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65 Responses to “David McWilliams on the Bank Guarantee and Pre-Crisis Regulation”
The bank liabilities guarantee is another good example of the importance of taking a comprehensive view of the State’s balance sheet, and in particular the importance of contingent liabilities. The original guarantee created a massive contingent liability. Uncertainty plays a critical role in the evalation of the expected value of a contingent liability. Even if it was thought at the time of guarantee that the expected capital losses would be small, it should have been apparent that with a property bubble bursting there was a chance of large losses. This should have given pause in offering a guarantee. While a guarantee of deposits — and probably any new bond financing — was necessary to stop a run and allow the banking system to continue to fund itself , guaranteeing liabilities that could not run seems hard to defend. It is hard to see the blanket guarantee being given if a comprehensive view of the State balance sheet — and expected value of contingent liabilities in particlar — was taken.
This surely is a case where the hardware could be ‘cutting edge’ or ’state of the art, to use the jargon of vacuous people, but if the software is dodgy, then it’s useless.
Searching for rationality where there was none, is also a useless.
Denial reigned; US credit markets were frozen; the soft landing had crashed 13 months before; big developers had even been paying interest on their loans and the property market was going to recover when?
In fairness to those bewildered men in Government Buildings, there were lots of well-paid ‘experts’ beyond, also out of their depth.
In February 2009, exactly 2 years after the subprime crisis broke out in the US, the Irish unit of Pricewaterhouse Coopers (PwC), the biggest of the Big 4 accounting firms, delivered a report on Anglo Irish Bank to the minister of finance.
“These annual impairment charges were €2.3bn and €3.0bn respectively per annum under the two scenarios for the years ended 30 September 2009 and 2010. The two PwC impairment loss scenarios exceeded Anglo’s worst case impairment loss scenario.”
“Jones Lang LaSalle valued a sample of 160 properties held as security in relation to the top 20 land & development exposures on Anglo’s books.”
Anglo Irish Bank reported a loss of €12.7bn for the 15 months to the end of December 2009 - the largest loss in Irish corporate history - after charging €15bn to cover bad debts.
The only reason the Canadian banks haven’t needed to be rescued (yet) is because they are surfing the Chinese resources wave - same as Australia.
The problem isn’t necessarily with regulation but punishment - banks will always try to corrupt the system through regulatory capture but if the civil and criminal implications of this make the process economically worthless then they are less likely to pursue this course of action.
So the only safe thing to do from a system perspective is to jail the bankers - pour encourager les autres.
“Uncertainty plays a critical role in the evalation of the expected value of a contingent liability.”
And the absence of sufficient documentation presumably didn’t help either, while modeling all of the scenarios in less than 12 hours was probably out of the question given the number of fag packets that would have been required.
He obviously knows that he is going to be called upon by any inquiry.
I think a lot of people will seek to lay a lot of blame at his door but I think we have to remember that the proposal to include liabilities came very late in the day as things were getting hairy to say the least.
If the request by JCT was to “Save your banks at all costs” then they obviously thought.
You are correct that he was naive to think that taking back a government guarantee was something that you could just decide to do.
But here is the thing.
Lenihan, Cowan and the others (if there were others involved in the ultimate decision) who decided to go with his plan did not believe that any other plan would have prevented an immediate banking collapse the next morning. A collapse that could have spread outside of Ireland.
The best defense of the guy I can give is that he was making his suggestions without all the facts (because the banks were in charge of the regulator) and that unlike most of the rest of those involved with the guarantee he did what he was doing for the the noblest of reasons.
He was trying to help out his country when the minister of finance came knocking on his door in the middle of the night.
Unlike most economists in this country he actually tries to predict what may happen in the future and makes often imaginative novel recommendations based on that.
What most of the rest of the academics do is analyse what has already happened, there is little attempt at foresight.
The most interesting unknown that could be investigated in this inquiry was who decided to go for this option?
Was it just Cowan and Lenihan, who then called the ministers?
Was it Cowan, Lenihan, some banking officials and some people from the department of finance and had they a vote?
The morning after the guarantee McWilliams did mention in his column that some in the department of finance were against his plan.
Its only fair they should be given credit.
What was their preferred option if they had one?
