If I have a company that is worth €1,000 and my regulator has told me I must raise another €250 to keep my licence, then if some external (international) investor offers me €250 for 50% of the company, is that a good deal?

I think it depends on what sort of lipstick is applied to the pig. L’Oréal because the pig is worth it. Isn’t BoI just the financial version of a ghost estate in Manorhamilton ? Without funding and credit what is it worth ?

I came across this article today , from May 2010, like an age away

http://www.ft.com/intl/cms/s/2/67ae51e2-5e35-11df-8153-00144feab49a.html#axzz1T6VZwM00

While no one is enamoured of Nama, it has, says Lenihan, “let us go in and make a real evaluation of where the real holes are”. The hope is that by taking out the biggest losses from the banks and recapitalising them, they can resume lending and Ireland’s cost of borrowing will eventually go down

Back then Ireland still had some measure of confidence attaching. Now the confidence has disappeared. The bonds are out of all the major indices. How to put humpty dumpty back together again ?
Can anyone map out a path back to sustainability for the banks?

@Robert Browne

You say

‘Elderfield is now telling us we need to get rid of the cap on bankers salaries. Presumably so we can recruit people of the calibre we were getting before the crisis started, is he serious? He pines for the days when we were giving them 2 and 3 million a year and the banking system was powering ahead. What is the governor of the central bank earning? Talk about paying peanuts and getting monkeys? I can see where Mr. Elderfield is coming from but do not agree with any cap being lifted? This is a gross insult to the Irish people who are paying his salary.’

I say:

I’ve have been saying this for some considerable time that this guy is an idiot – I have less than zero confidience in him and Honohan doing the job they are doing.

Can someone please explain this thought process to me in a rationale fashion because I can’t compute:

‘We need to pay these guys more money to run significantly smaller banks which I as Regulator have ensured will happen through the PCAR deleveraging program.’

These institutions are State owned or in the case of BOI likely Semi State businesses. The dogs in the street are telling us that executive salaries in semi state organisations are already light years ahead of comparable European organisations and now Elderfield believes it proper to look to pay more than half a million euro p.a. to run such business which because of his Basel III rules agenda automatically ensures normal bank lending will not return for a minimum of 10 years. Exactly what will they talk about at Board meetings?

I’ve no doubt where this is coming from is through his London connections – ‘Yes I’ll do the job in Dublin but not for a cent less than €1.5m’ is the clamor from his safe London selections – I’ve no doubt this is the trust of what’s happening here.

Please Matt just go home and party with them in Canary Wharf.

@Gavin

‘let Anglo go bust’, EFSF, says, ‘not so fast matey.’

+1
Thats the deal as I read it. But what the hell, I am neither financier or economist. I just try to read what is written. Sometimes even that is impossible.

@Grumpy.
Cannot agree that a rise in the valuation of other gilts should be brought into the picture of whether BOI valuation is a good deal, (If I understand you correctly). The deal itself should be evaluated on its own merits.

@ceteris

So for 241 million euro we give away the one bank that had a chance of redeeming itself, some banking strategy.
Despair……

+1000

@ALL

I really am surprised that the mainstream media has not asked some questions about this issue. It does not reflect well on the robustness of the financial or indeed general media. Questions like:
1. What is loss on the existing State investment at this sale price?
2. What are the implications of that loss for the next €19 billion going in to the banks.
3. Why only €241 upfront? After all the State’s preference dividend from BOI is worth €350? million each year. So foregoing this for one year only gives more that the initial sales price?
4. When these investors flip the bank, then sell the deposit book, how much of these deposits will be lost to the country?
5. Why pay consultants (Goldman Sachs, I think) millions to set up a deal that gives a sizeable slice of the bank away for peanuts.?
6. The biggest amadain in the country could give the bank away for peanuts. How do you describe the individuals that are willing to pay a fee of millions to give it away?

Patrcik McGill, given his lifetime’s experience, would not be least bit surprised at this deal. He possibly would only be surprised that the government didn’t throw in a few hundred Donegal spalpeens to sweeten the deal further.

@Edward
Banks are symbolic institutions , symbolic utilties.
They have no real physical value.
Their value if they have some lies in their ability to direct credit to people with ideas & no money and thus create new wealth.
They have been found wanting over the decades as more money has gone in then has been created out.
Its best now goverment just creates cash in my opinion but unfortunetly it must pay interest to more senior banks rather then have any sovergin rights.
Such is life – its best to watch this financial spectacle from a distance if one can , the blood & guts in this arena of the absurd is much too graphic for most.

@Seafoid.

Can anyone map out a path back to sustainability for the banks?

Yes. While a cow is still producing milk, milk the cow and sell the milk. Do not sell the milch cow.
And if the cow is dying or dead, shoot the cow. And tell the vet to move on quickly.

@ Grumpy
from the FT article you tagged
“Frankel uses a 33-country data set to measure the extent of optimism bias in budget forecasts”
This Frankel guy would have a field day if he looked at Ireland’s (Dept of Finance) budgeting over the last 4 years.

I want to also raise a related issue that I think was aimed at the type of people who contribute posts from this blog, namely the Labour leaders call for “People to put on the Green jersey”
Now it seems what he is actually suggesting is that Irish economic commentators should gag themselves with a green scarf.

I find this call from the leader of the Labour Party to be most depressing and out of place.
He obviously has a lot of faith in the confidence fairy.
Actually the lack of a response on this site is a good thing in my opinion and shows how highly people thought of his suggestion.
I always get the impression that although Gilmore is a clever political operator, when it comes to economic or even basic mathematics he is forced to focus on empty rhetorical commentary that could come from either left or right of the political divide simply because he doesn’t really get it.
Someone should advise him, that on matters of economics, the less said the better.

@Eamonn
Andrew maxwell exposed this chancer 2 years ago using simple direct language that the fourth estate will not ask.
Why are people surprised ?
Go to 5.25
http://www.youtube.com/watch?v=Br7LNKInYGw
The politicians have always been junior to the banks during the sov republic days.
I think the euro system is doing us all a favour by exposing the true servile nature of this relationship.
Besides the Labour Fabian thingy is so well incestuous.

