# Does the government need to recapitalize Irish banks?



## Brendan Burgess (13 Nov 2008)

_I have a conflict of interest as I am a shareholder in AIB. I also have an interest in the other banks through the ISEQ ETF._


Bank of Ireland's results this morning suggest that they do not need additional capital. They can rebuild their capital base by not paying dividends and by cutting back on making new loans. As their existing loan book is repaid, their capital ratios will improve. So I would agree with their assessment that they do not need new capital. It is not in the shareholders' interests to raise capital when the share price is so low. 

However, this calm, slow rebuilding of reserves would not be possible in the absence of the government guarantee. Without the guarantee, they would have to get additional capital to retain the confidence of the depositors. 

This clamp down on new loans is not in the public interest as it will damage the economy. But as a shareholder in Bank of Ireland, my primary interest is the value of the Bank of Ireland shares. (AIB would be in a very similar position to Bank of Ireland) 

Of course, it’s a vicious circle. If the banks stop new lending, the economy deteriorates further and the credit situation of the bank’s customers gets worse and worse. 

I see no point at all in putting government capital into Anglo Irish Bank or the Irish Nationwide. The outlook for them is just too uncertain and they should just stop making any new loans and see how good their loan book is in the fullness of time.  I don't think that there is any economic benefit to Ireland from putting tax payers' money into these banks to allow them to expand their lending outside Ireland. 

Irish Life and Permanent and the EBS don’t need capital either. They can rebuild their reserves through a cut in lending. Irish Life and Permanent may find it difficult to access capital, but the government could lend it money which would be repaid in time. 

So what does the government do about the economic problems caused by the freeze in new lending? In the past it set up ICC Bank and ACC Bank when lending was needed. Why not do this again? Rather than inject capital into banks with problems, the government could set up a state-owned bank which would have no legacy bad debts. 

At the end of the day, the government could buy the Bank of Ireland for around €1.5 billion and use it as the vehicle for growing the lending. Or they could buy AIB for a little bit more. When the current crisis is over, they could then float them at a considerable profit.


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## mercman (13 Nov 2008)

If only it was as simple and easy as you portray ??


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## z109 (13 Nov 2008)

The key conflict is the one you have identified. The banks in their current form would not survive without the government guarantee. The government guaranteed the banks (theoretically speaking at least, although I doubt they got that far in their blind panic) to keep money moving in the economy through continued lending.

If the banks are not lending because they need to improve their capital ratios and write down their bad debts, what is the point in saving them? As you suggest, it would be better to set up new banks, let the existing ones go bust and then buy up the assets required for the new banks from the liquidator (for example, IT systems, back office and branch networks).

I also believe the banks are fundamentally understimating the severity of two things:
1. The credit crunch - the current interbank spreads are likely to be the new normal; certainly, the old normal is not going to return. Why? The old ones were based on the fact that no major banks had gone bust in the previous ten years so risk was low. Now that we have had a major risk event, that will be factored into future interbank lending, bond prices etc.
2. The credit crunch in Ireland - as I posted previously, this has not really hit yet, IMO. As you identify, the vicious circle will mean that the previously solvent customers of the banks are no longer solvent. With unemployment, the state will pay the interest portion of the loan, so it may not be too bad. With underemployment, the state will not help and this is a far more serious situation. People will have to decide which debts they can afford to pay and still put food on the table. It sound melodramatic, but one look at the money makeover section on this site shows a number of people in very serious situations with mountains of debt, negative equity, and at best static income.

No interest in any bank shares.


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## CN624 (13 Nov 2008)

_Moderator's Note_

_Speculation about the price of shares is not allowed on Askaboutmoney, so posts which deal with this issue only will be deleted. _

_It is ok in this thread only, to refer to share prices in the context of a longer post_

_Brendan_


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## Duke of Marmalade (13 Nov 2008)

_Boss_, I think you have highlighted a real dilemma with the Irish solution. It appears to have saved the banks and the banking system at probably no cost to the taxpayer. But it has not saved the Irish economy, which seems to be destined to die of slow starvation of credit. Other jurisdictions have recognised that it needs rather more than saving the banks it needs encouraging them to lend. The British system starts to look good (hence the Brown Bounce). 

A State greenfield operation? - nice idea - but surely unable to be up to full speed in time.

Shareholders (inc me) are only diluted AFAIK if shares are issued at lower than market price - unless of course you believe market price is way understated.

I also agree that the banks seem to understate the issue. Why else do we get bullish statements from IL&P and BoI (profits still v high, no need for capital etc.) only to be followed or preceded by heavy price falls?


