Gary
http://LifeLastingSuccessBlog.com

Bang, bang!

Somebody shoot me now.

http://www.youtube.com/watch?v=mLboAXuxWXY

That is all very true but the horses have bolted out of every stable in the globe some time ago.

It is a well made point that bail outs now create moral hazard down the line. For that reason the top stratum in the banks must go and the shareholders must be left with a big loss as must the sub-debt holders. People seem to ignore that all those things re happening to one degree or another. Moral hazard relates to times gone by, not to the near future. Anybody who thinks otherwise has no comprehansion of the amount of wealth (genuine wealth earned through work and invested in “safe” banks) that has been wiped out.

To quote from the preface to the 1975 Edn of Galbraith’s “The Great Crash 1929″:

“In the wake of the 1929 crash, and with a view to preventing another runaway boom and the associated abuse, the Congress passed some tolerably astringent legislation including the Securities Exchange Act of 1934. It was not, at the time, especially necessary. Markets and financial adventure were then and for a long while after restrained not by S.E.C. but by the memory of what happened to so many in 1929″

Moral hazard is real and reform is necessary but we are not going to create moral hazard by taking whatever measures are necessary to resuscitate the financial system now. Neither are we going to avoid moral hazard in the future by not taking these measures. More substantial reforms will be required down the line.

Any bailout, and this is in my opinion a bailout, will be reflecting badly on the entity being bailed out.

Would I trust the owner of a bailed out bank to not need further bailouts? My answer is no.

Let the banks owners be concerned about the welfare of their business or you’ll have to do the worrying since the banks owners will know they do not need to.

My argument regarding reputation is that if the government will bail out the banks owners now, then there will be expectations of future similar events and therefore a prudent lender should have concerns about Irelands ability to repay.

When a lender is concerned about the borrowers ability to repay the interest will be higher. That is to me reputational damage to the Irish state. I believe NAMA will cause more reputational damage to the Irish state than nationalisation ever would.

“…commercial banking system is not built to have balance sheets that need to be sold into the market at the worse possible time.”

“”What are you saying? That banks are taking risks they know they can’t survive”

commercial banks convert short term deposits (liabilities) into longer term assets (loans) and maintain a 6-9% capital buffer. this capital buffer is there to aborb real losses and provisions for estimated real losses. its not there to absorb all losses from selling all your assets at market clearing prices at any time.

“AIG Vice Chairman Jacob Frenkel: “The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine.””

aig financial products was not a bank. i’m not actually sure what it was. a hedge fund with huge credit lines mabye that faced the mother of all margin calls. not a commercial bank.

”An an “incredible” critic of Nama, may I just point out that the Nama Bill authorises the agency to lend money to developers. In other words, after bailing out the banks and overpaying for the crappy toxic loans, Nama will give more money to the very people whose greed and short-sightedness got us into this mess.”

”In both cases, it is the Irish goverment who does the borrowing to clean up the banks. The only differences are whether we 1) wipe out equity and sub bondholder debt 2) take control of the management, in order to be able to remove those responsible from power and 3) ensure any potential overpayment for assets is recouped in the flotation of the new clean banks.”

may I point out that anglo irish was nationalised 6 months ago. since then:
1) the only significant new lending I believe they are doing is actually lending to existing large developers***
2) there is very little change in anglo ”management” (other than at board/senior director level).
3) anglo will be participating in NAMA using the same pricing metric as all the other non-nationalised banks
4) they are still current on LT2 sub debt (they actually paid 55c in the euro to buy some back)
5) they paid over E500mm to holders of hybrid/tier1 capital to buy them back at a significant discount to par
6) the irish state sunk E3bn of pure equity into anglo at the point of nationalisation to maintain its solvency (even when u nationalise, to remain as a bank, u need to be solvent)

anglo is now a zombie bank in long term run off.

now I’m not saying aib + boi are potential anglo’s but the anglo case shows u that nationalisation is not a perfect solution. I’ll agree there are plenty of imperfections in nama for the purists taste but there is too many grey areas in the irish current banking and economic mix to overlay textbook principals of free capital markets.

remove the global nature of the current credit crisis and the specific debt/budgetary+funding dynamics of ireland inc and I’d be the first guy to apply the full fury of the market place to every element of the banking system balance sheet upto but excluding small depositors. but we are not in normal times and Ireland is not facing a normal economic problem.