When one takes into account how politics works in Ireland would it be desirable to have a major bank owned by an Irish Gov’t. Nepotism, cronyism, favouritism and worse are never far below the surface. There is considerable risk (mostly political) involved in Irish banking unless one assumes that the Irish Gov’t will forever and a day prop up its investment in BOI.

On balance the literature points to a long and painful recovery from the type of economic collapse that Ireland has experienced. Just look at the USA, Greece and Portugal with Japan as the poster child of the effects of Financial failure on a country over more than twenty years. Ireland is not a country with a savings rate that matches Asia which means we are reliant on inflows of foreign investment. We are not Argentina, we are a European country that was never rich in natural resources with an outflow of people the country could not support for the past two or three hundred years.

@Joseph r

“Cannot agree that a rise in the valuation of other gilts should be brought into the picture of whether BOI valuation is a good deal, (If I understand you correctly). The deal itself should be evaluated on its own merits.”

Yes, it probably should be – unless you think Wilbur would be putting in a few billion next year if the banks solvency comes into question in the way it has previously. How much risk has the government really laid off?

As someone said above, maybe there will be some management differences, beyond outsourcing the telesales office to India.

@Eamonn Moran

I want to also raise a related issue that I think was aimed at the type of people who contribute posts from this blog, namely the Labour leaders call for “People to put on the Green jersey” Now it seems what he is actually suggesting is that Irish economic commentators should gag themselves with a green scarf.

I find this call from the leader of the Labour Party to be most depressing and out of place. He obviously has a lot of faith in the confidence fairy. Actually the lack of a response on this site is a good thing in my opinion and shows how highly people thought of his suggestion.

JTO again:

Anyone involved in business will agree that condidence is a vital component of economic growth. As Warren Buffet said: “Confidence is the key”. The fact that 95% on here ridicule that idea is because hardly any of them run a business or know anything about running a business. They are mostly taxpayer-paid academics or lifelong students, and disproportionately drawn from the politcial cranks of both right and left, who actually want the economy to do badly if it will advance their various political agendas. I’d say that the reason why so few successful business people post on here is because they are far too busy and don’t spend all day in the staff common room or the student union, which, frankly, is where a lot of posters on this site seem to originate from. So, on this issue, Gilmore is spot-on. Well done, Eamonn. Having said that, Gilmore is a ghastly hypocritical creep, who having originated his political career in the 1970s in the marxist sewer that was Official SF, a support organisation back then for a grubby, bank-robbing, kidnapping, drug-running, with occasional bomb-tossing and assassination thrown in on special occasions, has now self-elevated himself to the position ‘Mr Clean’ and runs around lecturing Church leaders about ethics.

The investor is getting a good deal if equity is protected from taking losses for the next 5-10 years. Since the Irish state is both the seller and the one who apparently decides who will pay for losses then this deal is a bit out of the ordinary.

Has promises been made as to who will carry future losses?

Off Topic:

I just saw that bowen construction went into liquidation. This follows on from the Superquinn receivership and many other insolvencies.

One major concern many people have is that banks/lender are funding companies which are trading with suppliers and subcontractors on normal credit and payment terms. The banks know the difficukties and are keeping them afloat.

When the bank decides to pull the plug when it suits the bank, there is a big bang effect for all these third parties. The small suppliers etc, who have not been privy to the borrower’s financial information, get burnt with the receivers/banks getting the value of their goods/services. This puts suppliers businesses at risk and many fail because of the loss. This is very destructive within the economy.

We cannot expect all such suppliers, contractors and subcontractors to negotiate bespoke contracts to cater for the new economic reality. Surely it is in the state’s interest to say that, in default of agreement to the contrary, lenders must provide funds to borrowers to honour such normal trading arrangements where the lender has decided to keep the borrower on life support and the lended is ultimately getting the value of the suppliers’ goods and services.

It would be interesting if anybody had a view on the economic damage this causes for small businesses operating on normal terms. Otherwise everything will go to COD cutting out many valuable short term credit arrangements that are currently lubricating the economy.

@ Jesper

there is no “risk sharing” included in this deal (apparently that was the sticking point right up until the end), so any future losses will be shared with all shareholders.

@JTO

I think what a lot of people on the site ridicule is when people try to put the cart before the horse when it comes to confidence.

Here is how I think confidence is best achieved. Sustainable results.

Get our act together, create viable Irish businesses that have the ability to compete internationally to help out the 90% of exports coming from MNC’s.
That’s what our political leaders should be focused on.

I don’t think you would find many business people who disagree.

What some of our political leaders, including it now seems (bizarrely) people from the left seem to think is that confidence is achieved via a simple change of attitude that can be achieved through some sort of mind manipulation.
I am not including you in this group as you usually try to use numbers to back up your optimistic claims.

It has surely got to the stage where talking and asking people to be more confident is actually counter productive.

When political leaders tell people to be more confident for 3 years in a row during a period of unprecedented economic decline surely it has the sort of impact, on those who actually listen, as you might find among the inhabitants of Orwells 1984.

Zhou are you suggesting companies in Ireland have been trading whilst the directors were aware they were inslovent?

@Eoin,

risk-sharing?

Normally equity is hit before suppliers are hit. Now it seems that profitability is based on debt buybacks bypassing the normal order.

The state write laws regarding defaulters (including mortgages), the state controls a large part of the property-market through NAMA and the state gives access to cheap ECB funding through a guarantee.

The state can either allow capitalism to work and then equity is likely to be wiped out or it can intervene thus benefitting equity-owners. Maybe no assurances regarding future action to be taken by the state were given, it would seem that if there were no assurances then this deal is high risk and the reward might not appear to match.

@grumpy

Reckless trading generally involves trading if you contract a debt which you know you won’t be able to pay when it falls due or if you know your actions will lead to losses on the part of your creditors. It is questionable if this occurs if you still have bank support to trade. Up until that point you can pay your debts as they fall due.

