Bank losses and mortgage debt forgiveness

This post was written by John McHale

The Sunday newspapers certainly show the debate about mortgage debt forgiveness is gathering steam.    Although policy in this area reflects a complex balancing of social and economic factors, an unavoidable aspect is the potential trade off between costs of any additional induced bank losses and the benefits debt forgiveness.  

Just two quick (related) points.   First, central to the argument for debt forgiveness is that banks have already made provisions for substantial mortgage debt-related losses.    I don’t think Greg Connor’s point in an earlier thread about the weak connection between existing accounting-determined write-downs and the case for forgiving debt has received the attention it deserves. 

This mixing up of accounting loss appraisal and debt forgiveness confuses an honest attempt to guess at likely losses (loss appraisal) with a completely separate activity which is trying to recover as much as is reasonably possible (debt management). Mixing up these two activities in this way would destroy the objectivity of bank accounting standards. It goes against every principle of accounting objectivity if accountants giving an honest appraisal of likely losses generate a change in bank cash flows. How could a bank accounting system by expected to be objective about loss appraisal in that case? Very bad notion.

Second, the concept of the debt Laffer curve is a useful tool for thinking about the potential trade off.   If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting.    This is most likely to be the case where banks would suffer large losses if borrowers walk away or if the bank pursues repossession.    The current regime of impossible bankruptcy/full recourse/extensive forbearance would appear to make it unlikely we are to the right of the peak.    I would be interested in people’s views. 

135 Responses to “Bank losses and mortgage debt forgiveness”

  1. James Conran Says:

    “If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting.”

    One scenario where the banks would in fact need prompting would be if there were a collective action problem, e.g. if a low total number of repossessions were optimal from a debt repayment point of view (e.g. because a high number hurts property values), individual banks may not have an incentive to unilaterally restrain the number of repossessions they pursue. No idea whatsoever how relevant this is to the present situation.

  2. Philip II Says:

    John, Gregory
    So, banks have made general provisions. That’s fine. Now, by the reductio ad absurbdum of your positions, they can never make or realise specific provisions to the amount of these. Or do they make the general provisions, bank the recapitalized money, and then go making specific provisions and come looking for more cash from the taxpayer when these exhaust the capital they have put in?

  3. Karl Whelan Says:

    @ John

    Perhaps I’m wrong but I read Greg’s comments as implying that the Irish banks have already taken large provisions for mortgage losses.

    As I understand it, that’s not the case.

    For example, according to AIB’s 2011 interim results (released in July) they have €26.6 billion in Irish mortgages and have taken €863 million in provisions.

    The FMP report tells us that AIB will incur losses of €3.1 billion on its Irish residential mortgages in the base case and €4.8 billion in a stress case. They have been recapitalised to deal with the stress case losses, so it’s not at all realistic for them to continue with the very low levels of loss provisions currently on the books.

    My understanding is that Central Bank are unhappy with the slow pace of write-downs, e.g.
    http://www.irishtimes.com/newspaper/finance/2011/0628/1224299679994.html

  4. Eureka Says:

    The fact that the houses, if repossessed, would have very little value helps push a little over to the right.
    Sensible reform of bankruptcy laws would help too.
    A “scheme” will be misused by banks and borrowers alike so that it becomes another bank bailout through a different conduit. I’m skeptical of the motives of the papers pushing for this - especially given the recent activity regarding BOI.

  5. Karl Whelan Says:

    AIB interim results document available here

    http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/AIB_Report/aib_d_reports&cid=1201859759654&channel=IRFP

  6. Brian Woods II Says:

    Testing

  7. David O'Donnell Says:

    Ah yes - Objectivity! The Objectivity of Bank Accounting Standards? And Principles (as distinct from Principals) mind you - Principles! Next we will be led to believe, I suppose, that Generally Accepted Accounting Principles are Objective … The Norms of the Powerfull become pseudo-science …..

    Becoming inductive for a mo - De Irish Banks are Thieves, Fraudsters, Colonisers, Slave Drivers, Charlatans ……

    How long more do we have to wait for reasonable personal bankruptcy and insolvency legislation? Manslaughter can do one for 7 years - P1ss on a bank and you get 12 years to life.

  8. John McHale Says:

    @Karl

    I take your point. But for the issue at hand, it seems to me it doesn’t matter that much if formal provisions are made or a capital buffer is put in place to allow for potential mortgage losses. As I interpret Greg, the important point is that the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness. Banks have a fiduciary responsibility not to forgive debt unless it increases the value of the bank, and I don’t think this is likely under the current regime. Of course, it is completely appropriate to question the regime.

  9. Ceterisparibus Says:

    @ Karl
    RTE radio news reporting that figures due tomorrow will show large increase in distressed mortgages. Also quoting Joan Burton saying that banks are not engaging with distressed borrowers.
    Do I remember Mr Gilmore saying no debt forgiveness recently.

  10. Karl Whelan Says:

    @ John

    “the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness.”

    It’s not at all irrelevant. Brian Hayes has been saying that the banks can’t afford writedowns on the order of €6 billion. Because of the recapitalisation, that is not true. The recapitalisation is what allows us to discuss the mechanics of how debt can be written down without having to factor in further cost to the taxpayer.

    “Banks have a fiduciary responsibility not to forgive debt unless it increases the value of the bank”

    Nobody is asking banks to forgive debts of people who are able to pay it back (well, almost nobody). The reality is that there are lots of people who will will not be able to pay it all back. And I believe the uncertainty associated with the current extend-and-pretend approach is damaging to the Irish banks. Both potential equity investors and bond investors are spooked by the absence of a workout model that they can see and understand. It’s time to get on with it.

  11. desmond brennan Says:

    @Karl
    IFRS standards don’t help there either. They pretty much require a provision to be a write off, and frown on statistical forecasting (instead requiring bottom up)

    @all
    ability to pay is primarily predicated on borrower income which is mainly employment. As Ireland is a ’small open economy’ , predicting employment is akin to predicting the global economy.

    I’m not sure I see any rush to do this, it is not as if Irish people need to move homes a lot. And at macro level, the statistical forecasting was done (though it was only for 3/5 year losses ?)

  12. Jesper Says:

    Reform bankruptcy laws.

    Largely unchanged management teams in banks that were managed so badly they had to be nationalised -> Have to love risk to invest in those banks ;-)

  13. Ceterisparibus Says:

    @Karl
    ” Both potential equity investors and bond investors are spooked by the absence of a workout model that they can see and understand. It’s time to get on with it.”
    Agree it’s time to get on with it but I have a feeling that it may come from Wilburs bank rather than banks controlled by the Government…found the RTE news clip….”Minister for Social Protection Joan Burton has said lending institutions need to engage immediately with those having difficulty in repaying their mortgages.
    Ms Burton said lenders and borrowers have to sit down on a case-by-case basis.
    Ms Burton said lending institutions at present were not engaging with borrowers sufficiently.
    Earlier this week Tánaiste Eamon Gilmore ruled out a blanket debt forgiveness scheme for distressed mortgage holders.
    Figures due out from the Central Bank tomorrow are expected to show a dramatic rise in cases.”

    I wonder how dramatic.

  14. John McHale Says:

    @Karl

    Just to be clear, I am not arguing against the need for an improved workout model.

    But I do worry when you say you say: “[t]he recapitalisation is what allows us to discuss the mechanics of how debt can be written down without having to factor in further cost to the taxpayer.” In the case of AIB, anything that eats into the banks capital is a direct loss to the tax payer that must be weighed against any benefits. One of the concerns about “overcapitalising” the banks is that it would be viewed as “free” money by the banks to pursue other objectives. David Hodgkinson’s statements in April did nothing to limit this concern.

    “This cash will make AIB “one of the best-capitalised banks in any country around the world”, said Mr Hodgkinson. AIB will use this “as firepower” for “longer-term solutions to business and homeowners under stress”, he said. The increased capital gave AIB the means to seek “better solutions” for customers.”

    http://www.irishtimes.com/newspaper/breaking/2011/0413/breaking4.html

  15. Brian Woods II Says:

    @ Karl

    Your position is confusing to me and others. RTE today quoted you as saying that since the capital has already been put in we should go straight to debt forgiveness along the levels of the PCAR stress tests, why wait?

    Yet you seem to be rowing back from the debt forgiveness camp and merely questioning the banks’ accounting policies, which by the way are largely out of their hands. The hard core debt forgivers such as Gurdiev and McWilliams do indeed want people’s debt forgiven even if they have ability to pay. They argue that the middle class feel good factor is the driver of the economy and that negative equity is seriously constraining this driver.

  16. Brian Woods II Says:

    Good, I seem to be in scope again, several of my posts didn’t make it through (they weren’t offensive).

    @ Karl

    The PCAR projections (I ignore bank provisions as irrelevant) are typical aggregate models. X% of people in this catregory will do this and Y% of that category other will do that. But PCAR does not give names and addresses and amounts.

    A debt forgiveness scheme as discussed in the media and by some economists involves identification of distressed categories and subsidising them now in a blanket fashion. I am unsure whether you belong to this school or are merely discussing bank accounting.

  17. Jagdip Singh Says:

    Could someone explain the debt Laffer curve. I’m afraid I have only come across the concept of the Laffer curve in the context of taxation - and with taxation it illustrates the point that if you have a 0% tax rate, government receipts from tax will be zero (D-oh!) and that if it’s 100% it will also be zero (because people aren’t so stupid as to work for nothing). But between tax rates of 0% and 100% there are points where different tax rates give rise to different amounts of income tax paid because tax rates influence working behaviour.

    But could someone explain the debt Laffer curve? (a quick Google returns this but even this isn’t very clear - http://www.imf.org/external/pubs/ft/fandd/2002/06/pattillo.htm)

    Separately with respect to bank provisioning. Banks have loans of 100, they have made provisions for losses of 5 but the Central Bank has told them they must have sufficient capital to absorb losses of 15 in the worst case. The 5 is already a loss accounted for in the P&L and balance sheets of banks. The banks could “forgive” the 5 tomorrow, and as long as the remaining 95 of loans didn’t have any risk whatsoever, there would be no additional need for losses.

    But most of the 5 is a general provision, so who would qualify for the debt forgiveness and what about additional losses once the 5 was forgiven?

  18. Karl Whelan Says:

    @ BW2

    Pretty clearly I’m not advocating a blanket write-down of debt. I’m also not just criticising bank accounting policies. However, the accounting numbers reflect the lack of actual action on debt writedowns, which are needed on a case-by-case basis along lines I have written about a few times.

