Stiffing the Anglo Bondholders — A Short Explanation

How to get the taxpayer off the hook

The Financial Times urged the government to force a debt-for-equity swap on the banks.  At first, I didn’t understand what that meant, but have a little patience and I’ll tell you what I learned.

In a straight-talking editorial that seems to have shocked our leaders, the FT suggested as follows:

It is time to staunch the bleeding. As Irish state guarantees near their expiry date, some banks will not be able to refinance their balances. The government should prepare insolvent banks for forced debt-for-equity swaps, which would instantly recapitalise the banks in question and cap the government’s exposure. This cannot be done frivolously; European institutions are exposed and EU partners must be consulted. But someone must put an end to the practice of handing banks blank cheques. Some Irish pluckiness would benefit us all.

No. I didn’t understand it either.  How could the banks be instantly recapitalised while at the same time limiting the exposure of the taxpayer?  Was this magic?

As it turns out, there’s no magic in it.  The Financial Times is simply suggesting that the government should force the bondholders to accept the reality that their investment failed, as they would have to do if they had invested in any other kind of business.

The letter would go like this.

Dear Bondholder

We were sorry to hear that your investment went belly-up, but that’s going to happen when you take a risk.  After all, you were hoping to get a big pay-off if the gamble worked out.

Unfortunately, your gamble didn’t work out, but not to worry.

You’re now the proud owner of a bank.


Best of luck for the future,

The Government.

Simple really.



Brian Lucey sets out the argument clearly HERE

44 thoughts on “Stiffing the Anglo Bondholders — A Short Explanation

  1. By jesus Bock I think I get it.. it seems all those talk of haircuts is the same thing too. And there was me thinking they were talking about going to a barber.
    What I don’t get though is.. if the bank ain’t worth a sack of potatoes how is it considered an equity swap.
    Is it that the bank is more equitable (less debt = more equity) because of the debt reduction/haircuts and the bondholders lose out because the debt that is owed to them is written off.
    It is kind of like magic really.. Hey presto.. less debt, more equity. Alakazam. Now you see it, now you don’t. :)

  2. Excellent letter, concise, send it !
    If Lenihan revealed the real figures as opposed to the drip fed ones, If anyone knew who the bondholders were, if anyone just knew the truth.
    Have to hand it to FF they could teach even the Israelis a thing or two about spin.
    Yesterday, The Greens ” Anglo has to be wound up ”
    Today The Greens ” We have try to wind up Anglo in less than 10 years ”
    The only thing thats being wound up is Ireland.

  3. That makes sense Bock.
    Now that should work for the ordinary citizen too. You can’t repay your mortgage.. I’ll tell you what Mr banker you can have a share in my house.

  4. The problem with that bit is that you end up with no house. This is a good thing with a screwed-up bank, but not with the roof over your head.

  5. Lest I forget to get good and angry before I sleep, The new board of Anglo had the offices completlely redecorated, So it looks plush enough to entertain the bondholders, Tied into a 35 yr lease, looks like they’re going nowhere anytime soon.
    Hunker down its a long ride.

  6. Well, a share in the house for what it’ll be worth some time in the future, depending on the percentage of loan to equity you have. I mean it makes sense and is fair. For instance your loan to value ratio is 50%,why does the bank get the 100% of your house if you can’t make the payments. They can have a percentage when it’s sold, if it’s sold. They can be a shareholder.
    I’d like to see these arrangements for ordinary, struggling people out there. Billions pumped into black holes for the few wealthy.

    Norma, 35 years, plush.. not a problem. Sur it’s on us. They know we’re good for it. Jesus I’m sounding like another commenter. Oh we the little people. The munchkins in fact.

  7. FME your idea would result in “moral jeopardy” that is if the Banks let people off paying the full mortgage with ever increasing interest, the people would just spend the money on other things such as food or clothes and that would never do.
    As for the FT’s idea of “debt for equity” swap , as they point out themselves this would require EU agreement. The bondholders are ,most likely, large European banks and other institutions and as our banks are zombie and worthless, then permission isn’t going to be forthcoming. Would anyone here care to buy an Irish Bank? As our cretin Government are paying 6% on the money they are borrowing to pay off the debts of the zombie banks to the same people. Where is the incentive to change for the bondholders? No FME we are not munchkins , they had a roof over their head and food on the table. Soon us little people shall have neither.