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## JohnBoy (13 Nov 2008)

Duke of Marmalade said:


> It appears to have saved the banks and the banking system at probably no cost to the taxpayer.


 
Au contraire mon ami! The cost to the Irish state of issuing debt has risen considerably. All that has happened is that the banking risks have been transferred from one counterparty to another. Everyone knows that the guarantee is a bluff because the Irish state cannot afford to pay out on this. In the end the banks will probably have to be recapitalised and this will cost the taxpayer even more. The most recent state bond issue (€4bn) had to offer buyers 0.25% over average European gov. bond yields in order to get them to buy it. Irish state debt is priced about 1.2% above that of Germany. This is an expensive guarantee.



Duke of Marmalade said:


> Shareholders (inc me) are only diluted AFAIK if shares are issued at lower than market price - unless of course you believe market price is way understated.


 
As an existing shareholder you will be granted the right to subscribe for new shares at the same price as everyone else (assuming that the banks issue new ordinary shares). You are only diluted if you don't take up your 'rights' to the new shares. In any event, as an Irish taxpayer you will end probably up owning the banks anyway because it is highly unlikely that that banks will be able to persuade institutional shareholders to buy more shares.


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## tiger (13 Nov 2008)

I don't believe the public are being allowed see the full picture.
In July the Dail finance committee were being told all was sunny in the garden, come Sept and emergency bail out is required to stop the collapse of the entire sector.
I don't have access to figures, but I suspect provisions for bad-debts will prove to be woefully inadequate.


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## JohnBoy (13 Nov 2008)

Brendan said:


> Bank of Ireland's results this morning suggest that they do not need additional capital. They can rebuild their capital base by not paying dividends and by cutting back on making new loans. As their existing loan book is repaid, their capital ratios will improve. So I would agree with their assessment that they do not need new capital. It is not in the shareholders' interests to raise capital when the share price is so low.



Can I discuss individual shares here? Dresdner reckon that BOI will need at least €1.1bn euros in additional capital (and possibly up to €1.6bn). Scrapping their dividend will save them €630m but this is not enough. Their Tier 1 equity capital is about 6.3% whereas the new international norm is over 8% (at an absolute minimum). This is still too low. If their loan losses are anything like the market suspects then they do need new capital. 




Brendan said:


> I see no point at all in putting government capital into Anglo Irish Bank or the Irish Nationwide. The outlook for them is just too uncertain and they should just stop making any new loans and see how good their loan book is in the fullness of time. I don't think that there is any economic benefit to Ireland from putting tax payers' money into these banks to allow them to expand their lending outside Ireland.



Why does BOI deserve help and not Anglo? Anglo's capital ratios are better than BOI or AIB. Moreover, judging by cost/income ratios Anglo is twice as efficient and profitable as its larger peers.




Brendan said:


> At the end of the day, the government could buy the Bank of Ireland for around €1.5 billion and use it as the vehicle for growing the lending. Or they could buy AIB for a little bit more. When the current crisis is over, they could then float them at a considerable profit.


 
Why should the government pay anything for these banks given that they only reason that their shares are not worthless is the existence of the state guarantee? If (as I believe) BOI, AIB and Anglo (perhaps even IL&P) all need to be recapitalised then the curreny equity value of the banks is a lot lower than the stockmarket implies. Since the government has saved these institutions why should it reward their shareholders at the taxpayers expense?


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## webtax (13 Nov 2008)

Brendan said:


> It is not in the shareholders' interests to raise capital when the share price is so low.
> ..This clamp down on new loans is not in the public interest as it will damage the economy. But as a shareholder in Bank of Ireland, my primary interest is the value of the Bank of Ireland shares.
> ..Of course, it’s a vicious circle. If the banks stop new lending, the economy deteriorates further and the credit situation of the bank’s customers gets worse and worse.



The directors of the banks are trying to convince their shareholders that it is in their interest not to recapitalise, when in reality it is not in the _directors_ interest. They will be out of a job if the government has to recapitalise the banks, which is why they have been so reluctant to write down the value of their assets to reflect reality. If they get their way we will be left with zombie banks with no money to lend whilst they wait for likes of the developments in ballsbridge to be eventually built and sold to restore their capital base.
Instead, a write off of the bad debts and subsequent recapitalisation would provide funds to be lent to successful businesses that would help restore the economy and generate profits for the banks in the future. Its the choice of whether to follow the Scandinavian (short term pain for long term gain) or Japanese (long term pain followed by more long term pain) model. As a rough guide to which is the better course, if the Irish bank directors are recommending once thing, then we  should be doing the opposite!



