On yesterday’s RTE Radio 1 This Week programme, the Minister for Finance, Michael Noonan appeared to claim credit for this new government, which only came to power on 9th March, in respect of the ongoing burning of subordinated bondholders that is expected to contribute €4bn to the €24bn of additional capital identified during the March 2011 stress tests. The Minister told RTE presenter, Dr Gavin Jennings:
“On the bondholders when the debate started there was no way whatsoever when Richard Bruton was arguing the case as FG finance spokesman, that bondholders should share the burden. No-one inEuropewould agree that even the junior bondholders, the subordinated bondholders would share the burden. And yet, that has been allowed now and as I say in the last three weeks alone, that has been worth almost €4bn to the Irish taxpayer in the negotiations we are doing with AIB and Bank of Ireland.”
The Minister said that “that [the burning of subordinated bondholders] had been allowed now” which implies that it wasn’t allowed before now, and that somehow he had wrung some concession from the Europe in this regard. But examining the history of subordinated bondholders wouldn’t support that implication at all. Since September 2008 when the blanket guarantee was introduced plenty of subordinated bonds have been redeemed with discounts by the covered banks (AIB, Anglo, Bank of Ireland, EBS, Irish Life and Permanent and INBS). For example in 2009 Anglo redeemed “€1,805m of Tier 1, €307m of Upper Tier 2 and €388m of Lower Tier 2 securities [which] were bought back at prices of 27%, 37% and 55% of par respectively”. In other words Anglo bought back €2,571m of subordinated debt for €819m, paying the subordinated bondholders an average of 32c in the euro. In November 2010, Anglo launched a buyback programme that triggered a credit event. And in December 2010, Bank of Ireland exchanged unguaranteed subordinated bonds for guaranteed bonds at 46-57.5c in the euro. And before the Minister came to office in March, Irish Nationwide had already embarked on a 20c in the euro burning. And lastly, in his outstanding legal battle with Aurelius Capital Management which is a company owning AIB subordinated bonds, the Minister appears to be relying on the provisions of the Credit Institutions (Stabilisation) Act which was enacted in December 2010.
So is it right that the Minister would seemingly claim €4bn credit for himself and his efforts? In terms of the continuing bank bailout, it is going dreadfully and it is difficult to point to any successes. The stress tests and restructuring in March 2011 were put in train by FF/the Greens and even they were working at the behest of the IMF and EU/ECB. The new government has failed to get a cut on the bailout interest rate, failed to burn senior bondholders including those at Anglo and INBS (a month ago Anglo repaid €200m of senior unguaranteed bondholder debt 100%) and failed to get a medium-term facility from the ECB so that our banks rely on funding week-to-week from the ECB which might be withdrawn at any time (the present non-standard liquidity is formally due to stop in September 2011 but the betting is it will be extended for another 3-6 months). When this government rings up a success in dealing with the banks, it will be trumpeted on here. In the meantime it is unedifying to see credit claimed where it is not due.
NAMA Wine Lake 
The Minister is as honest in claiming credit for introducing sub haircuts as he is about claiming that his haircutting saves taxpayer money. Case in point: you know, of course, that a proposal was tabled by American sub holders to recapitalize Bank of Ireland on their own penny. The Minister has rejected this plan, preferring to… inject 1.6 bn of taxpapyer money into the bank instead. How that is saving you fellows any money, I don’t know, but the Irish media fete it as such. And, of course, you already know that haircutting Bank of Ireland subs does *not save anyone a penny (the bank gets to write off the whole loan whether subs get 40 cents in the pound or 100 cents in the pound) — but that’s feted, too, even though it serves no purpose other than establish a precedent for blatant security laws violations by the irish state. Anyone who can read a balance sheet can see how pitiful this is. Everybody else gets to rejoice in the amazing string of great victories won by the Minister. Conclusion? The man is a great politician.
@Reg, victory?
Click to access TerminationofOfferfor75,000,00013_375percent.pdf
@NWL
Whatever the merits of the individual cases, this is an extraordinary climdown by BOI. Is the door now open for any subbie who goes to court?
The banks should have been folded on Sept 28th 2009. They still should be folded.
