ESM direct bank recapitalisation instrument

Nearly 12 months ago a Euro Area Summit Statement declared that:

When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.

Yesterday’s Eurogroup meeting examined this issue.  The statement is here.  The final sentence is:

The potential retroactive application of the instrument should be decided on a case-by-case basis and by mutual agreement.

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60 thoughts on “ESM direct bank recapitalisation instrument”

  1. The most significant comment on the retrospective funding by ESM of Irish Banks may well be Michael Noonan’s comment this morning on Morning Ireland that he expects both Aib and BofIre to be profitable in 2014. Ptsb, the third bank of the three in question, is not expected to be profitable until 2016 – according to the bank’s own statement of 6 January 2013. (Although this could be the old management trick of dampening expectations with a view to surpassing same to applause.)
    While the government’s investment in Ptsb, €2.3 billion for 99.2% equity ownership, may be ‘blocked in’ at the moment because future prospests are too uncertain, this cannot now be said of the governments equity investment in Aib (99.8%) – for a payment of €9.575 billion – and in BofIre (15.2%), at a net cost of around €1.9 billion.
    This morning’s comments by the minister signals the beginning of a sustained profitable phase for both Aib and BofIre. “Both Bank of Ireland and AIB have projected that they will be in profit in 2014. Looking at the Balance Sheets I think the forecasts will be accurate. I think we will have two profitable banks next year in a growing economy. Obviously that changes values of banks and it changes the arithmetic. It gives us other options because profitable banks in growing economies have a value in the market. So we are not solely tied to an ESM option any longer but it is important that we do have the ESM option and we have it as of yesterday.”
    I doubt if the minister would have offered such an opinion if it wasn’t based on solid projecting available to him. In terms of a pragmatic use of this government ownership – let’s debate, debate and debate it – I suggest three scenarios.
    1. Sell relativly quickly, as near to breakeven as possible, put the money into the newly designed, NewERA, and use to stimulate and boost the economy (now at an appropriate ‘turning the corner’ point) and recover an annual ‘return’ from the various ‘investments’ from the projects themselves or later via the enlarged (good times) government revenue. It may even be possible to refloat the NPRF (from whence NewERA) by 2025 or so.
    2. Hold the equity ownership intact – no slippage – and set off the net gains (and dividends) against what remains of the AngoNationwide promissory notes. €25 billion remains of €30.6 billion. Not forgetting the earlier €4.1 billion, pre-promissory note. The question here is could a €25 billion gain accrue?
    3. Persuade the ESM/ECB to take over the €6.054 billion ‘Special Capital Consideration’ given to Aib. This money, neither equity nor loan capital, was given to Aib in July 2011 with a clause in the financial instrument which said that ‘the government may not seek repayment’. As ESM will be a ‘break-even’ entity over the medium term, with gains from levies, capital gains, and possible gains from lending, such a scenario should not be ruled out. Any such undertaking would be in recognition of the Anglo/Nationwide bailout and its history within this EU wide problem.
    Also, ESM might agree to take over the remaining capital loans (at par) with their 8-10% annual interest charge, although the privates may wish to get this cake. The outstanding amount is €7.3 billion.
    There’s a lot to be said for options 2 & 3. Bank capitalisation, by definition, means ensuring that a bank’s net asset position (Balance Sheet Net Worth) is equal to a % (currently averaging between 6-10%) of the bank’s loan book. The above three banks’ net worth at 31 Dec 2012 was €17.5 billion. The weighted government ownership in a single figure is around 60%. 60% of €17.5 billion is €10.5 billion. This is only a little behind the government’s equity costs of €13.75 billion. A return to a profit figure for the three banks equal to their after-tax profit of 2007, €4 billion, is possible and likely. Throw in a loan book annual increase rate of 2.5 to 3.0 %, slightly better margins compared to 2007, and a holding of market share: what you get is a combined annual profit figure sometime after 2020 of €4 billion (same as 2007). The ‘opening’ net worth combined with the profit potential is what leads to a potential net yield of €25 billion.
    We can also bring in to play the gain already achieved on the support given to the banks. The overall gain on Central Bank profits plus the loan guarantees is already at around €6 billion. This is relevant if our overall position of reasonableness is to achieve an overall break-even.
    Am I the only one who thinks we are overly gleed at the possibility of selling the equity in the banks hastily – to the ESM or venture capitalists. If a gain on one side matched the loss on the other side, why not go for it. It would bring our government debt figure down considerably, it would give us all a better sense of not been trampled on by AngloNationwide, it would boost an economic take-off. Pragmatic government ownership of a portion of the banking sector for another 10-15 years, well managed, such as the IDA etc, might well be the suitable pragmatic solution to recovering the nasty losses at AngloNationwide, while also reboosting the economy.

