# 10bn recapitalisation of Irish Banks announced



## Guest116 (14 Dec 2008)

Just heard it on the 8pm news on the radio, anyone got more info?


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## z109 (14 Dec 2008)

Dept. Fin statement:
http://www.finance.gov.ie/viewdoc.asp?DocID=5604


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## Brendan Burgess (14 Dec 2008)

"the Government has decided either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10 billion. "

In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government.

"State investment will be assessed on a case-by-case basis in an objective and non-discriminatory manner, having regard to the *systemic importance of the institution*, the importance of maintaining the stability of the financial system in the State, and the most effective and economical use of resources available to the State and each credit institution’s particular requirement for capital. "


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## Brendan Burgess (14 Dec 2008)

It seems that the government is supporting a fund up to €10b. Does that mean that the government is going to contribute up to €10b or is that the total? 

I am glad to see the "systemic importance of the institution" as a criterion. 

Only AIB and Bank of Ireland are of systemic importance. 

A journalist has told me that the plan is to nationalise Anglo Irish Bank. This would not be consistent with the above.

Brendan


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## z109 (14 Dec 2008)

Brendan said:


> A journalist has told me that the plan is to nationalise Anglo Irish Bank. This would not be consistent with the above.


I agree with you, but I guess that Anglo will be the first to go and so will be bailed out on the:
"the importance of maintaining the stability of the financial system in the State"
catch-all clause. As evidenced in Japan, the UK, the US and the rest of Europe, the authorities persist in believing that there are only one or two bad apples and that the rest of the crop will save itself. So they save the first one or two to go bust (depending on the size of their banking sector). Then they realise that nearly all the banks are insolvent and panic, but they have no money left to put proper solutions in place and force the restructuring that is required leading to zombie banks that will survive, but that will not function.


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## webtax (14 Dec 2008)

Brendan said:


> A journalist has told me that the plan is to nationalise Anglo Irish Bank. This would not be consistent with the above



With the guarantee in place already we will be picking up the tab for anglo in any case. The bank is in effect worthless and will probably nationalised in full like northern rock. The government could then wind down its property portfolio and use it as an investment vehicle for its planned programme for R&D, export oriented businesses.


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## Brendan Burgess (14 Dec 2008)

Good point

Nationalise Anglo because it will cost so little to do anyway. 

Don't put any capital into it. Just wind down the loan book. There might well be a surplus at the end of the process, so the government gets a payoff.

That's good as long as they don't feel obliged to recapitalize it. 

What's the story with the Anglo pension fund? If it's a defined benefit scheme, is there a funding deficit? 

Brendan


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## ecstatic (14 Dec 2008)

Its wishy washy the details.

They say perhaps ordinary shares perhaps preference shares??

As an owner of AIB / BOI CFD's im assuming we will also be offered to subscribe?

Why should anglo be bailed out for there free wheeling antics the people of ireland do not require the risks there are only two banks required AIB/BOI to be frank we should shove the rest.

More questions than answers..... Quite typical of this government!


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## webtax (14 Dec 2008)

To give them a bit of credit they have played it quite well. The bad debts are going to arise with or without the recapitalisation and its not going to be an instant cure. 

At least they waited to see what was working in other countries first and then allowed the bank share prices to fall to the floor so their negotiating position has weakened. The govt are now getting much more 'bang for their buck'. If they had acted earlier they would have got a smaller share of the banks when Anglo & BoI were valued at €2/3 rather than sub €1.


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## SteH (14 Dec 2008)

I think this is a positive move and if things go right there should be a good return on the investment. It makes more sense than allowing the future profits of the banks to be given over to whoever signs the biggest cheque. At least now the state _should _see the money when the economy recovers.


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## j26 (15 Dec 2008)

I'll be very interested to see how this pans out.

It's quite vague, but then I suppose they have to keep their options open.

If Anglo Irish is nationalised, will it have to change its name?


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## JohnBoy (15 Dec 2008)

Is €10bn enough? I suspect that this will just be the government/state share of the total recapitalisation with Irish investment managers and private equity taking up the balance.

Will the senior management or the boards of the banks pay with the jobs? Will there be any accountability?


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## Bronte (15 Dec 2008)

If the government gives money/capital to a bank they receive shares in the bank in return.  Does this mean that the current shareholders shares are worth less?  How does it work.  Also the document says the current shareholders can also purchase shares, why would they want to do that? Because the shares are cheap or to protect the bank and their own shareholding?  Will the government be allowed to have someone on the board in return.  Is this not just throwing money at institutions that have been run incompetently and allowing them to continue doing so?  Sorry if these are very stupid questions but I don't really understand what it is the government is doing.