How BOI ever agreed to buy 13.75% bonds with Bristol and West several years or made no attempt to buy these out for equity is beyond belief.
Another example of sheer and continuing incompetence of the banks.
@Joseph, Reg might be able to give the best analysis of the announcement this morning though because he has some skin in the game, he might be reluctant to do that. But Bank of Ireland has implied the reason for the decision was because of difficulties with the timing schedule for the buyback and particularly the amount of time people had to respond. That was not the focus of the application in London’s High Court, it was about ranking and the health of Bank of Ireland.
Having seen RTE’s News at One, it is hard to understand that this is the same story as RTE report that it is pensioners who bought the bond and pensioners that hold the bond today. Now there may well be pensioners that still own the PIBS but there are “fast money funds” also. It really seems that the mass media is not reporting this story correctly
Hi NWL, I agree he is talking out through his hat but is he not claiming credit for the €6bn in haircuts are / have been imposed since the March 31st statement (using resolution legislation he described as draconian) rather than the €4bn through open market buybacks that had achieved before then?
@Kevin, I believe the subordinated actions have been worth €4bn since March 2011 – see here https://namawinelake.wordpress.com/2011/06/13/burning-the-bondholders-part-2-of-3-%e2%80%93-details-of-the-bondholdings-now-being-burned/ – but how can he claim any particular credit for these as there have been other actions previously and indeed it is the December 2010-enacted Credit Institutions (Stabilisation) Act which gives him complete authority it seems, in Irish courts at least, to secure haircuts now.
NWL
“Having seen RTE’s News at One, it is hard to understand that this is the same story as RTE report that it is pensioners who bought the bond and pensioners that hold the bond today. Now there may well be pensioners that still own the PIBS but there are “fast money funds” also. It really seems that the mass media is not reporting this story correctly”
will you *please stop repeating falsehoods?
i happen to be privy to the bondholder register of this particular bond: 35% of the bondholders hold 5000 or less; 55% 25,000 or less; the single biggest holders are four mutual funds (2 british and 2 american), which are NOT fast money: 1 owns 4% (GBP3 mln); the other three under 1% each; they all refused to join in our action because they are desperate to avoid the appearance of being big bad bondholders (the sort that must be haircut for the world to be made right);
this register alone was probably out biggest PR weapon, which is why the bank was… refusing to give it to us! (busy.., computers down… raining again)…
now, there is absolutely NO WAY for a fast money fund to acquire a meaningful position in this bond because of the way it trades: the spread is typically close to 20% (today it is 35-40, yesterday it was 26-33 — if you buy it in the morning and sell it in the afternoon, you have handed yourself a 22% loss); and daily volume is usually less than 5000. a fast money funds invests in paper where they can deploy large sums *fast (that’s why they are called fast money, geddit?). to deploy even a million into this issue would take a whole year of trading!
the american hedgies who offered to recapitalize BoI are perhaps fast money (not necessarily — some are LBO outfits, who buy and hold businesses); because it’s none of their business to protect small guys from illegal expropriation. this effort is entirely pensioners and — get this — is led by someone who does not even hold the issue.
so please, now you know the facts, stop repeating the nonsense about evil fast money hedgefunds, ok?
now… is it victory? yes, and no. BoI backed out — and that’s a victory. but they backed out today because tomorrow was the first days of hearing in an expedited procedure which they were going to lose like the sun rises in the east. (i have never spoken to so many high powered lawyers willing to take a case on spec — this is how sure the outcome of the case was — this is how certain was the illegality of BoI’s action). by withdrawing the tender, BOI prevents the court action from going forward and therefore prevents itself from being publicly and officially named a fraud by a UK court — which is not good enough for me. I want BOI to promise publicly and in writing never to violate UK or Irish securities laws again — especially if they mean to run the UK post office banking operation.
as it stands, BoI does not admit to any illegality (just “procedural difficulties”) and reserves the right to make further tender offers of this type in the future. in other words, “fine, have it your way, but we’ll go on violating the laws of the land and may yet come back and get you”.
as i said before: your bank, your government, your laws. you have to live with them. if you don’t see the problem here, you probably deserve whatever you get. : )
@Reg, regardless of the win/loss ratio, congratulations on your success. The RTE news bulletin is available online here – http://www.rte.ie/news/player.html?onenews#programme=One%20News – and you can make your own mind up about its accuracy.
