Ponzi Nation

Ponzi scheme; a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned.

Ireland has been run and then ruined by a succession of what can only be described as Ponzi Schemes and the biggest of them is still running.
For at least ten years our government, our banks, our property developers and our unions have all been aware of this and have all actively and knowingly participated in them.

Here’s a few examples;
1) Building/banking. Developers borrowed to buy land. The value of the land was determined not by any real commercial value but by the amount they could borrow. The banks then underwrote their commercial banking risk by giving out private mortgages in order to recover their initial loan from the developer. The income multiples allowed by the banks were staggering. Since the whole transaction only made sense when the next phase of the build/ next development started it was fundamentally unsustainable.
2) Public sector pay. Pay increases were given based on tax receipts that were swollen by the property bubble so commitments were given for long term current expenditure based on short term capital tax receipts; the pay rises were only sustainable as long as the government maintained the property bubble using tax breaks for builders and Stamp Duty exemptions for buyers.
3) Public sector pensions. This is the ultimate Ponzi Scheme. Current pension requirements are funded using levies and taxes on current employees. The guys going out can only get paid as long as there are guys coming in. The real reason for the public sector pension levy is because of the public sector pension bill. Since there was no actual pay cut the cost of pensions is now proportionately greater. In short public sector employees are getting screwed to pay for their retired colleges and since the ratio of working to retired is going to get significantly worse over the next 10-20 years the chances are that they will get significantly more screwed as time goes on.

Bang on the nail.

And do you notice how no-one talks about where the money has gone?

Say I lent Person A €500 million for "development". I now have to take the 50% haircut so have lost €250 million.

I transfer that loss to the taxpayer. Nationalise it!

But no one mentions that someone somewhere has received that €500 million.
It has not disappeared.

And then you hear Pat Carey on the radio today describing AIB as a reputable bank. Must be some other AIB that was not involved in scandal after scandal.

If you compare our situation to Iceland, it says a lot.

In Iceland the bankers and government ministers have left their positions and are now facing criminal charges. None of our lot have anything of the sort to fear, (not even Seanie Fitz whom the rest are trying to paint as the bogieman to save their own skins).

Soy - it'll never happen here - we've put up with TD's, FAS, Fingers etc doing what they like when they like, nothing happened - except they left with golden handshakes & I can't see anything happening to them. We've taken tax hikes (no matter what the gov call them they are taxes), increases in carbon tax (for the future "greening" of our power needs), cutbacks in teaching, nursing etc. We as a people have done nothing about it. Complaining about the government is seen as being "unpatriotic". Our young people & older people are planning to leave the country (a Canadian visa company had a seminar in Cork the other night there & they had a massive crowd). I'm despairing at the moment & don't know what the future holds for all of us - I'm not usually so pessimistic.

soy said:

If you compare our situation to Iceland, it says a lot.

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Plus they have cheaper access to international funds, this is capitalism

Brian Lenihan has said:

..... there were no plans to impose losses on holders of senior debt in through legislative measures.

This is not capitalism.

Romulan. Exacly what I was thinking, I know nothing about finance, but if some one borrowed money, where is it now?

Romulan said:

And do you notice how no-one talks about where the money has gone?

Say I lent Person A €500 million for "development". I now have to take the 50% haircut so have lost €250 million.

I transfer that loss to the taxpayer. Nationalise it!

But no one mentions that someone somewhere has received that €500 million.
It has not disappeared.

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The land sellers and building contractors got it.

Sean Coulson / South Wharf / Dublin port sold the Glass bottle site.

JurysDoyle sold the hotels in Ballsbridge to Sean Dunne.

Many farmers made millions from land sales to the NRA for our motorways. The Ennis bypass alone cost 37m in land alone.

And on, and on, and on.

Fascinating point on where the money has gone - must have gone somewhere. Farmers, Doyles etc. yes, but a lot went abroad since our banking sector has huge international indebtedness. Whether that money gone abroad is matched by foreign assets (holiday homes, shares etc.) it is hard to tell. I would like to see more evidence that the people who lost the money are being pursued to the ends of the earth and haven't used all sorts of dodges like giving assets to their mistresses and then claiming they are broke.

Purple, the NPRF will pay for the public services pensions after its investments in banks comes good.

derkaiser said:

there were no plans to impose losses on holders of senior debt in through legislative measures.

This is not capitalism.

