My understanding of the whole banking drama is fleeting (maybe naive). I would have thought that the banks of systemic importance were BOI and AIB and that the rest should be left to their fate. We seem to be borrowing money that the taxpayer will have to repay and pumping it into theses banks but we have little control over said banks. Also nationalising the banks exposes the taxpayer to a big downside.
Can someone tell why we couldn't have bought AIB and BOI when the shares were on the floor (for less than we recapitalised them with, I think) and had full control over the banks but had our liability limited to the cost of those shares?
.. including surprisingly naive professors at Trinity and UCD
Hi TarfHead
I don't think that you are being fair
He has been quoted in the media as far back as February 2006.
[broken link removed]
When they placed their money in the bank only the first 20K was guaranteed by the state. They are doing very well to get 100K back (200K for a joint account). Everyone knows that AIB and BoI are limited companies with the chance of failure and the possibility that they will not be able to repay their lenders.I think there are many valid arguements here [..against allowing irish banks to fail...], the ones I have a problem with are as follows:
- Many ordinary people have more than €100k on deposit. Older people, for example, may have saved all their lives and plan to live off this money. It shouldn't be seen as a gamble to keep your life savings in a bank
Do you have a source for this? It has been suggested that most of AIB and BoI's stated new lending is in fact rollup lending and making new loans to cover loans that are due by borrowers likely to be bought out by NAMA.DerKaiser said:
- It has been shown that AIB and BOI are the only banks maintaining any flow of liquidity in this country. We cannot depend on foreign banks to supply us with credit, it is too big a risk
Shareholders are paid only after bondholders but, according to Sunny below, senior bondholders and depositors share losses equally.DerKaiser said:Can we save the banks, maintain deposits but hit the sharholders and debtholders to the maximum extent?
The scenario we are discussing is one where insolvent banks are allowed to fail. Insolvent banks don't need future funding as they are dead.Shareholders and deeply subordinated debt holders have already been hit pretty hard. Targeting senior debt holders is more difficult because as senior unsecured creditors, they rank pari passu with depositors. Also, you would be shutting the banks out of the capital markets so where would they get future funding?
Is there a knock-on effect? is there not a difference between sovereign debt and limited company debt? Would you be more willing to lend to an Irish government that has guaranteed 440 billion euro of borrowings or an Irish government with the sense to allow limited companies to fail?Sunny said:Not to mention the knock on effect on Irish Government borrowing.
In my simplistic understanding of bonds, there are some people who buy bonds and choose to insure them by purchasing credit default swaps at the same time. These are insured debt holders. They face no loss if the issuing institution defaults. They are repaid by the organisation that wrote the swaps. Is that right?I don't understand what 'uninsured debt holders' are or what Credit Default Swaps on covered bonds have to do with anything.
'Too big to fail' is a loaded phrase that implies that such a thing exists. In competitive markets, companies fail when they make stupid decisions in their allocation of resources. In this way their more efficient competitors are rewarded. The winner is the consumer. I am sick of hearing about the lack of credit available to Irish SMEs when I have spent the last 15 years competing against companies using endless credit as a substitute for profits.The simple fact is that BOI and AIB are too big to fail. People really need to start accepting that. They might not like it but it is a fact of life. The other banks, we can argue about.
Is it worth turning the populace to debt slavery and risking the solvency of the entire state for the sake of these employees? Company failure and consequent job losses are part of the natural order of free market capitalism. Attempting to preserve failing companies is unfair to competitors and sustains the inefficient allocation of resources that caused the failure in the first place.5 things spring to mind immediatly
1: Thousands of people (bank staff) would lose their jobs which is a significant cost to the state in terms of social welfare payments and lost taxes
Bank shares are already down 90-95% so there's not much further to go. The failure of a couple of stock market companies should not impact on a properly diversified investment fund.Mpsox said:2: Pension funds and investment funds would take a big hit over the write down of the value of their shareholding in the banks in question
I understand the foreign owned banks lack of appetite for competing in the Irish market as the Irish government appears willing to do anything to bailout their failing competitors. How would you feel if you were NIB in the face of such a policy?Mpsox said:3: None of the foreign owned banks have either the interest in lending or funds available to do so to the scale required to replace the big 2 banks. NIB are closing branches, BOSI contemplating pulling out, Ulster Bank seems to have stopped mortgage lending and is closing First Active,
Is money on deposit in AIB or BoI really in Ireland? And if it is, does society benefit as a result? AIB and BoI are owned by international shareholders and institutions. Having loads of money on deposit in the past led to them making stupid lending decisions. Perhaps we would all have been better off if they'd had less money to lend?Mpsox said:4; They'd be a run of funds out of the country if it was thought this was going to happen
I've answered this previously above. 100K is not a pittance to be left with. The state guarantees an income for the old. Caveat emptor. The alternative punishes the poor and the innocent, the uninvolved, the people with no assets.5; Ordinary depositers with funds in excess of €100k would be punished for playing it safe and not "gambling" with their money in investements instead of simply putting it in the bank.
