17/11/2013: Mortgage holders in difficulty to avail of new initiative from tomorrow: IMHO

Tomorrow, the new IMHO pilot programme for AIB/EBS/Haven clients in mortgages arrears and distress comes on line. Key points of contact: www.mortgageholders.ie or via 1 809 623 624.

The full press release on the initiative is available here:  https://www.mortgageholders.ie/blog/posts/mortgage-holders-in-difficulty-to-avail-of-new-initiative-from-tomorrow

All details on the initiative purpose and set up are available here:  http://trueeconomics.blogspot.ie/2013/11/5112013-my-op-ed-for-journalie-on.html


Note: to preclude any confusion or accusations against IMHO or myself: I do not provide frontline client-facing advise or services. I am a member of the board. Sadly, given past experiences with some commentators, I have to state this. 

14/4/2012: Sunday Times 8/4/2012 - Irish banks: The Crunch is Getting Crunchier

This is an unedited version of my Sunday Times article from 08/04/2012.

A year has lapsed since the much-lauded publication of the first set of the Prudential Capital Assessment Review results – the stress tests – by the Central Bank of Ireland.

Covering the four core banking institutions subject to the State Guarantee, AIB, Bank of Ireland, Irish Life & Permanent and EBS, the tests were designed to be definitive. Once recapitalized by the Exchequer in-line with the PCAR, Irish banks were supposed to be returned to health – recommencing lending to the SMEs and households, returning to normal funding markets around 2013, while continuing to shed loans to improve their balance sheets.

The PCAR made some major predictions with respect to the banking sector performance over 2011-2013 that were not subject to Nama-imposed losses and, as such, are expected to continue into the future. Chiefly, the Central Bank allowed in its stress scenario for the lifetime losses of €17.2 billion on the residential mortgages books of the four institutions. Only €9.5 billion of these were forecast to hit in 2011-2013. Owner-occupier mortgages losses provided for 2011-2013 amounted to just 60% of the above. Post-2013, it was envisaged that the Irish banking system will be able to fund remaining losses out of its own operations with no recourse to the Exchequer assistance.

Having published the PCARs, the Irish Government proceeded to take a break from the banking crisis. Throughout the second half of 2011 there was a noticeable ‘We’ve sorted the banks’ mood permeating the refined halls of power.

Fast-forward twelve months. Annual results for the four domestic State-guaranteed banks for 2011 are, put frankly, alarming. Set aside for the moment the entire media spin about ‘lower 2011 losses compared to 2010 records’. Once controlled for Nama effects on 2010 figures, the data shows acceleration, not an amelioration of the crisis on the mortgages side.

Excluding IBRC, total amount of owner occupied mortgages that remain outstanding on the books of AIB and EBS, Bank of Ireland and PTSB comes to €71.8 billion or 63% of all such loans held by the banks operating in Ireland. According to the Central Bank of Ireland, 12.3% of all mortgages held in Ireland were 90 days or more in arrears – some €13.9 billion. Of these, the four State-guaranteed banks had €7.7 billion owner-occupier mortgages in arrears, representing 10.8% of their combined holdings. Given banks’ provisions, by the end of 2012, the expected combined losses on mortgages, can add up to 60% of the total 2011-2013 losses allowed under PCAR.

And this is before we recognise the risks contained in a number of mortgages restructured in 2009-2010 that will come off the forbearance arrangements. Many are likely to go into arrears once again in 2012 and 2013. Recall that the entire Government strategy for dealing with mortgages defaults rests on the extend-and-pretend principle of delaying the recognition of the loss by giving borrowers some relief from repayments, e.g. via interest-only periods. This approach is patently not working.

Looking at EBS and AIB results tells much of the story behind the forbearance risk factor. In 2010, the two banks had 16,992 restructured residential mortgages amounting to €3.7 billion. Of these, residential mortgages amounting to €3 billion were interest-only. Of all forbearance mortgages, 92% were classed as performing. By 2011, AIB and EBS held 32,266 forbearance residential loans totalling €6.2 billion – almost double the levels of 2010. Total amounts of mortgages in forbearance arrangements that went into impairment or arrears over the course of 2011 jumped more than seven-fold. One third of the forbearance mortgages are now in arrears.

While Bank of Ireland data is not as comprehensive on 2010 and 2011 comparatives, current (end of 2011) levels of restructured mortgages run at €1.25 billion, of which €249 million were impaired or past-due more than 90 days. This means that €999 million worth of restructured mortgages remain at risk of future arrears. PTSB report for 2011 shows restructured mortgages rising from €1.7 billion in 2010 to €2.1 billion, with those in arrears rising three fold to €524 million.

