Bad Bank to neutralise their toxic bad debts of AIB and BOI

The Irish Government now look likely to offload the toxic debt of AIB and BOI into Anglo in order to avoid having to nationalise them. The contaminated balance sheets of the major banks have destroyed confidence of investors and unless action is taken now the confidence will not return.


The idea of a BAD BANK is a grea tone, BUT ONLY IF MANAGED PROPERLY, and it is impossilbe to assume that Ireland would do this properly. This is where I think the ECB needs to step in, a bad bank managed by the ECB with serious consequences for the institutions if levels of toxicity exceed expectation. Any Irish solution will only involve the Galway tent set offloading the crap and going back to making hay.

“look. Here’s a solution and the banks, if pressed, just might agree to it”. The first thing to question is the “fair value” of assets being transferred. If the big two were to shift the dodgy developer loans at a realistic value, they’ll wipe out a significant portion of their capital. If they transfer at above a realistic value, the taxpayer losses.

Secondly (and this is where the author is disingenuous) is that the Irish banks would then be able to raise funds in wholesale markets. This isn’t true at present.

This idea, like the insuring bad loans idea, is likely to sell the taxpayers short. There’s no financial trickery to make the bad loans vanish. It may prevent a firesale, but a drip-drip doesn’t guarantee higher recoveries.

Why should the bank’s stakeholders gain by passing losses to the state? Nationalisation would also increase these banks’ ability to access wholesale funds.

From Davos 09 - “Dr. Doom,” Nouriel Roubini, discusses the Bad Bank idea…

Unfair on the taxpayer…

Best to nationalise the banks and get it over with…

The thing about nationalising the banks that worries me is what do we do after we’ve cleansed the system. In 5 years, will we be saying that nationalising the banks was the right move, or the bad bank idea was the right move.

What’s the best outcome from nationalisation?
Is it Bad debts = Existing shareholders funds + any profits/losses over the period of ownership + cash raised from eventual re-float on the stockmarket? Any greater and the taxpayer has a tab to pick up; any less and the government is accused of being hasty and court cases from international institutions kick-off.
Worst outcome…Bad debts are massive and taxpayer picks up a tab in the tens of billions due to governnment guarantee. Institutional investors are wiped out and Ireland Inc suffers reputational damage as a place for investment capital. Re-float of the new banks raises little international capital.

What’s the best outcome from the bad bank idea?
Is it Bad debts = difference between nominal loan values and the price that the bad bank pays for the toxic assets. AIB/BOI take sizeable writedowns but as perceived as somewhat less risky, a rights issue is a relative success and international capital is obtained. Shareholders are hit but not wiped out. Bad debts are managed and like Sweden, the taxpayer makes a profit from the bad bank.
Worst outcome…Bad debts are massive and taxpayer picks up a tab in the tens of billions due to governnment guarantee. The difference being that the tab is greater to the tune of around 10billion or so (existing shareholders funds).

Something another poster said struck as highly relevant to this problem (but I can’t find the quote), but it was about investors in New York and London consider investing in Ireland for about 3 seconds during their day. If we wipe out all the shareholders in BOI and AIB, will those three seconds be zero seconds for the foreseeable future. Where will the new banks get their capital from and fund new business from? Will this equally affect other Irish companies?

While the bad bank idea doesn’t appeal to me, it’s hard to see how nationalising the banks can be considered a better option. I’m open to enlightenment :slight_smile:

Really, you have to do both. You nationalise the banks, work out debt for equity swaps for a proportion of the debt and take the rest of the really toxic stuff under management with a debt recovery vehicle. There is too much bad debt out there to just do the debt to equitise (the levels of impairment will get particularly scary when you start to factor in unemployment - 80% of Irish homes are owned. Let’s say two-thirds have a mortgage. So somewhere around 50% of homes. Then look at the move of unemployment from 4% to somewhere north of 15%. That is looking at 5% of homes being impaired on their mortgages. You can probably add in another couple of percent due to declining income. This is way about traditional recession mortgage distress numbers. And this is just the residential side. The rest of it is a disaster, for much the same reasons (high unemployment and lower wages = severe commercial property distress).