  8. Great idea, but there’s always a but….
    Even though the bond holders in Anglo remain anonymous the major bond holders in other banks are normally pension funds. So if this is the case with Anglo and the bond holders accept the loss of 30 billion that’s 30 billion that’s going to be taken out of somebody’s pension fund, maybe yours or mine. D’ye fancy surviving the rest of you life on fuck all ? You can bet it won’t be Seanie’s pension !

  9. Anglo is not a Bank/financial institution in real banking terms. It was set up first and foremost by Greedy people for greedy people. Yes some of these bond holders will have direct links with financial institutions in Europe, but most of these are probably laughing already at the lengths the Irish Government is going to protect the rewards of their gambling by bringing our Republic to its knees. These institutions wont hurt that much after we close this Bank. On the other hand, however its the “Friends of Fianna Fail” bond holders who are holding the country to ransom, fuck em I say, either let them fall now and avoid a revolution, or they can wait for the revolution and take their chances.

  10. @Wrinkley Joe

    Yes, many pension funds invested in banks, a disastrous policy for the managers extracted and continue to extract swinging fees. This was another insider job, and the worthlessness of private pensions is one the consequences of building up a worthless debt and equity mountain.

    I taking it as a working assumption that all the pension schemes to which I have been forced to contribute will be worth exactly zilch by the time I retire. Which, if the neolib austerity sadists have anything to do with it, will be about a day before I shuffle off this mortal coil.

    We just have to accept the fact that supporting the elderly is a cost the we have to pay as a society out of progressive general taxation, and should not subject to the uncertainties of the casino that is the bond and equity market. It’s a matter of common decency. Taxing corporations at the rate that the rest of Europe does and closing down the Double Irish loophole would contribute quite a bit. As would really taxing the high-earners and closing down their tax evasion schemes.

    A much better idea for universal pension provision is to have a self-managed scheme for investment in infrastructure – for instance renewable energy or public transport, for which they can be guaranteed an income in the future.

  11. @Pope Epopt.

    Wonderful idea – with two chances of being implemented !.
    Meanwhile, what the fuck will people of 50 + do when their pension goes belly up next year.?
    Of course our politicians and (un)civil service will not be affected as their pension is guaranteed and will come out of state funds so why the fuck should they care about Joe Soap ? or even Wrinkley Joe.

  12. @Wrinkley Joe

    “what the fuck will people of 50 + do when their pension goes belly up next year.?”

    Suffer and depend on their family, friends etc. like so many other vulnerable people – that’s what. That’s why we need to change the rules of the game rather than put FG/Lab in to administer the same old same old.

  13. Pope and WJ. Firstly we must not forget Cowan is an unelected Leader, Appointed but not a result of the electorate. He is drowning in the fear and knowledge of what he has known, most especially since his evening with ex Anglo chiefs on Apr 24th ’08.
    Secondly, The primary support of Anglo is being sold as ” rebuilding confidence for the depositors ” How in the name of all rationality can ” confidence ” be rebuilt at the cost to the taxpayer with absolutly no guarantee of solvency.
    Mick Anysley inspires no confidence as he admitted recently when asked if Anglo’s exposure would remain under 30 billion mark, He responded with a ” crystal ball ” comment.

    ” Common decency ” is a trait any Country would try to exhibit, Here though it seems to be viewed as a weakness. For the Government to invest in Services for its people would incur the wrath of ” The Golden Circle ” who will avail of the excellent Health services in UK and France, Why would they care what happens to you Pope or you WJ, They are sorted.
    Lets look to the UK…..again ! Where the Bank bail out will produce a return for the tax payer, how did that happen ? because the UK government negotiated an intelligent tough deal with its Banks, because they didnt cosy up to the bastards only interested in feathering of nests……..Independence, my arse !
    My only question now is how can the electorate force the wind up of Anglo and disengage theirselves from the bondholders.
    Whether its Stockholm syndrome or Las Vegas syndrome is a moot point now, It just has to go.

  14. Excellent letter Bock. You could enhance it with the salutations of Myles Na gCopaleen in his final resignation letter from the civil service.

    A Cara

    Fuck off

    Mise Le Meas

  15. what are bonds?
    Are they the same as deposits or are the same as shares?
    when you put money on deposit you can expect to get it back.
    but if you buy shares or put money into any of the banks investment products you are told you could end up with less than you put in.
    so are these bonds just investments in the bank, bought by people who knew that they could be at a loss.
    the shareholders have already taken the hit, so why are we covering the bondholders for what they put in when it is now worth a tiny amount of this sum?
    Or am I missing something?