    Apologies if that confuses you but that’s my position.

  19. Ceterisparibus Says:

    @John McHale
    “One of the concerns about “overcapitalising” the banks is that it would be viewed as “free” money by the banks to pursue other objectives. David Hodgkinson’s statements in April did nothing to limit this concern.”

    I cannot see why this should be a concern with the Government controlling 99% of the share capital.

  20. Karl Whelan Says:

    @ John

    AIB only received all that capital because they are sitting on such substantial losses. I can’t see anything wrong with Hodgkinson’s comments. I would worry more if I thought he was denying the need for “longer-term solutions to business and homeowners under stress”.

  21. Philip II Says:

    Brian woods 11
    Can you link to where Gurdgiv and McWilliams have advocated a debt jubilee for those who can pay? Please..?

  22. hoganmahew Says:

    @Karl Whelan
    “Brian Hayes has been saying that the banks can’t afford writedowns on the order of €6 billion. Because of the recapitalisation, that is not true.”
    Perhaps it was not true at the time the recapitalisation was calculated, perhaps it is true now. Nah, it couldn’t be that the loss figures are headed higher for the mortgage banks, could it? That Anglo wasn’t the only poop on deck?

    http://www.whichwaytopay.ie/admin/ADMINNews/templates/financial-news-article.asp?articleid=294&zoneid=6
    INBS mortgage book worse than expected. Who else’s is worse than expected? Ranked against what expectations?

    There’s a whiff of fear around the place.

  23. Brian Woods II Says:

    @ Jaqdip

    I too am new to this debt Laffer curve, but Google did reveal that in the area of international indebtedness it is where if you were say to let Greece off a third of their debt you might be better off than leaving them to say “heck, we aren’t going to pay any of this”.

    I suggest that banks are using the d_L_c all the time in their individual negotiations. They know they can’t get 100% on original schedule so they try to find a recscheduling/rewriting which finds the peak of the d_L_c and maximises repayments. Otherwise they are in danger of the borrower saying “to heck with this, I’m off”.

  24. Brian Woods II Says:

    @ Philip II

    David McWilliams in today’s Sindo: Therefore, you have no wealth, just an enormous debt and interest rates are likely to rise rather than fall in the years ahead (according to the ECB). Your income has fallen and your taxes, direct and indirect have risen. The only way you can pay the mortgage is if you spend less on something else. So you stop buying things you used to buy.

    Read the article, McWilliams is definitely advocating wiping out negative equity even if it is payable. Comrade Gurdiev has spoken similarly.

  25. Brian Woods II Says:

    @ Karl

    Apology accepted. However somewhat more damage is done when an RTE commentator has similarly misinterpreted your argument. From this point on I am putting you down as not a true debt forgiver in the McWilliam/Gurdiev/Kelly school.

  26. Bond. Eoin Bond Says:

    @ Phillip II

    per you IT article…

    “Two main problems exist: first, hundreds of thousands of people now find themselves in negative equity, where the value of their primary residence is less than the loan secured on it; and second, more than 100,000 also find themselves in difficulty paying the interest costs on their personal home loans.”

    “If house prices fall by 55 per cent from the peak, half of buyers in 2004 and a quarter of those in 2003 would enter negative equity and 200,000 households would face negative equity of more than €50,000 and there would more than likely be 60,000 households in arrears.”

    “Individual households in debt do not spend, they do not invest: they attempt to pay down debt when and where they can and they hoard cash. Arrears and negative equity lead to reduced entrepreneurship in the long run, as distressed households face both less wealth against which to borrow and more uncertainty about their income and safety-net savings.”

    “These cumulative economic effects can be tackled through a debt forgiveness mechanism. Banks must allow private home borrowers to revert to pre-crisis debt burdens.”

    “For persons in negative equity, or where the loan is so large that it is becoming distressed, we suggest some degree of individual debt forgiveness and restructuring.”

    Does this not suggest a jubilee at least somewhat on the basis of negative equity as well as on arrears??

  27. Gavin Kostick Says:

    @ Jagdip Singh

    “with taxation it illustrates the point that if you have a 0% tax rate, government receipts from tax will be zero (D-oh!) and that if it’s 100% it will also be zero (because people aren’t so stupid as to work for nothing).”

    Also, I’ve no idea why the Laffer curve should be assumed to be some kind of smooth arc. Just because it is 0% at one end and 0% at the other, doesn’t mean it might not be lumpy - like those test-your-nerves wire-buzz games - in between.

    @ Karl Whelan

    “Nobody is asking banks to forgive debts of people who are able to pay it back (well, almost nobody).”

    I’ll have a quick go at why you would.

    Trying to divide between people who are able to pay, right now, versus people who aren’t able to pay gives a snap-shot of where people are right now and rewards or punishes accordingly. So, I might be out of a job right now, and thus qualify for forgiveness, but if I have a highly desirable skill, a few years from now I will be better off than a person who is able to pay right now, but, say, works for Anglo (or has a skill that has a diminishing attractiveness), and there’s every chance won’t be able to pay in the future.

    Why should people who are trouble now be prioritised over people who may be in trouble at some other time?

    If, on the other hand, you start by saying Ireland has just had a super-duper Minsky Moment, as developed by Paul McCulley (and thanks to D O’D for pointing Minsky out), then you would say that everyone who was sold a 100% interest only mortgage was sucked into a Ponzi scheme.

    In a consumer protection, Esther Ranzen, sort of way, you would then say that everyone who was sold such a mortgage was, to a certain extent, conned.

    Yes, this is a two-way street, and the person taking out the 100% interest-only mortgage is partly responsible for their troubles, but only partly, and the other party - the banks - are far more culpable.

    So I think there is a case to say, regardless of how the individual is doing now, the banks missold mortages during a certain period, and all people who took those loans should have some kind of relief.

    How that relief is worked in to the issue of the general good of the tax-payer I’ll leave for a moment.

  28. Jagdip Singh Says:

    @BWII

    Thanks for that, but I’m at a loss how you apply this concept where there is no bankruptcy (9 in 2005, 30 in 2010 doesn’t count), where there is no repossession (434 in 12 months doesn’t count), where there is a code of practice for arrears and where the pillar banks are supposedly not forgiving debt. There is no “to hell with it option” is there?

    Apologies, I am probably being slow, but I don’t understand what John has written

    “Second, the concept of the debt Laffer curve is a useful tool for thinking about the potential trade off. If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting. This is most likely to be the case where banks would suffer large losses if borrowers walk away or if the bank pursues repossession. “

  29. John McHale Says:

    @Jagdip

    Apologies for the lack of explanation on the debt Laffer curve.

    The idea is that beyond a certain point reducing the face value\interest rate can actually increase the expected present value of repayment. An obvious case is a non full recourse loan whereby the current borrower walking away would force the bank into a distressed sale. The bank then has an incentive to forgive part of the debt to the point that the borrower does not walk away. Another possibility would be a case where borrowers have a realistic bankruptcy option which could involve large lossses for the bank. My point is that these conditions do not apply in the Irish case. Even where borrowers are deeply distressed or in negative equity forgiving debt reduces the expected value of the loan asset. A value maximising bank would not engage in such transactions. I believe that it is best tht the banks retain a clear value maximising objective. That does not mean there are not serious flaws in the system, such as a absence of a proper bankruptcy regime, as you have argued. It is also possible that the State could subsidise workouts if clear externalities can be identified. But I do not agree with the idea that because capital has been injected to cover expected losses, the banks should use the capital to forgive debt.

  30. Bond. Eoin Bond Says:

    @ Gavin

    “and all people who took those loans should have some kind of relief.”

    as previously described on another ‘debt forgivesness’ thread, i took out a rational, affordable, well considered mortgage in 2005 as a FTB, one which i can easily afford with my nefarious banker salary. Why on earth should i get some form of relief just ‘cos im in negative equity?

    Can’t pay vs won’t pay vs ‘is it fair that i pay’ arguments here, and the money tree is pretty much tapped out already.

  31. Brian Woods II Says:

    @ Jaqdip

    I’ll leave John to explain his comment. I see it as some sort of law of diminishing returns. There comes a point when if you ask too much from a distressed borrower you will actually get less as they see the option of emigrating, say, as a way out.

    However, like you and for the reasons you cite I don’t think it is very relevant to the issue of a mortgage forgiveness scheme in our current scenario.

  32. Karl Whelan Says:

    @ BW2

    “somewhat more damage is done when an RTE commentator has similarly misinterpreted your argument. From this point on I am putting you down as not a true debt forgiver in the McWilliam/Gurdiev/Kelly school.”

    (a) Morgan Kelly did not call for a “blanket debt forgiveness” scheme and I don’t know why the media kept saying that he did. He spoke to the Indo about this yesterday.

    http://www.independent.ie/national-news/families-in-modern-ireland-skip-food-to-pay-the-mortgage-2859883.html

    “Responding directly to the claim made last week by the Tanaiste Eamon Gilmore, amongst others, that he had called for a “blanket write-off of mortgage debt”, Prof Kelly stated that the “purpose of debt forgiveness is not to eliminate negative equity, but to deal with the risk of people defaulting on smaller mortgages and losing their family homes”.”

    (b) If the RTE person did say “since the capital has already been put in we should go straight to debt forgiveness along the levels of the PCAR stress tests, why wait?”

    then that’s a simplification of what I’ve said (I’m not advocating going straight to writing down the exact amount from the PCAR tests but rather putting procedures in place to allow case-by-case writedowns) but I think captures a key point — writedowns along the lines of the PCAR scenarios won’t require additional taxpayer money beyond that already put in.

  33. Brian Woods II Says:

    @ Jaqdip

    John beat me to it.

  34. Philip II Says:

    Karl
    Alas, for they often make v useful posts , brian woods2 and Eoin bond seem to be somewhat consumed with hatred, if that’s not too strong a word, for certain Irish commentators. Thus, they seem to me to be unable to go beyond their own views on people to debate the merits of a proposal, or as you show here , the facts , when said proposals come from a select few.
    Most of us , me over 40years, have worked with people we dislike. Sometimes they are right in their proposals. And we have to suck that up.
    There’s a massive crisis on mortgage repayments present and looming. Let’s look at any and all arguments on their merits not on how much we do or don’t like the person presenting the argument.

    And, Eoin, I’m not Spartacus…

  35. Philip II Says:

    John
    “But I do not agree with the idea that because capital has been injectected that the banks should use the capital to forgive debt.”
    why was the capital injected then in excess of the then booked losses? Simple question…

  36. Brian Woods II Says:

    @ Karl

    The bank provisioning/accounting thing is ludicrous so I am ignoring that aspect.

