June 12, 2014

Bank investors will not be our 'saviours'!

Posted in Banks · 44 comments ·
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If you only look at one chart today to understand the story of Bank of Ireland, this is the one here.

Bank of Ireland Share Price vs Irish Lending Growth

It shows the movement in the share price of Bank of Ireland since Wilbur Ross bought his stake and it contrasts this upward movement with the downward trajectory in the amount of money lent into the economy during the same period.

Mr Ross made his tidy profit. That’s what he is paid to do and no one can begrudge this.

The government spin at the time was that his investment was good for Ireland; it wasn’t. It was good for Mr Ross but not for the economy in any material way. It is not Mr Ross’s job to provide financial assistance for the Irish economy. It is his job to make money, which he has done.

But the line spun in 2011 was that Mr Ross’s position would ensure that the biggest and least wrecked bank in the country would be in a position to lend again to the fragile economy. This has not happened. Overall lending to the economy continues to fall rapidly – as you can see from the chart.

Bank of Ireland’s share price has risen, yet lending to the economy has fallen.

And lending by Bank of Ireland has fallen – not by as much as the rest of the banks – but it is not bucking the trend in any significant way. So what is driving Bank of Ireland’s share price upwards?

It has risen because of “hope” value. The hope is that at some stage it will begin to lend rather than hoard money and, therefore, it will become a normal bank again. This will most likely happen at some stage.

Banks want to lend. This is how they make money. However, when a bank’s balance sheet is destroyed by bad debts, the bank has to get more money in than it is lending out, so that its loan to its deposit ratio comes back down to prudent levels. This means taking in more deposits and lending out less money. And this is what has happened here.

Meanwhile, Wilbur Ross – who said only three months ago that he was a “long-term” investor – has bailed out.

He bought his initial 9.1pc stake of BOI in late July 2011, when the share price was 10 cents. Ross was among a group of North American investors who took a 34.9pc stake in BOI following the Government signing up for the EU/IMF bailout. This stake saved the bank from full nationalisation by what was described at the time as a “Houdini-like escape”. The move reduced the State’s equity from 36pc to 15.1pc, with Mr Ross confident at the time that “Ireland will once again become a Celtic Tiger”.

Mr Ross exited Bank of Ireland in two stages. Following a sale of a chunk of shares this March and this move now, Mr Ross is expected to, more or less, treble his profit on his original investment. Now he has off-loaded his remaining 1.8 billion shares and made himself an estimated profit of €560m.

Fellow investor Prem Watsa, who joined Mr Ross in the initial March sale, has stated that he will hold his remaining 5.8pc stake for the long run and that the decision by Wilbur Ross to sell was “unrelated to business”.

Ross announced that one of the other investors who saved the bank in 2011, Fairfax Financial, was “aware of the trade, but did not participate in it”.

Ross, known as “The King of Bankruptcy” in the US, has said that his actions are in no way a reflection on the future prospects of BOI or the Irish recovery, stating both are “right on track”.

Ross has indicated that a desire to diversify his investments prompted the move, saying “with the continued appreciation of our bank holdings, we were getting so concentrated in banking that we had to cut back”.

In fairness, when you look at Mr Ross’ investment portfolio (from gurufocus.com), it shows that as late as March, it had 28pc of the total in banks and, obviously, he doesn’t want to be so exposed to an Irish bank.

He is also selling into a demand for Irish assets, but that demand is materially affected by having such a big beast as Mr Ross having such a big position. Without his presence, will it lead to investors second-guessing the strength or otherwise of Bank of Ireland?

Until the chart shows bank lending rising, not falling, there will be doubt about Bank of Ireland. After all, a bank that doesn’t lend isn’t a bank. Until it does – in a material way – it is little more than a safe deposit box, good for hoarding but not good for lending.

Mr Ross has done well for Mr Ross. Others will now pick up the stock at €0.26 and hope that it goes up from here.

However, the moral of the story is that people the Irish State is trumpeting as our saviours have little interest in staying here.

The “natural owners” of Irish assets are Irish people and if we end up buying at a premium what we sold at a discount, it just reveals how badly we have played our hand.

David McWilliams hosts a debate on the future of Irish property prices in Dalkey on Sunday, June 22. Tickets at www.dalkeybookfestival.org.

 

 

 

 

 

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  1. dorn

    So, in theory the irish government could offload some of its shares in BOI and make – oh let say … 2 billion – and use this towards the 2 billion in savings/cuts due at next budget? I look forward to such an intelligent choice being made by our parliamentary overlords.

