Burning the (wrong) bondholders

One of the great Christmas pleasures is watching Wallace and Gromit. For me their masterpiece of comedy noir is ‘the wrong trousers’, in which an unfortunate (but of course arising from a well-intentioned) wardrobe malfunction leads to Wallace being in effect kidnapped by his TechnoTrousers. A series of Claymation japes and high jinks ensues, but all is put right at the end.

Something similar seems to have happened Michael Noonan.  A well-intentioned effort to make a solid bank has taken him down a strange path. The proposal to impose up to 100% losses on the subordinated bondholders of Bank of Ireland arises from a good intention – that Bank be well capitalized, and that to do this it raises €4.2b by the end of the year. It is at present, despite a range of actions, some €350m short. So, the government is proposing to use its powers to in effect ‘burn’ subordinated bondholders, generating in that way the needed capital. Now, I have long argued that it was an immoral, unnecessary and needless waste of state funds to have kept ANY subordinated bondholders in play in the banks while the state invested taxpayers money. We invested €3.5b in 2008-9, and took up rights issues of €2b in total. The result is that the state now has approx. 15% of a bank plus a remaining high(ish) yielding preference share. At the time of the crisis, as show in appendix A, p 150, Bank of Ireland had €4.6b of dated subordinated debt, which was guaranteed and thus was at that stage unable to be deployed fully towards losses. Now, with the bank in essence almost out of the critical phase of the crisis this arises, which while perhaps welcome needs to be wondered at. It needs to be wondered at in the context of ….Anglo.

Bank of Ireland is, in my view, at first approximation, the only Irish bank that can exist outside longterm state control. And no, I don’t have shares in it.  AIB has collapsed into the state and will require massive and on-going restructuring both of its finances and its operations if it is ever to be refloated or sold off. And then there is Irish Bank Resolution Corporation, the banks formally known as Anglo ad Irish Nationwide.

Faced with a choice the government decided to spend €1b of taxpayer funds on unguaranteed unsecured bonds of a dead bank. Anglo is dead, but zombie like will not stop moving and consuming.  Putting money into Anglo is, as Constantin Gurdgiv described it “like gold plating a yugo and sinking it somewhere”.  Putting money into Bank of Ireland, with the state taking a modest increase in its share for the sake of (hopefully) completing the rehabilitation of a working bank and one on which the state might eventually even get some return.

Government is about choices; the monies sunk into the banks are sunk, but the ongoing decisions about how to spend scarce resources on banks should revolve around the marginal benefit. One the one hand, the whiling vortex of money that is Anglo/INBS, on the other a quasi-viable bank. I know which I would choose.