Bien sur. But that’s now. The Zeitgeist was very different pre Lehman. Neoliberalism didn’t need stuffy regulation and all that bureaucratic red tape. Light touch it and let the market sort out the details. Efficient markets could price everything perfectly. If they messed up the Rating Agencies would know.
Shur nothing has changed no lessons learned its a fecking banana republic,the market values the IRBC loans at x-ah shur lads NAMA will buy ehm at what we ‘think’ they worth-providing further state aid-why artificially support 20BILLION of loans ?
who told ya or forced ya this time-z germans again……..
Different countries have managed bank crises in different ways at different times, it’s not necessarily a binary choice between “taxpayer pays for everything” versus “total financial meltdown” (as DmcW’s articule seems to imply). Even in Ireland some of the bank investors (shareholders and junior bond holders) did make a contribution - the trick would have been to get bank investors to contribute more.
In Ireland’s case the losses were so large it is quite possible that the situation was basically unmanageable without a European bail-out. In that case it would have been better to delay paying off bank investors until the bail-out was at hand, so they could have been thrown into the mix at the negotiating table.
Are we, as a nation, capable of learning our lesson from past experiences and thus, not doomed to repeat them? If so, accept the past as an expensive, and ill-wanted, lesson and proceed to put adequate measure in place that make company directors and their senior management team legally culpable if their firm 1) claims it’s systemically important and 2) seeks state aid to keep it’s door open - part of the price to be paid to fall into the arms of the be embraced by it’s penal system.
Unfortunately, our national track record suggest no lessons will be learned so we do both - punish retrospectively and also put new systems in place for the future.
I’m up for assigning a dedicated team of 20 forensic accountants to the top 6 in each bank - and do every one of the bankers for each and every violation of the companies act - the end-of-year statements from 2007 and 2008 are classic examples of shareholder deception and false statements to the ISE. Start there and do them immediately for that and proceed to dig and offer them leniency for other information leading to convictions of others.
The only way to prevent the crime is to make it not pay!
The most interesting unknown that could be investigated in this inquiry was who decided to go for this option?
Was it just Cowan and Lenihan, who then called the ministers?
Was it Cowan, Lenihan, some banking officials and some people from the department of finance and had they a vote?
We know the answer to this. Gleeson and Sheehy (AIB), and Burrows and Goggin(BoI), walked into Government buildings on the 28th of September 2008 and demanded a guarantee, for their own banks. They further demanded that Anglo (and I believe Nationwide) not be included in such a guarantee. In this they were supported by the DoF.
Then Taoiseach Brian Cowen chaired a meeting debating which banks — if any — would be guaranteed. Supposedly the decision made was along the lines of “We’re not F**king letting Anglo go to the wall!!” or expletives to that effect. The next morning the Irish state put itself on the hook for €400 billion and counting.
For some reason, people seem to believe that the banking guarantee came out of a 2am meeting in David McWilliams’ kitchen (with minutes taken by the dog). Personally, I see the 28th as the culmination of a long collusion between the banks and the Department of Finance to put the exchequer on the hook for the losses which had been mounting since 2001.
A guarantee had been on the table at the DoF since Feb 2008 at the earliest. I believe the DoF always intended to bail out AIB and BoI — from as early as 2002-2003 — the only thing they hadn’t agreed on was how much they could get away with. I don’t see where DmW fits into the official policy decisions.
Banking is being tightened up internationally anyway in the wake of the various disasters which weren’t confined to Ireland. Leverage is not what it used to be. Banks have a lot less freedom to decide for themselves. Regulation is being strengthened. I wonder if they’ll eventually ditch internal models.
Didn’t Antoin Murphy work out the “cost” of the guarantee being blanket, and it wasn’t that much, I think. The suggestion that it should have only been for new bond issues just doesn’t stack up. Consider the following scenario. XYZ has a 100M maturing bond. Anglo raises 100M either from XYZ or from other sources on a guaranteed basis and redeems XYZ’s bond no problem.
We have well trodden this path. There was no bank resolution regime in place. Keeping Anglo partially solvent (for new issues) but not for maturing issues was not an option under the existing regime and changing the regime retrospectively was not an option.
