# Why we can't let the banks go bust



## DerKaiser (6 Aug 2009)

This was an alternative proposal on another thread (off topic) as to how the govt should deal with our banking problems


_What about this option: _
_don't renew the bank guarantee scheme in September 2010. _
_allow the banks to go bust if necessary _
_watch the shareholders getting burnt _
_watch the uninsured bondholders getting burnt _
_watch the cds writers getting burnt on covered bonds _
_payout deposit insurance for small depositors _
_allow large depositors to get pence in the pound for their deposits past 100k _
_everyone banks in future with NIB, Ulsterbank, Rabobank, Halifax etc _
_In this scenario, the state doesn't have to pay for the banks' mistakes beyond the agreed deposit insurance scheme._

_Nobody loses who wasn't gambling themselves._

_In the NAMA scenario every tax payer compensates the bondholders, shareholders and large depositors of the banks that were themselves limited companies. Now what about the taxpayer who simply wasn't involved. The man who didn't borrow money to bet on property, the man who didn't have 500k on deposit when only 18K was insured, the man who didn't invest in high yield bank shares, the man who didn't buy bonds from these crappy institutions - what about him? _

_I am sure I am missing something here. What is it?_

I think there are many valid arguements here, the ones I have a problem with are as follows:


Many ordinary people have more than €100k on deposit. Older people, for example, may have saved all their lives and plan to live off this money. It shouldn't be seen as a gamble to keep your life savings in a bank
It has been shown that AIB and BOI are the only banks maintaining any flow of liquidity in this country. We cannot depend on foreign banks to supply us with credit, it is too big a risk
Other than that I think the point of bondholders and shareholders sustaining maximum losses possible is valid. If anything the international markets believe bondholders in Irish banks should be taking bigger hits.

Can we save the banks, maintain deposits but hit the sharholders and debtholders to the maximum extent?


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## Sunny (6 Aug 2009)

Shareholders and deeply subordinated debt holders have already been hit pretty hard. Targeting senior debt holders is more difficult because as senior unsecured creditors, they rank pari passu with depositors. Also, you would be shutting the banks out of the capital markets so where would they get future funding? Not to mention the knock on effect on Irish Government borrowing. 
I don't understand what 'uninsured debt holders' are or what Credit Default Swaps on covered bonds have to do with anything.

The simple fact is that BOI and AIB are too big to fail. People really need to start accepting that. They might not like it but it is a fact of life. The other banks, we can argue about.


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## Mpsox (6 Aug 2009)

5 things spring to mind immediatly

1: Thousands of people (bank staff) would lose their jobs which is a significant cost to the state in terms of social welfare payments and lost taxes

2: Pension funds and investment funds would take a big hit over the write down of the value of their shareholding in the banks in question

3: None of the foreign owned banks have either the interest in lending or funds available to do so to the scale required to replace the big 2 banks. NIB are closing branches, BOSI contemplating pulling out, Ulster Bank seems to have stopped mortgage lending and is closing First Active, 

4; They'd be a run of funds out of the country if it was thought this was going to happen

5; Ordinary depositers with funds in excess of €100k would be punished for playing it safe and not "gambling" with their money in investements instead of simply putting it in the bank.


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## michaelm (6 Aug 2009)

My understanding of the whole banking drama is fleeting (maybe naive).  I would have thought that the banks of systemic importance were BOI and AIB and that the rest should be left to their fate.  We seem to be borrowing money that the taxpayer will have to repay and pumping it into theses banks but we have little control over said banks.  Also nationalising the banks exposes the taxpayer to a big downside.  

Can someone tell why we couldn't have bought AIB and BOI when the shares were on the floor (for less than we recapitalised them with, I think) and had full control over the banks but had our liability limited to the cost of those shares?


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## steviel (6 Aug 2009)

michaelm said:


> My understanding of the whole banking drama is fleeting (maybe naive).  I would have thought that the banks of systemic importance were BOI and AIB and that the rest should be left to their fate.  We seem to be borrowing money that the taxpayer will have to repay and pumping it into theses banks but we have little control over said banks.  Also nationalising the banks exposes the taxpayer to a big downside.
> 
> Can someone tell why we couldn't have bought AIB and BOI when the shares were on the floor (for less than we recapitalised them with, I think) and had full control over the banks but had our liability limited to the cost of those shares?



you are right that BOI and AIB are the only banks that we need to support the economy in the future.  But if the others (Anglo, Irish Nationwide, IL&P) were let go, it would have been disastrous, as evidenced by the current ACC / Liam Carroll situation.  Take Anglo, for example.  If it failed, and a liquidator or examiner took over, they would have chased for repayment of tens of billions of euros of impaired loans through the courts, bringing down all the cross collateralised or otherwise linked companies of the big developers banked by AIB and BOI, in the same way as the ACC action is a threat to the orderly workout of the Carroll loans through NAMA.  Commercial real estate prices would crash even further through the floor than they would otherwise do, AIB and BOI would fail outright and have to be fully nationalised, with larger losses (which have to be met by the taxpayer) and a bigger fallout to the economy.

Make no mistake, Anglo etc are not going concerns, and are not being run as such.  The current situation just allows them to be wound down in an orderly way, minimising the wider impact.  The 'short, sharp shock' of letting the banks fail, as advocated by some (including surprisingly naive professors at Trinity and UCD) would have been the biggest gamble imaginable, and there is no doubt in my mind that the IMF would now be running the country had this happened.


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## TarfHead (6 Aug 2009)

steviel said:


> .. including surprisingly naive professors at Trinity and UCD


 
[Rant]
There is one of those individuals who makes me shout at the radio/TV whenever he pops up. He looks as if he only recently started shaving, yet pontificates about banks like he has a wealth of experience and wisdom. I never heard of him in the media until things started going south last year, and now he's never off it - a rent-a-quote numty.

"Those who can, do, Those who cannot, _get a job as a XXXXXXXX of XXXXXX in xCD_"
[/Rant]


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## Brendan Burgess (6 Aug 2009)

Hi TarfHead

I don't think that you are being fair 

He has been quoted in the media as far back as February 2006.

[broken link removed]


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## TarfHead (6 Aug 2009)

Brendan said:


> Hi TarfHead
> 
> I don't think that you are being fair
> 
> ...



My bad - he evidently does has a track record of prescience  !

Good spot Brendan - and there was me thinking I was being sufficiently vague about the subject of my rant


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## PaulHoughton (7 Aug 2009)

OK, thanks DerKaiser for opening this thread to discuss the question of why the mistakes of some privately owned limited companies must be redeemed by forcing every tax-paying Irish citizen to pay hugely increased taxes for greatly reduced public services for the foreseeable future. The alternative that I propose is that Irish banks should be allowed to fail because they are limited companies and anyone who lent them money had a chance to take that into account.

Just to remind ourselves of the scale of the exposure we are opening ourselves up to by sustaining these failed companies: the bank guarantee scheme is for 440 billion - 13 times annual tax revenue and clearly more than the state could ever hope to pay. The  for Irish bank losses by the end of next year alone is €35 billion. 

Let's see what we have...



DerKaiser said:


> I think there are many valid arguements here [..against allowing irish banks to fail...], the ones I have a problem with are as follows:
> 
> 
> Many ordinary people have more than €100k on deposit. Older people, for example, may have saved all their lives and plan to live off this money. It shouldn't be seen as a gamble to keep your life savings in a bank


When they placed their money in the bank only the first 20K was guaranteed by the state. They are doing very well to get 100K back (200K for a joint account).  Everyone knows that AIB and BoI are limited companies with the chance of failure and the possibility that they will not be able to repay their lenders.

Placing money with a bank does incur a small risk in the same way that crossing the road incurs a small risk.



			
				DerKaiser said:
			
		

> It has been shown that AIB and BOI are the only banks maintaining any flow of liquidity in this country. We cannot depend on foreign banks to supply us with credit, it is too big a risk


Do you have a source for this? It has been suggested that most of AIB and BoI's stated new lending is in fact rollup lending and making new loans to cover loans that are due by borrowers likely to be bought out by NAMA. 

Lending money is not an act of charity or patriotic duty, it is a business decision taken in self interest. Usury is not performed for the benefit of the borrower. Companies will lend to Irish customers if those customers are judged likely by the market to repay those loans with interest. There is a competitive international market for lending and if AIB and BoI stop lending to the Irish then Irish people will become willing to pay increasing amounts of interest to borrow and someone else will start to lend. 



			
				DerKaiser said:
			
		

> Can we save the banks, maintain deposits but hit the sharholders and debtholders to the maximum extent?


Shareholders are paid only after bondholders but, according to Sunny below, senior bondholders and depositors share losses equally.



Sunny said:


> Shareholders and deeply subordinated debt holders have already been hit pretty hard. Targeting senior debt holders is more difficult because as senior unsecured creditors, they rank pari passu with depositors. Also, you would be shutting the banks out of the capital markets so where would they get future funding?


The scenario we are discussing is one where insolvent banks are allowed to fail. Insolvent banks don't need future funding as they are dead. 



			
				Sunny said:
			
		

> Not to mention the knock on effect on Irish Government borrowing.


Is there a knock-on effect? is there not a difference between sovereign debt and limited company debt? Would you be more willing to lend to an Irish government that has guaranteed 440 billion euro of borrowings or an Irish government with the sense to allow limited companies to fail?



> I don't understand what 'uninsured debt holders' are or what Credit Default Swaps on covered bonds have to do with anything.


In my simplistic understanding of bonds, there are some people who buy bonds and choose to insure them by purchasing credit default swaps at the same time. These are insured debt holders. They face no loss if the issuing institution defaults. They are repaid by the organisation that wrote the swaps. Is that right?

When I said covered bonds I meant bonds insured by CDSs. 'Covered bonds' is the wrong term.



> The simple fact is that BOI and AIB are too big to fail. People really need to start accepting that. They might not like it but it is a fact of life. The other banks, we can argue about.


'Too big to fail' is a loaded phrase that implies that such a thing exists. In competitive markets, companies fail when they make stupid decisions in their allocation of resources. In this way their more efficient competitors are rewarded. The winner is the consumer. I am sick of hearing about the lack of credit available to Irish SMEs when I have spent the last 15 years competing against companies using endless credit as a substitute for profits.
What if AIB fails, in a short time, their branch network would be sold to someone less accident-prone, the signs would change to Santander or HSBC, the mortgage would be sold on. Same sh*t, different day from the consumer's point of view.



Mpsox said:


> 5 things spring to mind immediatly
> 
> 1: Thousands of people (bank staff) would lose their jobs which is a significant cost to the state in terms of social welfare payments and lost taxes


Is it worth turning the populace to debt slavery and risking the solvency of the entire state for the sake of these employees? Company failure and consequent job losses are part of the natural order of free market capitalism. Attempting to preserve failing companies is unfair to competitors and sustains the inefficient allocation of resources that caused the failure in the first place.



			
				Mpsox said:
			
		

> 2: Pension funds and investment funds would take a big hit over the write down of the value of their shareholding in the banks in question


Bank shares are already down 90-95% so there's not much further to go. The failure of a couple of stock market companies should not impact on a properly diversified investment fund.



			
				Mpsox said:
			
		

> 3: None of the foreign owned banks have either the interest in lending or funds available to do so to the scale required to replace the big 2 banks. NIB are closing branches, BOSI contemplating pulling out, Ulster Bank seems to have stopped mortgage lending and is closing First Active,


I understand the foreign owned banks lack of appetite for competing in the Irish market as the Irish government appears willing to do anything to bailout their failing competitors. How would you feel if you were NIB in the face of such a policy?



			
				Mpsox said:
			
		

> 4; They'd be a run of funds out of the country if it was thought this was going to happen


Is money on deposit in AIB or BoI really in Ireland? And if it is, does society benefit as a result? AIB and BoI are owned by international shareholders and institutions. Having loads of money on deposit in the past led to them making stupid lending decisions. Perhaps we would all have been better off if they'd had less money to lend?



> 5; Ordinary depositers with funds in excess of €100k would be punished for playing it safe and not "gambling" with their money in investements instead of simply putting it in the bank.


