Wednesday, August 17, 2011

The Looting of the Irish and its implications for Greece

It would be understandable if the Greeks did not want to repeat the Irish experience of selling their assets for a fraction of their value.  Particularly, because this blog has already laid out exactly how the opaque auctions run by Wall Street result in the seller receiving less than the fair value of their assets.

As reported in an article in the Independent, the Irish bank Anglo will not generate the sale price it was hoping for from selling its US loan-book.

Think of the size of the discount we are talking.

The first discount from fair value occurs when Wall Street sets the expectation for what they think the assets can be sold for.  Naturally, because Wall Street makes a very large fee if a transaction occurs, this price is set as low as possible consistent with getting the mandate to sell the assets.

The second discount from fair value occurs when, in conducting its opaque auction, Wall Street seizes on current events to explain why the bids from investors who require at least a 20% return on their investment came in lower than expected.

Both of these discounts could be eliminated by full disclosure to all market participants before the auction.  This disclosure will result in independent analysts assessing the value of the assets for sale.  This is the value for the assets that Wall Street should have to meet or exceed to get its fee.

Without this independent valuation, any seller, be it Irish or Greek, is going to receive much less than fair value for their assets.
AS many as 25 investment groups, including some of the biggest names in finance, have reportedly lodged bids to buy parts of Anglo's $9.5bn (€6.6bn) US loan portfolio. 
But US publications have suggested that Anglo may get as little as $7bn from the sale, significantly below the $7.5bn to $8bn the bank had been hoping for earlier in the year. 
Note the lack of an independent market valuation.
The news comes after Tuesday night's deadline for first-round bids on the portfolio of 248 commercial loans stretching from Manhattan to Boston to Florida. 
The bids were lodged amid massive uncertainty in the US, as the country contemplated the economic impact of its first ever ratings agency downgrade. 
As well as depressing prices, the crisis has put buyers' ability to fund their offers into sharp focus, and financing will be a key factor in determining who will go through to the second round. 
The excuse for why the price is lower than the seller hoped for.
Anglo has already ruled out taking any role in funding a bidder, a view the bank still holds despite recent market events, sources confirmed. 
Bidders for the book are believed to include Deutsche Bank, Goldman Sachs, JP Morgan Chase, Wells Fargo, Lone Star Funds, TPG Capital and Blackstone Group. 
Most bidders are acting in consortium and only bidding for a section of the loan book, meaning the most likely outcome is that the book will be sold off in tranches....
The bank's official deadline is to sell the US assets by December 31, but management is working towards doing a deal by the end of the third quarter. 

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