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

Johnfas, there was no way on earth of getting through to your own branch for any of the UK banks (except I think NatWest reintroduced it as a way of gaining more custom). I amn't saying Irish banks are perfect, they're just a hell of a lot better than what is on offer across the water. Most UK large business don't even pretend they bother with customer service any longer... it's unmasked profiteering and 15 mins on hold to a call centre in India. They truly deserve what is coming to them, I hope!

Just as a cautionary tale, we had a small car loan with some subsection of Barclays which we paid off early, and were then pursued for months by their credit agency because we'd cancelled the direct debit. Funnily enough, every second time we rang them back, they said they HAD received the cheque. I am deeply distressed that John Varley has so far not been one of the rolling heads. I could go on.....

Auditor #9 wrote:

From the Pin discussion on it

Dreaded Estate wrote:

The latest market caps of the banks are

AIB €1,750bn
Anglo €286m
BOI €884m
ILP €408m

Total market cap of €3.3bn prior to recapitalization and €13.3bn after. Looks like the government will have a 75% stake in Irish banking sector.

Government Recap of Banks

As someone else said, the way the prices are going we'll soon have 100% of those banks.

Can someone explain this 75% figure to me? Is it that the Gov (or whoever puts in the €10bn) effectively ends up owning the a percentage of the bank in proportion to the amount of capital they put in?

What is the mechanics of a recapitalisation? Does this involve buying out shareholders?

And what does this do the existing shareholders? Does the value of each individual share they hold drop by 75% or do they end up owning 75% less shares? Either way, why don't the shareholders abandon ship right now and save themselves a 75% drop? Or, more precisely, another 75% drop!

coc wrote:

Can someone explain this 75% figure to me? Is it that the Gov (or whoever puts in the €10bn) effectively ends up owning the a percentage of the bank in proportion to the amount of capital they put in?

What is the mechanics of a recapitalisation? Does this involve buying out shareholders?

And what does this do the existing shareholders? Does the value of each individual share they hold drop by 75% or do they end up owning 75% less shares? Either way, why don't the shareholders abandon ship right now and save themselves a 75% drop? Or, more precisely, another 75% drop!

Coc, there are any number of means in which a nation's banks can be recapitalised. The figures quoted are just being bandied about without any real reference to reality.

For example, both the Americans and the Swedes have, in the past, set up new and temporary banks to buy the non-performing loans from the exisitng banks. They either buy the loans at 100% face value or at a discount. The existing banks receive money for the loans on the one hand and get rid of the liabilites represented by the non-performing loans on the other hand. This helps on both sides of the balance sheet by injecting new capital into the banks at zero interest and the banks capital ratios are greatly improved once the bad debt is removed. The existing share holders are vastly relieved since they keep their shares and the value is almost instantaneously improved by the impact of new money injected and old bad debts being removed from the balance sheet. The temporary bank then tries to sell the underlying assets (in this case homes, land banks and empty office blocs) back into the market over a couple of year in order to recoup some of the money they gave to the banks. The tax payer usually takes a hit. The Americans did fairly successfully during the S&L debacle and also let many of the S&L's quitely go out of business. If memory serves me correctly the US recovered something like .85 cents on the dollar. The Swedes only recovered about half their money, costing their exchequer some 3 billion krona.

The British recently took a different approach (I also believe the Fed Res did likewise with some US banks this year) were they recieved preferential shares in the banks which they gave tax payer's money to and which supercede the existing shareholders stakes. The existing shareholders suffered dilution in their holdings as the preferential shares requires dividend payments and return of the funds lent to the banks. I'm a bit sketchy on the exact details, but the syopsis pretty much sums up what occurred.

The amount given to banks will primarily be dependent on the amount of non-performing loans they have and the equity stakes, should the Irish govt eventually pursue this route, will be determined by the amounts given to the banks in order to protect the tax payer's money given to the banks and ensure eventual return of monies out of profits.

In a normal functioning economy, these issues would have been dealth with already as the equity prices indicate that if these banks were dogs they would have been quietly put to sleep in a humane manner. I can only surmise the goverment is sitting on its thumbs hoping that some miracle will occur and the big shareholders and pension trusts will be saved.

Why would they not let Anglo Irish go under? It is not essential to the economy, surely?

rockyracoon wrote:

In a normal functioning economy, these issues would have been dealth with already as the equity prices indicate that if these banks were dogs they would have been quietly put to sleep in a humane manner. I can only surmise the government is sitting on its thumbs hoping that some miracle will occur and the big shareholders and pension trusts will be saved.

I tend to think that the cost of trying to save Rufus may be much worse than if we let it pass on and invested in a new pup.

