Government guarantees all deposits in Irish banks

[Duke of Marmalade]

To use an analogy, what do you do with some-one who you suspect is deep in negative equity with their home and who is struggling to keep up with their mortgage payments who for some reason you cannot allow to go bankrupt? About the worst thing you could do would be to guarantee their liabilities unconditionaly allowing them to rack up extra loans and put new TVs and holidays on their credit-card.

Darag, I think you lost your way with this analogy. The correct analogy is that the bank are demanding back the mortgage. Maybe there is negative equity, maybe not. The value of the house is somewhat irrelevant as the person may be struggling but is fully confident of paying pack the mortgage over time.

As the parent of this person you have no problem telling the bank to back off and that you will guarantee the mortgage. The alternative is to see your son and grandchildren thrown out on the street. Chances are the guarantee will cost you nothing, bit of a no brainer to me. Of course you make absolutely sure your son does not abuse this lifeline, so let us see what terms and conditions the government sets.

 

[tiger]

As the parent of this person you have no problem telling the bank to back off and that you will guarantee the mortgage. The alternative is to see your son and grandchildren thrown out on the street. Chances are the guarantee will cost you nothing, bit of a no brainer to me. Of course you make absolutely sure your son does not abuse this lifeline, so let us see what terms and conditions the government sets.

I agree with this analogy, the parent doesn't want to see the son thrown out on to the street. As you've said there needs to be some tough love with this as well, the son needs to look at their lifestyle, cut back on the hols, sell the flash car, stop eating out all the time. At the moment I don't see any tough love being shown to the Irish banks.

 

[tiger]

Also, the assumption is that we're fully confident the son can pay back the mortgage. I don't believe this to be the case, at least not for all 6 "sons".

 

[Flax]

Maybe I'm dumb, but why do the banks desperately need to start lending again? Don't they already make a profit on the massive amount of interest they currently collect?

 

[Sunny]

Maybe I'm dumb, but why do the banks desperately need to start lending again? Don't they already make a profit on the massive amount of interest they currently collect?

They need to start borrowing again. Thats the problem

 

[Flax]

They need to start borrowing again. Thats the problem

OK, but I assume that's borrowing so they can lend more money? If so, I do not understand how their business model doesn't support the idea of making money off their current loans.

 

[Sunny]

OK, but I assume that's borrowing so they can lend more money? If so, I do not understand how their business model doesn't support the idea of making money off their current loans.

They have to borrow to continue to fund their existing business never mind future lending. Banks fund their loan books and general business in different ways. Customer Deposits, interbank funding, bonds etc. These all have different maturities and have to paid back. To do so, they need to borrow. Every bank has day to day funding needs and has to have access to money and capital markets. In Ireland's case they didn't, hence the liquidity crisis

 

[markowitzman]

http://www.cnbc.com/id/26986243

 

[Compass]

I think doing the figures is important - I don't have enough information but here is my attempt ..... After doing those figures, I am not as worried about the system wide guarantee - It seems clear that the banks assets and liabilities are ok.

Is there not a wee problem here?
Does anyone really know to what extent the taxpayer is exposed - do the banks themselves know?
Have they been 'upfront and honest' to the Irish public and our politicians?
To the ordinary person this really looks like we are 'buying a pig in a poke'. It might work but it might not .. someway to run a country. A gamble, part of life, but is that not also part of the reason why this crisis arose in the first place. Doubles or quits!!

 

[Brownie10]

Heard a rumour that Ulster bank, NIB and Postbank are applying? Anybody else hear this?

 

[iPoker]

But when the developer can not repay the loan to the bank, if the bank can't repay the loan to the other bank, You and Me will be repaying the loan.

I think doing the figures is important - I don't have enough information but here is my attempt

Irish times quote
"The NTMA had calculated that the liabilities of the six banks amounted to €440 billion while their assets came to €520 billion. Expanding the scheme to cover foreign-owned banks would have an impact on the calculations and would only be taken after serious consideration, the Minister said.
"

520 Billion of assets
lets assume 90% of assets is is loan book = 468B loan book
70% of loan book is property ref post earlier in this thread = 326B Loans tied to property

To erase the 80B more assets than liability, 50% of these loans must turn bad, and the underlying properties on the bad loans would only have to sell for 50% of their value.