  2. Profitable APART from the losses was how I read it.
    Im thin, apart from being fat.

  3. Potential ; Should ; case by case ; mutual
    Four conditional statements. Whats the joint probability of all four going our way?

  4. @ BL

    That German politicians are divided on issues relating to the euro and the ESM is hardly news! The SPD has no agreed position and is imploding in the opinion polls. The WSJ reported the situation as follows;

    “The ministers left open the possibility that Thursday’s decision could benefit euro-zone countries that have already used bailout loans to prop up troubled banks.

    “It will have to be decided case-by-case and by mutual agreement,” said Jeroen Dijsselbloem, who presides over the Eurogroup meetings. “It’s up to the member states to apply for it.”

    Ireland and Spain, and to a lesser degree Greece and Portugal, have seen their debt loads jump in recent years amid serious problems in their financial sectors.

    Mr. Schäuble described the retroactivity decision as “a concession to our Irish friends.”

    Taken together, a positive outcome even if what is really intended is open to interpretation. “Sufficient unto the day…”

  5. wow a German Politician says something populist in election campaign. Who would have thunk it?

  6. @ brian lucey

    Profitable APART from the losses was how I read it.
    Im thin, apart from being fat.

    That’s exacly what crossed my mind when reading gar ocos’ piece.

    50% of SME loans bankaxed and so on – there is no big property price recovery around the corner.

    While Wolfgang Schäuble, German finance minister, said an agreement on retroactivity was “a concession to our Irish friends,” he suggested on the way into the meeting of the Eurogroup in Luxembourg, that little money would be available for past recapitalisations: “I don’t think we have much leeway to use direct bank recapitalisation…retroactively.”

    @ gar ocos

    Contrary to the “rocket” growth Michael Noonan may dream of, China’s interbank rates hitting almost 11%, an annual budget deficit of 10% and overcapicity due to big pubic subsidies to undercut Western rivals, where are the growth engines?

  7. from yesterday….Hodgkinson-linked it on other tread.
    “We significantly reduced our operating loss during 2012, on a pre-exceptional basis, which included a 70% reduction in bad debt provisions year on year. However, notwithstanding the improvements in performance compared with 2011, AIB continued to be a loss-making organisation.
    The scale of the challenge ahead remains significant. However, building on the progress made to date, we still aim to generate a pre-provision operating profit in 2013, and return to post provision profitability during 2014.”

  8. MH,
    Did the overnight SHIBOR not drop to 8.5 this morn. Where is the 3 m rate? Does a 10% deficit matter in China with a LOLR?

  9. @ BL

    I would not worry about that Carsten Schneider from the SPD.
    He may be financial speaker of the parliament group, but that doesnt mean much.

    He is one of this classic left loud mouthes, who are already against something, before knowing what it is, and the potentially juicy parts of the deal are still pretty open, as far as I understand it.

    He is also a typical example for talking “international solidarity” to other countries , and then trying to block anything internally. And this is not the first time with him.

    The SPD is losing in the polls, because it becomes more and more clear, how low the quality of their figures is.

    He has just an apprenticeship (nothing wrong with that in itself) in a bank, worked there for half a year maximum, and then became MP. No real world work experience, just a big mouth.

  10. I appreciate all comments. The September 2008 bailed out banks had a combined loan book of around €405 billion. Today that loan book is down to €195 billion (Aib/Ebs, BofIre, Ptsb) in the active banking market, with around a further €40 billion or so being ‘bad banked’, i.e. not in the active banking market, i.e. Nama & Ibrc. The deposit target set in the 2011 PCAR has been reached in both Aib/Ebs and BofIre, but not in Ptsb. A slow build-up of loans to (say) €266.7 billion by 2025 (say) is reasonable. That’s an annualised increase rate of 2.75%. With a loan book of €318 billion in 2007, the four banks Aib, Ebs, BofIre & Ptsb (with Irish Life) made an after-tax profit of €4.1 billion. I believe this lower projected loan figure (€266.7 billion) with slighty higher margins (as trending) plus lower operating costs (also as trending) will yield an overall profit comparable to 2007. (A consideration here is that the annualised increase over the period could be greater than the cautious 2.75% included.) That would represent an 18 year cycle, 2007-25, with zero movement in monetary values. Compare with the 1970s onwards period when values were doubling per decade. The overall profit to 2025 plus the opening net asset value plus the additional value attaching to its sustainable annual profit will likely yield a profit of €25 billion to the government/state. And, as stated by one of the contributors, Aib, as recently as at yesterday’s Agm, are publicly forcasting a return to profitability in 2014. The following is a summary of figures.