Anyway aren’t there signs the nightmare is ending? Noonan is talking about a primary surplus. Government borrowing costs are at historic lows. Given where we were in 2008 or indeed 2010 a good case could be made that policy decisions, whilst obviously not perfect with hindsight, were a good bit better than some of the populist alternatives.
“Top officials at the US Federal Reserve took months to realise that the 2007 financial crisis would rock the world’s largest economy, according to an embarrassing set of meeting transcripts released on Friday.
The transcripts reveal that some Fed policy makers initially viewed the market turmoil, which erupted in August 2007 on the back of problems in the market for subprime mortgage loans, as good news because markets were pricing in more risk.”
I have great time for David McWilliams - but this article makes no sense once you see the state of the Canadian housing market and the wilful disregard/lack of powers the regulators have for banking prudence.
They’re almost Irish in their hear-no-evil, see-no-evil, speak-no-evil skills!
As an addendum:
We can’t look to the Americans to lead on this - the fact that Dick Fuld walked on the Repo 105 rap is testament to the fact that no one is going to jail there! Stephen Kinsella recently wrote in his Independent columns that most of the senior execs in Lehmans were fined or jailed - in fact not one of them were either jailed or fined: http://www.sec.gov/spotlight/enf-actions-fc.shtml
“We know the answer to this. Gleeson and Sheehy (AIB), and Burrows and Goggin(BoI), walked into Government buildings on the 28th of September 2008 and demanded a guarantee, for their own banks. They further demanded that Anglo (and I believe Nationwide) not be included in such a guarantee. In this they were supported by the DoF.”
Why would AIB and BOI not want Anglo to be included? Anglo falling would likely make them fall.
“We’re not F**king letting Anglo go to the wall!”
Wrong that quote was supposedly ” We are not F%*&ing nationalising anglo” and would have a completely different implication.
regarding jail thankfully there still exists this rather quaint and antiquated concept called…ei incumbit probatio qui dicit, non qui negat…you can just have the state run the entire banking sector,cant wait hopefully it will be as much fun as say getting a passport or drivers lic.
Dick dropped a BILLION-he not only had skin in but his whole net worth in!
“America doesn’t criminalize bad business decisions, even when they lead to business failure; if we did, Silicon Valley would be a penal colony. The fact that the collapse of financial firms can cause so much collateral damage for the economy doesn’t lower the legal bar for throwing CEOs in jail, no matter how much a basic sense of fairness makes a person wish it were so.”
Unfortunately nobody is available for comment at the moment
We acted on information we believed was correct at the time
I can’t comment on individual cases
Obviously it fell way short of expectations
We fulfilled all of our legal requirements
There have been failings in the system however lessons have been learned
The clouds are gathering and markets are worried. There are $1.2 trillion worth of home loans outstanding, according to the Bank of Canada, with roughly three-quarters covered either by the CMHC or a handful of private insurers that benefit from government backing. While part of that is securitized, the bulk is sitting on bank balance sheets.
So they may have tweaked the rate for those new to the market - but the banks have loaded up heartily already!
As for having the state run the banking sector - well I was happy for the state to stay out of it and the lads to reap what they sowed - just like they do in Silicon Valley…. Winners get their rewards and losers take their lumps. How do you reckon John, Dick and Angelo would have fared then?
“A guarantee had been on the table at the DoF since Feb 2008 at the earliest. I believe the DoF always intended to bail out AIB and BoI — from as early as 2002-2003 — the only thing they hadn’t agreed on was how much they could get away with. I don’t see where DmW fits into the official policy decisions..” Poppycock.
Eh - where in Gods holy earth did you get off in believeing that bailing out AIB or BOI was even close to the agenda of Govt in 2002-03 ? The goings on in Saipan were all the rage in 2002 not the problems of the AIB tracker mortgage book.
I have a lot of respect for DMcW. I find his observations generally pretty close to the truth and as suggested above he has an exceptionally good knack at seeing the economic future well before the posse arrives. There is no way however that even in 2002 DMcW had even countenced AIB going to the wall and he is one of the best in the business at economic fortune telling. So your comment is plain wrong.
