Sale of Subordinated Bond in BOI; NTMA 2012 Review

The 1BN coco bond had a nominal yield of 10% that was to be received by the DOF.
What was the price of the bond when it sold and what does that translate to in the hands of the purchaser?
I would have thought the price should be pitched at a yield equal to the State borrowing cost plus a a very small risk premium.
The statement seems to indicate that the purchasers are getting a yield of ~8.25%. Surely this is incorrect. Am I misreading this?

@Joseph where is the pricing announced?

Odd that according to the links, 8.25% is the tier one capital threshold below which point these kiddies convert into equity…

But BOI paid 10% for €250m 10 year subordinated bonds in December so while you’d hope that the cocos with 4 years left to run would be worth more than par, but how much more given there is also the known political will to exit?

@Eureka 1. We don’t want to own banks or cocos of banks or anything else to do with banks. So politically the State wants to sell.

2. BOI don’t want us owning them, or their convertible debt instruments, they want the market to hold them so they want us to sell so that they can claim to be standing on their own feet.

3. We have other bank assets that we want to sell, so being able to say to the markets “hey look, one of our banks is almost entirely off the national balance sheet and investors have confidence in it improves the chances of us being able to sell the remaining shares in BOI and maybe some of the investment in AIB and ILP. The BOI debt issued in December is already trading at a premium so now looks like a good time to sell.

4. We want to get cash in the door while everyone is smiling at us in case the EZ has another hiccup later making it more difficult to borrow/ sell assets

So yes, we’re foregoing €400m of income over the next four years if we think BOI is now sound. We’ll get a small sliver of that back assuming that these things weren’t sold at par. But the NTMA must have calculated that we’ll be better off for the above reasons in the longer term…

Is this one of subordinated bonds that still gets paid out (by the public exchequer) even if BoI makes a loss?

Ashling,
Will the buyer of the bond be forced to convert to equity in the event that BOI needs extra capital. Put simply, has the govt. not secured someone else to stand in the queue in front of it to take a bullet if need be.

@Aisling

1. We don’t want to own banks or cocos of banks or anything else to do with banks. So politically the State wants to sell.

What makes you say this? The state made an investment in BoI with public money. Shouldn’t it expect a return on that investment, indeed a profit?

2. BOI don’t want us owning them,….

So they ring up their friends in the DoF and get them to spend even more public money, getting the State to take a loss so BoI can own themselves into insolvency once again. And who’ll pick up the tab for that I hear you ask?(What fun!)

If BoI is completely privatised, I expect that it will be let go to the wall when the next crash comes. Well, that is, I would hope so. I actually expect the bank will be bailed out again. In either event, I don’t think the State should sell.

@Ashling

The State and NTMA did an excellent job yesterday in buying cash at ~3.5%.
Today the State bought cash for ~10% just to get rid of a piece of bank, a bank that it claims is on the way to recovery, in an economy that supposedly has 85% of the heaving lifting done on the way to recovery.

Ireland is being ransacked.
The deal only makes sense at this price if one believes that BOI currently with a Tier one ration of ~ 15% is in danger of hitting a tier one ratio of 8.25%. As for the supposed strategic value of the disposal, where I work strategic value does not pay the wages.

The State seems to have a special liking for disposing of BOI shares at prices very favourable to the purchasers. Makes one wonder.

It took an approx 75% haircut on the sale of BOI shares to the Wilbur Ross owned group. And now this!

God, I can only imagine the insanity that this thread will create in terms of people completely unfamiliar with subordinated coco bonds, given the fun we’ve had in the past with reltively simple stuff like promissory notes and ELA…

Quite simply, this is only marginally above equity risk, and would be considered quasi-equity by the ratings agencies.

@Aisling et al.

If the tier one capital only falls to say 9%, and BOI cannot raise additional fund on the markets then we still take the bullet if we want to rescue the bank.

If BOI were unable to raise the funds to redeem the note, while at the same time having positive equity of 9% or more, wouldn’t the bank be able to repo some of its assets with the ECB or the ICB to raise the funds, and so there would be no need for any further public money? i.e. the CB acts as a lender of last resort to a solvent bank?

I’d like to think that the following statement is unambiguously true – “If ever a time comes when the State needs to put more money into BOI, then any purchasers of these coco bonds will have lost 100% of the principal on these bonds” – but I don’t know for sure.

@Seamus + B.EB Thank you gentlemen. Happy to be proven wrong on this.

So, just to clarify, the State has made a ROI of 15.6% over 18 months in a risk averse world when the “masters of the universe” that are hedge fund managers were lucky to break even?

Had the Government put that money on deposit with BOI they’d have been looking at returns in the mid single figures, had they invested it in bunds they’d have been looking at the low single figures.

If true, seems like a great answer for the Irish taxpayer.

@Bryan G Confusing apples with pears. Equity does not equal tier one capital. ECB repo operations do not equal tier one capital.

Such a precipitous decline in tier one capital would require losses well in excess of the Blackrock estimates (adjusted for our 12.5% CT rate on deferred tax assets which still count as tier one but are being phased out under Basel III), in the 2011 EBA stress tests DTAs accounted for 56% of tier one for AIB but only 13% for BOI.

@B.EB & Aisling

I guess “unambiguously” just doesn’t apply to the world of banking, but it seems that for all practical purposes there aren’t any fancy dance moves possible that would result in the State being pushed to the top of the line again in front of the coco holders, and that’s unambiguously a good thing.

A couple of minutes googling threw the following up. Seems there could be conflicts of interests between equity and coco holders, but doesn’t impact the State directly since both are ahead in the loss hierarchy. Of course the real goal needs to be the removal of the implicit State guarantee on senior bondholders.

From a Telegraph article

Under the terms of a CoCo, an investor is sold a bond by a bank with the condition that should the lender’s core capital fall below a certain level the debt will transform into shares to provide the institution with an increased buffer to take new losses.

However, the Bank of England said that while this was fine in theory, in practice buyers of the CoCos could “run” as soon as a bank showed any signs of getting into trouble to be replaced by investors who might have a vested interest in forcing the bonds to convert into shares.

“Policymakers should also consider the possibility that precautionary contingent capital instruments lead to wider systemic problems because investors have incentives to manipulate the conversion trigger to generate a conversion or bank equity holders or management have incentives to take actions (such as fire-selling assets) to try to avoid a conversion occurring,” said the Bank.

CoCos were one of the measures looked at last year by the Government-appointed Independent Commission on Banking as part of its review into ways to make the British banking industry safer.

