The Baseline Scenario on Ireland

The influential Peter Boone and Simon Johnson have written a critique of the Irish approach to rescuing the banking sector: you can read it here.

166 thoughts on “The Baseline Scenario on Ireland”

  1. @Philip Lane

    A welcome shot of realism. It is still not too late …

    “When Irish-type banks fail, you have a dramatic and unpleasant choice. Either takeover the banks’ debts – and create a very real burden on taxpayers and a drag on growth. Or restructure these debts – forcing creditors to take a hit. If the banks are bigger, more powerful politically, and better connected in the corridors of power, you will find the creditors’ potential losses more fully shifted onto the shoulders of taxpayers.”

    Spot on. Yet the Kleptocracy reigns supreme …

  2. Of the advanced countries, Ireland and Denmark guaranteed bank debt during the crisis.

    According to the IMF the median of guarantees across 12 advanced countries was 6% of GDP; in the case of Ireland it was about 55% of GDP and below 20% for Denmark.

    So wouldn’t an unlimited deposit guarantee have stabilised the Irish banking system at the end of Sept 2008?

    Why did the Irish governemnt impose this straitjacket on itself and thereby end up in putting a huge burden on taxpayers?

  3. Good article, the opposition FG pretty much support limiting taxpayer exposure to loses where possible, yet Richard Bruton is almost invisible these days.

    Simon Jenkins (last week’s Guardian) on a similar UK experience where the Northern Rock style solution was shunned in favour of more deeply unpopular taxpayer bailouts,

    http://www.guardian.co.uk/commentisfree/2010/mar/11/banks-lied-darling-puppet-city

    @MH: I presume that last question was rhetorical.

  4. Oh dear. Just when the flow of NAMA-related posts seemed to have been staunched. I think, Michael H, that the answer to your question lies in the lack of an effective bank resolution process – not to mind a total domestic banking system resolution process – combined with the lobby of high-powered and infuential players (mentioned by Messrs Boone and Johnson). Faced with this, disenfranchised, powerless cictizens were always going to be hosed.

  5. @Paul Hunt

    The flow of NAMA_related posts needs to continue … on Governance, on facts, and on what is being done.

    @Joseph

    No – nothing that we do not already know – simply useful to get some external reviews on validity of what we do already know to be factual. The ‘standard’ tens to reign supreme around here on the ‘fiscal’ as well.

    @Ciaran Daly

    Richard who?

    @Michael Hennigan

    & many Danes are pretty livid at the 20% – and also at the bonuses for failure amongst their top bankers. Finalcialization gone mad one big global problem … we’re stuck with our own particular.

  6. @Paul Hunt
    “Oh dear. Just when the flow of NAMA-related posts seemed to have been staunched.”

    Nama hasn’t gone away, I think we are experiencing just the first turn of the screw i.e. the screwing of the taxpayer as per Boone & Johnson.

  7. @David & Brian,

    No desire to see a guillotine on NAMA-related comment, but it’s a done deal. I just happen to think that there are many other aspects of economic policy where the party-line hasn’t been set down in such fine detail and some comment and debate here might contribute to wider enlightenment and, one can only hope, encourage a smidgin of rationality in decision-making.

  8. @Paul
    It is not a done-deal unless you mean that the taxpayer has been done.

    The reality is that Nama and underlying issues will depress many aspects of the economy for years to come so I think that it is important to continue to discuss and strive to influence.

  9. @Brian,

    I agree about the malign impact, but I’m simply suggesting that the shambles be ring-fenced to minimise the baleful fall-out and that we apply some of the heat and light that NAMA generates to other areas.

  10. There is nothing in this article which regular readers of this blog do not already know.

    Still it is an astonishingly well-written piece, deftly putting the issue into the sort of perspective one tends to lose when suffocating through the political smokescreen cast forward in the Irish media.

  11. @Ribbit
    “it is an astonishingly well-written piece”

    Pah. They repeat one of the astonishingly unchallenged canards of the bubble –
    “Ireland, until 2009, seemed like a fiscally prudent nation. Successive governments had paid down the national debt to such an extent that total debt to GDP was only 25% at end 2008 – among industrialized countries, this was one of the lowest. ”

    Bubble GDP pumped by transfer pricing masked the fact that in absolute terms no debt was paid down during the Celtic Tiger. The National debt at the end of 2007 was €37,559 mn euro. At the end of 1997 it was €38,966 mn euro. The 2007 figure includes the netting effect of the NPRF…

    How much of GDP was not (and is not) real? Who knows. But measure Ireland’s debt performance as GGD percentages is a dangerous game.

    “When Irish-type banks fail, you have a dramatic and unpleasant choice. Either takeover the banks’ debts – and create a very real burden on taxpayers and a drag on growth.”
    Still, at least they recognise the choice that has been made – ‘debt to the banks’ and ‘death to the economy’…

  12. The article seems to imply that we should have defaulted on senior bank debt. Every time I hear this my heart leaps. Force the losses on those who lent recklessly to our reckless banks! Then I think of Alan Ahearne’s and others’ arguments that to default on senior bank debts would be devastating to the country as it would affect our ability to issue sovereign bonds at a time when we are running a large deficit.

    This argument has been shouted back and forth for over a year now and still never the twain will meet (though some anti-nama people agree senior debt would have to be honoured). I know I will never get a defintive answer to my question unless everything goes wrong and we end up with sovereign default. The answer is unknowable. I am truly sick of this particular conundrum.

  13. @zhou_enlai
    “The article seems to imply that we should have defaulted on senior bank debt. Every time I hear this my heart leaps. Force the losses on those who lent recklessly to our reckless banks! Then I think of Alan Ahearne’s and others’ arguments that to default on senior bank debts would be devastating to the country as it would affect our ability to issue sovereign bonds at a time when we are running a large deficit.”

    Yeah, we can go around and around in circles on this particular one.
    But I still fail to see why bank bonds, senior or otherwise, should have any guarantee from the state.

  14. @Zhou_EnLai

    Zhou – the fact remains that we do not know WHO these bondhoders are –

    Could I please see a two column table – banks on the left (sic) sovereign on the right (sic) – and then two more columns on amounts held – and sorted by bondholder name (another column) so that we can get some evidence that bank and sovereign sip from the same pot? In other words that de banks and de sovereign are intensely intercorrelated with each other within the upper_echelon kleptocracy …… as ex-Citizens Joe and Joan Serf would like to know who they are not working for, and in whose interests they and their offspring are being screwed ………

    and I do recognize your point on senior debt ………. (negotiation is not a difficult word)

  15. I didnt see this as suggesting senior debt can be hit. Theres still a good lot of book value sub debt out there to absorb losses (note that its the book value that absorbs losses not the market value). There is at present a fashion to rob Peter (Tier 2) to pay PAul (Tier 1 ) ; banks face t2 as well as t1 ratios we all seem to have forgotten.

  16. “The article seems to imply that we should have defaulted on senior bank debt. ”
    I don’t get the “we” bit here. Wasn’t the article suggesting that the government should not have guaranteed them. That is hardly a default by “us”.

  17. @DOD

    I think we are entitled to that list.

    @BL

    I think everybody agrees subordinated debt should lose a lot of skin (the max achievable).

    @AMcG

    Freudian slip. I was watching David McWilliams on Youtube where he said that the creditors should have been faced down after the guarantee was given. Maybe it coloured my reading of the article.

    In any event, it is the same old chestnut.

  18. Zhou
    the subbies skin is the same as that of a siberian tiger – protected by state. Until its open season on their 10b or so book value thats 10b the taxpayer is passing over without need, agree?

  19. @zhou enlai
    The argument about how a commercial bank defaulting on senior debt might impact the Irish state’s ability to issue bonds has been repeated ad-nauseam but never justified – at least to my understanding.

    The question is not so much “Whether?”. The question is more “If so, why?”.

    Why should it make any difference to the state’s ability to issue bonds if a commercial bank defaults on its debts (subordinated and otherwise)? The guarantee was temporary, as far as I knew in order to prevent a sudden failure. So, why must the guarantee be permanent? Why isn’t it perfectly possible – on a year’s notice – to wipe out a bank’s shareholders, bondholders and even trade creditors and still have a functioning banking system.

    Now I’m no banker, but I do have a smidgen of financial knowledge, and I have not seen or heard an adequate (for me) explanation.

  20. @Zhou
    “In any event, it is the same old chestnut.”
    There seems to me a big difference between defaulting on an existing guarantee, and introducing a guarantee where there was none. I agree with the authors that this was the result of “a coalition of interests”, and it should not have happened.

  21. Good article in todays NYT –

    http://economix.blogs.nytimes.com/2010/03/18/will-the-u-s-become-the-next-ireland/

    I especially liked the following

    But a strong lobby of real-estate developers, the investors who bought the bank bonds, and politicians with links to the failed developments (and their bankers) have managed to ensure that taxpayers rather than creditors will pay. The government plan is — with good reason — highly unpopular, but the coalition of interests in its favor is strong enough to ensure that it will proceed.

    Investors may wish to remain pleased today with Ireland, but Ireland’s “austerity” — reflecting an unwillingness to make creditors pay for their past mistakes — hardly seems a good lesson for Greece, the euro zone or anywhere else.

  22. @ Hugh

    many would argue that as the entire domestic banking industry here found itself technically insolvent (with the possible debateable exception of ILP), the matter became a quasi-sovereign problem rather than a private company problem. All the Irish banks were regulated and governed by Irish authorities, but funded by foreign lenders, so, the argument goes, the Irish state had a duty to support/back-stop the banking system. This is, for instance (and at the danger of being shot), how the world is currently treating Iceland!.

  23. Eoin
    “many would argue that as the entire domestic banking industry here found itself technically insolvent (with the possible debateable exception of ILP), the matter became a quasi-sovereign problem rather than a private company problem. All the Irish banks were regulated and governed by Irish authorities, but funded by foreign lenders, so, the argument goes, the Irish state had a duty to support/back-stop the banking system. This is, for instance (and at the danger of being shot), how the world is currently treating Iceland!.”
    Really? Tell us who argued that, absent the guarantee? The guarantee made it our problem.
    As for the lending/borrowing issue : 2008 figures from the CB (see for example Greg connor et al) was foreign bank lending 29%, other foreign deposits 4%; the other non-irish contingent were the siberian tigers of the subbies, some of whom are in the non-irish bond finance of 8%. Irish domiciled deposits (bank and other) were 41%. So, at max <50% was foreign sources of capital, and of course the ECB was a chunk of that at end 08.

  24. @ Brian

    “Really? Tell us who argued that, absent the guarantee?”

    What, you didn’t get the memo??

    More seriously, wasn’t the line doing the rounds at the time of the guarantee that the Irish government had merely “made explicit that which was always implicit”? And how do you explain the elected governments of both the UK and Holland holding the Icelandic state to account for the debts of their banking industry? You live in a world of textbook answers Brian, i live in one which claims that Ireland is not issuing any fresh debt this year even though if you counted NAMA and govt guaranteed bank debt the real figure is around 75bn. Via NAMA and the govt guarantee we’ve managed to keep the whole thing afloat somehow.

    “So, at max <50% was foreign sources of capital”

    So what, say 175bn or so, or roughly 120% of GNP? Chump change for a nation with total net outstanding national debt of 37bn in 2008, clearly…

  25. @ Brian

    “the bank part of it….would you invest in it?”

    No, the funding model is broken now. But that doesn’t necessarily mean its insolvent. If you were someone like Santander with whorish amounts of funding, it could make sense. Either way, you could probably wind it up and pay everyone off theoretically (practically is a different matter).

  26. I believe that “it thus cannot improve competitiveness without drastic private sector wage cuts” is a phrase that is repeated a little bit too often.

    Cost of doing business is (I believe) closely correlated to the cost of living. Drastic wage cuts would make it difficult for many and impossible for some to be able to continue to pay the state sponsored price floor of housing. I.e. taxing the low paid or decreasing their pay would be easier if the low paid didn’t pay so high rent.