  16. @De Fan. Bonds are loans given to banks by other banks and big boys. The banks can’t pay them back. So the Government says-thats ok!. Paddy Ireland here will bail you out. No problem. No need for pay cuts or anything like that. Our country depends on your expertise. Continue with your lifestyle boys. Paddy Ireland will tighten his fucking belt until he can no longer sit on the toilet.
    And those friends of ours that owe you money. Mustn’t go too hard on them. In fact to save you some trouble, we will take all their loans and put them into a FAIRY BANK called NAMA. The Fairies as you know are sworn to secrecy, so no one will ever breathe a word. We’ll send the bill to Paddy Ireland.

    Meanwhile you could ease off a bit on Paddy until the whole thing is set up. Then you can fillet the bastard. He was getting far too big for his boots anyway. For Christ’s sake he was even complaining about our pay. The cheek of the him. The Brits would never have taken that kind of insolence.

  17. thank you Tumbrel Cart,
    Now could these big boys be home grown, like the people who are now having their loans moved into NAMA.
    After all who else has Anglo have dealt with in the last 20 years,could becoming bond holders have been just another tax scam.

  18. This bond market is very big 100’s of billions is that right.
    so it goes up and down all day every day with hundreds if not thousands of dealers.
    just how much effect would anglo have, would it last more than a day?

  19. We’ll be invited to help out the banks even more now with Cash Machine charges to be introduced. The Minister for Scoffing, Ahern, was just on TV advocating a charge for this facility, just because we are not as cashless society as our European neighbours! He introduced this remark by way of countering so called Tiger Kidnappings. Happy to help out!

  20. “Not a cashless society”. I think some people would beg to differ. There’s no fucking cash Dermot, that’s only in your own pocket you’re feeling the wads.

    Is there an unspoken policy that I’m not aware of, to rape us at every and any available opportunity . Charges to take out your own fricken money. Jesus. Grant me patience. I think he said those comments in reference to a bank robbery. Got a load of it, the bank robbers were looking for cash in a bank.. they weren’t looking for an IOU or some cheques that they could deposit later.. therefore there is too much cash going around in society according to the genius that is Dermot Ahern. He’s taking a leaf out of the book of the thieves it seems. Minister for Justice my arse. Reminds me of the Ministries of Oceania in Orwells 1984.. Minister for Injustice more like. All they are missing is a Minister for Truth.

  21. @Wrinkly Joe. Yes pension funds are bond holders. However the pension funds of the Irish banks generally went for straight bets by buying shares in each other. Anglo shares were a particular favourite. A few years ago BIAM-Bank of Ireland Asset Management had two great bets. Anglo Irish and Northern Rock. Of course that is why pension funds are down billions. The Irish banks used peoples pension funds as a type of share support scheme for each other and as a vehicle to keep themselves in office through votes at AGMs. The Pensions Board finally woke up to this recklessness about a year after the money had been lost. They then politely asked the banks to be a little more careful. I heard no calls from the Pensions Board for the removal of the directors.
    Don’t worry about the pension funds. Its too late. The Irish Banks have fucked those already.

  22. At last! Debt-for-equity swaps are a perfectly normal occurrence in dealing with financial companies. SImply put, if a company has $1B of debt (bonds) and $1B of equity (shares) but cannot pay the interest, then you get a restructuring (or a liquidation). If the assets are worth less than $2B, the equity takes a hit. If the assets are worth less than $1B, then the equity is wiped out and the debt is partially or totally converted to new equity. Happens all the time in Chapter 11 bankruptcies in the US.
    I can see the logic in protecting depositors. There is no reason to protect bondholders.
    There is no requirement to get permission from the EU. Bondholders must agree to the final form of the reorganization (how the remaining value is split) but they don’t have the right to demand a bailout. As Bock said, they took risk in search of reward. They get to keep the consequences either way.
    As for the fact that pension funds may own the bonds, that is undoubtedly true. If there is to be a bailout of pension funds, it should be done directly. The Irish government should only be bailing out Irish pension funds (if any at all) and not foreign funds, or the many other private holders of bank bonds.
    We can’t afford this bailout financially. We also can’t afford the precedent it sets – that there is no need to take responsibility for investment decisions that you take. If bondholders had looked a bit harder, there might never have been a property bubble to begin with.
    Bock – I know this post is over-long and will annoy you for that. Apologies in advance, and congratulations on your excellent blog

  23. After watching Alan Dukes last night on Primetime, it was suggested to me that there has to be some sympathy for Mr Tallaght Accord as he is just trying to do a very difficult job. “After all, somebody has to do it.” Wasn’t that what the Nazis in the camps said. “I’m just doing my job.” For fuck sake! Saying ‘somebody has to do it’ doesn’t justify the crime. Everyone knows what the right thing to do here is, but those with their finger on the solution button are also those that stand to lose huge chunks of money.


