# Could the Central Bank have limited LTV's years ago?



## Purple (1 Oct 2008)

The property bubble was a result of cheap credit and massive LTV mortgages. We all knew it was happening. What could have been done to stop it? While tax reliefs added to the bubble they were not the major factor; cheap credit was, so given that we could not control access to cheap credit what else could have been done? Would limiting the LTV that banks could issue mortgages for have done the trick? 

Does the Central Bank have the power to limit or cap the loan to value ratio of mortgages that Irish banks (and other banks operating in Ireland)?
If it does then why didn’t it do so 5 or 10 years ago?
If it does not would giving it such powers be allowed under EU law?


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## rmelly (1 Oct 2008)

Could, or should? They made no effort to prevent people borrowing large multiples of earnings, despite their 'guidelines'.

How independent is the Central Bank anyway? Maybe government policy prevented them intervening? I doubt it though, given they always portrayed a pretty rosy picture, so I doubt they had the will to do so, regardless of any political intervention.


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## Purple (1 Oct 2008)

rmelly said:


> Could, or should? They made no effort to prevent people borrowing large multiples of earnings, despite their 'guidelines'.
> 
> How independent is the Central Bank anyway? Maybe government policy prevented them intervening? I doubt it though, given they always portrayed a pretty rosy picture, so I doubt they had the will to do so, regardless of any political intervention.


My question is do they have any teeth? Could they have forced the banks to do what they wanted them to do?


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## Complainer (1 Oct 2008)

Purple said:


> Does the Central Bank have the power to limit or cap the loan to value ratio of mortgages that Irish banks (and other banks operating in Ireland)?


Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?


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## room305 (1 Oct 2008)

Complainer said:


> Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?



Couldn't agree more. Banks should be allowed to fail.

Although I do feel obliged to state that the existence of the ECB and their ability to dictate interest rates (price fixing of money) is somewhat far removed from a laissez-faire system.


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## rmelly (1 Oct 2008)

room305 said:


> Couldn't agree more. Banks should be allowed to fail.


 
Taking this to the next level, do you also think there shouldn't be any form of deposit protection, whether 20k, 100k or unlimited?


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## Bronte (2 Oct 2008)

You've forgotton the 30 or more year mortgages and the mortgage of 100% or more to add to the easy credit, and low LTV. The central bank is made up of the other banks, it's a nice cosy club, and they weren't going to do so anything to stop the bubble as they were too greedy chasing profit and they obviously agreed to this as the best course of action amongst themselves when they held their highly secretive meetings. As a certain stage people were saying interest rates will never go above 4 %, well in my lifetime I remember interest rates of 17% but you had to have a deposit and beg your bank manager for a mortgage. You had to make some kind of effort, up to last year you just could pick your dream house, landscape it, furnish it , buy the new car all at the same time but you have more than 100% mortgage, no equity, no leeway as your mortgage is 40+ years and if interest rates go up by so much as a 1/4 of a percent it sends you over the abyss. In the meantime before interest rates rose and if you got into trouble you just went for a consolidation loan again and again and again.... Banks wrote blank cheques for people and what a surprise when these people learnt nothing and went back again for more credit. Of course when this mess all boils down there will be regulations so it doesn't happen again. Well not until 2034.

Edit: I should have said the Financial Regulator above not the central bank.  I'm getting confused between the two.  But it still amounts to the same thing.


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## Brendan Burgess (2 Oct 2008)

Go back and read some of the older threads from Askaboutmoney. Was this suggested? What was the response? 

The Financial Regulator, not the Central Bank, regulates the Irish banks. 

They did take action on the lending practices. For example, when the EBS ignored the stress testing, the FR pulled them in over it. 

The FR was in a difficult position.  They were concerned. They did implement stress testing. They did call for caution.  Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses.  They would not have appreciated that the FR was doing them a favour.

Brendan


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## ubiquitous (2 Oct 2008)

Brendan said:


> Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses.  They would not have appreciated that the FR was doing them a favour.


