Last week, an oft-celebrated, moustachioed superstar of the late great Celtic Tiger club, suggested that since the toxic assets on the balance sheets of Irish banks were so difficult to value, they should simply be "parked" somewhere, with no loss to anyone. This basically means that they should continue to be funded by the Irish taxpayer and that the shareholders of Irish banks should take no loss on them. Given Dermot Desmond's Gibralter-domiciled tax status, the suggestion to "park" the toxic detritus of Ireland's reckless property-development financing was nothing short of offensive towards the average-Joe tax payer in Ireland. Whatever about the ill-advised grandparents of Ireland who invested their 2d and 6p in Irish banking stocks with no real understanding of the business model, sharks like him should definitely pay the heavy price of losing their whole investment in this sorry mess.
Many people are very rightly concerned and suspicious about the €90bn question that faces the chosen ones given the dubious honour of directing operations at Nama. Various percentage discounts have been randomly bandied about, regarding the average price that NAMA should pay for these loans. Many have said they are probably worth only 50% of their original value, while some mischievous suggestions from interested parties such as Goodbody Stockbrokers (a wholly owned subsidiary of AIB) have campaigned an astonishingly optimistic 15-20% range. However, as someone pointed out to me this week, a 33% discount on an 85% original LTV loan, that has already been marked down by 10%, gets us to a 50% devaluation of the asset in question. Quite correct, however, I think the underlying assets are, in many cases, worth even less. An average purchase in the 33% territory, that most commentators are calling for, would completely wipe out the equity capitalisation of all the Irish banks concerned and so, require government investment. However, why keep investing in the equity and give the existing shareholders continuing participation (however decreasing) in any upside that a recovery would bring..?
Also, let's ask ourselves what that main Irish banks are doing themselves to assist in the crisis and, to alieviate the wider problem. AIB are, in fairness biting the bullet and selling €1.5bn of invesetments in non-core assets like its 24% stake in stateside M&T, and its 70.5% stake in Poland's Bank Zachodni WBK. The cash raised will help AIB's Tier 1 ratio increase to 10.5%, when added to the €3.5bn promised by the Irish government. However, while these positive steps are being taken, AIB is still throwing good money after bad at Irish property developers. In mid-March Allied Irish, alongside Bank of Scotland Ireland, pumped another €7m (each) into Liam Carrol's main Irish holding company, Danninger. This is the same company that AIB has, this past weekend, decided to take another impairment charge on its loans. Does extending more credit to a company, that you then consider a worse credit risk only weeks later, seem prudent to you? This type of move smacks of a mischievous attempt to buy time ahead of the NAMA loan transfers. Having a large exposure like Daninger unravel ahead of the loan transfer, would weaken AIB's hand dramatically when it comes time to deciding upon the value of these tosic assets to be transferred to NAMA. Meanwhile, Liam Carrol has taken this €14m and offered his unsecured trade creditors a 70% settlement of their due money. This is almost like robbing Peter to pay Paul. Problem is, Peter is being propped up by the Irish taxpayers. Paul, in this case, is the public pension of every man, woman and child in the Republic of Ireland. Given the standard of reprehensible statesmanship exhibited by Sean Fitzpatrick, when supposedly one of the leading stewards of Irish enterprise, I have very low expectations regarding the motivation of those in charge at Allied Irish Bank when it comes time to 'fess up' and acknowledge the true value of the business model they've been the architects of, and which will be their destructive legacy to the next generation.
Given the choice of properly writing these assets down or funding Dermo's punt, I would take the inevitable nationalisation of these banks that the resulting equity capital erosion would spell. Whether these loans stay on the banks' balance sheets, or not, is actually irrelevant. They will end up as state liabilities either way. Allied Irish Bank stock is worth zero - bottom line. If you still own some, hit the bid, cut your losses, and consider yourself lucky. Whoever you sell it to will get nothing, and deserves even less.
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