You may also be under duress from your bank to continue trading or your bank may be acting as a shadow director. (Interestingly, the NAMA Act exempts NAMA from being deemed to be a shadow director, presumably so NAMA can act as a shadow director without having to bear the consequences.)

Zhou, do you have any idea how many directors get pursued in any way or banned for this in Irl?

@ Eamon Moran and Grumpy

This from “The Irish Economy in Perspective June 2011 Department of Finance”

P. 33 (where there is also a nice chart)

“Following a contraction of 1% in 2010, there is now a broad consensus that the Irish economy will return to annual growth this year. While near-term prospects remain subdued on the whole – reflecting significant headwinds on the domestic front – a strong export performance is expected to translate into GDP growth of around ¾% in 2011 and 2½% in 2012 (see Chart above).

Turning to the medium term, the Irish economy is forecast to grow on average by 3% per annum over the period 2013-15.”

So 0.75%, 2.5%, 3%.

Applying yer man’s average ‘optimistic tendency’ of +0.2, +0.8, +1.5 (years 1, 2 & 3).

We get a prediction of 0.55%, 1.7% and 1.5%

Can’t wait – must come back and check.

http://www.finance.gov.ie/documents/publications/economicstatsetc/irisheconomyjune2011.pdf

I’d say the ODCE keep stats on it as they are the people responsible. There are a good few reported cases. This is probably because liquidators have to report any transgresssions to the ODCE.

However, recourse to the courts against directors on foot of reckless trading is no use to skint suppliers. The proofs are too difficult, the legal costs are too high, there is too much else at stake for the directors for them not to fight it, the directors may have no money and somebody else (receiver) has the benefit of the supplier’s product.

It’s well to remember that the State-owned Bank with No Name has still over 1,000 employed – – a large number for an Irish enterprise.

Once you get inside the circle, different rules apply and vested interests may dismiss me as bitter etc – – but why wouldn’t they when all they know from the time they started school is the protective embrace of the public sector?

There was once a strange event in Irish history when a Fianna Fáil minister called publicly for his department to be abolished – – it was indeed a rare event in the Irish political system where the modern Age of the Spoilsmen has eclipsed the notion of public service first and self-interest second.

At the Fianna Fáil Ard-Fheis in 1970, the Minister for Lands Seán Flanagan (1922 – 1993), who was captain of the Mayo All-Ireland football winning teams in 1950 and 1951 and was honoured in 2000 by the GAA as a member of their Gaelic Football Team of the Millennium, was accorded a standing ovation when he proposed that his own department should be abolished. In recent times, two Fianna Fáil ministers joined a legion of vested interests in opposition to the Bord Snip/McCarthy report proposals on reducing public spending.

As for reckless trading, unless it’s very blatant it’s difficult to prove.

As JTO suggests, most people who appear on chat panels or have a grip of the public megaphone do not have a notion as to what it’s like running a business and in particular one struggling to meet its monthly payroll.

I’m an entrepreneur myself having left the security of a multinational company but in my early career I did have the experience of the fear gripping decent people worried about their jobs in a company awaiting a cash injection.

Entrepreneurs are necessarily optimistic people and someone who has spent 20 years or whatever of their life building a business will always hope there is some way out.

There goes the other one…

*JUDGE DIRECTS IRELAND TO RECAP IRISH LIFE
*JUDGE ALLOWS IRELAND TO INJECT EU2.7 BILLION INTO IRISH LIFE

@Edward

“I love that people both think that the banks are worthless zombies and should be allowed to fail, and that the banks are valuable long-term assets that the government is selling cheaply like family silver.”

Having been kept alive in intensive care by the State/taxpayer and now likely to be able to breath without constant infusions of cash the State gives away a controlling stake for what appears to be a pittance.

The time to let them fail was long ago…things have moved on. Perhaps you don’t see the significance of the timing of this proposed investment.
A rights issue that was failing….then an announcement on Sunday night that international investors were prepared to put in money….stampede the existing guys to take some more up having been burned a year ago,,,and lo and behold Richie is to remain in charge according to the Indo.
As Grumpy says about the Italian banks something not quite right.

Lets see what the share sale reveals today.

As JTO suggests, most people who appear on chat panels or have a grip of the public megaphone do not have a notion as to what it’s like running a business and in particular one struggling to meet its monthly payroll.

I’m an entrepreneur myself having left the security of a multinational company but in my early career I did have the experience of the fear gripping decent people worried about their jobs in a company awaiting a cash injection.

Entrepreneurs are necessarily optimistic people and someone who has spent 20 years or whatever of their life building a business will always hope there is some way out.

What has this got to do with anything? Do you entrepreneurs have some preternatural insight into this deal enabling you to divine some positive outcome from it? Why is it a good thing that the very state which is propping up these banks, and which is going slowly bankrupt, should sell its investments in BoI at a substantial loss? Why? I don’t understand how this can be seen as a good thing.

Your point about the fate of Anglo Irish Bank in state hands is well taken though. I do understand that turning an entire bank into yet another overpaid government department is not a desirable option. However, this misses the key point that all the Irish banks ARE overpaid governments. All their undeserved bonuses, unmerited perks, and overpriced salaries are funded by the taxpayer, by closing hospitals and reducing social welfare on the unemployed to increases welfare like this for the very well employed.

If you are a businessman, then you should surely see that the State should not sell its investment at a loss? What is the benefit? Why would having a bank in private hands instil confidence in depositors? They were in private hands before–indeed, the very same private hand that they will be put back into! The state loses control, money, collateral; and for what? What? Why is this deal good for the state, the country, or the people? Why? Where is the sense in this sale?

Also, why is this man still in his job? If I made a national bank insolvent in the space of two years, I’d expect to be fired. Maybe I’m just expecting too much from the financial sector. Perhaps logic and prudence are only for the rest of us?

@ CP

on what basis can it be appealed though? CIFS legislation is pretty all-powerful in nature, and there’s only so much money they can waste on this unless they reckon they actually have a chance at winning.