In terms of my comment that “fast money funds” were involved in B&W PIBS, that is based on the list of plaintiffs in the action that was to commence this week which I understand is
(1) PALOMINO FUND LTD
(2) APPALOOSA INVESTMENT LIMITED PARTNERSHIP I
(3) LIPIZZANER LDC
(4) THOROUGHBRED FUND LP
(5) THOROUGHBRED MASTER LTD.
(6) WALKALOOSA LTD
(7) YORK SELECT, L.P.
(8) YORK CREDIT OPPORTUNITIES FUND, L.P.
(9) YORK SELECT MASTER FUND, L.P.
(10) YORK CREDIT OPPORTUNITIES MASTER FUND, L.P.
(11) OC OFFSHORE I, LTD
(12) OC OFFSHORE II, LTD
(13) OWL CREEK OVERSEAS MASTER FUND, LTD
(14) OWL CREEK SRI MASTER FUND, LTD
(15) CSS, LLC
(16) REDWOOD MASTER FUND, LTD
(17) FRIEDBERG GLOBAL MACRO HEDGE FUND LTD.
(18) FRIEDBERG GLOBAL MACRO HEDGE FUND
(19) VR GLOBAL PARTNERS, L.P.
(20) LITESPEED MASTER FUND LTD
(21) H PARTNERS LP
(22) H OFFSHORE FUND LTD.
(23) P H PARTNERS LTD.
Take the “FRIEDBERG GLOBAL MACRO HEDGE FUND” which according to Hedge Funds Review – see article here http://www.hedgefundsreview.com/hedge-funds-review/news/1556212/exclusive-friedberg-global-macro-hedge-fund-investors –
“The Friedberg Global Macro Hedge Fund has produced annualised returns of 17.5% since inception with volatility of around 16%. It returned 41.52% in 2008, its best year since inception.
The minimum investment is $250,000. There is a 2% management fee and 20% performance fee, subject to a high watermark.”
Is the 20% spread the minimum spread available to investors because for a company like Friedberg that would, as you correctly say, be a deterrent.
“but how can he claim any particular credit for these as there have been other actions previously and indeed it is the December 2010-enacted Credit Institutions (Stabilisation) Act”
ho ho ho! the 2010 act is faulty and to cure it the present minister proposed a new one (2011), which was so badly written that it died in committee.
as i say, there is a big difference between being a good minister of finance and a great politico.
@NWL
“In terms of my comment that “fast money funds” were involved in B&W PIBS, that is based on the list of plaintiffs in the action that was to commence this week which I understand is”
you’re confusing two different lawsuits; ours, which was in the matter of the B&W PIBS, otherwise known as the 13.375%; about which is today’s news (BOI withdrawing the tender — here: http://www.reuters.com/article/2011/06/28/bankofireland-idUSL3E7HS10O20110628) and which is an action by a bunch of p-o’ed septuagenarians;
and a much larger action by a bunch of hedgefunds from New York (the ones you list above) who are exclusively BOI LT2 debt holders (*not PIBS), who have offered to recapitalize the bank, many of whom are perhaps fast money, but whose complaints about illegality of the BOI tender were largely in line with our own, I am afraid; if you wish to distinguish between them and us on the ad hominem basis, fine, we’re happy to be the lovable senior citizens for you while they are the fast money; but BOI’s action is fraudulent and illegal no matter whom it hits
rgds
@Reg, thanks for clearing that up, I hadn’t realised there were two applications and assumed the pensioners had invested via one of the companies shown on the list of applicants. No ad hominem intended, it was simply RTE was portraying the applicants today as exclusively pensioners whereas the applicants which I refer to below seemed to have more squaliform features.
Again congratulations on your success, would it be fair to assume you are taking today’s action to be the end of the matter and to repaid at par at some time in the future?
@NWL
No disrespect to either yourself or @REG, but his success hurts my pocket.
What court should I as a taxpayer take my claim to?