Indeed but I would have thought that the whole reason for having a Financial Regulator and a Central Bank in the first instance was to ensure that politics would not affect the whole process of governance? Imagine if the Bank of England could not interest rates upwards because of political pressure?


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## shanegl (2 Oct 2008)

ubiquitous said:


> Indeed but I would have thought that the whole reason for having a Financial Regulator and a Central Bank in the first instance was to ensure that politics would not affect the whole process of governance? Imagine if the Bank of England could not interest rates upwards because of political pressure?


 
Exactly.


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## Purple (2 Oct 2008)

Complainer said:


> Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?


If you tell me your opinion then I'll answer your question but I will not be replying to any more posts from you where your only contribution is to have a go at me without offering anything constructive to the thread.


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## Purple (2 Oct 2008)

room305 said:


> Couldn't agree more. Banks should be allowed to fail.
> 
> Although I do feel obliged to state that the existence of the ECB and their ability to dictate interest rates (price fixing of money) is somewhat far removed from a laissez-faire system.


  But the free market is an artificial construct and regulation is required to keep it in existence.
Banks are of vital importance to the economy, they require a license to operate and it is in the public interest that they operate in a sound fashion. Even without the credit crunch Irish banks were going to be in trouble because of their exposure to the construction industry. The financial regulator, the Central Bank and the government all knew what was happening and they did nothing. I would like to know why. 
Could they have limited LTV’s?
Could they have limited the income multiples that people could borrow (change the stress testing criteria)?
Did the regulator or the ECB have the power to do the above? If so then why did they sit on their hands? If not then why did the government not empower them to do so?


Basically where does the book stop?


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## dereko1969 (2 Oct 2008)

Brendan said:


> Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses. They would not have appreciated that the FR was doing them a favour.
> 
> Brendan


 
the prices being charged for houses would not have been so high if the FR had done it's job and limited all mortgages to 80%LTV!! do you really think that the prices being charged for houses during the boom (RIP) were reflecting costs plus a reasonable profit margin? i don't think so, if the mortgages had been limited the prices being charged would have reflected that. the whole thing was a circle jerk between the banks and the developers.


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## Afuera (2 Oct 2008)

Brendan said:


> They did take action on the lending practices. For example, when the EBS ignored the stress testing, the FR pulled them in over it.


This does not sound like very strong action against EBS for ignoring their guidelines though does it? I also share Purple's concern on whether the FR actually has enough power to do it's job effectively or is it simply the case that it was negligent in it's role these last years. If it doesn't have enough power to fulfill it's role than that would need to be addressed fairly urgently. If it was simply negligent then heads should be rolling in the FR. Simple as that really.



Brendan said:


> The FR was in a difficult position.  They were concerned. They did implement stress testing. They did call for caution.  Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses.  They would not have appreciated that the FR was doing them a favour.


The FR is not a democratically elected body though. It does not have to pander to the masses; it simply has to ensure that the Irish financial system is sound. This they were not able to do so the reasons they failed need to be uncovered to prevent us reaching this point again.


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## Sunny (2 Oct 2008)

Why haven't we heard from the regulator or the head of the central bank in the past few days reassuring people that they know exactly what is on the bank's books and they feel very comfortable with what the Government is doing. I reckon it is because they haven't got a clue what is on bank's balance sheets. Also, what exactly is the role of the head of the Irish Central Bank at the moment? What does he do to justify being one of the highest paid central bankers in Europe. I work in financial sevices and I don't even know his name.

I used to be involved in regulatory reporting for a bank and while there are some very competent people working in the regulator, all they cared about was getting reports on time and making sure no big flashing neon warning signs appeared. I never once saw them take a hands on approach in 3 years of working in the area. They just believed everything banking executives told them. Just like in the recent prime time story about mis-selling. What did the regualtor do? Got a letter from each CEO telling her that they don't mis-sell. Good stuff!