    • tim1234

      Yes in theory! I think there’s sort of an agreement with the IMF that half of sale proceeds of stakes in banks will go towards repaying national debt and other half towards capital investment to create jobs (I stand to be corrected). So no money will probably go towards reducing the 2 billion correction which I’m sure you’re also thinking.

  2. Inside Dealings

    Recently more shares have been sold by US Company Executives on the markets than ordinary punters and this is a worrying thought for what is in store to come .The Rally is OVER sooner rather than later .

    Its Time to SELL .

    • atchman

      Agree, might be more some melt-up left in the old dog yet but at these dizzy heights I’m out! It’s been the most unbelievable rally given the economic backdrop. This is investor brains on QE.

  3. Watch the new trend to unfold when Tesco slowly edge themselves from the Food Market to allow Aldi and Lidle consolidate and then they enter the Retail Banking ………and take over Bank of Ireland .

    Knowing the known unknown is better than knowing the unknown unknown ,

    • Shane F

      Actually, Tesco’s are still building new stores in Ireland, I see one going up in Ballincollig, for instance.

  4. Pat Flannery

    Good morning David. Your Wilbur Ross story just underlines the answer I gave to Tony Brogan on your last blog. Here it is again:

    “Tony, my main reason for supporting Ireland in the Euro is based on my understanding of what happen to the Asian Tiger economies during the 1997 Asian Financial Crisis.

    http://en.wikipedia.org/wiki/1997_Asian_financial_crisis.

    If those independent Asian countries had a common currency like the Euro they would not have been ruined by what amounted to a bank run by hot international investment money. To me the lesson is: if George Soros can “short” the Bank of England (which he did and made his first billion) he can manipulate any currency for a quick profit. So can others. Soros has admitted to having shorted several of the Asian countries during (perhaps even causing) the 1997 crisis.

    So there you have it, my position in a nutshell. Ireland cannot afford to go it alone in the present financial world. It would be eaten alive by financial sharks like George Soros (a personal friend of Sir Anthony O’Reilly by the way).”

    Thank you David for exposing the activities of vulture capitalists like Wilbur Ross and Ireland’s vulnerability to predators like him and George Soros. If they can buy and sell our banks for a quick profit can you imagine the games they would play with our independent currency – if we were foolish enough to offer them one. This is the real world.

    • atchman

      You don’t think that vulture capitalists will tear apart the Euro if it begins to falter which is now a grave possibility? How would it be immune to a sudden change in investor sentiment?

      • Pat Flannery

        Nothing is immune to vulture capitalists, not even the Dollar. But there is better safety in numbers. The biggest policy challenges facing modern governments today are how to restrain financial speculation i.e. vulture capitalists, without losing the advantages of open markets and world trade.

        • atchman

          Worked out OK for Iceland.

          • atchman

            What I mean by that, is that being wrong in numbers doesn’t make it alright. A better policy challenge to confront would be to take a closer more realistic look at why speculators view you as prey. But western governments don’t want to that, instead they want to cling to status quo and hope safety in numbers will help – it won’t.

          • Paddy… seems the lesson here is that inflation is a hidden curse and a tax on the productive who are not doing as well as it seems at first glance.

            Also not noted was whether the wage rates were steady or falling. Many’s wages grew smaller through the depression ans are still lower than they were in 2008

    • michaelcoughlan

      Hi Pat,

      I disagree with your analysis. The euro is a currency which is over valued for Ireland and undervalued for Germany. The market will win. It ALWAYS has and ALWAYS will.

      As for the bit about vulture capitalists that includes all of us on the blog. This is because if you buy bitcoins or gold or sterling etc we are all selling the euro to do so which makes speculators of all of us.

    • Here is my just posted response which I copy and paste here as a duplicate.

      Tony Brogan
      June 13, 2014 at 4:40 am
      Thanks for that Pat
      The attached article basically points out that the acian tigers attracted a lot of foreign capital, has an extended boom on credit. Had that foreign investment reverse and voila a bust.
      Pat, this fits the model of “a credit based boom results in an equal sizes bust.
      Then Ireland as part of the EU and EMU has a similar boom induced by credit borrowing and voila a bust.
      What this has to do with a sovereign country having its own currency i still do not see.
      So I stick to my position that what every sovereign county needs is to not give its financial controls to a foreigner.
      Ireland needs its own currency to have a hope of survival.

      I forgot to add the Iceland story and mention it again here as a country had the balls to tell the bankers where to go.It is relative to Ireland within the Euro being bust and taken to the cleaners as against Iceland retaining their independence.