JohnBoy said:


> Why does BOI deserve help and not Anglo?


Because Anglo is essential a property developers bank with a small role in the woder economy, and keeping it on life support will cost more than letting it collapse would have. It was a big mistake to guarantee all the banks and imo the govt panicked and were more worried about percieved damage to our international reputation by having a bank here go bust.


JohnBoy said:


> Why should the government pay anything for these banks given that they only reason that their shares are not worthless is the existence of the state guarantee?



If the banks don't agree to recapitalisation then the government should use this leverage to force them.


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## JohnBoy (13 Nov 2008)

webtax said:


> Because Anglo is essential a property developers bank with a small role in the woder economy, and keeping it on life support will cost more than letting it collapse would have. It was a big mistake to guarantee all the banks and imo the govt panicked and were more worried about percieved damage to our international reputation by having a bank here go bust.


 
I agree with everything you have said apart from the above. The recent boom in Ireland has left the economy critically over-dependent on the construction industry. By letting any of the banks go you would have critically damaged the rest because they are all deep in property lending. If Anglo were to be cut loose from the state guarantee then the rest of the banks would have swiftly found out what the true value of their property assets was worth and this is probably not a problem that the Irish state is ready to face. The majority of the Irish populace is still happily clueless as to the real state of the banking system. It is only because of our membership of the euro that the IMF is not involved at this stage.

Also, the government would have to decide which banks to save and which banks to sacrifice. How would they justify these decisions?


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## Brendan Burgess (13 Nov 2008)

Hi JohnBoy

Anglo and Irish Nationwide can be just slowly wound down without adding any additional capital. No one knows the true state of these banks. After a few years the position will be a lot clearer and they may require government cash to meet the guarantees or they might turn out to be very solvent, profitable companies and can be let grow again. 

The economy can't afford to allow Bank of Ireland or AIB to be slowly wound down. 

Brendan


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## webtax (13 Nov 2008)

JohnBoy said:


> If Anglo were to be cut loose from the state guarantee then the rest of the banks would have swiftly found out what the true value of their property assets was worth and this is probably not a problem that the Irish state is ready to face.



The problem with saving anglo/inbs is that the credit markets are well aware of the true value of their property assets which is why the spread Ireland is paying on its debt has been rising - the banks problems are now Irelands problems. If the worst banks were let go bust the government could have picked them up for free and used them to provide funding to the businesses that are actually capable of delivering a return to the economy.


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## kaplan (14 Nov 2008)

Brendan's right on AIB & BOI.

Of course government needs to capitalise some banks and will have to do so. The fight back by AIB IL&P and BOI is to be expected. They are saying they are profitable, don’t need new capital and will deleverage, cut costs and dividends to shore up damaged capital bases. Current shareholders are to be left swinging in the wind nursing losses they will never recover. The upside will be saved for new shareholders – those with the dosh and dare to take a punt. 

The notion of state bank is just that a notion – both ICC and ACC were only ever minnows starved for capital by a reluctant shareholder which is why they were sold off. 

We are seeing a stand off between less than contrite corporate Ireland with its old boy network and a weakened government. Whatever about state finances what is really at issue here is the quite remarkable collapse of Fianna Fail credibility resulting from its responsibility for the boom to bust property market and an all too obvious leadership deficit. 

Whilst one of the prescriptions in any turnaround is firing corporate CEO’s and their senior management teams it equally applies to government.

Government will capitalise some banks – but not this government and by the time the new one doe’s, bankers will have deepened the recession. 

Meanwhile here’s a prediction. AIB gets IL&P (the P bit), BOI gets EBS and Anglo & INBS are left as zombies. Reason: there are only two banks that really matter, AIB & BOI. All the others business models are knackered. 

As far as the Ulster, NIB and BOSI are concerned, their parents are also focussed on deleveraging where internal capital to finance foreign (Irish) lending is a rare as hens teeth. Finally I thought BOSI’s gimmick in advertising competitive advantage in its non-Irish government guarantee status was rather stupid given its property, mortgage and asset finance exposure(cars, boats and helicopters)


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## JohnBoy (14 Nov 2008)

Brendan said:


> Hi JohnBoy
> 
> Anglo and Irish Nationwide can be just slowly wound down without adding any additional capital. No one knows the true state of these banks. After a few years the position will be a lot clearer and they may require government cash to meet the guarantees or they might turn out to be very solvent, profitable companies and can be let grow again.
> 
> ...


 
No one knows the true state of _any_ of the Irish banks!