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## NorfBank (2 Oct 2008)

Restricting LTV would have slowed down the buying process as buyers would have had to come up with deposits (i.e savings) but there were ways around this.
The multiples of salary that the banks were lending to certain applicants was root cause of the current crisis.  In theory I still see nothing wrong with 100% mortgages for professionals who have a fairly definite career path with a gradual rise in salary.
The problem was giving 100% mortgages to "normal" applicants with no career path or salary scale.
No matter how many 100% mortgage I have done for professionals (doctors, barristers, accountants) not one of them has defaulted or to my knowledge has been close to defaulting.
High LTV wasn't the problem, it was the class of applicant getting the 100% mortgage.


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## Duplex (2 Oct 2008)

NorfBank said:


> Restricting LTV would have slowed down the buying process as buyers would have had to come up with deposits (i.e savings) but there were ways around this.
> The multiples of salary that the banks were lending to certain applicants was root cause of the current crisis. In theory I still see nothing wrong with 100% mortgages for professionals who have a fairly definite career path with a gradual rise in salary.
> The problem was giving 100% mortgages to "normal" applicants with no career path or salary scale.
> No matter how many 100% mortgage I have done for professionals (doctors, barristers, accountants) not one of them has defaulted or to my knowledge has been close to defaulting.
> High LTV wasn't the problem, it was the class of applicant getting the 100% mortgage.


 
Of course 'professionals' operate in an economic world untouched by the vagaries of "normal" recessions, where career paths stretch into the distance like the yellow brick road. 

Regarding the role of the Central Bank this article from 2004 makes for interesting reading. 





> Central Bank must address house bubble trouble
> By Brian O’Mahony
> TWO economists have concluded that liberal lending by Irish banks has contributed 13% to the rise in house prices in recent years.This is the first time the questionable role of the banks in Irish house price inflation has been quantified.
> 
> ...


[broken link removed]


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## NorfBank (2 Oct 2008)

Duplex said:


> Of course 'professionals' operate in an economic world untouched by the vagaries of "normal" recessions, where career paths stretch into the distance like the yellow brick road.



my sentiments exactly


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## Purple (2 Oct 2008)

SPC100 said:


> I don't know the legalities, but to the me the income multiple would be a better and more appropriate metric than simply LTV.
> 
> People can still get deposits from parents, credit unions, Friends, car loans etc.,
> 
> ...


Good post; I agree.


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## NorfBank (2 Oct 2008)

SPC100 said:


> Even if the limit was set at 6 or 7 times one salary, people could not spend on houses what the bank would not give.
> 
> If this was the case it is hard to see how the average house would get to 10x the average salary.



Hypothetically if all applicants earn 30k and there are only one person mortgages then I agree house prices may hover around 210k  (7 times earning) if mortgages granted on a straight multiple.
However if there are 2 parties to the mortgage on 30k each then they are given €420k to play with, house prices shoot up to 10x the average salary.

Maybe the old days of a multiple of the first plus half of the second salary was the correct way after all.


One other thing, it wasn't just simple LTV, you had (have) to show repayment capacity on the amount you were being offered whether the LTV was 30% or 100%.


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## room305 (2 Oct 2008)

rmelly said:


> Taking this to the next level, do you also think there shouldn't be any form of deposit protection, whether 20k, 100k or unlimited?



Some people regard deposit protection as a moral hazard but I don't think it's reasonable to expect the public to know which banks are fiscally sound or not.

If the government provides an environment in which they claim to licence and regulate banks, but also allow them to engage in fractional reserve lending (lend money that does not exist) then it is only fair that depositors are guaranteed in some fashion.

However, I would prefer if the taxpayer wasn't on hook for this guarantee and instead banks were told to source insurance for their deposit base as a function of obtaining a banking licence.



Purple said:


> But the free market is an artificial construct and regulation is required to keep it in existence.



I agree that free markets are very much an artificial construct however, I disagree that _regulation_ is required for it to function. The laws of tort and contract should be sufficient.



Purple said:


> Banks are of vital importance to the economy, they require a license to operate and it is in the public interest that they operate in a sound fashion.