    Rent seeking is a big problem in Ireland. The dream seems to have been to live off the multinational exporters by providing expensive services to them and their employees. Due to a low cost base it was possible to make big profits for a while. Due to low cost of entry, many entered into this lucrative area. Due to lack of reliable information the bubble could grow bigger than in many other countries.

    The bubble has not yet fully burst, the difference between now and two years ago is that the bubble is more clearly visible despite the poor availability of reliable statistics.

    An economic policy designed to keep rent seeking at inflated levels is probably not going to help economic recovery.

    Maybe negotiations are happening now with bond holders. It would certainly reduce the cost of the bank crisis for the Irish state.

    All (?) agree that Ireland needs at least one healthy bank. The others might as well be wound down and maybe someone will buy the good pieces of the others to create some healthy competition. Saving all of them & leaving part of the ownership in private hands is a waste of money. Guarantee is running out, play out the bondholders of the different banks against each other during the negotiations and get some good deals 🙂

  27. Eoin
    “But that doesn’t necessarily mean its insolvent.” Err…helloo?
    Liabilities grossly, greatly, massively, exceed the capital base. Nobody seeking to make money is going to invest in it – why on earth would they? Godawmighty, what sort of definition of “insolvent” are you using Eoin? What would it take for you to say “yep, anglo’s a dead duck”…..?

  28. i too weep for the unborn edit functions….
    “More seriously, wasn’t the line doing the rounds at the time of the guarantee that the Irish government had merely “made explicit that which was always implicit”?

    No. It was , as I recall and as a search through the news archives suggest “the boys were bounced into it” (it being the subbies guarantee).

    “And how do you explain the elected governments of both the UK and Holland holding the Icelandic state to account for the debts of their banking industry?”
    Because they can. And because Iceland! is not in the EU, and so theres some lack of clarity as to the ultimate liability of Icesave (not, note, the “banking industry”. Oh, and because they can.

    “You live in a world of textbook answers Brian, i live in one which claims that Ireland is not issuing any fresh debt this year even though if you counted NAMA and govt guaranteed bank debt the real figure is around 75bn. Via NAMA and the govt guarantee we’ve managed to keep the whole thing afloat somehow.”
    I cant follow that. I live in Kildare, where we always said that NAMA was state debt. Unlike some. That we are still afloat is great. But lots of things float. Cream, oil, human waste…..Floating is not the same as steering your path.

  29. @Eoin
    “You live in a world of textbook answers Brian, i live in one which claims that Ireland is not issuing any fresh debt this year even though if you counted NAMA and govt guaranteed bank debt the real figure is around 75bn. Via NAMA and the govt guarantee we’ve managed to keep the whole thing afloat somehow.”

    But the real question is at what cost? €40bn-€50bn, maybe more?

    We would also have being able to “have kept the whole thing afloat” by forcing losses on bondholders. I accept that there would have been costs to this, however, I don’t think they would have been as large as the road we went down.

  30. @ Brian

    “Godawmighty, what sort of definition of “insolvent” are you using Eoin? What would it take for you to say “yep, anglo’s a dead duck”…..?”

    huh? are we talking about Anglo or PTSB?

    My original claim on PTSB was when the g’tee was brought in (Oct 2008) it was still probably solvent albeit in danger of being completely unable to fund itself. At the moment they’re trying to raise 600mio in fresh capital to shore up a 40bn loan book, so thats what 1.5% in fresh capital? Doesn’t sound like “liabilities grossly, greatly, massively, exceed the capital base”?

  31. @ DE

    i think with the benefit of 18 months of hindsight you have a fair argument that things could almost certainly have been handled better or more efficiently, but the government played the hands they were dealt at the time and i think they’ve done as well as they could. But this all comes back to the point i’ve made before that as the situation has changed, so should the way we should be, and are, tackling it.

    At the start of 2009 i think we were honestly within a month or two of having the IMF literally in the door as external funding stopped completely. We were as bad as Greece is now, but the world was in a lot worse state than it is now. I think the strong support we gained from us indicating that we wouldn’t start clattering debtholders of the banks got us through that worst part, in combination with the budgetary measures and the formation of the NAMA plan.

    And what have we done since then, with the situation stabilising?

    We have wiped out Anglo shareholders, we have started the dilution, likely to be massive, of the AIB/BOI shareholders, IRNW ‘shareholders’ will be virtually wiped out in any restructuring, and EBS shareholders will take a fair old hammering via this as well. So thats ordinary shareholders taking a good ‘oul stuffing for the most part, no?

    Subordinated debtholders have taken c.60%+ losses on the debt buybacks, we’ve stopped a lot of their coupon payments, and we’ve extended the duration of their funding, and even more losses will be laid on them when IRNW and Anglo take good/bad bank splits of some sort.

    Via NAMA we have pushed the ultimate “price” to pay for all of this out 5-10 years, when either the market may have recovered some or all of the losses, or we will have had the guts of a decade to fund the eventual losses.

    I’m not sure what else we can reasonably (as opposed to theoretically) have been expected to do to push losses down the capital structures of the banks (short of liquidation, as we don’t have a resolution process), at the same time as trying to fund a massive long term structural deficit, in the middle of a near-depression like domestic economy, and a deep-recession like global economy, knowing full well that the bulk of our bank debt was owned by the residents of our two biggest Eurozone partners, and that the bulk of the sovereign debt was going to be issued by the same guys? I mean, i know the “let the debtholders have it!” is what we’d all love to do, but i just really really don’t think it was doable.

  32. @Eoin
    “i think with the benefit of 18 months of hindsight”
    You say that like no-one was saying it at the time. D_E was certainly saying it.

    “At the start of 2009 i think we were honestly within a month or two of having the IMF literally in the door as external funding stopped completely. We were as bad as Greece is now, but the world was in a lot worse state than it is now.”
    I agree with you entirely and that is why it was the moment opportunity knocks. We should have been greedy when others were fearful. Bondholders, fearful of losing all would have coped with a larger debt-equity swap than they will now. It would have taken balls to be sure and all our ballsy people only take risks on sure things, it seems, but it for sure would have been the right time to act.

    Now we are stuck having to manufacture a time to act. The suggestion to play one set of bondholders off against others is, I think, a good one and about all we have left. Other than the state funding An Post to buy Postbank from Fortis, using a rump Anglo and setting up a state Landesbanken… a pox on all their houses…

  33. @ Bond. Eoin Bond…

    “but the government played the hands they were dealt at the time and i think they’ve done as well as they could.”

    Who was the dealer and were the cards marked?

  34. @ YM

    “You say that like no-one was saying it at the time. D_E was certainly saying it.”

    I mean that at the time everyone thought the whole financial system was collapsing in on itself, like ‘game over’ time. I don’t think anyone foresaw the financial sector recovering as strongly as it has, and on that basis i think it was an extreme call back then to let the banks sink or swim. You could also argue that a lot of the recovery has been based on the enourmous level of govt supports (globally as well as domestically) for the banking sector, and that letting bondholders go to the wall would have led to a repeat of the 1930’s. In fact, im pretty sure that that WAS the main rationale behond the backstopping of the financial sector…like, would letting Citi go bust have led to a stronger or weaker recovery, for instance?

  35. I am grateful for Eoin Bond’s comments – to me they make more sense than a lot of the commentary I hear. Sure if we had a genius, ballsy government it all may have worked out better – but to me that sounds like wishful and naive to expect the government that had supported the financial madness to pull that off. Thanks again for presenting your viewpoint.

  36. @ YM

    “I agree with you entirely and that is why it was the moment opportunity knocks. We should have been greedy when others were fearful. Bondholders, fearful of losing all would have coped with a larger debt-equity swap than they will now. It would have taken balls to be sure and all our ballsy people only take risks on sure things, it seems, but it for sure would have been the right time to act.”

    I mean, i kinda agree with you, im certainly not against the idea personally, but on the other hand i don’t know if thats necessarily how we should run an entire country, like on the roll of a dice!!! Per our previous discussion, with no gaping structural deficit it might have been more possible…

  37. @ Bond. Eoin Bond…

    “More seriously, wasn’t the line doing the rounds at the time of the guarantee that the Irish government had merely “made explicit that which was always implicit”? ”

    There was never an “implicit” guarantee.

    The truth of the matter is that Cowen and Lenihan screwed up on a monumental scale when they gave that guarantee.

    They gave away all negotiating power at the stroke of a pen.

    Now we’re going to have to wait for an exogenous event to take back the upper hand.

  38. @Eoin
    “Per our previous discussion, with no gaping structural deficit it might have been more possible…”
    Yeah.

    But this really is why it is the best policy for government to do nothing. If required to do something, extract a huge price for it. If somebody still wants you to do something, they are really in trouble. If they go and sort it out themselves, well, you’ve just saved the taxpayers a packet of money. It is on this basis that NAMA should have been entirely dismissed as a notion. The guarantee should have been for depositors (to avoid a run) and specific new issuance and yada-yada – I even bore myself now saying it!

    So, anyway, the guarantee will expire in under six months. We have one big bank too many, maybe two (as they are in the too big to fail category) and one bust building society that thinks it’s a bank. We have a state bank that doesn’t appear to serve a useful purpose. We have a bankassure with a broken model and a building society with a relatively modest capital requirement. What are we going to do with them all?

    – First thing we should do is break them all into tiny pieces.
    – Combine the pieces into useful entities.
    – Forget about the money that’s already been put in in return for senior bondholders taking the problem off our hands.
    – Abandon the purchase element of NAMA apart from Anglo and INBS.
    – Strip out some bits as new companies (bank clearing, for example) and set them up as a fixed profit enterprise – that is, they can only make so much in profit, they’re funded by CoCos or some other subordinate debt, but basically they’re a regulated entity that doesn’t have an equity component. So we set up utility companies for the bits that we have to have never in any danger of failing.
    – to ease the fiscal burden, do the same thing with the semi-states…

    Mad? Okay, come up with something better that does not involve massive levels of debt that will stymie growth for years to come.

  39. Paul de Grauwe makes some good and salient points on the Economists’ Forum at the FT:
    http://blogs.ft.com/economistsforum/2010/03/should-financial-markets-dictate-budgetary-policies-in-the-eurozone/#more-9576

    “In particular, the crisis has made clear that the financial markets are dictating and will continue to dictate the speed with which the eurozone governments are reducing their budget deficits and debt levels. In other words, not the governments but the financial markets will force exit strategies in the budgetary field.

    The believers in market efficiency are cheering. The markets are going to discipline profligate governments, forcing them back into orthodoxy. The reluctant governments failing to follow the market’s order will be punished with higher risk premia on their bonds. In the end the market will force them to return to the stable of budgetary orthodoxy.

    The view that financial markets are a reliable device forcing agents and institutions to be disciplined is popular again. This is surprising. After all, can’t we conclude from the recent past that, if anything, financial markets have failed dismally as a disciplinary device?

    …by forcing an early exit strategy on one member country of the eurozone, other countries that need not exit are also forced to do so. The probability of a new recession in the eurozone increases. There is only one way to solve this problem. This consists of the governments of the eurozone coordinating their budgetary policies better. Unfortunately, there is very little prospect for this to happen soon. As a result, financial markets, that are ill-suited to do so, will continue to dictate budgetary policies in the eurozone.”

  40. @ Bond. Eoin Bond…

    “I don’t think anyone foresaw the financial sector recovering as strongly as it has…”

    That would be the Irish financial sector?

    😆 😆 😆

  41. Eoin
    “I don’t think anyone foresaw the financial sector recovering as strongly as it has”.much of which has been built on the channeling/sale of vast amounts of gvt bonds, to be fair.

