Stiglitz on Primetime

Joseph Stiglitz appeared on PrimeTime last night and RTE have also made the extended interview available. He made extremely strong statements arguing against the NAMA approach, as well as advocating mortgage mitigation, and better measurement of societal well-being.

link here

121 replies on “Stiglitz on Primetime”

At last, someone calls a spade a spade, something for the Greens to bear in mind as they head off to their NAMA meeting this weekend.

Former vice President of the World Bank and Nobel laureate winner v our former minister for children Brian Lenihan and Peter Bacon.

im sorry guys but it just impossible to have to make decisions everytime someone decides to hurl an insult at an individual. i edited a comment. please just stick to the issues.

Stiglitz was more than blunt when he said, ” I think to overpay for these loans is really Criminal”. So, is criminality to become a government policy? Just because the DoF, for some reason, cannot come up with any other plan? Criminality or criminal enterprises do not happen in a vacuum they need players to carry out the criminal enterprise. Are the Greens going to partake in this?

Am I correct in thinking that Stiglitz is of the school of thought that AIG, Merrill Lynch, Morgan Stanley etc should all have been allowed to collapse on the basis that ‘this is how capitalism works’.

While I think that’s a coherent and fair-minded view, in the aftermath of the Lehmans Bros collapse, it’s a little bit too rugged for my delicate constitution.

IMHO the various government bailouts have been unsavory but neccessary. What is needed at this point is a new infrastructure-such as living wills for banks etc- to ensure that the financial sector is never again in a position to put a gun to the head of taxpayers throughout the world in the way they have in the last year.

robert – you are free to interpret Stiglitz as you want but it clearly wasnt the case that he had conducted a forensic examination of the legislation and concluded it was unlawful.

it seemed far more likely that he used the phrase in the sense of meaning wasteful, unfair, wrongheaded and so on. he clearly disagreed with the principles underlying it but lets exercise some common-sense in terms of overinterpreting one word.

Erm, he’s not exactly a Nobel laureate. Mr. Nobel didn’t much like economists, so he didn’t set up an award. So Mr. Stiglitz and the 61 others who have received awards for economics have received Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Apologies to many here for bringing up this delicate subject…

Concubhar – I dont think Mr. Stiglitz was advocating letting all the banks go to the wall, what I heard him say was that firstly the shareholders are wiped out totally then the bondholders become the owners and if this is not sufficient to save them then the government become the owners. This seems a lot more logical than purposely overpaying for assets which we dont really no the value of and passing the total cost on to the state.

Oh, don’t get me wrong, I like listening to his opinions. Like many other economists he is excellent at analysing what went wrong and what is still wrong. His solutions probably aren’t to everyone’s taste, but that shouldn’t take away from the rigour of his analysis.

@Concubhar O’Caolai
The guarantee expires in 11 months. After that we could continue to guarantee deposits but not bank bonds.

Once the bondholders know the guarantee will not be extended they would be more than willing to a deal of debt for equity.

I think Stiglitz initially wanted the UN to fix the economic crisis. Given the oil-for-food debacle and the rather messed up nature of a lot of things that the UN does, i’m not entirely sure this would be a good idea. He was also forced to leave the World Bank for being ever so slightly controversial in some of his comments/opinions.

@CM

The long term economic value concept originates in the EU Commission’s March 2009 paper.

Stiglitz is one guy I look up to a lot. I would bei nterested to hear more detailed analysis from Mr. Stiglitz as to the Irish situation. We are not like the USA in that not only are we not a reserve currency, we also don’t have a currency. We also have a small and discrete banking sector all of which is badly affected by the down-turn.

@zhou
But to what advantage?

What proportion of debt for equity would they be expected to swap? 20% maybe?
Would they get more than that in a liquidation?
(Maybe they would if they have CDS on the bonds?)

@zhou
Because they would get much less back by that route IMO.

At the end of the day if they pull the plug they essentially end up as quasi shareholders anyway.
Except they end up winding the bank down now rather than keeping it as a going concern.

@ Liam

in light of last night’s Primetime appearance, it might given some context to his “I think to overpay for these loans is really criminal” and “an example of fraud of taxpayers” lines. All im saying that he’s quite well known for big controversial and eye catching statements. As you yourself said, NAMA is not a criminal act, and i dont think its fair to say its a fraud either. You can argue that its stupid, wrong headed and based on irrational fear (i disagree, but i understand the arguments), but it isn’t criminal or a fraud.

@Eoin
Slightly off topic, but what benefit does the taxpayer get from paying LTEV rather than the current market value?

@ DE

they get a banking system that is not declared insolvent and which should be able to be operated as a going concern going forward. This has follow on positive effects for the State funding requirements. It also buys the entire state and its population more time to suffer the inevitable adjustment in wages, asset prices and government spending which we are due to encounter shortly. I simply think that its better for this adjustment to occur over 4 or 5 years (or more in certain situations) rather than 18 months.

As i have previously commented, i view the LTEV as a very large subsidy to the banking sector, but one which is justifiable given the economic and funding realities of Ireland at the present time. I am also very much in favour of an increased subordinated bond element to NAMA, and am very much a proponent of a special taxation policy for the banks going forward in order to recoup any losses resulting from NAMA.

@Eoin
I don’t follow your logic at all.

How would paying market value rather than LTEV lead to insolvency of the banking sector?

If the government paid €47bn (or even less) the government would inject any capital necessary to cover the shortfall.
Therefore there is no risk the banks would be deemed insolvent.

At least with this method we get share in return for any money provided to the banks.

From a sovereign risk perspective, IMO investors would much rather invest in a country that hasn’t just given away €7bn to pay the banking sector more than their assets are worth.

@ CoC

eh, wonderful imagery there….!!

But yes, i agree. The US can print cash and rely on the world to buy its Treasuries til the cows come home. Ireland does not have those luxuries. No one ‘needs’ Ireland in their portfolio. The only ones who need us to at least keep afloat is the EU and ECB, hence the reason they’ve given their blessing to NAMA.

The US tried to let Lehman, a commcercial/investment bank with say 5-10% (if even) of that particular market, go bust, and look what happened in its wake. If we tried to let an AIB or BOI go to the wall, or close to it via losses being applied to seniors b-holders, i think we’d be in for an extremely nasty shock we wouldn’t be able to T-bill ourselves out of. Unfortunately, in order to keep the markets happy, we have to come up with a market-friendly solution to our problems.

@Eoin
But no one is suggesting winding up AIB or BOI ala Lehman.

And the vast vast majority of the problems related to Lehman’s collapses had nothing to do senior bond holders. OTC trades and other derivatives were far more important.

@ DE

“From a sovereign risk perspective, IMO investors would much rather invest in a country that hasn’t just given away €7bn to pay the banking sector more than their assets are worth”

though no one seems willing to accept this little nugget of truth, the fact is that Irish government and bank bonds have rallied hugely since the NAMA proposals were announced. Irish CDS is now more or less equal to Greek CDS, and has rallied by around 25-30bps on every other Eurozone govt in that time.

Some of this is obviously due to a generally rosier economic outlook and suggestions that the budget is going to seriously tackle public sector expenditure. But a lot of it unquestionably has to do with NAMA being seen as a good, workable plan that keeps private capital with some skin in the game. I always said that NAMA, Lisbon and a tough budget were the key factors to getting the sovereign risk and government deficit back into a sustainable manner, and with two out of three seemingly covered, i stand 100% behind this assertion.

Just an aside as a foreigner, but in light of a recent thread about “how others see us” and supposedly enduring stereotypes:

@Concubhar O’Caolai
Buck up, man! “Puny little Ireland”…. have a bit of pride in your country! Speaking realistically about Ireland’s situation is one thing, but using that kind of negative language just sounds self-loathing, IMO.

To be fair, CO’C is, of course, not the first, the last or the only person to talk about Ireland in this manner. If the shoe fits…

@ DE

the Lehmans issues related to OTC trades etc, but it was the mere fact that an at least somewhat systematic financial entity could go completely to the wall that freaked investors out. A few weeks later we had de facto deposit runs (outside of retail) occurring against the likes of HBOS and RBS which had nothing to do with derivatives or anything like that. The point was that senior debtors (bonds and deposits) were no longer considered safe, and so people withdrew from these markets. As a result we had huge runs on the funding situations for all banks outside of the safest 20%.