I agree wholeheartedly, but who has been quicker to address the problems in Irish banks - shareholders who dumped their stock or the government/regulator/central bank? It was only because the bond traders refused to lend to Irish banks through fears for their solvency that the government even admitted there was a problem.



Purple said:


> Even without the credit crunch Irish banks were going to be in trouble because of their exposure to the construction industry.



Absolutely, the credit crunch is a return to normality not an aberration. It is the credit bubble preceding the crunch that was the aberration. Now that we are returning to an era of more sensible lending, a lot of banks are being left exposed.



Purple said:


> The financial regulator, the Central Bank and the government all knew what was happening and they did nothing. I would like to know why.



Nobody likes to break up a party. I'm sure something could have been done to try and _limit_ the madness but how effective would it have been? If LTVs were limited then perhaps banks and buyers would, with a bit of a nod and a wink, placed higher valuations on the property to make the loans look more prudent. This might have had the effect of only stoking the madness further.

If the buck stops anywhere it is either with the ECB (for keeping interest rates too low), or with the borrowers themselves.


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## z109 (2 Oct 2008)

Sunny said:


> Why haven't we heard from the regulator or the head of the central bank in the past few days reassuring people that they know exactly what is on the bank's books and they feel very comfortable with what the Government is doing. I reckon it is because they haven't got a clue what is on bank's balance sheets. Also, what exactly is the role of the head of the Irish Central Bank at the moment? What does he do to justify being one of the highest paid central bankers in Europe. I work in financial sevices and I don't even know his name.


We've heard from the Regulator now, if you watched Prime Time this evening. Feeling confident about the state of the system? No me neither. What a shambles:
- property lending was not the problem
- on 95% mortgages - people need choices
- no idea what the likely loss on the bailout will be

I'm sooo looking forward to hearing from the Head of the Central Bank.


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## wjc (2 Oct 2008)

Watched Prime Time tonight. Was worried before, now scared after seeing Martin Mansergh and Pat Neary defending the Governments plan. Frankly the two of them didn't inspire confidence to put it mildly. Didn't appear to have a clue what they were talking about.


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## Thomas22 (2 Oct 2008)

Brendan said:


> The FR was in a difficult position.  They were concerned. They did implement stress testing. They did call for caution.  Maybe they should have limited all mortgages to 80% LTV, but then there would have been a political backlash from FTB's who could not have bought houses.  They would not have appreciated that the FR was doing them a favour.
> 
> Brendan



The financial regulator should not even consider what the political backlash would have been. They are there solely to regulator financial firms and protect consumers. Nothing more


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## Sunny (3 Oct 2008)

yoganmahew said:


> We've heard from the Regulator now, if you watched Prime Time this evening. Feeling confident about the state of the system? No me neither. What a shambles:
> - property lending was not the problem
> - on 95% mortgages - people need choices
> - no idea what the likely loss on the bailout will be
> ...


 
I didn't see it. How can the regulator say property lending wasn't the problem?


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## Raskolnikov (3 Oct 2008)

wjc said:


> Watched Prime Time tonight. Was worried before, now scared after seeing Martin Mansergh and Pat Neary defending the Governments plan.


What was most disturbing was that Pat Neary didn't acknowledge any problems with the Irish banks. Despite the Irish banking system almost being brought to collapse, he was happy to still favour the "light touch" of regulation.

This would lead me to believe that no lessons will be learned and that we shall face more trouble down the line.


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## z109 (3 Oct 2008)

Sunny said:


> I didn't see it. How can the regulator say property lending wasn't the problem?


Online here:
[broken link removed]
(if you can get it to work)

He just opened his mouth and out came the words. Everyone else opened their mouths too as their jaws hit the floor.


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## Sunny (3 Oct 2008)

yoganmahew said:


> Online here:
> [broken link removed]
> (if you can get it to work)
> 
> He just opened his mouth and out came the words. Everyone else opened their mouths too as their jaws hit the floor.


 
I will have a look. Its great how the regulator and politicians all blame liquidity for the current problems. They don't seem very interested in asking why the Irish Banks in particular were facing such a liquidity crisis. Maybe ignorance is bliss!


