Bruton's "New bank", "Old bank" probably illegal

[mollox]

Richard Bruton’s proposal on Morning Ireland is clearly bonkers and almost certainly illegal.

He proposes that AIB & BOI each be split into two parts – a “new” bank with all the deposits and the loans which can be assessed as having value, split off from the “old” bank which would contain all the bad and doubtful lending. The latter would no longer actively operate as a bank, its task would be to manage down its loan book in order to achieve the best possible level of recovery. Almost inevitably, a fairly high proportion of those loans would ultimately have to be written off.

However, part of Bruton’s stated rationale was that there’s c. €25bn in bonds issued by AIB & BOI which are not covered by the existing Govt guarantee and responsibility for repayment of these could be left with the “old” asset-stripped bank.

This idea that the assets of AIB and BOI could be split into “good” & “bad”, with a specific objective of leaving holders of €25bn in bonds, issued by those banks, without recourse to the good assets would undoubtedly be rejected in any court of law in Ireland or Europe.

It’s like Pat Kenny transferring all his assets to Cathy Kenny and then calling his bank manager to say “hey, remember that €2m you lent me to buy a quarry? Well come and sue me for it, but you’ll get nothing ‘cos I’ve no assets. Even the quarry is in the wife’s name.” The transfer of his assets would be deemed illegal by the courts and would be reversed.

Not only would Bruton’s proposal be deemed illegal, the mere act of the Govt even making the proposal would also tell international markets that investing in any Irish company is not for the faint hearted. The message would be that we have a cowboy Govt., no-one would want to do business in/with Ireland.

It might deter US multinationals from establishing, expanding or even maintaining operations in Ireland. Richard Bruton’s proposal would constitute nothing short of corporate fraud perpetrated by a sovereign Govt..

Is that the message he wishes to convey?

[Duth Ealla]

Bonkers as it may sound you would be mistaken to think that it is solely his idea.
This is an idea thats being doing the rounds quite a bit recently and seems to be taking legs.

I am not sure that your assessment has the full force of law behind it. Are you a crazy FF head that opposes anything from the blue shirts.

[mollox]

Bonkers as it may sound you would be mistaken to think that it is solely his idea.
This is an idea thats being doing the rounds quite a bit recently and seems to be taking legs.

I am not sure that your assessment has the full force of law behind it. Are you a crazy FF head that opposes anything from the blue shirts.

Yes, I must be a "crazy FF head". I'll add that to my cherished "hate your country" accolade.

I'm familiar with the "good bank, bad bank" concept, but I don't believe that concept legally allows you to separate the claim of bondholders from the good assets and leave them only with recourse to the bad assets.

That's the bit where I think Bruton, who's usually sound, has lost it.

And if the international investment community sees that as the way our incoming Finance Minister wishes to operate, what impression does that create?

[JohnCallaghanWill]

The current FF proposal is very good for shareholders and directors. alternatives will be resisted by vested interests.


Bruton proposes as follows:

The Government's recapitalisation plans may leave taxpayers' dangerously exposed to massive bad debts and the Government should urgently consider other options, including the creation of brand new 'good banks' with clean balance sheets, Fine Gael Deputy Leader & Finance Spokesman Richard Bruton TD said today (Monday).

"It is time to look at other alternatives to the present proposal for recapitalisation.

"Fine Gael has huge concerns that the taxpayer is being asked to put money into banks without knowing the full extent of the hole in their balance sheet. There is a real risk that the only result will be to allow the existing banks to nurse along their dodgy property lending while continuing to starve viable businesses of access to the credit they so badly need.

"The taxpayers' interest is to kick-start new lending. It is not to protect the existing banks or those who knowingly took on the risk of funding their impaired lending policies.
"It is now time to look at a different model, which would create 'good banks' with clean balance sheets into which the taxpayers' recapitalisation would go.