@ Bond. Eoin Bond

Off the top… I think a reasonable good ground would be equal treatment.
BOI were given time to avoid State ownership.. as the investors in ILP have stated they can raise private equity quickly.. then it would appear that the shareholders in ILP are suffering discrimination.

@Cp & Eoin Bond

I thought the state was going to put 4Billion into IL&P. Are the existing shareholders going to get credit for the 1.3B from the sale of Irish Life and remain holding about 25% of the shares? This is what they wanted in correspondence I have seen.

I loved the part in the end when Lorenzo threatened famine and pestilence on Euro rejectionists – Liesman could not believe what he was hearing and had a dark laugh about it all.
Me thinks these guys are incubuses of Nations.
Bravo I like this mans refreshing honesty – we should get more of this rather then stale pronouncements such as sticking to the plan and such.

@ Brian M

*IRISH LIFE TO RAISE EU1.1 BLN FROM ASSET SALES, SUB-DEBT.

That fills the balance. Existing shareholders aren’t getting credit for this, and why should they? Why would the government pay 2.7bn for a 75% stake in a company with a current market cap of 20mn?

@Eoin Bond

IL&P shareholders may have other options to raise capital so I expect this to go the courts. Government really want to close IL&P, probably agreed with Troika, and sell off or give remains to pillar banks?

@Brian Mercer
It appears that the BOI deal was structured in such a way as to avoid State ownership and it is not unreasonable for the ILP shareholders to attempt to structure a deal where the sale of their most valuable asset (coupled with new investment) would result in the shareholders retaining a meaningful stake in the company.
I see MN saying he is prepared to talk…so maybe something can still be worked out. The bigger problem seems to be the ECB?/ICB liquidity support scheme.

@Stephen

MY OPINION (In answer to your question)

Yes for three reasons:

1)Less exchequer money has to be forked out as a result of the stress test.
2)This sets a value (3BN ?) on BOI which obviously sets a value on the remaining NRPF/DoF shares.
3)Because of the legislation passed before the last Government dissapeared I understand the Minister has extra powers until May 2012 so effectively policy decisions in the banks have to reflect the national interest.

NOW AN OBSERVATION

@All
Regarding the Old Parliament building: As I understand it the exchequer (via NRPF and DoF) still holds 32% of BoI shares so the possibility of an “asset for equity” swop is conceivable whereby a smaller BoI “sells” the Old Parliament for 7% shares to the NRPF and leases most of it back from the NRPF. The NRPF can also lease some of the building to DublinCity/Bord Failte which would boost torism and national pride.

NOW AN EONOMIC QUESTION FROM ME
@Stephen

I know the (Irish) stress test calculated a figure of 24BN. I also know AIB applied some “haircuts” thus reducing the amount of “stress money” it needs to 13BN, I also know ILP is selling its life division which leaves it with a requirement of approximately 3.7BN. This recent BoI deal refers to 1.23BN euro cash and if (I understand correctly ) appoximately 4BN in preference shares.
SO MY QUESTION: What is the amount remaining from the 24BN “stress money” does thethe tax payer have to be “pony up”?

It looks to me ,if I am reading this right, that the exchequer may now be providing 17BN “stress money” which would then mean that the (Bailout- Stitchup) is down to something like 40BN instead of 67.5BN when we factor in 18BN less than what was originally estimated for the banks, interest which we do not have to pay on that 18BN plus a lower interest rate on the remaining 50BN (67.5bn -18Bn) which must mean something like 40BN Euro. In other words we only pay interest on what we ACTUALLY borrow not on what we DONT borrow.

Many thanks:)

@Stephen
Re my last post.

Apologies my question should read as follows :

SO MY QUESTION: What amount remaining from the 24BN “stess money”does the exchequer now actually have to “pony up”?.

@ Livonian

just under 18bn i believe, dependent on what the take up is in the BOI rights issue. But, oh, don’t just take my word for it…

http://finance.gov.ie/viewdoc.asp?DocID=6943

“At an overall banking system level, by reducing the State’s funding of the PCAR €24 billion capital requirement to below €18 billion, the State will be able, for all practical purposes, to finance the PCAR requirement without recourse to external borrowing from the EU/IMF Funding Programme.”

@ Michael Hennigan

Many thanks for the CNBC link to LBS. What a smooth operator! He was especially good on the issue of the simplistic view in the US that Europe has troubles while the US does not and also on the issue of any member state “leaving or being ejected from” the euro.

@Bond

Thank you! Still an awful amount of money but I would also take some comfort from the fact that the amount is going down in Ireland while the rest of Europe is expressing scepticism about the recent EBA stress tests.

@Ceteris @Bond re Irish Life recap

I agree those shareholders may have some grounds to seek “equal treatment” but as I understand it (from the media report of the EGM) the large ILP shareholdrs were seeking an extension to 31st of December 2011 to raise funds which is much longer than BoI got.

Maybe they should be given until 30 september in order to avoid legal hassle. Somehow I think it would be very hard for them to raise it but you never know.The widespreas scepticism about the EBA stress tests may make Irish banks look more attractive.

@Cetris et whoever else got involved in the Mr Elderfield discussion

I doubt “that this guy is an idiot” (although his “moral hazard” comment last year did surprise me) but I also think Mr Elderfield is restricted in his experience to Canary Wharf, Bermuda and a pre-Lehman Brothers USA.So if he is speaking (I have not read it any where) about removing the cap on Bank executives salaries it should be seen in that context. The Banking salaries in both of those places should have no bearing on Banking salaries in small Irish domestic banks.

I would be more interested in what the new deputy Governor (a Swede) of the Irish central bank thinks about the salary cap and even more interested in what the salaries in Swedish Banks are like. Sweden has twice the population of Ireland (5 banks as opposed to our 2.5 Banks) and has survived a severe banking crisis.

If Mr Elderfield is “sounding out” a few potential candidates we should be grateful but IMHO I think we should switch the “recruitment” and “renumeration” task to the new Deputy Governor of the Irish Central Bank.

@DOCM
What really happens to the euro austerity surplus when the authorties fail to provide enough paper to save in ?
It must go somewhere right ?
Its energy saved in the financial ether yes ? no ?