I've answered this previously above. 100K is not a pittance to be left with. The state guarantees an income for the old. Caveat emptor. The alternative punishes the poor and the innocent, the uninvolved, the people with no assets.


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## DerKaiser (7 Aug 2009)

PaulHoughton said:


> Is money on deposit in AIB or BoI really in Ireland? And if it is, does society benefit as a result? AIB and BoI are owned by international shareholders and institutions. Having loads of money on deposit in the past led to them making stupid lending decisions. Perhaps we would all have been better off if they'd had less money to lend?.


Yes, it is there to back the supply of credit vital to maintain business in this country. A lot of this cheap credit was directed towards an overheated propery market, in this sense there was too much credit, but we now have the problem of well run businesses being choked of credit, and this is very very bad for employment and enterprise.




PaulHoughton said:


> I've answered this previously above. 100K is not a pittance to be left with. The state guarantees an income for the old. Caveat emptor.


I still beg to differ here. There are plenty of retired people who'd have larger sums on this on deposit that they've spent their entire working lives building up. If they live another 25 years, €100k provides a fairly limited addition to their old age pensions. 

I think it's worth paying a price to protect a system that allows people sleep easily in the knowledge that their life savings are secure and a system that keeps businesses running through a steady supply of credit.

Certainly €440m would be too high a price, but that is a total exposure figure and bears no relationship to what the true cost to the tax payer will actually be after sharholders and subordinated debt holders have taken their losess



PaulHoughton said:


> The alternative punishes the poor and the innocent, the uninvolved, the people with no assets.


The situation I find disturbing is this. 

We've had 10 years of almost full employment. There is a section of society who would otherwise have been on the dole all their lives who have worked and provided for themselves and now find they are out of a job with mortgages to pay off (they'd have been better on the dole with a council house).

Consider also people who have worked hard and saved all their lives who would lose much of their savings if banks went bust.

People are not stupid, they respond to incentives. If we say screw the people with houses and savings we are sending out a strong signal that honest effort and looking to improve your lot through hard work is to be punished in this country. I think sometimes the people who view themselves as champions of the poor forget that rewarding honest effort and seeking maximum possible employment is by far the best way of getting people out of the poverty trap.


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## Duke of Marmalade (7 Aug 2009)

PaulHoughton said:


> Placing money with a bank does incur a small risk in the same way that crossing the road incurs a small risk.
> 
> 
> 'Too big to fail' is a loaded phrase that implies that such a thing exists.


You are misinterpreting this phrase. Of course banks aren't too big to fail, haven't they proved that in spades. But some are too big to be *allowed* fail. And that is not because it would be unfair on staff, unfair on depositors who trusted their banks with their savings, unfair on bondholders who supported the Irish economy. Not for any of these moralistic reasons but solely because they are "*systemic*", that's the word, to our whole economic survival. 

The only similarly systemic enterprise I can think of is the ESB. If the ESB made one holy mess of their finances, say buying up all the damns in Africa or whatever, and was hopelessly insolvent I am afraid the State would have to bail it out in a similar fashion. Or would you be suggesting that a minimum power facility should be maintained to let ordinary folk boil a daily cup of tea, but let the rest of us fat cats with our dishwashers, and washing machines etc. be damned. After all we bought those appliances taking a risk that there would be a continually available power supply.  If we take risks like that what can we expect.


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## Mpsox (7 Aug 2009)

PaulHoughton said:


> I've answered this previously above. 100K is not a pittance to be left with. The state guarantees an income for the old. Caveat emptor. The alternative punishes the poor and the innocent, the uninvolved, the people with no assets.


 
 What you are suggesting is punish the people who were prudent, who saved for a rainy day, who managed their affairs wisely so that they would not have to rely solely on the state to support them. These people should be applauded, not potentially punished.


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## PaulHoughton (7 Aug 2009)

DerKaiser said:


> A lot of this cheap credit was directed towards an overheated propery market, in this sense there was too much credit, but we now have the problem of well run businesses being choked of credit, and this is very very bad for employment and enterprise.


I don't understand this idea that credit will dry up. Is this not like saying that Irish people will have no more crisps if Tayto shuts down? We are living in an economic community of 500 million people with thousands of lending institutions of all sizes. The law of supply and demand dictates that they will sell credit to Irish people in the absence of local lenders such as AIB & BoI.  Maybe they won't lend 100% LTV and 5x income for 40yrs at ECB + .5% but there is a market value for credit all the same. 



DerKaiser said:


> I still beg to differ here. There are plenty of retired people who'd have larger sums on this on deposit that they've spent their entire working lives building up. If they live another 25 years, €100k provides a fairly limited addition to their old age pensions.


Yes it would be very sad but is it worse than recovering their losses from the rest of us and our children over the coming decades? In 2009 it is clear that trusting a large sum of money to any one Irish bank is stupid and dangerous. There are plenty of places to invest large sums of money other than dropping it in the local bank. Post office, AAA gilts, AAA foreign banks - spread it between several institutions. The state had a deal with depositors: only the first 20K was guaranteed.



DerKaiser said:


> We've had 10 years of almost full employment. There is a section of society who would otherwise have been on the dole all their lives who have worked and provided for themselves and now find they are out of a job with mortgages to pay off (they'd have been better on the dole with a council house).


Yes they are in negative equity and must slave to pay off their debts for many years. This will happen with or without the closure of the failed banks. In hindsight, the Irish state provided too many incentives to buy property: section 23, section 27, section 48, section 50, mortgage relief, allowing large multiples of salary to be lent out, overpaying public sector staff with consequent salary rises for private sector staff, reducing stamp duty, affordable housing schemes, co-ownership, local authority buyout... Living in a council house is not the only alternative to buying property, you can also rent. An alternative govt policy to promoting house ownership for all would be to promote long term residential rental leases and reduce the supply of state housing.



DerKaiser said:


> Consider also people who have worked hard and saved all their lives who would lose much of their savings if banks went bust.
> People are not stupid, they respond to incentives. If we say screw the people with houses and savings we are sending out a strong signal that honest effort and looking to improve your lot through hard work is to be punished in this country. I think sometimes the people who view themselves as champions of the poor forget that rewarding honest effort and seeking maximum possible employment is by far the best way of getting people out of the poverty trap.


I see your point, but I think the alternative is worse. The signal we are now sending out is that if you lend money to private Irish banks and those banks then lose the money, that the state will compensate you by taxing the honest effort and hard work of a future generation of innocents. Incentives to work and to employ are created by low income taxes and low corporate taxes.



Duke of Marmalade said:


> You are misinterpreting this phrase. Of course banks aren't too big to fail, haven't they proved that in spades. But some are too big to be *allowed* fail. And that is not because it would be unfair on staff, unfair on depositors who trusted their banks with their savings, unfair on bondholders who supported the Irish economy. Not for any of these moralistic reasons but solely because they are "*systemic*", that's the word, to our whole economic survival.


Is this not the same argument produced whenever a large irish owned employer is insolvent. Irish Steel, Irish Sugar, Waterford Crystal all too big to fail - but too crap to serve their customers profitably. I don't understand systemic risk although it has been often repeated since the blanket guarantee scheme. What is the systemic risk of Irish banks collapsing? The purpose of this thread is to try to answer that question. 



Duke of Marmalade said:


> The only similarly systemic enterprise I can think of is the ESB. If the ESB made one holy mess of their finances, say buying up all the damns in Africa or whatever, and was hopelessly insolvent I am afraid the State would have to bail it out in a similar fashion.


Utility companies around the world do go bust or are acquired or merged. When insolvent, their infrastructure and other assets are sold to a more solvent competitor who is still in business as a result of making smarter decisions in the past. If the ESB shuts I imagine I would be getting my electricity from Airtricity or Bord Gáis or Veolia or GE or from whomever acquires their assets from the liquidator. In the UK, for example, the cable TV operators regularly go bust and are then acquired by each other. Telewest was taken over by NTL and in turn NTL was taken over by Virgin.

I see this process of companies failing and their assets being acquired by new companies as healthy and an integral part of the capitalist system that has brought us ever improving consumer benefits.

I am not saying that I am sure that allowing Irish banks to fail is definitely the better option than saving them. I am not sure and I want to discuss it. We seem to be betting the entire economy on this policy. I am not sure that the various organisations that have promoted the bailout such as the IMF and OECD have the interests of Irish people at heart. Perhaps their primary concern is protecting the international bondholders.

If AIB and BoI had been bought by overseas banks a few years ago, then this situation would presumably not have arisen. We would never have tried to save a foreign bank, would we? In what sense are AIB and BoI irish? Their shares and bonds are held internationally. They happen to be headquartered here, does that make them Irish? They are listed on multiple stock exchanges. They have Irish staff but then so would any foreign bank that owned them. Should we allow institutions to operate in Ireland that are considered 'too big to fail', if their existence constitutes a threat to the viability of the state?


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## Duke of Marmalade (8 Aug 2009)

Okay, Paul, bad analogy with the utility company.

If we woke in the morning to hear that the ESB was insolvent, the lights would still be working and would continue to do so until someone took over the infra structure.

If we woke to find a leading retail bank was insolvent then all its services would cease, because its services are in effect its balance sheet. ATMs would have to be closed down - can't have creditoirs rushing to get ahead of others. Cheques would be worthless. Direct Debits would all cease to function. Credit cards would be useless.  Not to mention the enormous wealth effect as 40% of the population suddenly find themselves potentially impoverished. Economic activity would be paralysed. And if one can be let go how long before the other goes? Panic, panic, panic. That's why the big banks are too big to be allowed fail. Not sure about the others.


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## darag (8 Aug 2009)

I would have a lot of sympathy for Paul's argument.  But I have a fear that the shock of banks failing would cause huge economic damage.  I'm not sure of the basis of this fear; Duke's picture is certainly a worst case scenario where banks would be allowed to suddenly fail.   I can't imagine that, having accepted that the government were not going to take on all current and future retail banking losses, that they would at least ensure an orderly wind-down.  If you were presented with what looked like a reasonable plan for the orderly wind-down of the insolvent banks, Duke, would you accept the idea of allowing the banks to fail, then?

I did a quick google on the effects of bank failures and what stands out is that most economists who have written on the subject distinguish two types of bank failure.  One is caused by a panic and the other is caused by insolvency.  I think that initially when this crisis (in Irish retail banking) started, the banks and the government repeatedly claimed that the reason for the stress in Irish retail banking was a type of panic (claiming liquidity problems) and not because they were insolvent - which everyone now agrees is the case.  I at the time believed that only Anglo (and maybe IN) was insolvent and that the others were sound.  That now is evidently not the case - most of the Irish banks are probably insolvent.

Most seem to agree that governments should help banks threatened by panics.  However, many economists, like Paul, disagree that government should protect insolvent banks.  Since, in the space  of a year, we've established that the nature of the problem with the Irish banks is fundamentally different that what was first assumed, the argument that  Paul makes is far more reasonable now than it would have this time last year.


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## sunrock (8 Aug 2009)

It would be so much simpler if the government nationalised the bankrupt banks, guaranteeing the safety of the deposits and the bond holders.Unfortunately the shareholders shouldn`t get anything as the banks are bankrupt.NAMA can then take the toxic loans of the banks on its books  and dispose of the assets of these loans gradually over 5 years or sf course new regulations and personnel are needed at these banks and serious penalties for flouting the rules.


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## PaulHoughton (9 Aug 2009)

Duke of Marmalade said:


> Okay, Paul, bad analogy with the utility company.


No, I think it's a good analogy. A bank, after all is just a private company with a bunch of assets that can be transferred in the event that it can no longer figure out how to continue as a going concern.



Duke of Marmalade said:


> If we woke to find a leading retail bank was insolvent then all its services would cease, because its services are in effect its balance sheet. ATMs would have to be closed down - can't have creditoirs rushing to get ahead of others. Cheques would be worthless. Direct Debits would all cease to function. Credit cards would be useless.  Not to mention the enormous wealth effect as 40% of the population suddenly find themselves potentially impoverished. Economic activity would be paralysed. And if one can be let go how long before the other goes? Panic, panic, panic. That's why the big banks are too big to be allowed fail. Not sure about the others.