    “Via NAMA we have pushed the ultimate “price” to pay for all of this out 5-10 years, when either the market may have recovered some or all of the losses, or we will have had the guts of a decade to fund the eventual losses.”
    kciking the can down the road is fine unless you run out of road…

    “Subordinated debtholders have taken c.60%+ losses on the debt buybacks”
    Tell me again why one element of the capital base is semi-saved (siberian subordinated debt tigers) while others (common or garden shareholders) get zero saving? Here’s an idea that was reasonable – make the capital, risk base, you know…absorb risk related losses. Oh, that would be capitalism of course.

  42. @ Bond. Eoin Bond…

    “would letting Citi go bust have led to a stronger or weaker recovery, for instance?”

    What recovery?

  43. @ Brian

    “Tell me again why one element of the capital base is semi-saved (siberian subordinated debt tigers) while others (common or garden shareholders) get zero saving”

    Eh, isn’t this the basic concept of capital structure seniority? Ordinary shareholders first, subs second, seniors/depositors third?

  44. Eoin
    Yes. But some were saved. Why? Why not all? Again, apart from the Carville “Intimidate everybody” argument, why were the subbies saved?

  45. @EB
    “indicating that we wouldn’t start clattering debtholders of the banks got us through that worst part, in combination with the budgetary measures and the formation of the NAMA plan”

    Sorry the data doesn’t supports those claims. Nor does my memory of the goings on at the time, in both Sep/Oct 2008 as well as later on.
    Fact (as I’ve mentionned here before): Ireland started selling off big time against Greece in April 2009 (as NAMA first mooted in any detail), from some -35bp in yield terms (2018 benchmarks) to a peak of +70bp end June.

    Lobbies, people and their knowledge set can make a big difference to outcomes. Ask advice from a bunch of economists/financiers vs some lawyers, and you’re likely to come up quite different policies in such circumstances, with the latter of course more likely favouring the status quo.

  46. @ Brian

    we’ve been down this road before. No resolution process = debt buybacks being by far the easiest and most efficient loss transmission method short of liquidation. 60% haircuts are also a debateable description of being “saved”.

  47. @ Holbrook Fields

    “Sure if we had a genius, ballsy government it all may have worked out better – but to me that sounds like wishful and naive to expect the government that had supported the financial madness to pull that off.”

    It seems you would extend “the only game in town” to the “only political party in town”.

    There is no doubt that those (politically) would created this mess are those who proffer solutions. To argue that this is meaningful is a tautology.

    The point is rather, that those same players are now digging the grave for any future decision making.

    There was not democratic mandate given for any of these decisions. The decisions are undemocratic.

  48. @Holbrook Fields
    As Mr Bond has pointed out previously we still don’t have bank resolution legislation and there is almost no public discussion of it (except here). This is because having none is so convenient for the elites discussed in the article. It strengthens the “no alternative to keeping Anglo/Nationwide going” argument.

    We have already incinerated €14Bn into Anglo (someone tell David Murphy it’s not €4 Bn anymore) and of that €10 Bn went in from the Central Bank with NO DISCUSSION. People talk about how the Oireachtas is failing to hold the government to account. You couldn’t hope for a better illustration of the contempt for the public and even the parliamentary process that our establishment have. They napalmed €10Bn without even a nod to the Dail.

    “One of the biggest creditors of Anglo is the Central Bank, which has very quietly lent Anglo over €10bn under something called the “master loan repurchase agreement”. (It doesn’t want you to know about this by the way.)

    The agreement is a hangover from when we had our own currency and is the ultimate “cash-for-trash” vehicle. Our Central Bank, out of its own coffers, loaned Anglo money and in return taken toxic collateral which the ECB wouldn’t touch.”

    http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-moneysucking-anglo-is-our-financial-stalingrad-2086182.html

    The Anglo/Nationwide zombie has eaten enough of our flesh. Civil society should demand a referendum before it’s fed anymore and also immediate bank resolution legislation.

  49. @ Ciaran

    so, in your opinion, why has Irish debt performed so well in the last 6 months? We’re still running a 12% deficit this year, and probably something in double digits or close to it next year. Is there not a fair argument that a functioning, privately operated and funded banking sector, in combination with a strong-willed budget austerity package, and a long term debt workout plan in NAMA, are all helping together to ease the stress on the states financial system? And relative to Europe (ex Greece), didn’t Irish CDS levels actually start spiking in January and February, well before any details of NAMA started to emerge, but just as we all start to get worried about blanket nationalisation?

  50. @ Greg and Oliver Vandt

    I really don’t have the expertise to argue the ins and out of all the potential financial arrangements, this blog exposes me to some of the key concepts and I try to pick up as much as I can when I have the time. There is not only one political game in town – the electorate has a choice, but unfortunately in 2007 they chose to re-elect a government that stank of corruption and vested interests.

  51. @Eoin

    financial actors might have been saved but even though they are still around they are not filling their function of allocating capital. In that sense the backstop of the financial sector is a big failure. It is like having a goalkeeper with two broken legs still in their casts guarding the goal. There might be a goalie, but the goalie isn’t doing much good.

    Growth will happen when cost of business has been allowed to fall to sustainable level. Cost of business is not only wages it is also property related costs, costs of using banks, costs of collecting money that are due, costs of using professional services (accountants, lawyers etc). I don’t believe the cost of doing business is down to sustainable levels just yet & the 1930s might yet repeat.

  52. @ Mick Costigan

    “The view that financial markets are a reliable device forcing agents and institutions to be disciplined is popular again. This is surprising. After all, can’t we conclude from the recent past that, if anything, financial markets have failed dismally as a disciplinary device?

    Good link.

    The thing that astounds me is that people (some) think this is over.

    The “financial” crisis has simply moved from the private to the sovereign.

    There will be an OECD default.

    The game is just getting interesting.

    You might enjoy this.

    http://www.rooseveltinstitute.org/policy-and-ideas/ideas-database/bring-transparency-balance-sheet-accounting

  53. As a follow up to my previous blog entry, Talent Retention, I wanted to include some additional remarks and observations, which I compiled together this evening in a second blog entry, The sacking of Athens.

    http://designcomment.blogspot.com/2010/03/sacking-of-athens.html

    I enjoyed reading Ray Kinsella’s article in today’s Irish Times newspaper, Take the mandarins out of healthcare equation. I only wish, the Irish state would have the good sense to take the small Irish shareholders out of the equation, and get on with the confrontation proper. BOH.

  54. @Eoin Bond

    “I’m not sure what else we can reasonably (as opposed to theoretically) have been expected to do to push losses down the capital structures of the banks (short of liquidation, as we don’t have a resolution process), at the same time as trying to fund a massive long term structural deficit, in the middle of a near-depression like domestic economy, and a deep-recession like global economy, knowing full well that the bulk of our bank debt was owned by the residents of our two biggest Eurozone partners, and that the bulk of the sovereign debt was going to be issued by the same guys? I mean, i know the “let the debtholders have it!” is what we’d all love to do, but i just really really don’t think it was doable.”

    Any ‘guess_timate on the breakdown of the bank/sovereign ratios/volumes between our two EZ partners? Even a rough one?

  55. @Bond, Eoin Bond.
    In IceSave the Dutch and UK govt are – AFAIK – pursuing money related to depositors, not bondholders.

    I have not heard any suggestion that the Irish govt not protect depositors.

  56. @Holbrook Fields
    Further to the above:
    “Since last March, the Central Bank has lent Anglo €10 billion in return for so called collateral of €14.5 billion. But the only collateral Anglo has are worthless loans like the land for Woodbrook golf course in Shankill, which Davy Stockbrokers now estimates is worth 5 per cent of its 2006 purchase price.

    If we were to apply the same discount to the Central Bank’s loan to Anglo, we would see that the Central Bank – acting in our name – has lent €10 billion in exchange for collateral that is worth just over €750million.So the Central Bank has probably already lost over €9 billion. The only way this will ever be recovered is if Nama succeeds in driving the price of this land in Shankill backup.

    But who wants this? The very rich private clients of Davy Stockbrokers, for one, who are betting that Nama will bail themout. Who pays for this class rescue scheme? You do!”
    http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=DAVID%20MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp

    The evil Tommy Cooper’s of the establishment have napalmed nine billion – just like that, without even the pretence of democratic accountability.

  57. @Bond. Eoin Bond…

    Take the ‘Discourse in the Face of Adversity Award’ for March.

    … and I mean that in a positive sense.

  58. @Eoin
    “so, in your opinion, why has Irish debt performed so well in the last 6 months?”

    We have performed well over the last few months but, the last time I checked we still had the second/third highest CDS in among the PIIGS.

  59. @Eoin
    Eh, isn’t this the basic concept of capital structure seniority? Ordinary shareholders first, subs second, seniors/depositors third?

    Or never in the case of depositors/seniors.

  60. @ Brian O’ Hanlon,

    Followed your link.

    “… that exists, 2.5 times Ireland’s national GDP which 3 no. Irish banks offered….”

    OK I’ll ask ya. Because this is really annoying to me, maybe not others.

    What is all this 1 no. 2 no. 3 no. Stuff?

    I know that 1, 2 & 3 are numbers.

    I don’t need you to tell me.

    Oh, on second (would that be 2 no.) thoughts?

  61. @David O’Donnell
    Thanks. The Government has lost us the equivalent of FIFTY TWO DDDAs on Anglo/Nationwide already (13Billion/250million). This madness must end.

  62. @Oliver V

    When lunatics control the asylum, madness becomes the norm, the standard, the mainstream, the orthodox.

    My apologies to all genuine and authentic lunatics. Nite all!

  63. At that fateful Sept meeting, with the exception of Brian Lenihan, all the principal parties had a direct hand in bring the economy to the predicament it was then in.

    I can understand the initial fears about the international dimension, but in this evolving situation in the UK, the rest of Europe and the US, once the early morning statement was made to the stock exchange, the dubbed “masterstroke” could hardly have been retracted.

    Within months, the Obama administration would force GM bondholders to accept an equity swap and even at that, they got very little.

    Given the bank failures, rescues and restructuring in many countries, Irish radical action would not have been extraordinary.

    Only a Fianna Fáiler could believe that Anglo which had focused almost exclusively on property related lending was systemic.

    The US FDIC had a well established procedure of seizing banks:


    CBS video: How the FDIC seizes banks

  64. @ Brian O’ Hanlon,

    OK.

    Just as long as you understand I’m not Billy or Jack.

    I still think it is annoying.

  65. @ David O’Donnell

    “The public debt crisis of Greece and other peripheral eurozone countries has the potential to harm the European Monetary Union. But the eurozone project has already inflicted damage onto Greece and other peripheral countries. There are two related reasons for the crisis: first, the skewed nature of monetary union and, second, the economic upheaval of 2007-9.”

    Why do Marxists use English in such an uncomfortable fashion? They have to me the same tone as Bond Salesmen. They would make slaves of us all.

    “Monetary union has removed or limited the freedom to set monetary and fiscal policy,”

    That’s absolutely astounding.

    A non-Marxist would never have worked that out.

    By the way what is Marxist monetary and fiscal policy?

    Is it anything close to Bernanke’s monetary and fiscal policy?

    “The race has been won by Germany squeezing its workers hard in the aftermath of reunification.”

    Do Marxist’s have to refer to Nation to find enemy?

    Was not East Germany German before it was Marxist?

    Did not West Germany not have to “squeeze” to accommodate a half a century of economic and social stupidity?

    Interesting link.

    Are the Ferengi Marxist or Anarcho Capitalists?

    Or to put that another way are the Marxists and Anarcho Capitalists just Ferengi?

  66. @ David O’Donnell

    “The crisis of 2007-9 compounded the predicament of peripheral countries because of the monetary and financial structures of the eurozone.”

    Yet another outstanding Marxist insight.

    Did the Anarcho Capitalists help the Marxists understand that?

    I’m thinking you are both David O’Donnell.

    I’m thinking you don’t care. You just want “just” anarchy.

    Where Justice be there David there be Monsters.

  67. @Greg

    It is a good link

    Whats your beef with Anarcho capitalism anyway? Where’s the slavery?