As for your comment that “no one is suggesting winding up AIB or BOI ala Lehman” – well if you’re not threatening to wind them up, then what are you actually threatening bondholders with? The only way to enforce losses against bondholders (even subs) would be to either wind up the banks, or at least threaten this process as a way of negotiating some sort of debt-for-equity swap (you can’t enforce this, must be voluntary). And if you’re not going to enforce losses against bondholders, then i don’t see where we ‘save’ money from nationalisation given the stigma that that generally attracts. You don’t think that foreign investors are going to be at least somewhat less willing to invest their capital in Ireland if they hear that the entire Irish banking sector just got nationalised? Really??

@Eoin
While the Irish spreads has undoubtedly narrowed and this is great news. It has been achieved by a market wide increase in risk appetite rather Ireland specific.

The latest 10YR spreads I have seen were from last night and there is still a sizable gap between Ireland and the rest of the PIIGS.

Ireland – 162bps
Greece – 130 bps
Italy – 89 bps
Portugal – 63 bps
Spain – 61 bps

All the private investors excluding the current shareholders would still have skin the gap by paying less.

@Eoin

On your second point on imposing losses on bondholders check out the INM debt for equity swap.

Absolutely no reason why any company would have to be wound to do a debt for equity swap.

And at the end of the day the threat could be made that the banks would be wound up.

I think the costs, in terms of sovereign funding, would be limited and won’t come close to the €7bn we are losing by overpaying for the loans.

Sorry Eoin one more point.

How was there a run on banks caused by potential senior bondholders losses. As bondholder can’t withdrawn their funding when they want.

We seem to be deep into the minutiae of NAMA again. Still, I suppose it’s probably better than using Prof. Stiglitz to bash NAMA and its proponents.

There is a possibility that he is not aware that all Irish based banks were rapidly heading down the plug-hole without any effective bank resolution procedure in place. He is probably more familiar with a situation where some banks – and even quite a few – might be on the verge of failing but the FDIC moves in on a Fri. afternoon, does the necessary – winds up the bad bits and sells the good bits – so that some semblance of normality is restored on Mon. morning.

@Eoin
“the fact is that Irish government and bank bonds have rallied hugely since the NAMA proposals were announced. Irish CDS is now more or less equal to Greek CDS, and has rallied by around 25-30bps on every other Eurozone govt in that time.”

I would not read too much into the lower yields. This is a worldwide trend. We are still paying way over the odds -5.472% on 15yr v. 4% on 30yr US even with the inherent currency risk.

I see BL saying on Bloomberg that the banks may need State money.

@YM/DE

They would pull the plug while still covere dby the guarantee to get 100% rather than 20%.

Mark Little said to Stiglitz that we are buying €77bn of loans and overpaying by €7bn. It was not crystal clear. He did not make it clear to Stiglitz that we are making the Banks write down losses of 25% – 30%. He also did not discuss the guarantee.

I must say that my interpretation of Stiglitz’s position is that senior debt should have to take pain. This was FG’s and (I think) Brian Lucey’s original position before they back-pedalled and said senior debt should not be touched.

zhou_enlai Says:
October 7th, 2009 at 5:59 pm

“I must say that my interpretation of Stiglitz’s position is that senior debt should have to take pain. This was FG’s and (I think) Brian Lucey’s original position before they back-pedalled and said senior debt should not be touched.”

Of course senior debt should take pain.

The only problem with that is that the Derivatives Death Star goes critical.

I think that’s what they’re all worried about (here and abroad).

There is no earthly reason why risk taking bond holders should not suffer loss.

Hi

Just as an addition to the Stiglitz debate, this Youtube video was posted on politics.ie.

http://www.politics.ie/2167094-post9.html

Has ever a man spoke so much common sense?

Was he speaking about TARP the original, the American version of NAMA, which has been much changed since originally mooted by Paulson?

Eoin:

“NAMA being … a good, workable plan that keeps private capital with some skin in the game”.

Correct me if I’m wrong but after overpaying the banks by €4 Billion (probably much more given the state of the property market) we will end up with no shareholding in return for our gift. The banks plan to raise finance to pay back the additional capital injected by the Nama process.

All we will have are some preference shares in return for our previous capital injections – and the banks can buy them back.

I repeat, in return for all our generosity we are getting no share of the future gain. Private capital are skinning us.

There are several possible motivations for this irrationality. It is simply stating a fact that criminality could be the main motivation. I can’t prove that it is but it could be – and that is very worrying. It is dishonest to stop this being said.

@Greg

The americans have wound up loads of banks and the Death Star is still stable (albeit the dollar is “under attack”).

@ Pancake

Excellent.

Every time I see him I think he’s going to brake into a fit of the giggles.

And who could blame him?

zhou_enlai Says:
October 7th, 2009 at 6:22 pm

“The americans have wound up loads of banks and the Death Star is still stable (albeit the dollar is “under attack”).”

At $14 Quadrillion + ?

Sticking with the science fiction analogy “She’ll no take it captin”.

Most, if not all of the banks that have been “wound up” have been subsumed into other banks.

The FDIC has run out of funds and is trying to get three years premiums in advance from the remaining banks, or failing that will go to the Treasury for a $500m dig out.

It has 400 banks on its watch list which didn’t even include Georgian Bank. The FDIC didn’t even see it and they have to write down its assets (CRE) by 45%.

http://www.marketwatch.com/story/georgia-bank-is-95th-us-failure-of-2009-2009-09-25

What happens the Derivative Death Star if Latvia devalues because its politicians refuse to allow its citizens freeze to death this winter.

Latvia may be small but the Death Star is very complex technology.

@ Greg

“Of course senior debt should take pain…There is no earthly reason why risk taking bond holders should not suffer loss.”

Without wanting to start going over some of the well trodden old ground we have gone over many many many times, this is where the inherent difference lies between many in this debate – many people like yourself believe that senior bondholders are risk capital investors. I, and many others, completely disagree.

Senior debt is on the same legal level as depositors for a very simple reasons – its treated as a very similar security by the banking sector. It is considered medium to long term funding capital and not considered risk capital (it yielded 15bps more than govt debt!). If you wish to impose losses on to funding capital, you are talking about radically altering the entire funding model and pricing of the entire financial system. This needs to be recognised right from the start.

@ DE

re run on RBS etc.

When Lehmans went bust, it was not just derivatives counterparts who took losses. Deposit holders, hedge fund with assets under management by Lehmans, CP holders, bondholders etc all took a bath if they still had exposure to them. The capital structure isn’t just as simple as deposits + senior bondholder. This basically meant that creditors at almost every level of the debt ladder could take hits, to levels that were not previously envisaged.

So when RBS started circling (allegedly) the drain, people with these exposures, or potential exposures (NB) got the hell out of dodge. Rumours start, shares drop, bonds drop. CP/MTN holders start refusing to roll over their funding, and counterparties start cutting credit lines and refusing to offer prices on any sort of exposure, never mind actually offering interbank deposits. Pretty soon existing deposits start flying out the door and you have a full on run, as deposit holders don’t want to be left their holding the baby at the end. While we like to think of bondholders as all being locked in for the next decade, for a bank the size of RBS ($1trn balance sheet?), they have bonds and CP maturing every day, requiring rollover or new buyers, and when Lehmans went bust, these guys stopped doing just that.

Re INM. I dont think you’re comparing like with like there. No one is going to save INM if they get into real major catastrophic trouble. We’ll survive without the SIndo helping me through my hangover on a Sunday afternoon. The bondholders know this, so they have to negotiate and deal. The idea of a large bank(s), with a huge market share in a small open economy like ours, going into liquidation, is a far more disturbing thought for soceity as a whole.

Eoin Says:
October 7th, 2009 at 6:53 pm

“Senior debt is on the same legal level as depositors for a very simple reasons – its treated as a very similar security by the banking sector.”

Yes we disagree fundamentally on where bond holders stand.

The law you refer to is not Constitutional Law or Statue Law. It is the law of contract, assuming the contract has been drafted to give bond holders rights equivalent to depositors.

I have to admit again Eoin that I am no lawyer, but it appears to me that contracts can be renegotiated to the benefit of both parties to salvage something from a crisis. This has happened time and time again.