@Joseph, without Reg and a couple of others coming on here to state their positions, we would have been in a more ignorant place. I cannot recall seeing a forum or comment in Ireland in support of bondholders. So when Reg and other bondholders take the time to comment on here, they’ll get treated with civility. And hopefully our store of knowledge increases which benefits us all.
@Reg, the Irish Times today carries what seems like a decent report of yesterday’s events including a photograph of a resolute looking 73-year old Albert Kempster in front of the Royal Courts of Justice in London.
http://www.irishtimes.com/newspaper/finance/2011/0629/1224299730651.html
The tone of the article is that BoI’s action yesterday was no big deal, the bonds at issue represented just 3% of the present campaign to haircut subordinated bonds and the withdrawal was for “administrative reasons”. There is a potential sting in the tail for the bondholders, the Irish Times reports
“The investors may still face losses as the bank said it would address the “unique difficulties” in the terminated offer by making a new offer at a later date.”
@Joseph Ryan
“No disrespect to either yourself or @REG, but his success hurts my pocket.”
Actually, no, it does not. though clearly i can repeat it until I am blue in the face for all the effect my words are having, from the accounting perspective it makes NO DIFFERENCE AT ALL to the irish tax payer whether BOI subbies get shares worth 20% of 40% of 100% of their bonds.
the BOI tender offer (“subordinate debt haircut”) is pitched low (at the 20/40% level) purely for political effect.
“What court should I as a taxpayer take my claim to?”
what you should do is ask your minister to stop acting in violation of your own country’s laws and get on with the business of recapitalizing the banks now; the useless BOI fight has already wasted 8 weeks of everybody’s time.
@NWL
yes, that was our case; it didn’t go to court because both BOI and the minister knew perfectly well that they would lose; in keeping, i predict that no case will go to court for precisely the same reason — they will all be settled out of court; (you note elsewhere this just may suggest the cases do have merit, after all);
what BOI and the minister choose to do instead is to pay off people who sue so that they can get on with the business of confiscating the property of those who for a variety of reasons cannot sue. generally, most of those who sue (like Aurelius who settled an AIB case today) are happy to be bribed to go away. ours has been the only case so far in which the person suing (mr Kempster) sued in the name of the whole class of his colleagues and refused to settle to their detriment in exchange for personal handout. tough, fearless and morally upright septuagenarian. (at one point the bank threatened to counter sue him for costs of about 600K but he believed in English law and English courts and refused to be cowed)
yes, the bank has promised to come after us again; but unless they make us a lawful offer which recognizes the bank’s contractual obligations and the irish government’s duty to observe and uphold its own laws, we will fight them again, and again they will lose.
for the record, i repeat: we would all be happy to use the proceeds of our bond to help recapitalize BOI if only they have made a decent and lawful offer. instead, they chose a crooked one. sadly, except for us, it seems to have worked. i am afraid once your government learns that it can get away with fraudulent and unlawful action, it will not stop at this. watch out.
like i say: your government, your laws, your republic. protect it, or lose it.
@Reg,
Your analysis which suggests that Ireland’s salvation lies in the repayment of bondholders has chutzpah, I’ll give you that. There’s a little bit of detail below but the gist is that Ireland being priced out of debt markets at present, has practically nothing to do with Minister Noonan’s present actions with bondholders and practically all to do with our country’s sovereign level of debt (which includes private bank bondholder debt because the government here has decided that most private bank debt will be repaid) and the perception that our national level of debt is unsustainable and will end in default. Your logic is akin to the rooster thinking his crowing causes the sun to come up in the morning – the concern isn’t that Ireland will contrive to bilk sovereign bondholders, the concern is that with the level of debt, the country won’t have a choice.
You suggest that Ireland’s elevated 10-yr bond rate, still 11.62%, is the result of our Minister’s actions with bondholders, which you claim makes Ireland some sort of renegade state where investors are not safe. Do you say the same about Greece with its bond at 16% and Portugal at 11%? The reason markets won’t lend to the three countries, briefly added to by Spain during the week, is that the existing level of debt and the existing annual deficits mean that debt levels get so high that the likelihood is that there is some future default.
You portray the UK as a relatively healthy economy compared with Ireland, with banks now back lending to the real economy after the crisis in 2007. Even that is not totally correct as I understand it; there are still severe problems with lending in the UK, with Business Secretary, Vince Cable recently intervening and threatening additional taxes if banks didn’t reach lending goals.