    “By the way what is Marxist monetary and fiscal policy?
    Is it anything close to Bernanke’s monetary and fiscal policy?”

    Yes it is. Well spotted! It’s the Fascist version of Marxism though.

    Marxism has always lead to slavery. We should know, as we are living a version of it now in the West.

    This crisis is a kick in the guts. Perhaps we might discard a few of our closely held delusions now and take a closer look at the Right.

    Rothbard use to say that he didn’t care what nomenclature for the Right was used as long as the term “conservative” was eschewed.

  68. @ David O’Donnell

    “Alternatives

    There are three strategic alternatives available to peripheral countries.”

    Only three David?

    Woops.

    Well excuse me.

    They are strategic.

    I love the smell of strategic in the morning.

  69. Mokabaybob,

    Hey, how are ya. Long time no hear.

    “Whats your beef with Anarcho capitalism anyway? Where’s the slavery? “

    Thing is bob, in a Utopian sense I have absolutely no difficulty with;

    Marxism

    Anarcho Capitalism,

    Social Democracy,

    Any Kind Of Democracy You Want,

    I’m Lovin It.

    Thing is bob, it’s not about the “politic” and the “war”.

    It’s about the money.

    Created out of thin air to control the peasant.

  70. @ Mokabaybob & David O’Donnell & Oliver Vandt & Bond. Eoin Bond… & Karl Whelan,

    Do any of you appreciate what it is to give up the control of your own ability to PRINT MONEY?

  71. http://www.irishtimes.com/newspaper/frontpage/2010/0319/1224266597769.html

    “A computer and a large quantity of documents were taken from Mr FitzPatrick’s home yesterday during a search, the warrant for which was obtained on Tuesday. He had no prior warning that he was to be arrested and his home searched.”

    That’s absolutely disgusting.

    They arrest a man in his own home because he has a “computer and a large quantity of documents”

    What next “a garden and a large quantity of cabbage”?

    Why not arrest a man for creating money out of thin air.

    Or would that be some other law. Would that be counterfeit?

    Or is that Fiat?

    Now, just how confusing is the “National” “Notional” “Debt”?

    Who is it that creates “Money”?

    Why is there a “Debt”?

    Who are the scum that would destroy a Nation for Greed?

    Can I see their faces? Can I see their fasces?

  72. Just a quick note on the brilliance, ballsyness or lack thereof it would have required to push for a debt for equity swap – it wouldn’t be the first time in history that such an event has taken place. In fact as I understand it, its pretty much standard issue for these situations, although I stand to be corrected on that.

  73. @ Ronan

    to push through a debt for equity swap you need either (a) a strong efficient resolution regime or (b) a real danger that liquidation could occur.

    (a) dont have it

    (b) with only 6 domestic irish banks, two of them representing 70% of the market and two of them representing 5%, it would be just a tad risky to try and liquidate a few of them, especially if the rest of the state is in crisis at the same time. If we had 25 banks it’d be an easier task. And with that i’ll continue that basic line of inquiry over on the new Brian Lucey thread…

  74. Ronan Burke

    You are correct. The only reason we could come up with was that there were private reasons for allowing the bondholders’ etc balance sheets to look good for a couple more years with a contingency fee in Switzerland for the decision makers.

    Otherwise?

    DOD
    I accept your abject, but delayed, apology.

    Chou and Eoin
    Your arguments lack force and clarity. Things are going to get so bad that even you will recant after the cock crows thrice!

    Oliver V
    Cogent. Good. Keep it up!

  75. @ EB

    I would see bond yields (asset swaps) – both levels and liquidity – as the major indicator of sovereign health, less CDS. Again, the data tells me quite different stories than what you suggest. And it is important that urban legends don’t grow around a fantasy interpretation of the past year.
    .
    I wouldn’t say that the crises are over. Instead I see – like the rating agencies and international bodies – that sovereign balance sheets are still deteriorating. The jury I think is still out on the end games. And while there is much water under the bridge, big decisions can still be taken.
    .
    They “played the hands they were dealt at the time”. This Panglossian view is quite different from what I see in the real world – financial decisions can make an awfully big difference to people’s prosperity, for better and for worse, and far more than even what readers here might realise. There is a massive responsibility on policy makers to make “good” decisions (they will be influenced of course by political predispositions and pressures).
    Take care in knocking down alternative policy actions – the world is richer in terms of possibilities.
    .
    On more minor points…
    I wouldn’t see “a strong-willed budget austerity package” as the best description of “running a 12% deficit this year” as you say, … and relative to GDP.
    I wouldn’t describe the Irish banking guarantees as “merely making explicit that which was always implicit”
    I wouldn’t see describe academics here as living in “a world of textbook answers”. There are none by the way in these matters.
    I don’t see talk that we “live in a world which claims that Ireland is not issuing any fresh debt this year”.
    .

  76. @Bond, Eoin Bond.
    “Eh, isn’t this the basic concept of capital structure seniority? Ordinary shareholders first, subs second, seniors/depositors third?”

    Again, AFAIK depositors are a different issue to any kind of bondholders, so can you or anyone explain why you would put seniors and depositors separated by a mere backslash and why the government seems to act as if senior bondholders are some protected species?

    First shareholders lose their shirt, then subs or trade creditors in some order, then senior bondholders, and then the government has to step in to ensure that depositors are protected with some form of deposit insurance.

    After all, senior debt is senior but that does not mean it’s guaranteed – in normal circumstances anyway. So, I’ll try my simple question again.

    Once the guarantee expires why can senior debt not be wiped out and the govt restructure the banks protecting depositors but no-one else, and why can this not be done without affecting the state’s ability to issue bonds?

  77. @Hugh Sheehy

    Senior debt is equivalent to deposits. Maybe you need to bone up a bit on what is what. Deposits used to only attract deposit insurance up to €20K. This would be an insignificant amount for a senior debt transaction so there is no benefit in having €20K deposit insurance for senior debt holders.

  78. @ Hugh

    “Again, AFAIK depositors are a different issue to any kind of bondholders, so can you or anyone explain why you would put seniors and depositors separated by a mere backslash and why the government seems to act as if senior bondholders are some protected species?”

    Well seniors and depositors are equally protected, and the EU has been somewhat vocal about them being treated the same. The exception to this would seem to be the case of sudden collapse, where they seem willing to bend the rules in favour of bailing out the depositors. But i dont think you could call AIB or BOI a “sudden” collapse anymore given that we’re 18 months into this. And as previously mentioned, without a resolution regime, liquidation is the only way to effect loss transferal to bondholders.

    @ Ciaran

    you are correct that bond yields represent real money and CDS generally respresent fast money. However, the CDS levels have generally proven to be right in all of this haven’t they? Both in terms of Ireland and Greece, they have front run an eventual movement in the bond yields.

    Im not claiming the crisis is by any means over, simply that the situation re the funding of the state is very much stabilised. Which country in the Eurozone has at this point pre-funded the highest %-age of 2010 requirements and at steadily “cheaper” levels?

    RE: “I don’t see talk that we “live in a world which claims that Ireland is not issuing any fresh debt this year”. — well i receive analyst reports which make this very claim all the time, as im sure you do. We all know its not true, but we all know thats the spin thats out there.

    Also RE: “And it is important that urban legends don’t grow around a fantasy interpretation of the past year.” — i dont think anyone can deny that the Irish govts (or the EU or whoever has been leading this, or sheer luck maybe even!) spinning of this has been exceptionally handled. Whether we like it or not (and i do!), creating an urban legend or fantasy interpretation can have very positive real effects on the economy.

  79. @Eoin: That’s pretty much all a certain class of Irish are good for: spinning. And what is worse believing their own spin.

    Remember Ben Graham’s dictum:

    “In the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company.”

    I would submit that the markets are voting again after weighing for a bit in 2008/2009.

  80. @ Garo

    “And what is worse believing their own spin.”

    You do have to remember to count in all the foreign bond buyers into the “believing the spin” camp right?

  81. Yes! Yes! And that is why the whole voting and weighing metaphor. They will eventually come to their senses.

  82. @Zhou, Eoin.
    “Senior debt is equivalent to deposits. Maybe you need to bone up a bit on what is what. ” and “Well seniors and depositors are equally protected, and the EU has been somewhat vocal about them being treated the same.”.

    Perhaps you could help me bone up by showing me where this is written. As I said before, I know a bit about finance (corporate and project mostly, not banking) so I’m not a total stranger to bond structures I know that the devil is usually in the detail. I suspect that many others are in the same boat, and reasserting your view of the facts doesn’t help educate.

    Since the US had a guarantee (the Temporary Liquidity Guarantee Program) that covered new (but not old) senior debt and the Federal Govt also protects depositors, it’s apparent that senior debt is not all homogenous in its level of protection and not always the same as deposits – at least in some jurisdictions.

    So, can you explain why senior debt here is apparently sacrosanct? I’ll try not to be patronized by the answer, honestly.

    Section VII of http://www.fdic.gov/bank/individual/failed/wamu.html is also perhaps of relevance, with sub debt being totally wiped out and senior debt having to make a claim. The operations of the bank, depositors, etc., continued reasonably seamlessly under new ownership.

    Again, it’s not clear to me why the guarantee has to be essentially permanent, nor why the banks cannot be wound down or sold, nor why the taxpayer needs to pick up the tab for anything much beyond deposit protection if the banks continue to operate without sorting out their capital structures.

  83. @ Hugh

    the status of deposits is pretty clear in terms of seniority vs senior debt. From EBS’s notes program:

    http://online.ebs.ie/internet/pdffiles/public/ebs6bneuroggbmtnprogramme.pdf

    “Status of the Notes: The Notes will constitute direct, unconditional, unsubordinated and unsecured obligations of the Issuer and will rank pari passu without any preference among themselves and equally with all
    other unsecured and unsubordinated obligations of the Issuer (other than those preferred”

    In this case, deposits would be another form of unsecured unsubordinated debt.

    Also, from askabout money

    http://www.askaboutmoney.com/showthread.php?t=121157

    As for the WaMu example, dear lord i’ve treatened it before so i better make good on my promise….*screams*…..WaMu – two seperate companies, one with the bonds and one with the deposits (and actually some sub debt which got paid out). I’d say this is the 7th or 8th time i’ve had to correct this example. It’s starting to get tiresome and irritating. I don’t mean that as a personal slight against you Hugh, but simply that im fed up being asked to prove stuff by people when its actually they who are referencing incorrect examples. As such, i’ve screamed this time, but god help me i will put a match to this place if someone mentions WaMu in this context again…

  84. @zhou_enlai
    Sorry, but just because senior debt ranks parri passi with deposits in a wind up doesn’t not mean it has to be treated the same in all circumstances.

    In fact, it has never really been treated exactly the same. As we have almost always had some government guarantee of depositors but up until recently senior bondholders were never guaranteed.

    As I have said many times before on this site, the state can decide to guarantee anything or nothing if we so choose. We could go so far as to guaranteed undated subordinated debt and let depositors lose everything!

  85. @DE

    I already pointed out that the deposit insurance/€20K guarantee was for depositors only. I have never said they cannot be treated differently. However, the initial criticism from HS was the use of a forward slash between the two when Eoin was explaining how they are dealt with in a liquidation/enforced loss situation. We didn’t guarantee senior debt because we had to but rather because defaulting on the type of debt it was, i.e. essentially large scale deposits, could destroy the credibility of our entire financial system. Alan Ahearne’s talk linked to above explains it better than I can.

  86. @zhou_enlai
    I have seen that link before and I accept that there would be consequences of imposing losses on senior debt.

    BUT…

    I don’t think those consequences would be greater than the €30bn+ cost of not imposing losses on the senior debt.

    p.s. Do you think our financial system has much credibility as it stands?

  87. @Zhou.
    I watched the Aherne video a long time ago, and again now. Funny, he says that the preference shares are going to result in a €560 million per annum payout and that the warrants are worth a fortune too. I seem to remember the preference share payout being squashed and the warrants are worthless if the bank is insolvent. The only thing he says that seems relevant is that most of the “senior debt” is certificates of deposit.