"This would involve separating from within each bank a new bank which would hold all the state guaranteed deposits and which would buy those parts of the loan book such as residential mortgage loans and business overdrafts which can be easily valued from the existing parent bank. This would constitute a new good bank with a clean balance sheet. Its capital base would be provided by the taxpayers' recapitalisation, hopefully with other private capital, and some small shareholding could be given to the existing shareholders. These new banks would then be well capitalised with a clean balance sheet and fully open to resume lending.


"A legacy bank would be left behind in each case which would no longer engage in any lending. Its role would be to manage the remainder of the loan book and recoup maximum value from it over time. It would be managed entirely in the interest of the existing capital owners and non-guaranteed creditors. Fine Gael believes that this alternative model deserves serious assessment and could offer a much better use of scarce taxpayers' resources."

There is no difficulty in transferring assets provided full market value is paid for them

[goosebump]

Technically, its possible to do what Bruton says.

Basically, the deposits in the the Good Bank would be backed by the taxpayer rather than by the toxic loans they are currently backed by. The Bad Bank would then try and recover value from the loads and transfer that into the Good Bank to built up its T1 Capital, which hopefully over time would allow the State to exit gracefully.

The issue is that it would require putting a price sticker on the toxic debt at a time when sentiment rather than market forces are dictating asset value.

From that point of view, it is very,very risky. It is also up for grabs as to whether the Good Bank would actually free up lending, or just hoard the capital.

Personally, I think we are better off injecting capital into the banks and allowing them to realise value from the loan book over time, wherein they can make a better judgement as to its value and whether or not it needs to be written down.

[goosebump]

[I]Bruton proposes as follows:

The Government's recapitalisation plans may leave taxpayers' dangerously exposed to massive bad debts and the Government should urgently consider other options, including the creation of brand new 'good banks' with clean balance sheets, Fine Gael Deputy Leader & Finance Spokesman Richard Bruton TD said today (Monday).

That's totally disingenuous. The Good Bank/Bad Bank strategy removes none of the taxpayers risk. In fact, it probably increases that risk. The value of the solution is that it *might* free up credit, that's it.

[JohnCallaghanWill]

Not so

Technically, its possible to do what Bruton says.

Basically, the deposits in the the Good Bank would be backed by the taxpayer rather than by the toxic loans they are currently backed by. The Bad Bank would then try and recover value from the loads and transfer that into the Good Bank to built up its T1 Capital, which hopefully over time would allow the State to exit gracefully.

The issue is that it would require putting a price sticker on the toxic debt at a time when sentiment rather than market forces are dictating asset value.

From that point of view, it is very,very risky. It is also up for grabs as to whether the Good Bank would actually free up lending, or just hoard the capital.

Personally, I think we are better off injecting capital into the banks and allowing them to realise value from the loan book over time, wherein they can make a better judgement as to its value and whether or not it needs to be written down.

it would not involve putting a "sticker on toxic debt"

The nonperforming loans would be held by the existing banks along with the share holders capital.

The new tax payer capital would be used to run a new bank unhindered by portfolios of bad loans.

This proposal will be resisted by FF and vested interests.

[goosebump]

Not so

it would not involve putting a "sticker on toxic debt"

The nonperforming loans would be held by the existing banks along with the share holders capital.

Fool.

The amount of retained capital (liabilities) has to equal the value of the outstanding loans (assets), so it deciding how much capital should be retained, the loan book has to be valued.

This is the reason that no Bad Banks have been created to this point, as nobody wants to take the risk of valuing the loans.

This is first year B.Comm stuff.

[Florentino Ariza]

Rather than being of such a nature as to scare away foreign investors, Bruton's thinking seems to be pretty mainstream, this is from the EU observer this morning:

"Options are likely to include the purchase of these devalued assets by member state governments followed by their storage and close monitoring in isolated ‘bad banks'."

and relates to proposals coming from Eurozone finance ministers.

EUobserver

[New_Economic_Agenda]

and almost certainly illegal.

do the legislature not makes laws pursuant to legislation?