Taken together with the aforementioned 2010-2011 dynamics, changes to the insolvency regime imply that mortgages losses can exceed Central Bank’s forecasts for 2011-2013 period. Of all four banks, Bank of Ireland remains the healthiest, and the likeliest candidate when it comes to mortgages-related losses. Of course, the banks can continue extending recognition of the losses past 2013, but that will mean no access to non-ECB funding at the time when ECB is increasingly concerned about extending more loans to Irish banks. Worse, with the first LTRO maturing in 2014, Irish banks will be staring into a new funding storm, when their healthier competitors all rush into the markets to fund their exits from LTRO.

Which, of course, means that the entire Government exercise of shoving taxpayers cash into insolvent institutions is unlikely to resolve the crisis. The core banks will continue nursing significant losses well into 2014-2015, with capital buffers remaining strained once potential losses are factored in. And this, in turn, will keep restrained their lending capacity.

Recent Central Bank estimates show that Irish economy will require up to €7 billion in SMEs lending and €9 billion in new mortgages in 2012-2014, while banks are to accelerate deleveraging of their loans books to meet lower loans to deposits standards. At the same time, there will be huge demand for Irish banks lending to the Exchequer, once some €28 billion of Government debt come to mature in 2013-2015. As we have seen with the Promissory Notes ‘deal’, so far, the Government has difficulty getting Irish banking system to buy into Government debt in appreciable amounts.

In other words, we are now staring at the basic conflict inherent in running a zombie banking system that continues to face massive losses on core assets. At the very best, the choice is: either the banks’ will lend to the real economy, while foregoing their support for Exchequer post-2013; or the state uses banking sector resources to cover its own bonds cliff, starving the real economy of credit. The first choice means at least a shot at growth, but the requirement for more EFSF/ESM borrowing (Bailout 2). The second choice means extending domestic recession into 2015.

It is also likely that we will see amplifying politicization of the banking system, with credit allocated to ‘connected’ enterprises and politically prioritized sectors, at the expense of overall economy. Reduced competition – from already below European average levels, judging by the ECB data – will continue to constrain credit supply.

The lesson to be learned from the 2011 full-year results for Irish banks is a simple, but painful one. Banks going through a combination of a severe asset bust and a massive debt overhang crisis are simply not going to survive in their current composition. We need to carry out a structured and orderly shutting down of the insolvent institutions, in particular, IBRC, EBS and PTSB. We also need to restructure AIB. At the same time, we should use the process of liquidation of the insolvent banks to incentivise emergence and development of new service providers.

This can be done by using assets base of the insolvent institution to attract new retail banking players into the market. This process can also involve enhancing the mutual and cooperative lenders models.

Given current funding difficulties, it is hard to imagine any significant uptick in lending in the Irish economy from the traditional banking platforms. Thus, we need to create a set of tax and regulatory incentives and enablers to support new types of lending, such as facilitated direct lending from investors to SMEs. Such models already exist outside Ireland and are gaining market shares around the world, in particular in advanced Asian economies.


The State Guaranteed banking model is, as the 2011 results show, firmly bust. Time to rethink the strategy is now.


Charts:

Box-out:

On the positive front, Q1 2012 Exchequer results released this week showed total tax take rising to the levels, not seen since 2009. Total tax revenues came in at €8,722 million, just below €8,792 in 2009. Year on year tax take is up 16.2%. But hold that vintage champagne in the fridge for a moment. Tax revenues for Q1 this year include reclassified USC charges which used to count as departmental receipts instead of tax revenues. The department of Finance does not provide estimates for how much of the income tax receipts is due to this change, but based on 2010 figures it is close to ca €525 mln. They also include €251 million of corporation tax receipts from 2011 that got credited into January 2012 figures. Netting these out, tax revenues are up 8.2% year on year – still appreciable amount, but down 7.6% on 2009. Compared to Q1 2008 – the first year of the crisis, we are still down in terms of tax receipts some 26.2%. Even at the impressive rate of growth, net of one-off changes, achieved in Q1 this year, it will take us through 2017-2018 before we get our tax take to 2007-2008 levels. As the Fianna Fail 2002 election posters used to say “A lot done. More to do.”

02/06/2011: Latest shenanigans at the banks

Two junior bondholders in Allied Irish Banks - Aurelius Capital Management and Abadi Co – are taking the Irish government to court today over the AIB plans to impose burden-sharing on some bondholders in failed banks. Aurelius is a distressed debt investment vehicle which also holds debt of Dubai World so it should be well familiar with the case of haircuts.