    @Eoin.
    I’d hate to bore you, but the EBS note also says that the notes are equal to other unsecured creditors and then adds “(other than those preferred by mandatory provisions of applicable law).”

    So, it seems that I’m not going to get much more than repeated assertion from you guys. It’s like watching the caricature Englishman in the foreign place. Repeating it slowly and loudly…

  88. @ Hugh

    i tell you what Hugh, how about you try and do some of the heavy lifting for a bit instead of me and Zhou, and you find the provision where it says that depositors actually rank higher than other forms of unsecured unsubordinated debt, ie find these “mandatory provisions of applicable law”. This should surely be easy to find off the Financial Regulator or the consumer ombudsman if it exists, no? It seems more sensible to believe that all elements of senior unsecured obliations rank equal to each other than it is to believe that they somehow don’t, unless you can provide a reference showing this. Thats about the extent of my contribution to this, at no stage have i been patronising to you, so perhaps you could consider treating me with the same respect.

    @ Karl/Brian/Philip

    any thoughts on pari passu ranking of deposits vs senior debt, and end this debate once and for all?

    @ Everyone else

    any thoughts on this subject? Has Hugh got some fellow companions or is he out on his own with this?

  89. @Eoin
    I accept that deposits rank parri passu with depositors in the event of a wind up.

    But as I’ve said many time before if a bank resolution is enacted allowing us to wind up the banks in an orderly manner.
    I see no reason why the government cannot give the depositors whatever compensation/guarantee they choose and don’t think it has to be the same compensation/guarantee as given the to senior bondholders.

  90. @ DE

    to be honest, im not sure how it would go down with the EU. At best i would think its a grey area, as they have said they dont want deposit protection schemes/laws to distort the interbank market. I think this is why a limited deposit protection scheme (ie up to €100k) has been allowed as it obviously wouldn’t affect interbank deposits, but would be construed as more of a consumer protection scheme. The problem with having the deposit scheme open ended in nominal size is that all that would happen is that banks/corporates would stop buying bonds and place money on much shorter deposits instead. This would not be a good situation for long term funding stability.

  91. @Eoin
    What you have suggested probably would happen but since they would only be protected up to say the €100k even on depositors I don’t see why they would bother switching.

    In reality what would happen is that the banks would have to offer higher rates on their senior bonds for the removal of any perceived implicit guarantee. Absolutely nothing wrong with these outcomes IMO.

  92. Ok Eoin! I’ll see your WaMu scream and raise you an IndyMac. IndyMac depositors over the insurance limit got 50 cents to the dollar but senior bondholders got zero. How about them apples?

  93. @Greg

    The Federation is worried. Both the Borg and the Ferengi Empires are in turmoil – and most worrying, provisional elements of both are in discussions re an alliance – unthinkable a mere 18 months ago. The Oracle Ferengi is now practically assimilated to Borg, as is the Posner, and the Red Borg are now out-fereng_ing the Ferengi in certain quadrants. Mairteen_Felsteen, at least, is solid in refusing to accept the medical card. The Oirish zone is declared out out bounds due to the emergence of too many black holes as both Ferengi and Borg abandon it to the Mule, who thinks he can still flog a bit of value out of it.

    Seven_of_Nine, again, not answering her phone – before she left she mentioned something while watching TV on ‘awfully mean’ before energising to New York/Washington but now think she might have meant ‘Offaly Men’ as one of them arrives home – but the other Offaly_Man has cancelled all engagements for a week – and G_Lee has still not recovered apparently – The Federation would welcome any update on her present position but I’m loath to let them know the reality due to the sensitive political and diplomatic consequences. Spose it’ll be just meself and Blind Biddy again for the Rugby – she is reading up on Lenin and Ayn_een Rand simultaneously so I’m prepared for the worst …

  94. @ Garo

    *sigh*

    sudden collapse/run on bank + efficient resolution regime allowing split of bank into IndyMac FSB (old bank) and IndyMac Federal Bank FSB (new bank).

    http://www.fdic.gov/bank/individual/failed/IndyMac.html

    With Anglo we had the run/collapse, but not the means of immediate transferal via resolution etc. The point is that with the EU looking on, you cant nationalise a bank, stabilise it, and then later on strip the deposit book away from the senior debt, even if you had a resolution regime. However, in regard to the IndyMac case, I’ve never said that this method should not ultimately be used to wind up a bank, all i’ve said is that it was not available THEN and is still not available NOW even 18 months later!! Saying “look at what the FDIC did” is a little pointless if the law never gets enacted. The UK basically faced a similar situation with Northern Rock. Further, even if we brought in a SRR now, im not sure how you could justify splitting a relatively stable BoI or AIB up in the same fashion given the lack of “suddenness” of the situation. This is where the EU would likely say that depositors and senior debt would have to be treated the same.

  95. @Eoin.
    Nice attempted upending of the discussion, but you’re the person saying that something is true and not showing why. I’ve been asking why you keep saying it’s true. Turning around and saying “Right, you prove that what I’m saying isn’t true” is no answer at all. Instead it’s practically an admission that you have as little actual knowledge as I’ve already admitted.

    I hate to bring up wikipedia – that paragon of interesting but potentially inaccurate information – but your approach wouldn’t even pass the bar for editing there.

    I’m simply asking why this equality of senior debt and depositors is being asserted, because from what I can see it is not the case in other jurisdictions. If it’s the case in Ireland then you can surely point at why.

  96. @Hugh Sheehy

    Everybody is lying. Senior debt does not rank pari passu with deposits. You have craked the case. Well done on not letting the debate get upended.

  97. @ Zhou

    he’s certainly cracked something. If a tree falls in the woods, but no one hears it, in Hugh Sheehy Land, its still standing up gloriously for all not to see…

    @ Hugh

    is there anyone else, anywhere, who does not believe that deposits rank pari passu with senior debt in Ireland?

  98. @Zhou.
    Wow, you guys don’t like questions. Try reading my posts and pretending for a moment that I’m not asking rhetorical questions, that I actually want to know the answer, that I’m not trying to make a point. If you manage to do that then you might believe that it’s true, ‘cos it is.

  99. @ Hugh

    alright, lets play this your way:

    “from what I can see it is not the case in other jurisdictions.”

    where, in what jurisdiction, legally, do deposits rank above senior debt? you’re making the assertion, so back it up. I’ve already explained the ridiculously misunderstood WaMu case, and i hope i’ve explained the slightly more structured IndyMac case (suddenness + resolution allowed the splitting of the bank assets and liabilities – at no stage did the deposits rank “higher”, they simply found a way to seperate them into a seperate company). Your turn.

  100. @ Hugh

    im going back to the EBS thing, cos its quite clearly the most basic and easy to understand citing of the pari passu clause.

    It states (essentially) that all unsecured debt shall rank equal unless there is a law that negates this. In your mind i have to basically prove a negative (that this law does not exist) to prove my point?

    It’s basically impossible to prove a negative Hugh. Your burden of proof requirement is completely ridiculous. The amount of time myself and Zhou have spent trying to explain what is a core tenet of European and US banking law is ridiculous. The last 20 posts are ridiculous. It’s ridiculous that i should actually care what someone who appears to have either no concept of basic banking principles or deference to those who, thinks about this, and who is wasting my Friday evening. I’m going to get a beer.

  101. @ Zhou

    you do realise you’ve finally sunk to my level by conversing with the crazies? Pah! Not so easy to sit back is it??? 😀

  102. @ Eoin,

    Taking a bite out of the depositors – say, if it was exchanged for equity in the remaining 3 or 4 Irish bank institutions – would have at least one advantage I am sure. It would wake a heck of a lot of Irish citizens out of their current complacent slumber, in relation to the sitting government in the Oireachtas. I remember during September 2008, when I was too busy busting my backside for Liam Carroll’s companies to even notice the structure(s) crumbling down around my ears – I remember getting a phonecall from nearest and dearest telling me, some of my deposits had been moved into a post office savings account. For a moment it grabbed my attention, that some people out there in the real world, were stacking up canned food in their basements, to use an analogy. I have no doubt whatsoever, if some degree of pain (even small) was exerted on the backs of ordinary Irish depositors, it would have the beneficial outcome that our dearest banking executive class, would quickly forget about their talent retention wipe-my-backside bonuses, and actually get serious about doing their job. Or risk having their livelihoods promptly removed from them altogether. This is the sense of urgency that is missing now, which I think George Lee in particular alluded to, which will eventually come down upon us, within the next couple of years. As the reality of Ireland’s predicament becomes apparent. BOH.

  103. @Zhou, Eoin.
    Again, read my posts and you’ll see that I put in all the caveats and admissions of uncertainty that make it clear that I’m not trying to make a point, just asking a question. I’ve said a couple of times that I don’t know banking, but if what you’re saying is a core tenet of European and US banking then – for heavens sake – why don’t you simply point me at that information rather than getting on your high horse?

    As for proving a negative, that’s exactly what Eoin asked me to do earlier and you can’t expect me to defer to the banking knowledge of someone who won’t explain themselves and who died in 1976.

    As for examples of places where deposits rank above other kinds of creditor, the EU list of various schemes at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/614&format=HTML&aged=0&language=EN&guiLanguage=en indicates at least a couple of places where private depositors are protected differently to – for instance – depositors that are legal persons. I’d expect that most of what we seem to be calling “senior bondholders”, with Certificates of Deposit or similar, would be legal persons not private depositors. So, do they rank higher? Apparently.

    Similarly, there’s a paper at the World Bank http://rru.worldbank.org/documents/CrisisResponse/Note4.pdf which indicates clearly that most guarantees never covered anything other than small depositors and shows that even today most guarantees only cover depositors and certain types (dates and maturities) of senior debt. Similarly, we could look at the old Danish guarantee, http://www.garantifonden.dk/GII/WebSite1.nsf/8186c4f1567ec79cc12564b9004af114/a66b3050f911c34141256a8b004fee0f/$FILE/Brochure_ENG.pdf which essentially indicates that nothing except deposits was covered, and specifically excludes “securities”, although it’s all a bit vague since it’s a brochure and not legislation.

    Even taking either the Washington Mutual or the IndyMac case, if a depositor is made whole and a senior debtholder is left holding nothing then I’d be inclined to call that “ranking higher”. Getting paid money sounds like a pretty good way to “rank higher” than not getting paid money. Greg mentioned this above and no-one has contradicted him.

    So, that’s what I mean by “from what I can see in other jurisdictions”.

    Is it possible for you two to be polite now or do you typically go straight to insults when you can’t actually back up what you’re saying – true or not?

  104. Now, here is the thing. Given that Irish citizens will be forced one way or another to become bank shareholders, in addition to working out commercial property and other types of bad debt, what I alluded to in this post;

    http://www.irisheconomy.ie/index.php/2010/03/19/alan-greenspan-the-crisis/#comment-40501

    Is that NAMA only de-risk’s the Irish banks from one point of view – the part of the property financing game the banks played in order to create the class that were the ‘build-er(s)’. The other side of that huge risk equation, is still there sitting on the books of Irish banks in the form of billions of mortgage debt. I guess, what I am saying is, we haven’t found a way to diversify bank risk in Ireland yet, with all of the dodging and diving. Brian Lucey brought up the point in his article today, quite well I though. BOH.

  105. Lads pari passu is a complete red herring.

    After a windup deposits could be made good by the government, they is absolutely nothing preventing us doing this as far as I can see.

  106. As D_E says and I was just about to say (and will say anyway having read to the bottom, I feel I’m entitled to my bit).

    What happens with the FDIC is that everyone loses. The FDIC makes good the depositors up to the guaranteed limit and then goes in and fights for equitable division of the rest of the spoils.

    Under the current 100k guarantee in Ireland, the same would apply to depositors up to 100k. Anything above that amount would be part of the resolution process with the bondholders from the depositors point of view, but the deposit insurance agency would be in there looking to get the 100k out. Given the low level of deposits in the Irish banks and the low level of senior debt (most of the funding is via repo) this would have been the cheapest option.

