Dear Ireland (& AIB), Haven't We All Learned The Problem Is Insolvency, Not Liquidity? The Deeper You Look The More You Find

Reggie Middleton's picture

As was to be expected, the defense of Allied Irish Banks has begun. Let's delve deeper into this bank capital/liquidity thing, shall we? I caution thee, though. Often, the deeper you look, the more you wil find.

In response to BoomBustBlogger Andy C20's comment on my article "Are You About To Get Cyprus'd in Ireland? When A Single Word's Worth Billions Of Euros...", as written below:

Reggie,
Perhaps I am missing something. 
I fail to see the charge discrepancy. Firstly we do not have the definition of Eligible Securities as governed by the Floating Charge so it is fair to say these Eligible Securities could be classified as certain segregated securities i.e. they are “certain” segregated securities because they relate only to Eligible Securities and do not include Non-Eligible Securities. Furthermore, while assets may be classed as Eligible Securities it does not mean they have actually been put into use as security.
I really do not understand your reasoning here. Why are you providing links to charge documents relating to AIB's participation in a payment system and then discussing the ins and outs of its repo schemes? They would be two completely separate items.
Perhaps you have other documents to hand but there is nothing posted above from which any conclusion could be made.

Here's how I see things. The following definition of "Eligible Securities" is taken directly from Allied Irish Banks, p.l.c. charge document:

"Eligible Securities" means, at any time, securities of such a class or description as may from time to time be designated by the European Central Bank as eligible for sale and/or purchase, as the case may be, by the Bank under its standard form for the time being of Master Repurchase Agreement, which specification may be made by reference to particular classes of repurchase transactions, and which are included in the Eligible Securities Schedule at such time.
As you can see, "Eligible Securities", in their charge document are not defined in such a way so as to mean "certain segregated securities". The difference between certain segregated securities and all eligible securities is quite clear. It does not mean the same thing. The charge document registered in the Companies Registration Office is the official document. The disclosure in the Allied Irish Banks, p.l.c. annual accounts is not a true representation of the charge document. It is misleading. In relation to Target2: it is only a payment system. The legal instruments that Allied Irish Banks, p.l.c. used in this charge document have been used previously without any mention of Target2. Using Target2 in this document is a red herring (and also misleading), and that's why I have mentioned it in my article.
In the charge document Allied Irish Banks, p.l.c. gave the floating charge to the Central Bank of Ireland and Financial Services Authority (which is really the ECB) over "All rights, title, interest and benefit, present and future in and to each of the Eligible Securities." The floating charge over the Eligible Securities (Repo Agreements) gave Allied Irish Banks, p.l.c. access to aggregated liquidity. Obviously Allied Irish Banks, p.l.c. had no Eligible Securities remaining at this time. This was the only option to access cash. It appears the bank was insolvent in February 2008. This would explain why the Government had to give a blanket Guarantee over Allied Irish Banks in September 2008. Allied Irish Banks had no assets available to access cash. They were completely insolvent. It was not a liquidity problem as being stated by Allied Irish Banks, p.l.c. It was an insolvency problem. 
I have been stating this for FIVE YEARS!!! Reference this post from Monday, 15 September 2008, One last time: liquidity is not the problem, it is the symptom:
I really think that I will scream if I hear another pundit or regulator comment on how the injection of liquidity will help this or that bank or lending institition. Haven't we all learned by now that the problem is insolvency, not liquidity? The Fed has created an alphabet soup of lending programs, discount windows and mechanisms to provide literally unlimited liquidity to the banks, even the option to offer stock as collateral! That's right, the US government has become the world's largest broker dealer, offering margin lending for stock accounts, mortgage financing and M&A deal finacing and advisory.
Again, as I see it, a depositor recapitalization of Irish banks seems very, very likely unless the Troika is willing to carry the entire bailout bill again. Reference "Are You About To Get Cyprus'd in Ireland? When A Single Word's Worth Billions Of Euros..."
image004image004image009image009
I will present additional pages of this document because, basically, the more you read the fishier things actually smell. To wit, in my post "Are You About To Get Cyprus'd in Ireland? When A Single Word's Worth Billions Of Euros..." I included a backgrounder on AIB which included: 

Credit Event occurred

The ISDA Determinations Committee, consisting of 15 USA and European banks, decided that a restructuring credit event occurred with respect to Allied Irish Banks on June 9, 2011

 Hmmm.. A credit event occurred... Notice the red highlights in the charge documents below, particularly the portions read as "Crystallization of Floating Charges" and "Event of Default". BoomBustBloggers are more than smart enough to take it from there....

In addition, there's the portion on "Negative Pledges". If there are negative pledge clauses included and the charge covers "each" eligible security... Then doesn't this somethow get in the way of the securitization business, particularly Irish MBS whose underlying assets must be pledged to a trust which effectively transers ownership? Doens't it also get in the way of hypothecation and rehypothecation? After all, how many times can you encumber a security that has a negative pledge clause attached to it. Again, I'm not an international securities attorney so don't take my opinion as legal advice, I'm just saying...

image004 copy copyimage004 copy copyimage018image018image019

There's a lot more coming down the pike and I'll be releasing more bank research to subscribers, of which are entities with US traded ADRs AND options. Yes, they are still trading high enough to short. Click here to subscribe.

For more on my bank research, see Who is Reggie Middleton?