I imagine there would be problems but I think these problems would be temporary. I think they would pale into insignificance compared to the pain we are planning to inflict on ourselves now and for the coming decades.

I don't know how old you are but we had a general bank strike about 40 years ago during which people wrote each other IOUs on bits of paper and society continued to function. ATMs did not exist at this time.

Going through the items you raise: 
Cheques are orders made to your bank to settle a debt. If the cheque bounces then the debt remains. So if you receive a cheque from a debtor drawn on an insolvent bank, neither you nor your debtor has lost the money. You simply ask your debtor for another form of payment such as a promissory note or an IOU

Direct debits are simply instructions to a bank to allow a trusted creditor to withdraw money from an account. Direct debits fail all the time, for example when the customer closes the account or withdraws the direct debit instruction or simply repudiates the transaction. In this case, the creditor simply adds the amount due to the customer's balance and contacts the customer to arrange a new form of payment.  Some utility companies have direct debit failure rates of up to 10% of monthly accounts so they're well used to it. I don't think they'd be very happy if their failure rate hit 80% one month but they's get over it. Few companies have more than a portion of their customer base on direct debit.

Credit cards: a large credit card customer base is a juicy asset. An insolvent bank would have no problem selling its credit card customer base to someone else. MBNA perhaps? Customers can easily switch credit card providers. 

ATMs and debit cards: Nasty but short term problem. If an Irish bank shuts I guess you get your next pay cheque made out to NIB or the post office and use IOUs and barter until then. 

'the enormous wealth effect as 40% of the population suddenly find themselves potentially impoverished' I think this is illusory. I've just had a look at AIB's latest balance sheet. The group has asets of 180bn. In the event of insolvency, Sunny says that senior debt and customer deposits share first dibs on assets. customer deposits are 83bn worldwide and senior debt is 12bn. So, I'm not sure that any customers would really be left short. It might take a while though. 

More than 60 banks in the US have gone bust this year alone so there must be plenty of experience worldwide of bank liquidation.



sunrock said:


> It would be so much simpler if the government nationalised the bankrupt banks, guaranteeing the safety of the deposits and the bond holders. Unfortunately the shareholders shouldn`t get anything as the banks are bankrupt. NAMA can then take the toxic loans of the banks on its books  and dispose of the assets of these loans gradually over 5 years or sf course new regulations and personnel are needed at these banks and serious penalties for flouting the rules.


Nationalising the banks would mean the taxpayer assuming all their liabilities in perpetuity. Why would we do this when the banks can legitimately fold and make their bondholders and shareholders pay. Buying a corporate bond is one step up from buying a share but it's still a gamble. Nationalised institutions are susceptible to low efficiency operation, political intereference, corruption and so on.

The IMF has a research paper carried out before the Irish banking crisis that summarises the methods uses to deal with 42 crisis episodes over the past 40 years in countries around the world. Bank closure is common. They also list  the occasions when countries extended blanket guarantees to their banks and those crises that led to losses for depositors.

In their , they detail how 6 countries exited from their blanket guarantee schemes.

I guess whatever strategy we adopt has to find a balance between protecting depositors and protecting the future earnings of taxpaying citizens.

The last two budgets sought to raise tax revenue by less than 3 billion in 2009. Yet we have already shovelled 7 billion into Anglo. Is there anyone who believes this is anything but the tip of the iceberg of future cash burning exercises?


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## Duke of Marmalade (9 Aug 2009)

Paul, good reminder about the bank strikes. We could, I suppose, enter a barter phase until alternative money transmission arrangements were put in place. Probably result in a temporary further 10% fall in GDP but of itself not a compelling reason for a bail out.

No, one is reminded of the real reason by _darag_. This is first and foremost a liquidity crisis. We are told there is €440Bn at stake. After the initial run had been met by available liquid resources I would guess about €350Bn of deposits/bonds would be frozen, pending liquidation, by the time the banks closed their doors. With or without a government guarantee this would be sheer economic disaster. _darag_ has pointed out that we now also potentially have a solvency issue, but even the most grim doomsayer puts this at no more than €20bn in excess of available capital. If the worst comes to the worst and over 10/15 years the taxpayer loses €20Bn that is far better than shutting down the system and leaving €350Bn frozen behind a liquidator's doors.


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## darag (9 Aug 2009)

Why should this be an all or nothing question?

If we could agree that some of the banks were clearly insolvent, then you could far easily accept Paul's arguments in favour of letting those ones go to the wall.

It seemed pretty clear to me even a year ago that Anglo was insolvent - having just 3 billion in equity on a 100 billion balance sheet where, I can't remember exactly, but about 60% or 70% of their assets comprised of property loans in the context of a collapsing property market and a general increase in the cost of credit.  

Admittedly determining whether any enterprise is solvent is a little more complex and subjective as you must also consider whether you can expect profits in the future.  An enterprise or bank may have zero or negative shareholder equity but still be solvent if it is generally agreed that they can generate profits to fill the gap.

Besides Anglo, the solvency of the other banks is not completely clear to me.  It seems that AIB at least may be solvent with a 180 billion balance sheet but from what I recall they only have 5 billion or so shareholder equity?  What is their property loan exposure?  However I think that AIB possibly has the ability to  generate profits in the future - from boring old retail banking - while Anglo, like Northern Rock, represents a busted business model that has no future even if they had a healthy balance sheet.

A bigger question is why is the government intent on applying an one-for-all and all-for-one approach?  The original guarantee exasperated me at the time because of this when it seemed like a single solution was not appropriate for all the Irish banks.  I am similarly skeptical about the NAMA plan because it represents a continuation of this crude policy.  As Duke pointed out elsewhere in relationship to the valuation model NAMA, this is a very costly and completely unnecessary basis on which to derive policy.

I think Paul would do better arguing that there is no point in maintaining Anglo and that we should be planning to let them go bust.  The others should be argued on a case by case basis.  Arguing that they all should be let go bust on the basis of appealing to capitalist principles (while appealing to me personally) makes it sound like you are basing your policy on dogma while pragmatics should be the driving force of the argument.

Many people mention the Swedish response but I have to admit ignorance of the details of it.  Through google I came across this article which contains excerpts from a speech given by the Swedish minister of finance at the time.  It makes for great reading.


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## PaulHoughton (9 Aug 2009)

Duke of Marmalade said:


> ..._darag_ has pointed out that we now also potentially have a solvency issue, but even the most grim doomsayer puts this at no more than €20bn in excess of available capital. If the worst comes to the worst and over 10/15 years the taxpayer loses €20Bn that is far better than shutting down the system and leaving €350Bn frozen behind a liquidator's doors.


Is it possible that the cost will far exceed 20bn? As previously noted, the IMF estimates Irish bank losses at 35bn by 2010 alone. I don't understand why the assets of an insolvent bank would spend long 'frozen behind a liquidator's door'. The banks assets are mostly virtual: certificates, deeds, bonds, mortgages. Tradable assets.



darag said:


> Why should this be an all or nothing question?


The truth always seems to lie somewhere in between.


darag said:


> Besides Anglo, the solvency of the other banks is not completely clear to me.  It seems that AIB at least may be solvent with a 180 billion balance sheet but from what I recall they only have 5 billion or so shareholder equity?


I don't know how useful shareholder equity is as a measure of the strength of a bank. A large amount of uncollectable loans will give a high number for shareholder equity. 

Here are some numbers from various banks for their ratio of equity to assets:
hsbc 6% (h1 09)
rabobank 5.8% (2008)
santander 4.8% (h1 09)
aib 4.4% (h1 09)
boi 3.6% (march09)
anglo 3.6% (sep-08)

I chose hsbc, santander and rabobank as the best I could think of.



darag said:


> However I think that AIB possibly has the ability to  generate profits in the future


I think it's clear that they are continuing to produce very strong operational profits before provision for bad debts. It's just a question of whether their asset writedowns are too much to bear.



> A bigger question is why is the government intent on applying an one for-all and all-for-one approach?


perhaps any other approach would be judged discriminatory and anti-competitive.  



> ...there is no point in maintaining Anglo and that we should be planning to let them go bust.  The others should be argued on a case by case basis.


As Anglo is now 100% state owned, allowing it to go bust is more difficult than when it was in private hands. I don't think that governments normally allow their limited semi-sate companies to shut down, leaving creditors short.  As pointed out before, however, we no longer have much reputation to defend. The Economist has referred to Ireland as "Reykjavik on Liffey".



> Arguing that they all should be let go bust on the basis of appealing to capitalist principles (while appealing to me personally) makes it sound like you are basing your policy on dogma while pragmatics should be the driving force of the argument.


Market economics is hardly some wacky ideology that may or may not work. 'Dogma' is just a pejorative term for somebody else's belief system. Market economics is indeed a dogma so long as you are an economist in Cuba or North Korea. For the rest of us it's like gravity or magnetism, just another force of nature that is neither good nor evil in itself.

There will always be a constituency pressing the state to save failed companies. It includes the directors, shareholders, bondholders, employees and their unions. Not heard so loudly are the competitors and consumers who are the big losers in any bailout. 

The EU precludes state aid because it is the belief of the member nations that state aid is unfair to competing companies and consumers and ultimately punishes success and rewards failure. The individual governments are delighted to have their hands tied when asked to provide state aid because they know it is hard to deny but bad for society overall. 

Sadly, EU countries decided to allow unlimited state aid for banks last year. And sadder still, Ireland stood to lose the most as a result.

In this part of the world, limited companies are so named because their directors and shareholders have limited liability for their debts. Essentially all limited companies hold an option to self destruct rather than pay their debts. Anyone who supplies credit to a limited liability company is granting an option not to be paid in the event of insolvency and that option is priced by the market and reflected in the cost of credit supplied to the company.

If we want banks with unlimited depositor protection then we should constitute them in this way and force them to insure these schemes on the open market. Or it could be an option for depositors to have an insured account or a higher interest uninsured account.

Another option would be to force irish banks in future to be constituted as unlimited liability companies. As such the shareholders might take a more conservative approach to risk.

As it stands we are setting ourselves up for this situation to happen all over again - the banks now know that they can take any kind of risk and rely on the taxpayer to provide a safety net. In the good years, an Irish bank will make a couple of billion euro in profit, in a bad year the taxpayer can pick up the tab.

I think this [broken link removed] says it all.


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## Bronte (10 Aug 2009)

PaulHoughton said:


> As it stands we are setting ourselves up for this situation to happen all over again - the banks now know that they can take any kind of risk and rely on the taxpayer to provide a safety net. In the good years, an Irish bank will make a couple of billion euro in profit, in a bad year the taxpayer can pick up the tab.
> 
> I think this [broken link removed] says it all.


 
This is what has me hopping mad.  I can't believe the Irish people are going to mortgage themselves and their children's futures to save some banks without a peep out of the electorate.  This whole thing is a con job to keep the bankers, developers and politicians at the top of the pile.  A preservation of the status quo.  It's more like a dictatorship than a democracy.


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## steviel (10 Aug 2009)

PaulHoughton said:


> If we want banks with unlimited depositor protection then we should constitute them in this way and force them to insure these schemes on the open market. Or it could be an option for depositors to have an insured account or a higher interest uninsured account.
> 
> Another option would be to force irish banks in future to be constituted as unlimited liability companies. As such the shareholders might take a more conservative approach to risk.
> 
> ...




Or we could just get a decent regulator, get representatives of the regulator permanently inside the banks and on the committees and audit teams, and pay the regulator's staff well enough that working for the regulator is an attractive career choice (make it worthwhile to be the policeman).

people are still moaning that Anglo is still a going concern, and if this were the case, they have every right to be angry.  But i have a little familiarity with what is happening inside Anglo, and meet seanior staff regaularly for a coffee.  Despite the guff spouted by the current chairman, rest assured Anglo is not being run as a going concern.  It will be wound down.  NAMA will take some of the loans (30%?, 50%? who knows), and the remainder will be dealt with somehow. Bank will be wound down or maybe used as a vehicle to mop up the remnants of Nationwide and Permanent.


