Bank of Ireland have released details of their capital raising plans. The fraction of government ownership of the bank will depend upon how many subordinated bondholders take equity instead of an alternative cash offer. Various scenarios are presented but it seems pretty likely that the bank will end up in majority state ownership. So we’re likely to have nationalised all our domestic banks. We await the long-predicted frogs and locusts.
This is hardly the most important issue right now with so much going on but it’s a two cents I’d like to toss out there all the same.
Last year, I regularly heard the following argument on this blog, in the media and in private. “Overpaying for assets via NAMA is actually the best way to recapitalise the banks. This is because we can purchase the property assets with “NAMA bonds” that we can just print off. They’re not real money, just IOUs. But if we paid a low price and had to recapitalise nationalised banks, we couldn’t do this. We’d have to borrow the money expensively on sovereign debt markets and then hand over real money to the banks.”
Tomorrow we should finally see a resolution of much of the uncertainty that has been hanging over the Irish banking system. We are being told that the estimated prices for NAMA transfers will be announced, as well as the capital requirements set by the Central Bank and the new legal framework for the Central Bank and Financial Regulator.
With the news so soon to be released, there is little point in me speculating as to what is going to happen. What I would flag, however, is that there is something of a disconnect between two sets of statements doing the rounds in today’s media coverage.
First, there has clearly been widespread leaking that the NAMA loan transfers will see some banks taking considerably larger writedowns than had previously been expected. For instance, in the Irish Independent, Emmet Oliver writes that “AIB is set to be hit with a discount of up to 40pc”.
Second, much of the coverage mentions the idea of the state owning 70 percent of AIB and 40 percent of BoI. See, for instance, here and here. And note that Emmet Oliver’s full sentence is “AIB is set to be hit with a discount of up to 40pc, making majority State control all but inevitable” and he mentions the Minister’s “plan to take a 70pc stake in the lender.”
The disconnect is that these two sets of figures don’t seem to add up. There is nothing new about the idea of the state potentially owning 70 percent of AIB. Even based on previous expectations for NAMA discounts, this was always a possibility. For instance, I’m looking now at a Davy stockbrokers report from April of last year that projected a base case of the government owning 78% of AIB.
However, it is hard to reconcile the continuing circulation of the same ownership statistics as before with the new information (if such it is) on discounts and also on capital levels.
To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.) So that leaves €6 billion in private core equity capital. AIB is supposed to be transferring €24 billion in loans to NAMA. Forty percent of €24 billion is €9.6 billion.
So, do the math on this and you’d probably come to a different conclusion about ownership percentages than have been flagged by the media. One way or another, we’ll find out tomorrow, but today’s leaks are confusing, perhaps deliberately so.
Update: This post should have been clearer that AIB’s annual report already allows for €4.1 billion in provisions for losses on loans going into NAMA. So the calculations would involve an additional €5.5 billion in losses over and above that. With half a billion in equity capital and the need to get up to a core equity ratio of eight percent, the 70 percent state ownership doesn’t add up. Still, perhaps I’ll see tomorrow how it’s going to add up and still end up with the 70 percent outcome.
I’ve noted on a number of occasions that both Brian Lenihan and Brian Cowen are very fond of misleading analogies in which any proposals to nationalise the two main Irish banks are linked to events in Iceland. For example, I noted recently that in an interview with Business and Finance, Minister Lenihan linked Iceland’s banking system collapse to a decision to nationalise. Some of the Minister’s bigger fans on this site argued that he was merely citing the sequence of events rather than indicating any actual causation.
Well, on this evening’s edition of The Last Word on Today FM, Minister Lenihan was at it again (podcast here — the interview is during the first hour of the show). In addition, as is usually the case when Lenihan and Cowen discuss this issue, the principal point of the discussion appeared to be to link the Labour Party’s position on the banking crisis to that of the Icelandic government. About 53 minutes in, the Minister said:
We didn’t go off, again like Iceland, and nationalise the system overnight because that lead to a banking collapse in Iceland. That’s what some of the Labour Party people wanted us to do in the last year.
(Cue philosophical debates in the comments about the meaning of the word “because” or perhaps “lead”).
My former colleague, Mike Casey, wrote the following in this article in today’s Irish Times:
When Nama is up and running, the banks will be able to borrow far greater amounts from the ECB. Some of this money may be lent to the private sector (one hopes), but it is likely that substantial funds will be made available to the Government to finance the budget deficit.
This may be the main reason why the Irish banks were not nationalised. If they had been nationalised this transfer of funds could not occur, since the ECB cannot lend directly to government.
I’m afraid I have to disagree with this argument for why Irish banks cannot be nationalised.