Looks Like Irish Banks Are Heading Towards Nationalization

Not too long ago, Ireland was hailed as the European economic miracle. The country even got full Gladwell treatment (his explanation was the "dependency ratio," Irish women were having fewer babies).

Now we learn that the Irish banking is in a world of trouble.

The bloodletting may be far from over for Ireland’s banks as the wheels come off what was once Europe’s fastest-moving economy.

The government said Jan. 16 it would seize control of Anglo Irish Bank Corp. following a scandal that forced the resignations of its chief executive officer and chairman. Three days later, Brian Goggin, CEO of Bank of Ireland Plc, said he will retire a year early following a bailout announced in December that also included Allied Irish Banks Plc. Bank of Ireland fell as much as 33 percent today in Dublin.

“Nobody can stop what’s happening,” said Ken Murray, CEO of Blue Planet Investment Management in Edinburgh. “It’s going to carry on, and governments are going to have to come up with the capital because the market doesn’t have it.”

It looks like the country is heading towards nationalizing its banks. The housing market continues to be a mess. Betweeen 1997 and 2007, home prices in Ireland rose by fourfold. In the end, the Celtic Tiger didn't have much in the way of teeth.

Disclosure: None

Comments

[Alpha Econ:]

Ireland is teetering on the brink of insolvency, while the government appears to be out to lunch. The idea that a state with astronomical (10-12%) deficit and with bond yields at the level of Greece can afford taking on its entire banking system is a delusion. See here: trueeconomics.blogspot... for what is happening in Ireland Inc's credit ratings backyard. And all along, Fitch and S&P continue to grade Ireland as AAA/A-1+, hat a farce!

Jan 22 05:12 AM

[clawmann:]

One Irish bank has been nationalized. One.
Anglo Irish bank.

Principally because of the scandal arising
from the revelations about large friendly loans made to insiders.
This is what caused the Irish government to reverse its policy from recapitaization to nationalization of this bank.

Ill-considered and ill-informed articles and headlines like the ones above
have only served to separate the average shareholder in AIB and BOI from his/her shares, all being purchased by the few who know better.

Jan 22 01:28 PM

[fatwollit:]

clawmann, agreed. Seeking Alpha writer stirring the pot is nothing new.

Jan 22 11:06 PM

[Douglas S:]

Do they honestly pay these people for this uninformed nonsense?
It's bad enough the article was basically stolen from Bloomberg without mention of the REAL authors Dara Doyle and Louisa Nesbitt (although a small link was provided), but more amazingly the copier only bothered to post the information he saw fit to post. What about this part Eddy?

''The government will provide “whatever funds are necessary” to enable Allied Irish and Bank of Ireland finance themselves, he said.
The government’s “firm intention” is to keep Allied Irish and Bank of Ireland in private ownership, Finance Minister Brian Lenihan told lawmakers yesterday.""
If you can find the link hidden above, the real article is a good read.
Thank you Dara and Louisa. Shame on you Eddy for fear mongering! Are you short either of these banks?

Jan 23 09:50 PM

[Fliujniligui:]

I had over 4000 shares in AIB before it slumps from 5 to 2 and now I bought 2000 this week and here is why I have now engaged my next year of wage in this company

1) I have non cyclical job
2)The business quality see below :