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## Brendan Burgess (15 Dec 2008)

Effectively, there will be some form of rights issue. 

Let's say that there are 100 shares in a company worth €3 each giving it a capitalization of €300. 

If there is a rights issue of 100 further shares at €1 each, it means that there are 200 shares and the company is worth €400 and each share is now worth €2. 

The old shareholders have lost €1 and the new shareholders have seen their holding double in value.

If each of the old shareholders buys one share each, then there is no change to their wealth or ownership of the company.

If the government insists that only the government or some outside investor can buy the new shares, then the existing shareholders will see the value of their investment decline.

The press release seems to suggest that the existing shareholders will be allowed to buy shares.

So my guess is 

A rights issue underwritten by the government. 
Any shares not bought by the existing shareholders will be bought by the government or by the outside investors.

Brendan


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## dewdrop (15 Dec 2008)

All the media talk is for the urgent need for banks to lend to businesses. Who in their right mind would lend in the present climate. I agree with some commentators that much more than 10m is required. a quick check on total bank advances and the potential for massive write offs seem to confirm this view. As someone just said on RTE prayer will be required in the coming time


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## D.S. (15 Dec 2008)

€20 bn is the figure being quoted as that required to adequately capitalise the banks. This figure is basically the difference between what the banks say they are worth and the value of the banking sector as quoted by the markets. Existing shareholders will have the right to participate in the scheme as much as the government but who would want to? My guess is that the Government has already struck a deal with the private equity companies who will raise the other €10bn the banking sector needs..

Without doubt - I don't see the Government just dropping money into Anglo Irish with the current scheme. In every other Government Recapitalisation Scheme that has occurred in other economic crises (e.g. South East Asia in the 1990's), the Government's have always demanded consolidation of the banking sector before supplying funds. Anglo Irish will be gobbled up v soon by one or more of the other financial institutions - maybe even this week.

AIB for me will not partake in this scheme. They are in a "relatively" healthy position in that they have plenty of assets that could be sold off to raise funds rather than going through the markets. 

All speculation of course until details emerge..


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## Duke of Marmalade (15 Dec 2008)

Brendan said:


> Effectively, there will be some form of rights issue.


Do you think this will also apply to any preference shares, _Boss_?


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## Brendan Burgess (15 Dec 2008)

Yes - that is how I would interpret the following: 

"In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government." 

As a shareholder in AIB, I don't want to see my holding devalued, so I would participate in any fund raising - especially if I know in advance that the fundraising will be fully subscribed. 

I would have been disappointed to see my shareholding diluted by issuing shares cheaply to other private investors or the government.

Brendan


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## JohnBoy (15 Dec 2008)

As an existing shareholder you have pre-emption rights so the bank cannot issue new shares above a certain lpercentage level without shareholder consent. In the recent UK recapitalisation rights issues the government ended up buying almost all the newly issued shares.


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## Bronte (15 Dec 2008)

Thanks for the 'simple' explaination.  Wouldn't ordinary shareholders who have seen a lot of loses be loath to buy more shares?  If the government does this would the share value go up in value.  Will the government be looking at the banks books before making this investment?  It would be silly to put money into a bank they may in effect be bust surely.


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## z109 (15 Dec 2008)

Brendan said:


> As a shareholder in AIB, I don't want to see my holding devalued, so I would participate in any fund raising - especially if I know in advance that the fundraising will be fully subscribed.


By fully subscribed, I presume you mean underwritten by the government? In this sense, recapitalisations are pretty much fully subscribed always - someone volunteers to carry the can in the event of no interest. With B&B in the UK recently, the investment banks that underwrote their last offering got slaughtered as nobody bought, so IBs (are there any left?) are unlikely to step in. So it has to be government.

As johnboy points out above, institutional desire to throw good money after bad has been low of late... so the likelihood is that you will have a shareholding in a largely nationalised bank (think AIG) that will be unlikely to see dividends for a good while. Not to teach your grandmother how to suck eggs, but is that really the best place for your capital at the moment?


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## D.S. (15 Dec 2008)

The Government has already looked at the bank's books front to back via PWCs investigation. Furthermore, under the terms of the state deposit guarantee scheme, the financial regulator now has representatives based on site with all the banks.

