You have to hand it to the good folk at our Department of Finance. Here’s the problem
“Anglo Irish Bank (Anglo) and Irish Nationwide Building Society (INBS) owe money to depositors and to bondholders. The depositors are civilians and should get the money back. The bondholders are investors and should face a discount if not a complete wipe-out. But the law equates depositors with senior bondholders so if you’re going to impose any loss on the senior bondholders, you’ll have to do the same to the depositors.”
And here’s the solution
“Transfer the deposits out of Anglo and INBS so that neither institution has any depositors left, just bondholders. And then wipe out the bondholders.”
It’s like the Hotel Rwanda but instead of blood thirsty Hutus, you have the beleaguered Department of Finance whose intent isn’t to “chop the cockroaches” but to “burn the bondholders”. But first they needed the Blue Helmets (in our case represented by Granny Ni Houlihan’s life savings on deposit in Anglo) to leave before it becomes a free-fire zone. And perhaps as soon as next week, Granny Ni Houlihan’s deposits will have been transferred out of Anglo following the decision last week to auction off the deposit books of Anglo and INBS. What will then stand in the way of burning the bondholders?
But the ingenuity (“plan and brazen violation” of bond agreement according to Fir Tree) of the DoF seems to have been uncovered by bondholders in the US who have sought to protect their position by seeking redress in the US courts. New York hedge fund, Fir Tree Capital purchased USD $200m of Anglo subordinated debt in 2005 (that is, pre the September 2008 guarantee and now apparently exposed) and although its action includes a complaint that Anglo is deliberately destroying value in itself through transfers to NAMA it seems that that the main aim of the action is to extract value from its investment before Anglo’s deposit book is auctioned off. Anglo’s transfers to NAMA commenced almost a year ago and it seems a bit late in the day to be complaining that value is being destroyed at that golem bank especially since NAMA is paying Anglo by reference to property values some 14 months ago (Ireland’s property market where Anglo is particularly exposed has continued to tank since then) and is paying a Long Term Economic Value premium, averaging 10%, on top of the current market values.
But the other strand, that Anglo is disposing of deposits (and assets of equal value) seems well-worth pursuing because in a couple of week’s time bondholders won’t be able to complain that they are being treated differently to depositors because Anglo may no longer have any deposits. The complaint appears not yet to be online in the US courts system (and it is hoped that more detail can be attached here later today) but it seems that this action has the potential to stall, if not scupper, the government’s plans for the wind-down of Anglo. UPDATE (1): 15th February, 2011 According to Bloomberg (and credit to Gerard Sheehy for pointing it out), the case is Fir Tree Capital Opportunity Master Fund LP v. Anglo Irish Bank Corp., 11-CV-0955, Southern District of New York Manhattan and we hope to have the application details later today. UPDATE (2): 15th February, 2011. The application is now available here.
UPDATE: 8th March, 2011. The Irish Independent claims to have seen Anglo’s response to the Fir Tree application and describes it as “highly agressive”. The response is understood to contend that Fir Tree’s application is “utterly meritless”. The Independent says the response claims that Fir Tree bought the Anglo subordinated bonds at a deep discount after the IMF/EU bailout in November 2010 and were now seeking to profit in their attempt to be repaid at par.
UPDATE: 5th January, 2012. It is reported by John Mulligan in the Irish Independent that Anglo (or IBRC as it is now known following the merger with Irish Nationwide Building Society last year) won in its bid to be granted immunity from legal action by Fir Tree, on the basis that Anglo is now a sovereign entity pursuant to the Foreign Sovereign Immunities Act as it is 100% owned by the Irish state; that decision was in November 2010. The report in the Independent today says that Fir Tree is appealing the decision – “the appeal has been deemed by the New York Appeals Court to be eligible for expedited proceedings. Fir Tree has until February 2 to lodge a brief with the court, while IBRC has 35 days after that to file its brief.”
UPDATE: 9th March 2012. In a question and answer exchange in the Dail (Irish parliament) this week, the Minister for Finance Michael Noonan confirmed to Sinn Fein leader Gerry Adams that “as things stand IBRC has a contractual obligation to pay interest and principal on the notes.”