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## Afuera (3 Oct 2008)

Raskolnikov said:


> What was most disturbing was that Pat Neary didn't acknowledge any problems with the Irish banks. Despite the Irish banking system almost being brought to collapse, he was happy to still favour the "light touch" of regulation.
> 
> This would lead me to believe that no lessons will be learned and that we shall face more trouble down the line.


Very disturbing indeed. Before that interview I was questioning whether the regulator had their hands tied and lacked the clout they needed to regulate properly or whether they were simply being negligent to let things get so bad. After watching that piece on prime time though all I can conclude is that they are actually incompetant. If it's going to be up to these guys to insure the stability of the Irish financial system well then I'm well and truly worried now.


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## sfag (3 Oct 2008)

Er... no one has answered the question - can the regulator force the banks to stick to a 80% LTV. 

I dont know either. I do know the government applies tax (stamp duty) to the amount you borrow. If they cant force te banks to stick to the LTV percentage they could apply a massive charge to the loan amount where it exceeds 80% LTV. That would do the trick. 

I'd say they have plenty of mechanisns - all of which - as another poster above has rightly pointed out - would have very unpopular.


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## oceanclub (3 Oct 2008)

Purple said:


> The property bubble was a result of cheap credit and massive LTV mortgages. *We all knew it was happening.*


 
We did? 

*checks browser header* 

I thought this was _askaboutmoney.com_, where everything was considered quite rosy and anyone who alluded to property crashes or rational exhuberance was just one of those begrudging missing-the-boat living-with-mummy grumpy bears...

P.


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## Purple (3 Oct 2008)

oceanclub said:


> We did?
> 
> *checks browser header*
> 
> ...


 I, for one, disagree with you and your swipe at the moderators here.


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## Complainer (3 Oct 2008)

Purple said:


> If you tell me your opinion then I'll answer your question but I will not be replying to any more posts from you where your only contribution is to have a go at me without offering anything constructive to the thread.


Fair enough. I generally just ignore the posts where you have a go at me without offering anything constructive to the thread, but everyone to their own, I guess.

The Govt has made a huge mistake in writing an open cheque to bail out the banks, with no up-front control or up-front fees. How come the US Govt package comes to $700 bn for 220m people, and our package comes to €400 bn for 4m people. If a bank needs to be bailed out, then it should be nationalised, as the UK govt did with Northern Rock. But it seems that FF are still ruled by the 'can't interfere in business' mantra, and are quite happy just to dole out the money instead.

When will the bail out package for the primary schools ready to collapse in debt and running off the principal's credit card for basic supplies arrive? It's easy to see where the priorities lie.


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## Purple (4 Oct 2008)

Complainer said:


> Fair enough. I generally just ignore the posts where you have a go at me without offering anything constructive to the thread, but everyone to their own, I guess.
> 
> The Govt has made a huge mistake in writing an open cheque to bail out the banks, with no up-front control or up-front fees. How come the US Govt package comes to $700 bn for 220m people, and our package comes to €400 bn for 4m people. If a bank needs to be bailed out, then it should be nationalised, as the UK govt did with Northern Rock. But it seems that FF are still ruled by the 'can't interfere in business' mantra, and are quite happy just to dole out the money instead.
> 
> When will the bail out package for the primary schools ready to collapse in debt and running off the principal's credit card for basic supplies arrive? It's easy to see where the priorities lie.




They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance. I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money. 

I am not sure if this was a good idea (but decisive action was a good idea) but I think your last comment is unfair.


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## Purple (4 Oct 2008)

Complainer said:


> Wouldn't this contradict with your laissez-faire principles, i.e. "You cannot help men permanently by doing for them what they could and should do for themselves". Surely we should just let the banks fail (that's how the free market works - right), and then take it from there?



 I have said on many occasions that the free market is an artificial construct which is maintained with government legislation and regulation (that’s why we have a monopolies commission). 
On this issue I would love to see some banks fail but unfortunately it is not in the national interest to do so.


