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‘Whether it is the scale or the duration of the bubble, the universality of it, the crony nature of it; all are possibilities. My favourite, though, is the idea that much of what the banks have counted both as assets and as profit for the last seven years simply didn’t exist’

That has echoes of the Flann O’Brien novel in which the Irish swords were so sharp that the point was stuck a few inches in you before you could feel anything.

‘It was unstable financial engineering in revaluations, slice and dice equity stakes, loans used to leverage loans. all wrapped in a taramasalata of cash-out Interest Rate Swaps with Anglo as the point man for Ireland and Lehman Brothers as their sole counterparty’

A touch of the Hunter Thompson’s there as well. You are on song tonight.

thanks so much for the link to the http://www.safehaven.com/article-16273.htm article - very interesting.

As you say, common or garden property bubbles with accompanying financial crises are easy to value. If ours was average it should cost about 12% of bank assets, that is, about 50 bn euro. We are moving well away from that point. There is therefore something uncommon about our bust.

Whether it is the scale or the duration of the bubble, the universality of it, the crony nature of it; all are possibilities. My favourite, though, is the idea that much of what the banks have counted both as assets and as profit for the last seven years simply didn’t exist.

It was unstable financial engineering in revaluations, slice and dice equity stakes, loans used to leverage loans. all wrapped in a taramasalata of cash-out Interest Rate Swaps with Anglo as the point man for Ireland and Lehman Brothers as their sole counterparty.

So when Mr. Cowen and Mr. Lenihan blame Lehman’s it is not for the reason that we think it is. It is not because of the waves it caused, but simply because Anglo bet the farm on it and every bank and every other person bet the farm on Anglo, Mr. Quinn being no exception…

You put your finger on the real reason for the delay.

Lenihan has been Micawber like waiting for something to turn up to make the pain less unbearable.
Even now he is expecting the recovery to start on July 1st at 0:00:01 and for money to start flowing into the exchequer.

He should have taken the same attitude as the Japanese Emperor did in August 1945. Endure the unendurable.

After all, it is not as if our problems were complicated.
We didn’t have an enormous volume of derivative toxicity that was difficult to value.
Common or garden property bubble problems were easy to value as numerous people have shown for the last 18 months by simple back of the envelope calculations. If you have the biggest asset bubble in modern history, then you apply the greatest discount in modern history.

But to be fair to Lenihan he is a politician and perhaps he felt that we needed to suffer an Hiroshima/Nagasaki moment before it became politically acceptable.

September 29th 2008 should have been that moment but we had to wait till March 30th 2010.

And all that has turned up in the meantime are more and more problems.
I wouldn’t expect too much to happen on July 1st.

It is refreshing to see that your level of debate has now sunk to posting links to Financial Analysis sites, why don’t you include something from Fitch’s, Moody’s, Blomberg, etc. etc.

We would never find those without your guiding hand.

Have you so little left to say on your own behalf?

@ paul quigley

“A new Dail, or a National Goverment is long overdue. ”

This National Government idea now appears to be part of FF strategy, to continue to be part of Government, still in a position of influence, still with access to the levers of power, still in a position to evade responsibility for the National Disaster they have inflicted on the country.

They even have RTE/Pravda on board, with so-called phone-in polls orchestrated by J. Duffy, allowing FF to escape the wrath of the people by becoming a part of a so-called National Government.

“Fianna Fail has played a big role in Irish history, but it is in the party’s own long term interests to depart governement with some dignity.”

How can you square this statement with your call for a National Government? How could you exclude FF from this enterprise?

Why are you worried about the long-term interests of the FF party?

FF’s biggest role in Irish History has been to beggar the country at least twice, and this latest effort, over the course of the ten-year Great Irish Property Bubble was the biggest.

For this they should be remember, but consigned to the Trash-can of History

Is there a limit to capital, if the banks are bust and governments are already committed? When? It seems inevitable that the demand will force up rates at a time of depression. What will give?

Karl Deeter
The IMF are backed by banks. So refi of banks is likely to get good press. Has Ireland turned into a bank?

Reggie Middleton turns in a good article on Ireland’s woes, taking a quick tour around Europe. Quite good. Sadly frightening. Massive debt owed by and to Ireland.

Safehaven is goldbug territory. Delving there for many years has shown that what appeared to be paranoia was in fact mere truth.

I meant to ask…..

I presume that once the government has (eventually) finished recapitalising them that the banks will then spend the next few years finding every device they can to dilute any public shareholding and reduce the value of said ‘investment’ as severely as possible?