Good to see you back. Trying to clear the decks so I can spend an extended time in the East. Fortunately (or unfortunately) a bluff proposition has resulted in a mountain of work and I can't seem to effectively delegate with this one. Anyway may well disappear myself soon.

The main puzzle to my mind is how long will the deflationary period last and when will inflation kick in. There are all sorts of debate and ideas about the type of inflation waiting round the corner. That inflation, more than anything may do more to saving the banks than any government intervention. On a personal level being able to predict when assets will cease to be worth less with time is pivotal in coming out of this ahead of the pack.



Cactus

We would all like to know the answer to that. There is probably a right tale to tell!

Squire

you're thinking four steps ahead there with the inflation. You see a bubble of some kind kicking in sometime soon ? This will be from the printing of the money - is that what you're thinking ?

McWilliams was just on Prime Time - I'll put the link here later. He is incredulous that the bank chiefs aren't signing on down in Gardiner Street now instead of still being in positions where they can potentially do what ? with 10 billion. McWilliams said the total bad debts will end up being 30 billion. Where will this money come from ? He reckons the taxpayer in the end. I'm telling you if those guys don't just resign then when that inflation kicks in then there will be burnings. People are already tired and they won't suffer another bubble if that's what the banks are waiting for so they can service their foreign debt. The Government do seem to be dallying and dawdling - we're going to see some deal in January now ...

Rockyracoon good to see you knocking some great posts together - you were sorely missed. Maybe you are sick of Southerners by this stage ?

Squire

don't forget your computer when you take the journey to the East.

cactus flower wrote:

Why would they not let Anglo Irish go under? It is not essential to the economy, surely?

A simple question, which on the surface, has a simple answer. If Anglo disappeared tomorrow the world would keep revolving. The liquidators would come in and many employees would have to retained as they dealt with asset liquidation. However, nothing is that simple.

Forgetting about the fairy tale being spun that banks are special and have to be handled differently to every other business enterprise in existence, we have to take into account the personal, political and broader economic picture. One of Ireland's leading business people has alot of capital tied up in Anglo. If Anglo were to disappear tomorrow how would that affect his other businesses? Lest we forget, it wasn't that long ago that these very same bankers and their politico buddies were swanning across Europe and lording it up in London as the financial wiz kids of Europe. They were doing property financial deals in the hundreds of millions. Didn't one acre in Dublin get financed for something like €195 million for a bit over an acre in the last couple of years? How would it look to the outside world if Anglo just went belly up so soon after helping to finance these deals? Don't forget we're supposed to be a financial centre of great repute. There'd be a-plenty of egg on face stuff here for bankers and their politico buddies. Plus you just have the same old buddy system in banks and govt as you have with any other business. Who knows who owns how many shares of Anglo and who might be financially damaged if Anglo were to shuffle off the mortal banking coil.

Thanks to all for any good wishes on my acerbic return. When the divil plays the tune, you gotta dance for the Euros.

On another side note, I see where Bloomberg is reporting the Fed's may lower interest rates to zero and buy all the bad shite on the US bank's books. Meanwhile, the Euro is on a steep upward trajectory as the Fed seems intent on printing as much money as it can before the new year. Is it the beginning of the dollar's death as we know it? They seem intent on printing trillions. I mean, how much longer will the world accept these near worthless sheets? Does anyone imagine the US ever intends paying off the trillions it already owes. It's all gone with the fairies at this stage.

The Dow is up 360 points on the news. If the Dow can just keep up the steam until the new year, I'm either going to be a much richer person or much poorer come the end of January. The soldiers are all lined up and ready to march to victory or demise.

Squire wrote:

rockyracoon wrote:

In a normal functioning economy, these issues would have been dealth with already as the equity prices indicate that if these banks were dogs they would have been quietly put to sleep in a humane manner. I can only surmise the government is sitting on its thumbs hoping that some miracle will occur and the big shareholders and pension trusts will be saved.

I tend to think that the cost of trying to save Rufus may be much worse than if we let it pass on and invested in a new pup.

Good to see you back. Trying to clear the decks so I can spend an extended time in the East. Fortunately (or unfortunately) a bluff proposition has resulted in a mountain of work and I can't seem to effectively delegate with this one. Anyway may well disappear myself soon.

The main puzzle to my mind is how long will the deflationary period last and when will inflation kick in. There are all sorts of debate and ideas about the type of inflation waiting round the corner. That inflation, more than anything may do more to saving the banks than any government intervention. On a personal level being able to predict when assets will cease to be worth less with time is pivotal in coming out of this ahead of the pack.