    Net Assets (Jan 2013), €17.5bn; Deduct for 2013, -€3.5bn; Average Profits (12 Years) = €36bn; Value of Sustainable Profits, €20bn;
    Total = €70bn; Gov Share, (60%), €42bn; Cost of Equity, €13.7bn;
    Gain, €28.3bn

  11. To paraphrase:

    June 2012: possibility of direct bank recap with Germany, France & Italy having a veto (regular decision)

    June 2013: possibility of direct bank recap with all countries having a veto (mutual agreement)

    The Dutch/Finns could agree to the last clause knowing they can prevent its activation, while giving some cost-free PR to the best boy in the bailout class.

    What I think might be achievable is a refinancing of the AIB/PTSB/BOI recap related loans by means of the ESM issuing “cashless” bonds which can be repo’d with the ECB, allowing the interest rate to be the ECB interest rate, rather than that required by the capital markets. This would bring the AIB/PTSB/BOI funding into line with the Greek and Spanish bank recap funding style, which was also used for Anglo/IBRC. This isn’t direct recapitalization since liability remains 100% with the relevant sovereign.

    There has not been a single euro of debt mutualization to date (notwithstanding the deluge of hysterical and chauvinistic German articles from newspapers, bloggers, professors etc. on that topic), and I don’t expect that to start now. No seismic shifts anywhere to be seen.

    Why does anyone expect the ESM to pay more for stakes in Irish banks than a private company would at market rates?

  12. @ Tullmcadoo

    Yes Chinese rates did fall back on Friday but the government is reported to be serious about cutting the current year-on-year credit growth of 23%.

    Reducing construction and cutting back in overcapacity in manufacturing while trying to avid a big rise in unemployment will not be easy.

    In sectors such as solar, steel, glass, paper, and car parts where labour accounts for only between 2% and 7% of production costs, and imported raw materials and energy accounted for most costs, Chinese products, with the benefit of public subsidies, are routinely sold for 25% to 30% less than those from the West, Japan and South Korea.

    Protests in Brazil, a fellow BRIC, illustrates the dangers ahead.

    Social safety nets were withdrawn in the early 1990s when companies were no longer obliged to provide, housing, health services and pensions.

    To boost consumer spending, health services etc will have to be improved. However, according to the World Bank tax revenues as a ratio of GDP are just above 10% and there will be a reluctance to hike them.

    Young couples, struggling themselves with city living, typically have to support 4 parents.

  13. I can imagine how the recapitalisation of the banks would seem like a good thing. Most of us learn that first of all the central bank creates base money and banks lend a proportion of this out which gets multiplied etc.

    However the system actually works in reverse with banks creating bank-account-money and the central bank creating central-bank-money to catch up.

    As Draghi said ,”It is a fallacy to make a mechanical connection between the creation of central bank liquidity and a rise in the money supply. The liquidity we provide to banks is used in the markets where banks lend to each other. It does not automatically increase credit or money in the economy – and so does not automatically lead to price pressure in the economy.”

    An abundance of central-bank-money does nothing for the real economy and hence I don’t see how the mechanism by which we get an abundance of central-bank-money is critical.

    Furthermore, for money to enter the real economy someone has to organise a loan from a bank – but this will come with a corresponding debt. Hence it doesn’t resolve the debt crisis.

  14. Gar ocs
    So what will you give me for my aib shares? Seriously. ..I presume much much more rhan the 6p theyre trading at.

  15. Following up on the bus comment from DOCM,

    I wondered, whether I can ask those questions.

    Let us assume, that the various official credits, Ireland got, are now just one simple 30 year 2.5% loan. Let us further assume, that the US are in about 3 years “back to normal”, and we would have some kind of stable “new normal”, Given the rate moves this weeks, …

    a) What rate would you estimate as a US 30 year comparison?
    b) How would you value then the above loan (just staying simple with the 30 years now, and I am intentionally NOT using the financial term for that, and the equivalent Excel function, and would like possible answers also to avoid the word : – )
    c) what percentage of the population can calculate this?
    d) what percentage of the populaton grasps the concept behind such a relatively trivial calculation?

    I am curious!

  16. Prof L,

    Perhaps you could deal with the substance of the posters arguments with your own numbers.

  17. Tull,

    the last thing I am looking for here is an “expert answer” for a pretty simple technical question (b). This I know very well. It was morea question for who here understands how much of history and mechanics of financial credit.

    And I also realize, that this blog is pretty much the only one, where even asking makes any sense.

