Category: Banking Crisis

Resolutions and Bondholders, Again

The S&P downgrades make for depressing reading. I really don’t want to beat the drum again about the government over-promising in relation to what the establishment of a NAMA could deliver. Still, it’s interesting to note that the basic problems afflicting the Irish banks—loan losses, weak operating income and concerns that the banks will be undercapitalised—are pretty much the same as they were this time last year.

This isn’t to say that a NAMA vehicle shouldn’t have been part of the solution: I advocated prior to Peter Bacon’s report that an asset management agency should be part of a comprehensive solution. At this point, it will be interesting to see in the end how different an outcome we get from the one I proposed last Spring and if it’s not so different, whether the government’s policy in the interim period will be seen as the dithering of officials in denial or an inspired period of delay to allow some breathing space to deal with the problem.

One shift in my thinking since last Spring is that the size of loan losses is now clearly large enough to warrant putting the banks through a resolution process and negotiating with bondholders prior to using state funds to recapitalise. In particular, it is worth noting that the covered banks have about €10 billion in outstanding subordinated bonds (€8 billion of which is accounted for by AIB and BoI).

Without doubt, our usual Bond friendly commenters will tell us that any subordinated bondholders losing money would lead to financial ruination for every Irish man, woman and child. However, given that the European Commission has been taking a hardline stance on the idea of state funds being used to compensate subordinated bondholders (see here and here) it is hard to see how this position can really be justified on practical or moral grounds.

S&P Downgrade Irish Banks Again

Standard and Poor’s have again downgraded the Irish banks. The Irish Times story about this is here. The S&P Press releases are here (need to sign up but it’s free.) The reasons for the downgrade of AIB are summarised as follows:

“The negative outlook reflects our view that the quantum and timing of equity raised through recapitalization may not be sufficient to support an ‘A-‘  rating, combined with our expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment,” said Ms. Curtin.

Negative rating action could occur if we consider that AIB’s recapitalization plans for 2010 are insufficient to adequately recapitalize the bank by our measures or are unlikely to be fully executed in 2010. Negative rating action could also occur if earnings pressures exceed our base-case expectations. The outlook could be revised to stable if there was reduced uncertainty regarding AIB’s ability to restore its capital position to an adequate level in the near term, and greater clarity on the strategic direction of the bank and scope of restructuring.

In relation to Bank of Ireland, the press release states:

“The rating action reflects our opinion of BOI’s prospects in light of our updated view on economic and industry risk in the bank’s core markets, together with our expectations regarding future credit losses,” said Standard & Poor’s credit analyst Giles Edwards.

It also factors in our view of the likely impact of its participation in Ireland’s National Asset Management Agency (NAMA) and associated restructuring and capital raising. We have lowered the ratings due to our view that the environment will remain challenging over the medium term and BOI’s financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and the bank continuing to make losses through 2011. 

S&P’s concerns about future loan losses and capital adequacy of both the major Irish banks are likely to be shared by many potential private equity investors.

Cooper on Implications of Flavin Judgment

I’ve been reluctant to write anything about the DCC\Fyffes\Flavin case (see here and here) despite my suspicion that it represented a very unfortunate precedent in an age in which corporate malfeasance in our leading businesses is a major issue in Irish public life. This is because I can’t claim to have read the 700 page Shipsey report and have a very limited understanding the complex legal issues involved. However, I think that Matt Cooper has done the public an important service in raising the potential implications of the case in this article and I’d be interested in hearing the opinion of some of our more legally-minded commenters as to whether Cooper’s concerns are well-founded.

Shipsey found that Flavin had done no wrong because he had taken legal advice prior to the relevant share dealings. Paul Abbleby of the Office of Director of Corporate Enforcement then concluded “There’s no way that any court would sanction a director for having followed the company’s legal advice.”

Cooper asks “So the question arises: has Shipsey set a precedent that legal advice trumps the law?” and points out how any future businessman wishing to do something illegal now only has to find a lawyer to tell him that what he wants to do is ok.

In relation to the banking crisis, Cooper points out that the defence that people believed they were behaving legally can now come to the aid of those who clearly behaved in an illegal fashion and that a public banking inquiry is likely to be our only chance to see certain individuals called to account for their actions.

As I say, I’m not a legal expert, so I’d like to hear whether those in the know think Cooper has this wrong.

Guarantee Meetings to Stay Secret

The Sunday Times reports that the Information Commissioner, Emily O’Reilly, has denied their Freedom of Information request to release documents related to two meetings on the night of September 29/30, 2008, one involving senior ministers and officials and another also involving senior banking executives. The paper reports:

In making the decision, she rejected advice from Sean Garvey, a senior investigator in the Office of the Information Commissioner (OIC), who recommended that the documents be released to The Sunday Times under the Freedom of Information (FoI) legislation because of strong “public interest”.

and

O’Reilly’s decision is a victory for the Department of Finance, which fought a 14-month battle against the release of any documents related to the bank guarantee. It relented and released uncontentious material two weeks ago, but remains opposed to the release of records relating to the guarantee meetings of September 29/30.

The department had warned that it would take High Court action to prevent the release of these records after Garvey recommended their release, with some redactions. Both AIB and Bank of Ireland also opposed their release.

It appears now that we may have to wait until 2038 to see these documents.

Anyone hoping that the banking inquiry will shed light on these meetings is likely to be disappointed. My reading of comments from various government ministers (including the Taoiseach’s interview on RTE’s This Week) is that despite having a terms of reference that includes September 2008, the banking inquiry will not cover the issues related to how the government took the decision to give an almost blanket liability guarantee to the Irish banks.

I was already disappointed that the terms of reference excluded the months after September 2008, when the government consistently put forward a wildly incorrect diagnosis of the scale of the problems in the banking sector (a diagnosis that was shared by its advisers at PWC.) It is even more disappointing to think that perhaps the key policy decision in responding to the crisis will not be open for discussion.

If a major purpose of the banking inquiry is to see that banking crises don’t cost the state a huge amount of money in the future, then to my mind, it needs to come to conclusions not only about how the crisis came about but also about whether the government’s response to it was based on the best information and whether a more informed approach would have saved the taxpayer money.

Casey’s Questions for the Banking Inquiry

Today’s Irish Times carries an excellent article by Mike Casey, formerly head of economics at the Central Bank, listing questions he believes should be addressed by the banking inquiry.