The value of the shares is determined by the markets. Government investment will not guarantee a rise in value unless the markets believe that the banking sector is in a sound position. Until more comes to light regarding bad debt charges and concentration risk to the commercial sector - the banking sector could remain quite volatile regardless of Government capital going into the banks..


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## D.S. (15 Dec 2008)

The private equity firms who have been sniffing about and who have met with the Government could quite easily participate in an injection. You could view this as likely given the fact that the Government are only injecting half of the 20bn required to stabilise the sector..


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## JohnBoy (15 Dec 2008)

Bronte said:


> Thanks for the 'simple' explaination. Wouldn't ordinary shareholders who have seen a lot of loses be loath to buy more shares? If the government does this would the share value go up in value. Will the government be looking at the banks books before making this investment? It would be silly to put money into a bank they may in effect be bust surely.


 
It really depends on their risk appetite and availibility of funds. The average Irish investor seems to me to be quite stubborn. I would not be surprised to see a reasonable degree of retail investor interest in any recapitalisation. I have not seen any response from the Irish Association of Investment Managers yet. They claimed that they had up to €6bn IIRC to inject into the banks.

IF the recapitasliation is successful and IF there is more honesty about loan book writedowns then you might see some interest in the shares of the surviving banks but the UK recapitalisations have been a disaster for those who bought into them. If the same people are running the banks post the recapitalisation then I cannot see this inspiring confidence with international investors (given that the domestic investors will probably be tapped out if they subscribe for new shares).


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## Bronte (15 Dec 2008)

D.S. said:


> The Government has already looked at the bank's books front to back via PWCs investigation. Furthermore, under the terms of the state deposit guarantee scheme, the financial regulator now has representatives based on site with all the banks.
> 
> ..


  That's great then the accountants have looked at the books and everything is fine.  Would that be the same accountants that have signed off the banks books in the last few years and said everything is rosy when it was not.  In relation to regulators, in the US the regulator singed of Madoff's (not sure of spelling) accounts too and it was all a pyramid scheme.


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## D.S. (15 Dec 2008)

Bronte said:


> That's great then the accountants have looked at the books and everything is fine. Would that be the same accountants that have signed off the banks books in the last few years and said everything is rosy when it was not. In relation to regulators, in the US the regulator singed of Madoff's (not sure of spelling) accounts too and it was all a pyramid scheme.


 

Hold on

1) Who else other than the accountants are _qualified _to examine the books??

2) Are you questioning the impartiality of the audit PWC carried out on behalf of the state?

There are a whole host of things that can be said here. But here are a few:

- the banks were adequately capitalised over the past few years based upon the mark-to-market value of the bank's positions _at that time_. Part of the problem that banks are experiencing is that they have to write off the positions they have due to the current accounting rules, despite the fact they may have no wish/need to settle these positions in this financial year.

- Irish banks are not the only banks who have a concentrated risk to the property sector and are experiencing a liquidity crisis. This is a global problem brought about by a globally agreed soft-touch regulatory approach.

- Maddoff's deliberately committed fraud and hid/supressed their actions. You can't equate that situation with the situation here in Ireland. There was a) no fraud, b) the risks were voiced by several prominent economists, and c) reports were given to the bank's themselves on their risk profile

 - The Government commissioned PWC to undertake the audit of Ireland's financial institutions. If there is anyone to blame if you feel they weren't impartial, it's the Government who should of taken this into account.

Your comments are v generalistic.

The Irish banking sector has made the same mistakes in lending policy as every other bank globally. Does this mean boards should be sacked and we start again? Maybe, but that's up to the shareholders.

What definititely needs to happen is a root/branch examination of 1) capital adequacy and liquidity rules and 2) corresponding lending policies to make sure the same mistakes aren't repeated.

We shouldn't buy into the media garbage we are recieving which is v much one sided and ill-informed.


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## Padraigb (15 Dec 2008)

D.S. said:


> ...The Irish banking sector has made the same mistakes in lending policy as every other bank globally...



I don't think that is true. The key element in the international crisis was the collapse of the sub-prime market. Do you not remember how Irish commentators smugly pointed out that Irish banks were not very exposed to that?

The reason why they were not exposed emerged quickly. Instead of investing in the dodgy bonds emanating from US sub-prime lenders, the Irish banks had their very own bubble in which to risk their funds.

The sub-prime crisis precipitated a crisis for the Irish banks, but it is quite possible that the crisis would have developed anyway.