    I am not sure but that the banks are already behaving exactly as you are advocating. They are presumably on a daily basis micro managing people with mortgage distress. Maybe they are even implicitly enacting Morgan Kelly’s recommendation.

    The debate has however gone into overdrive, on the back of McWilliams, Gurdiev etc. and the media definitely think that some form of blanket one off forgiveness can be academically justified. I am glad that you are not in that camp.

  37. Bond. Eoin Bond Says:

    @ Phillip II

    Hatred? Please, get over yourself dude.

    You said that no one is asking for relief on the basis of negative equity, but you jointly-penned a long op-ed which argued for just that (at least thats how it reads). Are you, or are you not, arguing for relief based on negative equity alone? I have fleshed out above, in response to Gavin, in very simple terms, why i think such a policy is wrong. These reasons, unfortunately for you, have nothing to do with you. But they are a key aspect to why many people are against a form of blanket or widespread debt relief mechanism.

    Btw, if i use your real name this won’t get posted. Bizarre policy. You are clearly a subject of controversy.

  38. Brian Woods II Says:

    @ Philip II

    Consumed with hatred.

    A bit OTT. I have to admit that McWilliam in particular does get up my nose. He is so full of his own importance and he has absolutely no qualms in headlining ideas which he must know are nonsense.

  39. Jagdip Singh Says:

    @John,

    Thanks for that explanation.

    On the bank provisioning, that surely just indicates the source of funding should there be the introduction of a proper bankruptcy regime or an innovation such as the debt forgiveness possibilities now being discussed.

    Yes, I do advocate a proper personal bankruptcy regime in advance of any mortgage or other debt forgiveness option. We are trying to go from the Iron Age of bankruptcy legislation to the Information Age in one fell swoop, which seems too ambitious.

    I think a proper bankruptcy regime would also mature our thinking on additional innovations.

    Take debt forgiveness for example.

    Suggest forgiving the mortgage debt of someone who has a substantial salary, is not in difficulty and has substantial non-property assets and bling, and most people will become incandescent.

    On the other hand, if the bank were to write down €40,000 on the €80,000 mortgage owed by MP Mac Domhnaill, the man who wrote to the Irish Times during the week poignantly describing the nightmare he faces, then I think most people would be infavour of that, forgiving some of the mortgage debt. In fact if people knew the real identity of MP, I think they would be trying to help more directly. A less emotional example is that auctioneers will tell you there is no point auctioning a repossessed farm in this country because the maximum bid will be €1.

    We’re not schizophrenic, it’s just we don’t know what is meant by debt forgiveness. A proper bankruptcy regime would make the concept clear, that debt forgiveness involves you giving up your assets and garnishing your salary for some time, and at the end debt is written off. It’s not about indiscriminately forgiving debt regardless of circumstances.

    And I agree with you about the bank provisions. When we work out how personal bankruptcy and any other innovation will work, the provisions will just help us with identifying the funding available.

  40. John McHale Says:

    @Philip II

    I am surprised you ask that question. The excess capital was injected in order to restore the creditworthiness of the banks, and hopefully end the dangerous dependence on the eurosystem for funding. In my view, the fragility of the banking system means that we need to be even more protective of that capital if anything, which is why the Hodgkinson comments raised a red flag.

  41. Bond. Eoin Bond Says:

    @ Karl

    re the “use” of the additional capital in the banks to allow for debt forgiveness.

    Isn’t there a body of thought that the PCAR/PLAr tests were a ‘kitchen sinking’ exercise to super-capitalise the Irish banks so no one would ever have to worry about their capitalisation? ie “even in a worst case scenario” they’ll be ok? Wouldn’t an accelerated debt writedown process not risk making the ‘worst case scenario’ more tangible and reverse the super-capitalisation process? At the very least there surely has to be some ‘upside’ exposure for either the banks or the taxpayer in the event of any rebound in property prices?

  42. Philip II Says:

    Wasn’t the capital injected due to losses, realised and projected? The effects you outline are consequences of that capital injection.
    If we need to hoard the capital, as I agree we do to keep the banks at all afloat, then we have a problem with how to deal with the Losses tht WILL come. How do we fund them? Wilbur? Joe taxpayer?

  43. Spaghetti monster Says:

    Eoin Bond
    All thats fine but what if, just for pure pigiron, the worst case was an underestimate of losses? All the other worst cases have been exceeded…

  44. ObsessiveMathsFreak Says:

    Second, the concept of the debt Laffer curve is a useful tool for thinking about the potential trade off. If we are to the right of the peak of the curve, so that reducing the debt actually increases the expected value of repayment, then the case for forgiveness is strong – indeed banks would not need much prompting.

    What? What is this? Laffer curves?! This is complete nonsense.

    You do realise that Laffer curves were dreamed up by Dick Cheney and Donald Rumsfeld in 1974. I’m not making this up. The whole idea has no empirical validity whatsoever. In fact, there’s no accepted form or equation for such a curve. The concept is “not even wrong”. They are about as valid a predicting tool as horoscopes.

    This is just unbelievable. We might as well be calling Psychic Suzy and asking for her opinion on the debt forgiveness schemes.

  45. Karl Whelan Says:

    @ BEB

    “Isn’t there a body of thought that the PCAR/PLAr tests were a ‘kitchen sinking’ exercise to super-capitalise the Irish banks so no one would ever have to worry about their capitalisation? ie “even in a worst case scenario” they’ll be ok?”

    Yep, they were recapitalised to deal with the stress case. But that still leaves a baseline case, i.e. what the CB says is actually happening now. Pretending things are better than they are is not a good idea — it didn’t serve us too well in 2008/2009.

  46. John McHale Says:

    @OMF

    Quite a comment.

    As I recall, Paul Krugman was quite taken with one of your comments before. You might be interested in his description of the debt Laffer curve, although it is in the context of international debt. This curve really has no relationship with the original Laffer curve except for the possibility that it may being to slope downwards beyond a certain point.

    http://books.google.ie/books?id=HJDzWicP45oC&pg=PA149&lpg=PA149&dq=paul+krugman+debt+laffer+curve&source=bl&ots=rn8BzSTKGS&sig=X_pr8r7pZk9iBPCcnY32Nr-vxHI&hl=en#v=onepage&q&f=false

    I must admit that I am quite amazed at your willingness to dismiss so completely something in such strident terms, without even a basic attempt to understand what you are dismissing. Being anonymous must help.

  47. Gregory Connor Says:

    Oh Gheesh, I spent the afternoon in a garden cente watching the missus look at potted plants, and just came back to this long thoughtful thread. Sorry I missed it earlier but will try to catch up now. Even public employees like myself need the occassional Sunday afternoon for chores away from the ‘net.

  48. Danny Haskins Says:

    Surely the difficulty here is that if you have a policy of debt forgiveness, where do you draw the line? Two people on the same street with the same mortgage (common on new estates) could have completely different circumstances- one having blown the Tiger on decking, cars and holidays, the other built up savings which they are now having to dip into.

    Is it fair the saver bails out the spender?

    The banks have to address the individual cases (and each household is different) fairly and yes there should be interest only payments with banks possibly taking a share of ownership too. But a blanket rule would be inequitable and encourage people able to pay to decide not to.

  49. Karl Whelan Says:

    @ Greg

    “watching the missus look at potted plants”

    Well, at least you didn’t have to watch Donegal and Dublin …

  50. What Goes Up... Says:

    @Karl Whelan

    Pretending things are better than they are is not a good idea — it didn’t serve us too well in 2008/2009.

    Is there nothing to be said for saying another mass?

    Maybe it’s time to take the zombies behind the woodshed?

  51. Eureka Says:

    I think that we are missing an opportunity here to reform the bankruptcy laws.
    Reforming bankruptcy allows for the development of a true entreprise culture. It also brings us into synch with our main competitors.
    That’s the way to sort out this problem

  52. Karl Whelan Says:

    @ BEB

    “Btw, if i use your real name this won’t get posted. Bizarre policy. You are clearly a subject of controversy.”

    Bizarre policy — really?

    Would you like people using your real name on this blog when replying to you? If not, then perhaps you might respect other people’s privacy.

  53. Eureka Says:

    At the risk of going completely off thread - can any body make any sense of this:
    http://www.bloomberg.com/news/2011-08-27/lagarde-urges-mandatory-recapitalization-of-eu-banks-to-avert-contagion.html

    It seems that countries have to recapitalize banks and stump up for stimulus measures in the short term - there’s something about this that doesn’t add up.

    Basically - if you recapitalize banks - shouldn’t that be the stimulus for the economy. Banks can not only lend to restimulate the economy - they can also be constructive in managing debt restructuring to stimulate the economy.

    There’s a real disconnect here. If the govt is responsible for “stimulating” the economy and if the govt is now going to be responsible for negotiating debt restructuring on bank debts then what in the name of God are banks doing? (apart from diverting money into the dead pit of Gold). The banks (worldwide and in Ireland), yet again, seem to be the problem

  54. Brian Woods Snr Says:

    Little bit of objectivity lads! Debt is a real bad entity - it grows exponentially! That’s the predicament - especially if you income is going in the opposite direction. Your in a silo; concrete boots; water rising. “Its the ripple that drowns you”.

    The Biblical response is the Jubillee. Got a problem with that? I do not. Hold your nose and DO IT. There are consequences. But they do not grow exponentially.

    The property asset issue is actually a virtuality - we had a 325% Ponzi bubble in res property. You cannot, in any circumstances deal with this unless there is a concommitant increase in incomes - which is a tad unlikely, for now. Though I would not rule this route out. Hence negative equity is with us for a while yet. Again, you cannot deal with this except you actually write-down valuations. All else is Hopium smoking.

    The legislators need to act, but that is unlikely. Gilmore should be careful. He was warned three years ago, in no uncertain terms, that a res property mortgage predicament was brewing. Stuck head in clouds. Burton’s RTE contribution to-day was political optics - though I did get some sense that she saw trouble, but was being real careful to avoid making any comment that would leave her exposed.

    This debt matter has to be tackled by the Dáil - on an all-party basis. Its simply too toxic.

    @OMF: “What? What is this? Laffer curves?! This is complete nonsense.”

    Thank you!

    Brian Snr.

  55. grumpy Says:

    @OMF

    Don’t think you will find an equation for “the J-curve” either, but that doesn’t matter much - it is a way to visualise a concept.