      The Icelandic people voted for this whereas the Irish are yet too chicken shit to contemplate it. It needs the backing of the people to succeed. The people have to demand it for it to happen. Not happening!!!

      Your examples Pat have all taken place in an atmosphere of a credit induced boom going bust. Soros did not perform the deed He knew what would happen and put himself in the position to profit. Say it again “And Ireland was /is a member of the Euro currency too when this disaster struck. The seed of the disaster was planted when cheap credit , unlimited , was made available to the Irish people.They used it wholesale.

  5. Pat Flannery

    atchman: ask any military tactician or any ordinary soldier – straddlers are dead ducks. Loners are always viewed as prey. Perhaps the Icelandic currency was too small a prey for the vultures to bother with.

    • From the outside looking in, it seems what Iceland had was a people with purpose demanding their government look after the welfare of its citizens, and not taking no for an answer. I’d hazard a guess that Iceland would do all it could to stop anyone (including “vulture capitalists “) trying to compromise its financial system for a quick profit again.

    • Adelaide

      What a upside-down argument, ‘straddling ducks’. By extension of that that ‘safety-in-numbers’ logic you would advocate a one-world global currency. But anyway, there already exists a global manipulation-free currency, it’s called Bitcoin.

      “Perhaps the Icelandic currency was too small a prey for the vultures to bother with.” Did not the Icelandics send the vulture capitalists packing in 2010 after its courageous president Ólafur Ragnar Grímsson forced its conniving parliament to hold a referendum to facilitate the will of the people in regard to its odious debts. Were it not for his refusal to counter-sign the craven government’s Icesave Bill then Iceland would have followed suit the craven Irish to its present debacle. Sadly for us we had the drunkard Cowen and the dimwit Lenihan looking out for our interests. I suspect Cowen was pissed the night he signed Ireland over to the debtors prison, I really do, a former colleague who was once outsourced a particular service to his circle witnessed the Taoiseach being a habitual drunkard.

      • He’s a well-known alcoholic Adelaide.

        No secret there.

      • Pat Flannery

        Adelaide, I realize that is very funny ‘straddling ducks’ – what an image. I of course meant to say “stragglers are dead ducks”.

        As for the rest of my argument – no, I would not advocate “a one-world global currency” and I admire the Icelandic people. Too bad the Irish do not have the same backbone, but they don’t and that’s that.

        As for Bitcoin, I am not sure any currency one can invent that would not be eyed by vulture capitalists. That is why you, atchman and Peter Reade are right: it comes down to the qualities of a country’s people as expressed in the leaders they choose.

        On that criterion the Irish are ‘straddling ducks’, straddling (screwing) each other. Too funny.

      • michaelcoughlan

        “But anyway, there already exists a global manipulation-free currency, it’s called Bitcoin”

        Not so. I’ll bet you a fraction of a bit coin I cant get back from bitcoin 24 that however dreamed up bitcoin holds over 51% so they can periodically dump the lot to force down the price and make a killing by buying the whole lot back in the mad panic that ensues at a knock down price.

    • michaelcoughlan

      Hi,

      When you read Confessions of an economic hitman by perkins you will see Iceland was the first country targeted for destruction by financial terrosists.

      The terrorists achieved their goal by convincing the Icelandic government to build a hydro electric power station to supply electricity to an aluminium works on the north of the Island.

      When the hydeo station came on stream the Icelandic government found out rapid quick that the electricity was being produced at an enoroums LOSS and forced the Icelandic people into the arms of the financial terrosits.

      It ain’t rocket science.

  6. I should add that the first criteria of sovereignty is to be rid of the central banking system and revert to money from Treasury.

    The second is to suspend production of money once demand is sated. That volume of money should never increase as if it does it is inflation being induced which robs the frugal. There is a solid case to demonstrate that an economy can and will grow without an increase in the money supply.

    Then the sovereign country moves to repeal legal tender laws so people may use whatever money they wish to engage in trade.

    Then silver coin be introduced as money in the manner previously described by Hugo Salinas Price.

    Then gold and silver bullion should be accumulated by the state as the savings of the people. most countries of the world are doing this as we trade comments.

    Westerners will shortly discover that all the wealth of the people of the North Americas and Europe have been traded away by their respective central banks. The thief is in charge of the bank. Fox in charge of the hen house. There is no gold left in the Fed or Fort Knox. No audit has been allowed and no inspection either.

    All countries need to regain their sovereignty not just Ireland

  7. Rag Doll

    The name Bank of Ireland denotes a sovereign institution .National banks elsewhere including our neighbours England and France have their Central Banks denoted with the name of their country eg Bank of England and Bank of France .A sovereign institution is what it says on the pack meant to be exactly that ‘a sovereign institution’.