You say that the economy cannot afford to allow either of the big two to be wound down slowly but since no one trusts their balance sheets this is what is happening already. The economy is going to be starved of credit. In their current form, there is no future for the Irish banks outside the government guarantee. If the government does not force disclosure then the guarantee will just have to be extended and what funding the banks do manage to raise will be done at the taxpayers expense.


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## Brendan Burgess (14 Nov 2008)

> The notion of state bank is just that a notion – both ICC and ACC were only ever minnows starved for capital by a reluctant shareholder which is why they were sold off.




As a shareholder in AIB, I would prefer if AIB was not recapitalized. 

As a citizen and tax payer, I think that the government should take over AIB and/or Bank of Ireland. It should then sell off their overseas assets. They could then start lending in Ireland again. And when the economy and markets recover, they could float them. 

This way, they keep the same downside as they have at the moment, but they get the upside of owning a potentially very valuable bank. 

The market capitalization of AIB this morning is only €2.6 billion. Bank of Ireland is €1.2 billion. So they can own the critical parts of the banking business in Ireland for under €4 billion. That is less than 1% of what people reckon the state guarantee is. 

So "the notion of a state bank" is very achievable. 

I don't see much point in injecting capital in the Irish banks at the moment as they might just use it to free up their lending in their overseas subsidiaries which have much more profit potential. 

Brendan


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## JohnBoy (14 Nov 2008)

Brendan said:


> As a shareholder in AIB, I would prefer if AIB was not recapitalized.
> 
> As a citizen and tax payer, I think that the government should take over AIB and/or Bank of Ireland. It should then sell off their overseas assets. They could then start lending in Ireland again. And when the economy and markets recover, they could float them.
> 
> ...


 
I would disagree that the government needs to pay anything for these banks. I would submit to you that the equity value is worthless as their bad debts probably outstrip the current equity base of the quoted banks. Moreover, they cannot fund themselves without state help. BOI alone has €11bn maturing next year and would go bust without the backstop provided by the Irish taxpayer. 

AIB has some attractive overseas assets but will not get great prices in the current market. All BOI has is a UK mortgage operation that has made a lot of BTL and self-cert loans - you will probably only get a distressed price for this.

If the government were to nationalise the two main banks then I reckon that they should wipe out the shareholders like the UK government did with Northern Rock. Equity capital, after all, is risk capital.

If the government were to pay current market levels for the two main banks they would probably find that they would need (at the absolute minimum) to stump up that amount again to cover loan losses. Indeed, I have seen figures of €20bn/€30bn suggested by some buy-side analysts as the total bad debt total for the boom (this includes everything - commercial, residential, credit cards, car loans etc). 

However logial it would be to punish shareholders, who after all, have probably benefitted via dividends throughout the boom years, I suspect that it will not happen. I doubt that the government has the determination to do this so there will be a compromise solution which will arguably cost the taxpayer more in the end.


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## Brendan Burgess (14 Nov 2008)

> I would submit to you that the equity value is worthless as their bad debts probably outstrip the current equity base of the quoted banks.


 
No. There is equity value in any company which is not obviously insolvent.

You, and many others, feel that AIB and BoI are insolvent. I don't think that they are. They have serious problems. They have loans to property developers which are currently very difficult to value. That does not mean that they are worthless forever. 

But most of their loan book is performing. People are repaying their loans. As well as this, the banks have an ongoing profitable business. 

But, as a taxpayer, it would make sense for the government to buy out Bank of Ireland and AIB, so that when they do recover, the government would get a great windfall. 

As a shareholder, I would prefer to wait to see if my shares recover.

Brendan


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## z109 (14 Nov 2008)

Duke of Marmalade said:


> needing capital is not the same as being insolvent or worthless


Eh, in what way? 

Since it's an awful time to raise capital, why would they need to raise capital if they, eh, didn't have to raise capital (in order to stave off insolvency).


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## Duke of Marmalade (14 Nov 2008)

_Yog_, bank capital is the reserve against the (hopefully) remote possibility of insolvency.  Needing more capital means that possibility is less remote it does not mean it is a certainty.


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## Duke of Marmalade (15 Nov 2008)

I fear that Ireland is facing a perfect storm. We should not underestimate the effect of this big fall in sterling. The old punt is now worth £1.09. This was regarded as disasterous back in the 90s but at least we could do somethin' about it then. And what if Obamanation scares away the multinationals? And heaven forbid we reject Lisbon again.


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## JohnBoy (16 Nov 2008)

There are a couple of additional points that I would like to raise having re-read this thread.