But remember the tools that the UK has available to it with control over its own currency. Remember back in January 2007 the exchange rate was GBP 1 = EUR 1.55, today it’s GBP 1 = EUR 1.10, a decline in value of 30%. That’s because the UK has had a recession which was worse than the core of Europe but arguably mostly because the UK has printed GBP 200bn of new money (quantitative easing – for a good explanation of the mechanics of quantitative easing including some nice graphics, see here http://news.bbc.co.uk/1/hi/business/7924506.stm). and that QE has debased your currency against the euro.
As you know the EuroZone has differentiated itself from the US and UK by not printing more money, though like the UK and US, interest rates were slashed to the bone soon after the crisis broke – they crept up from 1% to 1.25% three months ago and are likely to go to 1.5% in July and probably hit 2% by the end of this year. Although Ireland is on the floor, Germany isn’t and its economy is growing by 3% and inflation is of more concern to the Germans. The point is that the common currency not only means we can’t print our way out of the hole we’re in (like the UK), but in all likelihood EuroZone membership is likely to depress growth here with higher interest rates at a time when the economy is still on the floor.
So Ireland is stuck with its debt which was tiny before the financial crisis broke – 24.7% of GDP in 2006 and 24.8% in 2007. In addition we had stuck €25bn away in a rainy day sovereign wealth fund, the National Pension Reserve Fund. There was good reason to be impressed by Ireland in the 1990s/2000s, we had done a lot right but we also become overly dependent on the property sector. In 2008 we had a catastrophic collapse in the banking sector in tandem with the property sector. Partly as a result of pumping a projected €70bn (45% of GDP) into the banks, we will end up with a debt:GDP of just under 120%. Plainly we also have a deficit because when the property sector collapsed, taxes from that sector also collapsed and there was massive construction sector unemployment; the double whammy hit us hard, and the mismatch between state revenue and expenditure is where another 50% debt:GDP comes from, borrowing to fund the deficit which will be brought back under control by 2015-ish under present plans.
The UK is suffering horrendous inflation by our standards, RPI is up 5.2% year on year (your CPI is 4.5% but that excludes mortgage payments) – if I understand the figures correctly it is basics, like food, that are particularly rising in price and wages are not going up proportionately so living standards are declining. Your unemployment rate of nearly 8% is far better than our own 14.2% but still elevated. You have an 11% deficit which is even worse than Ireland’s and your national debt of 80% (or more than GBP 1tn) doesn’t look healthy either. You are also facing swingeing cuts to public spending, for example by raising pension ages. So remember, the UK may be healthier than Ireland in some respects, but you could argue that a lot of that perceived health is down to printing more sterling.
So reducing Ireland’s woes to not repaying bondholders, of which you are one, seems, to borrow a term from elsewhere this morning, economically illiterate. To repeat the basics, the Irish taxpayer has so far put €46bn into the banks and is expected to put upto €24bn in July (now looks like €19-20bn). So that bondholders can get repaid? Bondholders being risk-investors, that is, not like depositors. Would UK citizens commit to paying €1tn (which is pro-rata what it would cost you €70bn * 61m/4.5m) to its banks in order to repay investors? Would the UK double its national debt and more than double its annual interest payments on debt to repay bondholders in British banks? All without printing extra sterling? Like bloody hell it would. And that’s why “your average irish bloke bays for bondholder’s blood and does the wave every time Noonan announces a new “saving””
http://boards.fool.co.uk/khanna-p-it-helps-to-read-a-site-like-12298905.aspx?sort=threaded
As for the delay in recapitalising the banks, I expect it is because the Minister wants to ensure the current bondholder actions conclude satisfactorily without bondholders laying claim to the €20-24bn recap funds as soon as the Minister writes the cheque and also perhaps the Minister feels there is still some room to convince the ECB that unguaranteed unsecured senior bondholders should share in the burden of our financial crisis.
“the BOI tender offer (“subordinate debt haircut”) is pitched low (at the 20/40% level) purely for political effect. ”
judging by Joseph Ryan’s comments, the political effect works.