The government in this case should be using its Sovereign authority to knock heads together rather than using it to “steal” from its citizens. Of course I don’t use the word steal in a Criminal Law sense I use it in the context of the government abandoning its citizens, for reasons know only to themselves.

Eoin Says:
October 7th, 2009 at 6:53 pm

“If you wish to impose losses on to funding capital, you are talking about radically altering the entire funding model and pricing of the entire financial system. This needs to be recognised right from the start.”

Given that the funding model and pricing system of the financial system lead us into this nightmare would altering it be such a bad idea?

@zhou
“They would pull the plug while still covere dby the guarantee to get 100% rather than 20%.”
The clock is ticking. We are less than a year away from the end of the guarantee. The new guarantee will not include all senior debt. In particular senior debt that was in place before the guarantee. As with all other aspects of bank bailouts, there has to be a nuanced approach.

The guarantee and its continuation means that those brave enough to invest during the guarantee period should not be punished. This applies to the subordinate debt swap too. But the shareholders (who have not been diluted so far) and the existing bondholders at the time of the crisis risked their capital in enterprises that they did not do due diligence on. Theirs is the responsibility of risk management in setting prices of debt/equity. They failed. That those senior bondholders are coming away with equity and not having to scramble in a liquidation should be a result for them.

Now, it could be that there is a masterstroke being played here – put forward a proposal that is politically unpalatable, but good for the banks. Drag it out until it is clear that it isn’t going to work, by which time the markets have stabilised enough that private capital is available to do the work for most of the banks. I thought so originally, but have thought so less as the months have gone by and particularly when the indicative pricing was announced. But it could still be the case! Sorry, the phone’s ringing – optimist’s anonymous with the time of the next meeting…

@ Yoga
“there is a masterstroke being played here”
I thought so after a while, dragging this whole thing out may be a stroke of genius. But… who is our genius?

@ COC
Clearly you are squealling against us becoming a Private Investment Group?

Al

yoganmahew Says:
October 7th, 2009 at 7:11 pm

“Drag it out until it is clear that it isn’t going to work, by which time the markets have stabilised enough that private capital is available to do the work for most of the banks.”

I think you’re right there.

The two Brians were smoking to much market hopium.

They believed that by the time the guarantee ran out everything would be rosie in the garden.

They were wrong.

@ Greg
If you consider how much our recovery will depend on an international recovery, there is a certain degree of logic in holding back while looking busy doing something????

Al

@ Eoin & Greg:

Who exactly are the bond holders in question in the case of AIB and BOI? I mean are they pension funds or what? Would be helpful if we knew where exactly the buck would stop if decided that bond holders were to take a hit.

From my perspective as a Green, I am disgusted that the tax payer may have to take a hit. I will still in all probability vote for NAMA and revised programe for government on the basis that:

– nama is going to buy loans, not assets
– haircut may cover losses
– risk sharing has not been finalised
– price of credit is very attractive
– PfG in all likelihood will fundamentally reform politics in Ireland
– Instability and election not in interests of this country and could be beginning of the end
– As an economist I don’t believe most of the doom and gloom we are hearing from the profession, just like I didn’t buy into the hysteria 3 years ago and buy shares in anglo or AIB. Ireland will be fine and any projections from the depths of a depression are likely to be as inaccurate as ESRI medium term review 2008

Stiglitz is, however, a bit of a hero and it worries me a lot that he is so critical. I am adding to the list daily:). The principle that underlies nama is rotten no doubt.

Stiglitz’s comments are a reality check. Perhaps instead of people dismissing FG’s plan they should have refined it.

How about:

Constitutional amendment to repeal the guarantee. Guarantee deposits only. Also guarantee liabilities incurred by banks since the guarantee until now. Guarantee deposits only from now on.

Buy BOI.
Negotiate with bondholders over AIB.
That keeps the systemic part going.

Give Anglo and Nationwide to the bondholders.

Eoin, zhou-enlai and Concubhar O’Caolai won’t approve but it will save a lot of children’s lives in Crumlin.

The bank guarantee was supposed to be a masterstroke, a cost free solution to the crisis – not a cross on which the bondholders and shareholders could crucify us.

Al Says:
October 7th, 2009 at 8:06 pm

“If you consider how much our recovery will depend on an international recovery, there is a certain degree of logic in holding back while looking busy doing something????2

Al,

There may have been a degree of logic in it, but what if the logic was a house built on sand?

What does international recovery mean?

Does it mean a “jobless recovery” in the US? If it does, does it mean a jobless recovery in Ireland?

What if recovery if it is without jobs and if the median wage cannot support public and private debt?

We’re in trouble Al. All of this hopium must cease. Reality must (and will) return.

Part of that reality is that bond holders take their medicine, just like citizens and state employees.

@ JC

always difficult to tell who exactly owns the bonds at this point given their somewhat less than stellar ratings, but for the most part they’d still be owned by banks, insurance companies and pension funds on the continent. In particular, i’ve heard anecdotely that a lot of German and Austrian pension funds still hold them. This creates the additional problem in that if we default on the bonds, its fairly likely that the governments on the continent probably won’t be too happy with us (note how the UK and Holland are dealing with Iceland at the moment) – as I’ve said before, many in the EU view our banking crisis as a quasi-sovereign problem.

@ Eamonn

revoke an irrevokable guarantee’? Should we maintain any of our other existing forms of contract law? Should we disavow the national debt while we’re at it? And for the record, with or without the government guarantee, we’d still have a 20bn government deficit, and we’d still need drastic cuts in the public sector exenditure. This new push to link NAMA and the deficit (and so dying kids in Crumlin) side by side is as ridiculous as it is shameful. But hey, if we agree with NAMA evidently we’re criminals in favour of killing kids, right, so its what we deserve right?

In academia, an undergrad term paper, is a common feature. These papers have strict rules: you must cite your sources,you must provide cogent arguments for assertions and you must justify your conclusions. You do not have to be teetotal correct, plausible will do.

Nama: “The only game in town”. If you put this into your term paper you’d get a big fat F. Presumably there are other options to settling the financial crisis gripping our ‘banks’. So what are they? Why no debate about the possible outcomes of the unmentioned options? Laziness or chicanery?

I mention this since Stiglitz is in town. There are a few academics on this site. So how would they grade the ‘term paper’ on NAMA that has been submitted by …. … Whom?

Brian P

@Eoin
“i’ve heard anecdotely that a lot of German and Austrian pension funds still hold them. This creates the additional problem in that if we default on the bonds, its fairly likely that the governments on the continent probably won’t be too happy with us (note how the UK and Holland are dealing with Iceland at the moment)”

That is scaremongering. The Iceland situation is about deposits and you well know it. The bondholders in the Icelandic banks have already accepted that they will get equity stakes and not much else.

Concubhar O’Caolai Says:

IMHO the various government bailouts have been unsavory but neccessary. What is needed at this point is a new infrastructure-such as living wills for banks etc- to ensure that the financial sector is never again in a position to put a gun to the head of taxpayers throughout the world in the way they have in the last year.

Who are we actually talking about when we say ‘the financial sector’?

Lets be quite clear about one thing. The financial services sector is a bunch of maths and numbers oriented kids who get paid a way too much, to buy and sell stuff they cannot even contemplate in reality.

The Brian Lucey’s and other ‘educators’ here should be aware of this, when they stand in front of their classes this year. It has to start in the classroom. That is where the young bond traders and the young risk managers are obviously getting the wrong message. They are venturing forth into the big bad world and their reputations to date doesn’t not do them many favours.

I have mentioned the Larry Fish talk to young students at the MIT Sloan School of Management a couple of times here at IE. But I will mention it one last time, to reinforce my point.

On the one hand, Fish was talking to students who might enjoy a rewarding life working in financial services in the United States – because they probably will not do very well in any other industry. The rest of the globe is too competitive in terms of manufacturing costs etc, for the US to even be on the same ball park today. Fish was telling the young students, to look after the financial services sector. It is a major US employer and accounts for 40% of all corporate profits.

On the other hand, Fish was asking these students what their problem is – the Harvard Business School graduates this year, could not even sign their names to a basic statement of ethical responsibilities for the future. Fish was curious to know what the students’ problem with signing the oath was.