  24. People, including journalists, seem to be confused about Alan Dukes’s role. He’s the chairman of the bank, and it’s his job to act in the best interests of the company. He does not represent the taxpayer.

  25. JtP. I would ignore that prediction Cowan is making because he just does’nt know.
    Alan Dukes stated on Prime Time that he does’nt know what the next NAMA haircut will be, already it has gone from 68% to 48 % and the last one was 38% Anglo are hoping it will hold at 38%.
    Dukes went on to say when avoiding answering if Anglo debt will stay under 35 bil, That it dependes hugely on rise in property prices and the end of recession ! Is that not called catch 22.
    They conned everyone at the start with statements of 70% across the board.
    Dukes says the amount is up to the Policy makers.
    Its truly obvious that they don’t know what they are doing.
    Whats fascinating to me is that Anglo is state owned and NAMA is a state body, Could that whole process not be more efficient then ?
    Is NAMA just a newer version of the HSE ? Where it takes the safety officer and three technicians to change a lightbulb.

  26. @Spike. Very good post. Particularly you point on pensions funds.
    What does one make of Trichet’s remark on Anglo yesterday.
    “If I’m not mistaken it is a bank which is owned by the Government . . . so it’s a responsibility of the Government of Ireland and of the Irish authorities in general to take the appropriate decisions,” Mr Trichet told reporters. “I would say that it is the responsibility of the Irish Government and of the Irish authorities in general to deal with their banks. That is a responsibility that lies very much in Dublin.”

    How do you interpret this remark?

    My first reaction was ‘fuck you Trichet’. This bank was dumped on us from the bowels of the banking system. Our goverment, who thought the sun shone out of that particular area of the banking system was too fucking stupid to get out the way. Now we are in the shit.
    However on re-reading is he saying we should “deal with the banks”. There is a clear hint there that the banks are a seperate entity from the State, which they are. Therefore defaulting on bank bonds is not a State default. Is this an unclear signal from Trichet to fuck the bank bond holders-all of them? I think it might be.
    However he destroys his argument with the final remark.
    “That is a responsibility that lies very much in Dublin”. Mr Trichet, we have the most irresponsible people in the world in Dublin. We call them Fianna Fail. That is why we are where we are.

  27. The government just gave it. Bondholders are like all sharks. They eat whatever food comes their way and some that doen’t come their way if they can grab it.

    On the night of Sept 29th 2008 the government panicked and guaranteed every loan, every bond, every bill in all the Irish banks. The total came to about€450 billion but they didn’t really know what it was at the time. They still don’t. There was never a hope in hell that Ireland could guarantee that kind of money. The US went apoplectic over just twice that amount.
    The guarantee was for two years and runs out in a few weeks at the end of September.

    The government now has a choice. Don’t renew the bank guarantees which will save the country billions or continue to pay the bondholders at the expense of completely bankrupting the country. That means drastic cuts in services and massive increases in taxation.
    Faced with the choice of whose side are you on, this government is saying they are 100% on the side of bondholders and international financiers regardless of the consequences to Paddy Ireland.

    Jack Benny, the old comedian, who never liked parting with money had an old joke.
    He was being held up by a gunman who shouted-
    ‘Your money or your life’
    He was slow to answer so the gunman shouted louder.
    ‘Your money or your life’
    “Wait a minute, wait a minute” said Jack
    “I’m thinking about it”

    The Irish government should at least think about what its doing, like Jack Benny.

  28. @Tumbrel Cart, I agree with your reading of Trichet. The Irish government is the regulator of the Irish Banks, and has taken over Anglo, so the Irish government has to decide whatever next steps are to be taken. That DOES NOT mean that the government is obliged to bail out private investors in those entiities (unless the government has already foolishly legally obliged itself to do so). I agree with your comment – the guarantee was a needless government giveaway. Only domestic deposits should have been guaranteed.