    So, Prof,

    please dont spoil the party, and for all others too. You could earn a lot of respect from me, if you can answer b), have a reasonable estimate of (a), and c and d are wild guesses for everybody, I would assume.

  18. Mickey,
    Really, she who had a go at Bono over tax evasion yet who’s friend has tax issues. Degending the Assad regime is pretty cool as well.

  19. @Tull

    What appeals to me is the vim and vigour with which she attacks subjects that she must know are making her unpopular across a wide swath of the population. People like that are very useful if you can get them on your side.

  20. @ BL, gar ocos

    gar ocos estimates total (largely undiscounted) prospective value of bank equity is 70bn

    lets say 40% is AIB, that’s 28bn, allow for discounting and uncertainty, we are down to say 13.5bn, knock off prefs and we arrive finally at 10bn. Divide this up amongst 500bn shares, value per share = 2c. SELL

  21. @ tull/Mickey

    Fiery critiques of US imperialism are never really out of fashion. Didn’t one of the uncomfortable persons sitting beside the Taoiseach do that sort of thing back in the day ? But that was when the US was attacking little Vietnam. But it wasn’t part of the Axis of Evil, like Irag and Afghanistan. So the drones are OK then.

    http://en.wikipedia.org/wiki/Axis_of_evil

  22. Bw2
    When you notice ad you do the astounding number of shares….a 1 for 100 restructuring might take the bad look from them

  23. @ BL

    I really don’t understand the AIB share price. Its market cap is €30bn more than 50% greater than what it was at its peak! When the government diluted the free float to 0.2% I threw in the towel and sold my once rosy holding for a mere 12c a share, still twice as much as I would get now.

  24. Having read the speech I have come to the conclusion that Mario Draghi has produced a work as deep and sophisticated as The Prince by Niccolo Machiavelli.

    Placating Germans is just one stroke of genius.

    “Another sign of normalisation, and a very important one for German savers, pension funds and insurance companies, has been the increase in German government bond yields, previously suppressed by panic-driven safe-haven flows, which have edged up by around 25 basis points.”

  25. ‘The price of energy is declining as well and finally there are a number of important wealth effects that can support consumption and investment. These effects come from the rebound of financial markets that is benefitting virtually all economic agents, including corporations, banks and households’

    OK, the rebound is that of a dead cat, but the 1% are happy.

    ‘To avoid socially costly fire sales and in common with most other central banks, the ECB compensated for the shortfall in private finance by providing solvent banks with additional central bank liquidity against adequate collateral’
    They are solvent. Until proven otherwise. The ‘horribly undercapitalised’ DB sets the prudential standard for EZ megabanks.

    ‘First, we provided these banks with ample access to central bank liquidity – both by reducing our main policy rate and by expanding the collateral pool against which we would lend to euro area banks’

    The dodgy collateral is safe because we said the magic words ‘I dub you safe collateral’.

    ‘Third, we forcefully confronted financial fragmentation which has weakened the impact of monetary policy in the very parts of the euro area where it is most needed. Fragmentation has created divergent borrowing conditions for firms and households with equal creditworthiness but different country codes. As our main tool to combat fragmentation, we adopted Outright Monetary Transactions (OMTs)’

    We knew the EZ banks were stuffed with sovereign debt. If we didn’t bring in OMT, they would be well and truly stuffed.

    it is quite misleading to compare OMTs to historical episodes in which governments relied on central bank support to replace fiscal consolidation’
    Indeed it is. This is about trying to pretend EZ banks afre solvent when they are not..

    ‘Unfortunately, millions of unemployed are a much greater driver to reform that the interest rate to be paid on sovereign debt. And unfortunately, OMTs have almost no effect on the sources of employment creation. Indeed, while OMTs have eliminated one dimension of financial fragmentation (the risk of euro breakup), they only have a muted and indirect effect on the other source of fragmentation – the adverse feedback loop between sovereigns and banks’

    All right. It’s not funny when you go home for a wedding and all your nieces and nephews tell you vafanculo. I feel your pain.

    ‘This important improvement largely reflects the removal of unwarranted fears of a systemic collapse of monetary union that was previously priced-in by markets. Today, the euro area is therefore a more stable and resilient place to invest in than it was a year ago’

    Redenomination risk is reduced, but OK, credit risk is a teeny bit worse.

    ‘Before the ECB takes over the SSM, it will conduct together with the national supervisory authorities and with an appropriate involvement of private sector companies, a balance sheet review of those banks that it takes into the SSM. To this end, the national budgets and where needed, the ESM will have to provide adequate backstop’

    Che cazzo dici. Don’t ask me to go in there on my own. I can smell the dead bodies from here.

  26. I am actually a little disappointed, that none of you seem to be so far able to answer my simple valuation question above.

