"Was it worth paying €41.7 billion to bail out the Irish banks?"

[Brendan Burgess]

An interesting opinion piece here by Ciarán Hancock in the Irish Times based on the C&AG's update of the costs.

Was it worth paying €41.7bn to bail out Irish banks?

C&AG’s annual report puts cost of post-2008 crash bailout under the microscope again

www.irishtimes.com

I have not read the report from the C&AG yet.

But the main beneficiaries of the bail out were the Irish depositors. So a lot of individuals, credit unions, companies, pension funds would have lost a lot of money if we had not bailed out the depositors.

I am not saying we should have bailed them out. I am just pointing out that the cost to Ireland Inc. was a lot less than €41.7 billion.

Brendan

 

[NoRegretsCoyote]

If you do the sums you see that the surplus from Nama and BoI will nearly offset the losses to the state from AIB and ptsb.

The 'traditional' bits of the banking sector made some bad decisions but nothing like the sale of Anglo and INBS.


The real disaster zones were Anglo and INBS with €36bn that will never be recouped. It's a pity for policy that the difference between Anglo&INBS vs the rest wasn't more clear earlier

 

[joe sod]

I read the article and I think it's a bit lob sided because it doesn't include the fact that nama got the banks loan book at a 70percent haircut or 30percent of their value on the banks balance sheets. That 70percent discount was made up by the state which is a lot of the 41 billion bank bailout cost. Of course nama was shambolic in managing those assets, it sold off the best assets like the London properties (battersea power station) almost immediately at steep discounts to their real value.
Then last year it breathlessly proclaims that it is making good profits on selling the assets while conveniently forgetting that it got the assets at 70percent discount, any idiot could have made a profit from that.
That was the biggest mistake, setting up nama, a whole new bureaucracy with associated costs and no expertise in banking or managing assets.
It would have been a whole lot better to capitalize the banks, obviously with independent oversight from international experts, and not have set up nama at all. The banks at least would have had a vested interest in trying to get as much money back from those distressed assets as it was their mess originally. Nama were just bureaucrats that had no skin in the game.

 

[Brendan Burgess]

NAMA achieved three very important objectives

1) It removed a lot of the uncertainty from the banks. The banks got cash in place of their bad loans.
2) It meant that there were not 4 banks competing with each other to sell off distressed loans.
3) Centralising all the loans for a particular developer with the one organisation, meant that a holistic approach could be taken. If a developer had loans outstanding to three or four banks, one could try to steal a march on the others, by appointing a receiver or liquidator.

They did not sell off anything at steep discounts to their real value. They sold off stuff at the then market value. The fact that the market value subsequently increased does not mean that they were sold at less than their real value.

It was a real mess, but NAMA was a part of the solution and not the problem.

Brendan

 

[joe sod]

@Brendan Burgess, in fairness you make some good points, but I thought the banks were not capitalized to the full book value of their loans, in other words the 70 percent discount that nama got the loans for was not made up with hard cash on the banks balance sheets.
Secondly there was no pressure on nama to retrieve that full 70percent back, the government did not impose benchmarks for them to achieve , even recovering back half of that lost book value should have been a condition imposed .
The battersea power station was basically flipped by an investment fund a year or two later for double what it payed nama, so obviously the guys running that investment fund knew a lot more about it than nama.
Then it mishandled the sale of the northern Ireland assets selling them all off in one lump which was too big for most investors therefore they could not get full value as it was a buyer's market, the US fund was the only one able to bid on it.

 

[RedOnion]

Then it mishandled the sale of the northern Ireland assets selling them all off in one lump which was too big for most investors therefore they could not get full value as it was a buyer's market,

Imagine how much worse it would have been in a liquidation if the banks had been allowed to fail?

 

[NoRegretsCoyote]

@joe sod

Nama actually deliberately sold UK and US assets early, roughly 2011 to 2013, with Irish assets coming later, from roughly 2014 to 2016.

Imagine it had done it in the opposite order

 

[PMU]

But the main beneficiaries of the bail out were the Irish depositors. So a lot of individuals, credit unions, companies, pension funds would have lost a lot of money if we had not bailed out the depositors. I am not saying we should have bailed them out. I am just pointing out that the cost to Ireland Inc. was a lot less than €41.7 billion. Brendan

You are correct but the funds came from the State not from the bailed-out banks.

The compensation of depositors and guaranteed bondholders was made under the Eligible Liabilities Guarantee Scheme and the subsequent Deposit Guarantee Scheme. These were/are State schemes administered by the NTMA and payments made thereunder had nothing to do with the banks.
When the IBRC (previously Anglo) was liquidated its depositors received EUR 36 million under the DGS; bondholders received €934 million and deposit holders received €138.3 million under the ELG scheme. (The ELG has since compensated the deposit holders of three credit unions). (These figures are from a 2015 report on the ELGS by the Department of Finance.) So we are talking of in excess of EUR 1 billion in compensation payments, which is a lot less than EUR 41.7 billion, and which was made by the State.