    Come to think of it, I am fairly confident the banks are behind the curve in writing down their loan books but I have no idea what the equation for it is ;-)

    It is though a bit concerning that as with Laffer Curves for taxation, where you think the relevant part of the curve is is too often a matter of personal or political prejudice.

  56. Brian Woods II Says:

    @ B_E_B

    Please, please tell us who Philip II is. Use the following code: A-1,B-2,C-3 etc.

  57. Jagdip Singh Says:

    @Karl,

    Please, please tell us who Bond, Eoin Bond is. Use the following code: A-A,B-B,C-C etc.

  58. Katyushka Says:

    Brian woods second
    Isn’t that “who you think” Philip second is? Who was brian wood the first?

  59. Ceterisparibus Says:

    @
    The comments around here are getting rather tetchy.

    @John McHale
    “In my view, the fragility of the banking system means that we need to be even more protective of that capital if anything, which is why the Hodgkinson comments raised a red flag.”

    Forgive me…I may be a bit dense today… But I asked the question earlier…why would we have to worry about the banks behaving behaving like they recently did when the State have direct control of them through shareholdings and the ECB/ICB have control through ELA?

  60. Ceterisparibus Says:

    @Brian Woods Snr
    “The legislators need to act, but that is unlikely. Gilmore should be careful. He was warned three years ago, in no uncertain terms, that a res property mortgage predicament was brewing. Stuck head in clouds. Burton’s RTE contribution to-day was political optics - though I did get some sense that she saw trouble, but was being real careful to avoid making any comment that would leave her exposed.”
    I find it facinating that the Labour Party (Gilmore) are opposed to debt forgiveness when historically the other party were generally regarded as representing the landed classes in society and could be classed as right wing whose natural constituency was maintaining the status quo.

  61. hoganmahew Says:

    @John McHale
    I presume OMF can airily dismiss pretty much anything that relies on rational man acting in a dynamic equilibrium. He’s probably not alone in giving it the time of day.

    I don’t think it is a good idea for banks to hoard capital. It is precisely, in my view, the opposite of what the markets want to see. They want to see banks that have come clean about their losses - in this I think the Financial Regulator is correct to be disturbed at the slow pace of resolution. The banks have been given capital to account for losses. That they are not using it is a sign of weakness, not of strength.

    While IFRS (and Basle II) take a dim view of general provisions, surely we are beyond those failed accounting methods? The Spanish FR gave a pass on those to Spanish banks, leaving them better able to weather their bust, so it is not impossible to do.

  62. Tony Owens Says:

    @J McHale

    “But for the issue at hand, it seems to me it doesn’t matter that much if formal provisions are made or a capital buffer is put in place to allow for potential mortgage losses. As I interpret Greg, the important point is that the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness. Banks have a fiduciary responsibility not to forgive debt unless it increases the value of the bank, and I don’t think this is likely under the current regime”

    Mortgage debt relief is controversial and being muddied further as the discussion gathers pace. It can be helpful to revert to ethical principles to clarify things a bit.
    From the perspective of borrowers in difficulty it matters little whether relief comes via the banks or the State. There are contracts whether tacit or explicit between the borrow and each of these parties. Joan Burton on Radio1 today seems to be saying that dealing with the problem is a matter for the banks alone. That is ethically wrong.
    The majority of borrowers in difficulty paid substantial stamp duties directly to the State, in some cases at a rate of 9% which is very high in EU terms. This tax head was substantial and was used to artificially depress other forms of taxation, benefitting all taxpayers. The State however has failed in its duty of care to those borrowers (and indeed all its citizens) in various ways, and has engaged in explicit deception about the housing bubble and the economic outlook.
    In view of this, it seems to be that there is a straightforward moral obligation on the State to make reparation to at least some types of distressed borrowers up to the value of the duties they paid. Whether this is done by mandating the banks to do so, or by manipulating MIRAS, or whatever is for the state to decide. But it must be done, and the State has a moral responsibility in this regard.

  63. The Dork of Cork Says:

    @Jagdip
    Supply side economics needs a oil glut - we ain’t got a oil glut now.

    It was the Voodoo that monetarists engaged in during this time period - the glut was partially a result of shutting down long term economic planning & capital investment during the 70s so as to engage in a tempory consumption orgy which was expressed as success in the economic metrics of the time.

    Because gold was no longer a reserve currency - depletion was not expressed on the economic balance sheet as no final payment was needed = epic party = epic failure.
    I tend to think it was maybe just a American nationalist meme used to suck the sands dry of oil.
    Friedman was up to his tits in inventing acedemic mechanisms so that Americans could consume without investment - whats surprising is most people in Europe bought this crap.
    Coal / Gold standard economies pre 1914 ….., transition to oil standard dollar with old money Gold standard as a supplement 1919 - 71 …….. full Dollar / oil standard post 71…….. Euro freegold experiment begun 1999…… who knows ????????????????
    http://www.youtube.com/watch?v=zSA22rVJg6g

  64. Ceterisparibus Says:

    @Hogan/Eureka

    “I don’t think it is a good idea for banks to hoard capital. It is precisely, in my view, the opposite of what the markets want to see. They want to see banks that have come clean about their losses….”

    Cliff Taylor in the Business Posts today suggests that the Irish Banks have been buying up Irish Bonds and may have helped getting yields down. Liam Halligan also raises this issue in an article on why Bernake did not indicate QE3 was on the way in the US. He suggests they are investing in everything bar the real economy…
    http://www.telegraph.co.uk/finance/comment/8727080/Ben-Bernanke-realised-printing-yet-more-money-would-look-desperate.html

    So it seems nothing has changed.

  65. grumpy Says:

    @hogan

    I suspect the recruitment of Wilbur was regarded as such a coup - with its spillover onto marketing of Irish fiscal rectitude, Gilts etc, that unless there were some odd “comforts” given, this may act as a disincentive to take any “chances” over possible implied further losses.

  66. John McHale Says:

    @ceterisparibus

    Forgive me for not answering your important question earlier.

    At the risk of dredging up old debates, my view on this is, on reflection, related to a much earlier expressed concern about the behaviour of nationalised banks. See here: http://www.irisheconomy.ie/index.php/2009/04/18/on-nationalisation/

    My concern about nationalisation was that bank decision making would become throughly politicised. As things turned out, the banking system has been largely nationalised anyway due to the size of the losses despite the efforts to avoid it. I also have to admit that, thus far, the politicisation of decision making has been less than I feared. However, I worry that proposals that banks should put part of their new capital to the service of debt forgiveness is a turn in the wrong direction. I gather you see the banks now as properly an arm of politicans. As I noted in an earlier comment, I believe we are best served by banks that act as value maximisers. And, again, this is not to say there are not serious policy issues related to personal debt burdens, the absence of a modern bankruptcy regime, etc. But I do not think that forcing the banks to use capital for debt forgiveness is the right approach.

  67. ObsessiveMathsFreak Says:

    This curve really has no relationship with the original Laffer curve except for the possibility that it may being to slope downwards beyond a certain point.

    Which is the definition of the Laffer curve in its entirety. A curve that slopes down wherever it is convenient for the author. It’s a horoscope.

    http://books.google.ie/books?id=HJDzWicP45oC&pg=PA149&lpg=PA149&dq=paul+krugman+debt+laffer+curve&source=bl&ots=rn8BzSTKGS&sig=X_pr8r7pZk9iBPCcnY32Nr-vxHI&hl=en#v=onepage&q&f=false

    I checked this link. As far as I can see, it’s wrong. The author gives an implicit equation for a Laffer curve as:

    ln(P/(I-P))=7.88-1.41 ln(D/X)

    But solving this explicitly gives:

    P=2643.9/((D/X)^1.41 + 2643.9)

    The resulting curve looks nothing like the one shown in the reference above. It most certainly does not have a turning point or anything resembling one. It decreases monotonely towards zero for increasing values of D or D/X.

    I must admit that I am quite amazed at your willingness to dismiss so completely something in such strident terms, without even a basic attempt to understand what you are dismissing. Being anonymous must help.

    Actually, my willingness to dismiss these ideas comes from informing myself about them. I have investigated Laffer curves previously after I came across reports of another egregious misuse of the concept. I am aware of their origins, theory, and more importantly their mathematical illegitimacy. They are in no way quantitative.

    You might like to think of myself and a few other posters as economically illiterate and/or crankish. But there are quite a few people across Ireland who are by now fairly well read in economic, finance and banking matters, and our opinions are by now quite well-informed. Most importantly–like many chronic patients–having developed quite a few gall stones from the economic medicine we’ve been prescribed over the last decade, you’ll find we’re no longer as willing to digest any old prescription without proper scrutiny.

  68. PR Guy Says:

    @Karl Whelan

    “My understanding is that Central Bank are unhappy with the slow pace of write-downs, e.g.”

    Any thoughts as to why they might be dragging their feet? I would be interested in your views. Is it anything to do with stringing out tax write-offs on losses or being able to ‘present’ accounts in a certain way… or …. there must be something in it for them or they wouldn’t be doing it (I’m no accounting expert but I do know something about behaviours!).

  69. grumpy Says:

    @John McH

    Would you accept that those of us who were unconvinced by the Blackrock exercise are likely to suspect the banks are too nervous that accelerating their processes might reveal a further requirement for capital. It looks like extend and pretend which translates to investors as “watch out”.

    If they got on with it and demonstrated the reality of the supposed adequacy of their capital it would put something of a bottom under the banks - and gilts.

    That it is not happening sends out a signal.

  70. Bunbury Says:

    I spent the afternoon at the Curragh so catching up on this thread is a useful relaxant after my unrewarding financial investments in the ring.

    @OMF +1
    Don’t you know that economics is a social science only but economists, in an attempt to give it an air of intellectual rigour and a simulacrum of verisimilitude, invent esoteric concepts such as the ‘Laffer Curve’? Better called the ‘Laughter Curve’ in my opinion.

    On a separate note, but related to an earlier post on this thread, Anglo Irish Bank jobs are actually some of the safest jobs in the world (speaking as one with ‘contacts’ with that bank). The Government has invested so much money in it that it has to continually pretend that it is viable. Staff have not suffered any pay cuts and, indeed, have even got pay rises since the crisis came. Those who are made redundant will get very attractive terms.