    If you could, you would see, that Europe has provided quite substantial and generous help for countries like yours.

    Especially with keeping in mind, that Germany is only 27% of the EA, and that the other 73% of the credits had to be brought up by countries like Italy and Spain, who are not in such a favorable credit situations either, if I look up e.g. ISINs like IT0004923998 or ES00000123U9 .

    The complete German table, on one page, you can find here:
    http://www.deutsche-finanzagentur.de/fileadmin/Material_Deutsche_Finanzagentur/PDF/Aktuelle_Informationen/kredit_renditetabelle.pdf

    There are ways to help neighbor countries which are within the law, and there are attempts to break the European treaties.

    One of them, the OSI that the notorious Simon Johnson promotes, is not within the laws. It is the same guy, who constantly feeds the slander against the Deutsche Bank, with the false claim of undercapitalization. And he does this together with pretty open nationalist hate mongering against Germany in general in Greek media, we had this here already. Is it only for promoting his book, or does he have a more general agenda? Whatever, what he deserves is more like some years in jail : – ). If somebody thinks it does him any good, trying to blackmail with slander, I can assure it has the opposite effect.

    Now I am wondering, can at least a Prof here or … John ? value a simple bond?

  27. Francis,

    It appears the FED governor Hoenig agrees with Prof Johnson. you can look up the headline “DBK horribly undercapitalised” for yourself. You may have trouble jailing him as well.
    Your point about the soft restructuring of peripeheral debt is accurate but with Debt/GDP ratios over 100% the Southern Europeans and Ireland are one downturn away from bankruptcy. Some of this build up in debt was due to the enforced requirement to pay back the gambling debts of German financial institutions and savers. You still have to figure that the EU and the EZ will fracture sometime in the next two or three years.

  28. @francis

    The present value of money in Ireland is more highly valued than elsewhere. In Ireland they say a bird in the hand is worth three in the bush, in England they say it two in the bush.

    In Ireland it is widely believed that the Euro under Bundesbank tutelage will appreciate against the $US nine years out of ten for the next three decades. Could be at the end of 30 years the US will be paid back at 10% of a Euro.

    You are asking a simple question of people who are complicated and in turn make the question complicated. They put La Garde, Draghi, Weidman, Dijsselbloem into the equation then add Bernanke. Put all that in the blender and finish up with mush.

    Dealing with the Troika there is no certainty surrounding fixed rates or fixed terms. We get up in the morning, go outside, wet our finger, put it in the air and forecast terms and rates for today.

  29. Mickey,

    thanks for the Newfoundland link. It shows exactly how not to do it.
    Getting “Technology” from your local unemployment insurance scam artist partner, with 3 summer month worth of “production data”.

    Newfoundland became part of Canada in the 1930ties, after bankruptcy and the English forced that. I think a year ago some Icelanders also tried to get to some kind of monetary or other union with Canada, and were basically told, they can use canadian cash, but that’s it : -)

    The reason I am so persistent on the Greenhouses to be looked at, is not because I am some agro or bio specialist, I am a physicists, and more like : it moves, make it dead : – ) But about half a year ago I learned that Canadian greenhouses can compete with Mexico, because this business works nowadays very different from what we learned in school: lots of sunshine, rich dark soil, your “nutrients from the yearly flooding” : -)
    http://www.thecanadianencyclopedia.com/articles/greenhouse-crops

  30. We are getting some very unwelcome publicity across the pond today…
    From telegraph blog..
    “11.14 Top executives at Anglo Irish Bank lied to the government about the true extent of losses at the bank in order to secure taxpayer funding, according to tape recordings obtained by the Irish Independent.
    Senior manager John Bowe, who had been involved in negotiations with the Irish Central Bank, is heard on the recordings – taken from the bank’s own internal telephone systems – laughing and joking about how Anglo lured the state into stumping up bilions of euro to rescue it, according to the newspaper.
    Anglo asked the state for €7bn in taxpayer funding – but Mr Bowe said Anglo’s negotiators knew all along this was not enough to save the bank. It would eventually need €30bn to keep it afloat and was nationalised.
    In the tapes, Mr Bowe is asked by another senior manager Peter Fitzgerald how it came with the figure of €7bn. He laughs and says he picked the figure “out of my a—“.
    Mr Bowe denies that he misled the central bank. Mr Fitzgerald said he was unaware of any strategy or intention to mislead the authorities.
    You can listen to the recordings here.”

