Of FARTs and fire sales | FT Alphaville

Of FARTs and fire sales

As Irish Life & Permanent looks about to complete Ireland’s nationalisation of its entire domestic banking system…

More abbreviation fun on Tuesday with the mooted ECB facility to replace emergency loans from Irish national central banks, with an important moral for bailout philosophy.

Via Divyang Shah of IFR Markets, an arresting analogy:

As a refresher the original motivation behind Tres Sec Paulson’s TARP (Troubled Asset Relief Programme) was to prevent a fire sale of illiquid assets but failed to live up to its name and instead followed the script from the UK Brown government that directly injected cash into financial institutions. Instead it was left to the Fed to do what TARP had originally intended and this was done via the Term Securities Lending Facility (TSLF) as well as the Term Auction Facility (TAF).

The new ECB facility is intended to have no fixed time frame but as was the case with the initial discussions over TARP 1) under what conditions would banks be allowed access to this facility and 2) what price will the facility pay for assets. Being too generous on both would delay much needed bank restructuring providing a new means of not fixing the problem…

Perhaps the ECB might call it the Facility for Assets Relieved from Trouble. Not a BURP but a FART.

Nevertheless, the wrong kind of FART.


Which Tarp was right?

There’s plenty of old FT Alphaville discussion on Tarp’s changing mission in US banking — here, here and here, for starters — that might help to jog memories.

The question is, was Tarp I or Tarp II Europe’s better solution?

The Irish already tried Tarp I from 2008 to late 2010, by slowly sending rubbish assets to Ireland’s bad bank, and asking banks to recapitalise and restructure themselves over time. Not only that: state guarantees on banks’ self-funding too, in order to prevent a restructuring of bank debt itself, plus depositor flight.

Several ballooning and putrefying contingent liabilities later…

The Irish only ‘went British’ in late 2010, by which point going British meant going to the British, alongside the Swedish, the IMF and EFSF, for the loans for the cash to inject into the banks. More cash is now on its way. The obvious thing to ask is whether the Irish state can afford the cash, or more properly, the loans.

It can’t, so it’s going to the ECB to arrest a fire sale, as Irish officials make very clear. Perhaps the real question at this point is whether the attempts to avoid a fire sale turned the banks into hollow shells whom no buyer will touch now, and whence cash will never return; therefore whether the eventual fire sale will be in restructured Irish sovereign debt.

Oh well.

Returning to the ECB’s proposed loans to these very banks…

The new facility does feel very Tarpesque in atmosphere, in as much as the ECB’s actions will have the effect of propping up asset prices — but the assets stay on the banks’ balance sheets. The ECB won’t buy the assets or put them in a special purpose vehicle. This is where the price (haircut) issue could have been pressed harder or at least have been explicit, at least in theory. In practice, we already have the ECB version of Tarp I in its government bond purchases, which have most definitely overpaid for assets, and which are also forestalling/making inevitable a later restructuring.

So we think the ECB’s FART is a TAF.

Sub-TAF, possibly.

Just like the Fed’s Term Auction Facility, the Irish banks lending facility is an old-fashioned bailout — subsidised rates against poor collateral, and theoretically involving loans of short duration, that retain dead banks in the land of the living. Nevertheless, it remains unclear what rates or collateral eligibility would be offered, or if they’ll even be divulged. The non-ECB emergency loans replaced by the facility didn’t, after all.

And at least you can say for the Fed that they did divulge their collateral criteria. Eventually.

Related links:
Not-so-TAF-tastic – FT Alphaville
TAF is a really, really big deal – Interfluidity (2007)
A black swan in the money market – FRBSF (2008)
“Was the Fed keeping banks alive when they should have died?” – Bloomberg