  71. Ceterisparibus Says:

    @John McHale
    Thanks for the reply…I now understand where you are coming from. No I do not see the banks as properly an arm of politicians. In fact, I regard the twin pillar strategy as a disaster brought about by very poor strategic thinking at the height of the banking crisis. I advocated then the hiving off of AIB to a major international bank when it contained valuable assets such as the Polish and American arms and which could have been achieved by backstopping other losses with suitable guarantees.
    My point is that the State can now dictate policy to be followed by the Board.
    If the State in it’s wisdom decides to allow debt forgiveness then it can be implemented in the State controlled institutions.
    Where I have a real difficulty in dismissing the concept of debt forgiveness for ordinary mortgage holders in trouble is when I read in the Sunday Times last Sunday that the State ( in the guise of NAMA) is considering debt forgiveness for developers to the tune of 37billion euro.
    It is fascinating that so little comment has appeared on this.
    But back to banks..they will continue to act in their own self interest. If Cliff Taylor is right, I wonder who decided to buy Government bonds. Was it directed? As I posted above, Liam Halligan suggest that the American banks are only investing in what could be classified as riskier assets and I think the same applies in the UK.
    No, politicians in control of banks is never a good idea. Remember Foir the State piggy bank.

  72. Bunbury Says:

    @ Gregory Connor

    ‘Uxorious’ is the perfect adjective to describe your actions this afternoon.

    Just trying to add to the vocabulary on this site.

  73. desmond brennan Says:

    The wildcard is whether those in arrears, will get employed or not. Or get proper salaries again (I know of quite a few 5+ yrs PQE solicitors on under €35k)

    I think it might be of interest for the banks, and government to pool resources on a ‘human capirtal’ survey. Chiefly to concentrate on those not in employment (students, live register etc)

    Having overall figures would be very helpful, as it would give the banks a good sense of someone’s job prospects, and give the government guidance on where surplus people (e.g. builders) need re-training.

    As said before, I see no need to rush on write downs, at least not until the dust settles on the global economy.

  74. Ceterisparibus Says:

    @Bunbury
    I was wondering what all those guys were doing in Anglo. As most of their clients are in receivership I suppose they talk to the receivers every day for the purpose of updates and thereby keep the accountancy practices going at 500+ per hour.

  75. Jesper Says:

    Might the slowness in realising losses due to write-offs come from lack of expertise in dealing with insolvent consumer-borrowers?

    Also: The one making a decision is vulnerable to accusations of making bad decisions (do nothing and you do nothing wrong). If nobody want to risk making a mistake while making a decision, then the loss-recognition will be slow. Given how the banks operated, i.e. few if any dared to speak up against their policies, how many within the banks will have the courage now to make judgement calls regarding what & when to write off?

    Have to admire one thing about management: Get huge salaries for being skilled in making judgement calls and then they don’t make judgement calls…..

  76. Eureka Says:

    My LaGarde link is beginning to make a bit more sense:
    http://www.telegraph.co.uk/finance/financialcrisis/8721151/Market-crash-could-hit-within-weeks-warn-bankers.html
    It seems that there could be another major crisis in the offing.

    It is apparently about liquidity. Is this really going to happen - surely the ECB will ensure liquidity. (sorry I can’t link it to this thread properly other than to say that maybe economists should be paying a bit more attention to this than to puerile name-calling).

  77. Joseph Ryan Says:

    @ Karl Whelan

    I would very much agree with your point that the purpose of the stress tests was to determine the expected losses on the various catagories of bank lending and to inject capital in respect of the necessary provisions for these losses. The point mad by Gregory about a clear distinction between the ‘accounting’ assessment of loan losses and debt collection decisions is not a strong one. In the first instance the accounting information will come from the credit control/ debt collection unit and will be constantly updated from that source.

    What is required is that the banks publish a proper write off policy and use these provisions to fund it. Surely other commentators are not suggesting that the taxpayer, having provided for mortgage losses, is now going to stand idly by and watch banks start to turf families out on the road, while the provisions remain virtually intact on their books. And that the people turfed out of their houses will be pursued to the ends of the earth for the monies due.

    The banks could of course be thinking of using the ‘owner occupier mortgage’ provisions and using them against higher than expected losses on buy to let or SME loans or God forbid, the < 20 million property loans not being transferred to NAMA.

    The owner occupier mortgage provisions should be specifically ring fenced within the banks to deal with this issue.

    And Hodgkinson was right to call for an approved policy on this issue. Left to the Irish banks, as it is at present, the beneficiaries will once again be the big boys. A completely bust ‘property’ barrister will have his one million mortgage written off, while five carpenters with 200,000 mortgage will be squeezed like lemons.

    We should call for immediate publication of the numbers of all ‘not to pursue/ write off’ decisions in the various value brackets. It might make very interesting reading.
    It is just not sensible to allow write off decisions to be made behind closed doors by banks, with no written policy and on the basis that bankers are honourable and trustworthy in all their dealings and know what is best for Irish society. Ireland has just been down that road and we know the kind of boghole it landed us in.

  78. John Foody Says:

    @ All

    Great thread. Thanks for all contributions. What are the chances of any of this getting communicated in the media?

    @ Karl
    Well, at least you didn’t have to watch Donegal and Dublin …
    +10000

  79. Sarah Carey Says:

    @John Foody

    Sigh. I tried. I tried.

    I thought it was quite a constructive discussion.

    http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne

  80. Eureka Says:

    @ Sarah
    Good job.
    But - why not bankruptcy law reform?

  81. Bond. Eoin Bond... Says:

    @ BWII

    11.1.25.19.5.18 - 19.15.36.5.5

  82. Shay Begorrah Says:

    @Bond Eoin Bond @12:28

    You know they say the greatest trick the celebrity economist ever pulled was convincing the world he didn’t post.

    Lets try and keep a space for pen names.

  83. Ceterisparibus Says:

    The Greek crisis… It ain’t looking good….
    “A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an “economic government for eurozone states” are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses.
    “An unlimited transfer union and pooling of debts for any length of time would imply a shared financial government and decisively change the character of a European confederation of states,” said the draft, obtained by Der Spiegel.
    Mrs Merkel faces mutiny even within her own Christian Democrat (CDU) family. Wolfgang Bossbach, the spokesman for internal affairs, said he would oppose the package. “I can’t vote against my own conviction,” he said.”

  84. Sarah Carey Says:

    @Eureka

    That got a fair mention, and I think Emmet, Seamus and Brendan, agreed it was the logical outcome. Actually on the previous night’s show Charlie Flanagan said that legislation was due by Christmas. I really think this is the only sensible route and the one that will ultimately be rolled-out.

  85. John Foody Says:

    @ Sarah

    Not a judgement on your hosting abilities. I have some tv to catch up on, so I’ll have to reserve that :), I was in Finland last week. I was refering to some of the ‘articles’ I read in the Sunday papers and RTE news.

  86. grumpy Says:

    No surprises from Trichet:

    http://www.independent.co.uk/news/business/news/trichet-urges-eu-nations-to-work-together-2345671.html

    Btw Eoin, ironically you have screwed-up by making a basic, fundamental error. You have carelessly assumed that 3 is the same thing as 2. Embarrassed, or are you going to try to persuade us that you got it right.

  87. Michael Hennigan - Finfacts Says:

    The suggestion in the IT today that the Government may give additional powers to MABS to handle the issue of ability to pay on a case-by-case basis, merits attention.

    The Central Bank said last May that of 782,429 private residential mortgage accounts held in the Republic of Ireland to a value of almost €116bn, that figures show there was a total stock of 62,936 residential mortgage accounts that were categorised as restructured at the end of March 2011. Of this total 36,662 were not in arrears and were performing as per the restructured arrangement. The balance of restructured accounts (26,274) had arrears of varying categories (arrears both less than and greater than 90 days). Therefore, 86,271 accounts were either in arrears greater than 90 days or had been restructured and are not in arrears as at the end of March 2011.

    Besides the restructured mortgages, there must be large numbers of people who are just about managing to keep up with their bills but the rational reaction to the expectation of some sort of blanket forgiveness would be to not keep up with payments.

    I noted last week that we have one of the highest level of owner occupied housing in Western Europe without a mortgage and obviously some housing units were purchased by parents in their children’s names — I would think it’s a substantial number.

    There are many other issues; it’s understandable that a person who lost their business or job may not be able to pay a €500,000 or €1m mortgage, absent downsizing, unless most of the balance is cleared. So shouldn’t an agency have power to set reasonable options for a borrower in distress? In some cases a mortgage could be cleared in full by downsizing.

    These type of big schemes are ripe for abuse and the application of the law of unintended consequences.

    Forty per cent of third level students are in receipt of a public grant; from the time the scheme was introduced fort years ago, it was common to find wealthy farmers, already in receipt of public handouts, having their children on grants motoring to college while struggling middle income families above the income threshold having to fund fees and maintenance.

    Finally, it’s interesting how the BlackRock extreme scenario provision appears to give the illusion of a cost-free solution, as the monies have been already set-aside. Contrast that with a situation where one issue in the debate would be the amount of a special mortgage income tax levy that should be introduced in Budget 2012, to cover the cost.

  88. Bryan G Says:

    @Karl

    You still seem to be persisting with the viewpoint that the recap money given to the banks is a sunk cost that cannot be recovered, hence a debt forgiveness scheme would be without “further cost to the taxpayer”.

    On the matter of recouping taxpayer investment Hodgkinson said:

    Mr Hodgkinson said the “vast bulk” of the €13 billion to be injected in the fifth bailout of the banking sector would be repaid to the State as AIB slimmed down.

    Now I’m sure he’s being a little optimistic here, to say the least, but the principle is clear - the net cost to the taxpayer may be less (and maybe even significantly less) than the gross recap amount that has been injected. Furthermore the recap amount was deliberately high - as viewed by the Central Bank in the stress test report it covers “extreme and improbable” losses. So I agree with John McHale’s view that

    the important point is that the mortgage impairment-induced injection of capital is largely irrelevant to the question of debt forgiveness

    What matters is the long-term net cost, not the gross amount that was added to satisfy “the markets” and the ECB etc.

    Taking a step back and flipping the argument around - why would a personal insolvency scheme (modelled on those that already exist in most European countries) not be an adequate solution to the problem? In effect it would turn an existing loan into a combination of a non-recourse loan plus a deficiency judgement to be paid over 5 years, say, taking income and assets into account. I see a number of benefits to this approach:

    - It removes the decision making power from the banks themselves, otherwise they are in the schizophrenic situation of being required to implement a forgiveness scheme on one hand, and to maximize shareholder/taxpayer value on the other.
    - The process would be more transparent. I am highly sceptical of a Joan Burton-style approach that banks should “engage” with customers (behind closed doors). As mentioned above there is huge scope for the well-connected barrister to do better than Joe the plumber.
    - The process is independent of the type of bank (i.e. fully state-owned, partially state owned, or not state owned). All three classes of bank have significant amounts of mortgages in Ireland.