What I do suggest however is that the seeds of our downfall were definately grown out of the 2001 and 2002 lending years. there is no doubting that fact. Equally there had been no significant domestic slowdown here approaching what was seen in the US and elsewhere following 2001 and this gave us the false impression that our fundmentals were sound and warning signs being put up by DMcWs and others were quickly blown away as the lending party really got going with significantly more gusto into 2003 and 2004.
Nobody should forget that c60% of PTSBs entire mortgage book relates to lending decisions made between 2005-2007. In a normalised 25year mortgage loan book c4% to 5% of the book should be replaced in any ‘normal’ year. In the 2005-2007 years PTSB outdid themselves by a factor of c15x the norm. Nice one lads.
All the while however the basic flaw in the property game was starring everyone in the face and yet very very few were willing to read the warning signs and speak the unspeakable. Rents were telling the real property story.
On average from about 2002 to about 2007 rents in real terms were actually falling or flat whilst house price were rising at a very serious clip annually, nationwide. To say that this is weird is the understatment of the century.
This is not what soundly priced property markets tend to do.
Even today in Dublin we are now all too well aware that a rising rent market is pushing people into buying for good reasons, supply is scarce and demand is rising (in Dublin only I hasten to add). This was never the situation from about 2001 to about 2008 - during that period supply was never scarce in any part of the country and yet prices were rising with rents generally flat or falling. No market, no matter how odd its pricing trends, can live with such an upside down fundamental pricing flaw for too long. Yet we somehow we believed that in the RoI this was all explainable for about 7 years. More Poppycock.
The fact that the SEC had staff stationed in Lehman Brothers all over the summer of 2008, and so, were fully aware of Lehmans financial state before they imploded is the reason why no one is being pursued and the whole thing needs to be politically buried.
Not so much “innocent until proven guilty” - more “Dumb and Dumber”!
That’s how compromised the regulators were/are in the States.
Well in fairness, Canada spans several time zones and has greater mineral wealth than Ireland.
Hence it’s financial sector was probably more diversified than it was in Ireland, which was just a one horse race (to the bottom).
Of course Mr McWilliams jumps on the populist horse by blaming the developers… reckless lending but chooses to ignore…reckless demand, a media gorging on property porn and a Govt increasing spending on what was been spent.
The chimps were out of the cage long before 2001, and when lunatics were running the asylum… the end result is of course is………..(we all know).
As long as we allow double income for application mortgage purposes we will continue to have high property prices. But considering Mr Mc Williams was away for some of the 80’s.. it would appear that he missed this important point.
The rot set in long before 2007, at least 20 years earlier. But Waaaaaay heeeeeeeey………… who cares?
As DOCM mentioned previously…………..”All we need is the money”
“The government has tightened mortgage lending rules four times in five years, and the national market cooled in the second half of 2012 and early part of 2013.”
one main reasons is they have not yet had a housing market correction,only G7 country i think not to have one recently.
“Under the Basel III Advanced Approaches (applying to the six largest banks in Canada and other banks globally), rising home prices over the last several years have helped keep regulatory capital ratios strong by, in effect, keeping loan-to-value (LTV) ratios in Canada artificially low. Lower LTVs, in turn, have allowed Canadian banks to optimize RWA at lower levels, reducing the size of the denominator in risk-based capital measures. This has the effect of lowering the amount of capital banks hold against residential mortgage exposures.”
“And when it comes to “innocent until proven guilty” - when you have the DoJ saying bankers are “Too Big To Jail” - that point is kinda moot!”
A Forbes link now there’s a creepy weird publication,read by overweight republicans and midwesterners,if read at all,i have in fairness stumbled accidently upon it whilst waiting at the doctors/dentist car rental company…
ok i try to be nice..you are simply totally absolutely miles and miles WRONG….
its the companies that are you are referring too,ask the 85,000 x employees of AA how that prosecution worked out….
“In that memo addressed to all U.S. Attorneys, the DOJ outlined the factors to be considered in determining whether to prosecute corporations. One of those factors is “collateral consequences”. In determining whether to file criminal charges against a bank, or any corporation, U.S. Attorneys were ordered to weigh the impact that the prosecution would have on unrelated parties. The prosecutors were to take into account the “disproportionate harm to shareholders and employees not proven personally culpable”. It is this concern for innocent parties that may make banks practically bullet proof (at least from criminal charges).”
