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Bank of Ireland takes bizarre action to prevent the State acquiring more than 50% control

Bank of Ireland takes bizarre action to prevent the State acquiring more than 50% control

namawinelake | November 9, 2010 at 1:27 pm | Categories: NAMA | URL: http://wp.me/pNlCf-M9

 

photo machholz

The State presently owns 36.5% of the ordinary stock of Bank of Ireland thanks to the payment in lieu of cash of the 8% dividend on the €3.5bn “directed” investment from the National Pension Reserve Fund in March 2009 and the conversion of some preference shares to ordinary shares in May 2010. You might recall that in February 2010, BoI paid out 184m ordinary shares to the NPRF on its €3.5bn preference share investment made in March 2009, in lieu of a cash dividend because the pesky EU had forbidden it to make a cash distribution when in receipt of State-aid. Three months later, the NPRF acquired additional ordinary shares in BoI through the rights issue by the bank and the conversion of some €1.7bn of the preference shares to ordinary shares. As part of the rights issue conversion of preference shares the interest rate payable on the remaining €1.8bn of preference shares was to rise from 8% to 10.25%. So that’s how the State this morning owns 36.5% of BoI and has €1.8bn of preference shares yielding 10.25% per annum with the dividend due next February 2010.

Next February 2011, BoI will be required to pay the NPRF €214m – roughly 10.25% of €1.8 (I say roughly because remember we had €3.5bn preference shares earning 8% for about two months of this dividend year and then the 10.25% applies for 10 months approx). We are now waiting almost four months (a record as far as I can tell) for the EU to publish the Decision announced on 17th July, 2010 which set out the conditions for BoI’s restructuring. I’m willing to bet that the EU will allow BoI to start making cash payment for dividends again. Because if they don’t, BoI would need pay the €214m in ordinary shares or at current prices (€0.42 per share with the company having an ordinary share capitalisation of €2.24m), nearly 10% of the company which would bring the State shareholding up from 36.5% to 46.5%. Given the volatility of BoI’s share price, we could easily end up with an ordinary share dividend which would give us 50% of BoI – majority control which seems anathema to the State’s strategy for the banking sector.

And so yesterday in the High Court we witnessed the bizarre spectacle of BoI applying (in simple terms) to be allowed reclassify part of its capital base in such a way that a dividend payment can be made in cash so the horror of the State taking majority control of BoI can be avoided. Of course if economist Morgan Kelly, whose latest jeremiad in yesterday’s Irish Times is correct (and there is sufficient support for his position to suggest he’s not being a crackpot), then the scale of non-NAMA losses in BoI will give us majority State control in the near future anyway. Nonetheless it is interesting to see the legal lengths to which BoI will go to avoid majority ownership in the next three months

Comment:

The Government accepts now that Anglo will cost the taxpayers 34.5 billion and we must accept that AIB and Bank of Ireland will cost at least €30 billion because they were just as bad as Anglo in lending, not only to the Developers but to ordinary folk that couldn’t not even afford the matchboxes the banks were lending out money for. So you end up with a taxpayer bill of €13 billion for Bank of Ireland plus the 3.5 billion we already paid out Bank of Ireland lending practices were on par or  even worse than Anglo Irish Bank as they tried to catch up with Anglo . With the worsening mortgage default situation heading our way and a possible bailing out of negative equity home owners a much bigger loss provision will have to be faced up to at Bank of Ireland and that is before we start on the derivates Losses .For my money we are now looking at the end game.

Bank of Ireland is only months away from been nationalized and to assume anything else is simple ignoring reality, there cooked and we the taxpayers are snookered!

Just two points in support of this assumption

(1)    Yesterday the Irish times seem to have now gone against the Government with that article from MORGAN KELLY up to now there were mostly cheerleaders for the Government in its actions with the banks and the whole NAMA set up, the Kelly article is a watershed and a parting of the waves and I believe the Irish times is “smelling change” of Government is in the air and want to be on the winning side.

(2)   Cowen and lenihan have lost the plot all together and we now have foreign” minders “taking up residence in the Department of Finance and also in Treasury Buildings (NAMA ) Our sovereignty in lost because of the actions of these traitors and the blame game is about to get started.

                God help us all

look at these videos

http://www.bloomberg.com/video/64352822/

http://www.bloomberg.com/video/64349432/

Nationwide issues €4bn in bonds to itself

Nationwide issues €4bn in bonds to itself
In this section »
Lenihan says key bodies backed guarantee move
By
SIMON CARSWELL
IrishTimes.com

IRISH NATIONWIDE: IRISH NATIONWIDE has issued €4 billion of Government-guaranteed bonds effectively to itself. It can use the bonds to draw €4 billion in funding from the European Central bank to help tide it over a key refinancing period later this month.

The building society has €4 billion of debt covered under the original blanket Government guarantee maturing at the end of this month. The bonds will allow the building society to draw fresh funding from the ECB if necessary to repay this debt against a backdrop of heightened funding pressures across the guaranteed institutions.

A spokesman for the building society insisted Irish Nationwide had sufficient cash to repay €4 billion of guaranteed debt which must be repaid later this month.