Cactus

We would all like to know the answer to that. There is probably a right tale to tell!

Too small to fail maybe.

I'm not sure if was yourself Squire who said that the deflation is like the tide going out as the precursor of an inrushing tsunami of inflation. I am still unclear how much of this bail out money is "real" and how much of it is being printed. Anyone in debt might be relieved to see the value of the debt diluted but the erosion of spending power could be very painful to many.

If you are off East, Squire, don't forget about us altogether, if you are able post at all.

rockyracoon wrote:

cactus flower wrote:

Why would they not let Anglo Irish go under? It is not essential to the economy, surely?

A simple question, which on the surface, has a simple answer. If Anglo disappeared tomorrow the world would keep revolving. The liquidators would come in and many employees would have to retained as they dealt with asset liquidation. However, nothing is that simple.

Forgetting about the fairy tale being spun that banks are special and have to be handled differently to every other business enterprise in existence, we have to take into account the personal, political and broader economic picture. One of Ireland's leading business people has alot of capital tied up in Anglo.

Now, I think this might be the most galling thing for the people of Ireland yet. How much of these banking deals are based around satisfying the personal risks of risky individuals and how skewed will it make our economy and society ?

Do we know the extent of it, can we guess or do we just not care ?

cactus flower wrote:

I'm not sure if was yourself Squire who said that the deflation is like the tide going out as the precursor of an inrushing tsunami of inflation. I am still unclear how much of this bail out money is "real" and how much of it is being printed. Anyone in debt might be relieved to see the value of the debt diluted but the erosion of spending power could be very painful to many.

Not guilty, sounds like Sidewinder, but can identify with the sentiment.

There are a lot of comparisons being made with Japan, to my mind this is dubious analysis. The only similarity is property bubbles. Japan had a strong economy and the Japanese save. We are in sharp deflation that will last well into next year and perhaps beyond. After that inflation is highly probable. That is when the rules of the game change and that is when a lot more people will find they are in difficulty.

If we are fortunate the inflation will correct asset values on many balance sheets, though that is a bit of a jest as what you are really seeing is a depreciation in the value of the currency against assets. Very difficult times to make sound plans.

cactus flower wrote:

If you are off East, Squire, don't forget about us altogether, if you are able post at all.

We will see, I have a wedding to go to in Algeria, if I can't make it I at least have to pay them a visit soon. I tend to be very careful about what I send or do from such countries, I wouldn't even use a mobile from there! People think I am excessively careful, but you never know! From there I will head on East, though the wretched business venture I started up recently is proving a millstone. So likely to be back and forward.

With regards banks I agree with rockyracoon. The amount of nonsense that is churned out about them being special cases is pure bildge, and unfortunately because of the mystic of money and finance many believe it. IMO That is not why they are being bailed out!

It would be easier to pick up the pieces of a Bank that has failed and get it running again than say a construction company of comparable size. With regards property, investment and management, most bankers are very poor at assessing the value or potential of this sort of asset. They just do not have the necessary skills.

Opposition going cracked on Oireachtas Report on the non-recapitalisation, lack of plan and shutting down of A and E departments - at last Mary Harney is going to cut the numbers of trolleys, by closing the A and Es, J. O'Reilly said.

rockyracoon wrote:

For example, both the Americans and the Swedes have, in the past, set up new and temporary banks to buy the non-performing loans from the exisitng banks. They either buy the loans at 100% face value or at a discount. The existing banks receive money for the loans on the one hand and get rid of the liabilites represented by the non-performing loans on the other hand. This helps on both sides of the balance sheet by injecting new capital into the banks at zero interest and the banks capital ratios are greatly improved once the bad debt is removed....

See now that's very interesting stuff - very cogs and wheels. Why can't we do something similar here with our injured banks ? Because they're not that important but certain people want them to be important. The talk of needing a 'loosening of credit' is starting to get tired now. If a business is performing then it deserves the lubricant.

I'm glad rocky said that above as I chanced my arm the other day in a conversation with tonys about installing a new class of rudimentary bank to deal with shovelling the sh&t only and let the rest look after itself. Instead of this bailout shite of handing some gung-ho types a blank bloody cheque.

We can't do it not because it's an arduous task but because there's skullduggery afoot.

Auditor #9 wrote:

The talk of needing a 'loosening of credit' is starting to get tired now. If a business is performing then it deserves the lubricant.

Simple question, what is more likely to produce a loosening of credit, pouring money into a pit of unknown depth or starting afresh or with an organisation that is not encumbered?

Auditor #9 wrote:

We can't do it not because it's an arduous task but because there's skullduggery afoot.