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## kaplan (20 Aug 2009)

Most people cannot seperate the global liquidity crisis (now abating) from a domestic banking system solvency crisis caused by the collapse in the property bubble or to put it another way the demise of an economic policy that promoted, facilitated and funded a construction led consumption boom. Irish banks continuing problems are directly related to solvency - or going concern risks which will not be fully dealt with until banks balance sheets are cleansed of boom time bad debts. Furthermore as the economy enters into a deflationary spiral there is little chance the so called international green shoots will sprout global growth at levels required to stave off what will become yet another lost Irish decade. Worse still if, as some are predicting, a double dip occurs fuelled by commodity, food and oil inflation. Letting the banks go bust is not an option - funding their survival, and consolidation will require fresh government investment or a PPP scheme of joint government and private ownership. Few people realise how important Irish banking is and why preserving the existing banks has a wider national interest dimension. One of the dilemmas faced by Government is how to ensure the national banking system does not become dominated by foreign banks when it cannot afford to opt for the temporary nationalisation route. The costs of bailing out banking will be dwarfed by the final costs of economic recovery - whenever this occurs.


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## PaulHoughton (22 Aug 2009)

kaplan said:


> Letting the banks go bust is not an option


Why not?  it's looking like the best option to me.



> Few people realise how important Irish banking is and why preserving the existing banks has a wider national interest dimension.


Why is it important to prevent the main Irish banks from closing?



> One of the dilemmas faced by Government is how to ensure the national banking system does not become dominated by foreign banks


What is wrong with having foreign banks?

I see no reason in this thread to require the Irish taxpayers to save the Irish banks from liquidation. The main reasons for saving the banks that have been put forward are to maintain a supply of credit in the economy and to avoid a risk of losses for depositors. I don't believe either of these things would happen - the market will provide credit and the assets of the banks are sufficient to meet deposit liabilities even after mark-to-market write-down. 

I have read the history of the Swedish bank crisis and there is no comparison with their approach and ours. 

As a Green Party member I will be voting to leave government next month if NAMA is not dropped as I consider that it will cripple the country economically for decades in a vain attempt to maintain high residential and commercial property prices.


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## theresa1 (22 Aug 2009)

The Green Party are heading the same way as the P.D.'s - they will never recover even after pulling out of Government which they will eventually do. Green Party will go bust hopefully.


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## DerKaiser (22 Aug 2009)

PaulHoughton said:


> The main reasons for saving the banks that have been put forward are to maintain a supply of credit in the economy and to avoid a risk of losses for depositors. I don't believe either of these things would happen



That's a very naive attitude.  In practice there would be disastrous short to medium term impacts on enterprise.  

Just think about it, do you really believe that there wouldn't be serious disruption if most of the businesses in the country were forced to immediately find alternative lines of credit?

You might have a view on the way business _should_ work but that's not how it _does _work

Also, the implications of people not being able to trust banks to return their deposits is not a road we want to go down


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## Theo (22 Aug 2009)

I don't think anybody really knows what might happen if we let some or all of the banks fail.  But I do know one thing - I have no desire to take on the risk of bad and good loans alike from these people and effectively relieve them of the burden of their mistakes.  I'll take my chances and live with them.  In the same way I took on risk when I got a mortgage to buy my house.  Nobody will offer to take on my mortgage if I can't pay it - that's a risk I was happy to take on and I'm happy to take responsibility for it. Same for the banks. At least when all our banks go to the wall, someone else will come in who knows what they're doing and do a far better job. 

Secondly, does anyone else not find it astonishing that the entire former board of Anglo and Irish Nationwide are not in prison pending charges?  Wouldn't that send a clear signal to international investors that maybe we are not a nation of crooks and corruption after all?  

When I returned to Ireland from abroad in 2001, I really thought the country had turned a corner and turned its back on crookedness and corruption of the past. But now I see that we are still a nation of crooks and corruption and it saddens me deeply. If I lose my job, I will be considering leaving the country again, but this time, I probably will not return. 
I am disgusted to the core with us - we deserve what's coming


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## Shawady (24 Aug 2009)

Instead of NAMA buying these assets at inflated prices, why can't the government just loan the banks the money?
For example if the assets are worth 40 billion and the government is going to buy them for 60 billion, why can't they just lend the banks 20 billion which can be paid back to the government over 15-20 years. That way the risk of selling these assets is with the banks not the taxpayer.
I'm sure it would be more complicated than my example but there must be some way that the risk is with the banks ans not the taxpayer.


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## Guest116 (24 Aug 2009)

Theo said:


> I
> Secondly, does anyone else not find it astonishing that the entire former board of Anglo and Irish Nationwide are not in prison pending charges? Wouldn't that send a clear signal to international investors that maybe we are not a nation of crooks and corruption after all?


 
You cant put people in prision "pending charges"!


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## Carolina (24 Aug 2009)

DerKaiser said:


> Just think about it, do you really believe that there wouldn't be serious disruption if most of the businesses in the country were forced to immediately find alternative lines of credit?


Yes, but would that disruption not be better than the state borrowing an additional 70 or 80 billion at a time when we least afford it to plug a hole in the balance sheets of some privately owned companies?



> Also, the implications of people not being able to trust banks to return their deposits is not a road we want to go down


What is the implication? People have to put their money somewhere.

We have lived through oil crises in the 1970s and several periods for months at a time when all the Irish banks simply shut down due to strikes.



Shawady said:


> Instead of NAMA buying these assets at inflated prices, why can't the government just loan the banks the money?
> For example if the assets are worth 40 billion and the government is going to buy them for 60 billion, why can't they just lend the banks 20 billion which can be paid back to the government over 15-20 years. That way the risk of selling these assets is with the banks not the taxpayer.
> I'm sure it would be more complicated than my example but there must be some way that the risk is with the banks ans not the taxpayer.


They have a solvency problem not a liquidity problem. Lending money to them will make their balance sheets look even worse.

The profits of the Irish banks in non-bubble times are about 2bn a year. The IMF estimates they need 35bn. Why would you lend someone 17 times their annual income? Somebody has to pay this 35bn and it should be the people who lent money to the banks. 

Nobody forces you to keep money in a particular dodgy bank. There are plenty of solvent banks operating in Ireland.



aristotle25 said:


> You cant put people in prision "pending charges"!


Indeed you can be imprisoned without charge - for up to 7 days in Ireland - but only under suspicion of serious violent crimes.


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## DerKaiser (24 Aug 2009)

Carolina said:


> Yes, but would that disruption not be better than the state borrowing an additional 70 or 80 billion at a time when we least afford it to plug a hole in the balance sheets of some privately owned companies?


 
I agree that we can't write blank cheques to the banks. There's a serious need for a cost benefit analysis here as to how we best limit the long term taxpayer cost



Carolina said:


> What is the implication? People have to put their money somewhere


And better they put it in banks in the knowledge that they'll get it back rather than stuff it under their mattress for two reasons
1) Peace of mind
2) If the banks lose depositors then the credit supply will cease up completely driving businesses to the wall


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## Purple (24 Aug 2009)

kaplan said:


> Most people cannot seperate the global liquidity crisis (now abating) from a domestic banking system solvency crisis caused by the collapse in the property bubble or to put it another way the demise of an economic policy that promoted, facilitated and funded a construction led consumption boom. Irish banks continuing problems are directly related to solvency - or going concern risks which will not be fully dealt with until banks balance sheets are cleansed of boom time bad debts. Furthermore as the economy enters into a deflationary spiral there is little chance the so called international green shoots will sprout global growth at levels required to stave off what will become yet another lost Irish decade. Worse still if, as some are predicting, a double dip occurs fuelled by commodity, food and oil inflation. Letting the banks go bust is not an option - funding their survival, and consolidation will require fresh government investment or a PPP scheme of joint government and private ownership. Few people realise how important Irish banking is and why preserving the existing banks has a wider national interest dimension. One of the dilemmas faced by Government is how to ensure the national banking system does not become dominated by foreign banks when it cannot afford to opt for the temporary nationalisation route. The costs of bailing out banking will be dwarfed by the final costs of economic recovery - whenever this occurs.



Excellent post kaplan. If anyone thinks that it doesn't matter if me are dominated by foreign banks just take a look at what ACC are doing and what the knock-on domino effects will be for the country if they succeed.
We need Irish banks that are Irish owned (or at least depend on the Irish economy for most of their turnover).
By the way, NAMA is not bailing out the developers; they will have to repay NAMA instead of the banks. It is bailing out the banks so the beneficiaries are shareholders (pension funds) and depositors.


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## DerKaiser (24 Aug 2009)

Purple said:


> By the way, NAMA is not bailing out the developers; they will have to repay NAMA instead of the banks. It is bailing out the banks so the beneficiaries are shareholders (pension funds) and depositors.


 
....and the debtholders.


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## kaplan (24 Aug 2009)

Purple : ACCBank is doing what all other banks should be doing – it has done the nation some favour in outing the scale of collusion when banks no longer engage in the business of banking but revert to collective survival. My point on risks of future domination by foreign owned banks relates to the way in which they allocate capital and funding to their overseas subsidiaries. Example the insistence now by the FSA that foreign banks establish subsidiaries in the UK regulated by the FSA (rather than branches regulated by home country regulators) to prevent their repatriation of capital when faced with a crisis back home – this smacks of back door banking nationalism. At the same time Ulster Bank is being required to repatriate billions to its part UK Gov owned parent. Is it such a bad thing to insist that banking capital so necessary to underpin credit creation is protected by nation states? Many states ensure they maintain a strategic shareholding in vital national assets including banks. 

NAMA is designed to bail out banking – which is a necessary and inevitable consequence of the crisis as they are insolvent. But it also looks as if it will rescue shareholders and bond investors from total wipe out as writing down the value of core equity below legal regulatory thresholds would require further state capitalisation and increasing ownership up to full nationalisation. What’s right for banking versus what’s right for shareholders & bond holders is a distinction many miss. Its right to stabilise banking as the economy needs working banks. It’s wrong to leave shareholders and sub-ordinated bond holders off the hook of the risks knowingly taken. But forcing them to take a bath carries some risks – inherent within nationalisation such as political interference and lack of support from international investors etc. The compromise suggested by Professor Honohan’s Nama 2.0 is to provide for some upside for shareholders/bond investors via NAMA and deal with banks requirement for recapitalisation through a combination of state and private investment – if it can be attracted. Thus inevitable losses incurred by NAMA will be partially offset against future profits from banking as the state sells down its shareholding.   
 One of the problems is even if Nama leans towards the banks and their shareholders/bondholders the will be at the bare minimum of regulatory capital, require more as bad debts deepen and will not achieve anything close to the emerging higher levels required. Nama does not prevent the japanification of banking or by extension the economy.


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## Shawady (25 Aug 2009)

kaplan said:


> NAMA is designed to bail out banking – which is a necessary and inevitable consequence of the crisis as they are insolvent.


 
The government may have to save the banking system but I cannot understand why all banks have to be saved. I have not heard a good reason yet why Anglo was nationalised. My understanding was that this bank's primary business was with large property devlopers.

Why can't NAMA take on the bad loans for jsuta couple of the better performing banks?


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## steviel (25 Aug 2009)

Shawady, the answer to that was on the ACC thread.  If Anglo failed, receivers would likely have sought repayment of loans through the courts, forcing big developers into receivership like ACC was trying to do with Carroll.  And those same loans are cross collateralised with loans at BOI and AIB.  So you could end up with a liquidiation of properties on a massive scale which would hammer AIB and BOI.  Anglo was nationalised so the government could keep some kind of control and try to effect an orderly exit from this mess (ie.  NAMA, whether we like it or not), rather than end up with a messy and potentially catastrophic firesale when there is no market, and commercial real estate valuations are close to zero.  That would have hit our pockets a hell of a lot harder by AIB and BOI requiring many more billions in immediate cash than is necessary through the NAMA structure.  We dont have that kind of cash, so an IMF intervention would have been inevitable I think should Anglo have been let go. 

And that doesnt even address the issue of international investors losing money - we need them on side, whether we like it or not, to fund whatever banks are left standing after all this.  

