The short answer is “I don’t know” but this is precisely what this modern day inverse of Robin Hood is about to do – take €5.4bn from our National Pension Reserve Fund (NPRF) to buy shares in Allied Irish Banks (AIB and for our international friends again has nothing whatsoever to do with Anglo Irish Bank which is known here domestically simply as “Anglo”), and he is making the NPRF buy the shares at €0.50 each when two days ago, on Friday last they closed at €0.337 per share meaning that the NPRF will incur a loss of €1,760m from the start. The NPRF was set up to fund future pensions of ordinary citizens from 2025. AIB meanwhile had a market value of €364.2m of which we, the State, own €66.7m (that shareholding is from the conversion of our 8% dividend due on the €3.5bn preference shareholding in May 2010 to ordinary shares). According to the latest AIB accounts (the Interim Report for the first six months of 2010) the bank appeared to have over €4bn of junior (or subordinated) bondholders (note 32 on page 87). As we know, we can legally require these junior bondholders to accept a haircut on their debt. So, why is Brian Lenihan forcing our pensioners to pay €1.8bn to bail out the remaining €297m of private AIB shareholders and €4bn+ of subordinated debt holders? This entry examines the issue.
The history
In 2009 the government passed into law the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009. This allowed the government to “direct” the NPRF to make certain investments or underwrite certain share issues. To date there have been two transaction – in 2009 the investment of €7bn (€3.5bn apiece) in AIB and Bank of Ireland (BoI) preference shares and in April 2010 the direction to convert BoI preference shares to ordinary shares as part of that bank’s attempt to raise €3.4bn of fresh Tier 1 capital. Here is the timeline of that investment.
31st March 2009 – Directed investment of €3.5bn in BoI 8% preference shares
12th May 2009 – Directed investment of €3.5bn in AIB 8% preference shares
20th February 2010 – BoI pays the 8% dividend (for 10.5 months) in ordinary shares then worth €250.4m
26th April 2010 – Minister for Finance Lenihan announces participation of the State in the forthcoming BoI capital raising programme and the conversion of some of the State’s preference shares to ordinary shares. The NPRF issued a statement providing a little more detail on what was proposed.
13th May 2010 – AIB pays out its 8% dividend (for 12 months) in ordinary shares then worth €280m
29th October, 2010 – The NPRF publish their Q3, 2010 performance report in which they confirm the €7bn invested in AIB and BoI in 2009 is now worth an overall total of €6.615*
29th October, 2010 – the following is the performance of world stock markets from 20th April, 2010 (the mid-point of the two investments in AIB and BoI in 2009).
The present decision
“The past is a foreign country, they do things differently there” – So says one of the most famous opening lines in a novel, the Go-Between by LP Hartley. Using the current vernacular, the past is the past, we are where we are, that decision last year to invest in BoI and AIB was, from an investment point of view ill-judged and yielded poor results but it is done. The decision announced in April 2010 to underwrite the BoI share issue was also ill-judged as the shares have collapsed in value. World stock markets had one of their strongest rallies in history over the period of the investment and the NPRF had one hand tied behind their backs as they were forced to invest (“directed”) 1/3rd of their then total funds of €22bn to prop up two banks. All of that is tragic and exasperating for sure, but it is the past and can’t be undone. This entry is about the present and a decision that can be reversed.