***may seem like a stupid thing to do but it is often a very rational way of preserving value as a senior lender. developer uses the cash to pay of unsecured trade creditors/sub contractors at v significant discounts and also gets them to finish the property/development at often below marginal cost. its a workout that smart banks use all over the world - although clearly the headline of “lending money to bankrupt developers” does not fit well with our super smart media set.

What western state, other than perhaps Canada and Australia, has not had to support its banks in any way and has not had questions raised about regulation? Does Spain qualify? Is it the only one?

What other advanced banking system has been faced with the moral hazard dilemma of the Irish state (bar Iceland)? Could it be the international view of Irish banking system (a) dosen’t distinguish between Irish banks and (b) regards sectoral solvency a problem for the state to resolve and (c) knows of how a unique Irish regulatory/political/banking captive relationship amplified moral hazard risks.

Too big to fail means that no matter what is done there is no risk, this will lead to further risk-taking and sooner or later a bailout will be needed again.

Does anyone think that the current owners could be trusted to monitor their own investment after failing as badly as they’ve done now?”

None of the above issues are peculiar to Ireland and so have not caused the kind of reputational damage that full banking sector insolvency would cause.

I agree entirely on this point. I have mentiones it a few times in my posts.

@Karl, Brian and Philip.
Would this make a good topic for a thread.

Too big to fail or Too big has failed.

The talk of creating a third force in Irish Banking by forceing a merger of the smaller institutions seems crazy. We need more competition not less.
Talk of creating a third force also suggests they have given up hope on Anglo Irish. If that is the case, why are they contemplating taken Anglos toxic assets?

“FG have set out the principles behind their policy since before NAMA was announced.

Under the Irish system, there is no point in preparing draft legislation.

If FG get into office before NAMA is passed, there is sufficient work done
for the AG’s office to work on immediately.”

Well I acknowledged they’ve set out their principles since NAMA-time (wasn’t sure of the exact timeline) - my point was that they’ve had months to develop their alternative plan concurrently and, still, all we have to go on is their assurance that work is being done behind the scenes.

What exactly is the problem with proposing draft legislation? Nobody was suggesting that it would pass, or would even be intended to pass. It’s a bizarre attitude that just because a bill won’t pass that there’s no utility in even drawing it up. Part of having a credible plan is, well, demonstrating that you have a credible plan.

The government hasn’t done a brilliant job vis-a-vis NAMA, which makes Fine Gael’s failure to at least halt it in its tracks all the more bewildering.

The reputational damage is done already. The people who were responsible might want to try to sidestep their responsibility and pass the responsibility over to factors beyond their control. “Regulators didn’t stop them from taking too big risks”…..

Too big to fail means that no matter what is done there is no risk, this will lead to further risk-taking and sooner or later a bailout will be needed again.

Does anyone think that the current owners could be trusted to monitor their own investment after failing as badly as they’ve done now? Maybe the owners want the state to monitor their managers, if so it can be arranged: Nationalisation.

The debate about NAMA isn’t scaring away investors from Ireland. High property prices and the expectation of higher taxes to fund a big budget deficit is doing that already.

first off NAMA works in terms of the markets accepting it. This is hugely important. Spreads on Irish banks (even beyond the g’tee) and the Irish state have come in hugely since the March nadir, and the NTMA should have our entire 2009 funding requirements taken care of by the end of this week (ie with 3 and a half months to spare). The ECB seems to accept it, or else they wouldn’t be letting us massively rely on their repo operations to fund it. Im not saying NAMA is “the norm”, but it IS the assumed financial rescue plan in place. Like it or not, i’d suggest that there is just as much onus on you to displace it as on me to propose it.

secondly, Iceland nationalised and declared insolvent its entire banking sector, and has still yet to see a penny in fresh private equity, and isn’t likely to see any anytime soon. Nationalisation didn’t cause their crisis, but it doesn’t appear to have solved any of its problems either, and it turned whatever reputation it might have had into toast. Indeed even the IMF is still withholding their rescue package until some of the issues that were created by the insolvency+nationalisation process are cleared up.

