# "Burn the rhetoric, not the bondholders"



## Brendan Burgess (28 Feb 2011)

A good [broken link removed]by Donal O'Mahony of Davys in today's Irish Times




> The  incessant vox pop on this issue has been ill-served by a crass  misrepresentation of the senior bank debt investor. Far from being the  reckless high risk/high reward speculators characterised in various  dispatches, senior bondholders are the most risk-averse of species. They  are placed alongside rank and file depositors at the very top of the  creditor pecking order, where return of capital rather than return on  capital is the absolute byword. Senior debt provides term financing for  bank credit creation that stretches well beyond the limits of ordinary  deposit maturities. Continuous repayment of this debt, alongside that of  the pari passu depositor, is the confidence glue which sustains the  “maturity transformation” process of modern commercial banking.
> 
> Senior  bank debt, like deposits, is not risk capital, and does not share in  the profits (or losses) of banking operations.




...





> Risk capital resides  further down the balance sheet in the form of subordinated debt,  preference shares and common equity. It bears reminding that such  capital has already played a substantial role in the burden sharing of  Ireland’s bubble burst. Destruction of shareholder value (and loss of  capital reserves) across the banking system amounts to circa €55  billion, while a near €10 billion haircut has already been applied to  subordinated bondholdings following numerous liability management  exercises.









> It was a similar perception of systemic support loss for  senior subordinated paper in early October that contributed to a  vicious contagion of junked credit ratings, surging bond yields,  seized-up funding markets and dramatic deposit flight, all of which  culminating in the EU/IMF interventions of late-November.


----------



## Complainer (28 Feb 2011)

Would this be the same Davy's that told us in Feb 2008 that 



>  Ireland's potential growth rate is 3.5-4% until 2011, comprising trend
> productivity growth of at least 2% and labour force growth of 1.5%.
> 
> [...]
> ...


----------



## Brendan Burgess (28 Feb 2011)

And which part of his comments in the original post do you disagree with?


----------



## shanegl (28 Feb 2011)

I disagree with this:


> Far from being the  reckless high risk/high reward speculators  characterised in various  dispatches, senior bondholders are the most  risk-averse of species.


We wouldn't have a european-wide banking crisis if they were so risk-averse.

Holding Irish bank debt while they were hopelessly insolvent is not risk-averse. Junk is junk, senior or not.


----------



## Complainer (28 Feb 2011)

I disagree with the premise of the post/article that;

a) Davy can distinguish between their posterior and their elbow when it comes to economics, and
b) Davy staff speak for 'the national interest'.

Davy staff speak for Davy clients.


----------



## Brendan Burgess (28 Feb 2011)

Complainer said:


> I disagree with the premise of the post/article that;
> 
> a) Davy can distinguish between their posterior and their elbow when it comes to economics, and
> b) Davy staff speak for 'the national interest'.
> ...



In other words, you can't find anything wrong in the article? 

Brendan


----------



## Brendan Burgess (28 Feb 2011)

shanegl said:


> I disagree with this:
> We wouldn't have a european-wide banking crisis if they were so risk-averse.
> 
> Holding Irish bank debt while they were hopelessly insolvent is not risk-averse. Junk is junk, senior or not.



That is the same as saying that depositors are not risk averse because they made the mistake of putting their money on deposit in Irish banks. 

The bondholders  did not measure the risk correctly. Nor did the depositors.


----------



## Complainer (28 Feb 2011)

Brendan Burgess said:


> In other words, you can't find anything wrong in the article?



I gave up shortly after the first paragraph which is largely unreadable for the average reader.

"The incessant vox pop on this issue has been ill-served by a crass misrepresentation of the senior bank debt investor. Far from being the reckless high risk/high reward speculators characterised in various dispatches, senior bondholders are the most risk-averse of species. They are placed alongside rank and file depositors at the very top of the creditor pecking order, where return of capital rather than return on capital is the absolute byword. Senior debt provides term financing for bank credit creation that stretches well beyond the limits of ordinary deposit maturities. Continuous repayment of this debt, alongside that of the pari passu depositor, is the confidence glue which sustains the “maturity transformation” process of modern commercial banking. Senior bank debt, like deposits, is not risk capital, and does not share in the profits (or losses) of banking operations."

I just thought that others who can/do read it might like to keep in mind Davy's track record and reputation.


----------



## Jim2007 (28 Feb 2011)

shanegl said:


> I disagree with this:
> We wouldn't have a european-wide banking crisis if they were so risk-averse.
> 
> Holding Irish bank debt while they were hopelessly insolvent is not risk-averse. Junk is junk, senior or not.



So how does a pension fund taking up a long term bond a highly rated Irish bank cause a banking crisis???

We're not talking about hedge funds here, we're talking about pension funds, life assurance companies and the like.

Jim


----------