On 30th September, 2010 on the big bang day for Irish banking (“Black Thursday” if you wish), the Minister for Finance, Brian Lenihan, issued a statement early that morning which set out some of the detail of total costs of bailing out the banks. The statement had the following reference to AIB “In order to afford every opportunity to AIB to raise as much as possible of the required capital from the markets and to minimise further Government support, it has been decided that this capital requirement will be met through a placing and open offer to shareholders of AIB shares to the value of €5.4bn. This transaction will be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. If necessary, the NPRFC’s underwriting commitment will be satisfied by the conversion of up to €1.7bn. of its existing preference shares in the bank into ordinary shares along with a new cash investment for the balance of €3.7bn in ordinary shares. This transaction structure assumes the sale of AIB’s stake in M&T Bank and disposal of other assets in due course.” And that is it. There was a further statement in the Dail later that day in an exchange on another unconnected issue with the NPRF in which the Minister again stated “In my statement on banking issued this morning, I announced, in order to afford every opportunity to AIB to raise as much as possible of its new capital requirement of €7.9 billion from the markets and to minimise further Government support, that it has been decided the bank’s capital requirement will be met through placing an open offer to shareholders of AIB shares to the value of €5.4 billion. This transaction will be fully underwritten by the National Pensions Reserve Fund. The use of the National Pensions Reserve Fund to recapitalise our main financial institutions on commercial terms is the most appropriate and prudent use of the fund to assist in meeting the financial challenges we are facing”. Later that day, AIB issued a statement which included “A €5.4 billion equity capital raising will be launched during November which will be completed before 31 December 2010. This equity capital raising will be fully underwritten by the National Pensions Reserve Fund Commission (“NPRFC”) at a fixed price of €0.50 per new ordinary share, which represents a discount of approximately 9.4 per cent to the official closing price of an ordinary share on the Irish Stock Exchange on 29 September 2010. The capital raising will be structured as a placing and open offer and existing shareholders will be invited to subscribe for all or part of their pro rata entitlements. New institutional shareholders may also be permitted to subscribe for new shares under the offer.” And that is it. There has not been a peep or murmur from our politicians or media about the fact that we are now about to buy AIB shares and overpay their true value by €1.8bn. It is true that the shares collapsed from €0.40 to €0.337 a share in the past week but the shares have traded at below €0.474 a share since the announcement and we have been staring at a €1bn+ loss since 18th October, 2010.
Is there an alternative? Yes there is and I take you back now to January 2009 when Anglo was nationalized (in the sense that the State took over the bank 100%). The Minister’s statement began “The Government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc (“Anglo”), to take steps that will enable the Bank to be taken into public ownership. This decision has been taken after consultation with the Central Bank and the Financial Regulator which has confirmed that Anglo Irish Bank remains solvent. Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland. Anglo has a balance sheet of some €100bn with a substantial deposit base which the State is determined to safeguard. The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate Government support as necessary. All Anglo employees remain employed by the company.” AIB is in the same position today. As for Anglo the shareholders lost their money “With effect from 21 January 2009, your shares have been automatically transferred from your ownership to the Minister of Finance’s ownership.” and “An Assessor will be appointed by the Minister for Finance to assess whether compensation should be paid to those persons whose shares will be transferred to the Minister for Finance and, if so, to determine the fair and reasonable amount payable as such compensation. At this time, it cannot be said whether you will receive any compensation or, if you are entitled to compensation, how much you will receive.” This is what should happen with AIB now. In addition, there must be a negotiation with the €4bn+ of junior bondholders whereby they can be forced (legally forced I should add, as with Anglo’s and INBS’s junior bondholders) to take a substantial haircut on their debt. Senior bondholders would be unaffected (for the time being).
The question posed here has been “why is the Minister effectively robbing pensioners to bail out shareholders and junior bondholders”. The answer is probably that the government has a strategy of keeping two “Irish” banks at all costs. Why? National vanity? National security? Legacy? Truthfully I don’t know but it seems completely wrong to take pensioners’ nest egg and use it to prop up private shareholders and junior bondholders. And what is almost beyond belief is the silence from Opposition politicians and the mainstream media.
*Thanks to commenter Scarab for very helpfully providing the breakdown of the €6.615m 30th September 2010 valuation of our €7bn investment in 2009 as follows (I must admit that I am still checking the figures):
Investment in 2009 by the NPRF in AIB/BoI – €7bn
In Feb 2010 BoI paid their 8% dividend to the NPRF with 184.4m ordinary shares.
In May 2010, the NPRF converted €1,662m of preference shares to ordinary shares in the rights issue and acquired an additional 1,715m shares
On 30th September, 2010 BoI shares were worth €0.62 each. Therefore at that point, the NPRF’s investment in BoI was worth a total of (184.4+1,715) ordinary shares at €0.62 each plus the residual preference shares €1.837bn to give a total of €3.015bn
In May 2010 the AIB 8% Preference Share dividend was paid with 198.1m ordinary shares which were worth €0.51 at 30th September which when added to the €3.5m investment gives you a value of €3.601m for AIB.