thirdly, there isn’t a stream of private banks waiting to enter the Irish market. Indeed the flow of capital is currently going the other way via ACC, HBOS etc. As Zhou noted, private banks in receipt of government support in their domestic base nation will not be easily allowed to extend large amounts of capital into a country on the peripherary of Europe that just declared its banking sector insolvent.

fourthly, there is next to no loss absorbing capital left in the banks to ‘wipe out’. Liquidating 80% of the irish banking market, and our own €7bn in government preference shares, in order to maybe get at a few billion in capital seems like an inefficient suggestion to me. It sounds all well and grand that “those who made the gambles should take the loss”, but i don’t see how this is realistic in any meaningful and material manner. If someone could detail how much can be saved here, and the process we would go through to do this, in at least a somewhat full and detailed manner (i’ve heard the vague two line version), i’d appreciate it. If we could then net that off against the combined reputational and financial damage done from the insolvency process that’d be great. Anyone know what the external debt liabilities of the Irish sovereign and banking balance sheets are? Can anyone work out what the additional annual funding costs of this would be on even a 25bps general increase in the cost of this (caused by investor flight from a nationalised and insolvent Ireland banking sector)?

fifthly, and this is as much a question as an answer, when was the last banking sector IPO in a developed Western economy? Almost all activity in the sector has been trade-sale based. I don’t even know how much demand there is for a newly capitalised bank with brand new management, financial structures and regulatory oversight and operating in a still struggling economic outlook. To say that there’s some hidden short term cash cow that we’re giving away is highly debateable. Given that per point no. 3 above very few foreign banks are going to be able to approach us anytime soon, what is the percieved timeline for re-privatizing the banking sector? 6mths, 2yrs, or 5yrs? Far easier for the government to take a 70% stake, keep it as a going concern, change management and regulatory structures over the next couple of years, and then look for options along the lines of a rights issue, private equity or trade sale.

You can consider it insidious, or a cheap rhetorical device, or a part of a false dichotomy, or whatever other turn of phrase you want to use, but ill boil it down to simple terms: NAMA works, NAMA creates the breathing space the nation needs to get our financial system back working again and our indebtedness back to sustainable levels, NAMA doesn’t seem (or seek) to p1ss off or scare away all the people around Europe who are going to be lending us 100bn in the next couple of years, and NAMA doesn’t declare insolvent a sector of the economy which previously represented more than 40% of the ISEQ.

The dangers of overpayment (which would only be after the subordinated bonds were taken out) need to be measured against the dangers that the alternative plans (none of which have been spelt out in a politically viable process) do not work. As per Donal O’Mahony’s suggestion this morning (though i would never accuse Karl and Brian of being mischievous!), i think the funding risks for the Irish financial system of NAMA not being enacted have been massively understated, and the workability of NAMA-as-is massively under appreciated.

How much more lending will there be? The government needs quite a substantial amount and most banks are risk averse so a lot of the possible lending will probably be to the government. It is anyones guess how much will go to the Irish private sector.

Btw, amazing how the money flows:
Government borrows from ECB.
Government buys toxic assets from banks using money borrowed from ECB.
Government borrows from the now cashrich banks the money it paid for toxic assets to cover budget deficit.

Thanks for that. It was about time we had a bit of pro-NAMA moral outrage for a bit of balance!

“Thus far, the NAMA debate domestically has tended to gloss-over the
burning issue of bank funding risks in preference for a cacophonous
outcry over the likely “haircuts” being applied to loan values at the
asset transfer stage. Here, the commentariat have been at their most
misguided, nay mischievous, casually interchanging loan assets with
property assets as though they were one and the same, and thereby
confusing public perceptions regarding NAMA “overpayment”. ”

Come on Donal. Who out there is misleading the public about loans versus properties? Name names. The quotation marks around overpayment are great, aren’t they?

I also really liked this:
“A profit is not recognised in its own land betimes, but it is never too late to make amends.”

Funny guy.

I note that KW reckons nationalisation will possibly leave the banks better capitalised:

“I should emphasise here that much of this scenario could also come to pass after nationalisation and that this is not just me taking another swipe at the NAMA proposals. One difference may be that, if the objective of minimising state control is set aside, the nationalisation process may produce better capitalised banks than are likely to emerge from the current proposals.”

