Elderfield contradicts Lenihan on senior bondholders

Dreaded_Estate

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Are there any rational posters who think we could and should burn the senior bondholders?

If there are, please tell me how and why, in full and glorious detail, with no wishful thinking.

All the usual suspects who know full well, by the terms of the question, they are automatically excluded from replying, please respect those terms.
I think we could have burnt bondholders if we had, as Patrick Honohan in his report suggested, structured the guarantee differently.

Unfortunately because of previous mistakes the level of money that could be saved now makes it less worthwhile. Not completely worthless but definitely less worthwhile.

Page 20
Nevertheless, the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State‘s potential share of the losses.
PH clearly felt that if the guarantee had not been so extensive then sharing losses with senior bondholders would be/is an option.

So we can still share losses with the remaining un-guaranteed senior bondholders but the benefit of doing so is reduced by having repaying most over the guaranteed period.
 


MPB

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I think we could have burnt bondholders if we had, as Patrick Honohan in his report suggested, structured the guarantee differently.

Unfortunately because of previous mistakes the level of money that could be saved now makes it less worthwhile. Not completely worthless but definitely less worthwhile.

Page 20


PH clearly felt that if the guarantee had not been so extensive then sharing losses with senior bondholders would be/is an option.

So we can still share losses with the remaining un-guaranteed senior bondholders but the benefit of doing so is reduced by having repaying most over the guaranteed period.
Peter Matthews outlined a very credible plan a couple of weeks ago for the whole of the Banking system and it involved a sharing of the burden between State and Bondholders. The bondhlders would get equity in the Banks for debt writedown.


But I think Peter was mixing Ireland up with a country that had a proper Govt.
 

GDPR

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I think we could have burnt bondholders if we had, as Patrick Honohan in his report suggested, structured the guarantee differently.

Unfortunately because of previous mistakes the level of money that could be saved now makes it less worthwhile. Not completely worthless but definitely less worthwhile.

Page 20


PH clearly felt that if the guarantee had not been so extensive then sharing losses with senior bondholders would be/is an option.

So we can still share losses with the remaining un-guaranteed senior bondholders but the benefit of doing so is reduced by having repaying most over the guaranteed period.
Honohan was talking about long term sub bonds, not senior bonds, was he not?


I have never heard him suggest a default on senior bonds. is it even possible on your own terms? I don't think so, by agreement only, would seem to be the only way.
 

He3

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It is as if the idea of approaching the senior bondholders never occurred to the DoF in 2008 or any time since, until Elderfield raised it.

But then two years is a mere blink of an eye in politics here:

Tánaiste Mary Coughlan has said the Department of Enterprise has not yet decided whether or not the so-called 'leave and return' scheme introduced at Aer Lingus two years ago qualifies as redundancy

Whoever said a week is a long time in politics missed some Irish data.
 
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Dreaded_Estate

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Honohan was talking about long term sub bonds, not senior bonds, was he not?


I have never heard him suggest a default on senior bonds. is it even possible on your own terms? I don't think so, by agreement only, would seem to be the only way.
No he was taking about senior bonds. Another quote from his report.

Page 134

The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options
Not sure why it would have to be by agreement. The bondholders invested in a bank that is now hopelessly insolvent. The only reason they are getting 100% of their money back is because the Irish taxpayer is being made to be very generous with their money at the behest of the government.
 

Gadfly

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"Another quote from his report.

Page 134

Quote:
The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options "

That's a damning quote from the Governor's report.

It was not necessary.

Putting it less diplomatically, the government erred.

The error costs the exchequer billions.

Any ammo on that, tonic?
 

MPB

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Honohan was talking about long term sub bonds, not senior bonds, was he not?


I have never heard him suggest a default on senior bonds. is it even possible on your own terms? I don't think so, by agreement only, would seem to be the only way.
Still mixing up bankrupt Private Banks and the Sovereign, I see.
 

GDPR

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No he was taking about senior bonds.

Not sure why it would have to be by agreement. The bondholders invested in a bank that is now hopelessly insolvent. The only reason they are getting 100% of their money back is because the Irish taxpayer is being made to be very generous with their money at the behest of the government.
No, they reason the senior bondholders will get 100% of their money back is twofold, 1. We need to continue to borrow funds on the same market these lads came from and 2. If the depositors are to be fully protected we must either reach a mutually acceptable agreement with the bondholders to pay them off now or pay them in full later.

I would still doubt Honohan was talking about defaulting on senior debt, as far as I can see no one else of any credibility is suggesting that.
 

He3

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...

I would still doubt Honohan was talking about defaulting on senior debt, as far as I can see no one else of any credibility is suggesting that.

Classic tonicism when faced with Honohan's own words by posters :)
 

Gadfly

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I would still doubt Honohan was talking about defaulting on senior debt, as far as I can see no one else of any credibility is suggesting that.
I rather suspect that Honohan was talking about the exchequer accepting liability for losses which would otherwise have fallen on private investors, when it was not necessary to do so.