    The losses will be huge – no question. The only question is who pays – there is no magic solution that makes the bill go away. Putting the burden on taxpayers will crush growth for years to come. Bondholders explicitly signed up for this risk, and they should bear it.
    I don’t blame the bondholders. It’s their job to seek as much of a free lunch as they can get, using scare tactics, cozying up to politicians or whatever other means come to hand. It’s our government’s job to put our interests first and have enough spine to refuse to pay for others mistakes when we are not legally obliged to. Banks and institutional investors aren’t slow to default on the debt of underwater investments (Google “Stuyvesant Town default”). Basic finance – you don’t hand out money unless you get real value in return, and the decision on whether to bail out bondholders in our banks should have been done on the same basis.

    As for the consequences to our reputation? The State was not a guarantor of the original bonds, so there’s no default by the State. Will Ireland become a pariah in the bond market? Maybe for a month or two, but when the dust settles the only long term effect will be that bonds will be priced on the underlying risk again. WIthout the overhang of 3xGDP in loan guarantees the Irish state will look like a far better risk, and the economy might start to grow again.

    I also believe that it is very important to let the fund managers who bought these crap bonds suffer some pain. If Irish pension funds need a bailout as a result, the government can bail out those that it is responsible for (and only those!). Shine some light on the highly paid fund managers who didn’t do their job. I work in the industry and, along with others, looked at the Irish banks in 2005/6, and refused to touch them. The potential issues were not hard to spot if you did any real work. Those managers who were asleep on the job should be forced to deal with their incompetence, and fired.

    I agree wholeheartedly with Bock that the ultimate responsibility for changing all of this comes back to the voter. We’ve been abused by our politicians, and yet we re-elect the same shower of crooks and incompetents. Punish their mistakes the only way they understand, by taking their jobs away. Vote for independents, vote for policies and not parties, or deal with more corruption from the same shower we have. Ultimately you get the politicians and the government that you deserve.

  29. Davitt wanted to eradicate Landlordism, a system that favoured a few, and nationalise the land, to everybody’s benefit. FF nationalises a useless entity that benefits a few, to everybody’s cost. Sadly, a lot of us will not be around or too shagged from packing shelves in Dunnes at the age of 85 to care when the truth about Anglo/FF comes out. @ Spike : Agree with everything you say except “Ultimately you get the politicians and the government that you deserve”. Have tried voting Green, Socialist, Labour over the years and have come to the conclusion that Bukowski got it right with: “The difference between a democracy and a dictatorship is that in a democracy you vote first and take orders later; in a dictatorship you don’t have to waste your time voting.”

  30. Hi all. Has anybody copped on to the fact that there might be a link between the bailed-out Anglo bondholders and the ‘consultants’ advising the idiots in the Dail ( namely Merrill Lynch and Rothschilds)? In the case of the Latter, I have a feeling most of the bail-out cash went to them or their subsidiaries

  31. It wouldn’t surprise me in the slightest. The stupidity and incompetence of Lenihan and Biffo knows no limits.

  32. Brian Lenihan said it was unthinkable to stiff the senior debt holders, without explaining why. General Motors did it, almost every US airline has done it at some point or other, and they are all still in business. Unlike in politics, investors don’t hold grudges and fight yesterday’s battles. They look forwards, to future returns. if ireland had the balls to be honest about this crisis, tackle it openly and responsibly, do the right thing (ditch all the bond holders in the black hole), the country would get credit for being able to manage a crisis. This would only encourage new investors, who don’t give a shit if the last guy was stupid enough to get stiffed. The dithering and insecurity about what markets might think actually scares off investors. Brian Lenihan needs to grow a pair and put the country before a small group of mostly foreign investors.

    Do you seriously think some hedge fund manager in NY who took a flier on Anglo three years ago is sitting there thinking that he has an absolute right to get all his money back? He is laughing his ass off that Brian Lenihan is falling for his threats and can’t quite believe that nobody has woken up to reality yet. If he gets out in one piece, he will shit himself laughing at the stupidity of the Irish. He’s busy shorting the shit out of every Irish asset he can get his greasy little hands on as we speak. Cut the fucker off at the knees, I say.

  33. Take a look at Guido fawkes archives….type in Anglo. He has the a list with a good portion of the Bond holders on it. one might also have a quick look at the Mayo group and see if there is a connection to Mr Drumm.

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