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## z109 (4 Oct 2008)

Purple said:


> They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance. I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.
> 
> I am not sure if this was a good idea (but decisive action was a good idea) but I think your last comment is unfair.


Seeing as it looks like the government is going to raise a maximum of 2 bn (according to the front page of the IT and the banks are arguing that it should be only a billion!) and the lowest estimate of the losses I've seen is 5 bn, this hardly looks like something that is revenue neutral. I suggest looking beyond the spin to doing some sums and seeing they don't add up.

As a side issue, I wouldn't trust a single word from any of the Irish stockbrokers. These are the chaps that have been recommending buy, buy, buy all the way down. Up until the recession was announced, none of them were calling a recession. Most of them up to the middle of the year were calling for a bounceback in both the economy and house prices in the second half of the year. Like the rest of our financial establishment, they are a joke. Populated by intellectual minnows and looking out for their own bonuses. Have any of them ever had a sell recommendation on an Irish share? Incest isn't the half of it.


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## Complainer (4 Oct 2008)

Purple said:


> They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance.


THe guarantee only has value if the guarantor is able to pay up. The exposure to the state is €400 billion. 


Purple said:


> I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.


I read in the Irish TImes that they estimate the income at €2 billion, but sure what's €11 billion between friends. It's much more important to focus on key issues like civil servants holidays, right?


Purple said:


> I am not sure if this was a good idea (but decisive action was a good idea) but I think your last comment is unfair.


It was certainly opportunistic, but still relevant.


Purple said:


> I have said on many occasions that the free market is an artificial construct which is maintained with government legislation and regulation (that’s why we have a monopolies commission).


Actually we have The Competitions Authority, not a monopolies commission, but [broken link removed] And why do we have only one Competitions Authority?



Purple said:


> On this issue I would love to see some banks fail but unfortunately it is not in the national interest to do so.


Now we're getting to the nub of the debate. I'm not so sure that it would not have been in the national interest to let one bank (particularly one that is focussed on commercial developments in the UK, rather than Irish retail customers) fail. The €100k guarantee would protect the vast majority of customers anyway. The banking sector now knows that the free market just doesn't apply to them, they can do what they like and the Govt will bail them out if things go wrong. Perhaps a bit of 'tough love' in letting one bank go might have been more in the national interest in the long term.


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## diroche (4 Oct 2008)

Complainer said:


> I'm not so sure that it would not have been in the national interest to let one bank (particularly one that is focussed on commercial developments in the UK, rather than Irish retail customers) fail. The €100k guarantee would protect the vast majority of customers anyway. The banking sector now knows that the free market just doesn't apply to them, they can do what they like and the Govt will bail them out if things go wrong. Perhaps a bit of 'tough love' in letting one bank go might have been more in the national interest in the long term.



Agree wholeheartedly. Letting one bank fail (and if possible prosecuting the directors for reckless trading) would have given the whole banking sector the kick they need to get their houses in order. But when has this government ever taken a tough decision when a fudge will do?


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## room305 (4 Oct 2008)

Purple said:


> They did not write a blank cheque for 400 billion, they haven't spent any money yet. They have guaranteed that they will not let the banks fail, in effect they have given them insurance. I heard on RTE radio (sorry, no link) that NCB estimate the maximum cost will be 13 billion but will probably be cost neutral and may make money.



I'd say there is almost no chance it will be cost neutral and carries the distinct possibility of bankrupting the state. The regulator freely admitted that nobody has examined the toxic loan books the banks have been running so have no idea what the impairments will be. The banks have been very reluctant to write down any assets and have continued to roll-up interest on developer loans.

Over €100 billion has been loaned to developers by banks (€86 billion in the republic as per Irish Times). There is no way this is only going to incur an impairment rate of 2%. In many cases the developers have no means to repay the interest on these loans without finishing the projects. Even the development projects can be completed, the developers will be selling units below cost and will not be able to pay off the entire loan.The collateral for the loans (land banks) is falling in value, in many cases by over 50%.