In the end, the Commission recommended that regulators be given explicit powers to force bondholders to take losses in any future bank bail-out. The precise nature of these powers will not be known until the publication next month of a white paper on banking reform by the Treasury.

Unless there happen b a cool bil. under the bed,down back of Noonan’s sofa..that is….
The above math is nonsense.

@BEB yep unfortunately …and their derisory returns.
Your point is ?
Ah…no cost of funds then!
In

@ John G

“does not include transaction costs”

BOI paying for sale costs today…

And, as rapacious as the deal advisers may have been, I don’t think inclusion of their fees would alter the numbers that much, especially if, as has been reported, BoI themselves bore them.

@ John G

“Neither the time nor interest”

You started it dude, not my fault you hadn’t done any background research into the deal before offering such in debth expertise…

I will let it go but really WTF is a “return”
“Therefore total “return” for the govt of 1.056bn + 100mn (coupon from last year) = 1.156bn, ie 15.6% return in around 18 months”
Return on what now exactly as compared to..

Today’s Irish Times:

“Barroso and Van Rompuy back Irish bank debt deal”

‘Mr Barroso said Ireland’s presidency of the European Council offered a great opportunity for the State to “make its case better known” regarding a potential bank debt deal, as well as showcasing the “extraordinary resilience of the Irish economy and the capacity of the Irish people”.’

Article ends:

“The Government yesterday sold Bank of Ireland bonds worth €1 billion to a number of international institutional investors, marking the first return of public money injected into the banking system [correct? what about previous sale of chunk of BoI].

“Minister for Finance Michael Noonan welcomed the sale and said a further €7 billion in public investments in Bank of Ireland, AIB and PTSB, over and above ordinary shares, would be sold at the appropriate time. The €1 billion bond investment was part of €64 billion the public invested in the banks.”

Last sentence is the point for me and I appreciate these numbers vary – but Irish public put in €64bn approx: that money needs to come back / be renegotiated, plus extra for damages.

There’s more too it that simply getting the banks off the state’s hands.

Meanwhile even Asmussen says:

“Certainly, any costs incurred from resolution should first and foremost be covered by the private sector, through establishing a European Resolution Fund raised by levies on the banking sector.”

http://www.irishtimes.com/newspaper/frontpage/2013/0110/1224328631738.html

http://www.ecb.int/press/key/date/2012/html/sp121219.en.html

@ Zhou

they’d probably pay euribor +45bps or so for unsecured interbank cash

@ John G

my interpretation of “return” is the difference between what you put in and what you get back. Revolutionary, i know. We’re not talking about SEC/FSA audited peer comparable fund management returns from professional organisations tasked with investing and managing people’s money. We’re talking about a government having to do a somewhat one-off and temporary purchase of a stake in a bank, and then selling it, and the difference in between.

@ Aisling
“Equity does not equal tier one capital”. Ordinary equity and accumulated profits are Tier 1. Sub equity or other e.g. minority interest can also qualify, depending on terms, but usually with central bank restrictions and haircuts (there a whole world of ‘technicality’ and CB discretion in this area…and may differ from jurisdiction to jurisdiction). As per BEB above, the cocos are very close to ordinary equity in a winding up. Without knowing the legalities of these coscos in detail (there are different types /variations), if BOI were to get in the s**t as Aisling puts it, say by having a blow out on its mortgage books (not academic), then there is a strong chance that the cocos will be (should be) hit as well. While the Irish CB, etc. regularly state that the Irish banks are well capitalised, we know that this capital will be severely tested. In that sense, the sale of the cocos is excellent news. However, it makes me wonder what if any ‘comfort’ has been given to investors on this. Hopefully, none.

@Paul W to equate equity with tier one capital is just wrong when (presently) things like DTAs count as tier one capital (56% of it in the 2011 EBA stress tests for AIB – albeit with the happy accident that since we own AIB DTAs really are shareholder’s funds… But if we managed to flog AIB tomorrow the DTAs would still be tier one capital until Basel III kicks in fully and the grandfathering for DTAs passes.)

I would imagine that the cocos would be hit in the event of the mortgage book blowing up and pretty much halving BOI’s tier one equity (albeit that I cannot see that happening). There’s little comfort a Government with a debt to GDP ratio like ours could or should give.

Ok, Deferred Tax Assets….should have read further back more closely (also normally refers to Double Taxationo Agreements!). Surprised at the 56% level. Given continuing losses, are the DTAs real anyway? WOuld a purchaser of AIB or BOI accept?
As per Irish CB /Honohan ‘anxiety’ re mortgage losses last year, I think that the PCAR results /forecasts will be severely tested.
The question remain as to whether the cocos will be deleted pari passu with other shareholders funds. If the banks need another rescue, and more capital (likely), it would be good to know just how much ‘equity’ buffer the cocos give. Without knowing that, I suppose that we cannot be definitive about just how good this deal is.

I would also have thought also that any investor would be mindful of (stressed) cashflow profile of the cocos and would rely on low refinancing risk at term maturity. In that way, ‘unseen’ comfort can be taken (given) to an investor e.g. the hit to capital caused by mortgage books can be ‘managed’ to ensure that the coco investors don’t get hit….All sorts of ways (legal and practical) of making sure no losses to the investors and building ‘confidence’…!!

Double, not doubt tax agreements

@Paul W “We” means the EU in this instance, not Ireland, Ireland cannot change the rules on this unilaterally. I assume given the Commission paper on bailing in bondholders the EU will act on this and distinguish between senior bondholders and depositors going forward. All EU legislation takes time.

If you think that the Irish property market is near the bottom, and that BOI is well capitalized (and bearing in mind that reports suggest that the existing bank shareholders who must hold such views were significant purchasers) the yield looks commercial. They’re already in line to be wiped out as equity holders, so being in line to be wiped out as coco holders is nothing new… Only difference is that the bonds will pay more than the equity in the coming years

Related issue.
Why is the government building up such huge cash balances -approx. €25 billion while we are borrowing a total of over €150 billion? What is the net additional interest cost on this excess borrowing which is adding to the deficit each year? Could it be as much as €750 million?
Sounds like our top public servants and politicians are worried about possibly running out of Euro funds as the Troika funding ends during the next year.

@Tom

I am just repeating what BEB said but even though we are fulfilling bailout terms more actively than Greece, we wouldn’t want to even entertain the situation every three months that has afflicted Athens about needing bailout monies as a matter of urgency to pay this bond or that bond.