    College Green was the original location of the Irish Parliament for the whole of the country and now is in the hands of private investors .

    A country that feels no longer a sovereign state , that has sold the Irish Parliament building and a Sovereign Name ie Bank of Ireland is not worthy to hold a seat in the UN .

    A Sovereign Premium is an advantage held by investor when taking a risk with their money and recent investors in the Bank of Ireland knew that this was an gilt assurance to protect their risks on the international stage within The Markets .They proved to be right .

    The Irish citizens who’s sovereign name was taken from them are no longer protected as we always believed in The Constitution and their ‘inflated rights’ are only figments of imagination .They are now Rag Dolls .

    • tim1234

      Your comment reminds me of Johnny Ronan’s company being called Treasury Holdings which implies that it had some sort of an association with the NTMA. It’s a bit misleading to say the least, that the name of a developers company sounds like the state agency managing our sovereign funds.

  8. Happy Full Moon Day ….and its Friday 13th

    This week formed part of the 7 days before the Full Moon has been extraordinary both at home and world stage ….and all of this is forming the era of the Blood Moons .

    Shatter has gone and that is bad news for us as Irish .Precedence has shown in the few blood moons that arrived since the birth of Christ that punishing a Jew is a bad omen and those that show charity to a Jew as America has done gained economically .

    The recent advance in Iraq is more in context of the real events on world stage and we should expect the Jewish nation to respond appropriately .

  9. Perhaps following the lead of china and other countries would be the saviour of the country.

    http://www.ingoldwetrust.ch/sge-chairman-china-should-become-first-class-international-gold-market

    China is the largest buyer and the largest miner of gold in the world.Guess who has been selling? Westerners.

    • The Irish Constitution has been written for favouring Banks and Treason against The State and for encouraging Manipulation of its citizens at the highest levels.

      Its prose dictates the positives of this favouritism by a systematic exclusion of what really matters for real citizens when living in The State .

      The purpose of the Law Reform Committee is to act as muppets to self serving greed of others and never question the philosophy and purpose of what really matters .

  10. crazy cat

    Perhaps your man, Mr. Ross got out just in time.
    I see the Deutsche Bank are looking for 11.6 billion,

    http://www.themalaymailonline.com/money/article/deutsche-bank-us11.6b-stock-sale-comes-with-probe-warning

    Does this mean that the dominos will start falling again in September or October?

    • StephenKenny

      I suggest that since there is no fixing the US economy, or many of the European economies, the solution will be an attempt at launching an ‘asymmetric’ war against Russia, by all of NATO.

      The US already have advisers in most east european countries, and the NATO foreign ministers are, as well as speaking an eerie unison, as belligerent as I can remember; more so, in fact.

      This, in an attempt to stop the conflict, will lead to a nuclear strike on the UK. The truth is, no one really likes them. Not really. It’s a country that never quite commits to any international relationship, never quite supports anyone else, and they never quite stick to the laws the USA insists everyone else keeps. A land of smiling, backslapping, not quites.

      If a second tier UK city was nuked, other than it’s residents, and their friends and relations, I don’t think anyone would really mind too much. But it would stop attempts by NATO to start ‘spontaneous’ coups in East European countries and Russian regions.

      • StephenKenny

        and if you ask ‘why’, the answer is simple, and based on simple economics:
        The problem that the US, UK, and many other western countries have is that they have a standard of living that they can’t, by quite a wide margin, actually afford.
        Since wealth generation is too hard, and too expensive, what they want to do is to cut their costs. But if they do that, they cut their consumption, so the economies decline.
        The answer is to cut, very significantly, all their import costs. This can be done by strengthening their currencies, which unfortunately damages their exports.

        So the answer is to cut, very significantly, all their import costs AND increase their exports. The only way to do this, within an operating market (given the difficulty of wealth generation – see above ad nauseam), is to both increase and decrease your currency, against others. This clearly isn’t possible.

        So the answer is to cut, very significantly, all their import costs AND increase their exports AND have the benefits of the right side of both currency movements (increase and decrease) without either.

        So the answer is for every supplier country to have the economic disadvantages of the wrong side of both currency movements. No country would do this voluntarily.

        So the answer is that a suitably compliant government must be installed to enable us to ‘arrange’ the markets in this way.

        So the answer is war.

        • StephenKenny

          and finally, what is most depressing of all, is that none of this requires ‘smoke filled rooms’ and scheming global megalomaniacs.
          Since war is the extension of politics (von Clausewitz), this is merely what happens when financial and military industries get into politics.