    Things are more complicated now. The banks have significant debt funded via the Irish Central Bank and the state is, as far as I can see, liable for any losses under that funding arrangement.

  107. And one other note from the FDIC in the US where deposit liabilities are treated differently to other types of debt when a bank is being wound down for insufficient assets.

    “The Act provides that administrative expenses and deposit liabilities must be paid in full before any distribution can be made to general unsecured creditors or any lower priority claims.”

    Now that’s the USA, but it does seem to contradict the idea that equality of treatment of depositors and senior debt is a – what was it – a core tenet of European and US banking.

    I suppose I should await more insults from the two “all knowing and wise ones whose knowledge is so special as never to be challenged or questioned” as I attempt to understand what’s happening in the country.

    Hey ho. Maybe I should ask on politics.ie and get some proper internet shouting.

  108. @All

    Great comment from ‘trouserman’ on the original post above:

    “No ruling class has ever abolished or even reformed itself.” –Gore Vidal, The Last Empire (essays)

    Gore Vidal supports the 95% stat sig*** on Corporate Governance & Boards

  109. @Brian
    Yes, but there is nothing special in the arrangement. That’s the way the NCB operation of the ECB works for lending of last resort. So when a bank has a deposit run on and can’t get funding from anywhere else, the NCB (National Central Bank) does a special repo operation for them at the marginal (penalty) lending rate. The state is then responsible for any losses, though I believe it gains any profit…

    Such is my understanding, anyway.

  110. @Yogan “there is nothing special in the arrangement….when a bank has a deposit run on and can’t get funding from anywhere else, the NCB (National Central Bank) does a special repo operation for them at the marginal (penalty) lending rate.”

    I think there are two separate issues there. A bank doesn’t need a deposit run to be unable to get funding from usual sources. The interbank market collapsed in 2008 (hard to believe it was so long ago) and the ECB, along with other CBs started liquidity operations to ease the funding gap. A usual reaction to an unusual situation. An effective solution to a liquidity crisis.

    But Anglo had a solvency crisis, which is a different beast. So it needed direct capital injections. The worry with the Master Loan Repurchase Agreement is that it is a capital injection by another name. If the MRLAs accepting assets of low value (ie those that would otherwise have to be written down/off) then it is just postponing the day of reckoning when the assets are written down and the new capital injected. To my mind, this seems like quite a special arrangement indeed.

    My understanding is this. Anglo have assets with a book value of €14bn (ish). They are possibly worth a lot less than the book value, in fact so distressed that Anglo cannot use them for funding through any of the usual means. They should be written down/off, but (and I’m in speculative country here) a large writedown by an Irish bank and the subsequent recapitalisation would be damaging to the entire Irish banking system. The timing is important. This agreement started in March 2009 just after the Anglo nationalisation and when irish bank share prices were on the floor. Another major shock to the system at the time could easily have led to us now owning all the banks.

    So was the MRLA the right thing to do? Possibly (if you subscribe to the ‘confidence’ school of financial management). But it does mean that we have been on the hook for all of Anglo’s evils for a while now. And it probably isn’t 100% accurate to say there is ‘nothing unusual’ in the operations.

  111. @ Yoga, Lorcan,

    I heard on a radio interview lately, the discount rate was raised by the US fed. That must be something like what you describe, on the other side of the pond.

  112. @ Lorcan,

    I haven’t been following the whole Anglo saga that closely myself – but looking at the PrimeTime panel talk from last Thursday night on RTE, the Irish Times journalist was talking about Anglo’s €40 billion in bad loans. After profits on their better loans, they whittled it down to €14 billion somehow. Is that the €14 billion you referred to in the post above?

    I am sorry, I have lost all track of what has been going on with Anglo, in the past month/year. I just lost interest. Are these non-property loans. Wasn’t the contribution of Anglo in terms of its property loans for NAMA in the region of €30+ billion? Is that separate from the €14 billion we are talking about now? BOH.

  113. @ Hugh

    “Even taking either the Washington Mutual or the IndyMac case, if a depositor is made whole and a senior debtholder is left holding nothing then I’d be inclined to call that “ranking higher”. Getting paid money sounds like a pretty good way to “rank higher” than not getting paid money. Greg mentioned this above and no-one has contradicted him.

    Hugh, here’s my problem. I get that you don’t necessarily have a background in banking knowledge, and thats fair enough as there are some unique aspects to banking law/setup/regulations which are different to general corporate strructures. Thats fine. But you don’t actually seem to understand basic corporate structures either. In fact, you don’t seem to get the basic concept of “pari passu” and how it affects banks (or any corporate) and their creditors in a wind up situation, especially when it involves a resolution regime, or lack thereof.

    1. WaMu: there was two seperate companies from the beginning, it was how they set up the company from day one. Two seperate corporate and legal entities. One held the deposits, one issues the bonds. Lets call them WaMU Holding and WaMu Banking. WaMu Holding issued bonds and was the ultimate owner of WaMu banking, which held deposits. When it went bust the FDIC simply took the deposit-holding company and sold it to JP Morgan. Pari passu is not an issue here in any shape or form, as we are talking about TWO SEPERATE LEGAL CORPORATE ENTITIES. In fact, the subordinated debt holders of WaMu Banking actually got paid out and the seniors of WaMu Holding didn’t, because the courts found that the subordinated debtholders of a subsidiary ranked higher than the senior debtholders of the parent when it came to the assets held in the subsidiary. Get it?

    2. IndyMac. Again, same basic issue, where, thanks to an effective resolution regime (which does not exist here), the Feds were able to split the bank in two overnight into IndyMac FSB (the original entity) and IndyMac Federal Bank FSB (newly created). The deposits were transferred to the new one, and the other obligations were left in the original. So, as a result of having TWO SEPERATE LEGAL CORPORATE ENTITIES, pari passu is not an issue again!! Getting it yet?

    Pari passu only occurs when you are winding up/dispursing the takings from an individual legal entity. If the situation involves two legal entities, then there is no issue of pari passu between them. I don’t know how i can make it more clear than this, and how ridiculous the WaMu and IndyMac examples are in this context.

    Further, while IndyMac is a good example of how we would potentially like to deal with the failing banks, as i have REPEATEDLY stressed, and how people have REPEATEDLY misunderstood, we do not currently have a legal setup which can use a ‘special resolution regime’ (or whatever you want to call it) to allow for quick and seamless transfer of deposit assets out of failing banks and into new seperate legal entities. As such, it is incredibly difficult for us to “seperate” depositors from bondholders in terms of loss transference in failed banks. Any attempt to do so without very strong new EU approved laws would amount to imbezzlement and fraud by the state against the bondholders.

    This is a very basic concept (pari passu), and in some ways, as DE says, it is a red herring. But is incredibly important to understand it in terms of both WHY we need an SRR and HOW we should go about structuring an SRR. The sad reailty is that despite repeatedly explaining and discussing the issues of SRR/pari passu/FDIC-led bank ‘rescues’, people don’t seem to understand the following core concepts:

    1. pari passu equal ranking of seniors vs depositors and the EU’s opinion on this
    2. how an SRR is required to splits them up and get around pari passu
    3. how an SRR is generally used in “sudden” collapses and not in cases more similar to our banks
    4. how we dont actually have an SRR in this country ffs!!!

    Further Hugh, the EU/world bank/danish examples you provide above of deposit guarantee schemes are again nothing to do with “pari passu”. They are seperate legislative acts which provide for depositors to be made whole AFTER the ‘normal’ windup of a company leaves them short. They are not about placing depositors ahead of senior bondholders, they are simply about looking after depositors on the side. Lets say there is a BANK XYZ with deposits of 50 and senior debt of 50, and there is a deposit g’tee of 50. In a liqudiation the bank only realises 80, so the depositors get 40 and the senior debt get 40. OUTSIDE OF THIS, via the g’tee, the depositors are made whole by the state, costing 10. But again, this has NOTHING to do with the pari passu-ness of a corporate liquidation. As DE has said, we can guarantee the depositors if we want, but what we cannot do is use the assets of the banks to pay them out first. THIS IS WHAT PARI PASSU MEANS! We cant use the proceeds in the example above (80) to first pay out the depositors in full (ie 50) and then give the remaining 30 to the senior bondholders. The “making whole” will have to come directly from the state’s coffers.

    Im sorry folks, but im getting bored of trying to explain this. Pointing at the FDIC with very different examples of very different banking collapses in a very different legal framework is rather stupid in my view, especially when they actually tend to adhere to pari passu-ness of the corporate stucture. It adds nothing to the debate unless your willing to accept the 4 points above, or at the very least try to disprove them rather than simply taking on the childish “but why?” argument my 5 year old niece has even stopped doing. Please for the love of God stop quoting WaMu and IndyMac in this context, or so hlep me i will go postal on you all….

  114. @Eoin
    “Pointing at the FDIC with very different examples of very different banking collapses in a very different legal framework is rather stupid in my view, especially when they actually tend to adhere to pari passu-ness of the corporate stucture.”
    Well, yes and no.

    We need something in place. We need it in place before the current guarantee expires in case the some of the banks collapse like ninepins.

    The deposit insurance scheme as the FDIC has it is very similar to the deposit guarantee scheme we currently have. As you say, making depositors take losses is not a necessary outcome of a bank collapse, as depositors are insured. So I don’t know why you keep raising that as a bogeyman.

    Sure, those over 100k are going to suffer losses, but will that create general panic?

    Other than that, the FDIC operates pretty much like an examiner. The big difference is that the FDIC goes in early, decides that the bank is not going to make it and resolves it over a weekend. Our banks, barring the building societies, are probably too big to do that to even in an ideal world, so the first step must be to cut them down to a size where we can handle a failure.

    Rather than talking about pre-emptive nationalisation, the interested economists might do better to talk about pre-emptive examinership (yes, KW, I know you didn’t mention pre-empt, but you get what I mean).

  115. @ YM

    “so the first step must be to cut them down to a size where we can handle a failure.”

    Completely agree. Senor Lucey, however, does not, in his latest article i would note. And i dont raise depositor losses as a bogeyman, im simply trying to explain “how” they are guaranteed outside of the basic windup of the bank. This is something a lot of people dont seem to get – depositors are made whole by the state in most instances, not at the expence of bondholders when the banks assets are sold on.

  116. Eh, yeah. See my post above from yesterday that does the same… The thing is that the mechanism really doesn’t matter in the grand scheme of things, it is the outcome and the implications for the other banks.

  117. @ YM

    the mechanism doesnt matter, but there has to BE a mechanism of some sort. The problem we have is that we dont have one, and that lots and lots and lots of people dont seem to get this!!

    Rather than having protests saying “Down with NAMA”, we’d be far better served with one protesting “Give us an SSR for Christ’s sake!”. I believe Karl wanted to organise one involving himself, myself and Zhou (the unholy trinity), but our busy social calendars couldn’t be alligned. He mentioned something about starting at “Buswells”. I dont know who or what a Buswell is (im from a younger generation…) though.

  118. @Eoin

    “Give us an SSR for Christ’s sake!”.

    So get up the Dublin Mountains, as I suggested before [with a few from around here who are eminently capable of doing so], camp out for two nights, draft the bl**din thing, get it through the bl**din Dail in 24 hours, get the facts and figures from the NAMA boys’n’gurls [but NO transfers of IOUs], set the clean up in process, and save us €20 billion. Sure we can find some use for it ……….

    This inability to focus on TIME is doin me head in!