Debates on loan losses aside, the events of the past 18 months have dramatically altered the perception of risk within the banking industry. The minimum 'acceptable' levels of equity capital are now higher than they were before the credit cruch began. Currently, the level of core Tier 1 equity capital for every Irish bank (bar IL&P) falls short of the new acceptable norms. Were economic conditions more supportive, the banks might be able to gradually increase their capital bases without resorting to their shareholders but I don't think that this is an option in the current environment. So, in the post credit crunch world, the financial markets are demanding lower risk profiles from the banks that they are being asked to fund and i do not believe that any bank that is accused of having too little capital can simply ignore calls to remedy this.

Separately, I am not convinced that AIB and BOI are that only banks deserving of government support should additional capital be required. I appreciate that the two largest banks in the country need to survive but I wonder is it right to simply discard the rest? Would we really be better off if AIB and BOI where to only two banks to emerge from this recession? What about future competition within the industry? 

To date, I really cannot see that ANY of the banks have demonstrated that they are deserving of state cash should it be required. I am really concerned that we would have to create a national champion because no one bank has emerged from this debacle with its reputation or balance sheet intact. No single institution was possessed of enough sense to limit their exposure to an overheating property market.


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## JohnBoy (17 Nov 2008)

From today's Irish Times

[broken link removed]


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## Brendan Burgess (17 Nov 2008)

Bank of Ireland's market capitalization now is just €900m.  

Given that the government is taking all the downside in terms of its guarantee, it should simply buy the bank and use it to refinance the Irish economy. 

It could sell off the Life business for around €1billion. It could close down or sell off the oveseas activities. 

It would end up owning the Irish business for nothing.  If the bank recovers, then the Irish taxpayer would get a great windfall. 

If the Bank of Ireland is insolvent, which I doubt it is, the taxpayer will be discharging its liabilities anyway.

Brendan


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## JohnBoy (17 Nov 2008)

I am sure that this is being considered as one of the options for the industry but who would run the bank when it is in public ownership? I reckon that the government should announce a plan to inject funds via high-yielding preference shares. This should not cause further pain for the ordinary shareholders and would also remove the uncertainty that is killing the companies.

As an aside, some of the recent weakness in the share prices of the Irish banks is due to their upcoming ejection from a number of pan-European equity indices (BOI leaves one tonight). This, coupled with low trading volume is exacerbating share price movements.


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## Perplexed (17 Nov 2008)

If high yielding preference shares are issued, does this not leave ordinary shares worthless ?

I'm a  shareholder and also an employee of BOI. Scary times !


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## webtax (17 Nov 2008)

Perplexed said:


> If high yielding preference shares are issued, does this not leave ordinary shares worthless ?



Thinking longer term, and assuming the banks will have to be recapitalised preference shares are likely to be the route the govt will go. What I am wondering is how hard a deal the govt will strike with the banks regarding existing shareholders (the directors should go of course). If they wipe out the ordinary shareholders, where will that leave the Irish stock market and Irish companies listed there who go looking for capital in the future? Will international investors shun the Irish market and view it as in the same league as Argentina? I would guess that the government would want to leave something behind for existing shareholders so would that make the shares a buy?


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## Duke of Marmalade (17 Nov 2008)

JohnBoy said:


> From today's Irish Times
> 
> [broken link removed]


 
In one point this link seems to confuse funding and capital, but who am I to argue with such heavyweight academics.


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## Duke of Marmalade (17 Nov 2008)

Brendan said:


> Given that the government is taking *all* the downside in terms of its guarantee...


 
Is that true?  Aren't the shareholders taking all the downside until the point of actual insolvency, as only then does the government guarantee kick in?


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## JohnBoy (17 Nov 2008)

Perplexed said:


> If high yielding preference shares are issued, does this not leave ordinary shares worthless ?
> 
> I'm a shareholder and also an employee of BOI. Scary times !


 
Preference shares are usually non-voting but have preferential rights to dividends. As an ordinary shareholder this is probably the best outcome. No more ordinary shares will be issued but you will probably not receive any dividends until the preference shares have been redeemed/repaid.

This is the route the UK government is taking in providing capital to UK banks. As far as I know most banks would hope to repay this loan/buyback the shares within 2 years.


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## Brendan Burgess (17 Nov 2008)

Hi Duke

You are correct. The government is taking most of the downside. The shareholders in Bank of Ireland stand to lose around €1billion at the moment. The tax payer stands to lose a lot more due to the guarantee.

Brendan


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## Perplexed (17 Nov 2008)

But wouldn't it be true to say that a lot of shareholders are taxpayers ?