Also, even if though we are fufilling the conditions, if it came about suddenly that there was a definite (rather than just suspected as now) 15bn recap hole in the banks due to ongoing mortgage concerns then it’d also be more than reassuring to know that we would have some degree of leighweigh.

@Fiatluxjnr

“It’s a costly business building up that cash pile. It’s costing the taxpayer up to a billion this year. Namawinelake was the first to point this out.”

Errr..the first to point out that borrowing has associated interest costs? Okay.

We still have have and are getting the bailout money – it is not like we borrowed the on the private markets to replace it.

I think people need to show a little bit of realism on exactly what our long-term interest rate is likely to be when if and when we leave the troika. We were borrowing at close to 5% for much of 2009.

@OMF

“Last time I checked the total direct government capitalisation of BoI was €4.7 billion. So far, including this sale, only €2.1 billion has come back. I doubt the full €4.7 will ever be recouped”

The 4.7bn is net of the 1.1bn recieved by investors in summer 2011 according to the Gov.

(The Gov recap table says “The Exchequer cost of the 2011 BoI recap is shown net of share sale to private investors”).

So the net cost is now 3.7bn as far as I can see.

@ Fiat

“As for the CoCos it’s giving away 67m a year to bondholders. Why they didn’t price it to yield less than the 10% coupon is anybody’s guess. It appears very shortsighted for the state to be giving up revenue to supposedly help a minority owned bank.”

– Whats 67mn based on?
– They sold it on at 9.60% yield
– How did it help BOI?
– Did the foregone revenue come with associated risk?

@ B. EB

I think the €67 million comes from the first item here. The sale was “stupid”.

@Seamus Coffey
Amen.

@John G I erroneously thought that the investment was from the NPRF hence cost of funds would be moot given bund yields.

I think aiman addressed the cost of funds issue above and I would think that the bailout rate would be the appropriate rate since those were the funds invested.

Even accounting for cost of funds which you were right to point out, this still results in a profit for the Irish taxpayer.

Another reason the state want to divest itself of any stake in BoI is to distance itself from the personal insolvency issues that are going to rear their heads very shortly. It also fits in with the silly propaganda, being propagated by all and sundry in the green shirt industry, viz. that the state can recover without tackling the excesses in its own payroll and pensions, and that a second Croke Park agreement is again in the interest of the country. Soon enough, they will be telling us that a second bailout is in the interest of the country. which will spoil the narrative of getting our sovereignty back for 1916.

Noonan wants to distance FG/Labour from the blood on the floor approach that BoI are going to take, as plainly stated by Mr. Boucher at the Dail Finance committee in December AIB will be more the iron fist in the velvet glove.

The fact that the state surrendered all power to the banks yet again can hardly be yet another strategic blunder by government. These maneuvers are more likely strategic, in terms of the state trying to repair its own balance sheet, rather than allowing private individuals to repair their balance sheets. Fatal flaw here being the zero sum game and the failure to recognise that the two are inextricably linked. The state then is preparing the ground to distance themselves from the 5,000 plus bankruptcy figures being mooted for 2013.

The 1.1bn though will come in handy in March to help pay the 3.1bn PN that Mr. Rabbitte said we are not paying. NAMA are not playing ball this year though he will probably use his powers to just grab the balance from them in any event.

We already have Noonan telling us “he can do nothing about the banks, that his hands are tied”, conveniently, forgetting to tell us that, it is he himself, that is tying himself up, by giving the banks an effective veto over the whole insolvency legislation. Basically, they either like the proposal from the PIP’s or leave people with no other option but to take the nuclear option and go bankrupt. As Mr. Shatter laments, “he hopes” the banks do something nice for the people. To paraphrase Mrs Brown, “That would be Nice”.

@ B. EB

I think even the presenter was surprised with the “analysis” but he went along with it. There is a reason these things yield close to 10% but that didn’t seem to matter.

@ John G

ad hom with OMF? At his own admission he hadn’t a clue what he was talking about. He thought a syndicated tap was a derivative trade. He thinks the whole notion of bond sales is murky. Difficult to rationally argue with someone like that about whether bond sale should be viewed as successful or not.

As for the returns maths, you call it nonsense but dont provide any figures of your own as part of the retort. Pls do and we can have an actual debate rather than a slanging match from your bar stool.

@Bond Eoin Bond

“1. is Peter Brown aware of risk-adjusted returns??? Jebus, that is an awful analysis.”

Risk adjusted return?…today’s IT has a notice from AIB reducing interest on regular saver accounts to .5% . How’s that for risk adjusted return. Less 33% dirt tax and ,say, 1.7 inflation.

Didn’t Templeton load up after the ECB moved.

And BTW, I see a headline that we made 10m on the BOI junk. 10m on 1000000000m. Wow, some return!

@ Fiat

you’re not including dividend coupons received/due

@BEB its not even noon,so no bar stool,but i do have a lunch meeting.
will throw an oul pencil over it later today,good enough ?

@Eoin, tull

From Seamus’s rte link, according to the Irish institute of financial trading “its a distinct lack of understanding of financial market awareness”!

Maybe we should all enrol 🙂

Meanwhile the government has found a away to save 1m a year without touching increments. Wonder what the the consequent costs will turn out to be and how it has computed ‘risk’:

“It’s all over the media this morning – how the government has targeted the most vulnerable in society in possibly the most mean-spirited of all the mean-spirited cuts in Budget 2013. From now on, social monitored personal alarms will only be made available to 65 year olds living alone, who qualify for the scheme, to a maximum cost of €230 per alarm. The budget for the scheme, administered by the Department of the Environment, which over the past three years has benefitted some 7,000 elderly people annually, has been cut from €2.4m in 2012 to €1.15m this year. Over the past three years the scheme has cost the Exchequer €8.3m, which is less than the amount paid out in TDs’ allowances and expenses per annum.

As reported on the front page of today’s Irish Daily Mail, while all this was going through in the Budget, the Minister for the Environment, Phil Hogan, was on his middle-east trip in Doha to save the world from climate change. Defenders of the Minister charge the Mail with negative nitpicking and conflating unrelated issues. They may indeed have a point. However, the Minister’s absence from the Dail on Budget Day was notable, and since the date of the Budget as well as the date of the climate conference were well-known in advance, the Minister’s judgement in opting for a foreign assignment is questionable.

