Courtesy of Olivier Vandt on IE.ie
(Go to politicalworld and Cactusflower’s post for the working links to the documents).
Courtesy of Olivier Vandt on IE.ie
(Go to politicalworld and Cactusflower’s post for the working links to the documents).
Now this is very interesting. If this is the quality of advice the Minister was getting from the Dept (Jan 2008) and in light of what the outside advice (MS) was in Sept / Oct 2008 this throws a whole new light on the Misters actions in Sept / Oct 2008, especially the whole bizarre MacWilliams episode.
The paper is a very good summary of what was learned from Northern Rock and does a very good job of outlining the pros and cons of the various deposit guarantee scenarios. Note not a mention of bond holders anywhere. What is very interesting is that the paper spells out in detail that the minister cannot extended any help to an insolvent bank but can legally extended help an illequid bank. The paper also mentions TBTF and what criteria might be used.
So Anglos death spiral starts in summer 2007. They try to bolster deposit flight using cross deposits from the other banks but Anglo slides inevitably into insolvency by the summer of 2008. By this stage Anglo has 20B / 30B in phony deposits from the other banks on its book, is looking at 20B/30B losses on its loan books (using actuarial pricing), and probably the same kind of paper losses on its public and private derivatives books.
By all criteria and by all advice the minister had received there was no legal grounds for the minister to save Anglo. It was not a TBTF institution so he could not extend liquidity to it. The paper goes into some detail about winding up procedures for failed banks so we know what the preferred position of the Dept was. And anyway, Anglo was insolvent not illiquid by all criteria so there was nothing the minister could do legally to save Anglo.
Then McWilliams publishes his bank guarantee article in a Sunday Paper (the timing of which I thought very odd at the time). This guarantee solve a whole bunch of legal problems for the minister. By moving it from a deposit guarantee of one institution to a general guarantee (deposits plus bonds) of the whole banking system it solves a whole bunch of legal problems for the minister at a stroke. Lump in Anglo in with the TBTF banks declare it a systemic liquidity problem and open the spigots.
So based on the evidence so far it would seem that the minister was fully aware at the time just how serious and egregious the fraud was at Anglo. If was not fully conversant with the issues at Anglo then I see no reason why he should not have followed the very good advice he was getting regarding a simple deposit guarantee scheme on an institution by institution basis. So I dont think he was bounced into a situation without knowing full well exactly what had been going on at Anglo, AIB etc and that with the exception of BOI they were all technically insolvent by the summer of 2008. I think during the early stages of the crisis he may have engaged in a lot of plausible deniability behavior but by the end of 2008 he had all the details.
I think there is more than enough evidence by this stage to bring multiple felony charges of ministerial malfeasance against the minister. But I’m certain that part of all the calculation all the time was a) this is Ireland, no one is ever brought to book for abuse of the public trust and b) in the exceptional case that anyone is ever held responsible the minister has a terminal cancer and will be dead by the time anything happens. Yes, they really are that cynical.
Fucking hell. Just started to read the first of the documents. It is stunning stuff. Not the content of it, but the clarity of purpose of it.
“It is very important to note that the CBFSAI is prohibited from providing ELA [Exceptional Liquidity Assistance] to an insolvent institution. Therefore if there is any concern that a financial institution seeking ELA is insolvent, the CBFSAI would not be in a position to provide liquidity support without the question of some guarantee arising from the Exchequer.”
Now this guarantee would be to the CBFSAI, I believe, that it is indemnified against any losses that it might make should the insolvent bank go under.
Lots more in it. Shame it’s not quotable (scanned document).
Wow! Interesting stuff. Here’s a bit that caught my eye concerning the letter of comfort that was provided to Anglo.
Now here’s the really interesting thing. It emerged a few months ago (Comptrollers 2009 report) that a ‘letter of comfort’ was given to Anglo Irish Bank on the day of the Bank Guarantee 30th September 2008. Why? Because Lenihan knew that Anglo Irish Bank was insolvent.
Appendix 2 is fascinating. It gives an absolute roadmap for what to do with a bank and how to payoff depositors without having to treat them as parri passu with bondholders.
