Nationalisation Watch / Govt. rethinking 3.5 billion bailout for the banks?

cactus flower wrote:

ibis wrote:

I never gamble, I'm afraid. It's probably the only vice I have no time for whatsoever.

You hardly need to, Ibis, when your elected representatives are prepared to do so so generously on your behalf.

What other choice did they have? Flinging buckets of water around your house is a pretty stupid action, except when your house is on fire.

ibis wrote:

What other choice did they have? Flinging buckets of water around your house is a pretty stupid action, except when your house is on fire.

McWilliams was at it today - they had no other option. I suppose so, unless you want to try to mushroom an alternative banking system (did it have to be overnight?)... which might make an interesting debate. How much would have hit the fan if BOI and AIB went the way of Lehman's? Here he's calling for phase II - tight control on the banks.

Quote :

Ten years ago, while working in Moscow, I witnessed the collapse of the Russian banking system. I saw desperate people queuing outside main street banks. I witnessed investors losing all their wealth and I experienced what it was like to live in a society that was on the verge of psychological, as well as financial, collapse. We were a whisker away from that last week.

Make no mistake about it: last week, Ireland almost repeated the Russian experience of 1998.Had Brian Lenihan not intervened courageously to guarantee all deposits last Monday night, then at least one, if not two, Irish banks would have collapsed last Tuesday. By Thursday, we would have seen another bank fall and by Friday, the stock of the two big banks - Bank of Ireland and Allied Irish Bank - would have fallen to zero, rendering them effectively bankrupt.

There simply was no other choice. Over the past few days, commentators have queried the wisdom of Lenihan’s move, as if we had the luxury of a suite of options to pick from at our leisure. This was not the case. Ireland had run out of time, and only the most brazen and unexpected move could have prevailed.

David McWilliams

ibis wrote:

cactus flower wrote:

ibis wrote:

I never gamble, I'm afraid. It's probably the only vice I have no time for whatsoever.

You hardly need to, Ibis, when your elected representatives are prepared to do so so generously on your behalf.

What other choice did they have? Flinging buckets of water around your house is a pretty stupid action, except when your house is on fire.

I would compare what they've done with stacking the inside of the house with firewood and then flinging about some petrol - then giving a blank cheque to the fire brigade.

https://machinenation.forumakers.com/the-open-europe-forum-f30/ireland-the-world-economic-crisis-and-the-threat-to-the-euro-t1323-25.htm#39040

Quote :

The Irish government should have done what the Swedes did in 1991. At the end of a property boom like ours, their banks found themselves overwhelmed with bad debts to property developers. The Swedish government stepped in and, in return for banks' admitting the scale of their losses and
firing the senior managers that had caused their problems, provided capital in return for a share of ownership. As the Swedish economy recovered the government was able to sell off its share in the banks, with the result that the Swedish taxpayer lost nothing on the bailout. In Finland, by contrast, government denied that there was any problem until their banking system had collapsed and was then forced into a ruinously expensive bailout.
The government should have offered new capital to four of the institutions, and left the others, where the real problems lie, to fend for themselves. Nobody, apart from a few property speculators, would have noticed if these others had disappeared.

Not only does the Irish government guarantee of bank borrowing fail to solve the underlying problem of bad loans; it faces the Irish taxpayer with a real risk of enormous losses. By insuring the borrowing of banks with toxic assets the Irish government has taken up where the collapsed American insurer AIG left off. It was by guaranteeing to cover any losses to institutions that lent to client banks, what was called monoline insurance, that the world's largest insurance company went bankrupt.

The particular risk that the government now faces is that Irish banks will package toxic loans as asset backed securities and sell them off with a government guarantee, passing on their losses to the Irish taxpayer. Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan's signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking up the tab.The following months will see a battle of wits between banks and the financial regulator, as banks try to offload bad debts onto the taxpayer and the regulator tries to stop them. It is not hard to guess who will emerge as the winner. As this realization dawns on investors we can expect bank shares to soar in the coming weeks, and the cost of Irish government borrowing to rocket.