The Irish delegation to Doha is reputed to have cost the Irish taxpayer in the region of €30,000. It is arguable that it required the attendance of a senior Minister, either for the short speech which Phil Hogan delivered at the Conference proper or for any trade promotion duties that were arranged around such an Irish ministerial presence in the region. A junior Minister, such as the New Era Minister, Fergus O’Dowd, might have fitted the bill for Doha just as well.

The politics of this latest cut to services for the elderly are awful: as burgarlies rise, horrific reports of elderly people being attacked in their homes become more prevalent, and a crisis apparently looms in our policing service, reports that funding for personal alarm services for the elderly have now been halved only add to public cynicism that government rhetoric about ‘protecting the most vulnerable in our society’ is newspeak at its worst: this government couldn’t care less about the ‘vulnerable’.”

@Grumpy thanks for that…oh I just outsourced it.
So far the consensus in NY is a IRR…
Which I’m waiting for the analyst to finish !

@Grumpy thanks for that,tried changing it to John Bond Jonn…comment is getting moderated
I’m simply outsourced it the consensus here I’m NY is an IRR…just waiting for the analyst to finish..

Back to forgiveness.

Junker says legacy bank debt should be covered by ESM. It seems all the Brussels crowd are jumping on the bandwagon. But the downsides are quite an obstacle…
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_10/01/2013_477820

@Seamus

“Schedule:
2 weeks – Monday, Tuesday, Wednesday and Thursday, 9am-4.30pm. Plus One Year of Mentorship

Cost = €2,750
(most payment methods accepted cheque, bank draft, bank lodgement, visa)”

If you can negotiate a group discount, I want first dibs on the Darth Varder costume so tull & eoin have to go as a pantonime horse.

@David Od

It really is amazing how economists never pounce on this sort of anouncement and point ask questions about the subsequent costs that will accrue to the public purse – the headline gross “savings” figure is just accepted – so the only critical commentary the public become aware of is the social/moral question. That in turn is batted away with the idea that ‘we cant afford it’.

Of course, when it comes to reducing high levels of PS pay, or even not ratcheting it up each year through increments, there’s plenty of airing of consequential costs to the exechequer…

@David Od

What’s the average cost of treatment for a broken hip for someone who falls while trying to get to the phone or front door?

There used to be a school of economics known as the “Doheny and Nesbitt’s SOE” in the good old days. This has now clearly been replaced by the PKSOE. (At least the participants in the DNSOE had a credible excuse.)

The “vicious circle” (or is it “link”) between sovereigns and banks can be broken either by restoring solvency to one or the other but more than likely, given the symbiotic relationship between them, a combination of the two. Getting out of the banking business as fast as possible has to be the aim of any government that has seen its solvency wrecked by runaway banks. All other issues are secondary.

Peter Brwon is right on one point, however, and that is the risk of a precedent being established. He failed, however, to distinguish between the PNs, which were a monetary operation, and the other elements of the cost of the Irish bailout. It is well nigh impossible to imagine the ECB doing anything other than in the context of passing the parcel to EA governments.

@ Aisling

The SPD has latched on to the Cypriot situation and is refusing the provide the necessary support in the Bundestag for the proposed bailout.

@DOCM
Agree that the ECB will likely pass the parcel. Why then is Enda boxing himself into a corner?

@DOCM I have to say I feel really sorry for Cyprus in that Angela Merkel and co strong armed them into strong arming their banks into engaging in Greek PSI. Their nuts deficit is all their own making but the Greek bonds in the banks is unfair. Maybe they should just let their banks collapse/ sell them to Russia lock stock?

@Fiat Almost certainly but the question is how given the prohibition of OSI and the fact that what debt is left is mainly in the hands of hedge funds, under English law, so how can they get a CAC vote?

@John G Any IRR for us yet? Waiting with baited breath

@Grumpy I know that this is too mean for even Hogan but the hip is broken before the button is pressed (on the fall). Take away the button and there’s a chance of hypothermia discomfort etc while they can’t get to the phone they might head into a nursing home and die and then we can have a portion of their house to pay for their nursing home fees….

“Bond: You know, you’re cleverer than you look.
Q: Still, better than looking cleverer than you are.”
Die Another Day.

“Therefore total “return” for the govt of 1.056bn + 100mn (coupon from last year) = 1.156bn, ie 15.6% return in around 18 months”

So above is the ‘math’ that bothered me on my bar stool last night in Soho,thanks to Eoin this boring saga continues….it completely overstates the ‘return’.

I have looked and looked but not sure if this was a NPRF investment as BEB claims,its a d of f statement,but stand to be corrected,if anyone has a link.

basically 100 bucks invested-utilizing 3.5% as fund costs ignoring transactions costs.
Year 1-received 10 less 3.5 equates to a year 1 return/yield of 6.55.
Year 2-received 5 less 1.75 equates to a partial year return/yield of 3.25.
event mid year two sale proceeds 10mil.

i ‘outsourced’ this math to various ‘bond’ chaps that i know in NY most told me to f**k off they busy..but one or two said yeah use an IRR.
Further asked if BEB ‘math’ was worth a dam in the bond world eh nah they said its kindergarten stuff.

no one simply ‘adds’ up yearly the interest received to calculate a ‘return’.
so extrapolating BEB’s logic it would have been a 20% return after two years..30% after 3.
the most widely used ‘mark’ to compare this investment is an IRR.
BEB do you want the IRR….really ?
stand over my comment your ‘return’ is illogical.

@DOCM

“The “vicious circle” (or is it “link”) between sovereigns and banks can be broken either by restoring solvency to one or the other but more than likely, given the symbiotic relationship between them, a combination of the two. Getting out of the banking business as fast as possible has to be the aim of any government that has seen its solvency wrecked by runaway banks. All other issues are secondary.”

If you go so far as to argue that governments are banks and/or that banks and sovereigns are indissolubly linked, then I don’t see how you can argue governments can get out of the banking business.

Banks on their own managed to boot off the financial crisis. Governments getting rid of them gives them the chance to do it all again.

The Irish government should only get out of the banking business when:

(a) The return on the money put in is secured,
(b) It is safe(er) to do so, bank resolution scheme funded by banks, moral hazard removed, etc.

The government should not be trying to get out as fast as possible.

@John I’m all upset now. An IRR would arguably be the correct calculation (albeit that Governments cash account one could argue that they can use whatever basis they want including ignoring the cost side) but you haven’t provided an IRR for the transaction. What is the IRR bearing in mind that this is an 18 mth rather than a 2 year transaction as your numbers above for year two would seem to imply?