  119. @ All,

    I apologise, I haven’t been able to follow up this thread, in the past day or two. But there is one question I have been meaning to throw into the mix. Is there a fundamental conflict existing between solving a bank’s solvency problems and solving a bank’s liquidity problems. I mean, banks need funding to provide liquidity, which means high deposit rates amongst other things. I presume the high deposit rates and requirement for funding is set into motion by centralised ECB, or global regulations concerning a banks liquidity, or exposure to risk, or both. While on the other hand, if the same bank’s assets are coming under pressure or starting to fail, that puts pressure upon the bank to remove liabilities from its balance sheet. In which case, they would be better off without deposits. Does anyone see a problem there? I mean, in trying to solve both the liquidity and solvency problems at the same time. It is unclear to me in the Irish context, at what fuzzy point along the entire process, Ireland began to look at its banking crisis as the latter instead of the former. What we have therefore ended up with is a totally dis-organised policy response from government, with regards to fixing the banks. Not to mind, the more important task by far, to fix the financial system, which is comprised of only six institutions (as one of the Eoin’s said above I think). BOH.

  120. Also, it was presented this time last year, in 2009, by Dr. Peter Bacon that NAMA was a responsed to deal with Irish banking liquidity problems. When in fact, it is clear to me now, that NAMA as a solution seems tailor made to deal with solvency problems, but does nothing in regards to liquidity. I.e. NAMA creates a ‘bank’ which is 100% comprised of assets, and its only liabilities are to pay for legal and professional fees. (Something which Brian Lucey always reminds us about) What we have after 12 odd months now, is one part of a complete solution (minus resolution regime) to deal with banking solvency problems – but squat to deal with bank liquidity. (Except raising rates to the shrinking Irish banking market, even though the central ECD rates haven’t moved) Am I wrong? BOH.

  121. @Eoin
    “the mechanism doesnt matter, but there has to BE a mechanism of some sort. The problem we have is that we dont have one, and that lots and lots and lots of people dont seem to get this!!”
    Yes. Fine. But one could notionally be invented in 24 hours. A heads of bill that says ‘what England did modified for us being in the euro’. We didn’t have a guarantee or a nationalised Anglo until after a panicy night bill…

    The Minister for Finance already has the power under the NAMA bill to do what he likes to the banks anyway. He has the authority to restructure as he sees fit!

  122. @yoganmahew

    Yes – under the NAMA bill ‘the Minister … has the power … to do what he likes …”

    Lets keep on reminding the Serfs of this fact … Spartacus anyone?

  123. @Eoin.
    Goodness me, an apparently endless supply of insult and bluster.

    First, if you’d read what I wrote, I was clear that I know a bit about corporate finance and certainly enough to know the essentials of what happens when creditors have to form an orderly line. So, unsurprisingly, you’re simply exhibiting your lack of manners again.

    My questioning was about the specifics of banking, and preferably the specifics of Irish banking. It’s a topic of some importance at the moment. And no, I’m not an expert. However, once again, all you provide is bluster and noise but no illumination.

    As for your repeated insistence on pari passu, here’s how it appears in the list of priorities when the FDIC (yes, the USA and not Ireland) acts as receiver on a failing bank. This is from Bingham Law in the US. It’s perhaps not a perfect summary of the US law, but still.

    1. Secured Creditors (up to the value of the collateral)
    2. Federal and State taxes
    3. Special deposits
    4. Securities held in custodial accounts (they need to be segregated and with an identified owner)
    5. Unsecured claims including depositors’ claims. Unsecured claims are paid in the following priority;
    – receivership expenses
    – deposits pari passu among depositors
    – other general unsecured and unsubordinated claims
    6. Foreign Depositors
    7. Subordinated debt and equity

    It also notes that since deposits get priority, other unsecured creditors (but senior) creditors mostly receive no meaningful recovery. It gives no indication that the Federal government only pays out to top up depositors after assets are dispersed to depositors and creditors equally.

    So, according to the way these guys lay it out, domestic depositors get pari passu with each other but one passus in advance of the general senior creditors. That would make it impari passu or something. Bingham leave out things like unpaid salaries, which I suspect the law covers, but that’s likely to be a smaller element in most commercial bank failures.

    So, if you’re getting bored of trying to explain this, I’m equally bored of your responses. When your 5 year old niece asks you a question I hope you tell her more than “Because I say so”, but that does seem to be all you offer.

    So, perhaps you should try setting up a website or blog to host your wisdom. That way you could point people like me at a distilled version of your insights rather than having to repeat yourself in such a discourteous way. You could give the blog a URL suitable to your style on this thread….something like http://anillbredoaf.wordpress.com…so that people could know what to expect.

    Meantime, I’d be only delighted if anyone had the ability to point me at a nice summary of the Irish procedure – pre guarantee would be most interesting. If either Bingham, or my reading of Bingham, is wrong then I’d be happy to know that too. But I don’t think that Bond Eoin Bond will impress me as a source.

  124. @ One, Two, Three, FOUR ….

    Governor Daniel K. Tarullo

    Toward an Effective Resolution Regime for Large Financial Institutions

    At the Symposium on Building the Financial System of the 21st Century, Armonk, New York
    March 18, 2010

    http://www.federalreserve.gov/newsevents/speech/tarullo20100318a.pdf

    “First, any new regime should be used only in those rare circumstances where a firm’s failure would have serious adverse effects on financial stability. That is, the presumption should be that generally applicable bankruptcy law applies to nonbank financial firms–even large, interconnected ones. One way to help ensure that the regime is invoked only when necessary to protect the public’s interest in systemic stability is to use a “multi-key” approach–that is, one that requires the approval of multiple agencies and a determination by each that the high standards governing the use of the special regime have been met. Second, once invoked, the government should have broad authority to wind down the company in an orderly way. This authority should include–among other things–selling assets, liabilities, or business units of the firm; transferring the systemically significant or viable operations of the firm to a new bridge entity that can continue these operations; and repudiating burdensome contracts of the firm, subject to appropriate conditions and compensation. Third, there should be a clear expectation that the shareholders and creditors of the failing firm will bear losses to the fullest extent consistent with preserving financial stability. Shareholders of the firm ultimately are responsible for the organization’s management (or, more likely, mismanagement) and are supposed to be in a first-loss position upon failure of the firm. Shareholders, therefore, should pay the price for the firm’s failure and should not benefit from a government-managed resolution process. To promote market discipline on the part of the creditors of large, interconnected firms, unsecured creditors of the firms must also bear losses. Here is where the potential conflict of policy goals is obvious. While losses imposed on creditors will increase market discipline in the longer term, the immediate effect could be to provoke a run on other firms with broadly similar positions or business strategies. Thus the extent of these losses and the manner in which they are applied may need to depend on the facts of the individual case. At the very least, however, subordinated debt, or other financial interests that can qualify as regulatory capital, should be fully exposed to losses. Fourth, the ultimate cost of any government assistance provided in the course of the resolution process to prevent severe disruptions to the financial system should be borne by the firm or the financial services industry, not by taxpayers.

    The scope of financial institutions assessed for these purposes should be appropriately broad, reflecting that a wide range of financial institutions likely would benefit, directly or indirectly, from actions that avoid or mitigate threats to financial stability. However, because the largest and most interconnected firms likely would benefit the most, it seems appropriate that these firms should bear a proportionally larger share of any costs that cannot be recouped from the failing firm itself. To avoid pro-cyclical effects, such assessments should be collected over time. ”

    Quite!

  125. @ David O’Donnell

    “This inability to focus on TIME is doin me head in!”

    Tick Tock Tick Tock Tick Tock.

    That is rather the entire point of talk of regulation and “this will never happen again, because we say so” from the same people who gave you “this is not happening, the banks are solvent, because we say so”.

    Any propaganda will do, the moral failure of bish hops, an indiscretion of an overpaid kicker of a pig’s bladder, two very odd children from Lucan having “lost” their record contract and having “found” a new one.

    With all the news it’s difficult to know what day of the week it is never mind what time of day.

    Heaven preserve us from actually knowing what time it is and how little is left before the State commits €100bn to a patently insolvent financial architecture.

    Tick Tock.

    It is of course not only little Ireland.

    That’s what I mean by exogenous event.

    Tick Tock.

  126. @ Hugh Sheehy

    “@Eoin.
    Goodness me, an apparently endless supply of insult and bluster.”

    Welcome to the Bond. Eoin Bond… fan club.

    Consider yourself lucky that he hasn’t accused you of being insane, yet.

    “But I don’t think that Bond Eoin Bond will impress me as a source.”

    Funny thing that, I don’t trust him as a source either .Had to pull him up a number of times. A bit selective don’t you know.

    Still, water off a duck’s back though.

    He works for a bank.

  127. @Greg

    There is nothing ‘left’ – there is nothing ‘right’ – there is nothing ‘up’ – there is nothing ‘down’ – we must be in the ‘black_hole’ – is this ‘heaven’ – is this ‘hell’ – is this ‘the end’ – or is it ‘the beginning’ – did someone paint the blue pill red – why is seven_of_nine not answering the phone – tick tock tick tock tick tock tock tick tock tick tock tick WOW WOW WOW …… we are ‘back in time’ back in time …….. to zero.

  128. @Greg

    I own the bank. We own the bank. We own eoin. The banks own us. We are all serfs of the banks, as is Eoin.

  129. @ David O’Donnell

    “Spose it’ll be just meself and Blind Biddy again for the Rugby – she is reading up on Lenin and Ayn_een Rand simultaneously so I’m prepared for the worst …”

    Concern yourself not.

    Seven of Nine was as disappointed with the rugby today as I am sure Blind Biddy was.

    Seven of Nine sends her regards to Blind Biddy and is delighted that you finally persuaded the blind one to accept the Borg “Eye Socket Implant”. We hope she enjoyed the seeing rugby.

    Now if only she that big clock in front of her.

    Tick Tock Tick Tock.

    How does one say that in Greek? Or Latvian. Or Spanish. Or Austrian.

    It’s all just Californication to me.

    Maybe the replicator can print me up some of them Zimbabwean Dollars or some of them juicy NAMA bonds.

    Here’s an idea. The health service (apparently) doesn’t have enough money.

    Simple. Print up some of them NHealthMA bonds.

    Apparently it’s not National Debt.

    S&P, Moody’s & Fitch will ignore it completely.

    €20bn NHMA bonds out to sort the health service out.

  130. @ David O’Donnell

    “We own eoin.”

    No don’t get me excited.

    Could we use him to blow hot air at windmills?

    That ought to save us from the Green Horde who want to destroy my right to have a coal fired power station in Ireland.

    Do the Chinese “own” the Green movement?

  131. @Greg

    Just had text from seven_of_nine – advising THE Offaly_Man in his hour of need – knew he looked somwhat chirpy today – she is back tomro after the vote, at which time Blind Biddy is flying out to get the implant on the green card ………

  132. @ David O’Donnell

    Well you have to hand it to him. Only the King of Offaly could get Blind Biddy a USA medical card.

    Sometimes the power of my king leaves me in awe.

    At other times I am just shocked.

    What a generous King we have.

    And one with such knowledge of money.

    We are all safe under his reign.

  133. @ Hugh

    im not getting into a slagging match here, its rather pointless i feel. Its clear i can’t convince you of a basic principle of Irish (and most other advanced economies) banking setup in regard to this. Please feel free to think that depositors rank higher than senior bonholders in the event of liquidation. If this is your view, then we don’t actually need a new resolution regime put in place to effect the orderly wind up of a failed bank, because why else would we need one? I’ll also note that the challenge i threw down, “does anyone else agree with Hugh”, has garnered precisely ZERO responses in your favour.

  134. “I’ll also note that the challenge i threw down, “does anyone else agree with Hugh”, has garnered precisely ZERO responses in your favour.”

    It is rather silly to decide on issues of fact by vote on a comment board. Regardless, you can tote me up in Hugh’s column so there is ONE response in his favour.

  135. If it comes to a vote over whether the depositors versus senior bond parri passu issue matters, I’m with the people that say it is an irrelevance…

  136. As Dreaded Estate has pointed out, the issue of whether depositors rank parri-passu with senior debt is somewhat irrelevant in the absence of a bank resolution scheme. The decision to guarantee depositors and senior debts was based on economic concerns, not legal concerns.