The main beneficiary of the bail-out was the ECB, which had in effect been the main supplier of liquidity to Anglo.

 

[joe sod]

Imagine how much worse it would have been in a liquidation if the banks had been allowed to fail?

The banks could have been saved without the formation of nama, yes nationalisation like the British did with royal bank of Scotland, however we should have allowed the nationalized banks deal with their loan book not nama, that's my point. They could have just recapitalized the banks and that would have stopped them from failing as the British had done.

 

[RedOnion]

The banks could have been saved without the formation of nama, yes nationalisation like the British did with royal bank of Scotland, however we should have allowed the nationalized banks deal with their loan book not nama, that's my point. They could have just recapitalized the banks and that would have stopped them from failing as the British had done.

I'm sorry, but I don't follow you post at all.

The exact same thing happened in UK, except an internal unit and external funds took the place of NAMA. RBS was forced to clean it's balance sheet and did a lot of 'fire sales' after being bailed out. It took massive write downs on both portfolios that they sold and ones they kept. Their 'bad bank', the internal equivalent of NAMA, lost £50bn after they were rescued.

There plenty of articles criticising what happened in RBS and about how the tax payer lost money by not waiting it out - similar to what you said about NAMA. A article in the FT last year put it at £15bn.

Without Nama the Irish banks wouldn't have been able to access wholesale markets as early as they did. They might have sold loans for more, but their funding costs to get there would have been considerably higher.

Hindsight is a wonderful thing.

 

[joe sod]

From my reading of it the british governments stake in rbs is very much live as they still own the majority of the bank, the ultimate cost of the bailout wont be known until they sell off all their shares, so the bad bank structure is still all in play in that it is all included in the share price.
However there is no room for Nama to make back all the bailout cost because they have sold off most of the assets already crystallizing the losses at basically the 32 billion euro cost they got them at, they are due to only return a small surplus of 3.5 billion but nearly 40 billion euros is still lost forever because they have already been crystallized.

 

[RedOnion]

@joe sod
RBS sold billions worth of assets. Their 'bad bank' is gone. They lost billions. Funds that bought their books have made profits or further losses.
I don't see what point you're making.

 

[cremeegg]

If the bail out cost the Irish taxpayer €42bn, how much did the bail out of the Irish banks cost the British taxpayer.

I understand that the British govt, via RBS, bailed Ulster Bank to the tune of €15bn. While some of this no doubt related to NI and they will have recouped some of their money, it would appear that the British taxpayer's contribution to the bailout of the Irish banks was sizeable.

And bear in mind that the upside to all the money the banks lost was thousands of new houses. I am typing this sitting in a house funded by UB, although I did not default on my mortgage, it would nearly have been worth it just to think that the British taxpayer would have picked up the bill.

 

[NoRegretsCoyote]

A fair bit of INBS's losses were on UK commercial property.

Nama had a fair bit of UK portfolio from across the covered banks.

It wasn't a one-way street.

 

[Duke of Marmalade]

I am not saying we should have bailed them out. I am just pointing out that the cost to Ireland Inc. was a lot less than €41.7 billion.

Brendan

That raises a fascinating question. How much did Ireland inc. lose as a result of the binge? I suggest next to nothing. Foreign bondholders merely got their money back. Depositors got their money back. But Ireland inc. does currently have on its balance sheet a liability of €41.7bn arising from the binge. So following good old double entry principles where are the Debit entries? A substantial amount of assets have been transferred to the lucky so and so's who got unbelievable prices for their land and properties during the binge. They were allowed to hold onto these windfalls. We have a sacred cow in our tax system that there can be no retrospective taxation but given this unprecedented crisis a good case could have been made to levy a 80% retrospective binge tax on property gains since 2000.
But these weren't the only binge beneficiaries. The economy was apparently flying, taxes were cut, State pensions were doubled, social partners milked the system, bonuses and pay rises were aplenty (not just for bankers). But it was mostly an illusion - as Henda reminded us, we all binged to some degree. So some of that €41.7bn has been spent on foreign imports which we could not afford but some has finished up in peoples savings from windfall incomes and low taxes that were not warranted.
So folks this €41.7bn hole should be looked at as a massive transfer from current and future generations to the bingers of the early naughties (sic).
On the bright side we do have a fantastic motorway system, so whilst it might be argued that we couldn't afford it, it is an invisible entry on the Debit ledger.

 

[Duke of Marmalade]

You are correct but the funds came from the State not from the bailed-out banks.

