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:

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..."
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?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
apberusdisvet's picture

The question is:  are the Eurocrats just plain dumb, or are they psychos with a plan? 

Only time will tell, but given the incremental debt serfdom being imposed on all Europeans, especially since 2008, I would opt for the latter.

monad's picture


We watched you building, stone by stone, 

  The well-washed cells and well-washed graves

We shall inhabit but not own 

  Wherever Celts are kept as slaves; 

The water's waiting in the trough, 

  The tame oats sown are portioned free, 

There is Enough, and just Enough,

   And all is ready now but we.

    But you have not caught us yet, my lords,

    You have us still to get.

    A sorry army you'd have got, 

    Its flags are rags that float and rot,

    Its drums are empty pan and pot, 

    Its baggage is - an empty cot;

    But you have not caught us yet.


A little; and we might have slipped

 When came your rumors and your sales

And the foiled rich men, feeble-lipped,

  Said and unsaid their sorry tales; 

Great God! It needs a bolder brow

  To keep ten sheep inside a pen,

And we are sheep no longer now;

  You are but Masters. We are Men.

    We give you all good thanks, my lords,

    We buy at easy price;

    Thanks for the thousands that you stole,

    The bribes by wire, the bets on coal,

    The knowledge of that naked whole

    That hath delivered our flesh and soul

    Out of your Paradise.


We had held safe your parks; but when

  Men taunted you with bribe and fee,

We only saw the Lord of Men

  Grin like an Ape and climb a tree;

And humbly had we stood without

  Your princely barns; did we not see

In pointed faces peering out

  What Rats now own the granary.

    It is too late, too late, my lords,

    We give you back your grace:

    You cannot with all cajoling

    Make the wet ditch, or winds that sting,

    Lost pride, or the pawned wedding rings,

    Or drink or Death a blacker thing

    Than a smile upon your face.


Utopia of Usurers 1917


Shaten's picture

if they would have let the banks collapse,

Let the bond holders eat the loss,

protect the depositors

The majority of the issue would be resolved.


Then the goverments could start unwinding socialism to insure their future.

ATM's picture

In what bizarro world do Socialists dismantle themselves?

monad's picture

Socialism is a ruse. This is the road to technofeudalism: 1% everywhere work together to take everything, the rest piss off. Club of Rome/Henry Kissinger's Plan B.

Melin's picture

In what bizarro world does the socialist policy of government "protecting depositors" equal a step on a road to dismantling socialism?

Shaten's picture

I see the goverment as an organism that has a certain (limited) responsibility towards it's cells ( the citizens. As time progress the responsibilites change. (no indian protection needed).

But in this case it is in the best intrest of the citizens and the goverment that the depositors remain protected. I would entertain weather or not the 100,000 euro limit should cap the depositors or not; however, in this case it doesn't matter enough in relationship to all the money that germany has already thrown down the rabbit hole.

Without the deposit protection the citizens move their money to their homes, and in the words of bank robbers that is where all the crime will move.

Shaten's picture

yhea i know, one could dream.

If you really want a good chart map the amount of goverment activity in the private sector (socialism, communism) to the life span of a country.


Peter Pan's picture

This is why Europe stuffed up with Cyprus. If they were goingt o go after Cyprus then they should have gone after ALL depositors in Europe for 5-10%. One evenly imposed shock would have raised a lot of money and also stopped the withdrawl and shifting of funds within Europe which will only serve to destabilize the whole of Europe.

The handling just confirmed the lack of European unity, planning and execution.

coltek's picture

Good thinking. I like it!