Irish banks were facing potential losses on their property lending of the order of €10 to €20 billion. Thanks to Brian Lenihan's master-stroke it looks as if it will be you, rather than bank shareholders, who will be taking the loss.[/

Morgan Kelly

In both those cases the problem was local, not global. The problem is not essentially our banks' bad debts, which, given the way the Irish 'face' is bound up with property, are fairly limited in the case of domestic mortgages. We are not sub-prime, but the whole banking sector has seized up. Irish banks are not in trouble because of the Irish property market - if that was all that was happening they would be amongst the healthiest in the world, because the banks don't reduce your mortgage when your house price falls.

Just read this on p.ie - Denmark guarantees its banks and gets €4.5 billion for the deal

http://www.politics.ie/economy/35647-denmark-guarantees-all-deposits-reuters.html

Auditor #9 wrote:

Just read this on p.ie - Denmark guarantees its banks and gets €4.5 billion for the deal - http://www.politics.ie/economy/35647-denmark-guarantees-all-deposits-reuters.html

Just after reading this myself. There seems to be a cascading effect going on now. Will the Netherlands have to follow suit to protect their deposit base against the Danish move? Everyone is trying to "steal" the others depositors base. Germany's in the loop now as well. It was ok when very small countries like Ireland and Greece were following this strategy. If the UK follows suit, where the competitive advantage for Ireland or for any one given country for that matter?

The EU needs to get its act together and pronto. This cascading effect might do real damage to the Euro.

There seems to be some confusion about cause and effect. The run, if you like on Irish banks, last week and the previous week was due to the factor that international banks had cut off short term credit facilities to Irish banks. This was in part due to the global credit crunch, but was very specific to Irish banks due to the high loan book exposure to property developers and the amount of unsold housing stock. In come cases, it has been reported, the exposure to the given number of developers is below 100. In other words, bank's risk is highly concentrated on just several individual developers. It only requires a couple of developers to default on some big loans to throw a given bank into turmoil and possible insolvency. Hense the panic to shore up capital.

If I might offer a comment on the poll. Imo, it's really too early to say whether the Irish government's acts can be viewed in the context of being "triumphant" or a "failure". There's just too many unknown factors in play. The reprecussions of the bail out may not appear for several years down the line. Specifically, we don't know how a future generation of bankers will do business with the knowledge that the govt has implicitly insured banks against disaster. The competitive nature of the act will come under scrutiny. We have a "get out of jail" card on the immediate impact of the act as so many countries are scrambling to follow the strategy. However, you can be sure that the ECB and the competition authority are not amused.

A proverbial pandoras box has been opened. There may be some behind the scenes activities which will never see the light of day. You can place a good bet that the UK won't be forgetting our wee stroke any time soon.

I'm not sure I get the connection with the Euro weakening - or how it's weakening. The why is that now the Euro bloc is seen internationally as weaker than hitherto thought and so governments are selling their Euro reserves - is it something like that?

Does that mean we may become lot more competitive to outside nations - although it's swinging so dramtically between dollar and euro that there's no real incentive for business to move between the blocs because of the sudden shifts.

Are these two going to go up and down against each other for a while now?

Auditor #9 wrote:

I'm not sure I get the connection with the Euro weakening - or how it's weakening. The why is that now the Euro bloc is seen internationally as weaker than hitherto thought and so governments are selling their Euro reserves - is it something like that?

Does that mean we may become lot more competitive to outside nations - although it's swinging so dramtically between dollar and euro that there's no real incentive for business to move between the blocs because of the sudden shifts.

Are these two going to go up and down against each other for a while now?