I think it will be have a state owned bank which can be used to mop up whatever is left of Nationwide and Permo after all this, and possibly in the longer term be used to execute government policy - eg, lending to renewable energy firms - kind of like a development bank.


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## Shawady (25 Aug 2009)

Stevie, thanks for the explantion. It just seems amazing that the collapse of one bank (not even one of the bigger ones) could have such a catastrophic impact on the country.


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## steviel (25 Aug 2009)

The problem is that Ireland is not a big country, but we have big banks, massively exposed to one asset class, that share the same customers and security, with huge exposures relative to their capital base to individual developer groups, and over-reliance on the international markets for funding because they outgrew the domestic deposit base to such a degree by chasing asset growth.  So everything is more interlinked than any other Western banking system (a reason why comparisons to what other countries are doing to fix their banking situation are meaningless). The regulator is at fault for allowing such systemic risk to build up like this


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## csirl (25 Aug 2009)

> rather than end up with a messy and potentially catastrophic firesale when there is no market, and commercial real estate valuations are close to zero. That would have hit our pockets a hell of a lot harder


 
Who's pockets? Wont hit the taxpayer. Wont hit the ordinary citizen - in fact a lot could benefit from being able to buy a house very cheap.


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## steviel (25 Aug 2009)

it will hurt when you have to stump a few more tens of billions out of your taxpayer pocket to cover the increased losses at the 2 big banks due to liquidations, rather than a managed workout of the situation.  That would be immediate cash needed in the short term to keep the banks afloat.  And we couldnt afford it. The country would need IMF help (and we all know what that would mean in terms of minimum wage, social welfare, cost cutting on a scale not even envisaged in An Bord Snip).    NAMA costs a lot but it is not immediate cash out the door, and keeps out the IMF (for now at least)


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## sunrock (25 Aug 2009)

All very good arguments to save the banks from going bankrupt,but what people can`t understand is why the shareholders should be rescued. Without the government pumping money into the banks ,the banks would be bankrupt and the shares worthless.There should be no redress/compensation whatsoever for the shareholders.The banks should be nationalised under the guise of NAMA or whatever, depositors safeguarded and people should be offered the houses and morgages to qualified applicants at a realistic level to buy or rent....I`m talking about 100k for a 3 bed semi in the dublin commuter belt. This will help workers adjust to lower real wages.The governments policy of trying to keep house prices up by propping up the banks and the developers and making the taxpayer pay for it,is making people feel very uneasy.


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## Purple (25 Aug 2009)

kaplan, my point on ACC was very well explained by Steviel above. What they are now trying to do will trigger a fire sale which will destroy the whole Irish banking sector but they don't care as their parent bank just wants out of the Irish market.
Your points on collusion between the banks is well made. I posted here a few weeks back that the banks were not operating as banks at the moment. How could they be since they could borrow from the ECB at a lower rate than they give to depositors and they can't lend money because it makes their balance sheet look bad. They are just waiting to see what happens (with NAMA, with the bond market, with everything) and in the mean time there bugger all capital flowing through the economy.


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## steviel (25 Aug 2009)

Sunrock, I agree nationalisation is a different issue.  the question to which i was responding was why we couldnt just let Anglo go bankrupt.  And the answer is easy - we cannot let banks fail, under any circumstances for the reasons I outlined.  

Nationalisation is more complicated.  One thing to point out though is that people are getting emotional, and losing sight of the fact that NAMA and nationalisation are very similar.  They both involve an orderly recovery of the crappy loans, with us as the taxpayer making good the losses by recapitalising the banks.  

The advantage of NAMA is that the workout is done OFF the balance sheet of AIB and BOI, so that they can sooner illustrate to the world a clean balance sheet, and get on with their business.  Under nationalisation all the crap would be worked out ON the bank's balance sheets, and I think that it would take longer under this scenario for them to start functioning normally.  We have to pay the same to cover the losses either way, but NAMA should get us out of the mess faster as it ringfences the bad debt away from the banking system.  The downside of course is that we dont get the collective satisfaction of seeing shareholders wiped out, and I can understand the frustration (I feel very uneasy about it too, though there is an element cutting off your nose to spite your face in wanting nationalisation purely for the reason of wiping out shareholders)

I dont think the government are propping up house prices by what they are doing.  if they are trying to, they are failing misearbly.  Are residential property valuations not already down 50% or more, with rents are down significantly too.  That is without all the new supply coming on stream - all the massive developments that are being finished like Clancy Quay behind Heuston Station.  personally, I think house prices are going to look after themselves - dont think NAMA or anything is going to make a difference


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## Shawady (25 Aug 2009)

Stevie, I would aggree with what Sunrock said. I can understand the banking system has to be saved but why should the shareholders benefit. It is not that I would get some satisfaction to see shareholders lose their investment but why should the taxpayer take all the risk. From what I can see, if NAMA is successful it will mean there will be have to be reasonable price rises in the next 5-10 years. This will make it more difficult for wages to drop, which is supposed to be necessary to make us more competitive. No one knows what the future holds but in my opinion prices should fall a bit further or at least stay stagnant for a period.

Is it possible to have some system where NAMA works inconjunction with a part-nationalistaion (government takes 51% shareholding)?
Or government buys all shares in the short term with the option of selling them back when assets have reached their 'long-term economic value'?


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## onq (25 Aug 2009)

kaplan said:


> Purple : ACCBank is doing what all other banks should be doing <snip>.



ACC is furthering a global agenda by banking interests to directly control the worl'd finance houses.

Whether it is doing it knowingly is the question, but that it what its doing.

With the Royal family involved in Oil in Holland, I wouldn't be surprised if they know exaclty what's going on.

Regardless of earlier comments I have learnt a lot from reading these forums and now support the NAMA position.

ONQ.


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## steviel (25 Aug 2009)

Shawady said:


> Stevie, I would aggree with what Sunrock said. I can understand the banking system has to be saved but why should the shareholders benefit. It is not that I would get some satisfaction to see shareholders lose their investment but why should the taxpayer take all the risk. From what I can see, if NAMA is successful it will mean there will be have to be reasonable price rises in the next 5-10 years. This will make it more difficult for wages to drop, which is supposed to be necessary to make us more competitive. No one knows what the future holds but in my opinion prices should fall a bit further or at least stay stagnant for a period.
> 
> Is it possible to have some system where NAMA works inconjunction with a part-nationalistaion (government takes 51% shareholding)?
> Or government buys all shares in the short term with the option of selling them back when assets have reached their 'long-term economic value'?



I think the comments about NAMA needing price rises to work miss the point.  it makes no difference what happens to property prices in terms of what we as taxpayers will have to fork out.  the losses will be the same - the difference is whether the loss is taken through NAMA, or through the loans being worked out whilst staying with the nationalised banks.  I have no problem with banks being nationalised for a short period, as long as NAMA is also done.  NAMA is the important bit - whether the banks are nationalised afterwards is a secondary issue.  The point is to get the bad loans off the bank's balance sheet so they can be worked out seperately, miles away from BOI and AIB (except for the potential future levy to cover further losses at NAMA) leaving AIB and BOI to go out to the international market and say "hey, we have a clean start here, good assets, we are moving on, lend us some money or buy our bonds".  Without removing the bad assets, they wont be able to do this whether or not they are nationalised


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## Purple (25 Aug 2009)

Excellent, succinct and informative posts steviel


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## canicemcavoy (25 Aug 2009)

steviel said:


> leaving AIB and BOI to go out to the international market and say "hey, we have a clean start here, good assets, we are moving on, lend us some money or buy our bonds".


 
But if it's the same staff following the same practises, they haven't "moved on", have they? If you have a badly-run company that's in debt, then taking the debt away doesn't solve the original problem. In fact, in makes it worse, since the company doesn't have the face up to the original problem.


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## steviel (25 Aug 2009)

canicemcavoy said:


> But if it's the same staff following the same practises, they haven't "moved on", have they? If you have a badly-run company that's in debt, then taking the debt away doesn't solve the original problem. In fact, in makes it worse, since the company doesn't have the face up to the original problem.



You are right, we havent moved on in that there are still too many of the executives and senior managers still in situ in the big banks, and I know that many senior staff in irish banking still refuse to accept that they have done anything wrong.  More heads should have rolled, and maybe they will, post NAMA.  Someone like Mike Aynsley should be in BOI or AIB, not Anglo.  We need people like him - maybe former central bankers or CEOs from Canada, Australia or Scandinavia running the other banks (and we should be prepared to pay them what we need to in order to get them here).  Not the same guys, or other people from the 'establishment' who have the same particular 'Irish' way of doing business.  

Regulation has changed as well (or maybe that is wishful thinking), there are government people on the boards of all the banks, and the international markets will be more sensible in terms of lending for a while at least.  So we are in a new era to an extent.  The fact is that for the cleaned up AIB and BOI to get credit to where it is needed (to SMEs in particular) they need to borrow on the international markets - just not in the scale that they did in the last few years.


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## kaplan (26 Aug 2009)

Here are the two NAMA's - 

Option 1Government Nama
Buy all loans from the banks without first making shareholders or subordinated bond holders pay and bet €60bn hoping to lose less than €30bn. Ensure the price and mix of loans bought does not force you to capitalise the banks so much that they are nationalised. 

Option 2 NAMA 2.0 (Honohan)
Buy the loans after the shareholders and subordinated bondholders equity has been burned up and bet €40bn on the bad loans, invest capital in the banks nationalising them for a while and then re-privatise them, and hope to break even. 

Government has decided that option 1 is the best bet and is telling everyone that option 2 won’t work as investors won’t want to invest in nationalised good banks. Which means that no one will be interested in investing in cleaned up good banks that made close onto €2bn in gross profit last year, have been operating in Ireland for over 150 years, have hundreds of branches and millions of loyal customers. It may be right but it hasn’t produced anything to prove its view other than dire warnings of what will happen if its NAMA version doesn’t proceed.


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## darag (26 Aug 2009)

Purple said:


> kaplan, my point on ACC was very well explained by Steviel above. What they are now trying to do will trigger a fire sale which will destroy the whole Irish banking sector but they don't care as their parent bank just wants out of the Irish market.


This is hysterics -  "destroy the whole Irish banking sector" - how?  It will force a re-valuation of development land and nothing more.

The Irish retail banking sector is already "destroyed".  Blaming the actions of "evil" foreigners is silly - the Irish banks did it all on their own from what I can see.

Not knowing the extent of this destruction, by avoiding at all opportunity the chance of establishing reasonable market valuations for most of the bad loan collateral, does not make it magically go away.  That's a head-in-the-sand approach.

I've asked on another thread why a write down of loan collateral valuations is seen as something to be avoided?  Sweden liquidated bad loan collateral almost immediately - in a market as distressed as ours at the time - while Japan worked to preserve it's banks; they've been sustained for over 15 years at this stage waiting for the "inevitable" upturn in the property market.  They are still waiting and in the meantime their economy has stagnated.


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## Purple (26 Aug 2009)

darag said:


> This is hysterics -  "destroy the whole Irish banking sector" - how?  It will force a re-valuation of development land and nothing more.
> 
> The Irish retail banking sector is already "destroyed".  Blaming the actions of "evil" foreigners is silly - the Irish banks did it all on their own from what I can see.
> 
> ...



Are you suggesting that a revaluation of development land will have no knock-on effects? 
I am not suggesting that there's any "evil foreigners" is the equation, I am suggesting that the closer banks operating here are tied to the fortunes of the Irish economy the better.


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## Shawady (26 Aug 2009)

steviel said:


> I think the comments about NAMA needing price rises to work miss the point. it makes no difference what happens to property prices in terms of what we as taxpayers will have to fork out. the losses will be the same - the difference is whether the loss is taken through NAMA, or through the loans being worked out whilst staying with the nationalised banks. I have no problem with banks being nationalised for a short period, as long as NAMA is also done. NAMA is the important bit - whether the banks are nationalised afterwards is a secondary issue.


 
What is the main objection that opponents of nationalisation have?