Yes, it is there to back the supply of credit vital to maintain business in this country. A lot of this cheap credit was directed towards an overheated propery market, in this sense there was too much credit, but we now have the problem of well run businesses being choked of credit, and this is very very bad for employment and enterprise.Is money on deposit in AIB or BoI really in Ireland? And if it is, does society benefit as a result? AIB and BoI are owned by international shareholders and institutions. Having loads of money on deposit in the past led to them making stupid lending decisions. Perhaps we would all have been better off if they'd had less money to lend?.
I still beg to differ here. There are plenty of retired people who'd have larger sums on this on deposit that they've spent their entire working lives building up. If they live another 25 years, €100k provides a fairly limited addition to their old age pensions.I've answered this previously above. 100K is not a pittance to be left with. The state guarantees an income for the old. Caveat emptor.
The situation I find disturbing is this.The alternative punishes the poor and the innocent, the uninvolved, the people with no assets.
You are misinterpreting this phrase. Of course banks aren't too big to fail, haven't they proved that in spades.Placing money with a bank does incur a small risk in the same way that crossing the road incurs a small risk.
'Too big to fail' is a loaded phrase that implies that such a thing exists.
I've answered this previously above. 100K is not a pittance to be left with. The state guarantees an income for the old. Caveat emptor. The alternative punishes the poor and the innocent, the uninvolved, the people with no assets.
I don't understand this idea that credit will dry up. Is this not like saying that Irish people will have no more crisps if Tayto shuts down? We are living in an economic community of 500 million people with thousands of lending institutions of all sizes. The law of supply and demand dictates that they will sell credit to Irish people in the absence of local lenders such as AIB & BoI. Maybe they won't lend 100% LTV and 5x income for 40yrs at ECB + .5% but there is a market value for credit all the same.A lot of this cheap credit was directed towards an overheated propery market, in this sense there was too much credit, but we now have the problem of well run businesses being choked of credit, and this is very very bad for employment and enterprise.
Yes it would be very sad but is it worse than recovering their losses from the rest of us and our children over the coming decades? In 2009 it is clear that trusting a large sum of money to any one Irish bank is stupid and dangerous. There are plenty of places to invest large sums of money other than dropping it in the local bank. Post office, AAA gilts, AAA foreign banks - spread it between several institutions. The state had a deal with depositors: only the first 20K was guaranteed.I still beg to differ here. There are plenty of retired people who'd have larger sums on this on deposit that they've spent their entire working lives building up. If they live another 25 years, €100k provides a fairly limited addition to their old age pensions.
Yes they are in negative equity and must slave to pay off their debts for many years. This will happen with or without the closure of the failed banks. In hindsight, the Irish state provided too many incentives to buy property: section 23, section 27, section 48, section 50, mortgage relief, allowing large multiples of salary to be lent out, overpaying public sector staff with consequent salary rises for private sector staff, reducing stamp duty, affordable housing schemes, co-ownership, local authority buyout... Living in a council house is not the only alternative to buying property, you can also rent. An alternative govt policy to promoting house ownership for all would be to promote long term residential rental leases and reduce the supply of state housing.We've had 10 years of almost full employment. There is a section of society who would otherwise have been on the dole all their lives who have worked and provided for themselves and now find they are out of a job with mortgages to pay off (they'd have been better on the dole with a council house).
I see your point, but I think the alternative is worse. The signal we are now sending out is that if you lend money to private Irish banks and those banks then lose the money, that the state will compensate you by taxing the honest effort and hard work of a future generation of innocents. Incentives to work and to employ are created by low income taxes and low corporate taxes.Consider also people who have worked hard and saved all their lives who would lose much of their savings if banks went bust.
People are not stupid, they respond to incentives. If we say screw the people with houses and savings we are sending out a strong signal that honest effort and looking to improve your lot through hard work is to be punished in this country. I think sometimes the people who view themselves as champions of the poor forget that rewarding honest effort and seeking maximum possible employment is by far the best way of getting people out of the poverty trap.
Is this not the same argument produced whenever a large irish owned employer is insolvent. Irish Steel, Irish Sugar, Waterford Crystal all too big to fail - but too crap to serve their customers profitably. I don't understand systemic risk although it has been often repeated since the blanket guarantee scheme. What is the systemic risk of Irish banks collapsing? The purpose of this thread is to try to answer that question.You are misinterpreting this phrase. Of course banks aren't too big to fail, haven't they proved that in spades.But some are too big to be allowed fail. And that is not because it would be unfair on staff, unfair on depositors who trusted their banks with their savings, unfair on bondholders who supported the Irish economy. Not for any of these moralistic reasons but solely because they are "systemic", that's the word, to our whole economic survival.