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## Bronte (15 Dec 2008)

Just to be clear I'm not referring to PWC in particular and when I referred to 'same accountants' I meant big accounting professions in general.  It hasn't been unknown for accountants (some) to be too close to boards (eg Enron).


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## D.S. (15 Dec 2008)

Padraigb said:


> I don't think that is true. The key element in the international crisis was the collapse of the sub-prime market. Do you not remember how Irish commentators smugly pointed out that Irish banks were not very exposed to that?
> 
> The reason why they were not exposed emerged quickly. Instead of investing in the dodgy bonds emanating from US sub-prime lenders, the Irish banks had their very own bubble in which to risk their funds.
> 
> The sub-prime crisis precipitated a crisis for the Irish banks, but it is quite possible that the crisis would have developed anyway.


 
There's no doubt that Irish banks have relied heavily on loans to the property sector for profits over the last few years - Irish banks relaxed lending standards to both the residential and commerical sectors and relied on the originate-to-distribute model of banking to fund growth. However - this doesn't differ hugely in any way from the rest of the banking world? The only difference you point out is class of debt - Subprime debt - but it was still to the property sector.

I agree that Irish banks are exposed to excessive commercial debt in the Irish property market as opposed to many other banks who were exposed to toxic subprime debt originating in the states. But the mistakes were fundamentally the same. Relaxed lending standards and an over-reliance on the loan book to fuel growth without appropriate hedging strategies.


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## Humdinger (15 Dec 2008)

Presumably the €10bn from the reserve fund is currently invested ... do the government need to sell some of these assets to generate the €10bn?

Does'nt sound like a good time to sell assets if this is the case ... are they just locking in decreases/losses on investments made?


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## Duke of Marmalade (15 Dec 2008)

As an AIB s/holder the really interesting thing will be any preference share issues, if the _Boss_ is right and we have first refusal.  Let's say these are with a dividend of 10% and maybe an option to convert into ordinary shares at some future date at say €3 then I for one will take my quota. 

_(I am only using AIB as an example, hope this is not in breach of the AAM code.)_


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## Duke of Marmalade (15 Dec 2008)

Humdinger said:


> Presumably the €10bn from the reserve fund is currently invested ... do the government need to sell some of these assets to generate the €10bn?
> 
> Does'nt sound like a good time to sell assets if this is the case ... are they just locking in decreases/losses on investments made?


That's a humdinger of a point, I presume the NPRF is mostly in foreign equities.


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## webtax (15 Dec 2008)

Humdinger said:


> Presumably the €10bn from the reserve fund is currently invested ... do the government need to sell some of these assets to generate the €10bn?
> 
> Does'nt sound like a good time to sell assets if this is the case ... are they just locking in decreases/losses on investments made?



The vast majority of the fund is invested abroad so as not to distort the Irish market (all changing now!). I read somewhere that the fund has declined over 20% in the last year, but that is a sunk cost so locking it in doesn't really come into the equation. What matters now is how we protect our own economic interest and minimise the damage to it over the next few years. The total banking sector is currently capitalised at €3bn and while there are some heavy losses to be incurred in the next while I cannot imagine the banking system being really that worthless. Investing the fund here would give the government a strategic role in bank policy, 10% interest p.a. plus a share in the upside when the banks recover.

I would rather see this happening than leaving the fund invested in a foreign economy in which we have no stake, hoping that someday we recover our losses.


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## GSheehy (15 Dec 2008)

Perhaps I am reading this incorrectly but I don't think that the Government is committing €10bn from the NPRF.

Is it not the case that they will pick up the tab, up to €10bn, *after* existing shareholders and private investor have committed their dough.


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## JohnBoy (15 Dec 2008)

Duke of Marmalade said:


> As an AIB s/holder the really interesting thing will be any preference share issues, if the _Boss_ is right and we have first refusal. Let's say these are with a dividend of 10% and maybe an option to convert into ordinary shares at some future date at say €3 then I for one will take my quota.
> 
> _(I am only using AIB as an example, hope this is not in breach of the AAM code.)_


 
The cost of this new capital for the banks cannot be too penal otherwise the money will not flow from the banks to the rest of the economy. What type of lending can the banks engage in if their capital costs them 10%.


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## z109 (15 Dec 2008)

Duke of Marmalade said:


> As an AIB s/holder the really interesting thing will be any preference share issues, if the _Boss_ is right and we have first refusal.  Let's say these are with a dividend of 10% and maybe an option to convert into ordinary shares at some future date at say €3 then I for one will take my quota.