Ehhhhhh… none of this is my opinion. So freaking out and saying I’m “simply totally absolutely miles and miles WRONG….” is a slight overreaction!
You need to read the Forbes article - it’s by Senator Ted Kaufman and he’s discussing what Lanny Breuer said when he was stepping down as head of the Criminal Division in the Department of Justice.
Senator Kaufman goes on to state:
From my point of view, this is certainly a novel approach to prosecutorial decision-making. It is doubly puzzling because, back in 2009 and again in 2010, I chaired two Judiciary Committee Hearings on the Fraud Enforcement and Recovery Act. In extensive testimony in those hearings, and in meetings in my Senate office, Mr. Breuer never said anything like it.
Same crap in the UK with the Supinely Flawed Authority . Nobody went to jail for their banks either. Statutes of Limitations very handy as well.
Auditors who signed off accounts and accountants who put them together sail on regardless.
Moral hazard did very well out of the crisis.
Prof William Black in the US has written extensively about the nature of banking fraud and how to investigate and successfully prosecute perps. He headed the US govt investigation into the S&L scandal in the 80s, and successfully jailed many senior bank executives in spite of political opposition.
A lot of his work can be read on-line, see links at his wikipedia page.
One interesting observation he has made is that lending bubbles always involve fraud. As the bubble approaches its terminal phase, it becomes harder and harder to find credit-worthy borrowers and projects to lend to. But bank executives must keep lending to earn their bonuses and keep their customers afloat. The result is an increasing number of loans with flawed, fraudulent and missing documentation, as the loan officers basically fake their case to get the loan approved. Seek and you shall find.
I thought that was interesting given that Nama claimed it found many loans with missing or invalid documentation. I suppose it’s not a crime in Ireland.
What’s the law and order,hang them high,throw away the key crew think about this…
A fella just going about his job,prevented by a unruly mob enforcing a legal binding court order!
Shurly all laws should be enforced and obeyed,off for a slap up meal nice bottle or two vino,just gonna offer pay half the bill….
Ahh David….. He’s afraid someone is going to hold an enquiry into the bank guarantee and is practicing his self justification argument. Simple as that. I remember him bouncing around with a gaggle of politicians and the media in the Merrion Hotel the day after grinning like a Cheshire cat. He called it wrong… that’s all.
Fastforward Friday-now this is simply hysterical,no really you just have to laugh at the paddies…..everyone here is thats for sure…
“Mr Mulcahy gave a run through of Nama’s actions over the past three years. He said it had let out 12,000 apartments, which were mostly empty, in order to generate cash flow to support the loans it had assumed from the banks.
“If you put your mind to it, from Ikea, for about €8,000 or €9,000 you can fit out an apartment and you can let it in about 8½ days and we are letting all our apartments. The alternative was just to sit and look at them.” http://www.irishtimes.com/business/sectors/financial-services/nama-warns-of-problems-retaining-staff-1.1540074
Im assuming the hack here was simply blinded by the bull**it,but have a read of the article its absolute drivel….complete nonsense.
If you add in the 5,000 units in London that equates to 17,000 apartments that NAMA bought the curtains and carpets for at an avg of 10,000 a pop.In other words according to NMA,they spent 170,000,000 yep 170 MILLION on furnishings with Ikea !
Is the chap in charge an avid ABBA fan,likes mid 70’s Swedish flicks,a frustrated interior designer releasing his inner artist..or just full off it.
So there were no suitable Irish/Uk companies-just like that spent 170,000,000 at Ikea who famously pay 3% corporate taxes.
Give it a rest NAMA,complete total garbage-IT is just as bad slavishly,stupidly publishing this PR nonsense.
@francis its 3 years yes THREE years……………….NO RENT NO MORTGAGE PAYMENTS……pulled out 30,000 in equity too !
Let them default/exit and pay mid teen yields to fund lifestyles like this…link above
“They moved to Smart and borrowed an additional €30,000 to pay off business debts before slipping behind in repayments in 2010.”