    The State also had the legal freedom to deal with depositors differently as long as it dealt with all depositors the same. The only issue might have been if some of the senior debt holders could have said they were equivalent to depositors and entitles to be treated the same. The way around this would be to compensate each depositor/senior debt holder to maximum amount, e.g. €100K. However, Irish pension funds could not be treated differently to Sheiks for example.

    If there had been a resolution scheme the position would be different as rankings could force a debt for quity swap for lower ranking debts without the bank seizing up. HS appears to be looking at resolution schemes in other jurisdictions notwithstanding that we do not have an equivalent mechanism here, as has been commented on many times on this site.

    As such, HS is getting mixed up between bank resolution schemes in the USA and liquidation in Ireland. He may or may not also be getting mixed up between public statute law and private contract law. Either way, HS should be able to research the answers to his questions himself if he is not satisfied with the level of detail he has found here.

    HS said that depositors and bondholders should not be separated by a mere ‘/’ in Eoin’s description of a liquidation. As such I don’t think it is unfair for Eoin to defend himself notwithstanding that others consider that the issue raised by Hugh Sheehy is something of an irrelevancy.

    Beyond that, I think most posters are in agreement on the need for a resolution regime. The ranking of senior debt parri passu with deposits may not be wholly irrelevant though. Iceland has only underwritten deposit insurance to the tune of €20K per person. They have not been able to help Icelanders more than that as far as I am aware although I am open to correction. The Irish State may have been somwhat constrained in how it dealt with depositors/senior debt although I don’t profess to be able to give a definitive view on that point.

  137. @ Zhou,

    There is one slant to all of this, you, HS, Eoin and others have left out. Take this instance as an example. A colleague of mine was at a conference in Spain in 2008. He met a friend of his from Iceland at that conference. The thing is, the Icelandic person was stranded in Europe, without any money to spend. I think, she had intended to buy a ticket back to Iceland from the Europe end, when she intended to return home. But Icelandic currency became worthless while she was at the conference. (It was probably part of her annual leave or holiday if you know what I mean) It is like that movie Terminal, about Viktor Navorski (Tom Hanks), a man from the fictional country of Krakozhia. Anyone who has seen the movie will recall those tasty looking cracker/catchup/mayonaise delights he had to live on. Viktor basically got stuck in a ‘crack’ in the system. The movie always cracks me up. But it describes a very real situation for those who were stuck outside Iceland in 2008.

    Iceland! Iceland!

    (Is actually loosely translated from Krakozhia! Krakozhia!)

    This obviously did not happen in Ireland, because we all had Euro currency in our pockets and drew the same from machines, and credit cards etc, wherever Irish people happened to be situated in the world in 2008. So we didn’t exactly become Viktor Navorski’s over night. The point I want to emphasize here is, try not to think in terms of currencies for a minute. Try to contemplate this fact for a second. The oil and petroleum product supply chain for Ireland is operated on the basis of lean supply chain philosophy. In other words, there is almost nothing in terms of reserves in our current (and creaking old) oil tankage around the country. Futhermore, there is all sorts of problems with import capacity through our out dated harbour infrastructure in Ireland. Dublin is the main centre of demand, but there are no strategy oil reserves in that area. In December 2008, it is a little known fact that many retail petrol pumps serving motorists in Ireland literally ran dry. A report commissioned by minister for Energy, Eamon Ryan, into Ireland’s strategy oil reserves estimates that Ireland requires a 90-day storage facility. The purpose of which is to get Ireland over the hump, in the case of a real emergency – which might even be a prolonged strike at Dublin port. The idea being, the Irish economy would be damaged by a sudden, severe shock arising out of lack of oil reserves. You only have to think about recent events of flooding damage and snow conditions in late 2009, early 2010, to get a real picture. BOH.

  138. My understanding is that Joe Stiglitz and others are critical of the technique in post Asian Tiger economies, of hoarding large amounts of foreign currencies – euros and dollars. But I haven’t followed up that global economic system debate in quite a while. I only mention the oil supply reserves example in the above comment, to draw all your attentions to an aspect of deposits, and currencies, which has escaped debate on this thread. BOH.

  139. @ Garo

    just to get this straight – you are claiming that senior debt does not rank pari passu with depositors in Ireland? I respectfully disagree.

    To be honest, i think as Zhou has alluded to, we’re actually mixing up what we’re talking about. Pari passu is only relevant in terms of how the proceeds of the sale of a failed bank’s assets are distributed. The issue over depositors being made whole or partially whole by the State or via the use of an SRR later on are totally different items. The examples above that people have given about the US banks treating depositors differently etc are not examples of depositors ranking higher legally than bondholders. They do not disprove the issue of “pari passu” at all. What they are good examples of are of how the US government has found ways AROUND pari passu, to negate its impact (rather than negate its existence), and how it often makes the depositors whole AFTER liquidation/sale and SEPERATELY to liquidation/sale. When IndyMac and WaMu were liquidated or sold on, the key element to understand is that there were two seperate entities involved. The assets of each legal entity could only be disbursed to the creditors of that same legal entity, not to the other related but seperate legal entity. Hence all this talk about who ranked higher than who is actually irrelevant, as we are talking about seperate legal entities which had no claim over each other.

    The problem in this country, obviously, is that we dont have a way to seperate the banks into good vs bad, into the entity we want to give the assets to vs the entity we want to take the losses. Hence our only other option is to guarantee depositors up to 100k seperately, a decision which has no direct implications for pari passu.

    @ YM/Zhou

    its irrelevant in practical terms, but the core concept is important in understanding just why we need an SRR in the first place. If it didn’t exist (PP), then we wouldn’t need an SRR from the perspective of looking after depositors (but we’d still need an SRR to keep banks operational).

    The other issue that needs to be remembered is that an SRR is going to have to be compliant with EU law. They wont let us create a system which in the EU’s opinion allows the State to mistreat senior debt in favour of depositors. As such, the actual framework used is going to require some fairly nimble wording and possibly some changes to Irish company and contract law. Hence why i dont think it would be a bad idea for Karl or Phillip or Brian (or whatever academic wants to take this on) to consult with some legal experts on what needs to be done and what can be done to implement an SRR.

  140. Eoin, you are trying to obfuscate. Read what Hugh read again and try not to let ideology get in the way of facts. Back to the day job.

  141. @BOH

    Good point. I didn’t know that about the petrol station. As I said before, I think people should be told what the immediate and long term consequences of (a) a banking collapse and (b) sovereign default would be. The suspicion amongst some is that the consequences would not be so bad. I think they would be very bad but I would like to hear from those in the know.

  142. For general interest…

    The general parri-passu rule is in s.275 of the companies act 1963:

    275.—Subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and, subject to such application shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

    If depositors are not to rank parri-passu with other unsecured debtors then one must find an exception to this rule in statute law or in private contract law (i.e. in the contracts entered into by senior debt holders).

  143. @ Zhou

    on a far more basic principle, if senior debt ranked lower than deposits, you couldn’t actually call it senior debt could you? It’d technically be subordinated debt. The basic idea is that if something is called senior unsecured debt, nothing else that is unsecured (and depositors aren’t) can rank above it.

  144. @ Zhou,

    Good point. I didn’t know that about the petrol station. As I said before, I think people should be told what the immediate and long term consequences of (a) a banking collapse and (b) sovereign default would be. The suspicion amongst some is that the consequences would not be so bad. I think they would be very bad but I would like to hear from those in the know.

    The conclusion reached in the report minister Eamon Ryan commissioned on security of oil supply was insightful I thought. The shock to the economy in Ireland would be of a permanent nature, even though, things in terms of commercial oil supply would return to normal. Many businesses would be left behind, never again to recover. My guess is that, given Ireland has no strategic oil reserves, it doesn’t have much in the way of finance either. As Taoiseach Cowen said, we don’t have that money lying around. I guess, the national pension reserve fund is about the only thing – requiring certain legal alterations etc to access it.

    REVIEW OF THE SECURITY OF IRELAND’S ACCESS TO COMMERCIAL OIL SUPPLIES – FINAL REPORT, by Byrne O’Cleirigh Engineers and Purvin & Gertz Inc. Sept 2008.

  145. @Eoin

    That seems logical. I would have thought that subordinated debt is so called because the contract makes it so. Therefore, one assumes senor debt is not so.

    Generally, I like to see the primary source material on any point. In this case it is the debt instruments which I am not privy to.

    Given the importance of terms of the instruments, I suggest that it is in everybody’s interests that the form of such instruments be regulated (in form and in clearing/tracking/registration).

    IMHO this applies across all instruments entered into by financial institutions. In particular, CDOs, CDSs and all other innovations should be regulated. This is an international issue as much as a national issue.

    However, I suggest that what can be done on a national level should be done. We need to know not only what our bankers are issuing but also what they are buying. It is only because our bankers went property mad that they are not up to their oxters in CDOs. We need to know whether our systemic banks are dancing when the next game of musical chairs starts.

  146. @Eoin
    “If it didn’t exist (PP), then we wouldn’t need an SRR from the perspective of looking after depositors (but we’d still need an SRR to keep banks operational).”

    But that is not the point of irrelevance. A SRR will not change the parri-passu nature of depositors and senior debt. The point of irrelevance is in terms of systemic threat outcomes. Depositors are protected by the deposit insurance scheme which is backed by the state. Depositors will get their money back up to the deposit insurance limit regardless of what happens with the bank wind-up.

    Given that, why is the current examinership process unusable for banks? Is it likely that a new process would or could raise depositors above senior debt? (it looks unlikely for the reasons @Eoin has pointed out).

  147. @ Zhou,

    We need to know whether our systemic banks are dancing when the next game of musical chairs starts.

    My instinct, based on comments that Brian Lucey made in the past, is that, the 2008 crisis wasn’t severe enough to bring about a radical enough shift in political awareness, to the points you mention. I am a bit indifferent to it to be honest. But in my own psyche, what I am trying to do at the moment, is to psychological brace myself for a complete repeat performance of the 2008 in Ireland. The exact same thing. Except that in 2020, no one will bother to even reach back in their memories to remember Anglo Irish bank, Liam Carroll, Bernard McNamara or any of these characters. Judging by the length of the Moriarty Tribunal investigation, I believe it will take that long to get anything like answers. I think Brian Lucey is correct, the 2008 shock wasn’t severe enough to impress the need for change upon people. We will all witness a repeat of the same. BOH.

  148. @Zhou.
    Thanks for the reference, but the existence of a general principle that creditors should be paid in equal proportion (the clause 275 you reference) is not a surprise to me, much though you keep acting as if it is. However, that principle is still far from absolute, being subject to things like “the provisions of this Act”.

    A quick reading suggests that Irish companies law sets out priorities for creditors and that this multi-repeated pari passu is true if the creditors do rank equally but not if they don’t. Quelle surprise. For instance, it seems to me that clause 285 of the same law does that, giving priority to things like unpaid wages and taxes before other creditors get paid. However, it’s hardly relevant since it doesn’t mention banks.

    On the other hand, S.I. No. 168/1995 does mention banks, and seems to define “eligible deposits” in a way that covers how a bank liquidator should act.

    Is that the relevant act in Irish law?

    Section 10 and 11 seem to be particularly relevant, and seem to define what’s then to be considered as a balance available for creditors under the Companies Act you quote earlier, i.e. once “eligible deposits” as defined in section 16 are paid, the rest can be apportioned according to the Companies Act.

    It is – as usual with Irish statute – a bastard to read so I may well be misreading it. That’s a good possibility, because after three or four times cross referencing different subsection (a)s and (b)s and trying to sort out all the double negatives my eyes start to water, but things like Certificates of Deposit and Interbank deposits seem to be excluded.

    As I say, quite possible I’m misreading it, but since you and Eoin are such experts you’ll surely set me right. I just hope you’ll do it with grace and courtesy.

    @Eoin.
    If you don’t want to engage in slagging matches, don’t start them.

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