That can really be the only implication of a letter of comfort.
The document is also very clear on illiquidity leading to insolvency. By that stage, Anglo had been illiquid for so long…
The other document is on the NTMA and is equally eye-opening (though short enough to be ambiguous). The suspicion on here that the 20bn float the NTMA was holding was for the provision of liquidity to the banks appears to be true.
I’m not surprised FF are having a leadingship dance this weekend…
Nice one Coles2. This could be the government’s headache for this week.
For anyone harboring any doubt as to the complicity of FF in bailing out Anglo knowing full well it was insolvent long before, these documents will provide little solace. Lenihan is too smart to keep this to himslef, this was known at cabinet level IMO as well as in numerouse other circles, such as the AG, upper echelons of the CS, obviously the CB and FR as well as the movers and shakers like Desmond et al. I think this is why Desmond was so pissed a few months back, he knew they knew and decided to take a ridiculous punt back in 2008, i.e. lump Anglo in to the global financial meltdown, claim illiquidity, Lehmans effect, systemic importance, etc. to justify a blanket guarantee and hope that it all blew over before anyone knew. Remember these guys thought they were the inventors and patrons of the new paradigm, the Celtic Tiger was real to them, they really thought they could paste over the hole at Anglo and cover it with capital appreciations on the underlying assets and riding the back of a global recovery over a few years.
While the Irish legal system has no teeth to deal with this treachery, the electorate does, of course the rotten system does not provide much in the way of alternatives but that could all change quickly, Shane Ross going as an independant could be followed by 100 more, one can only hope.
That’s all way to complicated for most of the electorate to understand though. At least the detail in any case.
And that’s the worry. FF have never lost 2 elections in a row. They only get sin binned.
Maybe its different this time.
Document 37 - part 1
Financial Stability Issues — Scoping Paper
Document 37 - part 2
Company Law intervention Mechanisms
I Company Law provides for three forms of external intervention in the running/affairs of an insolvent (or potentially insolvent) company. In ascending order of relevance to a financial institution these are:
• Appointment of a receiver for all or part of the assets;
• Appointment of a liquidator (under three forms of winding up);
• Appointment of an Examiner (Court Protection).
There are also various provisions for appointment of inspectors etc. but in the case of a financial institution, such an appointment would either follow or precipitate the intervention options above. Anyhow, the supervisory powers of the CBFSAI would probably be more relevant and confidential. Company and Banking Law also provide mechanisms for internal reorganisation, transfers of business and mergers, but these are either cumbersome or involve significant time lags. The Court Protection route seems to offer the most advantageous approach to dealing with a problem financial institution, f intervention at this level is to be considered.
Appointment of a receiver
2 Receivers are usually appointed by creditors in respect of a charged asset once the conditions (default etc.) specified in the agreement creating the charge for the appointment occur. The receiver’s main function is to realise the security for the benefit of the creditor. Such appointments do not need court sanction although the courts also have an implicit power to appoint a receiver e.g. where the security is put in jeopardy or there is a winding up. Where the security relates to all of the assets of the company the receivers powers can extend to the running of the company and the salvage of its viable parts. Appointment of a receiver to a financial institution would immediately erode confidence in its solvency, require supervisory intervention and probably precipitate a request for appointment of either a liquidator or examiner. The CBFSAI does not seem to have explicit powers to appoint a receiver to a credit institution, but receivership per se would not seem to offer any benefits as a form of supervisory intervention. However, some of the powers enjoyed by a receiver might be looked at in the context of any proposal to extend the Bank’s supervisory powers to intervene in the direction of a financial institution.
Appointment of a liquidator
3 A liquidator may be appointed for the winding up of a company by
• The members (voluntary winding up of a solvent company)
• The creditors (voluntary winding up of an insolvent company)
• The Courts (compulsory winding up for insolvency or other reasons).
The functions of a liquidator are to wind up the affairs of the company and realise its assets for distribution (S258 Companies Act (CA) 1963). The appointment generally puts an end to the directors’ powers (completely so in the case of a Court appointment). The liquidator has considerable powers over the company’s assets etc., but many, particularly in relation to settlement with creditors, must be exercised under supervision of the Company’s members, creditors or the Court as appropriate. The winding up commences from the time the resolution is passed or the petition is presented to the court. All three forms of winding up are well publicised to creditors, public and authorities.