@JG Flashback Friday +1, God glad I don’t have to read that anymore
@WSTT yep DmcW was in the thick of it but ’twas and is Arthur Cox moving things along: Anglo, Bank Guarantee, NAMA, Siteserv, IBRC P Note and so on. Popped this in Village a while back on AC: http://www.villagemagazine.ie/index.php/2012/04/1630/
@DOD I think that phrase may have been Michael Smith poetic licence but this was not:
”Arthur Cox’s wide-ranging conflicts of interest have attracted the spleen of a wide range of commentators including solicitor Barry Lyons and celebrity economist David McWilliams, who said, “I am not a lawyer, but if I was looking at this country’s potential and I asked myself, have they learned from the crisis, have they changed. I’d see something like a huge law firm working for both sides as a worrying sign”.
Put yourself in McWilliam’s position. This big bloke with a sad face knocks on your door at night asking for advice about how to save the country from ruin. You know he is the FinMin. Would you let him in and try and help him or would you say he should go and smother himself.
It would have been difficult for Mcwilliams to have slept easily that night as he figured the country was up to its neck in doo-dah. He did what most people would have done and invited Lenihan in.
But really, as many have hinted at, the question facing Ireland was a legal one as much as (or more than) an economic one.
Normal rules hold that when a company declares bankruptcy and the ref blows the whistle then the creditors line up for their share: Administrator, taxman, senior bondholders, employees, suppliers, etc. whatever it is.
But what does one do if the firm has not declared bankruptcy. No ref blew the whistle. and Trichet would not allow it.
So the banks were given a govt guarantee… but not declared bankrupt… so how can the bondholders be burned? I don’t think the state calling in the IMF is a declaration of bankruptcy… so what does one do in this twilight zone of no rules?
Well, we are where we are.
‘But really, as many have hinted at, the question facing Ireland was a legal one as much as (or more than) an economic one’
It was an issue which cut to the heart of sovereignty, and was therefore a constitutional one. The problem was mis-framed as one of liquidity, as a realistic formulation would have indicted a whole generation of ministers, senior civil servants, and top bankers. Can’t happen. Mustn’t happen. Didn’t happen.
‘In 1980, during an appeal by the Birmingham Six (who were later acquitted) Lord Denning judged that the men should be stopped from challenging legal decisions. He listed several reasons for not allowing their appeal:
‘Just consider the course of events if their action were to proceed to trial … If the six men failed it would mean that much time and money and worry would have been expended by many people to no good purpose. If they won, it would mean that the police were guilty of perjury; that they were guilty of violence and threats; that the confessions were involuntary and improperly admitted in evidence; and that the convictions were erroneous. … That was such an appalling vista that every sensible person would say, “It cannot be right that these actions should go any further.’
The bank guarantee was given by Right Thinking Folk. Five years down the road, we are still ‘planning’ to investigate the debacle properly. Like the Cabinet papers, there will be a thirty year hiatus, to let the stink die down. Meanwhile the various clans and golden circles concentrate on securing what they have extracted from the businesses and institutions which they were supposed to serve.
Notwithstanding the fact that the various parts of the state apparatus continue to function, the Republic of Ireland is crippled. The state cannot be reformed, for lack of political will and political capacity. The banks cannot be restored to health, because the steps necessary to do so would be economically deflationary and politically divisive. All we can do, IMHO, is await events.
“Notwithstanding the fact that the various parts of the state apparatus continue to function, the Republic of Ireland is crippled.”
You wouldn’t think that if you’re out and about in Ireland. All I see are signs of a still prosperous country in the shops, at sports events, pubs and restaurants in Dublin, and in the food courts of shopping centres to name just a few. In my travels around Ireland and in my daily life I see no signs of distress or poverty. Social workers tell me that such poverty that does exist is entirely caused by alcoholism, drug use, psychological problems or other. Social welfare benefits and supports are still generous by international standards and there is no reason for anyone to go hungry. Of course, this can’t be said among ‘right thinking people’ but it is my experience.
My perception of Mr. McWilliams pieces/expressed views/pronouncements/stage appearances since the beginning of this crisis - it really began in 2002 - is of consistency in his(correct) views of a wildly over heated property market but great inconsistencies in his suggested remedies and future structures for the economy in general and banking in particular?
‘On the one hand - on the other hand’……but then he is an ‘economist’….