My reading of the options are that NAMA without nationalisation puts all the risk on the taxpayer but they may have some chance of getting money back. NAMA with nationalisation means taxpayers take the hit now but may be able to sell the banks in the future for some profit. In the latter case the shareholders lose out.

Stevie, what would happen if the government proceed as planned and in 10 years time property prices are still roughly what the are in 2009?


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## darag (26 Aug 2009)

Purple said:


> Are you suggesting that a revaluation of development land will have no knock-on effects?


I'm doing and have done no such thing.  I'm challenging your claim that such a re-valuation would "destroy the whole Irish banking sector" in your exact words.  This is a hysterical and completely misleading claim.  Are you going to defend it or not?

The damage to Irish retail banking has ALREADY been done.  Not knowing the extent of the damage does not lessen it - it simply hides it.



Purple said:


> I am not suggesting that there's any "evil foreigners" is the equation, I am suggesting that the closer banks operating here are tied to the fortunes of the Irish economy the better.


And I asked a very simple question which you and others seem unwilling to address.  How are the fortunes of the Irish economy helped by deferring a revaluation of loan collateral?

Unless you can justify this deferral as being of benefit to the country, then it make no sense to claim the actions of ACC are damaging to the fortunes of the Irish economy.  I would furthermore suggest that the actions of the Irish banks - with their collusion to avoid realisitic loan valuations - while beneficial to the fortunes of the shareholders, bond-holders, executives and employees of the Irish banks is far more damaging to the fortunes of the Irish economy .

And my argument is based on simple historical precedent.  We have two recent cases - that of Japan and Sweden - which almost exactly mirror that of Ireland at the moment.  Sweden's immediate write-down of asset values seems to have been proven to provide a far superior outcome than the other approach.


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## Purple (26 Aug 2009)

darag said:


> I'm doing and have done no such thing.  I'm challenging your claim that such a re-valuation would "destroy the whole Irish banking sector" in your exact words.  This is a hysterical and completely misleading claim.  Are you going to defend it or not?
> 
> The damage to Irish retail banking has ALREADY been done.  Not knowing the extent of the damage does not lessen it - it simply hides it.
> 
> ...



Ok, much to think about there.
I accept that "destroy the whole Irish banking sector" is excessive but I suggest that " It will force a re-valuation of development land and nothing more" is rather optimistic and that there certainly would be "more".

The whole point of NAMA is to take the bad loans off the bank’s balance sheet. That's why it is better than just nationalisation (which may still follow). If ACC get their way it will force a revaluation while the loans are still on the books, before NAMA gets going. When things happen is nearly as important as what happens. This is particularly true when seen in the context of the deposit guarantee scheme.
I’m open to correction but my understanding is that nationalisation of the banks without taking the loans off their books would put us into the Japanese model; NAMA puts us closer to the Swedish model.


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## steviel (26 Aug 2009)

People are getting carried away here I think.  Everyone other than FG and Labour (and obviously many menbers of the public who mistakenly think that developers are being let off the hook) agree that NAMA is the way forward.  A separation of good and bad assets.  Brian Lucey and the academics writing in the Irish times today are not for one moment arguing that the NAMA structure is not the right thing to do.

Other than legal issues with the documentation, the argument of the economists is over the price at which the loans are bought from the banks. The academics have an issue with too high a price being paid. But the losses will be the same either way.  NAMA will try to work out the loans to the best of their ability whether or not they buy the loans for 70c or 30c on the euro.  The issue is just about timing of losses, and therefore the timing of our payments as taxpayers.

Option 1 (the academics):  NAMA buys €90m loans for €30m.  There is a €60m hit to the banks, which will require that to be covered by the taxpayer and the banks effectively nationalised.  I have no issue with this nationalisation other than the fact that the state will have to come up with €60bn, or a large part of that, in CASH, in the next few months to recapitalise the banks.  I am no economist, so would defer to any experts out there, but can we come up with €60bn cash pretty much immerdiately without turning to the IMF?  That is the point which I think is a glaring ommission from Lucey et al's recommendations

Option 2 (Lenihan):  loans are bought for €70bn (?).  Immediate cash required to recapitalise banks is much less.  Should the property market not recover, and I am not saying it will at all, losses will be absorbed over a longer time, and the government will hopefully be able to keep in slightly better control of the country's finances than they would if they had to stump up €60bn in cash in the next few months.  Downside for many is that the banks wouldnt necessarily be nationalised.

NAMA will work the same way in both options.  Developers will owe NAMA 100% of the face amount of their loans, and NAMA will try to recover as much as they can.  Whether NAMA paid 30% or 70% wont affect this process, or the ultimate recovery

This is NOT the japanese model, where the assets stayed with the banks, who had no incentive to work them out.  This model cleans the banks, which is closer to the swedish model.

If prices are the same in 10 years as they are now, the losses will be the same whether NAMA is done, or the loans stay with the banks which will have been nationalised.  The argument is just around the mechanism and timing of the losses that we will have to pay for either way if we are to save the banking system.  NAMA does get all the loans in one place, so if should be more effective to move on the multi-banked developers, and get a better recovery

the point is that the losses, and what we have to pay as taxpayers is the same.  It is just an issue of timing, and I dont think we can afford to take the immediate hit!

To those that suggest that we should just let the banks go under - basically doing nothing.  Tossing a coin, head in the sand, hope for the best.  Who knows what the repurcussions would be.  I certainly wouldnt like to find out.  There would certainly be panic, and a run on all the banks.  One thing for sure is that the IMF would be running the country - and as a result minimum wage and social security would be a fraction of what they are now, and half the public sector would have been made redundant.

They are my views anyway.  Thats my last post - have work to do!  Im not a FG supporter by the way.  Im not Irish, but have been living here a while.  But my opinion is that Lenihan is dong a good job amongst the shower that make up FG.


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## callybags (26 Aug 2009)

This is the most lucid post on this matter I have seen so far.

Well said.


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## Purple (26 Aug 2009)

Steviel, do you mean FF?


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## steviel (26 Aug 2009)

Of course I do!  Some kind of Freudian slip maybe!  Apologies.  Not that FG are any less a shower!


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## Bronte (26 Aug 2009)

steviel said:


> To those that suggest that we should just let the banks go under - basically doing nothing. Tossing a coin, head in the sand, hope for the best. Who knows what the repurcussions would be. I certainly wouldnt like to find out. There would certainly be panic, and a run on all the banks. One thing for sure is that the IMF would be running the country - and as a result minimum wage and social security would be a fraction of what they are now, and half the public sector would have been made redundant.
> 
> .


 
Is this what has happened in Iceland?


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## darag (26 Aug 2009)

steviel said:


> People are getting carried away here I think.  Everyone other than FG and Labour (and obviously many menbers of the public who mistakenly think that developers are being let off the hook) agree that NAMA is the way forward.


To claim that the only members of the public who disagree with the NAMA plan are those who "mistakenly think that developers are being let off the hook" is simply false.  I neither agree with the NAMA plan, nor believe that it relieves developers of their debts.  I do believe that developers will be far happier owing money to a government body than private bodies.



steviel said:


> A separation of good and bad assets.  Brian Lucey and the academics writing in the Irish times today are not for one moment arguing that the NAMA structure is not the right thing to do.


The letter from the 20 economists suggested a rather different approach than that currently being sold as the "NAMA plan".  Your suggestion that there is consensus is simply false.


steviel said:


> Option 1 (the academics):  NAMA buys €90m loans for €30m.  There is a €60m hit to the banks, which will require that to be covered by the taxpayer and the banks effectively nationalised.  I have no issue with this nationalisation other than the fact that the state will have to come up with €60bn, or a large part of that, in CASH, in the next few months to recapitalise the banks.  I am no economist, so would defer to any experts out there, but can we come up with €60bn cash pretty much immerdiately without turning to the IMF?  That is the point which I think is a glaring ommission from Lucey et al's recommendations
> 
> Option 2 (Lenihan):  loans are bought for €70bn (?).  Immediate cash required to recapitalise banks is much less.  Should the property market not recover, and I am not saying it will at all, losses will be absorbed over a longer time, and the government will hopefully be able to keep in slightly better control of the country's finances than they would if they had to stump up €60bn in cash in the next few months.  Downside for many is that the banks wouldnt necessarily be nationalised.


False.  NOTHING is going to paid for by CASH because the government doesn't have any.  Everything will be paid for using borrowing - issuing government bonds.  There is NO difference to the net position of the exchequer and the tax-payer either way.



steviel said:


> NAMA will work the same way in both options.  Developers will owe NAMA 100% of the face amount of their loans, and NAMA will try to recover as much as they can.  Whether NAMA paid 30% or 70% wont affect this process, or the ultimate recovery


It's not about the recovery process; the loans are worth what they are worth.  It's about who pays for the failure in Irish retail banking. 

a) NAMA pays over market value - taxpayer picks up the entire bill.

b) NAMA pays market value - banks require re-capitalization which means shareholders pay for some of the bill.

c) Insolvent banks are allowed to fail before NAMA buys the loans - shareholders pay some of the bill, unsubordinated bond holders pay some of the bill and the government and bond holders share the bill for the rest.



steviel said:


> This is NOT the japanese model, where the assets stayed with the banks, who had no incentive to work them out.  This model cleans the banks, which is closer to the swedish model.


It's the Japanese model in that it's a 10 or 15 year plan based on the idea that it may be possible to recover value to the tax-payer if we hang in there long enough and that shareholders and bondholders should be protected from losses (which suited Japan because of the massive amount of cross-holdings in their business world).  The Swedish model was to take it on the chin and allow the economy to move on after a massive asset price bubble burst.


steviel said:


> If prices are the same in 10 years as they are now, the losses will be the same whether NAMA is done, or the loans stay with the banks which will have been nationalised.  The argument is just around the mechanism and timing of the losses that we will have to pay for either way if we are to save the banking system.  NAMA does get all the loans in one place, so if should be more effective to move on the multi-banked developers, and get a better recovery
> 
> the point is that the losses, and what we have to pay as taxpayers is the same.  It is just an issue of timing, and I dont think we can afford to take the immediate hit!


You're wrong.  I refer you to the a, b and c above.  The choice between them very much affects how much the tax-payer ends up paying.


steviel said:


> To those that suggest that we should just let the banks go under - basically doing nothing.  Tossing a coin, head in the sand, hope for the best.  Who knows what the repurcussions would be.  I certainly wouldnt like to find out.  There would certainly be panic, and a run on all the banks.  One thing for sure is that the IMF would be running the country - and as a result minimum wage and social security would be a fraction of what they are now, and half the public sector would have been made redundant.


There are retail banks going under all the time - particularly in the US.  It's not rocket science, it can be managed.  Believe it or not, just because you don't know what the process is, doesn't mean it's a head in the sand approach.  Lehman's was completely different as it was a huge underwriter of credit derivatives.  Retail banks are much much simpler and have been springing into existence and folding since fractional reserve banking was invented 700 years ago without the sky falling down.


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## canicemcavoy (26 Aug 2009)

steviel said:


> People are getting carried away here I think. Everyone other than FG and Labour (and obviously many menbers of the public who mistakenly think that developers are being let off the hook) agree that NAMA is the way forward.


 
What a bizarre way of putting it. Obviously you think the opinions of all the main political parties apart from Fianna Fail, the opinion of most of the general public, and the opinions of at least 46 economists, should be entirely discounted.

And just to point out that someone may agree that a NAMA*-like* solution might be a solution, but not this particular instance of NAMA. Fianna Fail can chant the mantra that they're doing what the Swedes did 'til they're blue in the face, but that doesn't make it so. 

For one thing, Sweden is regularly voted as - behind Finland - the second least corrupt nation on Earth. 

For another, their valuation commitee was a cross-party exercise and not - as in Ireland's case - a personal fiefdom of the Minister for Finance, no doubt to be staffed with the same yes-men and hacks who got us into trouble in the first place.


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## steviel (26 Aug 2009)

A few points for DARAG. (and this really is it this time!):  

1. Borrowing money on the international markets to plug a €60bn hole in the banks now due to losses, is very different to borrowing from the ECB under the repo type arrangement proposed under NAMA.  I dont think we could come up with €60bn CASH in the next few months from a mix of borrowing on the international markets, and raiding the pension fund.  We can however borrow from the ECB to fund a NAMA structure.