The total of €6.615bn in the NPRF statement comprises the €3.015bn for BoI and €3.601bn for AIB (€0.001bn rounding).
UPDATE: 1st November 2010. On Irisheconomy.ie it was pointed out that there was a written question by Labour deputy leader and finance spokesperson Joan Burton on 14th October, 2010 (question and answer below). The closing price on 14th October for AIB shares was €0.428 which would have given a loss of just under €800m.
Deputy Joan Burton asked the Minister for Finance if the National Pension Reserve Fund will participate in and underwrite the Allied Irish Banks rights issue at a fixed price of 50 cent per share irrespective of its prevailing market price at the time of the rights issue; and if he will make a statement on the matter. [36866/10]
Minister for Finance (Deputy Brian Lenihan): In my statement on banking on the 30th September last I indicated that AIB is to raise €5.4bn of capital through a placing and open offer to shareholders of AIB. The transaction is to be fully underwritten by the National Pension Reserve Fund Commission (NPRFC) at a fixed price of €0.50 per share and is expected to be completed in 2010 subject to shareholder and regulatory approval. I am advised that it is the normal practice in underwritten transactions that the underwriting price is fixed at announcement.
NAMA Wine Lake 
The question as to why would Brian rip off pensioners to bail out bankers reminds me of an old and very Irish ‘why?’ joke about dogs and balls.
In plain view, even when you’re trying to eat your crisps in front of the telly, lick, lick, maybe cough up a hair ball, then more lick, lick….until ….eyes bulging, veins popping, crumbs falling from the side of a frothy mouth, the owner picks up something and waps the dog around the ear….’cut it out ye stinkin’ mutt, I’m trying to eat’.
Someone hand me a proverbial slipper and I will throw it at Brian.
Otherwise he’ll keep just doing it.
Why? Because he can.
It’s gotten so ugly, people just want to look away.
While I appreciate that this is essential a factual, number crunching oriented blog, it is clear the answer to your question above cannot be found with a calculator. And I will leave it to someone else to suggest it is time for a revolution. Or…. mandatory castration for stealing from pensioners.
“The burden of ‘required knowledge'”, would be a nice topic for a socio-economic paper. It’s gotten so that if you don’t know absolutely everything, someone will rip you off.
Some will even smile for photos while doing it.
[…] blog performs yet another valuable public service and points out that Brian Lenihan’s statement of […]
“As we know, we can legally require these junior bondholders to accept a haircut on their debt.”
How do we know this? I don’t think we do know this – in fact, Id say the better view is that we can’t outside of a liquidation or the passing of a resolution scheme .
A good question Christy and I think the answer is a mix of current law and commercial logic. I will defer to Anglo’s CFO Maarten van Eden (link at bottom) who according to the Independent on Thursday last has told Anglo’s subordinated debt holders that “we are not negotiating” and according to the Independent “Anglo is offering to exchange €1.6bn of subordinated debt for new bonds at a rate of 20 cents in the euro as the nationalised lender seeks to generate capital and lighten the load on the citizenry”. What makes AIB’s position any different to Anglo’s? If the bank needs €10.4bn of new Tier 1 capital to keep its banking licence here and the State must provide *at least* €5.4bn of that, then I would strongly argue that AIB is no different to Anglo in 2009 and should be 100% nationalised now (not this 95% majority control jiggery pokery) and subordinate debt holders should take a substantial haircut before the State injects further capital.
http://www.independent.ie/business/bondholders-finally-faced-down-by-lenihan-just-ask-abramovich-2397807.html
Unfortunately I agree with Christy here, nothing has been proved in relation to imposed losses on subordinated bondholders. We’ve got a group on sub bondholders saying that they hold enough votes to scupper the buyback deal and are going to vote down the resolution
http://www.ft.com/cms/s/0/4154fa42-e21e-11df-9233-00144feabdc0.html
Either they believe the proposed legislation is unconstitutional and they will fight it in the courts or they are just trying to negociate a better deal. As you have shown Anglo have ruled out a better deal so it remains to be seen if the bondholders will now give up or vote against the resolution and head to the courts.