The DoF seems to be doing exactly what (some) developers appear to have been doing – transferring assets to wives etc. and then bankrupting themselves.
point well made NWL, but as the state is 100% owner is it not in a position to flog the banks assets (or liabilities, whichever you prefer to call them)? does the stabilisation legislation prior to christmas gives the Government two Aces in this regard?
Very well done on looking at this beast from different angles, it is difficult not to get tautological on the topic.
p.s. I wonder will anyone give you a hard time about black genocide… .
Well spotted NWL, and it can be compared to the circumstances surrounding the recent collapse of Amagerbanken, which had about 100,000 customers. It wasn’t the first Danish institution to fail, but it was the first bank to file for insolvency since Denmark’s government guarantees to troubled banks expired.
Amagerbanken had investors and its roughly 700 depositors, whose accounts were worth more than the country’s deposit-guarantee limit of 100,000 euros. Shareholders and holders of subordinated debt saw their investments wiped out, while holders of senior debt now face a haircut.
Amagerbanken’s assets are worth only about 59% of its total liabilities, which means that senior debt holders and those who have deposits exceeding €100,000 face the prospect of a roughly 41% loss. (The depositors on the amount over €100,000)
The difference with Anglo is that the government is trying to protect the depositors for political reasons. The route that you suggest is obviously a good wheeze if it succeeds.
The Danish case is indeed very interesting and has had precious little coverage here (no reporting from RTE, a tiny footnote to an article in the Irish Times, http://www.irishtimes.com/newspaper/finance/2011/0211/1224289523036.html, a bit more in the Independent http://www.independent.ie/business/irish/bond-holdersedging-closer-to-haircut-2538343.html and David McWilliams wrote (http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-forget-the-tv-sideshow-we-must-focus-on-europe-2531342.html)
“The Danish authorities said to the bondholders: ‘You invested in the bank, so you can share the assets amongst yourselves, don’t come crying to us when there is a shortfall.’ And guess what? Did the sky fall down? No. The Danish banking system hasn’t collapsed. In fact, Danish 10-year bonds — the bellwether for risk in a country — hardly moved. They were at 3.3pc on Friday and they are still 3.3pc today. Nobody cared. Capitalism works.”
It should be said of course that we now have two counterpoints (nicer term than masters) in Europe, the ECB and the EU (the latter incorporating our friends, Joaquin Almunia at the Competition Commission and Olli Rehn at the Commission for Economic and Financial Affairs). Twice in recent months eyebrows have been raised at the apparent difference in treatment of Denmark and Ireland. Denmark is not a euro member of course, but back in October when a certain Russian billionaire was getting uppity about the prospects for repayment of his INBS subordinated bonds, the Competition Commissioner was agreeing, in relation to Danish banks generally, wiping out shareholders and junior (subordinated) bondholders.
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/10/1266&format=HTML&aged=0&language=EN&guiLanguage=en
And as WSTT says Amagerbanken was wound down in much the same way we would have expected a wind-down here in Ireland pre September 2008 (remember back then when only €100,000-max deposits were guaranteed and that was it, and indeed that was €80,000 up from €20,000 on 20th September, 2008).
The non-Irish Financial Times probably had the best MSM coverage of Amagerbanken – http://ftalphaville.ft.com/blog/2011/02/07/481011/a-senior-haircut-precedent-in-denmark/ though irisheconomy.ie did debate the subject in some detail – http://www.irisheconomy.ie/index.php/2011/02/07/denmark-haircutting-senior-bonds/
Just thinking about this……
Am I incorrect? Is it a fact that Anglo and INBS do not have banking licenses at this point?
As an alternative, to get around our NY friends, could not a “bank” without a license burn both the bondholders and the depositors as per Amagerbanken…… but then separately the State could guarantee the depositors over €100,000?
AIB would present a problem of course if they want it to continue in existence….
When looking into what the government can and cannot do to banks, I thought it might of interest to your readers to see just how far a President can go. This was with US citizen’s dollar deposits in a neighboring country’s banking system. No gunboats were dispatched, even though the amount was around 10 billion in 1982 dollars. Maybe the Irish government can use this case as precedent by common law.
http://www.time.com/time/magazine/article/0,9171,951822-2,00.html
I have the court application document, any way to upload it or send it to you so it can be uploaded for the rest of your readers?