    Why would such an approach, i.e. one based on a consumer insolvency scheme, not be adequate?

  89. Bryan G Says:

    @Ceterisparibus

    Where I have a real difficulty in dismissing the concept of debt forgiveness for ordinary mortgage holders in trouble is when I read in the Sunday Times last Sunday that the State ( in the guise of NAMA) is considering debt forgiveness for developers to the tune of 37billion euro.
    It is fascinating that so little comment has appeared on this.

    I think the reason there’s so little comment is that it isn’t true. For an extensive post on this see NAMA Wine Lake The truth about NAMA’s debt forgiveness program

    Essentially NAMA seem to be creating a roll-your-own personal bankruptcy scheme. Again I think this is an argument that there should be a single official personal bankruptcy scheme with transparency built-in, rather than more of these ad-hoc behind-closed-doors approaches.

  90. Gavin Kostick Says:

    @ Shay, Mr Bond, Bryan G, and All.

    Shay, I was shocked, shocked I tell you to see Mr Bond put up the numbers. So shocked I got a pen and paper to work it out. And then I was even more shocked.

    But you’re right I think - where would we be without the Drapier’s Letter?

    Overall, this one is set to run and run. From today’s ‘Irish Times’.

    “A NEW agency with legal powers to enforce debt restructuring agreements between banks and struggling home owners is being considered by the Government to deal with the rise in distressed mortgages.

    “The Cabinet is awaiting a report from an expert group, which is due by the end of next month, before making any major decisions in this area.

    “However, a high-level Government source told The Irish Times yesterday it would avoid any measures “on such a scale that people feel they can abandon their mortgages”.

    “Government sources also stressed yesterday that the banks had been “over-capitalised” last March “on the basis of a very severe stress test”.

    “This was done so that the banks would have “a significant sum” for dealing with mortgage default.

    “Monitoring would have to be carried out to ensure there was a common approach by the banks, sources added.

    “They pointed out there were difficulties with debt forgiveness because taxpayers could take the view that they should not be expected to bear the burden, so it would have to be on a “case-by-case” basis.

    “Central Bank figures out this morning will show that about 55,000 home loans, or 7 per cent of the market, were in arrears at the end of June.”

    I’m afraid this still reads very confused.

    Any offers on who this “expert group” is how they are going about their business?

    http://www.irishtimes.com/newspaper/frontpage/2011/0829/1224303145680.html

    @ Mr Bond

    “Why on earth should i get some form of relief just ‘cos im in negative equity?”

    In practice I expect that whatever comes - if it does come - will focus on people in financial distress, and if distress can be relieved, fair enough.

    The point I was trying to make though, is not to do with negative equity, but more a consumer propection one: that anyone taking out a mortgage in a rigged market entering into a ponzi phase could be considered equally.

    After that I do find it complex. There’s the issue of whether any and all of 6bn of taxpayers money is better off in the banks, being used to provide relief which may have benefits in the wider economy, sooner or later being passed back from the banks to the state to use in some other, hopefully productive way.

    Actually, there’s a question. What happens to this ’significant sum’ for dealing with mortgage default, if the mortgages don’t (fully) default?

  91. Bond. Eoin Bond Says:

    @ Grumpy

    i was using the cyrillic alphabet in honour of our Bulgarian brethren…

  92. Philip ii Says:

    Gavin kostik
    “Actually, there’s a question. What happens to this ’significant sum’ for dealing with mortgage default, if the mortgages don’t (fully) default?”
    That is exactly the question. Some seem to see capital as some drsgons horde never to be touched. Other see it as a buffer against loss. We have losses. W have a buffer….

  93. shaun byrne Says:

    Just a suggestion
    How about all owner occupier mortgages are changed to non recourse loans. this way if you can pay you will stay and pay and if you can’t you will hand it back and move on. Very little moral hazard as you loose out on all the money you used up to pay the loan. this will also be a big help to those who have have job offers but cannot take them because they are in negative equity and cannot move.

  94. Brian Woods II Says:

    @ Gavin Kostik

    In the case of AIB something like 6Bn was supplied by way of “capital contribution” i.e. as a gift. This makes it legally easy for AIB to give the 6Bn back whence it came if it transpires that it does not after all need the money.

    @ B_E_B

    I know the guy, thanks.

  95. tull mcadoo Says:

    Philip II

    If the losses turn out to be less than the models predict the excess capital could be returned to the major shareholder for debt paydown or building roads/school etc or if they are greater it will require further tax payer bailout (current EU/ECB policy applying). So it is kind of important that whatever “scheme” is devised not be open ended and open to abuse….like so many other public schemes.

  96. Garry Says:

    “A NEW agency with legal powers….”

    A familiar response to the latest crisis emerges

    Step 1: Create a new agency, give them legal powers
    Step 2: Employ cronies to run agency.
    Step 3: ???
    Step 4: Profit.

    This is the model that has been used for years with ‘regulators’ such as for the financial industry, taxi industry, security industry etc etc etc…. and being expanded for with ever more agencies such as NAMA, credit review office etc.
    The net effect of all these agencies is to keep the system running for the benefit of the incumbents as the regulators are ‘captured’ by the biggest players… and use their powers to block disruptive competition.

    More bureaucrats, adding more cost which can be creamed off by the ‘professionals’ employed…. and more opportunities for corruption

    Instead of a bankrupt state shrinking and prioritizing on maintaining essential services, the state is expanding to create roles for the connected…. an Irish version of communism

  97. Bond. Eoin Bond Says:

    @ Phillip II/Karl/others

    away from the more controversial “fairness” (on both sides of the argument) issue involved here, i think the ‘capitalisation’ argument comes down to this - you think that the capital should be pro-actively ‘used’ to write down debt in the hope that this fresh start will get the economy going again, while myself and others believe that, having endangered the solvency of the state in recapitalising the banks, this capital should be ‘protected’ at all costs. A fair summary? We don’t think it should “never be used”, we just don’t think it should be proactively burnt through either.

  98. Yields or Bust Says:

    @shaun byrne

    I agree with the suggestion. To me it makes a lot more sense than many of the ’schemes’ which have been proposed and it also has the added effect of changing the long term rent v buy argument which many (particularly the lending banks) seem to have buried their head wanting to discuss partly because it demands a little bit of maths - which given the varied arguments in relation to this matter has us once again failing to understand the fundamental value of such an argument.

    The rent v buy argument in a non recourse situation makes lending banks move away from ‘ability to repay models’ and more importantly has them valuing houses on a pure rental yield metric. The current model mixes this ‘ability to repay’ i.e. income driven techniques and credit supply to derive a house price - this sounds nonsense and as a model is nonsense.

    In a non recourse situation house buyers would suddenly change their focus to the merits of one over the other. Equally for the last number of years this rent v buy test has been absent from the banks lending models for owner occupiers and in my view this has been the number one reason why the State is in the dire position it find itself today.

  99. tull mcadoo Says:

    SB

    I presume you mean that all mortgages be changed to non recourse without the interest rate going up?

  100. zhou_enlai Says:

    I disagree with Joan Burton and others saying that this matter can be solved solely by putting pressure on the banks to deal with it, whether that be throuh hcodes of conduct or otherwise.

    People are entitled to a proper legal framework for dealing with mortgage debt. That way, they have some control over their situation and can bring matters to a head, even if it means losing their home and being left with a residual debt.

    The idea that it will be left to the bureaucracy of the banks to deal with matters and that individual borrowers whose cases are neglected or mishandled have no real comeback is not good enough when people are suffering huge mental and financial pressure. Other countries have proper insolvency procedures to deal with these matters.

    It is very inhumane not to have such a system. For somebody who pays a great amount of lip-service to the concerns of ordinary people, it is very disappointing that Minister Burton would leave borrowers at the hands of bank bureaucracies and their endless coffee breaks.

    If there is a legal mechanism then banks will deal with matters more quickly and it will not be just a case of those who shout loudest or cause the most grief getting dealt with first. The banks all got their finger out and reviewed loans quickly when they thought they were going to lose a fortune on NAMA.

    Something equivalent must be put in place to “inspire” banks to play ball on smaller personal insolvencies involving secured debt. If the bank do not put forward their view of the person’s income and financial prospects then the borrower’s version and an examiner’s decision should be final.

  101. Brian Woods II Says:

    There is another reason why the PCAR capital is irrelevant to this debate. It was Seamus Coffey who pointed out that any scheme would have to apply to the non covered banks as well. Are we going to force the shareholders of foreign banks to accept excess losses on their mortgage book or are we going to throw some taxpayer money at them too?

    Debt forgiveness just doesn’t work.

  102. zhou_enlai Says:

    I think the capital provision argument is a red herring. The issue is how do banks value loans and what they can be sold for. If a loan is non-performing and the security is inadequate then it must be restructured so that it is sustainable over 25 years or so and so that it bears relation to the value of the security.

    The banks want to revalue their loans themselves but to reserve the right to claim the rest of the debt later. It is like a landlord who says you can pay less rent but you will still owe the unpaid portion. It is aggressive, oppressive, duress-based and economically unhealthy.

    Some people like Brendan Burgess thinks banks are doing people a favour by allowing them to defer interest payments. They are doing them no favours. They are reserving the right to cripple people for the rest of their lives instead of giving them a deal that most banks would consider commercially viable.

    Borrowers need to get over their mental block about hanging onto their home. Just as the banks want to reserve the right to financially cripple them (and thereby do damage to the national economy) for the rest of their natural lives, many borrowers want to default on their mortgages and hold onto their houses. It is this greed, ego, and lack of realism and perspective that is enabling banks to screw them and their children to the wall. The best example of this is a man so reckless that he will pay his dole towards a mortgage while his children go hungry.

  103. Gavin Kostick Says:

    @ All

    Summary article by John Ihle, ‘Sunday Business Post’ here:

    “Mortgage arrears cases rise by 20,000 per annum”

    http://www.sbpost.ie/news/mortgage-arrears-cases-rise-by-20000-per-annum-58327.html

    Ending:

    “Finance minister Michael Noonan has already convened a committee of civil servants to examine ways the government can help with difficulties in the mortgage market. It is understood the group is using last year’s report from the Expert Group of Mortgage Arrears and Personal Debt, chaired by Enterprise Ireland chairman Hugh Cooney, as a starting point. According to members of the group, the report was produced before the bail-out under the assumption the state’s resources for capitalising the banks were limited.

