The Mechanics of Buybacks

The Sunday Business Post reports the government intends to launch a buyback from Anglo bondholders (available here). 

The government is expected to launch a bond buyback for Anglo Irish Bank in the coming weeks, as part of a restructuring plan agreed with the EU Commission. 

The buyback, which will reduce the bill for taxpayers, will offer some bondholders in the new Anglo asset recovery vehicle the option of a bond, or a term deposit, in the new funding bank at a significant discount.

In the discussion of buybacks, or negotiating with bondholders”, it sometimes seems to be forgotten that the only way these negotiations succeed is that there is a credible threat that losses will be directly imposed on bondholders.   One particularly strange example was when the Minister for Finance took credit for the earlier round of Anglo subordinated debt buybacks, even though these buybacks only took place because of the lack of credibility of the governments policy of protecting bondholders.   The main reason the bondholders were willing to accept the buyback must have been the risk of a change of government.  

A good cop, bad cop routine may be going on at the moment, with the opposition parties being quite explicit about their intentions.   The Post reports,

Last week, Fine Gael leader Enda Kenny wrote to the EU competition commission saying there was, in his partys view, no sound legal or economic case for the Irish taxpayer to repay bond investors in Anglo Irish Bank following the expiry of the guarantee.

The letter made it clear that he was referring to those bondholders who invested before the September 2008 guarantee, both subordinated and senior debt holders. 

In considering what the threat point in buyback negotiations should be, I have also been surprised by the lack of curiosity about the details of the proposed Anglo split.   Most commentators have been content to repeat the mantra about the need for certainty on the cost and timing of resolving Anglo.   

It will take some time before these uncertainties can be resolved.  But surely we should be told now exactly how the mechanics of the split will work.   What will be the value of the claim that the funding bank will hold on the recovery bank?   Will this bond be guaranteed?   How will capital be divided between the two entities? 

On the last question, a number of reports make the point that the funding bank will only need light capitalisation given that it wont be making new loans.   This strikes me as a strange claim.  The main purpose of capital is to protect depositors from losses.   Surely a key objective of the split is to protect depositors so that they are willing to keep their funds in the funding bank, potentially weakening the need for guarantees of deposits or the bond issued by the recovery bank.   On the other hand, if the goal is to encourage the bondholders to accept buybacks, shouldnt the recovery bank be capitalised as lightly as possible?  Some harder questioning about the mechanics of the split seems warranted. 

Recovery Secnarios for Ireland: An Update

For those who are interested, our article on the above topic is available here.


Who Blinks First? Ireland, Greece, the ECB, and the Bank Guarantee

The rules of the game have changed for Ireland.  Should Ireland respond to this new risky-game environment by selling off some or all of its domestic banks to large foreign bank holding companies?  I believe that it should.  We can keep the names on the high street bank offices, but lose the liability guarantee.

CRUgate

The Climate Research Unit (CRU) of the University of East Anglia is a leading research centre on climate change. They are known for the data that they provide, particularly their estimate of the annual, global mean surface air temperature since 1850 or so. One of their servers was hacked and some 1000 emails and 3000 documents were stolen, most of them 10 years old. These emails were posted on the web, and are now being scrutinised by every one who has a grudge against climate change or climate policy, and against people who harbour such grudges.

What has emerged? There is a lot of chit-chat, and bitching about colleagues (with perhaps ground for a defamation suit or two). There are attempts at blocking other people’s careers, but no signs of success. There are hints of data manipulation. None of this surprised me. There are also indications of a systematic obstruction of freedom of information requests.

What does this mean? Not much really, although some people may end up in jail for stealing data and others may lose their jobs for breaking legal and academic rules on transparency.

Doubt has been cast over the CRU data. Insiders never really trusted their data, and it is actually little used as an input to other climate research. The global mean temperature record is used for communication rather than research. Most of the temperature graphs you have seen in the newspaper are from the CRU, but independent research has corroborated their main findings. Statistical analyses similarly have used alternative data series, and the results are broadly the same.

Some people have portrayed the climate debate as noble scientists versus savage businessmen. That image is now shattered, but it was pretty naive anyway. There are bad apples on both sides of the debate.

So? Objectively, nothing has changed. Climate change is still real, and still a real problem. A carbon tax is still the right policy. Subjectively, things are different. It is harder to argue that wise scientists of impeccable standing recommend action. Proponents of climate policy have to make a real case. I do that here.

UPDATE (26 Nov)

This story keeps growing. The latest person to get entangled is John Holdren, the science and technology advisor of President Obama. While Holdren’s email contains nothing untoward (in fact, he’s remarkably patient and polite), it does demonstrate a closeness between Holdren and people who are tainted.

Another new development: One of the CRU emails has language that may be read as financial irregularity.

UPDATE (30 Nov)

CRU has belatedly agreed to open its data bases.

It appears that it deleted duplicate records. While that is fine for archiving reasons, combined with the poor documentation of CRU’s algorithms, it does imply that the CRU’s homogenized data cannot be reconstructed.

UPDATE (2 Dec)

Penn State U had already announced an internal inquiry into the conduct of Michael Mann, citing the results of an earlier inquiry (but omitting the results of another) in its press release.

U East Anglia has now also announced an internal investigation, and Phil Jones (whose mailbox was hacked) has temporarily stepped down as director.

My prediction that the mainstream media of Ireland will soon report on this matter, is unfounded.

Waste policy

Minister Gormley just released a 1232 page review of waste policy. The press release is short and vague, but it does announce an increase of the landfill levy to €75 per tonne in 2012. It’s €15/t now, so that’s a 400% increase. The average price at the landfill gate is about €140/t. This will go up to €200/t, a 43% increase. Curtis et al. show that the effect on the volume of waste is small.

The press release also announces an incineration levy of €20-38/t. I do not know the details of the contract between Dublin City Council and Coventa/Dong, so I do not know whether its Dublin taxpayers or C/D shareholders who will be paying the annual €12-24 mln.

The summary report has a number of recommendations:

  1. More waste separation at source (7 bins for you), and improved collection of recyclables from homes
  2. Nonlinear waste charges applied at the county level (i.e., you will pay if your neighbours have too much waste)
  3. Stringent targets for recycling (we won’t be soccer champions, but we’ll beat the world on this)
  4. A ban on inter-county waste trade (this complies with WTO rules)

And this will of course cut emissions, create jobs, and save money.

A more detailed assessment will follow shortly.