Fish pointed out parts of the financial services sector that are completed un-regulated. While banking is very regulated. It is like the ESB utility network etc. In conclusion, Fish said we are in danger of losing the employment sector that is financial services altogether. Because regulation may be put on top of regulation.

@ YM

the bondholders in Icelandic banks are getting equity stakes in the banks and nothing else because…….the Icelandic state is completely bankrupt. Thats my point. You give bondholders equity stakes when you can’t afford to pay them off. Thats what you’d be saying to them. Iceland isn’t adhering to the ‘rules of capitalism’ per Stiglitz, it simply cant afford to pay them anything else.

I didnt mean the Icelandic case as scaremongering, but simply to show the similarities when an entire banking system goes bust – it no longer becomes about what the individual banks did wrong, but what the host state did wrong by letting it get to that point.

@ Greg

One can build on sand!

“What does international recovery mean?”

Internaional recovery can mean many things, in this context: exports.

“Does it mean a “jobless recovery” in the US? If it does, does it mean a jobless recovery in Ireland?”

From where I see it, it will be a jobless recovery, or a partial jobless recovery.

“We’re in trouble Al. All of this hopium must cease. Reality must (and will) return.”
Agreed

“Part of that reality is that bond holders take their medicine, just like citizens and state employees.”
Agreed.

Agreeing Al

As I see it the gov’t knows that the Irish people do not trust the gov’t to operate the failed/failing Irish banks. The Us gov’t sold TALF to the gullible Americans (stereotypes), so bingo if the US gov’t can get away with it, so can our bright boys in FF particularly when aided and abetted by the Greens. So we have NAMA another quasi, semi, demi quango that will be riddled with cronyism, favoritism, self dealing, patronage and even less edifying traits from the word go. Until the Dail is cleaned out during the next election we will stumble along as long as the ECB or IMF continues to provide support. Having said that I still have serious doubts about Irish voters who think they have to elect crooks so as they have an even chance when the goodies are being divvied out by the gov’t. Sure himself may be skimming off a bit of gravy but if we get the roast we can’t complain.

@ YM

which actually makes me think – would Stiglitz be hugely in favour of Iceland for letting its banks go to the wall and wiping out all equity and almost all bondholders? Surely they are the poster boys for his theory on solving the financial crisis?

@ Eoin

Thanks.

On:

“Senior debt is on the same legal level as depositors for a very simple reasons – its treated as a very similar security by the banking sector.”

I would point out that’s a weak argument when you consider the alternative – the tax payer picking up the tab. What possible relationship does he have to a private enterprise with the sole function of maximizing profit for shareholders. This is rhetorical really, obviously don’t expect an answer.

I’m pretty conflicted on this to be honest:(

jc Says:
October 7th, 2009 at 8:17 pm

No doubt Eoin will differ in his response. Here is mine for what it’s worth.

“Who exactly are the bond holders in question in the case of AIB and BOI?”

Exactly jc, the question of questions. It has taken on almost theological life. Those who believe that God is a “Bond” will fight to the death for their God. After all they are disciples. If they lose their God they are cast into the pit of despair. It has nothing to do with money jc, it is that their belief system will not allow them consider that their God might be a false God.

Bonds change hands every day. Stop, what I am thinking here, they change hands every second (or millisecond if you use HFT). The bond holder one second ago is not the same bondholder now.

Jc, they spend their entire working day (24 hours, Tokyo, London, New York …repeat and repeat) trading “bonds”.

“I mean are they pension funds or what?”

I have absolutely no doubt that your pension fund (or any managed “savings & investment” scheme”) will hold the obligations of the Irish banks to bond holders as part of their portfolio.

You might want to ask yourself why Irish Investment managers, including the National Pension Reserve Fund, skewed its portfolio to the Irish stock market and bond market. After all jc, will have been in the Euro for some time. If your investment manager wanted to match the liability that is your future pension against the assets in his/her portfolio it would have made more sense to weight the portfolio across the Eurozone.

In short jc, there is probably a good portion of your pension fund invested in the bonds of Irish banks.

But you are an honest man jc, you will not allow personal loss or gain influence you on the decision you must make.

“Would be helpful if we knew where exactly the buck would stop if decided that bond holders were to take a hit.”

jc, it will stop in the market. There will always be an ultimate holder of these bonds. But lets be clear jc, I have not seen anyone on this blog call for the destruction of senior bondholders. Renegotiate certainly, destroy never.

“From my perspective as a Green, I am disgusted that the tax payer may have to take a hit.”

Though not a member of the Green Party (floating voter) I share your disgust. By the way jc, it’s not just the taxpayer it is also the citizen. I am sure that you have met people in your life, perhaps some in your own family that you love, that will never be in a position to pay tax. They are nevertheless citizens.

“ I will still in all probability vote for NAMA and revised programe for government on the basis that:”

Don’t do it jc. You are being lied to.

“- nama is going to buy loans, not assets”

NAMA “is” buying the assets of the banks. The assets of the banks are loans jc. They are secured by property, which I understand many people think of as an “asset”. Jc, the only asset a bank has is the loans it makes. Nothing else. If the security for those loans becomes questionable the loan (and therefore the asset that NAMA buys) becomes questionable.

“- haircut may cover losses”

My view is that that is pretty much impossible. The books have been cooked. You are being sold a “political” haircut. You are being lead ot believe that it is, in this new language we have all had to con=me to grips woith, a “haircut” on the people who got us into this mess.

Wrong jc, very wrong. As a Green Party member you are being taken for the greates political haircut in the history of the State.

In short jc, Fianna Fail are going to scalp the Green Party.

“- risk sharing has not been finalised”

Jc, your NEC has already rigged your meeting. You will not get a choice at your meeting other than to give your leaders free rein to do what they will. Jc, they already know what their will is. You don’t count.

“- price of credit is very attractive”

Sorry jc, you’re not buying a new washing machine on HP here. This is the State you are dealing with.

The price of credit always fluctuates. It has been very cheap and it is about to get a lot more expensive. The bonds that NAMA issues are floating rate. The “price of credit” may not only destry NAMA but the entire State.

“- PfG in all likelihood will fundamentally reform politics in Ireland”

You’re being sold a pup jc. Any promise that Fianna Fail make to you isn’t worth the paper it’s written on. But here’s the thing jc, you won’t be provided with paper. Just words.

I agree Irish politics needs reform. But what would be the outcome of that reform if it is based on stealing from the citizens?

“- Instability and election not in interests of this country and could be beginning of the end”

Sound like Armageddon to me jc. I don’t buy it. It’s just more bullying nonsense from Fianna Fail and the leadership of the Green Party.

“- As an economist I don’t believe most of the doom and gloom we are hearing from the profession, just like I didn’t buy into the hysteria 3 years ago and buy shares in anglo or AIB. Ireland will be fine and any projections from the depths of a depression are likely to be as inaccurate as ESRI medium term review 2008”

I’m not an economist.

“Stiglitz is, however, a bit of a hero and it worries me a lot that he is so critical. I am adding to the list daily:). The principle that underlies nama is rotten no doubt.”

The “principle” that underlies NAMA is indeed rotten and possibly worse.

Pancake had a good link for Stiglitz earlier if you haven’t had a chance it’s worth a look.

http://www.irisheconomy.ie/index.php/2009/10/07/stiglitz-on-primetime/

@ Jc

well its about the basic ownership of private property and the rights that come with it when a contract is entered into. An investor in a senior bond of a bank has bought it under the legal guarantee that it ranks at the same level as a cash deposit in terms of debt seniority. As a result, he is entitled to believe it is of a fundamentally (though not so in practice) similar risk as that cash deposit, something the average taxpayer is obviously familiar with. If it didnt rank at the same level, either the bond would yield a lot more, or the deposit a lot less. I would hope that the average taxpayer can understand this argument when explained to him like this (as opposed to when its explained to him as the bond investor being some sort of nefarious hedge fund making millions out of a long term security that used to yield L+15bps…). A bond owner, regardless of who they are, has very similar rights to the average taxpayer in many ways.

Eoin

“revoke an irrevokable guarantee’?