  31. @francis

    The Mexicans have made Southwestern Ontario Glasshouse operations noncompetitive from November to March. The companies are still operating since the investment has been made. It is unlikely that new investments will be made. There are niche operations located near nuclear stations which use the excess heat available and also enjoy cheap electricity (minus distribution costs). Indeed the soft fruit canning and tomato processing (canning and paste) businesses are also suffering. Wine making is enjoying great success largely due to non tariff trade barriers at the provincial level.

  32. @ BrianLucey

    Hi Brian. Delighted to try. Same boat myself. Like your blog. The owner of the Ballyblue pub, in ficticious Ballyblue, lives abroad but receives a nice monthly cheque of €6,250 as ‘dividend’, adding up exactly to €75,000 per annum, which happens to be close enough, thereabouts, to the annual profit. Because of its location, nice vibes, management and staff, and planning restrictions in Ballyblue, the pub – as the owner well-knows – has a ‘sustainable annual profit’ of around the €75,000. It has been like that for years. The pub building itself, like other buildings on the street, is valued at €400,000. But the owner is unlikely to sell for that. What is the ‘sustainable annual profit’ of €75,000 worth to her/him? What would a buyer pay (thinking of the return over the years.)?

    Is there a ‘sustainable annual profit’ that may apply to the operational bailed-out banks in the medium-term? It is a bit of a grey area, fair enough, but buyers would likely factor in market-share, spread of branches, historical connection with customer base, population increase, scope of the economy. Also, the fact that new competition would likely take a while to bed down. Also, that bank lending in Ireland via internationally based branches (internet-linked) would not become a market changer.
    While examples from the ‘celtic tiger era’ may not wash, an example of the combination of balance sheet ‘net worth’ plus value of sustainable profits can be found in Aib and BofIre share prices before the meltdown. Aib’s 882 million shares had a market value of close to €20 billion but carried a balance sheet net worth of around €9 billion. This excess of market value over balance sheet net worth, in the case of profitable companies, is common, and, notwithstanding the horrible cock-ups in Aib/BofIre, a judgement of future use of government share ownership should at least allow for the possibility of a turnaround.

    BofIre’s current market value (per BofIre’s website) is around €4.5 billion (30 billion shares @ €0.15). Its Balance Sheet equity net worth (at 31 Dec 2012) was around €6.8 billion (€8.6 bn – €1.8 bn pref shares). There’s an uncertain period ahead when its capital loans of €2.8 billion (contingent capital + pref shares) could in theory end up being converted to ordinary share capital. However, if that is survived, more probable than not, it could be back up at a €1 bn plus annual profit in a short number of years. It seems to me that the tail-end of the bad-debting will work out reasonably ok. The tentative move to split mortgages with Aib & Ibrc now stating that the parked portions will be at zero interest suggests a move from bad debt provisioning to a reduced interest margin scenario. I.e. paying interest on a portion only of the mortgage, with the interest on the other portion being zeroed, amounts to an interest reduction. As with all retail units carrying different margin products, a way will be found to re-jig the margins so that the overall margin reaches the target. There will also be a case for leaving the put-aside part of the split mortgage on the books instead of bad-debting it, at least for a number of years, until the storm blows over. The only pressure on banks from shareholders will be to return to minimum profitability and to gradually recover margins. The medium-term option. That still allows room for proper debt resolution and write-off. I don’t believe that the banks hold the aces, particularily in the face of the 3-year bankruptcy rule. The NPRF at 31st March values BofIre shares ‘at market price’.

    The case of Aib: The NPRF values 513 billion Aib shares at €0.0079 per share (31st March), not ‘market price’. This gives a full value at that date of €4 billion. The ratio to the original cost of €9.575 billion (Aib, €8.7; EBS €0.875) is less than with BofIre. The Balance Sheet equity net worth at 31st December was €7.7 billion. As with BofIre, a turnaround is a real possibility, when its worth can move from ‘bricks & mortar’ worth to ‘sustainably profitable’ worth.

    In terms of the Irish economy, the following is what may be possible if government ownership is maintained in the banks. The promissory note remaining debt, €25 billion, can be siphoned of national debt and matched up against gains on bank ownership. The full amount of the NPRF can be netted off against the national debt, less the very high unused borrowing portion, to show a much more sustainable national debt figure. With banks turning the corner, and with a decent portion of household indebtedness dealt with, the economy will begin to move again, when the remainder of household/business debt can be sorted out. Maintaining the current level of ownership in the banks, particularily because it can address the AngloNationwide burden, would, in my opinion, be a smart move.

    Re Aib shares at €0.06. The balance sheet net worth is only €0.014. Don’t stand under. Seriously, I don’t get it.

  33. Tull,

    the subject Hoenig is no FED governor (anymore). He sits on the board of the FDIC, lets some occasional rant of to the delight of the lunatic fringe like the LaRouche folks, in Germany they go by the name of Büso.