There is a fear that the ECB will not be seen to be in control of the Euro. Individual nations within and outside the Euro are now taking unilateral action which affects the risk-reward equation and ultimately how assets are valued. There already seems to be a disconnect between interest rates, as set by the ECB, and the value of the Euro. Hypothetically, given our higher discount rate in the Eurozone, the Euro should be stronger against the dollar which has a discount rate of only 2%. Imo, some of this disconnect might be down to the credit crunch and how individual banks, and then banks in the aggregate, set interest rates among themselves in given geographical locations. For example, although the US base rate is 2%, the mortgage rate spreads are far higher than in the past due to the uncertainty in the US mortgage market and the perceived risk. However, Ireland's borrowing costs have now gone up because the national balance sheet just took on c€400 billion in depositor (and some bond debt) liabilities. We've skewed the interest rate differential between the ECB base rate and what we'd normally expect to pay to borrow as a nation. We've unilaterally changed the interest rate spread across the European market due to taking on such a big liability.*

My own view is that the Euro is as safe as houses. But it is safe due to one fact, and only one fact: Germany. However, it seems the Germans have decided to follow our lead. They aren't about to let any other nationa siphon off their deposits like they've seen happen to the UK. My uneducated guess is that after this storm passes, there is going to be some very tough measures introduced to make sure this type of unilateral behaviour by one nation can never occur again. For all intents and purposes if Germany were say tomorrow that it doesn't trust its Eurozone partners, the Euro would be crippled.

*This may overstate the case somewhat but the effects will play out and the spreads, as each nation follows our lead, will impact the markets eventually.

rockyracoon wrote:

For all intents and purposes if Germany were say tomorrow that it doesn't trust its Eurozone partners, the Euro would be crippled.

On which note it's worth pointing out that there has always been a camp of German opinion that felt abandoning the Deutschemark was a very bad move.

ibis wrote:

rockyracoon wrote:

For all intents and purposes if Germany were say tomorrow that it doesn't trust its Eurozone partners, the Euro would be crippled.

On which note it's worth pointing out that there has always been a camp of German opinion that felt abandoning the Deutschemark was a very bad move.

Let's hope they keep that camp quiet. I'm sure they will. There was a rather amusing news article recently whereby some German consumers were asking for their change in German Euros as they didn't trust the "southern" Euro change in particular. Just goes to show that there is a significant portion of Eurozone participants on the ground who really haven't fully understood the concept.

rockyracoon wrote:

ibis wrote:

rockyracoon wrote:

For all intents and purposes if Germany were say tomorrow that it doesn't trust its Eurozone partners, the Euro would be crippled.

On which note it's worth pointing out that there has always been a camp of German opinion that felt abandoning the Deutschemark was a very bad move.

Let's hope they keep that camp quiet. I'm sure they will. There was a rather amusing news article recently whereby some German consumers were asking for their change in German Euros as they didn't trust the "southern" Euro change in particular. Just goes to show that there is a significant portion of Eurozone participants on the ground who really haven't fully understood the concept.

Not really, since that story first appeared in the Telegraph, and turned out to have absolutely no factual basis. Not a single person across Europe has come forward to say "yes, I've seen them do it", and that's including all the German tourism around the Med. The sun-lounger thing, yes. The euro thing, no. Good myth, though.

ibis wrote:

In both those cases the problem was local, not global. The problem is not essentially our banks' bad debts, which, given the way the Irish 'face' is bound up with property, are fairly limited in the case of domestic mortgages. We are not sub-prime, but the whole banking sector has seized up. Irish banks are not in trouble because of the Irish property market - if that was all that was happening they would be amongst the healthiest in the world, because the banks don't reduce your mortgage when your house price falls.

I can't believe you're not better informed than that, Ibis. Whoever said that personal mortgages were the issue here. That's not to say that they will not become a tremendous problem for the people who will not be able to pay them down the line.
This is about overlending to about 200 commercial borrowers.

Really doesn't matter Ibis and ,frankly, in the bigger scheme of things it matters not a jot - myth or not.

CF, one bank's exposure to developers is thought to be around only 40 borrowers with a few having very significant exposure. (So much for the basic principle of spreading risk by lending to a large base of customers)

If you go over to finfacts home page, there is a head line article which is very sobbering reading about the state of Ireland's macroeconomic health.

cactus flower wrote:

ibis wrote:

In both those cases the problem was local, not global. The problem is not essentially our banks' bad debts, which, given the way the Irish 'face' is bound up with property, are fairly limited in the case of domestic mortgages. We are not sub-prime, but the whole banking sector has seized up. Irish banks are not in trouble because of the Irish property market - if that was all that was happening they would be amongst the healthiest in the world, because the banks don't reduce your mortgage when your house price falls.