The guarantee is not irrevocable. The public were sold it as a cheap way out of the crisis. If we had known the consequences we would not have agreed. And there is plenty of prima facie evidence that the banks were engaged in widespread unethical practices which were not disclosed to the public. The guarantee was based on false information. Now that the public are taking the hit there is an irrefutable moral case for its repeal. If you want to personally hand over lots of your money to bank shareholders and bondholders go ahead. But the rest of us prefer to save our money.

“Should we maintain any of our other existing forms of contract law? Should we disavow the national debt while we’re at it?”

That is the beauty of it. We honour all our other contracts and the national debt. Make that part of the referendum.

“And for the record, with or without the government guarantee, we’d still have a 20bn government deficit, and we’d still need drastic cuts in the public sector exenditure”.

You like dealing out harsh medicine to the little people while indulging the big ones. I agree big cuts are needed. But why compound our problems with a massive free gift to bank shareholders and bondholders?

“This new push to link NAMA and the deficit (and so dying kids in Crumlin) side by side is as ridiculous as it is shameful”.

Not at all. We are commmitting ourselves to billions and billions (59!!!!) of borrowings. The interest will cripple us. Nama will distort our costs. The lesson from the 80s is that children will die. Remember how thanks a million Charvet Haughey treated the haemophiliacs? Remember what was done to Bridget McCole? What they are doing now to the victims of the Magdalene Laundries?

If you are going to kill children – and you will – because of your fear of bondholders than be honest enough to admit that you find disappointing the bond holders the more frightening prospect.

“But hey, if we agree with NAMA evidently we’re criminals in favour of killing kids, right, so its what we deserve right?”

As I say, Nama is so irrational criminality is possibly a big motivation. If it is not criminal under the law it is so grossly immoral as to deserve to be.

@Eoin
I can’t speak for Stiglitz, but at the moment Iceland is viewed as having better future opportunities than Ireland because it has sorted its banking mess out. It has reached bottom, bar some shouting. We are still sliding.

Icelandic banks had assets (peak bubble-price assets) that amounted to ten times icelandic GDP. The Icelandic government has taken on a debt of 140% of GDP to pay back British and Dutch retail depositors on icelandic terms. That’s a pretty sweet deal for a state that started off by guaranteeing all debts. The icelandic people may not like it, but it is better than going bust.

Let’s turn the argument on its head for a moment. Iceland is 320k people. That’s smaller than the public service in Ireland. Let’s suppose that NAMA happens and that prices of commercial and C&D property fall as much as expected by both the bears and by historical experience. Let’s suppose that in 2011, there isn’t a recovery. The first sovereign bonds that the state issued early this year (the two year notes) come up for rollover. The state is still spending 60 bn a year, because the budget hasn’t cut the deficit (NAMA is going to fix everything), income is running at 40 bn. Anglo is a weeping sore and now so is NAMA. GGD is 110% and rising. Who in their right mind is going to roll over the debt?

So we have a debt crisis. The IMF come in and slash and burn in the public sector (look, this is just for argument’s sake). 100k public servants lose their jobs. Benefits are slashed. What do you think will happen to the banks then? They will collapse in a horrible heap!

(Yes, my turn to scaremonger 🙂 , but really, this is what I see is the risk of NAMA. It turns the risk of a crisis into the risk of a catastrophe while at the same time providing a veneer of “ah shure it’ll be grand” ).

@ Greg

just as a FYI clarification, i have read comments from a Paul MacDonnell on this site who said that senior bond holders should be wiped out if needs be. I don’t know him personally, but i believe he’s a reasonably well known fella in economics/finance/regulatory circles. He is what i’d call an agressively libertarian economist and believer in a 100% pure free market outcome devoid of state intervention. Stiglitz, who this thread is supposed to be about, would also seem to be going down this route, at least a good distance.

@jc
– nama is going to buy loans, not assets
– haircut may cover losses
– risk sharing has not been finalised
– price of credit is very attractive

Yes, NAMA is going to buy loans. The current market value of those loans is roughly equal to the book value less the expected losses on the loans.
The government estimates this to be €47bn.
As we are paying more than €47bn the haircut will never cover the expected losses.

Risk sharing hasn’t been finalized but €2.7bn only covers about 40% of the overpayment. What about the risk that prices, especially commercial, could fall much further?
To be meaningful the level of risk sharing would need to be about 10 times bigger to properly share the risks NAMA is accepting.

NAMA is not getting attractive finance. It is borrowing at variable rates.
And 1.5% to me sounds like a market interest rate for such a bond.
IMO the government could borrow at these rates through the market at anytime it wanted to.

@zhou
“They would pull the plug while still covere dby the guarantee to get 100% rather than 20%.”

As far as I am aware the bondholders don’t have that option. Their option to enforce a wind up could only be invoked if the capital ratios reached target certain levels.

Also the guarantee does not specify how the money would have to be repaid if it was ever invoked. We could make the guarantee repayment terms so unappetizing that they would never invoke it.

How does €1m per year for 1,000 years sound? 😆

“the bondholders in Icelandic banks are getting equity stakes in the banks and nothing else because…….the Icelandic state is completely bankrupt. Thats my point. You give bondholders equity stakes when you can’t afford to pay them off. Thats what you’d be saying to them. Iceland isn’t adhering to the ‘rules of capitalism’ per Stiglitz, it simply cant afford to pay them anything else.”

Stiglitz believes it is within the rules of capitalism. I would trust his word over yours. Iceland has set a precedent. Our banks (most of them) were not as reckless as the Icelandic ones. When Lehmans went down suddenly the world was in a state of panic. Giving Anglo & Nationwide to the bondholders will not shake the world.

“I didnt mean the Icelandic case as scaremongering, but simply to show the similarities when an entire banking system goes bust – it no longer becomes about what the individual banks did wrong, but what the host state did wrong by letting it get to that point”.

The bondholders are big boy capitalists. Even if they are just capitalists they understand that we are in unprecedented times. As McWilliams says we can make a deal with them. They look forward not back. They just want a resolution.

We are not talking about the whole banking system. Salvage BOI & make a deal on AIB.

Put the children first not the bondholders.

@Eoin
If bondholders must treated the same as depositors in all circumstances why have some government chosen to only guarantee deposits?

@ Eamonn

the legislation as signed by the Oireachtas….

“the guarantee is unconditional and irrevocable and ensures timely payment of the covered liabilities of the covered insitutions.”

http://finance.gov.ie/documents/publications/other/marketnoticeoct08.pdf

Just so we can be clear about which of our obligations and legislation you are seeking to disavow. You can call it stupid and irrational if you want, but its the law.

The rest of your politicised rant is not worthy of a response.

@ Jc

Do you believe this.

Eoin Says:
October 7th, 2009 at 9:39 pm

“well its about the basic ownership of private property and the rights that come with it when a contract is entered into. ….”

Eoin,

That is the greatest load of pseudo legal hokum I’ve heard from you yet.

@ DE

(a) depositors vote, bondholders don’t
(b) depositors are extremely irrational, bondholders only occasionally mildly so
(c) most depositors are far more interested in the safety of their funds than the income off it, bondholders try to find a balance. If you cant ensure the 100% safety of depositors funds, then most are going to take it out.
(d) the financial system works from the ground up ultimately. If the basic unsophisticated depositor isn’t given extra free security, how can we expect everything that leads on from that to work?

re guarantee. it says “in a timely manner”. Not sure what a court would ultimately view as fair in terms of this.

Stiglitz has really pierced through the dry ice storm created by Brian Lenihan. We have got our entire approach wrong. I suggest that we keep BOI and make a deal on AIB. In trying to moderate the insanities of Lenihan’s approach we have lost sight that it’s insanity. INM are making a deal with their bondholders. But many commentators – some working for it – declare that if our government make a deal with the bondholders of PRIVATE banks we will cause judgement day. If we even offer a deal global capitalism will collapse. Stop this scaremongering nonsense. We are a member of the EU and a long-time funder of the IMF and the World Bank. The ECB are our Central Bank. Stiglitz has thrown us one last life line. Lets take it.

@ Greg

my basic point is that bondholders have supplied long term funding to the banking sector, and so to the average taxpaying mortgage holder, on the basis of certain legal protections. It should be explained to the taxpayer as this, and not via some “big boy capitalist” label. If we go down this route, demonise them and ultimately make them take material losses, then they aint coming back to the table. Please see the contribution of our Swedish friend, Mr Bo Lundgren, who is completely in agreement with the guarantee and who said that if senior bondholders took losses they would likely be unwilling to invest again for a long time.