@ Gavin Kostick

I have argued that governments are now effectively in the banking business because of the near unresricted issue of government debt and the resulting “maturity transformation” i.e. raising cash now on the basis of IOUs to be paid later. I have never said that this is necessarily a good thing and I doubt very much if it is notably because these bonds are automatically assumed to carry no risk as far as accounting for them is concerned (which is clealy a nonsense).

It would be far preferable if banks were involved in providing credit to the real economy and not to profligate governments. “Safe assets” would then be the bonds issued by productive companies, not dud government bonds. This is what a much reduced Irish banking sector is now haltingly getting involved in. All the better if overseas banks take over. At least, the taxpayer will not be left with the bill when the lessons of the present are again forgotten.

That is the direction Germany is taking with the now constitutional requirement that there be a balanced budget. Our national objective is not self-reliance but “to get back into the markets”. Assorted national heroes must be turning in their graves.

I would still, of course, favour the issue of bonds for productive purposes rather than consumption AKA “front-line services” i.e. they would provide a real return rather be eternally rolled over leaving the bill to our children and grandchildren.

@ Gavin Kostick

I should add, for clarity, that the link between sovereigns and banks must remain symbiotic as the task of credit creation has effectively been farmed out by the former to the latter and no better system has yet been devised. It works as long as the sovereign is wise. Wisdom is a limited commodity.

@ John/Aisling

An IRR (if we actually got one) is only useful for comparison purposes (ie how good is this investment compared to another, or if we were trying to highlight how “great” the investment was). This would make sense if the govt was in the business of trying to justify the original investment or of professionally managing money, or if a huge amount of fanfare had been created over their alleged return. But this isn’t the case for any of these, we/the govt have only stated in here what the absolute nominal gross return was, and that it seems pretty decent. Just like the US govt, and indeed most in the market, typically refer to their investments in AIG and GM in gross nominal terms, that it exactly what the Irish govt is doing. Some people are not happy with this, but that doesn’t make it wrong.

http://www.bloomberg.com/news/2012-09-11/aig-stock-prices-at-32-50-share-as-treasury-cuts-stake.html

@the artist formerly known as John G

Why have you re-defined this as an IRR?

The investment was held for 18 months and the return from it was…..?

@OMF

What you said:

“This sounds like a hair brained derivative plan”

Wrong, no derivatives and in fact, a bog standard bond sale.

” by an agency currently unable to actually sell a proper bond.”

Wrong, if is a proper bond.

” I fully expect to discover that this will end up costing millions more in fees, or higher bonds rates”

Difficult to see how this could put bond rates up. The fees are the fees, why would they go up by millions more? Could you have done it cheaper?

“solely because it uses an opaque maze of demented financial abstractions.”

Wrong, or can you outline what constitutes the opaque maze of demented financial abstractions in this particular case?

@BEB My position is that I can intellectually see the merits to using an IRR rather than ignoring the cost side (but I did not see that as an absolute given how Government’s account) and I can see the merits in not using an IRR. But while I acknowledge it is generally used for the purposes of comparing investments and rescue aid is not made on the basis of “deciding on a good investment”, even if we used an IRR we still made a profit.

Of course it then turned out that John was talking up the IRR without producing any numbers as to the IRR.

what about my post above, about selling the Cocos to a commercially minded semi-state like the ESB, or Bord Gais etc.?

@Aisling correct I no longer do the “math” or grunt work in the office here.
As this is a “personal” project I asked one the analysts to run the IRR…after work…it’s 5 here!
Will have the IRR,post it with assumptions and can discuss merits or otherwise tomorrow ok ?
I actually tried running it myself but given its 18 months,you can’t “cheat” has be done manually.

@Grumpy
“I have to say, the reaction to the last few days events has been, in substantial part, absolutely bizarre, notwithstanding the fact that over the last few years ‘the establishment’ in Ireland and elsewhere has lost a lot of the public’s trust.”

As you say the ‘establishment’ has lost a lot of the public’s trust.

So why would some of the public react negatively to the govt sale of coco bonds?
The public have been spun a good news scenario for the past few years. ‘The economy is improving, 85% of heaving lifting done, we have recapitalised the banks to the tune of mega billions, the only country in Europe that has done so, etc, etc etc. Quite believable, even to the sceptical, if ones considers the fall in govt bond prices, notwithstanding the Draghi backstop. But then out of the blue;

The govt sell a coco in ‘our’ best bank at a junk yield of 10%, because ..because of strategy, or because..who knows but best expressed by Seamus Coffey;
“I for one prefer that the government has €1 billion in cash than a 10% contingent convertible bond in a bank of the same value.”

So which is it? Do we have well capitalised banks, with BOI as star pupil, or after all the billions, do we still have junk that the government wants rid of.
Or alternatively if the banks are in better shape than the yield obtained (which I believe they may be), has the government completely lost its nerve and its brains, or is its bank strategy is being driven by the ECB/Trolika, regardless of the cost to Ireland, a possibility that I believe is closer to reality.

On a broader issue, if the economy deteriorates or Europe takes another dive, who in their right mind thinks that in the absence of bank resolution scheme, fully funded otherwise than by the meagre means of the State, that the whole sorry mess will not land the banks right back in mothers arms again.

Either we believe our rhetoric about the banks, and keep them to extract value, or we sell them at junk yields, effectively telling all and sundry that we are spinning yarns and that the potatoes are so hot that we would throw them out the window for nothing.

@DOCM
Though I appear to be on the wrong side of this argument, I share your concern as expressed above;
“Our national objective is not self-reliance but “to get back into the markets”. Assorted national heroes must be turning in their graves.”
Extraordinary, but that is where we are.

@Peader Coleman.
“For example if a commercially minded semi-state like the ESB, or Bord Gais, bought these bonds from the Government?”

You raise an interesting question, but the question should really be put in a broader context. Why are pension funds, including many semi state funds, investing virtually everything outside the country, with tax relief in full provided at source both to the contributions of the pension members and to whatever gains they may earn on VW or Coca Cola etc.
While coco bonds may not be investment of choice, the question needs to be addressed.
Indeed as far as I know, the State is in advanced discussion to ‘sell’ Irish Life, which manages many of these semi-state pension funds.
So the irony will be that a ailing State that has a quasi guarantee on the salaries and conditions of its semi state employees, will sit and watch from a distance as their tax relieved pension contributions are invested in the countries of our ‘partners’.
When Irish Life is sold, we will not even have one ‘public interest director’, not even one earning €1000 a day, sitting on the board telling us that all that is being done or not done, as the case may be, is for the greater good of this great little nation.