Do you currently hold preferred shares? If not, then should you acquire any through a recapitalisation that would dilute the other preferred shareholders, so the likelihood is that you will only be offerred the type of equity or equity-like instruments (whatever they are) that you currently have! Any excess (i.e. quota that is not taken up) will be offerred to Private Equity and/or investment banks and then the government will soak it up. Presumably Private Equity will have first dibs on selling on their debt in the open market and the government will be locked in for a time period before they can sell their equity on.


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## Duke of Marmalade (15 Dec 2008)

_Yog_, that kinda makes sense and is at variance with the _Boss'_ interpretation. The last thing we ordinary shareholders want then, is juicy preference shares which we can't apply for. Now I see why AIB shares fell today.


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## z109 (15 Dec 2008)

Duke of Marmalade said:


> _Yog_, that kinda makes sense and is at variance with the _Boss'_ interpretation. The last thing we ordinary shareholders want then, is juicy preference shares which we can't apply for. Now I see why AIB shares fell today.


'xactly - I want some of those juicy preference shares too - who wouldn't? 8 or 10% essentially government guaranteed with a warrant for common equity should the price recover and no downside if it doesn't? You would have to be mad or think that the state will go bankrupt before it can make good on it's guarantees to not buy them


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## Duke of Marmalade (16 Dec 2008)

yoganmahew said:


> 'xactly - I want some of those juicy preference shares too - who wouldn't? 8 or 10% essentially government guaranteed with a warrant for common equity should the price recover and no downside if it doesn't? You would have to be mad or think that the state will go bankrupt before it can make good on it's guarantees to not buy them


_Yog_, I have been talking to a few folk. General feel is that the _Boss_ is right - ordinary shareholders will be given first refusal. I know that technically speaking this is not legally necessary and not the approach followed by the UK, but the government statement does seem to offer this safeguard, I hope so.


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## z109 (16 Dec 2008)

Duke of Marmalade said:


> _Yog_, I have been talking to a few folk. General feel is that the _Boss_ is right - ordinary shareholders will be given first refusal. I know that technically speaking this is not legally necessary and not the approach followed by the UK, but the government statement does seem to offer this safeguard, I hope so.


Fair enough - it would finally be some good news for shareholders.


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## Bronte (17 Dec 2008)

Why don't the AIB want the money?  Wasn't it this bank and the BOI that went to the minister last month in desperation?


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## PaddyW (17 Dec 2008)

Desperation that if the other banks went down it would have taken the big two down with them?


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## Sunny (17 Dec 2008)

PaddyW said:


> Desperation that if the other banks went down it would have taken the big two down with them?


 
Exactly. The banks were facing a liquidity crisis at the time and rumours were that one of the other large banks wouldn't survive another 24 hours and could have taken aither BOI or/and AIB with them. The issue of capital and solvency is a different albeit related one.


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## Bronte (18 Dec 2008)

So why doesn't the government wind down the bad bank?  And let the strong banks continue?


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## D.S. (18 Dec 2008)

Bronte said:


> So why doesn't the government wind down the bad bank? And let the strong banks continue?


 
That's exactly what they are doing. The Government already knows the strong & weak players and is seeking consolidation in the market. It's a complicated process and can be a legal mess if there are unwilling parties


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## JohnBoy (18 Dec 2008)

Bronte said:


> So why doesn't the government wind down the bad bank? And let the strong banks continue?


 
We for one the state guaranteed all of them and if it were to backtrack now the guarantee would loose all credibility.

Secondly, there may not be a strong bank. As far as I can see, Ireland only has weak banks and very weak banks. The 'strongest' Irish bank probably still needs additional capital even though it says that it does not. 

I agree that the state should only back those banks that can (or need) to be saved. However, the government has tied its own hands with the guarantee. That is probably why it is trying to force through mergers.


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## D.S. (18 Dec 2008)

JohnBoy said:


> We for one the state guaranteed all of them and if it were to backtrack now the guarantee would loose all credibility.
> 
> Secondly, there may not be a strong bank. As far as I can see, Ireland only has weak banks and very weak banks. The 'strongest' Irish bank probably still needs additional capital even though it says that it does not.
> 
> I agree that the state should only back those banks that can (or need) to be saved. However, the government has tied its own hands with the guarantee. That is probably why it is trying to force through mergers.