@ Eoin

the legislation as signed by the Oireachtas….

“the guarantee is unconditional and irrevocable and ensures timely payment of the covered liabilities of the covered insitutions.”

Throughout history countries have welshed on commitments. We are in unprecedented times. In Iceland bondholders have been financially murdered. In Latvia & Spain bad things may be on the way. All I want to do is give them a …haircut, yes, that sounds right. The bondholders are going to have to cut a deal. They’ll get over it. A constitutional amendment, overriding all European legislation – even the threat of such – would be enough.

“You can call it stupid and irrational if you want, but its the law.” So we amend the constitution. We do it frequently. The guarantee was made without adequate infromation being given to the public. We were not told what would happen. The banks were hiding their corruption and the state of their loan books. We change our laws, and our constitution all the time. ANY law is revocable – no matter what it says. The question is constitutionality and we can solve it. You should be glad I’m saving you money.

“The rest of your politicised rant is not worthy of a response.”

We are in a crisis. Money is scarce. We shouldn’t be borrowing Bernanke’s helicopter to fly over the bondholders scattering money. You remember how we just cancelled the cervical cancer vaccine for children because of lack of money? Nama will cause much more of that. It will also encourage the government not to take action on upward-only rental agreements & slow the fall in property prices which will improve competitiveness – costing jobs, homes, marriages.

Nama will do terrible damage.

@Eoin
You seem to be fixated on senior bondholders.
All the solutions myself and others could still be achieved without touching them.

Just looking at the subordinated bonds the following is still outstanding for the three main banks.

http://www.nama.ie/Publications/2009/Supplementary_Documentation.pdf
AIB €4,071m
BOI €4,545m
Anglo €4,945m
Total €13,561m

Now I don’t agree with some of your opinions on senior bondholders but surely you don’t think the same about subordinated bondholders.

Couldn’t these be converted to equity as part of a NAMA process paying market value?

We wouldn’t even have to go near the senior bondholders but could substantially reduce the cost to the state.

@ Eamonn

Marraiges, children, terrible things happening, trying to save me money? Listen dude, i get enough of this crap from my girlfriend, i certainly don’t need it on here. Take your monologues over to politics.ie please.

@jc

Stiglitz is a bit of a hero for me too. He wasn’t here to talk about NAMA and he wasn’t given any great detail. All the same, his reaction was dsconcerting.

If the PfG deals with electoral reform and perhaps corporate donations then I think it is worth voting for as those are changes that will have long lasting effects.

@Eoin/DE

Banks could not elect to treat depositors other than parri passu. However the Govt could have guaranteed one and not the others. However, the Govt could not choose to aid companies in the state by covering some senior debt and not others. The Govt could not bring in a partial senior bond cover for Credit Unions, Irish Insurance companies, Irish Airlines, Irish Shipping companies, Irish Pension Funds or even specific EU insurance companies (I don’t know who hold these bonds save that Credit Unions, Pension Funds and Insurance Companies have been hinted at).

Apart from that, I am unhappy to think that unguaranteed subordinated bondholders might have got out with 40% of their money.

@ DE

im far less willing to protect subs. I just dont think its that easy to get them to switch into equity. Even if u take away the g’tee on them (which i’d be all for), how do you force them to switch? You’d have to be threatening them with the serious possibility of liquidation, which i dont see as feasible. Better to take them out at 30 cents via market tenders as has already been happening. A 70% haircut is still fairly large for a market friendly and simple process which could be done in the space of a couple of weeks.

@Eoin
I don’t see why sub bondholders would have any preference for accepting cash vs accepting equity. They will understand the value of the equity they are getting in return for their debt. At the end of the day it is all $€£$€£ just in different forms.

You might have to give them a little more than cash but this simple change would allow us to apply a much deeper discount to the loans purchased.

If the discount was substantial enough to knock out existing shareholders completely at least the banks wouldn’t end up 100% state owned.
And I think everyone can agree that is a positive.

Eoin Says:
October 7th, 2009 at 10:21 pm

“my basic point is that bondholders have supplied long term funding to the banking sector, and so to the average taxpaying mortgage holder, on the basis of certain legal protections.”

“my basic point is that bondholders have supplied long term funding to the banking sector”

Eoin,

Why do you keep letting your argument down.

Are we not now in the place we are exactly because your God “the bondholders” did not provide “long term funding”. It was short term funding Eoin.

Come on Eoin. Stop messing with my head.

Provide we with the term liability profile in billions of the Irish banks.

You work there.

Give. Give.

@zhou_enlai

Wouldn’t it be easier and cheaper to protect any Irish institutions through tax and other measures than a blanket bailout of all professional investors?

@Eoin

“Marraiges, children, terrible things happening, trying to save me money? Listen dude, i get enough of this crap from my girlfriend, i certainly don’t need it on here.”

Your girlfriend is a wise woman and she is right to be watching how you spend money – you want to give a giant free gift to hardened international capitalists!

“Take your monologues over to politics.ie please.”

As you said yourself:
“we’d still need drastic cuts in the public sector exenditure”.
Money is tight. Wasting it will cause unnecessary pain. That’s wrong. And it’s political.

“im far less willing to protect subs. I just dont think its that easy to get them to switch into equity. Even if u take away the g’tee on them (which i’d be all for), how do you force them to switch? You’d have to be threatening them with the serious possibility of liquidation, which i dont see as feasible. Better to take them out at 30 cents via market tenders as has already been happening. A 70% haircut is still fairly large for a market friendly and simple process which could be done in the space of a couple of weeks.”

That sounds better. But why not couple an 80% haircut for the subordinated people with a 10% tidy trim for the senior bondholders. They can afford it. They will just write it off as just another part of the financial crisis, “it’s in last years accounts”, “Ireland’s infamous property bust”, “at least it wasn’t even fractionally as bad as Iceland” etc. We could give no haircut for BOI, a tiny one for AIB and really shave Anglo and Nationwide.
Irish Nationwide and Anglo are hated. I think a minister threatening to liquidate them would be pretty convincing.

Listening to Stiglitz has put me completely off the Nama process. Create a giant Fas for property loans, with our country’s reputation on property corruption? Insane.

Nama is also much worse and much more corrupt than pre-privatising the banks for a temporary period with good safeguards and a fair amount of skin for the subs and seniors.

As I said before, Nama as is skins the taxpayer.

@DE

I don’t see how Credit Union or Insurance Company or Pension Fund losses on senior bonds could be made up with tax measures or other measures.

@Zhou
I don’t see why not. Think of it as a reverse banking levy.

As many have said the government is free to do whatever it wants through a Finance bill.

Eamonn76 Says:
October 7th, 2009 at 11:20 pm

“@Eoin

“Marraiges, children, terrible things happening, trying to save me money? Listen dude, i get enough of this crap from my girlfriend, i certainly don’t need it on here.””

Eamonn,

I think I’m going to have to call you “The Dude Eamonn”

Did he really say that?

I’ll have to look back through this thread.

The Dude?

Does he know what he’s messing with?

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

If I was a betting man I’d say that’s one pissed off and losing bond/currency/interest trader.

Still it’s his God not yours.

In the Stiglitz interview why did Mark Little say, “what we have done in this country is …” When what he should have said was, “what we are proposing to do is…” Why is everyone parroting that NAMA is a done deal? John’ O Donoghue obviously does not think so! The Greens may well decide not to give this criminal overpaying its blessing. If they do, how long before they have to face an electorate whom they have betrayed in every way possible.

Just heard some Green councillor say on Vincent Browne show, that the Green Program for Government, can be torn up as it was now totally defunct and not achievable. Browne reminded him that of 13 different objectives not one had been achieved. The performance of this guy was truly bizarre coming as it does just 72 hrs before another negotiated program for government is to be agreed and which is then to be touted by Gormley and Ryan as worthy of “trumping” NAMA. If these programs for government are so useless they should concentrate on one thing and one thing only NAMA.

Anyone notice too, that when Mark Little repeated the official state line as promulgated by RTE, and the Independent Newspaper group, that… “we are a small, dependent, insignificant country who cannot really do anything else except play along with the big financial players” that Stiglitz took exception and said that attitude was nonsense.