There are a lot more people affected through pension & investment plans.


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## z109 (17 Nov 2008)

Perplexed said:


> But wouldn't it be true to say that a lot of shareholders are taxpayers ?
> 
> There are a lot more people affected through pension & investment plans.


So they will get hit twice or three times. But that money has already been earned and spent. The taxpayer could be on the hook for billions in liabilities that will be paid for in poorer public services for the next generation. Think I'm being alarmist? Nobody is going to buy short-dated Irish government debt because they can buy Irish government guaranteed bank short-term debt at a better yield. So the government will be issuing long-dated debt in the event the guarantee is called upon. And they will have to issue over a range of dates up to thirty years. And probably at a fruity yield (since every other government in the world is issuing huge amounts of debt). Each and every year the government will have to put a significant proportion of its income into servicing the national debt.

But of course, we'll all be grand. Sure those bankers are smart fellows; went to university and all and know each other well and know all the politicians too. They'll see that we aren't out of pocket... won't they?


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## Duke of Marmalade (18 Nov 2008)

Brendan said:


> Hi Duke
> 
> You are correct. The government is taking most of the downside. The shareholders in Bank of Ireland stand to lose around €1billion at the moment. The tax payer stands to lose a lot more due to the guarantee.
> 
> Brendan


 
Don't want to get bogged down in a semantic argument. I still think the risk of actual insolvency is quite small - this is what the government is insuring against, they still argue that it is a small contingent liability. The shareholders on the other hand stand to lose all the net assets up to the point of insolvency. The market value of 1Bn is an assessment of what will be left after these loan losses.

The argument for state capitalisation seems to revolve around the state being the only one with the stomach to lend into a recession. The banks, acting prudently (for a change), are not prepared to take the risks which are necessary to avoid a severe economic downturn.

In summary. If the government recapitalises the banks in some shape or form the taxpayer is definitely taking on a much greater short term financial risk than the mere guarantee. But, and I am starting to believe this, the taxpayer might need to take these risks for the long term good of the economy.


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## DerKaiser (18 Nov 2008)

Duke of Marmalade said:


> Don't want to get bogged down in a semantic argument. I still think the risk of actual insolvency is quite small - this is what the government is insuring against, they still argue that it is a small contingent liability. The shareholders on the other hand stand to lose all the net assets up to the point of insolvency. The market value of 1Bn is an assessment of what will be left after these loan losses.
> 
> The argument for state capitalisation seems to revolve around the state being the only one with the stomach to lend into a recession. The banks, acting prudently (for a change), are not prepared to take the risks which are necessary to avoid a severe economic downturn.
> 
> In summary. If the government recapitalises the banks in some shape or form the taxpayer is definitely taking on a much greater short term financial risk than the mere guarantee. But, and I am starting to believe this, the taxpayer might need to take these risks for the long term good of the economy.


Haven't put much thought into this arguement, but does the fact that the buffer between assets and liabilities has fallen €17bn make the €1bn market capitalisation remaining a very slim margin against further negative news?  I understand that much of the loss in market capitalisation was as much to do with the loss of expected future growth but it seems to me that the banks have no handle on the level of bad debts and the projections for these will only go one way unless someone seriously stimulates the economy


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## webtax (18 Nov 2008)

The talk of what form the capitalisation will take is just speculation at the moment, but some in the media have been suggesting that the smaller banks will be merged into the larger ones as part of the process. IMO this would be a very retrograde step and would leave a very uncompetitive banking system in the island when the dust settles.
The foreign-owned banks are likely to view the Irish market as very low priority and if we are left with just the two big bank it will be just like the bad old uncompetitive days again.


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## Simeon (18 Nov 2008)

Dan White's article in today's Herald is worth a read.


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## z109 (18 Nov 2008)

Simeon said:


> Dan White's article in today's Herald is worth a read.


http://www.herald.ie/opinion/column...s-control-of-our-disgraced-banks-1543327.html
The end bit:


> ...
> The Government should ignore the bank bosses. They are now totally    discredited. While they might seem to think that the banks can get by    without fresh capital, no-one else now believes that.
> 
> By delaying the much-needed recapitalisation, the bank bosses are threatening    to make a bad situation even worse.
> ...


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## PaddyW (19 Nov 2008)

Is recapitalisation now inevitable? From what I've been reading this morning, it looks like it is.


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## Sunny (19 Nov 2008)

PaddyW said:


> Is recapitalisation now inevitable? From what I've been reading this morning, it looks like it is.


