Economics 13/07/10: AIB needs your cash

The dogs are barking across Dublin’s RDS. Touring the USofA, our Taoiseach has told the nation that AIB may (oh, just ‘may’?) need further state support to meet new capital targets. That admission, of course, comes after the solemn statement by Minister Lenihan back in March that the announced measures to provide capital to AIB and BofI were final. And on the heels of numerous assertions by our banks’ cheerleaders squad in Dublin’s stockbrokerage houses that AIB will be able to raise capital on its own accord, once the taxpayers pay through the nose for ordinary shares in the bank in round 3 of recapitalisations.

Well, taxpayers did pay through the nose. And AIB still needs more than €7 billion – based on status quo scenario concerning loans quality. Should it see continued deterioration in loans going forward from Q1 2010, the bank will need more than that. How much more? Anybody’s guess. But that open ended nature of AIB’s liabilities won’t hold back our nation’s leader. Last night, Brian Cowen pledged an open ended support to AIB saying that AIB “may need some help, but we will provide that”. How much will Brian be ready to ‘provide’? Not a single word. There is no stop-loss rule operating for this Government. Then again, we know as much from the Government treatment of the Anglo.


And while on the matters of Taoiseach tour of the US, unable to sell the idea that Ireland has turned economic ’corner’ on the recession, our leader is meeting some pretty important people. NYSE CEO Duncan Niederauer and NYC mayor Michael Bloomberg are on the list of those who need to be wooed into ‘Green Jersey’ club. Presumably, they’d love to send some of their companies (listings and HQs) down to the Emerald Isle, but need Taoiseach to convince them.

Messrs Bloomberg and Niederauer will have to be satisfied with playing the second fiddle in Mr Cowen’s sonorous opus ‘Turning Over, Again’. Per Taoiseach: "The first objective will be to give a clear message to key media outlets, business figures and opinion formers that Ireland has turned the corner…"

In other words, accustomed to his own PR hype, economic management is all in the media reporting for Mr Cowen. That, plus what’s being said at business lunches and social dinners in Manhattan. In other words, if the foreigners – especially the important ones – can be made believe things are good back in Auld Dublin, then surely they must be good.

No? Who says so? Oh, those pesky 450,000 unemployed and underemployed back in Ireland? Well, we’ll have jobs for them in no time, once Micheal O'Blumberg and Duncan MacNiedehan send their NYC 'investitors' over to Upper Merrion Street to buy some of those banks shares. After all, Bertie Ahearn thinks they should be a bargain at €5 each, while with Brian Cowen's latest unconditional pledge to plug AIB's capital hole no matter what, Bertie might just be right...

But just in case you think it’s all about Brian Cowen telling the Americans how to properly read our economic stats and banks balance sheets to discern the ‘turnaround’, think twice. Per Reuters report: “Mr Cowen said he will also ask for advice from business and political leaders on how Ireland can continue its fight against the recession and create jobs.”

Oh, wait – what recession? Didn’t we turn that corner?

Does anyone find this a little bit strange? We have an elected leader of the nation whose job description is to govern the state going over to the US to 'ask business leaders for an advice' on how to do his job?

Then again, our Taoiseach can boast of his policies getting us out of the recession. So why would he ask foreigners to provide him with their own ‘get out of recession’ ideas? May be, its because he really hasn’t a policy himself or he might need external validation for his policy of having no policy, or may be it is both. You tell me. But it does seem a bit uncomfortable, in aesthetic terms, to see our head of state travelling to the US to ‘consult’ foreign business leaders on how to solve our problems. I can’t imagine Angela Merkel or Nicolas Sarkozy doing the same. At least, not in front of the media…

Economics 26/04/2010: Bank of Ireland Conversion Deal

Bank of Ireland deal: per latest report from the RTE, the State's shareholding in BofI will increase to 36% from 16% through a conversion of €1.7bn of funds given to the bank last year into ordinary shares. The bank will now attempt to raise the other €1.7bn in equity from private markets with a rumored discount on first-offer of 40%.

Minister for Finance Brian Lenihan said that 'This transaction is good news for our economy, good news for the taxpayer and good news for Bank of Ireland's shareholders and investors.'

This is another extraordinary statement made by the Minister. The Minister has just informed the nation that we are overpaying some 11%+ (see below) for the shares gained under this conversion, since 'the transaction has been agreed on market terms'.

Aside: the Minister does not appear to clearly understand the terms of conversion he agree to, as 'market terms' would mean that the state is converting at a current price (Friday close of €1.80) less cumulated dividends (2 years @8%), less the discount extended to the market (38-42%). 'Market terms' therefore would imply conversion at €0.88 per share, not €1 per share achieved.

Finally, the Minister failed to negotiate a discount that should be due any large-scale investor. All in, the estimated overpayment of 11% is really a likely underestimate. In exchange for our money, we, the taxpayers, got a pile of over-priced shares which are about to be diluted!

Looking closer at the details: BofI plans to raise €500mln from private placements with institutionals, priced at €1.53 or 15% discount on Friday close price. The main issue will be €1.2bn (net) with 38-42% discount. Preference shares held by the taxpayers will be converted at €1 per share (they were bought at €1.2 per share and paid no dividend), which actually means we de facto are paying €1.16 per share, while existing shareholders can get shares at as low as €1.04-1.06. Government-held warrants are priced at ca €491mln.