    The international valid capital requirements are set by Basel 2.5. The US banks dont fulfil them, and throw a little diversion, other rules like Hoenig promotes. Slandering non-American corporation is always fun for them, trying to game the playing field by new surprise american rules too : – )

    http://www.bloomberg.com/news/2013-04-23/bernanke-warned-by-barnier-that-bank-unit-rules-risk-retaliation.html

    The answer to this is not taking the slanderer seriously, but sending a letter to the boss, Bernanke, and putting the word “retaliation” into it, before you leak it to the press : – )

    Sooo, nothing wrong with the Deutsche Bank, but a lot with Kansas – Hoenig. The DB fulfils all valid rules, and did not need a government bailout, in contrast to most US/ UK banks

    But the way he says it, is not technically criminal, e.g.
    http://finance.yahoo.com/news/exclusive-deutsche-bank-horribly-undercapitalized-193505128.html

    although good enough to confuse people like you. Just the usual foul play, yellow card only : – )

    That Johnson is a different caliber.

  34. Francis,
    2 trillion of assets on top of 50bn of tangible equity. Your model only has to be a teensy bit wrong for it to go belly up. In contrast JPM has 2 trillion on 150bn of TE.

  35. tull,

    if this Hoenig would really care about the capital ratio rules, he would have taken on his home grown Morgan Stanley, which is the full concern of the US tax payer. But this was not the purpose. The isolated lunatic wants to reestablish the predominance of US rules over international rules, and resorts to shameless national slander.

    And the Barnier letter was the appropriate answer.

    There is no point discussing the pro’s and con’s of various rules with people who can not even value a simple bond.

  36. I suppose there is no point holding a discussion with someone who does not accept or recognise that peripheral European,US & UK taxpayers have bailed out reckless German investors who bought bonds in risky and over leveraged institutions geared to over heated property markets.

  37. LOL,

    I knew that you would make that false claim.

    And in deed I completely refuse the attempts to construe any liability of Europe in general or Germany specific for the reckless financial shenanigans of Ireland, US & UK.

    Gullible german bankers and to some degree german taxpayers are the victims of criminal bankers, raters, and the criminally lax oversight in these countries.

    Remember IKB, HRE, Depfa, Sachsen LB ?

  38. http://www.villagemagazine.ie/index.php/2013/04/still-waiting-for-the-truth-from-the-regulator/
    Still waiting for the truth from the regulator (Village December ’10)

    via http://whistleblowerirl.blogspot.ie/2011/07/central-bank-bill-published-breaking.html

    An enraged German body politic believes Ireland’s regulatory régime did not help. And Ireland, perhaps myopically, refused requests from Germany for a contribution to the DEPFA bailout.

    In a separate but analogous case Sachsen Landesbank had to receive over 17bn in emergency funding from Germany following liquidity difficulties with its Irish subsidiary, Ormond Quay, and ultimately was taken over by Landesbank Baden-Württemberg (LBBW Bank)

  39. Dorothy, thanks for the posts !

    I remember this story from ….. 2010 or so in the Irish Times, I think.
    At that time both the bank and the whistleblower were not named, some weird parliament inquiry.

    But it is important for Ireland to find those who did the cover up then and burn them at the stake (figuratively, of course)

    Beyond that, this is pretty much water under the bridge for us now.
    The “normal people” have long forgotten about it now.
    Sachsen LB was hacked to pieces for being gullible and the entity doesn’t exist anymore, stricken from the records. The prime and the finance minister had to go.

    But when people come and tell me that they bailed us out, it gets a little galling.

  40. On that next sentence

    “Unfortunately for Ireland the same smarting Germany, more than any other country, is responsible for the penal bailout interest-rate that may scuttle Ireland”

    my interpretation of that consilium link from DOCM was, that it is now some mix of basically 30 year 2.5% loans.

    I would very welcome to be penalized with that kind of conditions over any amount you could afford : – )

  41. @ francis

    Your interpretation would be correct.

    Might I suggest that the link also underlines that there can be no outcome to the debate on responsibility because it is based on a false premise i.e. that dealings between states, especially in the financial arena, have a moral character. In a credit bust, it is those states that are still creditworthy that emerge with some room for manouevre. Those that are not are policy takers, not policy makers. They will be assisted to the extent that the still creditworthy consider to be in their own interest.