 
Its been inevitable for a while now. I think Eugene Sheehy can safely start clearing out his desk or will he try and back down from his "we would rather die than raise capital" statement.


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## DerKaiser (19 Nov 2008)

yoganmahew said:


> http://www.herald.ie/opinion/column...s-control-of-our-disgraced-banks-1543327.html
> The end bit:


 
The bank bosses are going down and they want to take the banks with them.  Their only hope of keeping their jobs is reliant on keeping some kind of zombie banking system afloat without government intervention.

Time to clear them all out.  Get tough on their crony developer friends. And get some profitable new lending going, backed by public funds if needs be.  

My suggestions for how the banks could recapitalise are as follows:

1.  Sell off the insurance part of their business, in many cases this will raise more money than their current market capitalisation (In Irish Life's case, probably at least 3 times it!)

2.  Inject public cash to get safe/profitable borrwing going again (only 1 in 7 applicants now get approval for car finance!)

3.  Force the builders to cut prices and get things moving.  example - A large number of almost completed apartments in The Grange, Stillorgan are being held back until at least next year by the developer.  The asking price is €600k.  They won't get this now so they wait and the bank sits on it's hands until they try sell them.  Solution?  Cut the prices to €400k (cost) and they'll sell.  The bank will be recapitalised.  The current situation is merely the developer gambling with the banks money


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## Duke of Marmalade (19 Nov 2008)

DerKaiser said:


> 1. Sell off the insurance part of their business, in many cases this will raise more money than their current market capitalisation (In Irish Life's case, probably at least 3 times it!)


I think you will find that the book value of life subs are already contributing more to the regulator's calculation of capital than could possibly be realised in a sale.


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## darag (19 Nov 2008)

I've sort of avoided these discussions over the last couple of weeks.  I've pretty much said my piece regarding the worthlessness of the guarantee to support the Irish banking system here at length quite a while back.  I don't like saying "I told you so" but I told you so!

But I'd like to correct what seems a misunderstanding concerning the state of  BOI in particular and Brendan's interpretation of the results it announced.  Yes, they posted decent profits (700m) for the first half and so you might think that all they need to do is sit tight, pay no dividends and soon their equity will be restored.  Unfortunately part of the announcement was that they are expecting ZERO profits for the second part of the year.  Now I think it's fair to say, the way the economy is going, that they could very easily be facing large losses next year.  So their meagre capital cushion is likely to be eroded going forwards.  And the markets recognise this hence the share price collapse.

I can't believe that I haven't heard a single representative of the industry mention improving profitability (i.e. cutting costs).  Unless this happens putting government equity into these banks may well be a waste.


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## NorthDrum (19 Nov 2008)

Firstly disclosure, I have shares in BOI worth at this stage a weekend in cork (probobley not including spending money!)

Have been reading all these posts and pretty much feel that whatever is going to happen needs to happen soon.

Everybody else seems to be going down the capitalisation route very quickly to shore up the craters in the bankings systems, I dont understand why we are not. Im not debating whether or not its the perfect way to sort out the existing economic problems in this country, but I havent heard a better alternative that can be implemented sooner rather then later.

How long more can we deliberate over what we should do and at what cost will delaying a decision have on our economy?


I was discussing this topic with somebody today and Unless I am extremely mistaken the following is blatently evident and needs to be sorted:

1. Bank Bosses cannot be trusted. They appear to be sending out signals that totally contradict what we already know. Their only interest appears to be not capitalising for the self interests of those with the most to loose (ie. the bigwig corporates who always looks after their own selfish interests).

2.Ireland does not need as many banks as it currently has, some should be forced to merge under current economic circumstances. Worry about competition when the economy is back on track.

3. The government doesnt really know what its going to do or it doesnt know how to tell us. Lack of leadership and transparency has only further scared the average Joe Public (sounds familiar!).

4. Whatever happens the working class will end up footing a majority of the bill.

Personally I feel the whole Banking sector needs to be disected and rebuilt from scratch. Issues about regulation can be sorted when they are rummaging through the remains of whats left after this knightmare. Heads should role regarding the regulation of the Banks but thats for another day . . . Im surprised nobody here has mentioned the Finnish banking system that had to totally rebuild itself in the 1990's after a very similar situation happened to their banking system.

Seems to me like we are being held to randsom by the banks at the moment. Could they be putting pressure on the Govt to agree to certain terms (eg bonus's, certain regulatory concessions etc) before being capitalised or is it a case that our government are just dithering over what to do ?