Otherwise known as the nationalisation of losses.
 

Dreaded_Estate

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No, they reason the senior bondholders will get 100% of their money back is twofold, 1. We need to continue to borrow funds on the same market these lads came from and 2. If the depositors are to be fully protected we must either reach a mutually acceptable agreement with the bondholders to pay them off now or pay them in full later.

I would still doubt Honohan was talking about defaulting on senior debt, as far as I can see no one else of any credibility is suggesting that.

The corporate market and sovereign debt market are not the same tonic. I know first hand plenty of sovereign bond investors who won't touch Irish sovereign debt precisely because the debts wracked up on behalf of the banks are so significant. They have told me that if the losses to the state were reduced, i.e. shared with corporate bondholders they would look at Irish debt again.

PH clearly stated that the guarantee of senior bonds complicated loss allocation and increased the cost to the taxpayers. The only way to reduce the cost to the taxpayer would have been to impose losses on senior bondholders so clearly PH though this was/is an option.
 

Radix

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Well whoever they are:

  • Have enjoyed gambling and winning on Anglo in the years running up to the crash.
  • Have been guaranteed any losses subsequent to the crash
  • May have their entire ante refunded by the taxpayer with knobs on
  • Can re-enter the bond market or property market at the bottom with their full ante assured - multiplying the potential for personal wealth growth.
Bastards.
A golden circle?

No, not "bastards"; heroes!

Be careful not to bite the hands that feed ye there!

"Oft hath a man cut a rod, with which to beat himself."
 

GDPR

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PH clearly stated that the guarantee of senior bonds complicated loss allocation and increased the cost to the taxpayers. The only way to reduce the cost to the taxpayer would have been to impose losses on senior bondholders so clearly PH though this was/is an option.
No, he most definetely did not.

I've had another look at the report and nowhere does he say senior bonds should not have been covered. His issue with "long term bonds" seems to be that as they were locked in beyond the term of the guarantee anyway, they should not have been included. It is the "term" that is his issue, not the type of bond.


From the report
"Apart from exclusion of shareholder funds, the question arose as to
whether or not to include subordinated debt. Given that the whole point of subordinated debt is to be a form of risk-absorbing capital, and as such is sold as being explicitly more risky than senior bonds, it would have been reasonable to argue that subordinated debt holders should not be exempt from possible losses"

The clear implication there is that senior bonds SHOULD be treated differently.
 

GDPR

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Classic tonicism when faced with Honohan's own words by posters :)
Try not to fall over yourself in the rush to agree with your own opinion, it's unseemly and in the circumstances, faintly ridiculous.
 

LetsGoToWork

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Has anyone considered the possibility that substantial bond holders of Anglo may have been the domestic banks - and that to allow Anglo to under was to allow all Irish banks to go under?
 

Dreaded_Estate

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No, he most definetely did not.

I've had another look at the report and nowhere does he say senior bonds should not have been covered. His issue with "long term bonds" seems to be that as they were locked in beyond the term of the guarantee anyway, they should not have been included. It is the "term" that is his issue, not the type of bond.


From the report
"Apart from exclusion of shareholder funds, the question arose as to
whether or not to include subordinated debt. Given that the whole point of subordinated debt is to be a form of risk-absorbing capital, and as such is sold as being explicitly more risky than senior bonds, it would have been reasonable to argue that subordinated debt holders should not be exempt from possible losses"

The clear implication there is that senior bonds SHOULD be treated differently.
He clearly states it tonic.

Nevertheless, the extent of the cover provided (including to outstanding long-term bonds) can – even without the benefit of hindsight – be criticised inasmuch as it complicated and narrowed the eventual resolution options for the failing institutions and increased the State‘s potential share of the losses.
 

Gadfly

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Has anyone considered the possibility that substantial bond holders of Anglo may have been the domestic banks - and that to allow Anglo to under was to allow all Irish banks to go under?
The two main banks did not argue for including Anglo in the rescue. So this seems very unlikely.

The government chose to do it differently for other, still obscure motives.
 

Dreaded_Estate

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Wasn't this another argument you were using for guaranteeing existing senior bonds tonic?

Patrick Honohan" said:
Arguments voiced in favour of this decision, namely, that many holders of these instruments were also holders of Irish bonds and that a guarantee in respect of them would help banks raise new bonds are open to question: after all, extending a government guarantee to non-Government bonds has the effect of stressing the sovereign to the disadvantage of existing holders of Government bonds; besides, new bonds could have been guaranteed separately.
 

MPB

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Wasn't this another argument you were using for guaranteeing existing senior bonds tonic?
Nice of Professor Honohan to explain exactly why the Market in Sovereign Bonds have turned against us. They do not like to have their investments put at risk by the Govt of the country in which they placed their faith.

Guaranteeing the Bonds in toxic Private Banks does exactly this.
 


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