He said the listing of the bonds was to “improve the liquidity of Irish Nationwide” ahead of the building society shrinking radically as a consequence of the transfer of €9 billion in loans – more than 80 per cent of its loan book – to the National Asset Management Agency and the receipt of Nama bonds to improve liquidity.

It is understood that Irish Nationwide will start drawing ECB funding using the bonds as short-term collateral this week and will refinance the debt with Nama bonds as they are issued before all loans are transferred by February.

In what was described as an unusual move by markets sources, Irish Nationwide has listed the bonds but not sold them to investors and they remain on the balance sheet of the building society.

The bonds were listed under the building society’s so-called “global medium-term note programme” with a maturity of six months.

The timing allows the society to use ECB funding now to tide Irish Nationwide over the end of the year when the extended Government blanket guarantee expires.

Michael Cummins, a director of fixed-income specialists Glas Securities, said it was unclear how Irish Nationwide would issue the bonds to draw ECB funding in order to repay debts maturing this month. However, retaining them on the building society’s balance sheet “would not be standard practice”, he said.

One bond analyst said he had never seen a funding transaction structured in such a way, describing it as “a type of micro-quantitative easing” – a means of allowing a central bank to print money to support an institution.

“You could say it is innovative in some respects – it gets them through the September 2010 refinancing,” said the analyst.

A spokeswoman for the Central Bank said it did not comment on loan facilities given to institutions.

“Where an asset class is eligible for ECB borrowings, the Central Bank will provide funding on behalf of the Eurosystem, in accordance with the rules and procedures agreed by the Eurosystem,” she said.

Comment :

This is sheer madness now this corrupt institution is placing bonds debts like confetti at a wedding
With all these billions sloshing around it should come as no surprise to anyone if a few hundred million “Go missing”
There are enough gangsters involved with this process, and we the taxpayers are heading for a big fall mark my words when billions are floating around like this you can be sure the crooks are not to far behind
Irish Nationwide should be shut down and the directors responsible for this disaster should be brought up on charges of fraud and not heading off into the sunset waded down with enormous pensions and bonus

Here is what The story.ie has to say Link http://thestory.ie/2010/09/08/banks-qe-themselves/

Banks QE themselves
Posted: 08 Sep 2010 03:03 AM PDT
It seems we have something of an answer as to how Irish banks expect to get through the €30bn funding cliff this month. In the Irish Times today:
IRISH NATIONWIDE has issued €4 billion of Government-guaranteed bonds effectively to itself. It can use the bonds to draw €4 billion in funding from the European Central to help tide it over a key refinancing period later this month.
The building society has €4 billion of debt covered under the original blanket Government guarantee maturing at the end of this month. The bonds will allow the building society to draw fresh funding from the ECB if necessary to repay this debt against a backdrop of heightened funding pressures across the guaranteed institutions.
So what does that mean? Irish Nationwide is issuing bonds (these ones) and then using the bonds as collateral to borrow from the ECB marginal lending facility (MLF), also known as the discount window.
This is not dissimilar from the practice we learned of last week where nationalised bank, Anglo Irish, is using promissory notes issued by the Government as part of recapitalisation (ostensibly long term), as collateral with our own Central Bank in order to fund itself (they dare not go to the ECB?), at a rate of 1:1. This appears to have gone relatively unnoticed, and is buried in Anglo’s interim report, referred to as the Special Master Repurchase Agreement, which comes on top of the Master Loan Repurchase Agreement.
Expect to see other Irish bank create fictitious money in order to fund themselves via the discount window.
It also seems that this type of transaction is nothing new. Back before the September 2008 crisis, it seems that Lehman Brothers were doing something similar. Per the FT back in April 2008:
It was rather elliptically suggested by Bloomberg (from a Morgan Stanley analysis) that Freedom’s notes had been used as collateral by Lehman in the Fed’s primary dealer credit facility. And that that was – in the main – the reason the CLO had been created and successfully closed.
But there’s some confusion. In this article, Bloomberg say Lehman sold the $2.2bn of senior notes in Freedom “in a private placement”, which can’t be true if they’re being used in repos with the Fed by Lehman. As for the equity tranche, it’s unrated, so the NY Fed won’t accept it as collateral.
The WSJ reports that only some of the senior notes may actually have been pledged to the Fed. The small amount was supposed to “test” what the Fed would accept.
Since the test seems to have gone well, can other banks be expected to jump on the CLO bandwagon? JP Morgan is understood to be doing just that – with rumours of senior notes of a recently closed CLO being pledged in the PCDF.
But even if Freedom, and other CLOs, were created with the express intent of pledging notes to get liquid collateral through the PCDF, so what?
And it wasn’t only in the US this was happening. In the UK these are referred to as ‘phantom securities’:
In the depths of the financial crisis, the Old Lady began expanding the bank collateral eligible for use at its various liquidity operations, and starting new ones up. Unsurprisingly, given market conditions at the time, banks flocked to make use of the facilities. In fact, they began creating things specifically for use at the BoE, which the Bank gave the attention-grabbing title of ‘phantom securities.’
Some day, we will eventually we will have to confront reality, and stop this merry-go-round of fiction.

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