I think you may be a tad conservative YM due to the level of 2nd property/btl ownership and the mountain of personal (soft credit) debt in this country. We are literally swimming in it. :open_mouth:

I think you are right, but I am afraid of coming over like a nut (even here on the 'pin). I believe our situation is worse than Sweden and that eventual write-downs will amount to about 25% of loans overall (about 100 bn). This is just a gut feeling, though.

Property taxes and social housing dig-outs for developers will hasten the bust for BTLers.

William Seidman on ‘bad banks’

A bad idea - better things to do - a bad idea

Nobody knows what the bad assets are worth.

Taxpayers suffer

Alternative - Special LegislationBridge bank - take bank over, clean it up and sell it on…

The excepts from this note from Meredith Whitney posted on FTAlphaville refer to her dismissal of a US bad bank, but the same caveats apply to Irish banks: … -bad-idea/

Has the AIB/BOI recapitalisation plan announcement been put off indefinitely?

I thought it was meant to be ready for publication by now.

What’s the rumour mill saying?

Looks like the plan is now for 8 Billion but some stalling going on as the banks look for further guarantees against losses!!! … 24954.html

THE Government was last night resisting pressure from Ireland’s two biggest banks to insert an insurance clause into its €8bn recapitalisation plan that would guarantee against potential losses on toxic property loans. …

Details of a final plan here could be released later this week, as the Government is keen to set out its stall ahead of a review of Ireland’s credit status by rating agency Standard & Poor’s. It is feared uncertainty about the bank recapitalisation plan could jeopardise Ireland’s prized AAA credit status.

Trevor Cullinan, a senior sovereign ratings analyst at the agency, told the Irish Independent yesterday that the €8bn for AIB and BoI was in line with its expectations, and “still in the ballpark we set out earlier”.

The Government is also considering new guidelines on recapitalisations from the European Central Bank, which look at the guaranteeing of toxic assets as well as “bad bank” schemes, which the Govern-ment is understood to be less keen on.

The ECB hopes the guidelines can help prevent one-upmanship across the 27-nation bloc. The Government is planning to pump more into AIB and BoI than originally intended. A total of €7.5bn was touted when the plan was released last month.

Under the €8bn scheme, which is being funded by the National Pension Reserve Fund, the Government will take preference shares in the institutions which would also carry voting rights and would carry an 8pc interest rate."

My reading is that the banks have to come clean as part of the recapitalization and they are resisting placing the government in a tight spot, coming clean could require allot more money, not doing so could mean any recapitalization have little net effect. Bottom line IMO is that the potential losses are HUGE and Ireland Inc does not have the funds to cover them so it comes back to the famous guarantee and the fact that the banks have no need to address this situation with the urgency it deserves. :cry:

Mc Williams claims that €40 billion will be required - the €8 billion is the first instalment :open_mouth:

The Irish Government does not appear to have the financial capacity to fully bail out the banks.

We are all doomed I tell you - doomed! :open_mouth:

40 Billion is 10,000 for every man, woman, and child in the country or upwards of 50,000 per worker (moving target that). Why bother??? Surely some bank from some corner of the planet will serve ligitimate customers in Ireland. Modify the guarantee to cover deposits only and let the banks deal with the rest.

why should depositors be protected? they put money into a bank (persumamably many are those who sold the overpriced property etc) that then lent the bulk of it on property that has now collapsed in value and the loans gone bad. why should the taxpayer pick up the bill. in an equitable model it is the depositors that need to lose some money in addition of course to the shareholders, bondholders being wiped out. if the banks are that bad they should be liquidated, a value placed on their assets and the money distributed to the depositors. the gaurantee scheme was a bad idea if it sinks the boat completely.

Purely to retain confidence in the entire system. Bondholders in banks are the big boys, professional money men, the smartest guys in the room etc. Depositors otoh are poor auld Mary with the few bob she has left over from her Husband’s insurance money that she needs for her hip operation etc.

If poor auld Mary loses her deposit money from an Irish bank there will be an immediate deposit run on every financial institiution in Ireland that would rival chariots of fire. Dunnes Stores and Penneys would sell out of pillowcases within hours.

Instant systemic failure and a financial collapse. It’s a wonderful life indeed.

Some caution on what a bad bank can achieve, from someone who has seen them in operation… … 58a.0.html