  11. c_west

    “The “natural owners” of Irish assets are Irish people and if we end up buying at a premium what we sold at a discount, it just reveals how badly we have played our hand.”

    I actually think Bank of Ireland is a good investment – BUT only in the very very long term. Eventually it will start lending out again, super long term the economy will grow again, get over the debt and B of I will be at the heart of that, like AIB.

    The stock is not a bargain though at the moment by any means. If you consider that its book value is something like 25 cents per share, it trades at a slight premium to book. Also that book is made up of big portion of tracker mortgages. Compare that to a bank like JP Morgan that trades for just over book value also. JP Morgan has an annual return on equity of 10%. Other US banks don’t trade at book but they have return on equity of 15 or 16% and they are just a phenomenally profitable businesses. So if you look at it like that Irish people should look abroad before looking to B of I et al for an investment in my opinion.

    In general the difference between the US banks and Irish banks is very telling. US banks are lending again and they will benefit from a growing economy. The stimulus and QE is debatable but an economy that is basically back on its feet, with unemployment at 6 or 7% is surely better than the situation we have, with double the unemployment and no stimulus. The US for all its faults has actually looked after its citizens better in that regard.
    The fines that they are now pursuing JP Morgan for ($13 billion), Citigroup ($4 billion +), Bank of America (in total upwards of $50 billion since 2009) mean that the US government is fining these companies to compensate the state for the damage they caused.

    There is no talk of that here yet and really there should be. We (the taxpayers) have made the sacrifice of saving these guys and running the risk of holding their equity.
    We should get some share of future profits, or there should be a fine to compensate for the raiding of our national pension fund, the cost of diverting funds to them over critical areas like health or people with disabilities, the cost of diverting funds to them vs. stimulus for the economy… and so on.

    There needs to be more debate about that to ensure the stakes we hold in the banks are not just sold at fire sale prices with no real benefit to the taxpayer other than having banks that aren’t bust and allowing them to continue business as normal. I would almost go so far as to say we should retain full ownership of AIB and take its profits for 10 years or so after it returns to full profitability but that is disregarding the need for the funds elsewhere.

    • StephenKenny

      There is a beautiful symmetry to the banks’ current activities, but it’s one that runs a reasonable chance of helping to radically change the political climate for us all.

      Ten years ago, the headlines in the banking world were very similar to today, if you care to cast your minds back. Surging profits, surging property prices, and forecasts of almost endless growth in this new financial led economy. They were heady days. It was just a year or so later that someone wrote a book called ‘The Pope’s Children’ that gave some dire warnings of the goings on in little Ireland. But the world’s most elite bankers poured scorn over such doom mongers, assuring us that the worst we could expect was a ‘soft landing’. Remember?

      Then all the unpleasantness of the endless, tiresome, frauds, started to appear. The banks, selling ‘NINJA’ mortgages to people who couldn’t read or write, the world’s leading credit agencies being ‘persuaded’ by the banks to grade these ‘sub-prime’ mortgages with a risk rating as low as government debt! Then the banks had persuaded the major funds, mainly pension funds, had believed them, and bought them by the boatful! Bonuses and commissions all round! Tens and hundreds of billions. Wealth not seen since the ‘Gilded Age’, but all based on fraud.

      They were amazing days. The daily news just brought stories of more and more unbelievable fraud and dodgy goings on.

      Then the bailouts, over 15 types, of them, with quite a few still going on. Do you remember when $700bn was a lot of money? Enough to make everyone stop in their tracks? It’d hardly buy a decent suit on Wall Street these days, let alone get everyone to sit up and look.

      So now some fines, not really very big compared the numbers floating around these days. But no one has even been cautioned by a regulator let alone the anti-fraud police, no one has lost their jobs, no one has even taken a pay cut. But the banks have been fined.

      If it’s not the staff, then it must be the investors who are bearing the burden of these fines. And of course thats where the beautiful symmetry comes in:
      The major shareholders are the big funds, and the big funds are the pension funds, future pensioners, in fact.

      So the pensioners got turned over by all the original frauds around securitised sub prime loans and dodgy credit agencies, and five years later it’s the pensioners who are paying the fines for the original frauds around securitised sub prime loans and dodgy credit agencies.

      Eventually, people are going to vote for politicians who put a stop to all this, and I fear that many will be caught as political and economic ‘collateral damage’.

  12. Bamboo

    Question for you:
    If they fine the banks then who is going to pay the fine?

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