Members and creditors voluntary winding up
4 The members (shareholders) may by special resolution appoint a liquidator to wind up a company (S251 CA 1963). In the case of a solvent company the only further formalities
arc a statement of solvency by the directors (independently verified), notification of the Registrar of Companies and a public notice. If the company is insolvent, an ordinary resolution is all that is required but there must be a publicly advertised creditors meeting on the day the resolution is proposed to be voted or the following day. The creditors are entitled to appoint the liquidator and a committee of inspection to fix his remuneration and oversee the winding up. Neither course precludes application to the Court either on specific points of the liquidation or for a compulsory winding up Ss 49 and 50 Of the Central Bank Act (CBA) 1989 provide that the CBFSAI is entitled to receive any documents etc. which are required to be sent to creditors and to be represented on any committee of inspection in any winding up of a license holder (i.e. bank) or former license holder. S 109 of the Building Societies Act (I3SA) 1989 applies the company law and CBFSAI provisions to liquidation of Building Societies.
Compulsory winding up under a Court appointed liquidator
5 The company, any creditor, the M/ETE (following an inspection report) and any member or contributory (a person liable to contribute to the assets in the event of its being wound up) may petition the Court for the winding up of a company (S215 CA 1983). The grounds on which the Court may order a winding up sets out in S213 CA 163 but the most common reason is inability to pay its debts (e.g. Revenue cases). This status is deemed to exist if a judgment order is returned unsatisfied or if a creditor owed more than £1000 is unable to secure payment, security or compounding of the debt within 3 weeks (S 214 CA 1963).
6 The CI3FSAI is entitled to prior notice and a hearing in relation to any petition to wind up a bank The Bank may also petition for the winding up of a bank on four grounds i.e. that it may be unable to meet its obligations to creditors, has failed to comply with a direction under S21 of the CBA 1971, has ceased to carry on banking, or in the interests of depositors. Wbere a bank is being wound up voluntarily the Bank may also apply on these grounds to have it wound up by the Court (S48 CBA 1989). The Bank has similar powers in relation to Building Societies (S 1 09 BSA 1989).
7 The court has wide powers in relation to the appointment of a liquidator and may terminate or vary the appointment and appoint a provisional liquidator (to secure the assets pending liquidation). The official liquidator is an officer of the Court and has extensive powers (subject to Court control). Usually the Court directs him to call a creditors meeting and to set a timetable for various phases of the winding up process. The appointment does not prevent the appointment of a receiver in respect of charged assets but it restricts the receiver’s powers to manage the business or enter into contracts binding the company
8 From a practical point of view a liquidation has a number of important effects:
• It freezes the assets and the transactions of the company;
It freezes all actions against the company;
• It terminates all contracts of employment;
• It invokes the fraudulent preference rule in relation to certain payments, floating
charges and other securities and transactions effected in the previous 6 months.
• Payments to creditors etc. would generally not commence until the liquidator has
established the true state of affairs of the company
9 In the case of a financial institution these practical difficulties would have important implications. There could be delay or uncertainty in relation to repayment of short term commercial deposits and settlement of other payment transactions. The liquidity of the institution would also he affected by the triggering of cross-default clauses in long term debt instruments which would render them immediately repayable, while it would be unable to raise
firnds on any commercial basis, thus increasing the level of uncertainty for creditors. This would have knock on effects on liquidity both in the payments system and for commercial transactions (e.g. money held by solicitors and others towards the conclusion of contracts). The value and nature of assets (loans, securities derivatives etc.) and liabilities (e.g. debt instruments) could both be difficult to determine and adversely affected by the appointment of the liquidator. Termination of employment contracts could affect the availability of useful personnel to the liquidator (particularly in the areas of dealing with depositors and collection of assets/loan repayments from creditors).
