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Banking Crisis

Let’s hope our new State-owned bank is not for forbearance

Two contradictory ideas about the consequences of possible failure at Anglo Irish Bank were going the rounds in the last few weeks.

The first idea — a strange one — was that any attempt to foreclose or restructure non-performing corporate creditors of Anglo Irish Bank would have an unfavorable “ripple effect” on the other banks, who also have lent to the same firms. (What kind of ripple? If it causes the other banks to wake-up and help restructure weak firms, that can only be good for everyone — except perhaps the controlling shareholders of the borrowing firms, who are currently living on borrowed times).

The second idea — not quite so strange — was that a bank being wound down would obviously do worse in recovering on the bad loans it had made. (That sort of thing has happened to China’s AMCs, but mainly where the AMC has decided to sit back and not pursue the recovery courses open to it).

Despite their doubtful validity, both arguments are now likely to be used to try to prevent the soon-to-be state-owned Anglo from pursuing delinquent debtors with vigour.

That would be a bad mistake both for the bank’s own recoveries, and for the economy as a whole.

State-owned banks around the world have tended to fall into the pattern of ending-up as lenders of last resort to large but barely viable companies with good political connections.

May I be permitted to repeat a paragraph from my conference paper of last week:

“Distressed firms need to be decisively restructured, and not kept alive on a drip-feed. The dangers here apply especially to property-based companies, but also to others. In other words, parallel to the financial restructuring of banks, there needs to be work ensuring that surviving non-financial firms are financially solid. This can be done largely by the market; the barriers to prompt action here are likely to come from banks that are in denial about the true financial condition of their biggest borrowers, and from political pressure.”

If nationalization means that previously cossetted Anglo borrowers are now going to be pursued energetically, it may prove to have been a good thing.

8 replies on “Let’s hope our new State-owned bank is not for forbearance”

Patrick’s comments probably deserve a more serious Reply than the following – a quote from Karl Marx that was drawn to my attention by a (non-economist) friend – but who knows?

“Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised, and the State will have to take the road which will eventually lead to communism”

Karl Marx, Das Kapital, 1867

Brendan,
I thought your friend’s quote was a little too apt. The quote is not from Das Kapital and this link summarises the reasons to doubt that Marx ever uttered such words:
http://meganmcardle.theatlantic.com/archives/2009/01/faux_marx.php

(If anyone does know of a 19th. century economist who forsaw an era in which the working class would be overburdened with consumer debt, I’ll join the fan-club.)

Patrick,
On your main point – Distressed firms need to be decisively restructured, and not kept alive on a drip-feed – I don’t see how property speculators can be “decisively restructured”. There are construction firms connected to the speculators but they are already being restructured in very decisive manner (builders and architectural firms are laying-off staff in large numbers).

The property boom began as system allowing local monopolists to extract profits from the original “Celtic Tiger” i.e. the export-led growth generated by imported multinationals. Once the export growth ceased, it became a pure pyramid scheme i.e. there is no business model once the price collapses.

Aggresive foreclosure on existing bad loans would undermine the fragile property market. The banks’ only realistic prospect of recovery, therefore, is through recourse to the speculators’ previous gains. As the banks pursue that logic, we are likely to see a succession of high-profile cases replicating the Michael Lynn saga.

With the dropping of hte 20m deposit requirement this AM on the advice of the AG (who didnt say it was illegal note…) this gifts 20m to (we are advised) 50 creditors. …..

MLeF: I agree with much of what you say, including that most property speculators’ business models are broken. That’s why restructuring is essential — not least to prevent the over-indebted from looting and absconding as you have suggested will happen. Restructuring will in some cases have to include winding up of the indebted property firms.

Re Brian: the argument advanced this morning on the radio — that the original proposal was bad since it meant that no-one would deposit money with Anglo — was obviously completely spurious, since I don’t think there was ever a chance that people owing them more than 20m would stick their necks into the lion’s jaw in that manner. Presumably their assets are far far away at this stage and will remain there for the foreseeable future.

if banking collapse boils down to property speculation then stopping property speculation is one of the core issues we must address, cheap credit had a huge role, it was always dangerous, it helped create the great depression!

maybe the state should instead prop up a stronger bank and not focus on a ‘no bank left behind’ approach that will never work without breaking the coffers of every citizen in the process. Perhaps letting a bank go to the wall would be better, like any company in this position, the functional parts are bought out and kept on as profitable entities, the rubbish is left to burn.

the depositors have to keep their money somewhere so that would likely be the stronger bank -that’s what the guarantee is for – who were rewarded with bailout money for doing a better job than Anglo did.

The anglo deal truly is a reward for bad behavior and now that every banker knows bailouts are ready they’ll focus more on arranging their ‘handshake’ money than caring about any meaningful recovery. Essentially saving the weakest removes a need for survival of the fittest, if you save the worst then you’ll definitely save the best.

Patrick,
Today’s debate in the Oireachtas on the Bill to nationalise Anglo will be a pivotal event for the future of banking in Ireland. In form and in substance, this Bill has no precedent in this State. The Bill is quite unlike nationalising measures like the Transport Act 1944 establishing CIE which sets out the objects of the new company.

The Oireachtas should insist on clarity from the Government as to its plans for running Anglo. It’s not credible for the Government to say Anglo will operate “at arms length” from Government when, for example the Bill (s.17.3) provides:
“The Minister or the Minister’s nominee may by written instrument direct the
directors of Anglo Irish Bank to take or not to take any action or do or not to do anything including (without prejudice to the generality of the foregoing) to dispose of all of its assets or a specified asset. The directors shall comply with such a direction.”

I hope the Government outlines a plan for Anglo which would focus on debt recovery and the orderly winding-up of its affairs, perhaps over the course of 3 or 4 years. The “bad bank” idea seems to me a recipe for disaster with the losses of all Irish banks heaped on the taxpayer. I see no case of injecting capital into Anglo but that would be essential if the Government intends that it should be a “going concern”. I would be concerned that the records of Anglo have already been compromised (you will recall the fiasco of Irish Trust Bank).

Current circumstances justify drastic measures but it is essential to mitigate the risks which inevitably arise for a State-controlled bank. Deputies and Senators need sound advice to ensure that this Bill is not adopted in haste to the detriment of our economic future.

That Marx quote is a HOAX. It has been repeatedly debunked on the web. Marx never said anything close to that in Capital, or anywhere else. Tip off – there was no such thing as consumer “technology” in 1867. The scenario imagined in this quote has nothing to do with Marx’s thoughts on the transition from capitalism to socialism, it is a fabricated quote designed to scare people.

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