For once LBS is correct – the Greek PSI deal is more costly for taxpayers than if there was no deal. The EU Commission agreed:

It would have been less expensive and less risky to do this without [private sector involvement],” said a senior official from the European Commission, the EU’s executive arm. “But it was sine qua non for some member states”

The reasons are given in the article posted above: http://blogs.reuters.com/columns/2011/07/25/greek-rescue-bizarrely-increases-its-debts/

In nominal terms Greek debt will be reduced by
€13.5bn from the Bank PSI deal
€12.6bn from the Buyback program (regarded as an optimistic figure)

However Greece’s liabilities increase by
Borrowing €35bn-€42bn to collateralize the new bonds it will issue
Borrowing €20bn for the Buyback program (to retire €32.5bn of old bonds)
Borrowing €20bn to recapitalize Greek banks (though not all of this due to PSI)

So I figure that in nominal terms Greece’s gross debt will increase by about €30bn.

Now in net or NPV terms the impact is not quite as bad, however it looks as if the overall impact is still negative. In net terms Greece will still own the collateral and shares in its banks, however for debt sustainability analyses it is gross debt that matters, since that is what needs to be serviced. NPV calculations can vary hugely depending on the predicted future value of the new debt (discount rate used) and can also vary hugely depending on how the current debt stream is valued (e.g. face value, market value etc). Here’s what the IMF say about NPV measures of debt

Although discounting a stream of payments associated with a restructuring can add some value in assessing a debt restructuring, this value is limited, can be misleading, and does not contain enough information to allow the IMF (or a member country) to fully evaluate a debt restructuring operation. For instance, the sensitivity of NPV calculations to the choice of the discount rate can affect assessments in individual country cases and has led to some skepticism regarding their use. Moreover, NPV estimates are used in a variety of circumstances to satisfy diverse objectives, and there is no consensus among IMF staff on the choice of the appropriate discount rate.

By enforcing the groundrules that it did, the ECB have essentially ensured that any benefit from PSI is either negligible or even a net negative. So remembering the only possible 4 sources of “who pays”

1) ECB (via reflation/QE etc)
2) National Taxpayers
3) EU Taxpayers
4) Private sector/creditors (via haircuts)

In practice groups (1) and (4) are now out of the picture, leaving only groups (2) and (3). Real problems will occur when (3) actually start paying real money, as against taking on contingent liabilities. This is where the next battle will be. Expect to see the EFSF requiring collateral for their loans, a much higher degree of intrusive conditionality, and further ceding of formerly sovereign powers to the EU. Due to the squeeze enforced by (1) and (4), groups (2) and (3) are going to detest the political structure in which they are trapped.

@Livonian
I was not involved in the Elderfield discussion but I did note his recent moral hazard argument. I wonder how he reconciles pumping billions into a severely challenged institution, leaving the executives in place who were in charge when the proverbial hit the fan and (presumably) agreeing to hand control of same institution to financial vultures…. with his difficulty in helping Joe Soap with his mortgage due to “moral hazard”.
Methinks it is immoral…

“By enforcing the groundrules that it did, the ECB have essentially ensured that any benefit from PSI is either negligible or even a net negative”.

versus:

“It would have been less expensive and less risky to do this without [private sector involvement],” said a senior official from the European Commission, the EU’s executive arm. “But it was sine qua non for some member states” .

LBS made the position of the ECB quite clear. They never thought, and still do not think, that PSI is a good idea. It is Germany and the Netherlands that are insisiting on PSI involvement. They still live in the dreamland of a cost-free lunch.

What is the difference between groups 2) and 3)?

It is good to see the Irish Times critically examine the BOI deal…
“In truth, the Government did not have a very strong hand and everybody knew it. A state carrying a junk status credit rating is clearly not in a credible position to adopt a hardball approach. Even so there is a point after which any deal stops making sense and a reduction in the upfront cost of the bank bailout by €1.1 billion is not going to materially influence the outcome of the current crisis. Arguably the gain to the State could have been larger if it held on to the shares with a view to selling them in six months or a year. And it may well have to suffer the ignominy of watching the private equity investors that came on board yesterday do something along those lines ”

I am amazed at the lack of criticism of this deal in the media and on here

@DOCM

Protecting creditors at all costs is a uniquely European approach, as is the effective elevation of private debt over sovereign debt in terms of seniority. Successful programs implemented elsewhere like Brady Bonds imposed significant losses on bondholders. Germany and the Netherlands were trying to follow the same principle. You try and give the impression that PSI ‘cannot’ be done without the costs outweighing the benefits for the taxpayer. But historical evidence shows that this is not the case. In Europe meaningful PSI ‘will not’ be done, due to the power structures that exist. The capitulation by Germany came, not last week, but on June 17; the rest was just the logical consequences of that particular Sarkozy-Merkel agreement.

Category (2) is Greek taxpayers paying back Greek debt. Category (3) is EU-wide taxpayers/EFSF assuming or paying back Greek debt.

(3) hasn’t yet happened, as far as I’m aware. Direct costs to non-Greek governments due to Greek debt will kick in though when the ESM is capitalized, or when EFSF debt is restructured so that the original lenders (e.g. Japan, China etc) are paid back as scheduled, but Greece does not pay back the EFSF as scheduled – i.e. the guarantees are called upon.

@Ceterisparibus
Whats the point – the local petty elite here consider BOI is something special indeed some think it is Hibernia
Your wasting your time.
Leave with the words of Jesse about the $ debt ceiling debate – I believe he might as well be talking about this hall of mirrors.

“I can’t recall this amount of bare faced lying and misleadingly hysterical headlines in quite some time. Well, that’s a currency and class war for you.”

@Eoin Bond

“eh, the IT then goes on to say the deal might make sense overall.”

I do not think it can be interpreted as you have done..

“The subsequent attraction of outside investors into the banking system that has suffered the worst losses in the developed world as a result of the global credit crisis and a domestic property bubble may help to sustain a positive feedback loop that will see confidence about Ireland return both internationally and at home.