The compensation of depositors and guaranteed bondholders was made under the Eligible Liabilities Guarantee Scheme and the subsequent Deposit Guarantee Scheme. These were/are State schemes administered by the NTMA and payments made thereunder had nothing to do with the banks.
When the IBRC (previously Anglo) was liquidated its depositors received EUR 36 million under the DGS; bondholders received €934 million and deposit holders received €138.3 million under the ELG scheme. (The ELG has since compensated the deposit holders of three credit unions). (These figures are from a 2015 report on the ELGS by the Department of Finance.) So we are talking of in excess of EUR 1 billion in compensation payments, which is a lot less than EUR 41.7 billion, and which was made by the State.

That is a very narrow interpretation of Brendan's point. The DGS and ELG compo payments are a small part of this. For example, Anglo transferred €9bn of deposits to AIB. That would not have been possible without the bail out of Anglo.

 

[Purple]

That raises a fascinating question. How much did Ireland inc. lose as a result of the binge? I suggest next to nothing. Foreign bondholders merely got their money back. Depositors got their money back. But Ireland inc. does currently have on its balance sheet a liability of €41.7bn arising from the binge. So following good old double entry principles where are the Debit entries? A substantial amount of assets have been transferred to the lucky so and so's who got unbelievable prices for their land and properties during the binge. They were allowed to hold onto these windfalls. We have a sacred cow in our tax system that there can be no retrospective taxation but given this unprecedented crisis a good case could have been made to levy a 80% retrospective binge tax on property gains since 2000.
But these weren't the only binge beneficiaries. The economy was apparently flying, taxes were cut, State pensions were doubled, social partners milked the system, bonuses and pay rises were aplenty (not just for bankers). But it was mostly an illusion - as Henda reminded us, we all binged to some degree. So some of that €41.7bn has been spent on foreign imports which we could not afford but some has finished up in peoples savings from windfall incomes and low taxes that were not warranted.
So folks this €41.7bn hole should be looked at as a massive transfer from current and future generations to the bingers of the early naughties (sic).
On the bright side we do have a fantastic motorway system, so whilst it might be argued that we couldn't afford it, it is an invisible entry on the Debit ledger.

We bailed out the Depositors and the Bondholders. Banks are just infrastructure through which the money flows but they were always dealing with other people's money. Those other people are the Depositors and the Bondholders (pension funds etc). Ironically they were mostly of the same generation who splurged in the early naughties (and are now retired, drawing the pensions which were bailed out).
Basically the generation who had the money, made the investments, ran the country, ran the banks, ran the investment funds, ran everything and ran them all into the ground are the people who were actually bailed out.
The young people who can't afford a house and won't have a pension, along with the kids in school now and their kids will pay for it.

 

[Duke of Marmalade]

We bailed out the Depositors and the Bondholders.

Whatever about bondholders, society had a moral duty to bail out depositors. Any argument that depositors knowingly were risk takers is. in the words of the great classical scholar, humbug. That goes for those depositors who went for the higher rates paid by Fingers and Drummer.
Nut it wasn't moral imperative that bailed out depositors. If we had allowed the banking system simply to collapse we would have been blasted back to the Stone Age, and no way would we be where we are today.

 

[Purple]

Whatever about bondholders, society had a moral duty to bail out depositors. Any argument that depositors knowingly were risk takers is. in the words of the great classical scholar, humbug. That goes for those depositors who went for the higher rates paid by Fingers and Drummer.
Nut it wasn't moral imperative that bailed out depositors. If we had allowed the banking system simply to collapse we would have been blasted back to the Stone Age, and no way would we be where we are today.

I don't know about the moral imperative of the people who traded down and took their windfall being bailed out by the people they sold their houses to but I do accept that it was done on the basis of necessity. I'd just like pensioners, the worst generation in the history of this state, to show a bit more humility and gratitude to the young people who they foisted their mistakes on. A bit less greed and selfishness would be nice.

 

[peemac]

If the bail out cost the Irish taxpayer €42bn, how much did the bail out of the Irish banks cost the British taxpayer.

I understand that the British govt, via RBS, bailed Ulster Bank to the tune of €15bn. While some of this no doubt related to NI and they will have recouped some of their money, it would appear that the British taxpayer's contribution to the bailout of the Irish banks was sizeable.

And bear in mind that the upside to all the money the banks lost was thousands of new houses. I am typing this sitting in a house funded by UB, although I did not default on my mortgage, it would nearly have been worth it just to think that the British taxpayer would have picked up the bill.

I was at a dinner last weekend that had a couple of bankers at my table - a former Bank of Scotland Ireland and also a former RBS senior exec (one very senior)

They reckon the UK tax payer lost substantially over €20bn to Irish borrowers as many loans for international property were made through the parent banks rather than the Irish subsidiary and irish investors were voracious in their appetite for international property.