    “On Friday, Central Bank governor Patrick Honohan and head of financial regulation Matthew Elderfield are due before the Oireachtas finance committee. It is understood debt forgiveness is on the agenda.”

  104. Garry Says:

    Zhou, The houses have been built………. all that is going on is arguing who pays the bill…. nobody need die sleeping at the side of the road this winter, theres plenty of empty houses around…..

    I’d suggest rather than waste yet more money paying people to mediate on debts, there are much cheaper and simpler solutions.
    Changing the tax laws so unoccupied houses attract a higher tax (can be framed so the owners are liable. (banks for possessed, developers for unsold)
    Reduce landlords dole aka rent allowance, spend the savings on energy/utility/food vouchers
    or even the nuclear option change laws on squatters rights … use it or lose it….

    So there u go… 3 low cost suggestions which disrupt the system, resolve the issue of providing shelter…. without any need for more bureaucrats.

    Anyways, the tipping point will happen soon enough when it will become fashionable to throw the keys back. the shame is some will go cold and hungry this winter in an attempt to sustain the unsustainable……….

    it’s sad but understandable as people are mimicking the official response to this depression.

  105. Sarah Carey Says:

    two points

    1. On restructured mortgages: I’d be slow to assume that restructured = unsustainable. We extended the term of our mortgage. It helps with cash flow but is still sustainable. The EBS will get their money. No way am I entitled to or need any forgiveness. (eh, well, financial forgiveness at least ;-) )

    2. Too late to revert to non-recourse loans, but as a product, I think they are a great idea. Transfers risk to the lender (although as the sub-prime crisis showed, they found a way out of that too).

    3. @Gavin “anyone taking out a mortgage in a rigged market entering into a ponzi phase could be considered equally.”
    I reject this I have to say. It still took a buyer to sign the dotted line and borrow that money no matter how crazy. I sympathise with the “get on the ladder” panic, but ultimately they opted in, when plenty decided to make do and rent.

    4. @John Foody, ok being out of the country is excusable. FInland? What were you doing there?

  106. Sarah Carey Says:

    oh that was four. I always go on longer than I intended..

  107. zhou_enlai Says:

    @Garry,
    1. We don’t have a shelter problem.
    2. We have a social welfare system that provides for people’s basic needs.
    3. Taxing uninhabited houses is not going to solve anything. Most developers are in debt, especially where the houses are unsold, and most will sell or rent anything they can.

    We do seem to have an education problem where people are paying their dole towards loans. A Judge would not order a man with children to pay part of his dole towards a mortgage. You are entitled to retain funds to cover the necessities of living, and not necessarily in total penury - witness Simon Kelly in Wicklow District Court.

    We also have a problem of despair, incentives for productive people not to be industrious (because all money now and in the future willl go to the bank) and incentives to default (to bring matters to a head) and to emigrate. A proper legal framework would help.

  108. seafóid Says:

    I love these acronyms

    The FMP report tells us that AIB will incur losses of €3.1 billion on its Irish residential mortgages in the base case and €4.8 billion in a stress case.

    So AIB has a projected loss of €3.1 billion- well FMePink !

  109. Ludwig Heinrich Edler Says:

    Interest thread and fascinating discussion.

    I have not had time to read all of the above comments, so perhaps this point has already been made (in which case apologies for repeating) but what about the effect of debt forgiveness on property prices?

    In one form or another, debt forgiveness involves allowing someone who cannot pay a mortgage to stay in their “home”.

    I imagine I am a Serbian-German property investment company with a pocket full of euro-cash looking to get into the market.

    I would like nothing better than to buy a rake of houses at knock-down prices from backrupt Irish people and rent them out.

    The problem is that these houses are not for sale at their market value, because no one is foreclosing on them and forcing them to pack up their removal vans.

    As a result, the rental market is inflated too.

    All of this hurt competitiveness, and drags the Irish economy deeper into its lost decade.

    Foreclosure is not painless, but half-measures cause infection and festering, which is worse. Mortgage debt foregiveness is a half measure.

  110. Dom K. Says:

    Consuming without investment - isn’t that the Keynesian dream? Why blame Friedman?

  111. Occam Says:

    I am not familiar with laffer curves but there is a good argument that by using an appropriate debt for equity model, a bank ultimately has a better chance of maximising its return from a defaulting homeloan. John Hussman, who is far more erudite than me has written persuasively on this point in an american context. However Irish banks need more than a prompt to engage in such an exercise.
    http://www.hussmanfunds.com/wmc/wmc090223.htm

  112. El Leader Maximo Says:

    Shaun Byrne’s idea of resetting all (PPR only, say taken out between certain years presumably) mortgages to non recourse is an interesting one. It seems a fair balance to offset the ponzi scheme run by FF - stoke up the market to release profits to their builder/developer supporters, use public funds especially stamp duty to buy elections, denude the tax system etc.

    You can argue till the cows come home about what’s fair and how you measure it but there’s no doubt that an element of the price paid by anyone who bought their house in the noughties was rigged. How come we never hear of banks or estate agents being sued or challenged on the valuations they approved before mortgage drawdown ? did the people who did these valuations have professional indemnity insurance ? How about new beginning take some kind of class action suit to force the banks to fess up to their own part in the mess & adjust the outstanding principal. They do it every day for so called developers, I know I did consulting work for a non covered institution around loan collateral.

  113. zhou_enlai Says:

    @Ludwig

    “In one form or another, debt forgiveness involves allowing someone who cannot pay a mortgage to stay in their “home”.”

    Debt forgiveness does not necessarily involve allowing somebody to stay in their home. It may mean kicking them out, selling the house and agreeing a reduced residual loan burden.

    e.g. I borrowed €1,000,000; Value of House = €400K. Sell house, rent smaller house and pay off €50,000 over 15 years.

    That is debt forgiveness that gets the bank something they can sell on, and gives me a reason to work hard to rid my self of residual debt and try to secure my future.

  114. Karl Whelan Says:

    @ BEB\Bryan G

    “you think that the capital should be pro-actively ‘used’ to write down debt in the hope that this fresh start will get the economy going again, while myself and others believe that, having endangered the solvency of the state in recapitalising the banks, this capital should be ‘protected’ at all costs. A fair summary? We don’t think it should “never be used”, we just don’t think it should be proactively burnt through either.”

    An alternative summary — I’m in favour of recognising the reality that many of the mortgages are unsustainable and designing fair and efficient procedures for recognising this, keeping in mind that the banks have been recapitalised partly on the basis of large mortgage losses. You’re in favour of pretending their isn’t a problem because you want to protect capital.

    To be honest, as of a few months ago, I didn’t even think the second camp existed. I thought there was a consensus that there were large losses on the Irish mortgage book, that they would need to be recognised, and that the banks had to be capitalised to deal with this.

    I’m a bit depressed to see people disagreeing with this but hopeful on the basis that you guys are not running the government or the Central Bank.

  115. Bond. Eoin Bond Says:

    @ Karl

    i should have noted there’s a fair degree of difference between your relatively sensible suggestions and some of the more aggressive “debt relief across the board” plans. If you’re merely suggesting that the banks need a good kick up the arse in writing off where appropriate (and therefore its not really debt relief or forgivness), then fine. I’m simply worried that the politics of this will stray into “write off first, ask questions later” territory. You’ll note above that there’s widespread calls from generally rational people for large scale, negative equity related or “it was a fix”-based debt writedowns, with absolutely no tackling of the “cant vs wont” pay debate or realising that this money ultimately comes from the taxpayer and has not already been “spent” as some seem to suggest.

  116. The Dork of Cork Says:

    @Dom K
    Yes there was a strange synthesis of Keynesian trained economists exposed to monetarist thinking during the late 60s & 70s.

    Paul Craig Roberts for instance was essentially a Keynesian who belived consumption was being held up by Goverment monopolies & high taxes.
    But nearly any type of spending seems to work when you have a oil glut - me thinks the conservation measures of the 70s/80s/ ( especially oil power stations shutting down) combined with higher oil production created the conditions for higher spending - but this was expressed in higher debt levels which both producers of oil and manufactered goods held chiefly outside America
    Combine Keynesian consumption levels with a monetarist lack of investment in the commons , with a lack of a final Austrian payment mechanism and you get the mess of today.

  117. Karl Whelan Says:

    @ Eoin

    “You’ll note above that there’s widespread calls from generally rational people for large scale, negative equity related or “it was a fix”-based debt writedowns”

    While I have some sympathy for these people, those proposals are clearly a non-runner. Morgan Kelly has also clarified that he is not in favour of those proposals, though clarified is perhaps not the right term since he was never actually reported as calling for a blanket writedown.

    Anyway, perhaps time to move over to the juicy new mortgage arrears statistics thread!

  118. John Foody Says:

    First off, who is this Government source?

    http://www.irishtimes.com/newspaper/breaking/2011/0829/breaking3.htm

    Government source also stressed yesterday that the banks had been “over-capitalised” last March “on the basis of a very severe stress test”.
    This was done so that the banks would have “a significant sum” for dealing with mortgage default.

    It was done to convince investors that if the worst happened, it could cover it. Saying it was done, so it’s ok to allow/help the worst to happen is a bit different.

    Though I’m reassured by his/hers “case-by-case” basis comment. I can’t see any other way to do it.

    Joan Brutons comment “they also have to concentrate on reaching out to the people that they lent to in the boom”. How is this suppose to work, banks trying to actively find people to give mortgage haircuts to on one side and maximize profits for their shareholders-’the taxpayer’ on the other.

    Enter the idea for a new agency. A referee. In an ideal world it could work. In a politicians wanting to be seen to ‘do something’ - ‘anything’ world it’s at a disadvantage.

    I am pro the lets sort this out approach, but we have to thread softly. NAMA followed a crystallize losses fast approach, if this is done improperly and we follow another crystallize losses fast approach, chewing up lumps of reserve capital, where does that leave us with the current World/European bank drop.

    As for the bankruptcy legislation, there’s no reason that can’t be sorted out asap.

    @ Sahra C
    Holiday, my other half is from there. Lovely country, containing lots and lots of trees and relatively quaint political and social problems.

  119. zhou_enlai Says:

    @John Foody

    “I am pro the lets sort this out approach, but we have to thread softly. NAMA followed a crystallize losses fast approach, if this is done improperly and we follow another crystallize losses fast approach, chewing up lumps of reserve capital, where does that leave us with the current World/ European bank drop.”

    Good point. However, at the very least we should have a proper personal insolvency regime and a proper bank resolution regime by now.