Is this correct? Surely the state can recapitalise as much as it wants once NAMA has established the base position?

Apologies - I wasn’t trying to say FG (or any other opposition party for that matter) should have published draft legislation. Bad choice of words on my part.

I meant eg a document that dealt with/spelled out their alternative plan in some similar level of detail so that we really could start comparing apples with apples.

Given that we have heard little real detail about their Good Bank plan (in the public domain anyway), I have to say I think that’s pretty poor opposition when the opportunity was there to bring some fine minds to bear on it, in a co-ordinated way, so that we did have a credible, clearly better, opposition and public supported alternative to (or significant improvements on) NAMA that they could have used to wipe the floor with the NAMA brigade on Wednesday.

I think they have missed a great opportunity (though I doubt Dr Fitzgerald would agree with me!) and I have to say that I am disappointed they haven’t done a better job in discrediting NAMA as it stands and coming up with a great alternative. In fact, the only good debate seems to have been here on this BB but when people stand up to be counted (eg the 46) it seems to be met with PR and personal attacks rather than intelligent counter-argument.

What I would be interested to know is do the opposition parties also think that the objective is to get credit flowing again (and it’s been pretty clear to me, regardless of what other agendas may be around, that’s what Mr Lenihan is actually stating the objective of NAMA is)? I presume they do? If they do, and if they think NAMA (as is) isn’t the way to do it………… then I still say the same thing….. “where’s the beef?”

Maybe I’m wrong. Maybe they will suddenly produce a rabbit out of the hat at the 11th hour. Maybe messrs Bruton and Burton will get up and do an incredible, unified double act. Maybe ‘there is no alternative’ (nah, I can’t believe that!).

Maybe I won’t hold my breath.

I despair. I am seriously thinking of leaving the country. NAMA cannot be ‘fair’ or ‘right’ and I really don’t see why my children (or yours) should pay for it.

I do not wish to insult you by insinuating that your false dichotomy between text-book wishful thinking and real-world, Only Show In Town, Nama pragmatism is a cheap rhetorical device, but what you are saying does not gel with common sense.

Look, the banking system is broken. Investors know this, economists know this and sooner or later even the Irish public will get to know this.

This, if you like, is the “real world actuality”.

Investors who lend to the Irish govt do so because they know there are two million skilled taxpayers in Ireland who will sweat and bleed in order to pay them back - more or less regardless of what ever happens.

This is the sovereign guarantee and it is another “real world actuality”.

Yet another real world actuality is that if we create a good financial regulatory regime and float a couple of clean banks with solid deposits and performing loan assets on the balance sheets, investors (probably other banks) will snap them up at a market price.

This isn’t a text book observation, Eoin, rather it is an observation on the financial marketplace as it really functions. A clean banking sector is worth something, and the proof is that banks get bought and sold all the time.

But the thing about your false dichotomy that really jars is the way you insidiously use the current Nama plan as a reference point, from which to question nationalisation as a dangerous departure from the norm.

Let’s be clear: the Nama Bill is the dangerous departure from the norm. It will not work and you have no evidence that it ever could.

So, as a proponent of this radical plan, show us your proof that we, the taxpayers, should spend millions on this extraordinary measure?

Will the banks start lending again?

We still do not know the final figures. At the moment the general consensus seems to be that after Nama the banks will have Tier 1 capital ratios of around 4%.

More to the point, using the last set of accounts, the loan/deposit ratio at BOI was 161%
AIB was 156%

They will almost certainly be looking to scale back to at least pre-crisis levels. I think they were around 137% in 2007.

That will take time. As I said earlier, perhaps 2 to 3 years to get credit flowing. After Nama, they will have to be seen to increase lending but it will be marginal.

I agree 100%.

fair enough for FG not publishing the legislation, but i’ve barely heard about their Good Bank plan at all in the last 3 or 4 months. Given that this is at a time when the Irish papers have essentially donated 25%+ of their opinion pages to the NAMA debate, it seems that they have either lost faith in the plan themselves, or they don’t see it as being a serious runner in terms of how the electorate have responded to it.