The problem for some of the banks was not just liquidity but insolvency.



Purple said:


> I have said on many occasions that the free market is an artificial construct which is maintained with government legislation and regulation (that’s why we have a monopolies commission).
> On this issue I would love to see some banks fail but unfortunately it is not in the national interest to do so.



You say it's not in the national interest to let _any_ bank fail, ever - no matter how recklessly the run their business? The idea of risk-free enterprise is anathema to capitalism.

Why shouldn't the banks be allowed to fail, and just have the state guarantee all deposits. Most of which could probably be recouped through an orderly sale of the assets of the failed institution. Why are we bailing out bondholders and shareholders as well?

The state has essentially gone all-in with the entire economy on a poor hand hoping something will come up on the flop.


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## GeneralZod (4 Oct 2008)

room305 said:


> If the buck stops anywhere it is either with the ECB (for keeping interest rates too low), or with the borrowers themselves.



If we follow that line of reasoning then shouldn't we take that one step further back and say that the mistake was ceding our briefly held (1979-1998) currency independence because it is unrealistic to expect the ECB to set rates according to Irish needs.


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## Complainer (5 Oct 2008)

Anyone with even the mildest interest in this issue will enjoy the Irish Times 'blow by blow' description of what happened on Monday night - See [broken link removed] - The last line is pretty scary!


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## ang1170 (5 Oct 2008)

room305 said:


> Why shouldn't the banks be allowed to fail, and just have the state guarantee all deposits. Most of which could probably be recouped through an orderly sale of the assets of the failed institution.
> 
> Why are we bailing out bondholders and shareholders as well?


 
Exactly! Can anyone answer this, please?


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## Purple (5 Oct 2008)

room305 said:


> You say it's not in the national interest to let _any_ bank fail, ever - no matter how recklessly the run their business? The idea of risk-free enterprise is anathema to capitalism.


 It’s not in the national interest to let banks fail in the current climate as doing so would cause a run on all Irish banks.



room305 said:


> Why shouldn't the banks be allowed to fail, and just have the state guarantee all deposits.


 As above


room305 said:


> Most of which could probably be recouped through an orderly sale of the assets of the failed institution.


 Does  this not contradict your suggestion that “I'd say there is almost no chance it will be cost neutral and carries the distinct possibility of bankrupting the state.”



room305 said:


> The state has essentially gone all-in with the entire economy on a poor hand hoping something will come up on the flop.


 The screw-up took place over the last  10 years, they are just trying to get out of it now without losing the farm.


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## Complainer (5 Oct 2008)

Purple said:


> Its not in the national interest to let banks fail in the current climate as doing so would cause a run on all Irish banks.


How do you come to this conclusion, given that the deposit guarantee scheme was in place?


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## room305 (5 Oct 2008)

GeneralZod said:


> If we follow that line of reasoning then shouldn't we take that one step further back and say that the mistake was ceding our briefly held (1979-1998) currency independence because it is unrealistic to expect the ECB to set rates according to Irish needs.



I'm not sure if that would be your conclusion but it would certainly be mine.



Purple said:


> It’s not in the national interest to let banks fail in the current climate as doing so would cause a run on all Irish banks.



Even if all deposits are guaranteed by the government?



Purple said:


> Does  this not contradict your suggestion that “I'd say there is almost no chance it will be cost neutral and carries the distinct possibility of bankrupting the state.”



Guaranteeing all deposits is likely to be cost neutral as the assets of the failed bank could be sold to cover depositors.



Purple said:


> The screw-up took place over the last  10 years, they are just trying to get out of it now without losing the farm.



By doubling down? Chasing losses and applying hope as an investment strategy are two of the mistakes likely to lead investors to bankruptcy. I'm just shocked it is now government policy.


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## tyoung (5 Oct 2008)

The state should have got an equity stake for its troubles. Enough so that there was no rise in the share price following the announcement. That to me would indicate that the move was market neutral.
 A bank can fail for liquidity or solvency reasons. This move removes, at least temporarily, the liquidity risks but the solvency issue remains. If enough of the banks' assets go bad, liabilities could swamp assets and in the event of a liquidation cost taxpayers.