There are a lot of half truths doing the rounds. Without sub prime we were heading for an eventual crash with all the bogus assets being sold and sliced and insurance that was not worth the paper it was written on. But everyone thinks it is all those irresponsible people who took out mortgages they could not afford. The problem is mismanagement over large swaths of the financial sector, probable endemic fraud and an utter failure to effectively regulate. Apparently people actually queried Madoff's activities and suggested investigation was necessary and no one did anything!

No doubt people were suspicious but despite the nonsense of "open door" culture at all these big institutions it is clear that the honest situation is far removed from that. BBC Radio ran a series of anonymous interviews with people 'inside the financial crisis' a couple of months ago. One of the interviews was with a guy in his late 20s who brought up several issues with his manager. He ended up feeling that his job would be so under threat if he pursued the matter than he obviously didn't. This was presumably down to the fact that the manager was getting paid based on performance related bonus - which is a nonsense in and of itself.

As I said, I have a relation who works in the city, 77% of his annual income is from bonuses. Only 23% is his basic wage. Now that is ridiculous.

johnfás wrote:

As I said, I have a relation who works in the city, 77% of his annual income is from bonuses. Only 23% is his basic wage. Now that is ridiculous.

I pay some people a percentage of the profit as a bonus, but there are tangible goods and their involvement produces the profit. When it comes to the financial sector I am not so sure that this works as bonuses and commissions become an end in themselves and are ultimately corrupting.

The problem with bonuses and commissions is that the people receive reward without direct liability. They are unaccountable unless what they did was in some way illegal.

Yes apologies, commission is really what I meant. He gets 1% of all business he brings in.

the current crises can be summed up in the following sentence (courtesy of jeremy clarkeson):

the world thought it had £10 but it turned out it only had £2.

Just to note that we seem to be little further down the road with the bank recapitalisation / economic rescue.

The Banks are running around like blue arsed flies internally, talking the talk and walking the walk to an extent. However, it is not apparent that PWC or the Regulator have been able to get a picture of the real situation. It is also not clear that the Banks themselves know the real situation.

All the international evidence suggests that recapitalisation of the Banks will not increase lending. Accordingly, it is hard to know how much bang we will get for our buck. It is unclear what the benefits of recapitalisation will be or to what extent one should recapitalise and to what extent one should keep one's money for other projects.

No convincing national investment projects have been mooted. All we have is the NDP and we are stuck with it. Will we have to look at conscription to factories and national projects or not? Can private enterprise get us out of the hole if we give it the money or will private enterprise decide that profits cannot be made? We don't know.

What conditions might attach to the recapitalisation? What stimulus to lending can be put in place? We don't know and the Minister doesn't either. Is a good plan today better than the perfect plan tomorrow? We don't know. At the moment there is no coherent plan vis-a-vis the banks and stimulus; there is no timetable for a plan to be ready; there is no indication that whatever plan we come up with will address the problems.

Should we just sit it out for a month or two until we know what way the international economic winds are blowing before putting the entire contents of our wallet on the table (on top of the mortgage on our house which we gave to secure the bank guarantee)? I don't know and whereas FG say they know I don't trust them that they do.

It would be nice if the Govt could convince us that they are confident that they do know something. If they can't get the info, in the way that Harney couldn't get the info about the health crises, then they need to look like they are taking names and kicking ass (apt, even if possibly my least favourite americanism). There was a rumour that a big gun in one of the Banks was going to resign last weekend. It didn't transpire. The Govt needs to be seen to be looking for blood.

It would also help if the banks came out with some convincing statements too. They need to sound honest. If they said "x% of our commercial loans aren't performing, y% are paying interest only, property assets have been devalued by z% on avarage and gearing is now v% on average and we think this means blah" then at least we could take a view as to what we are dealing with and how honest they are being. For instance, if they said they had devalued commercial property by 20% over the past year then we would know they have not done enough. It would put all their chat in context.

zhou,

banks do know how much of their book is at risk but would contravene accounting standards and company law if it provided for them. the law says that only loans in default can be provided for.

boi and aib have been much more forthcoming about the composition of thier book than uk and us banks. the analysists in the uk have just chucked out the banks models and applied 1990 uk recessionary metrics.

i ask you to look at boi's interim statement and aib's pre close trading statement (along with their half year statement) and see whether there's any further info you need. i'm assuming you are somewhat finance savvy and can interpret what you see. if you look at the telecons and webcasts, the uk analysists lack of questions (all info was provided) is very noticable.

I'm way behind you on that stuff Zak. Can you give a few links for duds like me when you get a chance?