I can't believe you're not better informed than that, Ibis. Whoever said that personal mortgages were the issue here. That's not to say that they will not become a tremendous problem for the people who will not be able to pay them down the line.
This is about overlending to about 200 commercial borrowers.

Yes - in other words our banks have a completely different domestic problem from the general 'sub-prime crisis', which is what I am trying (apparently badly) to point out. It wouldn't, however, be a problem if there were no more general crisis - because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Quote :

Really doesn't matter Ibis and ,frankly, in the bigger scheme of things it matters not a jot - myth or not.

Why bother repeating it then?

Whatever

Ibis, I sometimes wonder if it is your sworn and dedicated objective in life to spend your time defending the indefensible :-)

Maybe Fianna Fail is actually paying you to do this? Once again, my sweet, your arguments are immersed in, forgive me, casuist digressons and distortions which seem to me to be little more than attempts to derail discussion of the central and obvious facts: the country is completely bust, the banks are in horrific straits because of lending to developers who cannot now repay them and because of tomfoolery on the financial markets during the last 20 years of free-market bullshit. The Irish situation is not particular - we are experiencing identical problems as the US because of the over exposure of Irish banks such as AIB to the subprime market there, for instance. Alan Greenspan started all of this at the behest of Friedmanite economic philosophy and he got out just before the shit hit the fan. There is plenty of time yet and a near certain probability that the property market will indeed fall to less than 20% of its peak value. It will have no choice but to since nothing and noone will be able to afford anything more. The full effect of this crash has scarcely begun to make itself felt. The lives of millions of blameless people will be ruined for the next decade at least - if indeed recovery is ever possible absent root and branch political reform. In any case, if the situation was as you are trying to persuade us, there would be no need whatever for the so-called bailout in the first place! Man! You really make me laugh sometimes, ya know!

ibis wrote:

Yes - in other words our banks have a completely different domestic problem from the general 'sub-prime crisis', which is what I am trying (apparently badly) to point out. It wouldn't, however, be a problem if there were no more general crisis - because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Two points:

1. The statement you I have highlighted in bold is factually incorrect. Markets are well below 20% below peak and are even further below the expected increased value which the more "ballsy" and inexperienced developers were counting on.

2. The liquidity problem has been caused by reckless lending (US subprime). The two cannot be separated. The culture of awarding bonuses based in lending appears to have been a global phenomenon. Also, as the global economy nosedives our banks will be affected by more and more bad debts affecting their financial health whether there is liquidity or not. This will make it harder or more expensive for them to get funding even when liquidity improves internationally.

ibis wrote:

because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Developers costs are a lot more than 20% of sale value!!! I can't even envisage a situation where that could be true. I must be misunderstanding.

The decision of the German government to follow our lead has resulted in almost all banks in Germany imposing upper limits on what people can withdraw from ATMs (regardless of what an individual's "daily limit" is or may have been) Germans with long memories can remember varying "hard cash" experiences and are deeply distrustful of banks as a rule. This will be interesting.

Aragon. Are you of the belief that there is free market economics over here. The banks were forced by law to make the loans to people who everyone knew could not pay. In a free market you would never have had Freddy or Fannie.

The problems are coming home to roost but if you are relying on the State to fix things then you are in for a long term grief. It is not even a week since the jokers gauranteed the banks and look how that has worked.

I knew Cowan would ruin Ireland but did not think he would ruin the entire world

youngdan wrote:

Aragon. Are you of the belief that there is free market economics over here. The banks were forced by law to make the loans to people who everyone knew could not pay. In a free market you would never have had Freddy or Fannie.

The problems are coming home to roost but if you are relying on the State to fix things then you are in for a long term grief. It is not even a week since the jokers gauranteed the banks and look how that has worked.