Even assuming the bank asset values are based on 2006, Regardless of how bad it gets it is hard to imagine this case - Remember also a good percentage of their loan book will still be in positive equity, being made pre 2005. so it seems they have more assets than liabilities and a cushion.

After doing those figures, I am not as worried about the system wide guarantee - It seems clear that the banks assets and liabilities are ok.

But, we might still get hit having to pay out on one bank, I don't have figures for each bank to take a look at each bank, and see what it might cost us.

Makes sense....

also, is it not the case that a significant portion of AIB's liabilities are owed to BOI, and vice versa, and similar permutations for the other 4 groupings? As such, while GROSS liabilities may be €440 b, the use of this figure is kind of an irrelevance (if I'm right that balances exist between the groupings)...obviously assets would also be grossed up in this situation.

Overall, I find the reporting of this story in the media ridiculous. There is no relevance to this €440 b figure. It is a scare tactic. It means absolutely nothing.

As for the potential widening to subs of UK banks, on face value, yes, I don't see why Irish regulated entities (even if subsids) should not be given equal treatment, HOWEVER, I (and presumably most other taxpayers) are concerned that this could be abused by UK parent companies whereby they USE the benefit of the guarantee to access cheaper funding for their entire UK operations at our expense, and (more dramatically) and T-1 to filing for bankruptcy, transfer all assets out of the Irish entity, leaving the Irish entity (and consequently the Irish taxpayer) lumbered with the full value of their gross obligations. WHY AREN'T THE BBA LOBBYING THE UK GOVERNMENT FOR A SIMILAR GUARANTEE, RATHER THAN COMPLAINING TO US POOR IRISH!!

 

[Dinarius]

WHY AREN'T THE BBA LOBBYING THE UK GOVERNMENT FOR A SIMILAR GUARANTEE, RATHER THAN COMPLAINING TO US POOR IRISH!!

Because, as has already been pointed out by some British commentators, the equivalent figure for London would be truly astronomical.

D.

 

[Sunny]

Latest rumours are that more European Countries are looking to follow in the absence of anything else. To be fair to Lenihan, he is taking alot of stick from the British and some Europeans but I have yet to hear of one feasible alternative from any source. The UK are not exactly a shining example of how to deal with a crisis after the Northern Rock debacle.

 

[iPoker]

Because, as has already been pointed out by some British commentators, the equivalent figure for London would be truly astronomical.

D.

relatively?

Irish GDP is about 140b, this guarantee over GROSS liabilities of 440b
UK GDP is about STG£1trillion, potential guarantee has been estimated at STG£1.1 trillion
??

seems less atronomical for them, relatively

 

[Dinarius]

Well, it looks like an astronomical sum to me! ;-)

Though I admit that, given its size relative to GDP, the risk does appear smaller on the surface.

I forgot to mention that another barrier to a similar scheme in the UK would be the sheer number of institutions - potentially dozens, if not 100+.

Lenihan is talking about putting in people to watch over our risk in the six named so far. To do the same thing in the UK would be a bureaucratic nightmare.

They know this and this is partly why they're up in arms about our move. I presume that France and Germany would have similar problems of scale, if they felt the need to act.

D.

 

[Duke of Marmalade]

Professor Morgan Kelly (you know the guy that makes George Lee sound positive) writes as follows in today's IT:

Banks will package toxic loans as asset-backed securities and sell them off with a Government guarantee, passing on their losses to the Irish taxpayer.

He has to have that wrong. There is no way that the XYZ Bank will be allowed to dump all its toxic waste on the Irish taxpayer and continue with the rest of its profitable business. I presume the Irish taxpayer will only step in when XYZ Bank is unable to honour any guarantees on such packaging i.e. when it is insolvent or when all other avenues (mergers etc.) have failed.

Why does the good professor wish to grossly mislead like that?

 

[darag]

Darag, I think you lost your way with this analogy. The correct analogy is that the bank are demanding back the mortgage. Maybe there is negative equity, maybe not. The value of the house is somewhat irrelevant as the person may be struggling but is fully confident of paying pack the mortgage over time.