Utility companies around the world do go bust or are acquired or merged. When insolvent, their infrastructure and other assets are sold to a more solvent competitor who is still in business as a result of making smarter decisions in the past. If the ESB shuts I imagine I would be getting my electricity from Airtricity or Bord Gáis or Veolia or GE or from whomever acquires their assets from the liquidator. In the UK, for example, the cable TV operators regularly go bust and are then acquired by each other. Telewest was taken over by NTL and in turn NTL was taken over by Virgin.The only similarly systemic enterprise I can think of is the ESB. If the ESB made one holy mess of their finances, say buying up all the damns in Africa or whatever, and was hopelessly insolvent I am afraid the State would have to bail it out in a similar fashion.
No, I think it's a good analogy. A bank, after all is just a private company with a bunch of assets that can be transferred in the event that it can no longer figure out how to continue as a going concern.Okay, Paul, bad analogy with the utility company.
I imagine there would be problems but I think these problems would be temporary. I think they would pale into insignificance compared to the pain we are planning to inflict on ourselves now and for the coming decades.If we woke to find a leading retail bank was insolvent then all its services would cease, because its services are in effect its balance sheet. ATMs would have to be closed down - can't have creditoirs rushing to get ahead of others. Cheques would be worthless. Direct Debits would all cease to function. Credit cards would be useless. Not to mention the enormous wealth effect as 40% of the population suddenly find themselves potentially impoverished. Economic activity would be paralysed. And if one can be let go how long before the other goes? Panic, panic, panic.That's why the big banks are too big to be allowed fail. Not sure about the others.
Nationalising the banks would mean the taxpayer assuming all their liabilities in perpetuity. Why would we do this when the banks can legitimately fold and make their bondholders and shareholders pay. Buying a corporate bond is one step up from buying a share but it's still a gamble. Nationalised institutions are susceptible to low efficiency operation, political intereference, corruption and so on.It would be so much simpler if the government nationalised the bankrupt banks, guaranteeing the safety of the deposits and the bond holders. Unfortunately the shareholders shouldn`t get anything as the banks are bankrupt. NAMA can then take the toxic loans of the banks on its books and dispose of the assets of these loans gradually over 5 years or sf course new regulations and personnel are needed at these banks and serious penalties for flouting the rules.
Is it possible that the cost will far exceed 20bn? As previously noted, the IMF estimates Irish bank losses at 35bn by 2010 alone. I don't understand why the assets of an insolvent bank would spend long 'frozen behind a liquidator's door'. The banks assets are mostly virtual: certificates, deeds, bonds, mortgages. Tradable assets....darag has pointed out that we now also potentially have a solvency issue, but even the most grim doomsayer puts this at no more than €20bn in excess of available capital. If the worst comes to the worst and over 10/15 years the taxpayer loses €20Bn that is far better than shutting down the system and leaving €350Bn frozen behind a liquidator's doors.
The truth always seems to lie somewhere in between.Why should this be an all or nothing question?
I don't know how useful shareholder equity is as a measure of the strength of a bank. A large amount of uncollectable loans will give a high number for shareholder equity.Besides Anglo, the solvency of the other banks is not completely clear to me. It seems that AIB at least may be solvent with a 180 billion balance sheet but from what I recall they only have 5 billion or so shareholder equity?
I think it's clear that they are continuing to produce very strong operational profits before provision for bad debts. It's just a question of whether their asset writedowns are too much to bear.However I think that AIB possibly has the ability to generate profits in the future
perhaps any other approach would be judged discriminatory and anti-competitive.A bigger question is why is the government intent on applying an one for-all and all-for-one approach?
As Anglo is now 100% state owned, allowing it to go bust is more difficult than when it was in private hands. I don't think that governments normally allow their limited semi-sate companies to shut down, leaving creditors short. As pointed out before, however, we no longer have much reputation to defend. The Economist has referred to Ireland as "Reykjavik on Liffey"....there is no point in maintaining Anglo and that we should be planning to let them go bust. The others should be argued on a case by case basis.
Market economics is hardly some wacky ideology that may or may not work. 'Dogma' is just a pejorative term for somebody else's belief system. Market economics is indeed a dogma so long as you are an economist in Cuba or North Korea. For the rest of us it's like gravity or magnetism, just another force of nature that is neither good nor evil in itself.Arguing that they all should be let go bust on the basis of appealing to capitalist principles (while appealing to me personally) makes it sound like you are basing your policy on dogma while pragmatics should be the driving force of the argument.
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?
We use cookies and similar technologies for the following purposes:
Do you accept cookies and these technologies?