Thanks John, if it’s a document as opposed to a weblink, then you can either (yourself) upload it to a document sharing site like google docs and post a link in a comment. Or alternately, email it to jagdipsingh2008 at hotmail dot co dot uk and it will be attached to the post and a new post alert with the attachment will be broadcast.
http://uploading.com/files/bfd69ce3/6745267-fircapitalcomplaint.pdf/
Hope that works
Thank you so much John, I have uploaded the 18-page document on here where you can download it without the deliberate delay from the UPLOADING.com website
Click to access fircapitalcomplaint.pdf
[…] NAMA Wine Lake reports on this case. […]
Direction Order – Anglo
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B0Ur74Y2pairN2QyMTY1M2EtYzZiMS00NTE5LThmZDMtYjhhOWI1MWJjM2Zm&hl=en&authkey=CJ32wtAO
Direction Order – INBS
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B0Ur74Y2pairYTk4YjkyZjctNTIyMi00OGViLTg2NmQtM2I3ZGFkZTE2ODY4&hl=en&authkey=CO6qre4F
On a quick review of the pleadings, the bondholders’ case seems very weak. The bonds are subordinated bonds, and thus any argument as to equality (pari passu) with deposit holders are misplaced. These bonds were issued on the express understanding that they ranked behind other creditors. The covenants which the bondholders allege to have breached refers to the transfer of assets as an entirety or a substantial entirety. The bonds are to remain within the bank and thus the requirement for entirety/substantial entirety requirement does not seem to be fulfilled.
The only possible basis on which the bondholders might have a case would be if there was some basis for suggesting that there was an element of fraudulent preference involved. There is absolutely no evidence of this: liabilities in the form of deposits are being “sold” backed with equivalent/appropriate assets.
Is there any other part of the pleadings other than the below statement within the pleadings on page two of the document that has made you believe they are subordinated creditors:
“The Minister also may obtain ex parte “subordinated liabilities orders” that purport to eliminate any and all rights of subordinated creditors such as the Note-holders.”
If they are subordinated note holders, would they not have already been subject to the voluntary buyback 80% haircut offered last year? They knew ‘resolution and reorganisation legislation (as it was referred to then) was coming down the line to squash those who did not accept the offer.
If they were part of the buyback offer, why do you think they waited until the Direction Order by the Minister concerning Anglo and INBS merger and deposit auction to issue a pleadings rather than after the enactment of the Credit Institutions Stabilisation Bill in December?
What was so significant about the direction order as opposed to the enactment of the actual Bill which can empower the current or next Minister to wipe out their investments entirely? It would seem a risky strategy on their behalf that they didn’t feel a squeeze down against those who didn’t accept the buyback was going to occur before the bank was wound down?
If it is the case that the Minister feared and Firhouse received similar advice, that it would legally be more difficult to enact a subordinated liabilities order before the winding down of the bank, what does that say about the actual power of the statute for the 55% of AIB note-holders who recently refused the 70% haircut buyback?
Or am I missing something? I’m certainly no expert.
Hi John, yes that was the sentence I relied on to conclude that Fir Tree is a subordinated bondholder. As gadge says below this might be a weak case on Fir Tree’s part. NAMA transfers started ten months ago and it seems late in the date to complain of any loss in value there (and given NAMA is paying an LEV premium and valuing at a relatively high level for Irish property loans which represent the majority of Anglo loans, Anglo is enjoying no small amount of state aid and indeed liquidity courtesy of NAMA bonds and ECB/CBI support). The application may certainly cause an unwelcome delay to what seems like a very quick action in respect of Anglo/INBS’s deposit book, they’ve had two years to resolve both institutions, yet the deposit books are likely to be sold in an auction which will take 21 days start (letters of invitation to eligible banks) to finish (acceptance of bid and execution of Transfer Order).
I think those are strong points you raise in respect of the CI(S) Act, Anglo/INBS and application to AIB and indeed BoI, and I think there will be differing views on this new legal landscape.
Excellent blog. Found it from a link at Naked Capitalism.
Alot of sentences start with “But”. Might be worth rethinking the sentence every time that happens. But that’s just my view.
Thanks shtove, feedback always welcome. Not just praise, but!
[…] have to be 100% and qualitatively on the type of asset it will accept. There is no update on the Fir Tree action which could delay the […]