In either case I believe the situation is different in AIB than in Anglo. Firstly because of the capital structure – if the share price is an accurate reflection of the value of the bank the ordinary shareholders are insolvent to between 1bn and 1.5bn, unlike Anglo the subordinated bondholders are not next in line to pick up the tab, the preference shareholders (i.e. you and me) are. With 3.5bn in preference stock the property rights of the sub bondholders would appear to be intact based on the share price valuation which would make constitutional loss allocation very difficult if not impossible.
Secondly due to the enormus losses incurred by Anglo it would be much more difficult for an Anglo sub bondholder to argue in court that they would have anything to gain from a wind up, this may be less clear for an AIB subbie.
I wonder though if we do manage to impose losses on Anglo subbies would this make AIB subbies a bit jittery so that they may be encouraged to participate in a more generous resolution scheme. What if the government, underwrite the first 3.5bn of the capital raising using the pref shares and the subbies underwrite the second 1.9bn converting their bonds to equity if required. We have now saved 1.9bn, possibly gained some financially savy (debateable of course) equity partners and have placed the remaining sub holders at the bottom of the pile for any further loss allocation.
AIB is grossly insolvent. It is trading while insolvent. The one thing keeping it alive is the government guarantee.
The share price is irrelevant and really unconnected to the capital that “we the people” (I’m becoming a Yank!) have to provide to fund this putrid piece of sh*te, because of that guarantee.
The only way the taxpayers’ capital injection can be reduced is by burning the bondholders (all of them) and the shareholders.
The whole sick crock of a company is not worth a Euro.
[…] See the rest here: Why is Brian Lenihan about to take €1.8bn from pensioners to bail … […]
[…] The short answer is “I don’t know” but this is precisely what this modern day inverse of Robin Hood is about to do – take €5.4bn from our National Pension Reserve Fund (NPRF) to buy shares in Allied Irish Banks (AIB and for our international friends again has nothing whatsoever to do with Anglo Irish Bank which is known here domestically simply as “Anglo”), and he is making the NPRF buy the shares at €0.50 each when two days ago, on Friday last they closed at €0.337 per share meaning that the NPRF will incur a loss of €1,760m from the start. The NPRF was set up to fund future pensions of ordinary citizens from 2025. AIB meanwhile had a market value of €364.2m of which we, the State, own €66.7m (that shareholding is from the conversion of our 8% dividend due on the €3.5bn preference shareholding in May 2010 to ordinary shares). According to the latest AIB accounts (the Interim Report for the first six months of 2010) the bank appeared to have over €4bn of junior (or subordinated) bondholders (note 32 on page 87). As we know, we can legally require these junior bondholders to accept a haircut on their debt. So, why is Brian Lenihan forcing our pensioners to pay €1.8bn to bail out the remaining €297m of private AIB shareholders and €4bn+ of subordinated debt holders? This entry examines the issue. (link to full article) […]
If the new AIB shares are placed at a price higher than their current market price (34cents) then I assume they are unlikely to attract subscribers and the NPRF will have to pick up the entire tab of E5.4bn which they have underwritten. The scope for offering the shares at a price lower than 34cents is presumably limited by the fact that the nominal value of the shares seems to be 32cents and am I right in saying that the shares cannot be issued at a discount on par value? Lets start the novena now that the share price picks up over the next few weeks.
Michael, you might be right that it might need an EGM to issue shares at a discount to par value. Will check the position. My basic problem with AIB is that it had €9.5bn of capital at the end of June 2010 (representing assets of €166bn and liabilities of €157bn). The June 2010 had a mickey-mouse (also known as IFRS 9) provision for losses on NAMA loans of 26%. The MfF says that should now be 60% (which I would say is in the right range but on the low side). That will give rise to additional losses of €5.5bn on NAMA loans (including the €5-20m NAMA loans that AIB is keeping). AIB has €70bn of other commercial property and lending with what I believe is a very low provision for losses and if these losses were realistic, then alongside the NAMA loan losses they would wipe out the capital of AIB. In that sense I believe AIB is insolvent. And if that is correct then subordinated bondholders (€4bn+ of them) and shareholders (€370m including our own €70m of shares) should be wiped out before the State uses its pension fund to capitalise AIB.