Other than straightforward rights issues (which, for the sake of argument, let’s say the government doesn’t take up) are there any other instruments/approaches the banks can use to achieve this?

Has the minister done anything to safeguard us (the taxpayer) against such a dilution happening?

Or am I wrong in this thinking and the reality is more likely that the banks will be perfect gentlemen and consider us as their most important shareholders and do everything they can to ensure that ’shareholder value’ is uppermost in their minds.

“First, a borrower has a legal contact with the bank from which they took out the loan. That loan could not be transferred to an asset company until special new legistaltion had been drawn up passed through the Dail that changed the laws regarding such contracts. That legislation was included in the NAMA Bill”.

Although some on here might just say “you are wrong”, I will merely say I disagree with you.

A lot of loans will have transferability language bulit into them especially the larger ones so outright sale could be achieved without a veto from the borrower. For those that do not there are many ways to transfer the economics of a loan - a funded sub participation, an unfunded sub participation, a bespoke CDS, a CLN etc. All very easy to set up. Also, a series of Total Return Swaps or bespoke securitisations could be employed. All possible to do within a time range of 1-30 days.

Your other logistical reason for delay - ” The bottom up valuation process could not legally begin until after the asset comany was signed into law in November 2009.” - is possibly legally correct but the process could have been done commercially very quickly in advance of that. A simple loan can and does take minutes to value. A more complex one maybe a couple of days.

An interesting aside is that in order to value a loan, the valuer should take account of demand FOR THAT LOAN (not the underlying property) which implies knowing what the loan would command in the secondary loan market. I understand that no account was taken of actual loan demand and that valuations were carried out irrespective of the market. So if you were only employing a spreadsheet, it would be very easy to come up with a “valuation”. Interestingly, improvements in the loan market would probably have compensated for the continued deterioration in the propert market although I’d still be surprised if valuations then or now would be as higj as 53%.

Noel, looking back from afar and being able to see the wood from the trees (as some posters on here can even though they are still in the wood), it has been both sad and infuriating to see our country’s humiliation compounded by incompetence, resulting in generations being strangled by massive debts (be they “IOUs” or “promissory” or straight bonds).

Please - enough of the justifications.

There is evidence of spin being effective in the article. I have to say that the Irish government has been very ineffective in their spin. I wonder why given that Lisbon brought out far more of it? I wonder how much unanimity there may be at the top?

‘Step back 20,25 or 30, and the rest, in years. Irish banks never lent in quantities of any significance to industry or manufacturing start-ups…
‘the kind of conditions that prevail in Latvia currently, for instance, can’t be discounted….’

Nice to hear some of the old political economy tunes. Historically informed and globally sensitive. Keep playing.

@ Noel

‘But an all-party agreement in September was not possible, because NAMA was the subject of such heated public debate back then. That debate, much of it spurious, caused the delay………’

All-party agreement was never reached. The debate is genuine, but it has, as you say, slowed things down. The main obstacle, however, is a breakdown of trust in the poltiical system. We can’t spoof our way out of a crisis of these dimensions.

The party of government, and especially the Taoiseach, are hopelessly compromised by their holding of power during the period when gross regulatory failure occurred. That’s not a partisan observation. Remember the sin of hubris, of which the ancient Greeks spoke.

It is the mark of personal and political maturity to acknowledge error, and step aside where necessary. A new Dail, or a National Goverment is long overdue. Clinging on in the hope of a ‘recovery’ increases public cynicism about politicians (ref Joseph’s closing comment above)

Fianna Fail has played a big role in Irish history, but it is in the party’s own long term interests to depart governement with some dignity.

All I’m saying is maybe it’s because they act like politicians with normal human weaknesses that it’s taken so long and not some other more complicated reason? I would hate to give them too much credit… such as they might have actually known what they were doing. The words ‘tossers’ comes to mind.

Well said! I find that the arguments for NAMA all end up in the sands of a vast desert, yet simple sentences of yours show just how wrong that strategy has been and will be.

Snappy false name…..
Correct. But as I have said before, it suits those who are still rich, to actively devastate the asset base as they will pick up gems cheaply.

Devastate the asset base! Do it slowly over decades or do it now. That is the only choice. Add borrowings until the reduction in prices occurs. Simple!

In addition, capital is so scarce that it will become very expensive, very soon. Taxes usually apply to activity. We needed and still need to activate the economy. Liquidate now. Costs will be lower and activity can pick up.