 

Can you elaborate on this??

I don't see how the Guarantee has weakened anyone's position. The Guarantee has proved an effective instrument for allowing the banks to raise funds on the debt markets. If there is any problem with the guarantee is that 2 years is just not long enough and that banks are limited in how much more funds they can raise using the guarantee.

Furthermore, the guarantee doesn't cover loans but covers:

• all retail and corporate deposits,
• inter-bank deposits,
• senior unsecured debt,
• asset covered securities, and​• dated subordinated debt (Lower Tier 2),

The Government hasn't tied it's hands at all. Even for the weakest of the banks, the consumer has his/her deposits protected which was a necessary move to prevent a run on the banks.

The Guarantee was a way to protect consumer/coroprate deposits, improve the interbank problem, and be a vehicle to raise debt. 

Unfortunately, the guarantee hasn't done enough to solve the liquidity problem that the banks face, but it has not (and was never meant to) had any effect on the long term solvency or credit risk of the weaker banks.

If a bank is weak because it is over-exposed to commercial property. No amount of guarantee's or capital injections will save this bank you could argue. These banks need to be consolidated with a "stronger bank".

The state has already made clear it's intention to consolidate the market before it injects funds. A merger of some sort is imminent.


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## JohnBoy (18 Dec 2008)

My point is that the government extended the guarantee to all the banks both the good and the bad so how does it now let any bank fail? On what grounds can the state allow one of the weaker banks to go under if it has guaranteed much of it's debt until 2010? Soon after the guarantee was announced the share prices of the Irish banks started to fall again as the investment community realised that this was a guarantee that could not afford called. It is telling that no other country has followed the Irish example. Even if the much talked about consolidation comes to pass, the taxpayer is still on the hook for losses (until 2010 at least).

I agree with you in that the term of the guarantee is probably too short but the government has pledged the taxpayer to cover liabilities that are in excess of 2x GNP. How can we hope to cover even a fraction of this guarantee? If the Irish banks were to suffer similar % losses on their property lending that the Swedish banks did as a result of their property boom then the cumulative cost of the boom could easily run into tens of billions of euros. 

By the way, I appreciate the stronger bank argument but the fact is that the strongest bank we have has about 55% of all loans devoted to property and constuction, is inadequately capitalised and is overly dependent on wholesale funding. The others are even worse!


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## barryl (18 Dec 2008)

D.S. said:


> That's exactly what they are doing. The Government already knows the strong & weak players and is seeking consolidation in the market. It's a complicated process and can be a legal mess if there are unwilling parties


 How do you know what the government are doing? Its all pretty hush hush as far as I can see.


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## D.S. (18 Dec 2008)

JohnBoy said:


> It is telling that no other country has followed the Irish example. Even if the much talked about consolidation comes to pass, the taxpayer is still on the hook for losses (until 2010 at least).


 
Simply not true. Here is a list of other State Guarantee Schemes:

France: Up to 320 billion euros to be made available to guarantee bank lending. The fund will guarantee bank paper issued before Dec 31, 2009, and lasting up to five years.

Germany: The government will provide 400 billion in guarantees which will run until December 31, 2009.

Italy: The Treasury will guarantee new bonds issued by banks until Dec 31, 2009, with a maturity of up to five years.

UK: Government to guarantee about 250 billion pounds in short- and medium-term borrowing by banks.

Austrailia: The government said it will guarantee all new and existing bank deposits for three years all wholesale funding to Australian banks for five years.

Austria: Government has issued a blanket guarantee on savers' bank deposits, and put aside 10 billion euros to guarantee the deposits of small- and medium-sized companies. Up to 75 billion euros will be provided in guarantees for interbank lending. The guarantees will be given to a newly formed clearing house company managed by the banks.

I could keep going on but sufficed to say Bulgaria, Cyprus, Czech Republic, Denmark, Greece, Hong Kong, Hungary have all announced guarantee schemes of one form or another covering either deposits, interbank lending, debt raising.



JohnBoy said:


> My point is that the government extended the guarantee to all the banks both the good and the bad so how does it now let any bank fail? On what grounds can the state allow one of the weaker banks to go under if it has guaranteed much of it's debt until 2010?


 

The guarantee was put in place to protect the system. Yes that includes weaker and stronger banks but the same thing occurred in every other country listed above. There was a huge danger of people losing faith in the banks as a mechanism for holding and transferring money and the Governments had to first protect the banking system and attempt to get the cogs of credit going again. They achieved that partly.

