Some Basic Nationalisation & Recapitalisation Questions

[dave2k]

I know nothing about the banking crisis and am trying to get it straight in my head. Please forgive me if I sound like a total idiot asking these questions.

I know that credit is essential for our economy. It is essential for our businesses to get a hold of credit to operate (keep jobs) and to expand (create new jobs).

I am curious as to why the banks were not allowed to fail and then the government pick them up for less than the cost of recapitalization. This way the government would own (at least one) it's own bank and could dish out all the credit it deemed necessary (within reason of course).

Am I right in assuming that the only reason this has not happened is because the banks would not fail immediately (if ever) and we would be in for years of frozen credit?

Why can't the state use it's latest nationalisation (Anglo) to dish out credit to the ailing small businesses? It couldn't be an infrastructure issue so why? If it's a matter of not having the correct capital ratio, surely the government could use the money it used to recapitalise BOI and AIB to capitalize IT'S OWN (THE TAXPAYERS) BANK? (as apposed to a privately held bank?)

Could the state not simply BUY a bank, say BOI, using the same taxpayer money it used to recapitalise it , sell off the non essential parts of it and start lending on it's own terms? Would this not achieve the desired stimulation effect?


I understand that being a banking simpleton I must have grossly oversimplified above. Please let me know where I'm going wrong in my thinking.

 

[Duke of Marmalade]

I am curious as to why the banks were not allowed to fail and then the government pick them up for less than the cost of recapitalization. issue so why?

Do you mean let the banks default on their liabilities and then buy them up with their assets? That's not the way our legal system works, thankfully. If you "pick up" the banks you pick up their liabilities. The only "letting them fail" option is to start a completely fresh bank from scratch. I guess that ain't so easy, never mind the chaos between the time the banks failed and the very long time to build up a viable replacement.

 

[UptheDeise]

Do you mean let the banks default on their liabilities and then buy them up with their assets? That's not the way our legal system works, thankfully. If you "pick up" the banks you pick up their liabilities. The only "letting them fail" option is to start a completely fresh bank from scratch. I guess that ain't so easy, never mind the chaos between the time the banks failed and the very long time to build up a viable replacement.

But our banks have failed through their own fault. Why should we pick up the tab for that?

When a company goes bankrupt it goes to the wall. That rule applies to banks as well. We should let the banks go to the wall and start afresh. All the capital is in place for the rebuild to happen.

 

[Cayne]

But our banks have failed through their own fault. Why should we pick up the tab for that?

Because if the banks go to the wall then we re all in trouble. The banks form the centre point of an economy! The consequences of letting the banks fail are dire.

 

[UptheDeise]

Because if the banks go to the wall then we re all in trouble. The banks form the centre point of an economy! The consequences of letting the banks fail are dire.

Yes, if the banks go to the wall we will receive a severe sharp shock but that is better than what the government is doing now. Proping up these zombies banks and dragging the whole crisis out over a longer period of time.

Banks have failed in the past before and will continue to do so in the future.

 

[Sunny]

Yes, if the banks go to the wall we will receive a severe sharp shock but that is better than what the government is doing now. Proping up these zombies banks and dragging the whole crisis out over a longer period of time.

Banks have failed in the past before and will continue to do so in the future.

No economy has ever successfully let their biggest banks fail. AIB and BOI cannot under any circumstances be allowed to fail. The rest you can argue about.

 

[UptheDeise]

No economy has ever successfully let their biggest banks fail. AIB and BOI cannot under any circumstances be allowed to fail. The rest you can argue about.

When Japan proped up its failed banks in the 1990s they suffered from stagnation. They still haven't fully recovered from that.

Why can't we allow AIB and BOI fail, they already had and wil ultimately fail as the recapitalisation won;t work. What a waste of €7 billion euros.

 

[Sunny]

When Japan proped up its failed banks in the 1990s they suffered from stagnation. They still haven't fully recovered from that.

Why can't we allow AIB and BOI fail, they already had and wil ultimately fail as the recapitalisation won;t work. What a waste of €7 billion euros.

The reason Japan lost a decade was they took way too long to even begin to recognise the problem. They continued to allow the banks make reckless loans and they were slow in using monetary policy to help. It wasn't till the late 90's that they actually started facing up to the problems and made the banks who were reluctant to do so because of the stigma attached make write downs. The Japanese model didn't fail because it propped up the banks, it failed because it wasn't decisive enough in cleaning up the balance sheets.

Anyone who thinks the Irish economy could survive its two main banks going under is deluding himself. There is no doubt that if this happened, we would be looking at soverign default.