I knew Cowan would ruin Ireland but did not think he would ruin the entire world

So long as there is political influence in the market at any level there is by definition no such thing as the Free Market. Still it is something to strive for if carried out properly.
I think the mistake of thatcher and reagan and all those who followed after them in the 1990s that the freeing up of the market was not accompanied by a similar move to "open up" and better democratise politics.
I'm not saying that politcians are all to blame for the current mess, but rather the fact that deregulation often went ahead under the nose of the people, for reasons that were often ambiguous in regard to the interests of the people.

I am all for free markets but all markets need effective regulation so that you know that when you buy a kilo of halal beef sausages it does in fact weigh 1 Kilo and is suitable for a Muslim occasion.

When you buy shares in a company you like to know that the balance books are a fair representation and you need to regulate all sorts of Hedge Funds and derivatives, simply to prevent abuse.


Youngdan

I have vague memories of reading that either New Jersey or New York tried to introduce legislation that would prevent the extremes in mortgage lending but were prevent by Bush administration taking legal action. Was this just a bad dream?

Spent the weekend with some friends, traditional conservative types and no one there was in the slightest impressed by the Irish Government and the problem it has created for everyone else. This will have repercussions and if luck turns sour this could be an unmitigated disaster.

Interesting to see how Iceland, with its own currency, and outside the Euro Zone is fairing. Today it suspended trading in financials and is seeking loans from the ECB.

Seems like the Germans (Merkel) are rowing back on their blanket gaurantee. They are expressing a political will to gaurantee all deposits with no limits but without enacting the legislation apparently to make the blanket bail-out law. Confusing? The markets think so.

Given my own background, I'm kind of loathe to give even faint praise to the UK but they been restrained in their actions so far. They've raised the depositor's gaurantee to £50k per account which doesn't require any new legislation. This should salve depositor's worries while calming the banker's concerns about Ireland siphoning off their capital reserves. This is a low cost solution, which if effective, will actually reduce the cost of credit unlike our blanket bail-out which has increased the cost of credit.

There have been some posts on this site and other sites which claim that Ireland wouldn't have been in such a bad situation if a global credit crisis hadn't occured. They also point out that Irish banks, by and large, didn't become embroiled in the derivative toxins market. Irish banks, however, did involve themselves in a credit binge. They ended up lending relatively large sums to too few property developers, and hence didn't spread their risk. Different scenario, same result. The idea that if the world's credit markets had remained more stable and that Irish banks could have somehow swept all this under the carpet is not a solution. They would still have been lending huge mortgages, at hugely inflated property prices, and re-lending the more money to the big property developers to keep the whole circle turning. At some point, the party would have ended. Property prices, already ridiculously high given our national aggregate wealth, would have reached preposterous hieghts.

Another way at looking at the global credit crunch, it to view it as a timely brake on the Irish bank's lending practices. Really, we need to review the entire process but I have the bad feeling that scapegoats will be found to explain away the mess and set us up for another round of the property party. McWilliams blamed the UK hedge funds (implied patriotism references) and the govt and their media allies are blaming the global credit crunch (implied yankee stupidity and over-indulgence). The governor and bankers of Ireland would do well to invest in a few mirrors.

Zhou_Enlai wrote:

ibis wrote:

Yes - in other words our banks have a completely different domestic problem from the general 'sub-prime crisis', which is what I am trying (apparently badly) to point out. It wouldn't, however, be a problem if there were no more general crisis - because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Two points:

1. The statement you I have highlighted in bold is factually incorrect. Markets are well below 20% below peak and are even further below the expected increased value which the more "ballsy" and inexperienced developers were counting on.

20% of peak - ie, what was worth €1m to be worth €200k - not 'off' peak.

Zhou_Enlai wrote:

2. The liquidity problem has been caused by reckless lending (US subprime). The two cannot be separated. The culture of awarding bonuses based in lending appears to have been a global phenomenon. Also, as the global economy nosedives our banks will be affected by more and more bad debts affecting their financial health whether there is liquidity or not. This will make it harder or more expensive for them to get funding even when liquidity improves internationally.

True, but our 'reckless lending' is in a different league from US reckless lending. Irish banks were lending at silly multiples to people who will do their damnedest to keep paying them - US banks were lending at silly multiples to people who would default on a library fine.