Delay evil, hasten good. It is all that we can do.

“Irish banks had to restrict lending over the past year because their access to wholesale funds has been restricted.”

Step back 20,25 or 30, and the rest, in years. Irish banks never lent in quantities of any significance to industry or manufacturing start-ups. Back in 1969 pre-EEC, Joe Lee had a piece in the Irish Times railing against the crippling conservatism of Irish investment culture. Traditional focus has been on property and the professions. Look at historical trends in prices of farm land (crazy in the last fifteen years given the minute per acre returns).

It is understandable that the banks aren’t lending. Personal debt is horrendous. There is little indigenous manufacturing industry left after the property splurge, their familiar territory. Excluding the multinationals, what’s left are service enterprises and tributaries to the property sector. With almost 500k unemployed and some 300K reliant on reduced public service salaries (800k on the government payroll directly), why would would they lend to these sectors? (aside: why do car dealers insist on referring to their retail sector as an industry in a country that doesn’t manufacture cars?). It is not be prudent. Step into any accountant’s office and the main differences between now and two years ago are less staff, less clients and more P45s being written. The economy is in a decline and is unlikely barring an act of providence to jump ahead of healthier EU states. Under NAMA the leverage inflicted on the population is so great that it hard to see how growth will recover in the medium term. Tom Gross (PIMCO) recently released one of his periodic state of the world pieces and he was quite pessimistic about highly leveraged economies returning to minimal growth rates. Ireland ranked as tolerable for bondholders just about but volatile. Conditions will get a worse in the near future as the government hoovers more money out of the economy to meet debt obligations, not just a little worse, and the kind of conditions that prevail in Latvia currently, for instance, can’t be discounted.

I suggest that from now on, we look at regulation realistically. I believe, the function of regulation is simply this, it is to buy a sovereign some time to re-organise itself in the event of a financial crisis, which can hit that soverign for a whole plethora of reasons. Consider the plight of those foot soldiers who were ’sent over the top’ in the first world war on offensive attacks. They ran into barbed wire in no-man’s land. Barbed wire, an invention which came from the great plains of the United States in the 1800s, to prevent cattle from running. Never before seen in any major conflict, in the great war it changed everything. What we do see in Ireland today, is a failure of regulation because we have too much legal barbed wire in the way of our offensive. Our troops are getting shot down in no man’s land, and hence we have to hide in our trenches, creating trench art out of bullets with our pen knives, like we are doing here. We have to ‘winter’ it out, because of another invention of WWI, tinned food. Previously the troops had been able to sit out the winter away from the battle lines. Commanders command from way behind the lines via communications. Ireland as a country has been pinned down into its trenches by the constant threat of artillery fire from the markets, if we so much as twitch. It is time to change tactics and it is time to change generals. BOH.

“even if the Regulator got an initial stab at the capitalisation requirements wrong they could come back and revise these requirements”

But the question is whether an injection of new capital last year would have made a difference to the supply of credit. You finish your original post by blaming the delay in the resolution of the banking crisis for the fact that “that our banks have continued to restrict credit for another year.”

But lack of capital was only part of the story.

As Patrick Honohan said about capital injections:

“It would be well to realise, though, that such injections are a necessary but not sufficient condition for expanded bank lending. As is evident worldwide, one cannot rely on a mechanical multiplier in this rgard.”

http://www.irishtimes.com/newspaper/opinion/2008/1211/1228864660643.html

Irish banks had to restrict lending over the past year because their access to wholesale funds has been restricted. Although the banks have a State guarentee, concerns about the solvency of the State itself have depressed wholesale lending to Irish banks. That is why the December budget was so important.

The optimal timing was probably: a credibility boosting December budget followed by what turned out to be the 30 March announcment in mid-January, when the Dail returned from the Xmas break. So the banking resolution is 2.5 months behind where it should be.

But for that to have happened, the NAMA bill would have to had passed in mid-September. That, in turn, would have required an all-party agreement to fast-track the bill. But an all-party agreement in September was not possible, because NAMA was the subject of such heated public debate back then. That debate, much of it spurious, caused the delay that you are now complaining about.

One thing I have never understood is why zero coupon bonds were considered so bad. Mr. Bacon came out against them strongly in his initial plan as they wouldn’t attract so great a price, but surely that is irrelevant? It might mean more have to be issued to come to an agreeable price, but they could be issued for varying durations to spread the risk to the state - matched to the expected income from NAMA as it were ( ), but without the annual costs and risks of the NAMA bonds?