2.  Yes, small community banks go under in the US all the time, and there have been some reasonably big failures by Irish standards.  Depositors are moved to other banks, and loans sold at a fraction of the value with shareholders and sub note holders wiped out, and senior debt holders made good by the state (the FDIC).  But they are a tiny fraction of the system, and of the nations wealth.  That is a bit different to letting your 2 largest banks, which dominate the banking system, fail.  It would be like letting Bank of America and Citibank fail.  What impact on the US financial system do you think that would have?

3.  And how do the shareholders pay, share the load, under a recap if NAMA pays market value for the loans?  There is precious little private shareholders capital left!  Remember there is a good chunk of our money in there already.  It would be burned through very quickly - would be a fraction of what is required.  A drop in the ocean compared to the €60 odd billion needed.  The state is paying no matter what.

4.  My point was that there IS consensus in that the bad assets have to be separated from the good (something that Japan didnt do).  A NAMA 'type' structure as you put it.  The main issue is still around pricing


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## csirl (26 Aug 2009)

IMHO the short sharp shock is the way to go. There are very few situations, (and I'm talking generally, not just about banking) where the long drawn out transition is better than the short sharp shock.


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## Duke of Marmalade (26 Aug 2009)

So now we have the Gang of 46 writing to the IT. I thought Alan Aherne did a pretty good one man job in rubbishing their letter, both in the IT and on RTE this morning.

For a start he informs us that 240 economists were invited to sign up and only 46 did, a notable absentee being Patrick Honohan. So the G46 letter constitutes very much a minority view from that learned constituency.

To me the big issue in this academic debate is can we credibly let the bondholders take the hit - I don't think anybody has any issue with shareholders taking the hit, as they have done in spades. 

The G46 say B/holders should suffer and this is now the FG line. Alan Aherne's refutation is that this can't be done because of the State guarantee. But that was a bit disingenuous. Can we viably dump on the bondholders when the State guarantee runs out in 9/10? I thought this would mean effectively putting the banks into receivership/liquidation, triggering the deposit guarantee and in effect collapsing the whole house of cards. 

But if even a 20% minority of economic academics and an opportunistic, though generally responsibe, FG are proposing dumping on the bondholders maybe it is not the meltdown I think it is. And the price of these bonds suggests that the market is not at all sure that they are immune from being dumped. Any experts out there on what this course would truly mean in practice?


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## darag (26 Aug 2009)

steviel said:


> 1. Borrowing money on the international markets to plug a €60bn hole in the banks now due to losses, is very different to borrowing from the ECB under the repo type arrangement proposed under NAMA.  I dont think we could come up with €60bn CASH in the next few months from a mix of borrowing on the international markets, and raiding the pension fund.  We can however borrow from the ECB to fund a NAMA structure.


I think you're a bit confused; the government is not going to be borrowing any money from the ECB no matter what.  The ECB will ultimately lend cash using government bonds as collateral - yes using an arrangement called repo.  But the bonds have to be issued in the first place - either to provide the initial capital for NAMA or to re-capitalize the banks.



steviel said:


> 2.  Yes, small community banks go under in the US all the time, and there have been some reasonably big failures by Irish standards.  Depositors are moved to other banks, and loans sold at a fraction of the value with shareholders and sub note holders wiped out, and senior debt holders made good by the state (the FDIC).  But they are a tiny fraction of the system, and of the nations wealth.  That is a bit different to letting your 2 largest banks, which dominate the banking system, fail.  It would be like letting Bank of America and Citibank fail.  What impact on the US financial system do you think that would have?


Again I think you are confusing things;  the impact would be great but not because of their share of the "nation's wealth".  The reason you can't just shut up shop on AIB or BOI or Citibank or Bank of America (like you could with Anglo or the building societies) is because they are all vital pieces of their respective nation's payments and clearing systems.  Banks are more than deposits and loans.  There is no question that payments and clearing have to be protected at all costs.  Again there is precedent and experience available to separate these bank functions and nearly all banks in fact have separate structures for lending - commercial and retail.  Not to diminish the scale of the task but it is doable and has been done in the past.


steviel said:


> 3.  And how do the shareholders pay, share the load, under a recap if NAMA pays market value for the loans?  There is precious little private shareholders capital left!  Remember there is a good chunk of our money in there already.  It would be burned through very quickly - would be a fraction of what is required.  A drop in the ocean compared to the €60 odd billion needed.  The state is paying no matter what.


The existing shareholders will pay because the banks are now worth something - 3 or 4 billion market cap the last time I looked.  A government recapitalization would dilute the existing shareholdings to practically zero (given we are realistically talking about putting in more than the total market cap) or nationalization would wipe the shareholders out.



steviel said:


> 4.  My point was that there IS consensus in that the bad assets have to be separated from the good (something that Japan didnt do).  A NAMA 'type' structure as you put it.  The main issue is still around pricing


Well at least you are admitting that much which is an advance over the claim that it doesn't matter how much NAMA pays for the loans.  As I pointed out above with my a, b and c scenarios it very much does matter.  And we are talking about THE NAMA  (the one being proposed by the government) not some hypothetical NAMA 'type' structure.  I don't have a problem with the principal of transferring some bad loans out of retail banks - I have a serious problem with NAMA as proposed.


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## Duke of Marmalade (26 Aug 2009)

darag said:


> I think you're a bit confused; the government is not going to be borrowing any money from the ECB no matter what. The ECB will ultimately lend cash using government bonds as collateral - yes using an arrangement called repo. But the bonds have to be issued in the first place - either to provide the initial capital for NAMA or to re-capitalize the banks.


I think _steveil_ has a point. As I understand it NAMA will be allowed to print fairly soft bonds (paying 1.5% p.a.) without actually issuing these to the marketplace. The ECB seems to allow that, as NAMA is acquiring assets (rather than equity).

If it was that easy to pay for equity why all this fuss about getting the Pension Reserve Fund to use its cash for the prefs? I think the ECB rules must be that equity injections must be funded by "real" cash, rather than printed bonds.


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## steviel (26 Aug 2009)

DARAG, injecting capital into the banks requires general borrowing on the international markets (at very penal rates, if indeed we can), raiding the pension fund, or diverting cash away from public services to put into banks (given that we have a very finite borrowing capacity right now).  ECB will not help us out with borrowing for recapitalisation, indeed is prohibited under European legislation from directly buying sovereign debt of its member states.

The NAMA structure involves issuing bonds to the ECB, not to the international markets.  

It is the main issue, and directly linked to the price that NAMA can afford to pay for the loans given the impact that the price has on the amount of recapitalisation, and therefore the amount of cash that is borrowed from international markets, or diverted from other sources.


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## tiger (26 Aug 2009)

Duke of Marmalade said:


> So now we have the Gang of 46 writing to the IT. I thought Alan Aherne did a pretty good one man job in rubbishing their letter, both in the IT and on RTE this morning.
> 
> For a start he informs us that 240 economists were invited to sign up and only 46 did, a notable absentee being Patrick Honohan. So the G46 letter constitutes very much a minority view from that learned constituency.


 
It would be an error of logic to assume that the other 194 support NAMA.

Ahearne uses the words "sloppy" a few too many times for my liking.

I personally don't like NAMA in it's current format, but we need some "NAMA-like" solution, and I think it's important that there is real cross party & cross interest group debate, that some form of consensus is reached as we will be living with this for a long time.


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## Purple (26 Aug 2009)

tiger said:


> we need some "NAMA-like" solution, and I think it's important that there is real cross party & cross interest group debate, that some form of consensus is reached as we will be living with this for a long time.



On that I agree 100% but with FG's proposing off the wall populist rubbish it's hard to see how it could happen.


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## canicemcavoy (26 Aug 2009)

steviel said:


> Regulation has changed as well (or maybe that is wishful thinking), there are government people on the boards of all the banks, and the international markets will be more sensible in terms of lending for a while at least. So we are in a new era to an extent.


 
Honest question; which regulations have changed? I meant to ask this questions elsewhere but this might be the best place to ask it. 

For example, has there been any new regulations about the ratio of deposits to lending that a bank has?


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## darag (26 Aug 2009)

Not to get side-tracked on a technical matter, when I said the government had to issue bonds, I meant simply that.  Not that the government has to sell them to the markets.  These bonds are "sold" to NAMA or the banks in exchange for equity.  Either can then use repo with the ECB to turn them into cash.  It matters little if NAMA issues the bonds either, the process is the same.

The only reason I brought this up was because steviel claimed that NAMA overpaying for the loans had the advantage of NOT requiring the government to have to flog bonds on the market.  This is NOT an advantage as it makes no difference either way.  The government does not need cash to re-capitalize the banks - it can issue bonds and hand them to the banks.

steviel has not addressed the substantive and vital point which is that it matters a great deal (in terms of cost to the taxpayer) what NAMA pays for the loans.


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## Duke of Marmalade (26 Aug 2009)

steviel said:


> The NAMA structure involves issuing bonds to the ECB, not to the international markets.


Is that strictly accurate? The bonds finish up on the banks' balance sheets. Okay they can repo them at ECB for liquidity management. But I don't think NAMA issues bonds directly to ECB. Your main point though must be true - it is a much more onerous requirement to fund equity than to fund this NAMA (because of ECB rules).

Crossed posts with _darag_. _darag_ I don't think that is correct. I don't think ECB rules allow the government simply to "print" bonds for that equity. That's why we had all this fuss about had the Pension Reserve Fund any spare cash or could it realise some assets of its own to help out. Buying equity seems to require "real" cash arising from real market transactions whereas NAMA bonds seem merely to be a matter of printing them.


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## darag (26 Aug 2009)

Duke, I don't think I suggested that the banks "prints" bonds.  The government "prints" or issues the bonds.  The government can then use these bonds to "buy" equity in the banks (i.e. recapitalise them) or to fund the capitalization of NAMA.  The bonds end up on the balance sheets of banks or NAMA (and as you say can be repoed for cash with the ECB if the bank or NAMA wishes).  They also end up in the national debt.  Maybe we are saying the same thing.  I don't see why the ECB would be happier to accept NAMA issued bonds for repo purposes than government issued ones.

I think this discussion has gotten too technical.  There have been important issues being discussed here being swamped by details of the mechanics of how the cash is to be borrowed.  It's not that relevant.  Maybe a moderator could snip split these posts off to another thread called "The mechanics of funding NAMA" or something like that.  My main point was that neither approach requires flogging government bonds into the markets.


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## Duke of Marmalade (26 Aug 2009)

_darag_, agree we are getting a bit off topic. I also had a typo in the original and have changed "banks" to "government".

Let's just flog it one more time. We agree that there are two completely different methods of the Government issuing bonds:

1) Through the market open tender process. This is what is used to fund government deficits.

2) Simply printing the bonds and exchanging them with a captive buyer for other assets. This is the NAMA aproach and has needed ECB clearance.

So the question is can government equity in the banking system be simply funded by method (2) or would they be forced into the market disciplines of method (1). I think the rules must state this latter.

Yes I agree this is a relatively minor technical side issue. For me the main matter that certanly I need answered is can the Government viably land a lot of this problem on bank bondholders as is suggested by the G46 and FG? If this is a viable option we must definitely follow it. My instinct is that to screw the bondholders would have such ramifications as to precipitate the meltdown we are trying to avoid.


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## steviel (26 Aug 2009)

The process is this, and i think it is THE main influence on the price of the loans (and the amount of resulting recapitalisation required)

1.  NAMA / the government issues bonds (not sure which - I think NAMA directly).  
2.  These are given to the banks in return for their toxic loans (at some discount yet to be determined).  
3.  Then the banks take these bonds to the ECB and swap (repo) them for cash, which they can then lend to all of us.