He was not buying the propaganda because, he knew from his World Bank experience, that the modus operandi is usually the same. There is a crisis, the government are told (usually very late at night) that unless you play along and act very, quickly bad things will happen. This is the familiar recipe for, in his words, “robbing the taxpayer”. It reminds me of the 30th of september last? It also reminds me of the familiar, NAMA “only game in town” and if you don’t do as I say bad things will happen to the Irish tax payer threat!

In fact, it is the opposite, and he warned us that, if as a country, we go down the NAMA road and overpay, we will end up with a huge national debt. Then what plays out? The same institutions whose bondholders have invested in the the Irish banks, the very one’s who are praising the government and why would they not (for rescuing their bond holders) will turn around and tell us in two years time, “sorry Ireland we cannot invest in your country any longer because you are too indebted”. Spreads immediately widen and we are screwed even more!

On my 80% and 10% haircut and tidy trim for subordinate and senior bondholders proposal: I do not know if these figures are enough or too much. Whatever minimises the cost to the taxpayer. But lets have a small certain cost if we have to not the potentially huge one of Nama.

Also on Nama, I came across this in your archives:

Lenihan on Insurance and Bad Bank Proposals:

In an interview with Jamie Smyth for The Irish Times published Feb 11:

“We are at a great advantage that many of the larger (European) states have very extensive loan books and it is very difficult for them to do the type of comprehensive trawl through their banking system that we have been able to do,” said Mr Lenihan.

He has done a comprehensive trawl? In Feb. I thought he gave us a preliminary assessment in September. So preliminary that he could not even tell us the discount for BOI and AIB.

Maybe he got his tenses confused, but then he said:

“He said the Government had an estimate for the amount of toxic assets held by Irish banks but he preferred not to release it. It had been stress tested against the expected downturn in economic activity this year and fed into the bank capitalisation scheme”.

On the one hand that perhaps draws back from comprehensive trawl. On the other it confims that he had pretty good estimates in February.
How can this be explained?

Is it because when he proposed Nama he wanted us to think that he knew all the details and there was nothing risky?

But now he wants to pretend he is still conducting a preliminary examination so he doesn’t have to come clean about the performance of the loans and the discounts?

Is the truth just what suits him at the time?

@ jc

Read the entire thread again jc.

Do you get it?

NAMA is the greatest robbery in Irish history.

Your call. Don’t be scared. Stay on the right side of truth.

Here’s some reggae music while you think about it.

It’s about Police & Thieves.

Nobody stopped them.

“..fightin the nation…”

Your call jc.

“…all the crimes committed day by day…no one try to stop it in any way..”

Your call jc.

“….all the peace makers turn war officers….”

Your call jc.

“….scaring the nation with their guns & ammunition….”

Your call jc.

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

jc,

Don’t let the history of the Green Party in Ireland go down with the thieves.

Your call jc.

Robert Browne Says:
October 8th, 2009 at 12:02 am

“Just heard some Green councillor say on Vincent Browne show, that the Green Program for Government, can be torn up as it was now totally defunct and not achievable.”

I’m sure he described himself as an Independent councillor who joined the Green Party after he was elected.

I agree.

It was beyond the usual political hallucination that we have become accustomed to.

This politician actually said the Green Party can make a deal with Fianna Fail in the next two weeks and, having conned everybody, just tear it up.

Truly astounding.

Pat Fitzpatrick of GAN (Greens Against NAMA) was there. I thought he did a pretty good job but had to much manners to tell the Independent turncoat to go where the sun doesn’t shine.

Then I thought, how many greedy little independents have infected the Green Party for their own political futures?

Has the Green Party become polluted?

Then this piece of opportunistic filth goes on to disparage Patricia McKenna. What’s that about?

Someone who has more loyalty to the Green Party that this Independent turncoat could imagine in ten lifetimes.

What have they become? Just more greedy gombeen men?

Why wasn’t John Gormley, Eoin Ryan or Dan Boyle there?

Why was it left to Sam Smyth to undermine Pat Fitzpatrick.

Have the Green leadership now found their true colour.

A yellow spine?

I am a fan of this blog and free expression.
But in the real world there are out firs like AOL IOL etc who will prevent people from seeing a blog if the F^&k word has been used and remains there uncensored.
I thought most bloggers knew that already.
In which case it might be sabotage!
Please censor the offending word?

In order for banks to pay taxes high or low they need to make profits. The economy will dip again badly and profits there may be none. All their profits come from their government ceded oligopoly on banking services. They extract profits from the economy.

The point is obvious: we overpay to enable special persons to minimize their losses despite the existence od a derivatives market. Then we get peter to pay paul so he can pay peter, at some admin cost.
Who are these special persons and how much do they share with their cronies? Until there has been an investigation it is premature to say that a Bill cannot be a crime or a criminal act. The cost alone dwarfs annual budgetary measures. Some of these have been bought and paid for by special persons in the past. The scale of this does not mean it cannot be acrime.

I see Nama as threatening to the stability of Ireland in the same way as the UK was with Iceland, and still is, and in the same way as Latvia et al are. They face widespread social disruption and frankly, possible chaos. Ireland has many differences, I draw those in to illustrate what has happened already to small un prepared nations.
The key difference is that we are not yet obliged to invest the enormous sum of monsy. I see from the tone of this thread a weary recognition of issues, but the avoidance by the optimists of a very probable scenario. Is there enormous time pressure? Are the banks thirsting to lend but have no pennies? I think not.

Time is an ally to us all. If I am wrong, and I hope to Gos I am, then go ahead with Nama. 7,000,000,000 is almost chicken feed. But the whole sum is actually at risk. 77,000,000,000 euro. As time goes by the need for Nama and the terms etc can be better appreciated.

Why the rush?

Greg

Really like your posts and please keep em coming!

Infiltration is an old trick that always precedes a split! Some cosy would be friend sidles up to “keep enemies closer”. Very common with ruling parties. Every sideshow is a threat to be taken seriously. So they infiltrate and try to destroy. 5th column? Ever wondered why apolitician can change parties? No longer effective at the infiltration role!

Robert Browne

Stiglitz is obviously aware of what is really happening now. Those who depend upon mainstream media, owned by those who own the bondholders, will never learn anything. The PTB know what is baked in and coming down the pipeline!

I appreciate your postings!

Eoin
The Constitution recognizes treaties and Acts of the Oireachtas. The guarantee is not law. It is a unilateral declaration that is likely unenforceable. It would obviously be unwise to renege, but perfectly lawful to do so. What such a similar declaration would be worth in the future could be guessed at! But hard times bring hard decisions! Someone once said proudly that he changes his mind, if the facts change. Gicen what has transpired since we all know that the guarantee is worth less than it was.
Any hot derivative action to record the market sentiment on that, anyone?

Having endured a solid year of spin and waffle, it was slightly wierd listening to such an eminent figure speaking with that level of directness and clarity.

One of the core (and most frustrating) talking points from the pro-NAMA lobby is the assertion that any other possible arrangement would lead to certain national ruin.

It was refreshing to listen to Prof Stiglitz simply dismissing this as the nonsense that it is.

NAMA is not ‘the only game in town.’ There are credible alternatives. And most of them would offer significantly better value to the Irish taxpayer than the deal on the table.

Eamonn76

I really think poor Eoin is on the run from you! Right on his wavelength!

The enormous increase in borrowings will really hand Ireland over to some very interesting people. Hard faced indeed!

Given the amounts of money available to cronies if this Nama goes through, I am shocked at how few shills there are on this site. I like to think that it is so well run and has such depth that they reral;ize that their poor arguments cannot be exposed here any longer.

Everyone take a bow!

And now lobby the President and the Greens!