10 While these adverse implications could be minirnised by delaying liquidation until there had been an orderly run down of the business (deposit and lending bases) and/or its reliance on short term deposits, significant funding might have to be provided to replace the volatile commercial deposits. In those circumstances any transfer of property (or security given) in respect of that funding could be rendered void if this took place within the previous six months and the company was insolvent (i.e. unable to meet its liabilities as they arose) at the time (S286 CA 1963). The CBFSAI, as funder would then become an unsecured creditor, whose dividend would depend on the outcome of the winding up. Any decision to provide financial support (other than temporary liquidity to an otherwise very sound institution) would have to have regard to the likely outcome of a liquidation. In the case of an institution with a strong retail deposit base would an intervention which effectively met 100 per cent of the liabilities of commercial depositors before liquidation either prejudice the use of the deposit protection scheme to meet the liabilities to small depositors, or give them grounds to claim unfair treatment?
Appointment of an Examiner (court protection)
11 The protection and examination procedure is designed to save all or part of the undertaking and to prevent it being wound up. The Company, its directors, shareholders or creditors may apply to the Court to have an examiner appointed to the Company. However, only the CBFSAI may apply in the case of a credit institution which is supervised by it (this seems to exclude Building Societies). Creditors’ rights are restricted from the moment the petition is presented. An application to the Court should:
• be in good faith and factually accurate;
• be supported by good reasons why the examiner should be appointed;
• be supported by a report of an independent accountant (although in exceptional cases the court may postpone this for up to 10 days);
• demonstrate that the company is insolvent or likely to become so (5 tests are provided);
• satisfy the Court that there is a reasonable prospect of ensuring the survival of all or part of the undertalcing.
The CBFSAI do not consider that their supervisoly data would be detailed enough/suitable to establish viability or to support the independent accountant report to support its application as it would not reflect the difficulties the institution is experiencing,
12 The immediate effect of court protection is to provide the company with extensive protection against creditors, claims, realization or repossession of assets against which security was given, liquidation and receivership, from the time of application Shareholders and directors may continue to exercise their rights and functions but the Court may give directions in relation to the conduct of the company’s business, including restriction of the directors’ powers. The granting of protection and the appointment of the examiner must be notified to the Companies Office and the creditors etc. and advertised within specified time limits.
13 The examiner has 2 principal functions:
• To examine the affairs of the company and to report back to the court (within 3 weeks of his appointment), and
• To seek to put together a scheme to ensure the company’s survival to report back to the Court (within 6 weeks of his appointment).
The Court may extend the above time limits. Also the Court must he immediately informed of any irregularities in the company’s affairs found by the examiner. If the conclusions of the initial report are adverse the Court may make such orders as it sees fit including a winding up order. If the conclusions are that all or part of the company can survive, that a scheme would facilitate this, and that to do so would be more advantageous than a winding up, the examiner prepares his proposed scheme for the survival of the company and presents it to the Court, and then to the various classes of creditors etc. Once the latter have agreed to the scheme the Court confirms it and it may be implemented.
14 In the case of a credit institution Court protection would offer a number of advantages. While it would freeze the company’s transactions, the examiner can be given extensive powers to continue its operations pending the putting in place of the final rescue package. Where necessary, in order to secure the survival of the company, the examiner may certify liability in respect of certain transactions, thus making them an expense of the examination which would then have priority over other debts of the company. These powers could presumably be granted immediately if the Bank’s application were able to demonstrate the ultimate viability of the business, the availability of appropriate funding and measures to reduce or control the risks of prejudicing the position of other classes of creditor. Holders of subordinated debt instruments or long term deposits would remain restricted in relation to demanding immediate repayment e.g. under cross default clauses in their agreements. This could allow the repayment of deposits and the settlement of payments as they fall when due, thus minimising the short term liquidity problems associated with a liquidation.
Appointment of Inspectors or intervention of the Director of Corporate Enforcement
15 The Companies Acts provide for various powers of direct or Court ordered investigations into the affairs of a company. However, their scope is confined to investigation of breaches of Company Law. Obviously, an inspection of this nature could not be ruled out if breaches of Company Law came to light during other interventions to rescue a financial institution. An early intervention of this nature would have the effect of damaging confidence in the institution and offers less scope for dealing with its banking business than a direction by the Banic (under S 21 CBA 1971). Interventions of this nature would not help directly in a rescue or salvage of a credit institution, although it may be a necessary accompaniment if public funds were being committed.