    That the euro edifice is still shaky is borne out by this leaked document on the stalled negotiations on bank resolution. The country creating the biggest difficulties is France! It demonstrates that countries will fight tooth and nail to retain their room for manouevre even if, as in the case of France, it is illusory.

    http://blogs.r.ftdata.co.uk/brusselsblog/files/2013/06/Bail-inCompromise.pdf

    As far as Ireland is concerned, it must be glaringly obvious, even to the dimmest observer, that the country was run for a critical period by cowboy bankers and cowboy politicians, with an inadequate and largely powerless administration caught in the middle. The party of the cowboys responsible is now the most popular in the polls. What does that say about our collective sense of responsibility?

  42. Francis,
    Sometime after the German election, reality will rear its ugly head again. The potential range of outcomes remains the same as ever
    – default by the periphery and part of the core, including the implosion of the EU
    -restructuring of the debt including OSI and terming E… Funds for 1000. Years at 1%
    -QE & inflation targeting
    -fiscal transfers
    -the surprise reemergence of the growth fairy.
    All measures will be on the table. One thing is for certain, the current German implementation of a version of the post WW1 settlement is as doomed to failure as that particular experiment. History rhymes as they say.

  43. @ francis

    Anat Admati and Martin Hellwig share Simon Johnson’s view of DBK. A disaster waiting to happen, as soon as the Bernanke credit bubble bursts. Total assets, not just risk-weighed assets, and gross, not net, derivative positions are unsustainable. This movie is coming to your town.

    http://press.princeton.edu/titles/9929.html

  44. @ DOCM

    ‘As far as Ireland is concerned, it must be glaringly obvious, even to the dimmest observer, that the country was run for a critical period by cowboy bankers and cowboy politicians, with an inadequate and largely powerless administration caught in the middle. The party of the cowboys responsible is now the most popular in the polls. What does that say about our collective sense of responsibility?’

    Fianna Fail deserve a lot of criticism, and there has certainly been some rare cowboy conduct. I am interested though in how many suited sobersides’ of all parties and none’ lost the run of themselves in the property bunga bunga. All those ‘safe’ cautious people who helped the bubble along, because it paid.

    http://www.youtube.com/watch?v=Pc6IOieGuig

    This complacent self-serving groupthink is, IMHO, every bit as much a hazard as the cowboy mentality. Which is why FF is not dead.

  45. Paul,

    I looked up the content page and the index of this book. The DB is mentioned, everything else would be a huge surprise, but not prominently.

    And I do not see any racist hate mongering, like from that vicious Simon Johnson.

    It did not only become clear from this guy, that if we would give in to the racist blackmail, this would go on forever. It is nececessary, to say no, and then point with the naked finger at them, and shout : criminal, get them.

    I agree with you, that there is a new for further reform, namely reducing the systemic risk via those huge (600 trn) derivatives, which make this just one big web of entanglements.

    Whether Basel III is the biggest pearl of wisdom, one can discuss. But the US turnaround and to go for a flatter risk discrimination, is pretty transparent, the purpose of diversion too. But without fundamental knowledge of this whole business, how is a bond valued, how do these Risk Management philosophies work, why does this not work for extreme risks, or in the last 2 years with RoRo basicallly for the whole market, the discussion is pretty useless.

    Since the book adresses a broad readership, it therefore can not go beyond a certain level, and I will not buy it.

    I have read way too many books like that in myl life. I have here a James O’Connor 1973 “The financial crisis of the State”

    At a time when debt / GDP was at a kind of century low : – )

    I came to macro economics, because I was not only thinking, but implementing quantitatively my own long term risk management strategy, and at some point understood, that I have to understand macro economics for that. I could take with about two weeks preparation a professional risk manager exam, if I wanted to.

    Tull,

    QE in the US is ending, just in case you havent heard it.

    If you default, you would have to live with the consequences, and they would be much worse, and everybody knows that.

    It has become pretty clear, that in a number of countries the politicians do not want to tell the voters, that they have to live within their means, and try to blame it on Europe / Germany. We have noted that, and we will certainly not reward that.

  46. Paul,

    that FF is not dead, is no surprise. In Iceland the old parties got reelcted, Berlusconis PdL got 30%, less than 2 years after he drove Italy nearly into insolvency.

    Then you look at Turkey and Brazil, where a litlle cool off after a long growth streak leads to agressive disappointment.

    In Germany we also have some 20%, who basically mäander from one “protest party” to the next. And I know a 60 year old, who would have voted for a party, which has as program to cut his pension in half.
    Until I told him : – )
    10 years ago, he looked like a kind of reasonable person.

  47. @ PQ

    I think that the point you make is covered in my final rhetorical question. However, as someone remarked on the thread initiated by Frank Barry, “the fish rots from the head”. There is also little doubt that the distinction between the functions of an independent public service and the functions of politicians was blurred, if not ignored. The need to re-establish it is not even yet recognised.

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