You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up. The terms of the guarantee fund also demand that for all those who participate, they must introduce measures to protect the weaker parties and produce detailed business plans as to how they will improve their position. Now this does not guarantee anything but does, if adminstered correctly by the government, provide a solid platform to work our way out of this mess.

You are perfectly right that weaker bank's deposits, interbank lending, bonds are protected. Is this necessarily a bad thing??? Yes the state is at risk of being out of pocket (but only if something goes wrong), but it means that the weaker bank is a least more attractive to a potential buyer or merger approach. It helps protect the jobs, funds, engagements & commitments of these banks from grinding to a complete halt.




JohnBoy said:


> I agree with you in that the term of the guarantee is probably too short but the government has pledged the taxpayer to cover liabilities that are in excess of 2x GNP. How can we hope to cover even a fraction of this guarantee? If the Irish banks were to suffer similar % losses on their property lending that the Swedish banks did as a result of their property boom then the cumulative cost of the boom could easily run into tens of billions of euros.
> 
> By the way, I appreciate the stronger bank argument but the fact is that the strongest bank we have has about 55% of all loans devoted to property and constuction, is inadequately capitalised and is overly dependent on wholesale funding. The others are even worse!


 
A couple of things on the above..

The Government does not need to cover anything unless something goes wrong.

Should something go wrong I would argue the cost of funding the guarantee via exchequer borrowing far exceeds the risk to the economy, jobs, and stability if the government had left the banks to fend for themselves.

I agree the banks are undercapitalisd. But I get v apprehensive when I see people make quotes like 55% of exposure to the construction industry/commercial industry. Can you quote your source for this figure??

Also, do you appreciate that in the instance that your right and the figure of 55% exposure is correct or even higher - that the banks can recover a signigicant portion of these loans? Even if property prices have dropped, the recovery rates are usually adequate when you factor in items such as collateral on hand, the ability to sue counterparties who don't meet their contractual commitments etc etc. The banks would take a hit no doubt, but they would still come out the other end. It's the economy who would be the big loser.

I have spent some time looking at the tier 1 and tier 2 capital ratios of these banks. They are off no doubt, but I honestly believe the scaremongering, public witch hunt, and inaccurate reporting of the situation is actually leading us all into a self-fulfilling prophecy...


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## D.S. (18 Dec 2008)

barryl said:


> How do you know what the government are doing? Its all pretty hush hush as far as I can see.


 
I agree it's hush hush but information has got out.

We know the Government knows the strong and weak players for several reasons.

1) Annual reporting - the markets know the strong and weak players based on this. So does the Government

2) PWC Audit - PWC have audited the banks and this report was provided to the Dept. of Finance weeks ago.

3) The Financial Regulator has placed regulators on site with all banks to monitor activity.

4) The state has had several meetings with all the heads of the financial institutions and has indicated on more than one occasion that consolidation of the market is important to safeguard the financial stability of the market. It's no secret that one of the bank's brought with them legal counsel to assist them with their discussions and that is widely seen as a sign that consolidation in the market is at least being discussed right now.

Personally, I also think consolidation is a no brainer for two important reasons:

- Consolidation is happending in almost every other market across the globe (UK, US, Germany, etc etc)
- This is not the first financial crisis we have ever been through. If you look to the financial crises in Hong Kong, South East Asia, and China, which occurred over the 80's and 90's you will see that the Government initiatives in these countries almost exactly mimic the actions of our Government, and more broadly the US/UK Governments in recent times. Guarantee Schemes were in the majority of cases introduced first, followed by market consolidation, followed by capital injection to the remaining players. 

Personally, I would be v suprised if the government injected any capital before consolidation. It would not be a prudent use of funds.


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## JohnBoy (18 Dec 2008)

Of the guarantees mentioned above, do any equate to two times (a shrinking) GDP? Lot of countries have guaranteed deposits (up to a certain level) and some have guaranteed interbank borrowing but have any guaranteed almost all of the liabilities of the banking system? 


_You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up._ 

And the state is paying a premium over almost every other Eurozone country for issuing debt as a consequence. Last week the German federal government had trouble selling bonds - how do you think investors will now see Ireland?