These are not investors who bought Irish banks bonds at their full value, but those who pick up distressed debt at a significant discount. However, it is their right to maximize their returns on such investments.

Let us recall that AIB is the sickest of the 4 banks reviewed under the original PCARs back on March 31 this year. Under the stress tests, AIB is expected to lose €3.07bn on Residential Mortgages (all figures refer to stress scenario, 3-year time frame), €972mln on Corporate loans, €2.67bn on SMEs loans, €4.49bn on Commercial Real Estate loans and €1.4bn on Non-mortgage Consumer loans and Other loans. The grand total expected 2011-2013 losses under stressed scenario is €12.6bn or almost ½ of the total expected stress scenario losses across IRL-4 banks of €27.72bn.

Of the €24bn capital buffer for IRL-4 required by the Central Bank PCAR exercise, full €13.3bn is accounted for by AIB.

Which implies that AIB – accounting for just €93.7bn of the €273.94bn of loans held by the IRL-4 at the time of PCARs (just over 34.2% of the total loans of IRL-4) is responsible for over 55.4% of overall capital demands. It is, by a mile, the worst performing bank of IRL-4... Really, folks, 'Be with AIB' as their old commercials would say.

So in the case of AIB, Finance Minister Michael Noonan – the majority shareholder in AIB – is now attempting to impose losses of between 75 and 90 percent on €2.6bn of the bank’s subordinated debt. This means that the bond-holders are expected to contribute just 15-16% of the total cost of the latest bank recapitalization programme. This, of course, is a drop in a sea of pain already levied against Irish taxpayers.

The problem in Ireland is that the so-called subordinated liabilities orders (SLO), which the government is using to force a deal on bondholders is untested in law. Bondholders can claim priority over shareholders in the event of insolvency. But the banks are now existing solely on government life-support. Although they are complete zombies, they are not technically insolvent. This in turn means their equity retains some – if only tiny – value. The Irish Government in the case of AIB driving bondholders’ haircuts can be seen as the means for improving that value to the shareholder at the expense of bondholders, since equity will benefit from lower debt and changes in the capital structure.

In the case of AIB this means two possible things:

• If the court finds in favour of Aurelius and Abadi, the deal is off the table or will be more expensive to execute (lower haircuts), which will in turn imply greater demand on taxpayers to step in. Of course, this also means the Gov in effect destroying a large portion of its own shares value.
• If the court rules in favour of the Gov, the deal is on and we have a precedent for aggressive burden sharing. This, however, will only benefit the majority state-owned banks, i.e. Anglo, INBS, EBS and AIB, and only with respect to savings on subordinated debt.
  

The problem is in the timing of this burden sharing – the previous Gov insistence on paying on bonds in full means that we, the taxpayers, are now on the hook for losses on our shares in the banks via dilution. You don’t have to go far to see what happens here. Just look at Bank of Ireland (below).

Normal process of banks workout should have been:

• Step 1 – Impose losses on shareholders, while preserving depositors by ring-fencing them via specific legislation to remove equivalent status between senior bondholders and depositors. Such legislation can be enacted on the grounds that depositors are not lenders to the activities of the banks, but are clients of the banks for the purpose of safe-keeping of their money. It is also justified from the point of view of finance, as depositors are being paid much lower rates of return on their money, implying lower risk premium
• Step 2 – Impose losses on bondholders via a combination of robust haircuts and debt-for-equity swaps, but only after depositors are protected
• Step 3 – For any amounts of capital still outstanding per writedowns requirements, the Government can then take equity positions in the banks.

This sequence of actions would have prevented depositors runs and repeated taxpayer equity dilutions. It would also have given the Government a mandate to take over and reform failed banks.

By doing everything backwards, we are now in a veritable mess. This mess was not caused by the current Government – it is the toxic legacy of the previous Government which made gross errors in managing the whole banking crisis. This mess is extremely hard to unwind and my sympathies go here to Minister Noonan who is at the very least trying to do something right after years of spoofing and wasting taxpayers money by his predecessor.

Note: The Government is aiming to cut around €5bn from the total bill for bailing out Irish-6 banks. Imposing losses of up to 90 percent on junior bonds in AIB, Bank of Ireland, Irish Life & Permanent and EBS Building Society is on the cards:

• IL&P said it would offer 20cents on the euro for €840m of debt
• EBS wants to pay 10c to 20c on the euro for around €260m of subordinated bonds
• Bank of Ireland is pushing up to 90% discount on €2.6 billion worth of subordinated debt. Bank of Ireland said it would offer holders of Tier 1 securities just 10 percent of the face value of their original investment, and holders of Tier 2 securities 20 percent.