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Don't follow you. Capitalism relies on a set of rules - like shareholders can't lose more than their investment, bondholders have a right to sue if not paid etc. A change of law, euphemistically known as a Resolution Scheme, is changing the rules of capitalism retrospectively. You can see that if the rules can be changed at the drop of a hat people will be reluctant to play the game in the future.

They are going to change the rules for Anglo's subbies but not its seniors. That is a fine judgment of what you can just about get away with and have (foreign) punters still prepared to play the game.

Duke of Marmalade said:

Purple, the NPRF will pay for the public services pensions after its investments in banks comes good.

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LOL, yes, what was I thinking!

roker said:

Romulan. Exacly what I was thinking, I know nothing about finance, but if some one borrowed money, where is it now?

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First it went to landowners. Some of them invested it in banks and lost most/all of their money. Others put it on deposit which was used by banks to make loans for houses, holidays, TVs. Basically, the majority of the money will have found its way into either assets that have fallen in value, or consumables that always fall in value to zero. There are very few people who put their money into non-consumable assets that have increased in value. And some of it went abroad on foreign "investments" in some resorts in the next guaranteed property boom in Bulgaria.

Duke of Marmalade said:

Purple, the NPRF will pay for the public services pensions after its investments in banks comes good.

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HAHAHAHAHAAHHAHA

Duke of Marmalade said:

Don't follow you. Capitalism relies on a set of rules - like shareholders can't lose more than their investment, bondholders have a right to sue if not paid etc. A change of law, euphemistically known as a Resolution Scheme, is changing the rules of capitalism retrospectively. You can see that if the rules can be changed at the drop of a hat people will be reluctant to play the game in the future.

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I actually took the point DerKaiser was making to indicate that investors, i.e. bond holders were not allowed to take a loss on their investment. The fact that the government stepped in to bail out bond holders was not playing by the rules of free market capitalism.
I agree that changing rules in retrospect should not and cannot be allowed, but there was never a rule that said bond holders would be bailed out, only a precedence that this would happen.

Purple said:

3) Public sector pensions. This is the ultimate Ponzi Scheme. Current pension requirements are funded using levies and taxes on current employees. The guys going out can only get paid as long as there are guys coming in. The real reason for the public sector pension levy is because of the public sector pension bill. Since there was no actual pay cut the cost of pensions is now proportionately greater. In short public sector employees are getting screwed to pay for their retired colleges and since the ratio of working to retired is going to get significantly worse over the next 10-20 years the chances are that they will get significantly more screwed as time goes on.

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Actually it's not just public sector pensions, but state pensions and all social welfare benefits that are run as a pay as you go, i.e. ponzi scheme. I fully agree with calling all these state payment programs ponzi schemes. And the government actually has the neck to differentiate the state pension as "contributory" and "non-contributory". I am paying for pensioners of present, not for my own pension. And if the next one or two generations pull the wool from over their eyes and see what has been repeatedly done for decades, they may well say enough is enough, and I wouldn't blame them. Which is why my retirement plans are not based on receiving any state pension; better safe than sorry.

Purple said:

The real reason for the public sector pension levy is because of the public sector pension bill. Since there was no actual pay cut the cost of pensions is now proportionately greater. In short public sector employees are getting screwed to pay for their retired colleges and since the ratio of working to retired is going to get significantly worse over the next 10-20 years the chances are that they will get significantly more screwed as time goes on.

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+1.
The pension levy was a fudge and the fact that PS pensions were not cut in line with PS pay makes a mockery that this government 'make the difficult decisions'.

Chris said:

I actually took the point DerKaiser was making to indicate that investors, i.e. bond holders were not allowed to take a loss on their investment. The fact that the government stepped in to bail out bond holders was not playing by the rules of free market capitalism.

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That is a different point. I agree that there has been government intervention. The primary purpose of this intervention was not to bail out bondholders. It was not even to preserve Ireland's credit rating. It was to prevent a collapse of the banking system which would have torpedoed us back to the Stone Age and not merely to the early nineties.

If it was legally possible to keep Anglo alive and default on bondholders then the government would have jumped at it, notwithstanding the damage to credibility. But the bondholders' nuclear button was always that if they are defaulted upon they can sue and push the bank into bankruptcy and Ireland back to the Stone Age.

DerKaiser's point should in fact be made in reverse as follows: "If the government has already intervened why doesn't it intervene again by changing our laws retrospectively?" It is a credible question and the judgement has clearly been that for the few billion that would be ostensibly recouped from Anglo seniors, the damage to credibility and creditability would be inestimable.