If that happens, then the Government may be able to argue that whatever they lost on the Bank of Ireland swings yesterday, it was able to recoup on the recovery roundabout.” from IT article

“the Government may be able to argue that whatever they lost ….

A bit of live horse and you will get grass…or something like that

@Livonian

I believe the total cost to Irish taxpayers for the banks is €64bn; comprising €46bn (pre-PCAR) + €18bn (PCAR)

Thus with a projected peak debt stock of about €210bn, about 30% will be due to the banks and 70% due to the accumulated deficits.

Most, if not all, of the State money for bank recap has come from the NPRF, Exchequer balances and Promissory Notes, rather than from the EU bailout money. Ultimately I don’t think it matters much which internal pool of money is used to pay which particular expense (e.g. bank recap / deficit funding / bond redemption).

On caps to bank exec pay.

I’ve always thought that the amount of pay wasn’t as a big an issue as the structure of the package. During the boom the massive incentives to all affected staff to LENDLENDLEND was a big problem; rewarding staff with shares and sweetheart exit deals regardless of screw ups. I wouldn’t care how much the CEO got p/a if he left with nothing having collapsed the share price and walked the bank into a state bailout. Also bonuses should be calculated on a number of factors – not just share price etc but some sort of “stability audit” (? vague concept but you get me I’m sure). If there was a method of pricing in real personal accountability then give them the mil if they want it.

@ ceteris

‘I am amazed at the lack of criticism of this deal in the media and on here’

This is supposed to be a bit of good news. Insofar as it act as it serves to stop ‘last Irish domestic bank falls into state ownnership….hee haw…head for the lifeboats” going out on Bloomberg, then it has been a success in political terms. A fig leaf which takes the bare look off things in Glockamorra.
Even the Dork is losing the power of speech.

@Oliver Vandt

Giant warning signs plus a pong

The IT article suggests that the Government may have been under pressure to get outside investors. I can see the rational for bringing on board international banking investors…but this motley crew looks like a bunch of vulture financiers and we hand them control…the initial payment keeps varying but was quoted as 241m yesterday. Even the IT points out that 1.1b
out of 70b is not going to change much.
What was needed was a major bank like Santander to come in and revive banking in Ireland. But the Government allowed the other pillar to be dismembered leaving only the carcass . The banking strategy being pursued is a disaster.

@Paul Quigley
Good news? I don’t want to hear the bad stuff…..makes us look like a bunch of idiots.

BTW, where are the results of the rights issue? Perhaps they had to go back to the drawing board.

@ CP

from your excerpt

“Arguably the gain to the State could have been larger if it held on”

Basically the IT is arguing that its a risk both ways. Which is what every investment decision should be.

@Eoin Bond
I would argue that the State is still bearing the bulk of the risk with a diminished upside after this sellout. The State is on the hook for all that ECB and ICB liquidity funding and will likely continue to do so. The State is also guaranteeing all the deposit funding.

What has happened to the rights issue results? Ominous or wha?

@ceteris paribus
Thinking again about the very serious concerns raised in NWL’s blog I would not be shocked to see this deal coming up in some way in a tribunal in 10 years time. This could be the phone licence all over again.

@zhou_enlai

“When the bank decides to pull the plug when it suits the bank, there is a big bang effect for all these third parties. ”

This is a very interesting topic and worthy of its own thread. Sadly, it’s 0545 and I have to dash but a quick tuppenceworth is:

a) isn’t this akin to ‘insider trading’? Acting on information not available to… etc.

b) the knock-on effect is not just the loss to the supplier but the relationship difficulties and changes to how business will be conducted (credit terms, etc.) once sme’suppliers in Ireland cop on and realise they are going to be the ones picking up the tab.

c) those suppliers need better safeguards put in place and that can only come from legislation

d) banks – don’tcha just love ’em?

Mr Mercer you are running ahead of the curve “Government really want to close IL&P, probably agreed with Troika, and sell off or give remains to pillar banks?”

I was only thinking the other day, now might be a good time to pick up a few cheap shares in pillar banks, just before the government spends a couple of years putting any good bits from other places into them.

As for people expecting analysis and critcism of the BoI deal in the media…. they are all in Tuscany/SW France/Spain/etc. at the moment.

@ CP

rights issue closed yesterday. Don’t think results out until today or tomorrow, no?

@ Bryan G

I have no view on the issue of whether PSI is a good or a bad thing. I do not have the technical capacity to come to a judgement. My aim is to try and identify clearly who is responsible for what.

The insistence on PSI is the result of pressure – for domestic political reasons – from Germany and the Netherlands. The ECB was, and remains, opposed because of the contagion risk in the “technical default” involved. The ECB could not conceivably accept the collateral of the sovereign bonds of Greece in such circumstances and the solution found – through Greece borrowing for credit enhancements and the short period of “technical defaut”- seemingly meets this concern. However, it reveals, as you point out, that Germany and the Netherlands expect private investors to take a real hit now while they accept only a contingent liability (hence my reference to a “cost-free lunch”).

As to the ESM, for the life of me, I cannot see what value it can have. It contains prescriptive, and punitive, procedural language in it articles which have no place in a treaty text and a mark-up of 200 basis points in an annex which forms an integral part of it. In short, it is the gospel according to the Old Testament not the New. One gets the impression that EZ ministers simply signed it to get it out of the way for the moment and see it as the instruction book for preventing future crises while they get on with the work of trying to fix the present one.

Despite the optimism of LBS that the markets will eventually “understand” the new approach, the omens do not seem to be good and because of the point on which we are essentially in agreement: the structure of the EFSF.

The legal text governing the EFSF simply states that it can be “amended in writing” by the signatories. There is no information on what exactly the changes are to be or whether they have even been negotiated and agreed.

@ceterisparibus

I am amazed at the lack of criticism of this deal in the media.

JTO again:

Easily explained, dear ceterisparibus.

Indeed, exactly as I predicted this time last year.

When FF were in government, the Dublin 4 media hated them, absolutely loathed, detested and reviled them.

