Secrecy and Transparency!

October 12, 2010

As a taxpayer increasingly on the hook for more and more billions paid by our erstwhile and ‘sofar’ peculiar ‘government of the people for the banks and bondholders’, one wonders, where is my taxpayer money  going?

Of course, there are multi tiered layers of answers to this question. But here’s a couple of points re Anglo’s anonymous bondholders for whom, if you have children and are resident in Ireland like me, your children will be working for, over decades to come,  in order to pay the casino debts of Irish bankers and politicians:

“Many books were written and movies made with the backdrop of illegal use of Bearer bonds. After World War I, Bearer bonds were used as a means to avoid paying tax and later Bearer bonds were used for funding illegal activities. Though United States banned Bearer bonds in 1982, US corporations still issue Bearer bonds through Euro bonds. Interestingly in 1985, US legalized sale of Bearer bonds to foreigners through US treasury bonds.”

..”Difference between Bearer bonds and registered bonds:

Bearer bond holders can sell their bonds with no interference either from the company or government. Since Bearer bonds do not carry the name of the owner, the holder has to give just the certificate to the potential buyer in exchange of money. On the other hand, the issuer of the registered bonds keep the records regarding the owner of the bond and in case of sale, the present holder of the bond has to inform the issuer about the sale so that the name of the buyer can be recorded.Bearer bond holders are responsible for the safety and security of the bonds, collection of interest by depositing coupons to the issuer and re-payment of principal amount while the issuer of the registered bonds have to shoulder all these responsibilities and do the paper work keeping a record of the ownership and all kinds of transactions.In registered bonds, it is easier to trace taxable income but tracing the taxable income is not possible in Bearer bonds since there are no records about the ownership of such bonds.The future of Bearer bonds looks bleak because of its misuse by money launderers and tax evaders.”

Thanks for paulmcd of for raising the issue of the secretive world of bearer bonds.

Rating agencies play a big part in establishing the authentic security of banks and their assets. What of their secretive means of rating banks and how reliable are they?

Here’s an interesting link re the relationship between secrecy/transparency and corruption in the banking system

Here’s exactly what Moody’s were saying about the Irish banks during the boom. Mind your gagging reflexes:

Moody’s bank financial strength ratings (BFSRs)

Following report by Pat Boyle, April 24 2007

“The two major banks, AIB and Bank of Ireland, both had their rating upgraded from Aa3 to Aa2, while both Anglo Irish Bank and EBS Building Society were re-rated to A1 from a previous rating of A2. Irish Life & Permanent was moved from a rating of A1 to Aa3.

Most of the other institutions had their existing rating affirmed, these included First Active, Hewlett Packard International Bank, Irish Nationwide Building Society, Ulster Bank and Zurich bank.

The Bank Financial Strength Rating (BFSR) applied by Moody’s represents the agency’s view of the bank’s intrinsic safety and soundness and excludes certain external credit risks and credit support elements that are addressed by Moody’s Bank Deposit Ratings.”

By a simple process of deduction one can deduce from the above that Moody’s agency ratings are intrinsically unsafe and unsound!

“..The liquidity of the capital markets also allows investors to trade their positions on a daily basis.

Such liquidity, coupled with the desire of some investors to keep their positions confidential, has the unfortunate result that issuers seldom know their bondholders.

A long-distance bondholder relationship is very comfortable as long as the company is able to meet its interest and principal repayment obligations.

Once a company sails into troubled water, it is difficult and sometimes seemingly impossible to negotiate with a nameless, faceless, ever-changing group of creditors spread around the world.

…..However, finding holders of bonds that are trading is like piecing together a jigsaw puzzle while someone hides the pieces.

Many issuers erroneously assume that the trustee can provide them with a list of bondholders. The terms of the indenture under which the bonds are issued generally state that the trustee as registrar will maintain a list of bondholders. But issuers quickly find this list is not very enlightening due to the way in which the clearing systems operate and hold bonds.

….As long as the bonds are in book entry form, they are held in the name of the nominee or a common depositary for the relevant clearing system. If the bonds are held in DTC, the nominee is Cede & Co. If the bonds are held in Euroclear or Clearstream, they are registered in the name of one of the approved banks that act as a depositary for both systems, such as Deutsche Bank or Citibank.

Locating and identifying bondholders is the first and biggest challenge in any restructuring. This is a function of the structure of the clearing systems,which were designed to improve liquidity by using special security codes consisting of digits and letters for each bond rather than using the names of the companies issuing the bonds.

……As a result, the ultimate investor has several layers of ownership between itself and the issuer and is able to hide behind the name of the broker. When a troubled company tries to send a notice to bondholders regarding a restructuring, the message often gets delayed or even lost in the layers of custodians. Sadly, the ultimate investors and decision makers often do not learn of a vote until the deadline has passed.

…….Another sub-custodial relationship arises when a US domestic branch of a broker holds the bond on behalf of a foreign affiliate. For example, you could find Nomura in New York is holding securities at DTC for Nomura Singapore, which in turn holds for a small broker in Hong Kong, which holds for a private investor in China. The more responsible brokers will sometimes respond at both levels on behalf of their ultimate client with respect to a bondholder identification request. Fortunately, this is not difficult to spot as the size of the positions should be identical.

…As mentioned, bonds are highly tradable instruments. Traders have to trade. Positions change overnight and information about a bondholder group can be out of date as soon as it has been collected in distressed situations. In a default, trading activity increases whenever new information is released into the market. Often a bondholder identification exercise needs to be repeated or at least updated several times before an issuer seeks formal approval of any restructuring plan. ”

Note mention of Deutsche Bank above. Think of the links between the Deutsche and ECB. ECB may be protecting Deutsche bank bondholders against Anglo restructuring? Wheels within wheels!

Working with bondholders is as illusive as NAMA trying to find a pot of gold among all those ghostland estates marked with crosses on a map of Ireland Inc following our Klondyke gold rush.


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