Structural Changes to the Company
16 The vast majority of structural changes to a company (e.g. reduction or issue of share capital, mergers, change of purpose and often sale of major assets require as a minimum the prior approval of the shareholders by special resolution. In the case of a credit institution which is a publicly quoted company the time scale for effecting such a change, and the need to obtain it to shareholder approval on both sides (or legislative authority in the case of the State), would to limit the scope for use of such mechanisms to restore confidence in its solvency, or to effect
urgent changes in its operations. Similarly, these requirements would seem to preclude an arrangement with whereby rescue funding would be provided (by the State or another company) in exchange for share capital.
17 The situation in the case of an unquoted or subsidiary company would be slightly better. The directors or owners could presumably take some remedial actions before the need for them became public. In some circumstances this might require a direction from the CBFSAI. In thc case of subsidiary company, sale to a third party could also be agreed if it were within the powers of both sides (i.e. directors of the companies involved) or in the expectation of subsequent shareholder sanction. This course would not be without risk to the survival/reputation of the parent company, particularly if a clean break were not possible or a liquidation by the new owners followed immediately. It would still be dependent on a clear plan for dealing with the problems of the affected institution, and a contingency plan to support the parent if it were a financial institution
18 The course outlined at par 17 was followed when the State acquired the insolvent ICI from AIB in 1985 and put it into administration under the Insurance Acts, with funding effectively provided by A113 and the banking system under parallel and subsequent agreements. (Shareholder and legislative cover was given retrospectively.) Similarly, the State acquired a share holding in Irish Life in 1939 by facilitating the merger of a number of insolvent life companies and making up the deficit on policyholders funds (The Insurance Act 1939 provided for the Minister’s holding and confirmed the arrangement) However, the relevance of these models to a credit institution is limited. Insurance liabilities are generally long term while most credit institutions are heavily dependent on short term deposits. Also, unlike non-repayment of deposits, delays in or partial settlement of insurance claims would have little or no systematic effects on payment systems or liquidity in the banking system.
Stock Exchange considerations
19 In the case of a listed institution, the Stock Exchange would have to be informed, by the affected company, of any development which would have a material impact on its share price. This greatly complicates any effort to rescue the institution from its difficulties. Any solvency or structural liquidity problems affecting the credit rating or borrowing terms of a credit institution would presumably have implications for the share price of the institution (or its parent in the case of a subsidiary) and would certainly have to be reported. While it is not clear if liquidity support alone would need to be reported, this is probably academic as the underlying problem (e.g. balance sheet exposure, management change) would still have to be reported. The 24 hours time limit for reporting these development would effectively set the time frame for putting in place support/remedial measures While it might be possible to empower the CBFSAI to override or grant an exemption from this reporting requirement, this would seem undesirable. The side effects could include downgrading the overall standing of CBFSAI shares relative to other companies, placing the CBFSAI in an awkward position as supervisor of the Stock Exchange, and accusations of providing excessive comfort for credit institutions. The current position of leaving it to the company to balance the risk of not reporting against the risk ofprejudicing remedial measures may be the lesser evil.
Some Tentative Assumptions and con clusioizs
Intervention should only be considered where dfficulties for the banking and/or payment systems are foreseen arising from serious problems likely to affect the long term liquidity or the balance sheet of a credit institution.
• Where the institution is substantially viable (or has a significant “goodwill value 9 a market solution (takeover or inerger may be the preferred option or the target of any short term intervention.
• Company law intervention would of its nature only from part of any package to assist a troubled financial institution, and would probably accompany or follow measures to support its liquidity.
• The Court Protection (Examinership,) procedure seems to offer the least difficulties and most advantages of all the procedures except possibly in the case of dire insolvency.
• If Court Protection is recognised as the most useful of the tools available there may be scope for fine tuning aspects of the legislation governing the initiation of the process ‘e.g. use of CBFSAI data) to render it more user friendly.