@ Greg (dude)

AIB senior debt (very rough figures in EUR, cb = cov bond)

152mio 2042
380mio 2030
550mio 2025
770mio 2023
400mio 2019
868mio 2019
500mio 2017
1.67bn 2017 (cb)
270mio 2015
400mio 2015
2bn 2013 (cb)
3.5bn 2012

BOI

100mio 2027
490mio 2020
650mio 2019
420mio 2018
550mio 2018
1360mio 2017
65mio 2016
60mio 2016 (cb)
815mio 2015
2100mio 2015 (cb)
1500mio 2014 (cb)
1150mio 2014
2250mio 2013 (cb)
2300mio 2013
640mio 2012 (cb)
1975mio 2012

So, it’s quite clear the maturity profile of a lot of the debt of AIB and BOI is medium to long term in nature. And all of this debt was issued at least 13 mths ago, and with no new medium/long term debt coming on since then, so on a normal market basis there would be even more of it, especially in the 2012/2013/14 area (eg there’s tons of 2011 stuff on the books right now). Perhaps you could actually look up the data yourself (all easily available on the AIB Group website) before accusing me of lying? Normally i would imagine a bank like AIB and BOI, with lots of very long term assets, would fund via senior debt with a weighted average maturity of 4/5 years, which would fit in with my medium-to-long term description used in the previous posts above.

Also, if you have an issue with the term ‘dude’, take it up with KW, he’s a fan of the term as well.

@ DE

having looked through some of the debt outstanding for the Big Two, are you sure your figures are correct on the sub debt? I see a lot less ‘outstanding’ given the big buy backs this year? But its not easy to get exact figures on it all. I make it more like 4-5bn in sub debt outstanding for the big two, trading at 30-35 cents, so with a market value of 1.2-1.75bn? But listen, i dont have all that much issue with debt-for-equity swapping them, i just dont think its going to be as easy a sell as you make out given they they’re still guaranteed and they’re in systematically extremely important institutions. They know we aint gonna threaten liquidation just to get rid of them. They can sell for 35 cents right now, so wouldn’t we have to pay above this to get rid of them?

@Eoin
My understanding of the guarantee is that only dated subordinate debt is covered. The fact that sub debt is trading at 30-35 cents makes me think that there is undated out there.

But a debt/equity swap of 4-5 bn (book value) in sub debt at a conversion value of 40c gives the sub debt holders a good uplift, while reducing the liabilities of the banks by 4-5 bn. No?

@DE

I don’t get you at all at all.

How exactly could the state protect Irish Insurance Companies, Irish Credit Unions, Irish Pensions from losses on senior bonds? I cannot figure out what you are proposing.

BTW – the State cannot give unfair state aid in contravention of EU laws in a finance act.

@Eoin

Are they definitely senior bonds figures for the banks? How come the maturity is so long?

@ YM

sorry, you’re right, the prefs are unguaranteed, and they make up the bulk of the outstanding subs. My bad.

However, i again dont see how you ‘force’ them into d-for-e swaps if we all admit that liquidation is off the table. Seems far simpler to just cash them out at current market prices. But if we did d-for-e them at acceptable terms, whats the upside for us the taxpayer? Couldn’t AIB do a rights issue and use the funds to the same end? I suppose im saying this doesn’t appear to be a plan that solves any particularly significant problems? Suppose there’s a bit of extra liquidity as a result, but beyond that i dont seem the compelling logic. To clarify, im not against the sub d-for-e plan, just don’t see what it does to help all that much? We’d also be introducing a significant new shareholder (maybe 20%?) who we don’t know all that much about.

@Pat the Plumber…. agree 100%, I have long regarded NAMA as fraud, and have listened to various ‘professional’ people arguing otherwise…. To the point where I would even doubt it myself..

Very refreshing to see someone come in, take one look at it and be so frank. Because, despite what the professionals say, its not that complicated..
There were some international figures who came in and were a lot more polite but were critical; their words were then twisted by Lenny to claim they supported NAMA. He will do well to spin criminal to support.

NAMA is an attempt to misappropriate tens of billions of euros under false pretenses… It may be well intentioned but it is still fraud.

To create a agency whose main purpose is to defraud the taxpayer by overpaying is criminal. There is no other word for it.

If they want to bail out an industry; do it honestly and call it state aid. the EU will find a way to accommodate.

The banking crisis is a result of fraud….. fraudulent packaging and mis selling of ‘assets’ by banks, allowed excessive lending and false profits to be declared for at least a decade…time to clean it up.

@ zhou

hmmm, scratch the AIB ’42, its a sub (in Yen oddly…). All the rest it senior.

But just to make clear, there’s obviously tons of stuff maturing in 2010 and 2011, but this is the debt that’s further out. The banks would also have CP and interbank cash deposits out to a year. And then there’s the whole customer deposit book.

A lot of people have got caught up in this whole “banks borrow short and lend long” story, and assume that banks NEVER issue long dated debt. Their balance sheets are a lot more nuanced than that. Most of their assets are probably 15yr in duration, so if you have an average 4-5yr senior debt profile, a lot of CP out to a year, and a customer deposit book which is more or less callable (even if its a FTD), there’s a good mix out there. Add on to this the perpetual and subordinated issues, and there’s a fairly broad range of different securities with different maturities, while still fitting into the lend-long-borrow-short model.

@Eoin

All from the NAMA supplementary info document. They give a breakdown of the subies post buy back

AIB – Page 43
€5,112m – Tier I & Tier II

BOI – Page 57
€6,283m – No breakdown

Anglo – Page 71
€2,392m – No breakdown

Yes we would probably have to pay a little bit above 35c, to do the sub debt exchange for equity rather than cash.

But doing it this way changes how the losses are distributed among the stakeholders.

If the debt is exchanged for cash the existing shareholders gain the difference between the book value and purchase price (65c in €).

If the debt is exchanged for equity the shareholders gain initially but are then diluted when the new equity is given to the subordinated bondholders.

This method is far more efficient at recapping the banks.
Essentially the subies are agreeing to take the cash they get from the debt buy back and invest it straight back into the bank as equity.

This means the state has to invest less, surely not a bad thing.

It also allows us to 100% nationalize the banks as part of the NAMA process (by purchasing at market value) and then instantly get new private shareholders back on board through the swap.

@ Zhou/Greg

uggh. scratch my figures. Bloomberg aint making it easy to differenciate between senior and subordinated debt.

Here’s AIB’s senior debt per AIB

http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/AIB_Article/aib_d_article&c=AIB_Article&cid=1096576938077&channel=IRHP

It has some stuff listed here which is described as subordinated when you read the prospectus. Can anyone figure this out? AIB seem to have a 30bn EMTN programme, from which they can issue either senior debt or subordinated debt, but classify it all as senior debt? Huh?

Anyway, regardless, some of the definitely senior stuff would have been 4-5 yr in maturity (per the link above), which was i think (i think) my initial assertion.

@Eoin

Sorry, meant to add, why are we worried about long-dated senior debt? It can’t leave before it is due, so really we should be focusing on making sure the short-term debt is sustainable. Deleveraging the banks is one way of doing this. A Cypriot-style asset swap facility (basically a state-run repo mechanism as far as I can see) is good possibility to sustain short-term debt while equity raises go on – it removes the risk of a short-term crisis while at the same time providing some funding certainty.

“But if we did d-for-e them at acceptable terms, whats the upside for us the taxpayer? ”
The taxpayer doesn’t need an upside. What the taxpayer needs is no downside. It is about risk, not potential reward. The risks that are being addressed are not having a functional banking system and not having a functional state. NAMA addresses one of those risks at the expense of the other.

@yogan…. “he risks that are being addressed are not having a functional banking system and not having a functional state. ”

exactly…. nobody is doing a worst case scenario for NAMA….the “sure if prices don’t rise 10%, we have bigger problems” is the same attitude that saw hundreds of millions spent on sites. “Sure if property crashes, were all ____” was a common refrain in the boom.

Guess what… it crashed…Guess what with NAMA? there can be an upside and a downside…

yoganmahew Says:
October 8th, 2009 at 10:00 am

Excellent.

If there is no risk that citizen/taxpayer needs no upside.

NAMA is not the “only game in town”, but I heard it said twice on RTE this morning.

Do you have a link for more detail on the Cypriot-style asset swap facility?

Was at family funeral and could not moderate this. have deleted some comments. sorry if this offends the people who had their comments deleted but swearing and sexual imagery should be avoided. it unnecessarily turns away people from the discussion and doesn’t in most cases have any positive value.

@ Eoin

Thanks:) Still voting for it though. The principle is wrong, wrong wrong, but it has been bandaged up enough at this stage to resemble something that might work.

I believe in this country. As the Bert would say “yez are all takin’ down de bleedin economy”.

LOL

Comments are closed.