  120. Ludwig Heinrich Edler Says:

    @Zhou,

    “Debt forgiveness does not necessarily involve allowing somebody to stay in their home. It may mean kicking them out, selling the house and agreeing a reduced residual loan burden.”

    Okay, I hadn’t heard of this kind of option being on the table, but again, maybe I am missing details. If that is so, then it just sounds like the kind of debt negotiation that banks will want to be doing anyway. Why does the govt need to be involved in this?

    But to me, most of the talk was about keeping people in their homes, which was my point about the housing market.

  121. tull mcadoo Says:

    @KW
    “I’m in favour of recognising the reality that many of the mortgages are unsustainable and designing fair and efficient procedures for recognising this, keeping in mind that the banks have been recapitalised partly on the basis of large mortgage losses.”

    That is a laudable aspiration and perfectly sensible. The risk is that thatt he polciy designed to attain this objective goes horribly wrong and ends up costing the taxpayer much more than envisaged. Can you think of one example of a scheme in this country that i) ahieved its objectives ii) came in on or under budget and iiii) did not suffer from mission creep.

  122. John McHale Says:

    Karl writes:

    “An alternative summary — I’m in favour of recognising the reality that many of the mortgages are unsustainable and designing fair and efficient procedures for recognising this, keeping in mind that the banks have been recapitalised partly on the basis of large mortgage losses. You’re in favour of pretending their isn’t a problem because you want to protect capital.

    To be honest, as of a few months ago, I didn’t even think the second camp existed. I thought there was a consensus that there were large losses on the Irish mortgage book, that they would need to be recognised, and that the banks had to be capitalised to deal with this.

    I’m a bit depressed to see people disagreeing with this but hopeful on the basis that you guys are not running the government or the Central Bank.”

    I think that is a bit harsh as a summary of what is has been argued on this thread. It might be useful to sum up the purpose of the post in light of the useful discussion.

    1. While clearly related, the processes of loss recognition/stress testing and debt forgiveness are distinct.

    2. The concept of the debt Laffer curve is a useful device of understanding the implications of debt foregiveness for the size of the expected bank losses. Putting aside incentive effects, Karl’s position makes most sense in the context of being on a flat portion of the debt Laffer curve. In this case, debt forgiveness in line with accounting loss recognition does not affect expected bank losses; reality is being recognised. To the extent that debt foregiveness benefits the individuals concerned, there are benefits but no bank-loss related costs (again putting incentive effects aside). The concern is that debt foregiveness does affect expected bank losses (e.g. option value is being given up in the case where someone’s circumstances improves). We then face a trade off in terms the costs of additonal expected bank losses and the benefits to the individuals and the economy more generally of reduced debt burdens. Given the damage done by bank losses to the Irish economy, I don’t see how this aspect can be neglected.

    3. There is a worry about a situation where banks are given multiple objectives, including broader social/economic goals associated with debt forgiveness. I think it is better that banks — including State-owned banks — have a clear value-maximisation (i.e. long-term profits) objective, especially where they are well capitalised. From a policy perspective, it is better to work on the constraints within which banks must pursue this objective, including the personal bankruptcy framework, forbearance rules, subsidies for workouts, etc.

    Crushing debt burdens are a legitimate policy concern. But we cannot afford to take our eye off the potential implications for bank losses.

  123. Gregory Connor Says:

    The Financial Regulator’s very strong push towards encouraging mortgage debt forbearance in its recent policy pronouncement (highlighted in namawinelake) was a mistake IMHO. Recently, bank management have been using forbearance as a cloke for extend-and-pretend practices which are in any case a strong temptation from their narrow management perspective.

    Also, the term “forgiveness” is getting too many soft hearts and heads fluttering wildly, and helping to increase strategic mortgage arrears. How about the term “improved resolution” instead of “forgiveness” as a policy goal?

  124. tull mcadoo Says:

    Gregory,

    I think it is too late -the feline is already out of the sack. An increasing percentage of punter know that their is limited upside in keeping a good credit record since there is no credit and they won’t be borrowing again for the forseeable future. Bank managers are probably playing the extend and pretend game as well since they are now bureaucrats with not profit motive ….in AIB anyway so they routinely wave through forebearance requests. There is no sanction over a strategic default since you won’t lose your home.

    Why anybody would pay their mortgage now I don’t know since there is a deal to be cut. I will be off to my manager to discuss going interest only now. Next conversation after that will be to move the few bob I have offshore so that there is no prospect of being haircut.

  125. grumpy Says:

    @Gregory

    I think the campaigners for this miscalculated quite a bit. They were clumsy, hence there was an understandable backlash. Now all the talk is of “nobody ever suggested any sort of blanket mortgage forgiveness” - but the fact they have to say that says a lot about how they presented the idea to start with.

    It has also, unhelpfully, got people thinking about strategic defaults.

  126. Bond. Eoin Bond Says:

    @ Grumpy

    i think you’re right. This initially started out with some people calling for “blanket relief for negative equity”, and has only in the last few days taken on a more nuanced “use of capital/losses already provisioned to allow for appropriate write-downs” argument. While the like of Karl have been consistent and genuine in that position, there’s a fair few bandwagon members who have actually suggested something far more wide-ranging and aggressive when left to their own devices.

  127. Gavin Kostick Says:

    @ grumpy

    “It has also, unhelpfully, got people thinking about strategic defaults.”

    On another thread you’re bemoaning the failure of capitalism due to the rubbish financial sector.

    Yet, it is also regularly remarked that the Irish are not the French, never mind the Greeks, and prepared to strike good and proper.

    But this is the land of Captain Boycott, so maybe a general refusal to deal with the landlord has some traction here.

    @ All

    Gimicky idea alert.

    If there is some money to be used from the ‘excessive’ capitalisation of the Irish banks, how about stopping the chinese water torture of the increases on the variable rates, which are nothing to do with the ECB rate?

  128. Bryan G Says:

    @Karl

    I note that whenever faced with questioning on your “no further cost to the taxpayer” position, or acknowledging the trade-off between different bank debt management policies and their corresponding costs to the taxpayer, you simply run away and ignore the issue.

    “You’re in favour of pretending their isn’t a problem because you want to protect capital.”

    This is a bizarre statement - did you actually read my post? For a start my concern is not to “protect capital” per se but to protect taxpayer funds, but more significantly I did propose a solution to the problem and asked why this would not be adequate. Again this question was simply ignored.

    So again - this time slightly expanded (I won’t repeat what I wrote above or in other posts such as this one on the essential elements of such an insolvency scheme.

    - Use as criteria for an “unsustainable mortgage” those defined by the Mortgage Arrears and Personal Debt Group
    - If a mortgage is deemed unsustainable the borrower enters a personal insolvency process, based on those that already exist in most European countries, as described in my other posts.

    Why would such an approach not be adequate?

  129. Jagdip Singh Says:

    @John,

    Is it a matter for concern that the stress tests in March 2011 didn’t refer to the forthcoming reform of personal bankruptcy?
    http://www.centralbank.ie/press-area/press-releases%5CPages%5CCapitalandLiquidityResultsPublishedforBankingSector.aspx

    A personal bankruptcy regime consists of a number of levers which benefit the debtor or creditor. The shorter the bankruptcy period, for example, the more leverage the debtor has, and the corollary is true also, so a 12 year period benefits the creditor.

    Presumably the bankruptcy reform mandated in the MoU with our bailout creditors may need to consider the provisions and reserves in our banks?

    Did the stress test constrain our freedom of action in implementing the bankruptcy reform which is best for our economy and society?

  130. John McHale Says:

    @Jagdip

    Important question. Though it is probably naive to think that the existing levels of net debt will not affect the design of the personal bankruptcy regime, such long-term legislation should put the current balance sheet situation aside as much as possible, hopefully instead drawing on best international practice for a steady state regime. While again it is inevitable the balance between debtor and creditor will be a central design focus, I think another (debtor-focused) trade off is just as important: the benefits of a humane regime that allows people the chance of a fresh start versus the costs of a more lenient regime in terms of everyone’s creditworthiness.

  131. Jagdip Singh Says:

    @John,

    Thanks.

    Like many reforms needed at present, it’s like the fellow giving you directions who says he wouldn’t start from here.

    The ideal time for bankruptcy reform was in the early 2000s which might have put a brake on lending and construction.

    It’s certainly going to be a challenge to introduce a bankruptcy regime now with weak banks, weak household balance sheets, overhang of property and all the rest. Presumably the trade-offs will favour weak banks in the short term, which is understandable even if socially hard to swallow.

  132. bill hobbs Says:

    @gregory - perhaps the correct term is “earned debt forgiveness”. “Improved resolution” is a term suited to banks and not their indebted consumer borrowers.
    Given numbers on financially vulnerable consumers with mutiple lender relationships it’s been obvious for some time that some form of national debt management programme was needed. One that sits between debtor and creditor.

    The proper design of any programme should allow its manager to objectively assess repayment capacity, weed out the free-riders and establish a settlement agreement with mutiple-lenders. And probably monitor and administer the agreements which could include a payment system.

    In the case of unsecured debt it’s relatively straightforward - in the case of OO/PDH mortgage debt the manager should have a range of options at their disposal, similarly with BTL debts.

    This process cannot be left with the principal lender (in most cases the mortgage holder) given the inherent conflicts and lack of trust in banking.

    I am of the view that in the absence of a proper debt management process which is an intergal component of a modern personal insolvency regime, strategic default risk is amplified.

  133. Donogh Diamond Says:

    I’ve been trying to figure out how to communicate this point that Gregory Connor has been making simply but accurately and this is the best I can do:
    It is the job of those who are appraising potential losses at banks to prepare for the worst, and is the job of debt managers at banks to make sure that the worst never happens - if we confuse the two we simply ensure that the worst does happen.

  134. Yields or Bust Says:

    @donogh

    The ‘worst’ presumably being that those who overcharged for houses and are suffocating with debts which bear no relationship to the current asset prices, primarily as a result of the excessive supply of which they had zero contol over and which is sitting idle and financied by the banks, finally stop paying their mortgages?

    Explain to me why this would be such as bad thing?

  135. Donogh Diamond Says:

    @Yields or Bust
    The ‘worst’ being that taxpayers, most of whom have no mortgages at all, having finally recapitalised our banks adequately (including a provision for very substantial levels of bad mortgage debt) are called upon to do so yet again, because the debt management side of the banks that we own have been prevented from doing their jobs and collecting all outstanding debt that it is reasonable and sensible to collect.

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