With regards to the Govt buying up a bank (AIB or BOI preferably), does it not make sense overall? I mean banks invariably make money as they charge us for putting money in, taking money out, leaving money in and make money on our money. This isnt even going into the other services banks make money on and is keeping my point very simple (I know there are more dynamics involved but bear with me). 

I could never understand why the government contracted out companies for toll roads, giving them the rights to own the tolls (especially considering the profits that these tollbridges make). I understand the concept behind state sponcored bodies and holding onto industrys that are in the publics interests, but surely that doesnt mean that they cant hold onto companies or industries that make money? Surely there is a competitive friendly way of our government making money out of corporate investments? Getting back to the point, why cant the government capitalise one specific bank or do what Brendan suggested and setup its own bank?

In theory and keeping things on a simpler note, if it is true that Anglo are the ones whom are most exposed (in terms of bad debts and how they loaned money to builders), then why shouldnt they be left with the worst terms of the Government bailout (and/or eventual capitalisation) whether it be by forced merger or no capitalisation. Surely making an example of at least one bank would send out a signal of intent (ie repurcussions for actions) which has been all to invisible up until now. Im not saying we should let them goto the wall but while there is a collective burden to be shared in the banking industry, why does this mean that every bank should get the same "bailout". Risk v Reward ! ! ! Whats fair about the Irish Public having to bail the banks out in the first place, what we want for our money shouldnt be about being fair on all banks but being selective on what suits us most . . 

Finally, whats most important is that the government does what is best for the country, for the economy, nobody else. We are hearing of all sorts of taxes being put on cars, health, carparks etc. I dont mind being taxed up the ass once I am living in a fair economy that looks after all interests (not the interest of those at the top of the ladder). Banking has been riding the pigs back with no repurcussions up until the Sht finally hath hit the preverbial fan.

Me personally, While I dont understand all dynamics to the banking industry (and as far as competition acts go) I dont see why the government just doesnt have one bank. A central bank, owned and run by the public. The profits that some of these banks make are a fraction of our govts budget. Would you mind slightly higher bank charges & have no competition if it meant lower taxes and more money in the coffers for the government? But just as important it meant the heads of the bank were answerable to its public. Hey presto, confidence issues in the banking sector gone . .


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## Duke of Marmalade (19 Nov 2008)

darag said:


> I've sort of avoided these discussions over the last couple of weeks. I've pretty much said my piece regarding the worthlessness of the guarantee to support the Irish banking system here at length quite a while back. I don't like saying "I told you so" but I told you so!


Now _darag_, I agree you always opposed the guarantee scheme. The scheme achieved its aim of securing funding for Irish banks at no cost to taxpayers and did not lead to the sort of abuses you predicted. 

Things have moved on. The issue now is who is going to take the risks of lending into a recessionary economy? It's starting to look like there is only one sucker of last resort - the taxpayer.


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## darag (6 Dec 2008)

Duke of Marmalade said:


> Now _darag_, I agree you always opposed the guarantee scheme. The scheme achieved its aim of securing funding for Irish banks at no cost to taxpayers and did not lead to the sort of abuses you predicted.


Au contraire Duke.  I wonder will we ever agree on anything?

Things are happening pretty much exactly as I said it would.   I said at the time that Anglo were a bust.  The markets are have come to the same conclusion and are valuing it effectively at zero with a share price of 48c.  (Remember they were around a fiver when I was ranting the last time.)  Normally that would be the end of the road for a bank but because of the government guarantee they are able to keep digging by borrowing another billion.  What is the justification for this bond issue?  It does absolutely nothing for capital ratios.  Perhaps Anglo have discovered a sure thing customer looking for a loan that is bound to make them a profit?  Nonsense.  No, this billion will be used to keep the show on the road for as long as possible.  This is exactly the abuse I was talking about.  When this billion is gone they'll borrow again but when the inevitable happens, the government will be left with the tab.

What  I certainly didn't predict or imagine was that they'd be as brazen as this.  It's actually disgraceful.  The statement accompanying their annual results during the week shows the contempt with which they hold the public and the government with the soviet-style confident black-is-white proclamations.  I would have at least expected them to announce some token austerity measures or something but no - they'll just keep going as long as possible without a single job being cut.

There is no way they should be allowed to issue bonds in their current state.  Perhaps if they had announced massive job and cost cuts and a realistic plan to improve their balance sheet, it could be justified.  Their lies are transparent to everyone; if anyone believed them (i.e. that they expect, by profit retention, to improve their tier 1 ratio and sort out their balance sheet), would they not snap them up?  I mean they have 100 billion worth of assets and you could by the whole thing for 350million.  It stinks worse than a barrel of old fish guts.


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