@DOCM

‘It works as long as the sovereign is wise. Wisdom is a limited commodity.

Are you inferring that the financial system has been “wise” over the past 15 yrs or so? Or are you indulging in not so subtle one-sided spinning?

Methinks, based on empirics on this blog, the latter.

Pat Kenny’s wind-up was pretty good. Looks like many here agree with the “a waste of 67m a year for some good PR” that I think Mr. Kenny lobbed up as a soundbite, waiting for that analyst to smash over the net with a flourish.

Out of curiosity I went back and checked Anglo’s Annual Report as of 30 Sept 2008. The coco trigger point would not have been hit – it was solvent after all – they had just hit a little liquidity bump you see. While the coco may be good in its role as a loss absorber, it is useless as some sort of early warning signal that gives anyone time to react and avoid a full bank resolution, so if the trigger is ever hit there’s a high probability that it will be completely wiped out. it’s a binary outcome – win big or lose everything.

Now the real test is this – would you invest your own money in this security? Due to new regulations in the US, hedge funds here are now required to publicly report their holdings to the SEC. As a result there are now ETFs that track hedge funds to allow the man in the street to follow along and mirror all that hedge fund genius (e.g. Global X GURU). I would suggest that some enterprising financial type in Dublin set up a similar fund which would track the performance of the investments that the government is now walking away from, allowing the man in the street to follow along too and show their confidence in the banks and their profitability. Perhaps it could be called IRLOPT (for optimistic).

An even more enterprising financial type could set up another fund that shorted IRLOPT for all the naysayers (IRLWTF ?).

What the government does is far more significant than what it says. By selling the security it is signifying that it believes there is a fair chance that the trigger will be hit and that 1BN will disappear, and that this is a chance it is not willing to take. Maybe the “bank deal” talks aren’t going well. Or maybe there’s some sort of effort to ring fence AIB and AIB alone so that an ESM recap of AIB won’t be applicable to Spanish and Greek banks, and that this effort is just one part of a lengthy stage-managed process. Time will tell.

JR,
Is it such a junk yield? What other European bank co-cos trade. Barclays & Lloyds have co-cos in the market. I think the Barclays coupon was 8.5% so perhaps somebody like Eoin or Grumpy will tell us where it trades at the mo. Then is the BofI co-co good value bearing in mind that there is still a non trivial rosk of being converted. I think you should answer this question before going off on a rant.

Remember if BofI needs to be recapitalised again, there will be somebody in the queue before seniors/deposit holders and the taxpayer are touched. that will be the lad who bought a billion of these co-cos.

Also, I should correct your facts. We were not the only country to stump up taxpayers funds for bank re-caps. Ever hear of RBS, LLoyds, Depfa, the FROB, the TARP, AIG, ABN-Amro, ING, Fortis etc. The scale here is off the charts due to the stupid decision to join the euro and complete mismanagement of regualtion and fiscal policy.

Finally, most of the Irish Life funds are from private sector workers and self employed. I bet they are glad that that company had relatively little exposure to Ireland when the stuff hit the fan. Moreover, as a policy holder I would not want them investing my pension savings in some political boon doggle to “stimulate” the domestic economy unless I was well paid for the risk.

tull i think Barc cocos are about 7.4% market yield, but they are 10y and in usd but they have a lower trigger at 7% – eoin might check. Think most would agree Barc has less tail risk than boi.

@paul quigley et al.

Absent new political and social ideas, we are fubared.

Never underestimate the power of economic blogs to promote change! I don’t know how much of the trillion-dollar coin discussion has percolated across the Atlantic, but what began as a comment on an MMT blog has now gone mainstream in the USA e.g. this TV program segment. The former head of the US Mint says it is a perfectly legal and sensible idea to solve the problem. Of course the real benefit of the discussion is forcing people to think about how the monetary system actually works, and whether there are better alternatives, and challenging the prudent homeowner/swabian housewife view of government finances which is unquestionable ideology for both the Republican party and Angela Merkel.

At the core of the issue today is why the Treasury should only be allowed to issue debt and the Fed only allowed to issue money – some proposals think the roles should be reversed. There used to be “United States Notes” issued by the Treasury, in contrast to the Federal Reserve Notes issued today. This allowed for government spending without first needing to borrow and pay interest – and helped to win the war for Abraham Lincoln. In the modern age the question needs to be asked as to why a government needs to pay interest on money it creates and spends – the trillion dollar coin is in effect a zero-coupon perpetual bond. The Fed has multiple levers with which to control inflation and in the modern economy inflation has totally decoupled from the money supply, so simple anecdotes about wheelbarrows and Weimar are not an adequate rebuttal (assuming that there is a reasonable level of taxation to drain the money supply).

As part of this initiative which has now gone mainstream there was a Bill introduced in Congress to bring back United States Notes and outlaw Federal Reserve ones – in effect to change the basis of the monetary system back to what is was previously.

I think it would be a very interesting exercise for the Left in Ireland to take this Bill, transform it to an Irish context (which I think would involve issuing Irish State Notes alongside, not instead of, Euro, which could be used for government payments and taxes, and cycle through the economy), and holding some committee hearings (inviting the ECB, who are not known for their love of being asked hard questions in public) on the merits of zero-coupon government debt (dated and perpetual). The whole motivation for this is the unemployment level, so that objections to the scheme would need to be followed with an alternative proposal that would address the problem, which appears not to be the responsibility of any EU institution.

@ Paul Quigley

“Government debt is a supposed risk free asset, because governments can always raise taxes enough to keep it serviced, even if it is never paid off.”

and

“Draghi has to introduce OMT because his euro government debts are looking a bit dodgy.”

It is the logical conflict between these two statements that are at the heart of the matter.

Let governments supervise banks so that the credit of the latter is good. Let them run their own affairs – and economies – so that their own credit is good. Not even Germany has been able to manage this. The relations between princes and their bankers were also often poor but “war and pestilence” are hopefully no longer on the agenda.

“Let governments supervise banks so that the credit of the latter is good.”

So how would that work, then, DOCM? I mean in the real world.

How would you regulate bonuses ?

And gosh, how many banking scandals did we have last year? HSBC laundering Mexican drug money, the London whale, UBS agus mar sin de.

And if the bankers become to big to fail and the government is unable to regulate them because it fears a banking collapse?