• It is doubtful f an effective form of support or supervisory action (intermediate between short term liquidity support and company law intervention.) could be devised which would enable a credit institution to continue trading in a normal or near normal manner.
• There is a need to explore further the nature of deposits as liabilities of a credit institution and the related question of when or if a liquidity problem affecting their repayment on time would constitute insolvency ( as in unable to meet liabilities as they fall due).
Goodhart approach to deposit protection
Charles Goodhart, Emeritus Professor of Ranking and Finance, LSE, has recently advocated an alternative approach to the protection of depositors than the deposit protection schemes currently in place in the US and elsewhere. He argues that on receipt of evidence that a bank cannot meet its due commitments, or can do so only by persistent recourse to the Bank of England for Lender of Last Resort support, and on receipt of a letter from the Governor of the Bank of England to the effect that failure of that bank would probably have contagious consequences, the Chancellor should have the power to nationalise the bank on a temporary basis (with a maximum horizon of perhaps two years).
Once it is nationalised, the Chancellor would be expected, but not obligated, to dismiss senior management. All deposits, irrespective of currency denomination, location or counterparty would be guaranteed hut no dividends or interest on subordinated debt would be paid during the temporary nationalisation.
At, or before, the two-year horizon, the Chancellor would be required to hold an open auction to sell the bank back to the private sector, although some potential bidders might have to be prevented on competition grounds. With the auction proceeds, the Government would first be repaid for any losses in making good on the guarantees and then the remaining creditors, debt and equity holders would be paid off in strict order of seniority.
An advantage of this approach would be that no additional deposit insurance or extra regulation would be required. Crucially the scheme would penalise those who make the poor decisions: the bank managers and their shareholders. Professor Goodhart acknowledges the difficulty for governments in penalising shareholders for managerial errors, since they include charities, pensioners, voters and other worthy people.
Meeting with Dr Somers 21 May — Financial Stabili lanningjssues
The key message we would wish to see communicated is that the NTMA and NPRF should continue its welcome engagement with the Department of Finance, Central Bank and Irish banks to help sustain financial stability.
Hardy man jxbr, thanks.
PS. I’m sure the scans of DoF and CB documents that are released are crooked on purpose…
And (if I’m reading it correctly) it states that in order to payoff depositors without having to treat them as parri passu with bondholders, we must nationalise the bank. “Once it is nationalised,” according to Appendix 2, “the [Minister] would be expected, but not obligated, to dismiss senior management.”
“We’re not fucking nationalising Anglo.”
Are these documents being discussed anywhere else?
So, for those of us who are a bit slower on the uptake … the government knew full well that Anglo was up shit creek without a paddle (a.k.a insolvent), but decided to take the ultimate gamble of the Irish property madness by assuming it could be de-insolvent-ised with a bit of TLC (Biffo and Fitzy, over a game of golf), a few billion of tax payer money, and a couple of years. Is that about it?
The “Green Jersey” agenda (as spoken about by Gillian Bowler on Marian Finucane’s show on Sunday) was the Financial Regulator and the Govenor of the Central Bank getting the banks together in Summer 2008 and getting them to work in concert (illegally) to support each other, as Seán Quinn’s CFD gamble on Anglo had left a trail of blood in the water, whipping the Hedge Fund sharks into a feeding frenzy.
Having given the nod to the illegal Anglo share support scheme, the FR/CB proceeded to tie the fate of the banks and the taxpayer together. The Green Jersey was really a Green Noose.
The DoF had developed a plan to allow Anglo to go bust. The DoF had a document that clearly spelt out how Anglo (and others) couldn’t be saved without extraordinary political intervention.
The future of the country was pissed away by treasonous politicians and mandarins to bail out their cronies.
Crookedness and stupidity handed billions of taxpayer money to hedgefunds by guaranteeing what were essentially share support schemes.
And the more money the " green agenda" tried to pour in the more the hedgefunds squelaed with delight.
Don’t let detail get in the way of hanging civil servants and the public sector…
As I always pointed out, all decisions are political in the final analysis…
How was I hanging civil servants?