No it's not the correct analogy. The 100K depositor's guarantee stopped the flight of deposit money. The problem isn't that the (two) dodgy banks are being hounded to hand back what they've borrowed; it's because no-one will lend them a penny more more because of a justifiable fear that it cannot be paid back.

The correct analogy is that the son has remortgaged to the hilt using the equity in house (and is now in a negative equity position) and has maxed his current account overdraft and his credit cards and now finds that nobody - even the door-to-door money lender - will lend him any more.

But he needs to borrow even more just to keep going. Unless he has a huge promotion and pay rise coming up in work or the value of his house suddenly rockets or he wins the lotto, his situation is doomed and going guarantor to allow him to borrow more just to keep ticking over for a few more months or even years is the last thing a responsible parent would do. Do that just defers dealing with the underlying issue and in fact the problem will be much worse when you eventually do have to face the music and you have now endangered your own financial security.

Unfortunately, sorting a situation like this demands your son will lose the house but them's the breaks. He'll have learned a lesson as he goes back to a frugal lifestyle renting a bedsit; you'll be burdened with his debts but at least the two of you will have dealt with the problem face on before it had spiralled out of control threatening to take you down with him. At least he can look to his sister for inspiration who, in contrast, put money aside during the good times, borrowed only what she could afford to pay back and while things are tough at the moment her house is safe.

The problem with (at least one of) the banks is so simple: they owe more than they own and in fact it's gotten so bad they need to borrow even more just to survive. Other banks and financial institutions know this and were refusing to lend to them. As a result they were about to go belly up. And that's all there is to it; a child could understand it. Everything else is just obfuscation.

This cowardly stupid scheme just defers the inevitable and makes the inevitable sh*t sandwich even bigger. And worse it endangers the finances of entire country.

 

[darag]

Is there not a wee problem here?
Does anyone really know to what extent the taxpayer is exposed - do the banks themselves know?
Have they been 'upfront and honest' to the Irish public and our politicians?
To the ordinary person this really looks like we are 'buying a pig in a poke'. It might work but it might not .. someway to run a country. A gamble, part of life, but is that not also part of the reason why this crisis arose in the first place. Doubles or quits!!

I couldn't have put it better myself, Compass.

Where are the figures in this debate? The 400B figure is absolutely useless.

I remember being shocked but impressed at the start of the year when UBS took the hit on their balance sheet by writing it down 20B. This was after writing off 9B or something a few months earlier. Has any Irish bank even attempted to be as straightforward and honest about their position?

Would it be too much to ask to be told how much each bank owes and how much they own? And could we have a breakdown of the latter figure by type please and when it was valued?

I doubt we will be told as I expect the truth will make the correct course of action too obvious which is to fold the one or two dogs and shore up the capital base of the others by taking equity.

 

[darag]

Professor Morgan Kelly (you know the guy that makes George Lee sound positive) writes as follows in today's IT:


He has to have that wrong. There is no way that the XYZ Bank will be allowed to dump all its toxic waste on the Irish taxpayer and continue with the rest of its profitable business. I presume the Irish taxpayer will only step in when XYZ Bank is unable to honour any guarantees on such packaging i.e. when it is insolvent or when all other avenues (mergers etc.) have failed.

Why does the good professor wish to grossly mislead like that?

What are you about? At best we are looking at getting a member representing the government on the board. I didn't hear anything about the government taking any sort of executive role. And even if it wanted to where is the expertise going to come from to supervise every money market and bond market deal of six banks? Not to mention that most of these deals aren't even done in public markets and don't have standarised contracts. How the hell is the government going to vet every bond every bank sells? Are they going to hire an army of high-end financial legal people to examine the small print of every deal? There is absolutely nothing in the legislation that I know of that provides this sort of micro control to the government. It's the very first thing I'd do if I was a bank exec; i.e. get these rotten loans off my books at the expense of the Irish taxpayer.

 

[darag]

It didn't take them long:

If they can come up with a retail product like this within days, I can't wait to see what schemes those clever bankers will come up to convert the govnerment guarantee into free money.