 

[UptheDeise]

The reason Japan lost a decade was they took way too long to even begin to recognise the problem. They continued to allow the banks make reckless loans and they were slow in using monetary policy to help. It wasn't till the late 90's that they actually started facing up to the problems and made the banks who were reluctant to do so because of the stigma attached make write downs. The Japanese model didn't fail because it propped up the banks, it failed because it wasn't decisive enough in cleaning up the balance sheets.

Anyone who thinks the Irish economy could survive its two main banks going under is deluding himself. There is no doubt that if this happened, we would be looking at soverign default.

The Japanese banks were Bailed out by the government in the 1990s. That's what happened. Incidentally, it was either Greenspan or Bernanke that paid a visit to Japan at this time and warned the Japanese not to bail out their banks.

If those banks are allowed to go to the wall we will have entrepreneurs coming along to set up new ones.

 

[Sunny]

The Japanese banks were Bailed out by the government in the 1990s. That's what happened. Incidentally, it was either Greenspan or Bernanke that paid a visit to Japan at this time and warned the Japanese not to bail out their banks.

If those banks are allowed to go to the wall we will have entrepreneurs coming along to set up new ones.

Of course they were bailed out. My point is that they were not bailed out quickly or strongly enough. They were allowed to continue on like nothing happened for a couple of years. The idea of giving state aid in dribs and drabs is not going to work. I may not agree with everything about NAMA but it is decisive and should, if done properly draw a line under the banks problems.
I have never heard Greenspan or Bernanke say that about the Japanese banks. I do know that Greenspan was on record in the late 90's saying Japan needed to recognise the losses within the banking system and move on. In one speech he said


The Swedish case, in contrast to America’s savings and loan crisis of the 1980s and Japan’s current banking crisis, also illustrates another factor that often comes into play with banking sector problems: speedy resolution is good, whereas delay can significantly increase the fiscal and economic costs of a crisis. Resolving a banking-sector crisis often involves government outlays because of implicit or explicit government safety net guarantees for banks. Accordingly, the political difficulty in raising taxpayer funds has often encouraged governments to procrastinate and delay resolution, as we saw during our savings and loan crisis. Delay, of course, can add to the fiscal costs and prolong a credit crunch.

Can you name me one Country that has allowed one of its major lending institutions never mind two to fail and considered it a good idea. Most recent one was Iceland. That turned out well for them! ​

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[Duke of Marmalade]

Sunny I don't know why we bother refuting what is a ridiculous proposition. But let's just consider that last September the Government had not guaranteed bank liabilities. There would have been a run on the banks and yes they probably would have "failed" as is being suggested. Fails means they have run out of money to pay calls on their deposits/bonds, a liquidity crisis, nothing really to do with the quality of their loans.

Next step they go into liquidation. The balance sheet is frozen until the liquidator sorts out the mess. That means that the vast bulk of deposits and current accounts in the country are frozen. The money transmission system freezes and the economy has lost its money supply. And pray where would this new good bank get its funds with all the deposits in the other banks frozen?

The result is not just a recession/depression but a retreat to the stone ages - I'd say a 95% contraction in the economy. Not even Sinn Fein have argued that the big banks should have been allowed to fail.

 

[BadSanta]

I think everyone has a gripe with the bank, up the deise has so much so that he wants to see them go down. to put it simply if the big 2 failed...irelands economy is finished... any so called entrepreneur would have set sail for a different country long ago if the banks were gonna fail instead of waiting for iceland part 2.

 

[DerKaiser]

I am curious as to why the banks were not allowed to fail

I think people keep forgetting that there's a lot of ordinary people with their life's savings on deposit in banks. These would be the people to lose most if the government let the banks fail.

Also, as everyone else has said, we would be back to the barter system without a trusted and fully functioning banking system to keep some kind of credit flowing through the economy

 

[Spondulicks]

What did the politicians say when ICC and ACC were privatised?

What is the market price for senior executives in Irish banks today - if there was a transfer market , what could they command?

What do the terms of reference look like on remuneration committees of boards in financial institutions today and are they still using the same consultants as gave them the flawed models that led us to where we are now? Rewarding X and hoping for Y!

Where are the chief economists in the financial institutions and what value have their forecasts now?

As PJ O'Rourke remarked, micro economics is where economists are specifically wrong while macroeconomics is where they are generally wrong! Perhaps this only holds for the banking version as their judgement becomes clouded by the brand, the need to sell and the need to obtain media attention.