It is revealing, perhaps, of the state of our nation’s policy making that over a year ago myself, Brian Lucey, Peter Mathews, David McWilliams and a small number of other commentators suggested 80-90% haircuts for subordinated bondholders. We were, of course, promptly attacked as ‘reckless’, ‘irresponsible’ and ‘naïve’. Yet, doing this back then would have netted taxpayers savings of more than double the amount hoped for today.

And this is before the savings that could have been generated from avoiding painful dilution of equity holdings acquired by the Government in Irish banks. How painful? Look no further than the unfolding Bank of Ireland saga.

Bank of Ireland's lower Tier 2 paper is trading at 37-40 cents on the euro post-announcement of the after the announcement that T2 will be offered an 80 percent discount alongside with a ‘more attractive’ debt-for-equity swap. Tier 1 paper holders are offered 10 cents on the euro cash ex-accrued interest. Shares swap will factor in accrued interest to sweeten the deal. The debt-equity swap is so powerful of a promise that BofI shares have all but collapsed over the last few days losing over 62% of their already minuscule value. Of course, with Government holding 39% of equity pre-swap, the taxpayers have suffered the same loss as the ordinary shareholders, all courtesy of perverse timing of equity injections by the previous Government.

And there’s more. Even if successful in applying haircuts and swaps to junior bondholders, Bank of Ireland will still need to raise additional €1.6bn from either new investors or existent shareholders (including the Government). Which means even more dilution is to come.

Economics 29/05/2010: EBS - taxpayers are on the hook, again

One really has to start worrying about the going-ons at the DofF, the CBFSAI and in the Government. After all, over recent weeks we have been told that:

1. The leadership in this country is finally getting its hand on the pulse of the financial sector and the economy (a tale that emerged back in March when Minister for Finance, the Governor of the CB and the FR made back to back statements concerning the plans for the banking sector stabilization, and subsequently went on to assure the nation that all is now going to be fine);
2. Ireland has turned the corner (we've heard this in its various variants since May 2009);
3. With Nama working overtime, lending is about to be restored across the nation;
4. There are no more nasty surprises (apart from the ever-shifting capital targets in the Anglo);
5. That banks can now sort themselves out and hence there will be no need for a sweeping Guarantee extension comes September;
6. That Ireland is so far ahead of the PIIGS curve, it is reckless and dangerous, and erroneous, to claim otherwise.

Well, as of today we, the taxpayers, own another banking institution - the EBS - which, up until now was regarded as the least sickly of the Irish banks. Per Irish Times report today: "The Government’s move came after the society failed to attract private investors. The State now seems set to invest up to €875 million in total over the next 10 years."

Pardon my French, but what the h***ll is going on in our circles of power? One would naturally expect the Government and the regulators responsible for the banking sector to be in a daily contact with the institution, like EBS, while it is engaged in a major talks with potential buyers. And one would expect the talks to progress over time, with some clear indications as to whether the deal was likely or not. A sudden release of this new information is, therefore,

• either a reflection of the fact that our banking sector authorities did not have a clue as to the progression of the talks - in which case they once again failed to 'keep their hand' on the patient's pulse; or
• they have at the very least did not disclose pertinent information to the markets and the public as to the state of these talks.

Either way, the news that the taxpayers are once again stuck for ca €1 billion in bailout funds (more than the amount of €600mln the Spanish Government had to inject in one of its banks, triggering a massive run on Spanish markets) without any, and I repeat, any public official making the matter public until the deal was done!

Of course, another remarkable thing about the deal is that it comes on foot of Nama being deployed in the market. Last year, myself, Brian Lucey, Peter Mathews, Karl Whelan and others have warned that nationalization of the failing Irish banks was the least costly option for their recapitalization that should be pursued. Nationalization of EBS would have cost no more than €650-800 million and would have led to a 100% ownership of the bank by the State. In return, we could have imposed a speedy reform on the bank's board and management, and actively repaired its balancesheet.

Instead, we have paid countless millions for it through Nama, shelled out almost €1 billion in direct capital commitments, supplied it with a state Guarantee worth well in excess of €200 million in risk-related implicit costs, and still control only 51% of the bank. We are now left with a quasi-state asset that cannot be reformed and is at a risk of being left to linger like a zombie stuck between private markets and the politicos.

One wonders, will anyone, responsible for Nama and the rest of our banks policy ever be held accountable for this waste?