Duke of Marmalade said:

But the bondholders' nuclear button was always that if they are defaulted upon they can sue and push the bank into bankruptcy and Ireland back to the Stone Age.

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How does one bank going bust push Ireland back kto the Stone Age?

Complainer said:

How does one bank going bust push Ireland back to the Stone Age?

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70bn (assuming Anglo) of assets on firesale. Property and other asset values collapse. Other banks assets lose value collaterally and besides Anglo owes them money, so all banks collapse. No money transmission. No credit. Deposits worseless.

After you have used up the stuff in the freezer, and remember the electricity is probably cut off by this stage, its back to hunting for rabbits and collecting berries.

If landowners etc got the bulk of the money, it would be back in to the banking system in their name. On a point of private pensions, my annuity is not guaranteed if the company which holds it colapses

Duke of Marmalade said:

70bn (assuming Anglo) of assets on firesale. Property and other asset values collapse. Other banks assets lose value collaterally and besides Anglo owes them money, so all banks collapse. No money transmission. No credit. Deposits worseless.

After you have used up the stuff in the freezer, and remember the electricity is probably cut off by this stage, its back to hunting for rabbits and collecting berries.

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I think you are exaggerating the consequences of a bank failure and buying too much into the spin put on this by politicians the world over. When a company is forced into liquidation it doesn't automatically result in a firesale of assets.
I'm not saying that there would have been no bad side effects of banks going bust. But bankruptcy proceedings do not result in the the companies evaporating into thin air. What happens is that their viable businesses, like day to day money transactions for individuals, would be sold off to a new or existing company. This happens all the time with companies of various sizes, and there is no evidence that a large scale bank failure would result in a total collapse of the the banking system.

Duke of Marmalade said:

70bn (assuming Anglo) of assets on firesale. Property and other asset values collapse. Other banks assets lose value collaterally and besides Anglo owes them money, so all banks collapse. No money transmission. No credit. Deposits worseless.

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Chris said:

I think you are exaggerating the consequences of a bank failure and buying too much into the spin put on this by politicians the world over. When a company is forced into liquidation it doesn't automatically result in a firesale of assets.
I'm not saying that there would have been no bad side effects of banks going bust. But bankruptcy proceedings do not result in the the companies evaporating into thin air. What happens is that their viable businesses, like day to day money transactions for individuals, would be sold off to a new or existing company. This happens all the time with companies of various sizes, and there is no evidence that a large scale bank failure would result in a total collapse of the the banking system.

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One of the strange things about our current financial mess is that occasionally, those on the edges of the right and left find themselves in agreement. I'm with Chris on this. The consequences outlined by the Duke are exaggerated. Let's go one step deeper on the analysis.

1) The €70b assets are not all in Ireland. Anglo was heavily involved in the UK and Europe. I don't know what this split is, but it definitely wasn't €70b in Ireland. So the impact would be considerably smaller.
2) As the Duke says, there is no automatic firesale. The Govt could fairly easily and quickly have created a mini-NAMA to take over the Anglo assets and manage them out, to avoid a firesale.
3) Whatever remaining impact there might be on property prices will have an upside. Businesses are collapsing daily due to rent costs. Hard-working young couples are still finding it very difficult to get their first house in the current market. Property prices need to drop further. This will cause problems for those in or near negative equity, so we need some kind of solution there.

Just for the record, the deposit guarantee of €100k per person was already in place, so the only benefit of the broader guarantee for Anglo was for those holding more than €100k.

Complainer said:

Just for the record, the deposit guarantee of €100k per person was already in place, so the only benefit of the broader guarantee for Anglo was for those holding more than €100k.

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Having a guarantee in place is one thing, actually delivering on it is another. That would have resulted in 70bn being provided by the government immediately.

Firefly said:

Having a guarantee in place is one thing, actually delivering on it is another. That would have resulted in 70bn being provided by the government immediately.

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Have you taken the €100k per person limit into account in your calculation?

Complainer said:

Have you taken the €100k per person limit into account in your calculation?

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No - but does anyone know how much of the 70BN is made up of deposits > 100K? Even so..there would be a run on the banks - anyone with deposits even less than 100k would withdraw as they would fear that (a) the government wouldn't be able to guarantee their deplosits or (b) that the 100k would be reduced.