EDIT: I can of course googlethat stuff when I get the chance. I suppose I have been relying on the reports in the main stream media. If the info is there and has been revealed then the banks should package it as a press release and get it out to the papers. The Govt should refer to it too. If it is not reported then there is not much more they can do. The point is that the Govt should insist that the banks do all they can to give the public confidence that they are being honest and transparent and that real progress is being made.

in the main, the journalists have no grasp of the legal constraints around loan losses. its very easy for some hack to claim that house prices are down 20% so the loan book should be down 20% but thats wrong, along with most of the analysis out there.

part of the problem is that banks and accountants cannot explain the concepts in newsworthy bite size articles, it takes pages and pages of drudge which would be unpublishable!!!

i looked at both aib and boi investor/senior mgt conferences and the answers in the main were "turn to page 14" etc. i was told by one of the organisers that the analysists arrived an hour in advance, read the reports and headed back to their offices, the rooms were 20% full. we now know that they took the disclosures and fecked out the models and applied 1990 uk metrics to guide earnings etc for 2010. they havent (by their own admission) accounted for differing economic conditions, accounting standards and regulations in their application of metrics.

hence, the market (through the analysists) say that there are billions of unannounced loan losses out there destroying capital.
time will tell if their models match actual losses, i'll bet they don't!

a look at the investor relations sections of the aib and boi websites should show what i mentioned above, and look for ubs, merrill lynch and goldman sachs for their takes on the statements. constrast to irish brokers who know irish banks better.

zakalwe wrote:

in the main, the journalists have no grasp of the legal constraints around loan losses. its very easy for some hack to claim that house prices are down 20% so the loan book should be down 20% but thats wrong, along with most of the analysis out there.

part of the problem is that banks and accountants cannot explain the concepts in newsworthy bite size articles, it takes pages and pages of drudge which would be unpublishable!!!

i looked at both aib and boi investor/senior mgt conferences and the answers in the main were "turn to page 14" etc. i was told by one of the organisers that the analysists arrived an hour in advance, read the reports and headed back to their offices, the rooms were 20% full. we now know that they took the disclosures and fecked out the models and applied 1990 uk metrics to guide earnings etc for 2010. they havent (by their own admission) accounted for differing economic conditions, accounting standards and regulations in their application of metrics.

hence, the market (through the analysists) say that there are billions of unannounced loan losses out there destroying capital.
time will tell if their models match actual losses, i'll bet they don't!

a look at the investor relations sections of the aib and boi websites should show what i mentioned above, and look for ubs, merrill lynch and goldman sachs for their takes on the statements. constrast to irish brokers who know irish banks better.

Would the bulk of questionable loans have originally been property, including commercial property outside Ireland? Now some credit card debt, personal mortgages and business loans in Ireland are looking dodgier by the day as unemployment goes up. At the moment, a lot of the assets against which the loans are secured are unsaleable at any real price. The banks only know which loads are performing today, and presumably they have reported on that?

Quote :

No convincing national investment projects have been mooted. All we have is the NDP and we are stuck with it. Will we have to look at conscription to factories and national projects or not? Can private enterprise get us out of the hole if we give it the money or will private enterprise decide that profits cannot be made? We don't know.

Zhou, you are beginning to sound like the most radical-thinking person on the site (I'm not sure whether left or right), but if people are going to be required to work in factories, surely those factories should be nationalised - and how about the co-operative structure Pax was talking about for running them ? Co-ops have proven better at weathering this type of storm than private enterprise. If people are asked to take wage cuts they will surely want a share of profits come recovery?

The NDP is almost certainly better prepared and much more ready than Obama's scheme that is being pulled together very quickly - I was reading yesterday about how difficult it was going to be to spend the money - I know from experience that disbursing grants can be much harder than you would think.

The problem with the NDP is that it didn't take environmental sustainability to its heart, and so far as I can find out, is much to reliant on UK-derived energy sources.

The NDP should be rolled out in a rigorous manner. None of this crap that we've had over the past decade where you get farmers in the back arse of nowhere getting huge land payouts. I have personal friends whose family have made fortunes out of compulsory purchase orders on their property.

johnfás wrote:

The NDP should be rolled out in a rigorous manner. None of this crap that we've had over the past decade where you get farmers in the back arse of nowhere getting huge land payouts. I have personal friends whose family have made fortunes out of compulsory purchase orders on their property.

I'm amazed at that. I know a lot of people who have had land cpo'd and the payments, particularly where the viability of a farm is destroyed, I think in no way meet the full loss (which after all is in perpetuity).

I know someone in Kildare who got 2 million for not alot of land. I know people who got several hundred thousand for a couple of feet of a back garden that you couldn't do anything with anyway when the Luas was built.