We now have an FG/Stickie government. The media love them. Nothing they ever do will attract any serious criticism from the media. So, get used to it for the next 5 years (minimum). I predict that this won’t be the last time you write: “I am amazed at the lack of criticism …. in the media.” As long as they continue to stoke up the anti-Catholic mob, the FG/Stickie will have the Dublin 4 media eating out of their hands. It worked up north for a long time, why shouldn’t it work here? Kenny is allready a cult hero with the Dublin 4 media.

Regarding the actual merits of the deal, I haven’t a clue. All I will say is that, if the FF government had made a deal that was identical in every respect, you would not have had cause to write: “I am amazed at the lack of criticism of this deal in the media.”

@ JtO & CP

Part of the problem is the format and intent of the government press releases.

Consider the opening paragraphs of the one at the start of this thread from the Department of Finance.

“The Minister for Finance, Michael Noonan T.D., today welcomed the successful conclusion of negotiations by the Government with a group of investors. Subject to appropriate regulatory clearances being obtained, they have committed to buy up to €1.123 billion of the State’s shares in Bank of Ireland, reducing accordingly the State’s obligation to capitalise for this amount as part of the March stress tests.

“The investors will initially purchase on an unconditional basis €241 million of the State’s shareholding and are further committing to purchase the remainder of up to €882 million after appropriate regulatory approvals have been obtained. ”

This completely fails the ‘who, what, where, when, how, why’ test, and immediately sets it up as a piece of persuasion rather than information. It’s not even good PR as it encourages suspicion, and fails to communicate fact. Having read a fair few from this and the last government, the style seems to be consistent from one governemtn to the other.

I’d be interested in PR guy’s professional take on this.

“I KEEP six honest serving-men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who.
I send them over land and sea,
I send them east and west;
But after they have worked for me,
I give them all a rest.

“I let them rest from nine till five,
For I am busy then,
As well as breakfast, lunch, and tea,
For they are hungry men.
But different folk have different views;
I know a person small—
She keeps ten million serving-men,
Who get no rest at all!

“She sends’em abroad on her own affairs,
From the second she opens her eyes—
One million Hows, two million Wheres,
And seven million Whys!”

R Kipling

@ceteris/Others
RE BOI deal.

I see you not getting any real answers on this very very bad BOI deal in this thread.

The questions are simple
1. What is the harcut % on the existing goverment share?
2. What multiple of future earnings did the new investors pay.

I stll contend that the haircut is 60%.
The new investors will eventually pay €1.1 billion for a 37% stake. At potential annual profits of over 1 billion, that will work out to about three years earnings. The standard is about ten year earnings. And they are fully protected on the downside.
And potebtially a pillar bank becomes a Northern Rock operated from India with just ATM machimes.
And what happened to the need to save to ‘Irish (domestic) Banking sector. Was it just to give ot away for nothing, paying megamillions to Goldman Sachs to set up the deal?

This is a financially moronic, economically illiterate, nationally treasonous deal.

@Joseph,Gavin,EB,Oliver
It is hugely disappointing that this deal has not been put under the microscope by our financially literate brethren.
The Spin on the rights take-up is something else. A reported 60% is in fact 38.6% which would be rated as a disaster in any underwriting institution.
It will be interesting to see the breakdown of the eventual shareholdings but it appears that the new investors with their guaranteed 25% min. have de facto control of BOI for an initial 241 million euro.
Not bad going to get your hands on a bank that has the State guaranteeing all it’s liabilities (including deposits) for such an initial outlay.
One of the interesting reported aspects of the deal was that the CEO negotiated his own position to remain in charge. No conflict of interests there!!!
Enda promised us openess and transparency…and what do we get.

The best interests of the State and taxpayer was not served by rounding up a bunch of vulture financiers and quasi hedge funds to take over the one bank
The State had which appeared capable of fulfilling the requirements of the economy. Clearly BOI should have been sold to an international bank capable of funding it, if necessary with State guarantees on potential shortfalls.

It appears that we are not like America who will do the right thing…after trying everything else first.
Thanks to Stephen Kinsella for opening the thread and as Oliver says..we live to fight another day, maybe.

@ceteris paribus
I’m not sure that that consortium of investors got such a great deal as you think.See the note at the top of Page 28 of a  Bank of Ireland document issued last year. http://www.bankofireland.com/fs/doc/publications/capital…/circular-final.pdf :
“Also under the EU Restructuring Plan, the Bank will commit not to paydividends on its Ordinary Stock until the earlier of (i) 30September2012; or (ii) such date that the 2009 Preference Stock isredeemed or no longer owned by the State through the NPRFC orotherwise.   The Directors intend to resume paying dividends on OrdinaryStock after the above conditions have been satisfied and the Group hasdemonstrated that it can maintain appropriate capital ratios andsustainable profits.”
If you were to win a million euros in the lotto, would you join aconsortium with a thousand other millionaires,  to buy shares in Bankof Ireland, on the promise that you just might get a dividend some time after September next year if profits are sustainable?Where are the “sustainable profits” going to come from in Bank of Ireland over the next few years?
If I won a million euros, I’d invest a couple of thousand euros in Amarin shares, as a gamble, and put the rest on deposit in ten different banks.    I was a very small-scale investor, but I sold my Bank of Ireland Ordinary  shares in a panic in 2006, after reading and rereading David McWilliams’ articles on hiswebsite at the time.  But I held onto my Bank of Ireland Preference shares, which are now worth more than they were last year thanks to those new investors, and the pref shares are again yielding a dividend of 6% , after a “gap year“ last year.

@DavidC
These boys are not in it for dividends. Wilbur has form and I anticipate slash and burn strategy with outsourcing to India. The level of control ceded by the St

sorry..

The level of control ceded by the State is mind boggling when you consider the exposure by the State to guarantees for bonds and depositors. Remove the guarantees and see how the investors/hedge funds fare.

@ceterisparibus

“Not bad going to get your hands on a bank that has the State guaranteeing all it’s liabilities (including deposits) for such an initial outlay.”

It’s a steal. They knew it would be. Bankers and vulture fund types always run rings round politicians and civil servants.