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## Purple (5 Oct 2008)

Complainer said:


> How do you come to this conclusion, given that the deposit guarantee scheme was in place?



My apologies, I should have said all bank stocks (an even bigger run).


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## z109 (5 Oct 2008)

Purple said:


> My apologies, I should have said all bank stocks (an even bigger run).


But what does it matter if, in the short-term, stock prices fluctuate? It is extremely unlikely that an Irish bank (or any other bank for that matter) would have a successful public rights issue, so banks should already be looking to alternative means to raise capital.


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## Purple (5 Oct 2008)

yoganmahew said:


> But what does it matter if, in the short-term, stock prices fluctuate? It is extremely unlikely that an Irish bank (or any other bank for that matter) would have a successful public rights issue, so banks should already be looking to alternative means to raise capital.



Are you suggesting that AIB and BOI etc trading at under ten cents would have no damaging impact on Ireland in general?


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## z109 (5 Oct 2008)

Purple said:


> Are you suggesting that AIB and BOI etc trading at under ten cents would have no damaging impact on Ireland in general?


That damage is already done in the precipitous decline of their share prices over the past year.

The bailout is another nail in the reputational coffin.

Nobody needs a bailout if they aren't in trouble.


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## Purple (5 Oct 2008)

yoganmahew said:


> That damage is already done in the precipitous decline of their share prices over the past year.
> 
> The bailout is another nail in the reputational coffin.
> 
> Nobody needs a bailout if they aren't in trouble.


So things weren't going to get worse on the stare price front and the bail out damaged their reputation? I disagree.


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## Complainer (5 Oct 2008)

Purple said:


> My apologies, I should have said all bank stocks (an even bigger run).


If that is the case, the obvious action is to nationalise - If the state is the bear the risk, it must have the control and the ownership too. As it currently stands, the state bears the risk and the shareholders will take the gain if/when it comes.


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## Purple (6 Oct 2008)

Complainer said:


> If that is the case, the obvious action is to nationalise - If the state is the bear the risk, it must have the control and the ownership too. As it currently stands, the state bears the risk and the shareholders will take the gain if/when it comes.



Do you think that the state should nationalise the banks?
Do you think that this would have a good or bad impact on capital flows into Ireland?


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## z105 (6 Oct 2008)

> How come the US Govt package comes to $700 bn for 220m people, and our package comes to €400 bn for 4m people



You might find it's more like 303m people ?

[broken link removed]


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## Complainer (6 Oct 2008)

Purple said:


> Do you think that the state should nationalise the banks?
> Do you think that this would have a good or bad impact on capital flows into Ireland?


It didn't seem to cause too many problems for NOrthern Rock. They had to limit the capital inflows to stop them dominating the UK market.


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## room305 (6 Oct 2008)

Purple said:


> So things weren't going to get worse on the stare price front and the bail out damaged their reputation? I disagree.



I don't think he suggested bank shares weren't going to decline further, just that the bailout hardly helped their reputation.



Complainer said:


> If that is the case, the obvious action is to nationalise - If the state is the bear the risk, it must have the control and the ownership too. As it currently stands, the state bears the risk and the shareholders will take the gain if/when it comes.



I'm not sure if nationalisation is the best option for insolvent banks, I'd prefer the appointment of a liquidator. Sell off the assets, repay the depositors, then the bondholders.

However, I agree fully that if the state going to guarantee the banks they should assume a large equity stake, at least equal to the guarantee. They should also fire everybody at board and senior executive level, appoint a new board, block dividend repayments during the period of the guarantee and eliminate all "golden parachutes" or bonuses during this period also.



Purple said:


> Do you think that the state should nationalise the banks?
> Do you think that this would have a good or bad impact on capital flows into Ireland?



While I don't agree with nationalisation it would at least provide the public with the benefit of full disclosure of the bank's lending and the potential liabilities to which the taxpayer is now exposed.


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