Michael, I need to still consult the legislation but from a UK company formation specialist that incorporates Irish companies (link below) yes it would appear that a company cannot issue shares below nominal value in the State (that is, it must at least receive in cash the nominal value of the shares). As I write this the market value of AIB ordinary shares is €0.275 (http://uk.finance.yahoo.com/q?s=aib.ir) which would lead to an upfront loss to the NPRF of €2.430bn – €3.15bn. Recent events must surely force the government re-think its banking strategy.
http://www.fletcherkennedy.com/ireland/
I agree with a lot of what was said in the original analysis except for the phrase “pensioners’ money”.
This is cookie jar accounting at its worst. There is no “pensioners’ money”, “motorists’ money”, “taxpayers’ money”,”welfare money”, etc money is money, no matter what you call it. It all belongs to the citizens. Full Stop.
The real argument is over what we do with our money and how we spend, raise and, increasingly, borrow it.
But let us address the correct question, and not query whether the “pensioners’ money” is being used properly
You’re right of course except the money presently resides in our National Pension Reserve Fund and in that sense it is in the pensioners’ cookie-jar. It probably emphasises the civic argument more to associate the funds with pensioners than say motorists or even children, so I don’t apologise for that. But yes you are right, it is citizens’ money.
As far as I know Patrick Honohan and Philip Lane warned ever before the NPRF was set up that it would be robbed at the first sign of trouble in the economy if it was not ring fenced from politicians. It wasn’t and now it is being raided left, right and centre. I also believe the warned about the fund being invested in “Irish” bonds and companies. By the time Lenihan is finished with his slashing and burning there wlll be very little left of this country.
The nation must be punished for the sins visited on the head of the father. Must say, he is doing an admirable job in this regard.
I think the way to go forward with NPRF (assuming anything is left after the pillaging currently underway) is to:
1. Create wholly separate funds for public service pensions and general social welfare pensions.
2. Carve up PRSI and pension levy so that pension contribution to each fund (as applicable) is separately listed on payslips.
3. End the practice of 1% of GDP bulk-transfer, transferring instead the proceeds of (2) above (although permitted one one-off basis in order to restore NPRF to prior state).
4. The rate at which (2) above is levied to be determined by NPRF not Government.
5. Creation of an analogue to the Canada Pension Plan Investment Board, removing the concept of Ministerial Directed Investments entirely.
If a Canadian finance minister attempted to raid CPP or an Ontario finance minister the province’s Teachers Pension Plan or Municipal Retirees Employment Scheme, there would be riots. Because citizens do not contribute directly to NPRF, they are not as conscious of what is being done here.
I think you are suggesting a scheme somewhat like the one used in France.
The money deducted from pay is transferred to a fund, from which pensions are paid. The % contribution and pension level are set independantly – by a committee composed of representatives from employers, employees(represented by trade unions) and government appointees.
However, this doesn’t always work – especially if there is a shortfall between contributions and pensions – remember this is not a funded scheme, so investment returns do not enter into the equation. What is paid in by working employees is used to pay the pensions of the retired.
It comes down to a political decision as to how much the working generation will pay the retired generation.
Joe, I think it’s difficult to exclude the pols and the vested interests completely (and I was basing my exemplars more on Canada which is where I live now) but I feel the most important parts involve pensioners feel that they have paid into the pension pot directly rather than the nebulous PRSI funds and that they have direct accountability for stewardship of monies rather than the exchequer paying from central funds.
But that is just it, most pensioners have NOT paid into a pension pot (at least with regard to their PRSI deductions), these have been used to pay the pensions of those who have already retired.
There is huge ignorance about state and public service pensions. They are completely unfunded and are completely dependent on the ability/forebearance of the current workforce to pay their pensions. It’s almost a PONZI scheme!
As for those lucky(?) privately employed employees who are part of a funded pension scheme, most of these are now under water and it is doubtful whether they will be able to pay out on the pensions promised.