@DOCM I think your interpretation is spot on. Its nicely done it has to be said, Germans don’t like the idea of a banking union but Sinn has them in a state of frenzy over Target 2 so spin the banking union as a potential solution to Target 2 imbalances. It is not really about a European Banking Supervisor getting to supervise the fine German Landesbanks but rather about allowing the Bundesbank supervise PIIGS banks to protect its Target 2 position.

Even if the guvmint got a 500% return on the wonga the banks would still owe the people tens of billions.

It’s a bit like getting excited over Longford winning NFL division 3 . Nobody will remember in September.

@ John Gallaher

Let me put your analyst of their misery by helping you out with a short test – no HP 12c required!

a) What is the IRR of a bond that pays a 10% annual coupon, if you buy and sell it for €1,000m?
b) If you buy a bond for €1,000m and sell it for €1,010m one year later, what is your IRR?
c) If you buy the same €1,000m bond but this time sell it for €1,010m eighteen months later instead of a year, what is your IRR (hint it is 2/3 of the answer to b)?

If you answered 10%, 1% and 0.66% then you would be correct. Therefore by adding a and c together you can see the government got an IRR of 10.7% on their investment.

Now for the honours question – If you buy a bond that yields an annual return of 10.7%, but you have an annual cost of funds of 3.5%, what is the net return achieved if you subtract 3.5% per annum from 10.7% per annum?

I’ll leave that last question for you to work out on the back of a napkin in Scores tonight.

@Edward thanks for that,is Scores still open ?.Not really a New York thing,reserved for “tourists” really and I don’t like to “look” not ,my thing,i find those place quite demeaning,but glad you are up to date on adult entertainment in NY,hopefully at your own expense.
Thanks Paul that did help…Edward no misery at all difficult to crack the whip too hard when asking a favor.Ok to review and discuss its 9 am here !
As clearly stated above NOT my area of expertise nor do I do the “math” here.

So net 7.2% versus indicative. 7.02% CDS…Near enough! Market.
So why does the Govt agencies involved explain this clearly?

Am I reading the CDS 70.2 percentage points correct there?

@ Paul W

BOI senior CDS is 360bps, their subordinated CDS 540bps. Both have moved in a lot over the last week, particularly subordinated CDS (-80bps).

A CDS of 540bps wpuld bring your real, insured return down on a subordinated bond (not a coco) from 10% to 4.6%, but a coco triggering does not equal a default, which again shows the difference between a standard sub debt bond and a coco.

@ BEB
We crossed there. Yes, it’s not sub-debt. Understood. But hopefully our calc is now more alligned with those of the dealers on the trade (subjct to my Q. re CDS language above).

@ Edward that is correct for a-c but you already know that,unless i’m missing something on the honors question you just subtract.
The IRR on those notes is 10.7%.
much ado about nothing.

@tull thanks for the carer advice,surprisingly the current one going quite well.

@Edward now that we are in agreement with the IRR what does it mean…
are you happy with that return?
this part i don’t have to outsource or rely on the ‘help”

@ Edward
Apologies, have been travelling. I now remember your calc basis. However, in a live deal, on a swapped basis, a dealing desk would also discount the cash flows to a zero coupon basis. Correct?
Ditto re John’s Q: meaning? Have you access to like CDS comparison?

So after 160 plus posts, what is the conclusion?
I note that many of the “failure porn” posters think that the govt was wrong to to sell a 10% coupon bond.

Was the price right?

@ tull
Did you try asking Leslie Crowther?

@ Tull

The knee jerk reaction for the perma-bears is to assume the worst, refuse to accept any potential for good news/decisions, eventually decry even established facts or solid evidence and replace with conjecture, insinuation and perhaps even crazy conspiracy theories. If all this fails to ‘fail’, head in the sand/I’m taking my ball/this is getting boring/let’s change the subject/”it’s the bankers what done it” attitudes begin to be enacted (usually in that order).

@Tull, jay….sus you were all over me like a cheap Italian suit for the IRR..you got it care to discuss?
Or like Edward above you just like to watch !

@Bond. Eoin Bond
“The knee jerk reaction for the perma-bears …”

I thought bears were sellers!
Frankly, this sale at a ~10% yield has come as a shock me. I genuinely assumed BOI was on the road to recovery, mostly from listening to govt rhetoric.
It is a big let down to know that somebody wants to get out, even if they have made a profit on the transaction, which as you know is irrelevant to the decision to sell.
There is also the implication for other banks. If a 2016 10% coco bond in BOI can only be sold at par, where does that leave AIB and PTSB cocos or other equity.

People are being paid big, big, money to ‘fix’ the banks. I decided just now to take a look at what efforts BOI was making to reduce its admin/payroll cost and guess what.
Jan- June 2011 Wages & Salaries €353 million
Jan- June 2012 Wages & Salaries €350 million, but pension costs up from 43m to 51m and ‘restructuring, read redundancy costs, an additional 60m.

Basically no payroll reduction whatsoever, and an additional 60m ‘restructuring’ cost.
Mr Boucher is being paid big bucks to deliver a turnaround in BOI, as are many others in his organization, as are other bankers in other banks.
It seems to be much easier to blame ELG, funding cost etc, mortgage arrears etc
No normal commercial operation would get away with that. Staff costs would have been cut, it is as simple as that.
The taxpayer should not have to stump up for an impregnably protected sector. Even in the PS there was a wage rate reduction of ~9% and a pension levy of ~6%. What was there in the banks? Nothing.
If the banks want to be saved, and if the State wants to save them, then bank staff and in particular bank executives should be compelled to share the cost.
Many people are tired being bled dry to ‘save’ the banks. Where has it got us. Better to compel recap from creditors, including depositors, and in particular including staff salaries, including pensioned staff.

JG,

First of all thanks to EB,Edward, Grumpy and PaulW for advancing my knowledge of this situation. maybe when your mates come back with the answer to some of your qustions, I can extend some kudos to you.

Since you ask for my non expert views. Anybody who reads the doom porn suff on here & took it seriously would be amazed that anybody in thier right mind would buy Irish govt fixed inocme assets at 14-13 12-11-10-9-8% etc etc right in to what is it now 3%. You would have lost a fortune following the wisdom here.

The same person would be amazed that somebody would buy Irish bank subordinate paper at 10% until he read the same posters attacking the govt for selling their holding at 10%. Then he would just give up and laugh.

For what it is worth and it is not a worth a lot, I think the govt sold its holding a point or two cheap but it hit a bid for size. It seems to be a a yiled of about 9%+. The nearest comp, I iould find is Barclays which is apparantly trading at about 7-7.5%. But that has a lower trigger point so is less likely to be called. The Barclays paper is issued in GBP which at least is a proper currency with a competant CB/FSA regualting it.