Well I think it is worth it, I bought 2000 this week and told myself
that in the worst case, I would lose it but that in the advent it
doesn't happens, I won't lose money and this thing will survive and
thrive and be profitable. This business is very well managed and you
should go on their website and read their presentations for 2006, 2007
and half year 2008 + the interim report of november 2008. There you
can see how they managed the business and the risks. Moreover, AIB
owns 24% of M&T Bank (Symbol MTB) and 71 % of BZWBK. Together, the
shares of AIB in these 2 business is worth around 4 times current AIB
market cap, and those companies are profitable and outstanding in
their respective market. This offers a great margin of safety.
Moreover, Irish government is commited to support AIB and IRE trough
the crisis as they are of systemic importance, and they want to avoid
nationalization.
Personnaly I am convinced AIB won't run in life threathening troubles
and that the nationalization and shareholder dilution won't be on the
table. In the case of IRE, I am cautious and I do not buy that. The
principal factors who give some shielding to AIB are the fact they
showed wisdom by making loans at anaverage of less than 70% loan to
value ratio (Means that the collateral against which the debt is
granted can depreciate by 30% before the bank becomes unhedged by it),
they had the insight to avoid massive losses incurred worldwide
following investments in subprime and complex related products, they
had experience with troubles in 2002 when a rogue trader devastated
Allfirst and risk management is more ingrained in AIB culture since
then, they developped partnership with M&T Bank and BZWBK showing that
they are able to detect and assess value correctly and act upon it.
By the way, M&T partnership was decided in 2002 after extensive study
from AIB when they judged that M&T was managed in the same sound
manner as their core business. This is a good sign since M&T has
topped analysts estimates in Q4 2008 and did major profits. For a
bank in USA right now, doing profits is herculean prowess.
Well I told you all I know about this business.
You probably noticed the massive drop in share price over time and
especially over last weekend. It is because government in Ireland
nationalized Anglo Irish Bank, which has the same acronym AIB but
which is very different. This bank, Anglo, did lend to speculative
residential developpers and had not much risk management policies, as
it was relying on an always expanding housing bubble. The director of
Anglo, A guy named Fitzpatrick if my memory is good, also made loans
to himself for 87 million Euros and hid those loans from financial
authoriy for 8 years and he used this money for investments in Anglo,
speculative stuff and also to treat himself well. Facing the
reputation damage to Ireland and systemic risks Anglo failure would
pose to Ireland, coupled to the fact that depositors ran on Anglo when
they knew about scandals and that Anglo was probably insolvent,
government nationalized it. This triggered speculation and great
fears among shareholders of IRE and AIB, regardless to whatever
difference exists between those 3 banks.
From now on, AIB has done an excellent job. They managed with
transparency, talked about risk management in their reports to
shareholders well before 2008, A sign that they did not start managing
risk just after recession fears came in, they passed every rate cut to
consumers which is a sign that they care about team approach to ease
the crisis and that they are financially healthy (You have difficulty
to pass rate cuts to customers when you are in a harder situation
because market knows about it and you can't find wholesale financing
at a rate good enough to be in the money if you lend at the new lower
rate), They did not engage in speculative lending to catch up Anglo
when it did well and their directors did not hide stuff and make
doubtful loans to themselves or known insolvent parties. All the fear
from Anglo nationalization was overstated by the markets and triggered
a drop from 5$ to 1$ in 2 days.
Now, Ireland government is acting to definitely kill viability doubts
about AIB and IRE by accelerating the recapitalization plans to inject
2 billions euros in each in a non dilutive preference share offering
and it is possible that an additional billion be added by the
government and that one could be in the worse case dilutive. At 2$ per
ADR, even a 80% dilution would not change the fact that it is a good
bargain. Personnaly, I think things will ease and that the
recapitalization will just make it loud and clear that Ireland banking
system is strong. This recapitalization move is more political than
essential, but yet I think it is positive on every aspects, especially
for AIB. This buffer will ensure that AIB is not willing to sell M&T
and BZWBK in order to get more capital, and this will certainly
preserve shareholder value as those assets are highly valuable.
Warren Buffett has a 7% stake in M&T, so I am not alone to think it is
worth something. When things improve, AIB will just have to buy back
the shares in the event it received a 1 billion dilutive injections
and it will have to redeem (call back) the prefered shares and then it
will be free to grow and serve us well, the shareholders.
If you read around, there are even people who question Ireland as a
solvent country. For information, Ireland has a debt representing 29%
of its GDP. Highly regarded Canada has a debt of 50% of its GDP, so
Ireland enters recession in a strong position to weather it. USA has
a debt over 100% of its own GDP and despite this, they will, with
reason, incur more debt to invest in themselves to avoid damage that
would otherwise extend far wider than the simple cost of adding the
debt to avoid that damage. I did not go in Ireland yet but maybe I
will and should. From what I know, as we have a lot of Irish people
in Québec who came in 19 th century because of a starvation in their
country, and from what I read on their news paper, Irish are proud of
their country and what they do. They seem to be a cohesive People who
is able to act and mobilize in order to manage acute and important
problems and this bodes well for the current recession.
Right now the bargain is in AIB, and probably IRE but this one has
less layers of protection and is not really cheaper so I stick to
AIB. If market keeps crashing in a wider basis, there is a
probability that the remaining of Irish businesses will be at very
depressed levels and I watch in parallel IRL, the New Ireland Fund
which trades on NYSE. It may become the next big bargain.

Jan 24 05:25 PM