The ECB has worked with Ireland in structuring NAMA so that they can effectively take newly issued Irish government bonds via the banks in return for cash.  If we dont want the ECB's help in NAMA we have to find the money elsewhere, as the ECB are not allowed to lend money directly to their member governments, by buying bonds or otherwise (ie the government cannot issue bonds directly to the ECB in order to raise cash to recapitalise the banks).  Therefore re-capitalisation funds have to come from the general exchequer (maybe borrow from the IMF?) - but in any case likely at the expense of public services and the pension fund.

Is it seriously suggested that the government turn round to the ECB and say we dont need their help.  That we will take the hits in full now, recapitalise / nationalise the banks now, and find the money in the open market or from somewhere else ourselves?


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## Purple (26 Aug 2009)

Can this thread be made a key post? It's very informative. I disagree with darag and duke this this is too technical; the detail is what matters so keep up the good work guys.


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## darag (26 Aug 2009)

Duke, I think the confusion between us is what it means to "issue" bonds.  It is often used in both senses - the creation of the bonds or alternatively the creation plus the initial exchange of the bonds - most often for cash.  The confusion is my fault.  I will use the terms "create" and "sell" from now on.

The ECB have to be consulted when any euro-zone government creates bonds whether these are subsequently exchanged for cash (most commonly) or for some other financial instrument (including equity, other bonds, etc.).  What the bonds are exchanged for isn't the primary concern of the ECB.  The fact that the bonds exist and can be used as collateral by the ultimate holder to borrow from the ECB at attractive rates of interest is their concern because each euro-zone government bond created represents a potential drain on their reserves.

And yes I agree that one of the most important issues is whether the bondholders can be made take some of the hit.  But we haven't even gotten to ordinary bondholders yet.  The current NAMA plan allows the shareholders and the unsubordinated bond holders to keep all their money. That alone is reason for me to dislike it.  I have to admit that I haven't read the G46 letter so I am not in a position to comment.  But we are not talking about wiping out the ordinary bondholders - pulling a figure out of the air, I suspect a liquidation of Anglo for example, once the unsubordinated bondholders are wiped out might involve a haircut of about 25% for the ordinary bondholders assuming the government provides backing for all the deposits.  Not great for them but they've been receiving coupon payments for years in exchange for accepting risk of this eventuality.

steviel, I refer you to the first two paragraphs.  The ECB have to be consulted and agree to the creation of ANY bonds by the Irish government.  It isn't even possible for the government to turn it's back on the ECB - this is was one of the conditions of our entry into the Eurozone; the ECB have to be consulted whenever the government borrows.


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## mobcon (26 Aug 2009)

Allow me to introduce the following thoughtful seven points, I would like you to consider about the debacle in the Irish property market and proposed rescue by nama
1. Nama is not to help the developer, but is to help the banks who give the impression that they will release funds to the business community and private mortgages, when they have there toxic debt has been taken of their “books” - how much loans have they given out since they have received 7.5 billion from us (the taxpayers) ?
2. Brian Lenihan is smart guy and is doing the best job he can do in my opinion, to date I believe he has made the correct decisions, unfortunately he is being lied to by the financial elite and other vested interests and is getting no support from Mr Cowen (Mr Aherns protégée).
3. I have been in the construction game for 25 years and in the property game for the last 5 years as a coach and consultant doing feasibilities and believe me when i say that on a value basis most toxic assets are overvalued by at least 70-80%. Let me clarify my personal position - I am not in debt to any bank !
4. When are we going to see a auctioneer, who overvalued land and properties, which the lender accepted without due diligence be charged with illegal bad practices, remember all these bad practices will be covered up by nama. 
5. Why not let the Allied Irish Banks, Bank of Ireland and Irish Nationwide go - push them off the edge of the cliff! That is what they would do if a company/individual had borrowed money from them and unfortunately the business failed. 
6. Lets be practical and get real for a change - The shareholders have lost their investment anyway and in order for any shareholder to recoup there investment from € 1.20 back to € 22.00  it will need to increase by 1,200% as if that is going to happen within the next 30-40 years, look how long it took the shares to recover after wall street crash  50-60 years !
I personally lost € 10,000.00 in bank shares, could not afford it but I have to get with it
The Banks made bad commercial decisions and got it wrong, they should pay the price
Of mismanagement - does anyone know of any businessman who borrowed monies
From any of our main banks and was given clemency or dare I say treated fair by the their lender when things did not work out!
7. The alternative - Instead borrow 40bn, 20bn, invest it in Ireland inc in job creation and business loans only on condition that it all prices in Ireland across the board drop by 25% - which would lower our total cost base by 25%. 20bn into a new national bank (Anglo etc) and loan it out to deserving cases - all to be administered by a new elite of passionate Irish businessmen who have the interests of the country at heart - are they out there, I meet them every day !.
8. Is it amazing how many well known business people who are not involved in this property nightmare.
On behalf of the all the honest business people who are lying awake at night wondering how they are going to survive until Christmas and we are lot more in number than 50 sol called developers, the majority of which are masquerading as fronts for syndicates, comprising of accountants, solicitors, auctioneers, businessmen and bankers etc.


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## Bronte (27 Aug 2009)

mobcon said:


> Of mismanagement - does anyone know of any businessman who borrowed monies
> From any of our main banks and was given clemency or dare I say treated fair by the their lender when things did not work out!
> .


 Yes there is one that I know of, Larry Goodman.  He was too big to fail.


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## Bronte (27 Aug 2009)

mobcon said:


> and we are lot more in number than 50 sol called developers, the majority of which are masquerading as fronts for syndicates, comprising of accountants, solicitors, auctioneers, businessmen and bankers etc.


 
Could you clarify what you mean by this?


In relation to the posts prior to this, I'm lost, it's too technical. Why can no one give a simple explaination of exactly what NAMA is going to do, you 'experts' all seem to disagree with each other. The Green party was on the radio yesterday to explain it and still I don't understand. Surely in a democracy we are entitled to know exactly what our children's futures are being mortgaged for and for whose benefit and who will be punished and what will change so that is doens't happen again.

If I believed that the bankers would never be allowed to recklessly lend again, that developers would pay financially, that a bank would never again hold Irish society to ransom, that people were jailed for their negligence, reckless trading, that the regulator was not in bed with the lot of them and government too then I could support NAMA. I want heads to roll. That is the Taoiseach who was the minister for finance, all the top bankers and the developers who all have brought this country to it's knees. We are being told a whole heap of b------t. How can we trust the very same people who got us into this mess to bring us out of it. This blackmail of that the whole system will collapse if we don't support the banks, well let the system collapse and let's all start anew. There are plenty of 'foreign' banks that will come to deal in Ireland if the Irish banks go bust and that would be no bad thing. This cartel has gone on long enough. Everything is so tainted, even now we have the debacle of the judiciary, with a Supreme Court decision effectively being appealed to the High Court, where does it end this cosy cartel of the elite. And not to forget estate agents who can now go to the High court with a 'new' valuation - based on hocus pocus. 
Fooled once shame on you, fooled twice shame on me. 
Do you know something I think not one person has one clue what NAMA is going to do.


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## canicemcavoy (27 Aug 2009)

canicemcavoy said:


> Honest question; which regulations have changed? I meant to ask this questions elsewhere but this might be the best place to ask it.
> 
> For example, has there been any new regulations about the ratio of deposits to lending that a bank has?


 
I'm just curious is the reason that there was no response to my question is because there is no new regulation planned and Lenihan thinks the current regulations are just peachy?


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## Carolina (28 Aug 2009)

I have summarised the answers provided to the question in the thread title. I have also added counterarguments that have been posted. Please post any more reasons you have not to let the banks go bust and any more counterarguments.

*People with large honestly earned cash deposits may lose out*
Counterarguments: 
1. There will be enough money to pay all depositors in full once the subordinated debt and shareholder debt is written off. eg AIB has 180bn in assets and 85bn in depositor/senior debt.
2. Putting money in a bank is not the same as locking it in a box. The bank lends it out and if they lend it stupidly then it's gone. 

*It shouldn't be seen as a gamble to keep your life savings in a bank*
Counterarguments: 
1. It is a gamble. A low risk gamble. Risk free banking is impossible. Keeping your money in a box is also risky.

*We need Irish banks because foreign banks may not supply credit.*
Counterarguments: 
1. Banks lend money to make a profit. They don't lend out of patriotism or kindness. If Irish people are starved of  credit the market will supply credit at a price.
2. It would be better to have foreign than Irish banks in Ireland because then nobody would suggest we save them if they become insolvent.

*Senior debt ranks equally with depositors so they can't be hit*
Counterarguments: 
1. senior debt is only 7% of AIB assets so they can afford to repay it along with depositors.

*Knock on effects on Irish govt borrowing*
Counterarguments: 
1. Banks are rated separately from governments by rating agencies
2. Irish govt debt might be better rated if it wasn't lumbered with 70bn of bonds issued to save the banks.
3. Bondholders understand they have risks - that's reflected in the coupon and tradable value.
4. Some junior bondholders are insured with credit default swaps so will not care if the bonds are cancelled

*Many bank staff would lose jobs*
Counterarguments: 
1. Many new jobs would be created in the new banks that enter the market
2. job losses are bad but the alternative is far worse

*Pension funds invested in Irish banks would lose value*
Counterarguments: 
1. They have huge losses from peak already so not much further to fall.
2. No pension should be heavily invested in one sector in one small country
3. The alternative is far worse.

*Foreign banks appear to be pulling out of Ireland*
1. Yes that's because we are planning to stuff their competitors full of money as a reward for insolvency.

*A run of funds out of the country*
Counterarguments: 
1. This has already happened.
2. New clean banks would attract depositors more than the current shower.

*Cross collateralised loans would bring down all the banks if the small banks fail*
Counterarguments: 
1. Yes, so we let them fail if needs be. Their mistake for accepting securities that were already spoken for.

*If depositors lose money it will disincentivise people from working hard and saving money in future*
Counterarguments: 
1. The alternative is a bigger disincentive to work as it will require lower salaries and higher taxes for worse services for decades. Our children will be wage slaves toiling to repay the debts incurred by the banks.

*Banks are systemic national service providers like utility companies. We wouldn't let a utility company fail.*
Counterarguments: 
1. We do let utility companies fail and when they do, their assets are sold to new companies that provide the same service without any of the debts of the old company. The shareholders and the creditors of the utility company lose their investment but the consumer is protected.

*Bank failure would be disruptive to the economy: no cheques, credit cards, no atms, general panic.*
Counterarguments: 
1. We have had interruptions in banking service for months at a time in the past during strikes. 
2. The alternative is far worse, costs much more and takes longer.

*The max cost is 20bn over 10/15 yrs which is affordable.*
Counterarguments: 
1. The IMF says its 35bn
2. Nobody really knows what it is. 
3. 20bn is a lot to pay and get nothing in return

*People will stuff money in mattresses if they don't trust the banks, drying up the credit supply*
Counterarguments: 
1. You get no return for mattress stuffing
2. matresses are not risk free
3. liquidity for credit does not have to come from Irish people.

*We can't rely on foreign banks - look at how nasty accBank behaves / Everyone else is engaging in banking nationalism so we should too*
Counterarguments: 
1. accBanbk is doing what is right. No foreign bank will operate here if we tell them that their loans aren't repayable.
2. Foreign banks will lend to Irish people if they think they will repay the loans with interest. The same way that  foreign car companies sell cars to Irish people.
3. New banks can start in Ireland to capture marrket share. 

*NAMA is not immediate cash out the door and it keeps out the IMF*
Counterarguments: 
1. NAMA is 60bn of added debt plus interest
2. Doubling our debt (again) is not a good way to keep the IMF at bay

*The IMF would be running the country - and as a result minimum wage and social security would be a fraction of what they are now, and half the public sector would have been made redundant*
Counterarguments: 
1. Half the public sector is already redundant but still drawing salaries
2. Minimum wage is higher than the equivalent in france, germany or the UK. We can't afford it and it's preventing companies from hiring staff.
3. Some welfare rates are comparatively high such as JSA (3X the UK rate)
4. The IMF have to be invited in by us

*Small banks can fail but some are too big to fail*
Counterarguments: 
1. 'too big to fail' is just a slogan. 
2. by the same token we could say that the banks are 'to expensive to save'


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