I would not want to be a BoI employee right now. Hello dole queue.

Ross is leading a multinational consortium of private equity investors and hedge funds. If Ross saw this as a safe investment with a reasonable prospect of above average returns he would be in there alone. This is a number of companies rolling the dice by betting a small part of their individual assets on a risky investment. There are many unknowns related to the liabilities of BOI today. Add political risk and it would take someone with a strong stomach to risk more than 5% of their assets on BOI.

BOI was shopped around and this is the best deal to make it onto the table. If it was a good deal the Irish oligarchy would be all over it before the solicitation went public.

@Mickey Hickey
I would not disagree with your take on this deal. However, the executives of BOI obviously ran rings around the DOF and succeeded in preserving their positions. I now wonder about the abilities of the NTMA, which previously had a good reputation.
For the State, aka, taxpayer to convert a 36% stake to 15%, where they are guaranteeing all of the liabilities of the institution takes some ingenuity.

Wilbur has been around the block…he previously ran rings around the Japanese and is partial to cheap Indian labour. Read the complaints from his
mortgage servicing operations.

Show us the numbers Michael and Enda. How much did the State lose.

Another point is the legality of all of this. Are certain State institutions remaining within their statutory remit?

@ CP

why do you keep saying “for an initial 241mn”? Once the regulatory clearance is out of the way they’re in for another 870mn or so.

A whole mismash of different North American investors with a combined stake of 35% or so isn’t necessarily going to be able to control BOI very easily. They have a blocking stake obviously, but they’re not going to be able to do everything their own way day-to-day either.

@Michey Hickey.

BOI was shopped around and this is the best deal to make it onto the table.

The best deal on the table was no deal. Tell the vulture funs to take a hike.
This is national emasculation on reality TV. Except its for real.

@ BEB

‘A whole mismash of different North American investors with a combined stake of 35% or so isn’t necessarily going to be able to control BOI very easily.’

It’s far from a mishmash, it’s a small number of very sharp players. While they may nominally be in competition with each other, there is nothing to stop them acting in concert to extract value from Ireland. Insider assistance will be critical, if that is the game.

They may well have got a promise that Ireland will recapitalise, but not go back into BKIR equity. A drop in the share price going forward would give paper losses, but would let them pick up the rest of a 50 %+1 stake on the cheap. Given the shambles in AIB, the moribund state of the economy, and the coming Spanish wobbles, that’s well possible.

I am not sure how value can be extracted from having control of the bank in thiose circumstances, but these are savvy operators in the Hall of Mirrors. The bank guarantee shows the level our politicians inhabit, so retail customers and employeees can expect to be soaked.

@ Paul Q

“there is nothing to stop them acting in concert”

Well there is actually given that they have a combined stake above 30%. Acting in concert, if deemed so by the regulator, would force them to bid for the whole bank.

@ paul quigley & Mr Bond

An idle thought.

I think I noticed that even when BoI returns to profitability, it won’t have to pay tax for a bit, as futures taxes are being ofset against current losses or something.

I wonder if the new investors could route profit from elsewhere through the bank for the sake of, ahem, tax efficiency.

Government haircut on this deal—75%.

Taking the updated figures on todays Irish Independent. The government will get 15% for its investment of €1.9 billion, my estimate of the government haircut is now 75%.

One analyst quoted in the same article said:
“This is good news, the smaller the State shareholding, the better”.
Some analyst. Uneducated, unadulterated nonsense and propaganda.
Some ‘free press’.

@ Gavin

one ‘pro’ to raising the corp tax rate would be that it would increase the value of the tax credits in BOI!

@Bond Eoin Bond

“A whole mismash of different North American investors with a combined stake of 35% or so isn’t necessarily going to be able to control BOI very easily. They have a blocking stake obviously, but they’re not going to be able to do everything their own way day-to-day either.”

The reason I use the 241m figure is that is the “deposit” that secures the deal
(as you say, pending regulatory approval. Leaves lots of wriggle room if things should go pear shaped… And let’s face it, lots can go wrong…Italy, Spain looking a bit ropy today,Greek deal being questioned. And then you have the US situation…
As for the “concert” argument it is nonsense to suggest that the parties didn’t
Act in concert in negotiating the deal…perhaps through their proxy, the BOI executive.
As you point out they have a blocking position and were, according to reports, guaranteed the minimum 25% required.
Do you seriously believe that they will not continue to act in concert…Wilbur is not a long term value investor…in fact, his speciality (DIP finance ) denotes short term ~ quick buck returns.
As for the rules of the ISE, clearly they were and continue to be circumvented.

@Gavin/Bond

BOI tax credit y/e 31/12/2009 was €447 million.
BOI tax credit y/e 31/12/2010 was €341 million.

I thought legislation was to be put in place to prevent tax credits going to banks that had to be bailed out.

@All Govt Accounts specialists.

When commenting on the ‘disappointing’ corp tax results, you may wish to consider calculating the value of tax credits repaid to bust banks.

You may also wish to consider how long this will continue.

My reading of Simon Carswell article in today’s Irish Times pretty much confirms a 75% haircut on the State’s existing shareholding.

He does say that there are other benefits, acknowledging that ‘strong signals sent out by the investment are hard to value’.

I am not clear how ‘strong signals’ are valued in the world of finance. But one thing is clear, Wilbur was not going pay any hard cash for them.

http://www.irishtimes.com/newspaper/finance/2011/0729/1224301559873.html

One moot point about the new shareholders of BoI is that one of them, Capital research, a hedge fund, is, among a handful of other hedge funds (including Warren Buffet, T Rowe Price, ValuAct) one the leading shareholders of… Moody’s Investor Services!
Moodys is owned 100% buy hedge funds. Is it just me or don’t hedge funds typically have massive vested interests when it comes to rating any debt issuer?

Moody’s recently downgraded each and every Irish bank to junk status. But my hunch is such ratings could make a miraculous recovery within a month or two. Given Moody’s track record for greenmail and dubious rating policies (see SEC, US congress hearings, Hannover re, Express Scripts, etc) I wouldn’t be surprised

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