_You are perfectly right that weaker bank's deposits, interbank lending, bonds are protected. Is this necessarily a bad thing??? Yes the state is at risk of being out of pocket (but only if something goes wrong), but it means that the weaker bank is a least more attractive to a potential buyer or merger approach. It helps protect the jobs, funds, engagements & commitments of these banks from grinding to a complete halt._

The weaker banks are only attractive as long as the state guarantee is in place. And more to the point something IS going wrong with the banks. The economy is shrinking at a 5% annualised pace and we have private sector credit equal to twice our GDP (higher if you compare to GNP) yet we are to believe that our banks are only experiencing modest loan losses?


_Should something go wrong I would argue the cost of funding the guarantee via exchequer borrowing far exceeds the risk to the economy, jobs, and stability if the government had left the banks to fend for themselves._

Very true but we have signed a blank cheque. Public finances are sinking deeper into the red. Our budget deficit will equate to at least 5% of GNP this year and perhaps even 10% next year - and this is without an Obama-style fiscal stimulus. This is simply because tax revenues have collapsed whilst public spending has not.

_I agree the banks are undercapitalisd. But I get v apprehensive when I see people make quotes like 55% of exposure to the construction industry/commercial industry. Can you quote your source for this figure??_

Actually I was wrong on 55% for the best bank. It is actually 60% exposure to property for the 'strongest bank' (AIB). Page 119 of the 2007 annual report. It also has a loan/deposit ratio of about 150% too. 

[broken link removed]


_Also, do you appreciate that in the instance that your right and the figure of 55% exposure is correct or even higher - that the banks can recover a signigicant portion of these loans?_ 

I appreciate that but they will still make significant losses! I don't expect every loan to go bad, but their property exposure is so large (and geographically concentrated) that large losses are inevitable.

_Even if property prices have dropped, the recovery rates are usually adequate when you factor in items such as collateral on hand, the ability to sue counterparties who don't meet their contractual commitments etc etc. The banks would take a hit no doubt, but they would still come out the other end. It's the economy who would be the big loser._

What do you mean by adequate? What type of collateral do you think that the bank have for lots of their property lending. For mortgages and BTL it is property. For development and commercial it is probably buildings and land too. On the last BOI conference call I listened to I heard that development land had fallen in value by up to 50% in some cases; residential and commercial property prices are down by at least 20% and rents are falling! The situation could not be worse. How can the bank not make large losses on their property lending in this environment?


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## Duke of Marmalade (21 Dec 2008)

yoganmahew said:


> Fair enough - it would finally be some good news for shareholders.


Oh dear, _Yog_ seems to be right, the sunday papers are speculating that AIB and BOI shareholders are going to be compromised by preference shares given to government with no right of first refusal.


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## z109 (21 Dec 2008)

D.S. said:


> You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up.


Something already has gone wrong.

Hefty? At 0.12% of assets covered? The CDS on Irish banks would suggest the market puts a premium of 200 times this rate (at a CDS of 240bp).

With regard to the guarantee of debt schemes, they mostly relate to future borrowing, i.e. borrowing from the guarantee up to some specified date, not borrowing that was in the place in the past. This is the appropriate guarantee in my view - the state will support new borrowing by the banks, but existing borrowing stands on its terms. Capital infusions and new guaranteed borrowing to be used to pay off the old borrowings as they come due.


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## z109 (21 Dec 2008)

Duke of Marmalade said:


> Oh dear, _Yog_ seems to be right, the sunday papers are speculating that AIB and BOI shareholders are going to be compromised by preference shares given to government with no right of first refusal.


Bother. I feel both for existing small shareholders, who have been royally stuffed by this whole affair and for people like me who would be prepared to invest at a reasonable premium for the risk involved.


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## darag (21 Dec 2008)

Re-capitalisation was always going to hurt existing shareholders.  This is very unfortunate and I feel for investors - large as well as small but when re-capitalisation is required it generally means that the businesses involved are worthless as they stand.  Thus existing shareholders hold an entitlement to a share of nothing.  Such is the nature of public limited companies.


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## sfag (22 Dec 2008)

Brendan said:


> Good point
> 
> Nationalise Anglo because it will cost so little to do anyway.
> 
> ...


 

Anglo have a loan book of 79 billion - almost all commercial. How much of that is going to be toxic - half? three quarters??. 
The cost of nationalizing something with large debts is going to be a lot more than the 300 million stock market valuation. 
Any donation to this bank will keep it breathing in anticipation for a hoped for rise in the economy in the future. 
Impossible to nationalize,  and the state will lose every which way because it has guarenteed the losses.


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