The BofI paper is in euros, still has significant tail risk and the monetary authority not to say the financial regulation is disfunctional. In addition, who knows what impact the capricious behaviour of the core towards Cyrpus will have.

The govt has found a guy to pay a billion to stand in front of it in the event of a recap. Moreover, it is one billion back and 64 to go so I will settle for that. Now let us move on to the rest.

Maybe JG, you could give us your view now, I appear to have missed it.

@Tull I’m out NFL game,money on it.
Thank you for your response.
Lets agree to disagree its unsporting to continue.

Payback is a bi**h..
@Tull I’m out NFL game,money on it.
Thank you for your response.
Lets agree to disagree its unsporting to continue.

@BEB I’m not taking the ball away.
Just refuse engage here its pointless.
Saturday afternoon better things to do.
Tull thanks for your response…such that it was.
The question was about the IRR achieved?

JG,
things will have turned for definite when somebody buys AIB
No idea who bought them but good luck to them

I belive Edward gave you the bones of an answer on the IRR but we still do not know whether you think it is good or bad. Are you sure you not a broker?

@Tullmcadoo

“Anybody who reads the doom porn suff on here & took it seriously would be amazed that anybody in thier right mind would buy Irish govt fixed inocme assets at 14-13 12-11-10-9-8% etc etc right in to what is it now 3%. You would have lost a fortune following the wisdom here.

The same person would be amazed that somebody would buy Irish bank subordinate paper at 10% until he read the same posters attacking the govt for selling their holding at 10%. Then he would just give up and laugh.”

Irish bonds were a excellent buy at 10%-14%. I, for one, certainly said so. The problem was that Irish pension funds-yes, those people again-simply do not or will not buy Irish bonds.

http://www.irisheconomy.ie/index.php/2011/06/01/leogate-and-green-jersey-economics/#comment-150038

@Aiman..eh I know ?

Different ways of looking at the figures. However, a dealer would do IRR basis. Need a like market comparison to first see if it was market level. BoI CDS would bee good but. He WSJ quotation above is confusing. Can’t find anything on markit.com. Hopefully John can revert with bloomberg data tomorrow.
Assuming though it is bona fide market (but big suspicions /q’s from the cynical like me!), the question is then not price, but strategy. Difficult to argue that it was negative to sell from a strategic point of view.

fyi

Looks like Mad Ould Jozie’s bazooka round landed somewhere influential ….

The PANIC BUTTONS for the elderly have been restored!

@ John Gallaher

My apologies for the delayed response, I have a ‘no blackberry’ policy at home on the weekend. To answer your question, yes I am happy with a 10.7% return for the government in this instance.

The first point that I’d make is that I am pleasantly surprised by any bailout that offers a return of tax-payer’s capital, let alone a return on said capital.

Secondly, though I’m no expert in CoCo bank debt, when I compare the risks on these bonds to alternative investment opportunities, a 10.7% IRR looks like a reasonably attractive (unlevered) return to me. Whether you think a low-interest rate environment is helpful or not, it most certainly has boosted asset values and lowered returns – for example, US High Yield bonds (which approximates some of the riskiest corporate bonds) currently yield an average of 6.1% (per the BoA ML High Yield index). Looking closer to home, at the Irish stock market, the best dividend yield I can get is about 3.3% (Dragon Oil or Irish Continental), to which you should add long-term nominal GDP growth to get to expected returns (let’s say an optimistic 5% NGDP as an assumption), which would be 8.3% expected returns from investing in them, which is again much lower than 10.7% despite being more risky from a capital structure perspective (bonds with equity characteristics rather than just equity).

Taking a look at hard assets in Ireland, you would think that Ireland is stacked with cheap property given the economic uncertainty (or rather certainty of further cuts) and some of the press/commentary, but commercial office property yields in Dublin are at 6.0% according to CBRE’s latest market report and Kennedy Wilson are running around town picking up apartment complexes at sub-6.0% net yields.

So to sum up, there aren’t too many places out there where you can get a reasonably secure return of 10.7% in an a tradable security. Would I have made the investment, with my own money, 18 months ago? No, but then again I don’t feel obliged to protect the Irish banking system (and the reality is that the government would always have felt the need to step in/backstop the bank so at least they got paid a 10% coupon on €1bn to do so then and have now found someone else to fill some of that gap).

@ Paul W

I can’t speak for how every desk/trader would look at this, but I have spent some time buying loans/bonds on the secondary market. When we priced those, we would always speak in terms of ‘yield-to-maturity’, which is an IRR calculation consisting of two cashflows: (i) the interest payments; (ii) plus any gain/loss on redemption from buying the bond at below/above par value of 100 (which I guess is what you mean by discounting on zero-coupon basis). The IRR is your discount rate – if you think the IRR is going to adequately compensate you for the default/other risks you buy it.

In terms of subtracting your cost of funds, that is not something that we would ever take into account when assessing whether or not to make an investment because your cost of funds is the same no matter what you are investing in (and you’re not likely to know the answer anyway). If you work in a bank, then you might have a transfer pricing mechanism in place where your team is loaned money at a set rate from central treasury, but this a back-office/accounting treatment that wouldn’t impact your decision on whether or not to invest (for the same reason, you pay the transfer pricing on everything).

@Aiman mention it in what reference….it was in every report on it,still lost me on mentioning it in conjunction with the IRR.
There is NO agreement on a method/black box solution to elevate this investment,which was the original question.
The buyers are “rumored” to be among the current owners….no the Irish owners..its “funky” paper could become illiquid quickly,reduced exposure.
But….was producing terrific yield short window you guys cashed out,smart money would have held till maturity…or maybe sold half.

@ Edward
Swapped zero coupon discount is to exclude implicit inflation in interest rates.

Yes, from a front office (non desk) point of view, we would always have taken CoF into account (as charged internally by treasury). Different institutions have different CoF. In any event, our primary commercial benchmarks were then Gross and Net Return on (Regulatory) Capital. I ran Banking Books not Trading Books (another ‘wrinkle’ in this discussion from a banking /accounting point of view).

Interesting comments. Brings back memories!

Rumour that the army demolition experts are examining a spent bazooka round in an isolated, derelict and ununhabited part of Minsiter Hogan’s constituency!

Mad ould Jozie must have aced the training program! Panic Buttons anyone?