Government guarantees all deposits in Irish banks

[Duke of Marmalade]

It's the very first thing I'd do if I was a bank exec; i.e. get these rotten loans off my books at the expense of the Irish taxpayer.

I think you are totally missing the plot here. It is not the rotten loans that are being guaranteed, it is the bank in its entirety. No way can a bank offload its toxic loans on the Irish taxpayer and continue business as usual on the rest, I think that is the US solution, but clearly it is not ours. This is what the professor very disingenuosly suggests.

 

[Duke of Marmalade]

It didn't take them long:

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

Darag, I agree that that promotion is an absolute disgrace. It doesn't even benefit from the Government guarantee as it is a 3 year bond, and yet all the body language suggests that it does.

 

[putsch]

It didn't take them long:

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



Oh my! That is really scarey - has this been approved by the regulator?

On another point has anyone done a comparison of pay packets of Irish bankers vs other European CEOs? Just happened to be looking at Credit Agricole today - largest banking group in Europe. Their CEO earned something like 2.5m in 2007 wihile BOI CEO earned c.4m - what's the rationale for this?

 

[putsch]

""

It didn't take them long:

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


Oh my! That is really scarey - has this been approved by the regulator?

On another point has anyone done a comparison of pay packets of Irish bankers vs other European CEOs? Just happened to be looking at Credit Agricole today - largest banking group in Europe. Their CEO earned something like 2.5m in 2007 wihile BOI CEO earned c.4m - what's the rationale for this?

 

[darag]

I think you are totally missing the plot here. It is not the rotten loans that are being guaranteed, it is the bank in its entirety. No way can a bank offload its toxic loans on the Irish taxpayer and continue business as usual on the rest, I think that is the US solution, but clearly it is not ours. This is what the professor very disingenuosly suggests.

Duke, this is banking. You cannot offer the type of guarantee the government just did and interpret its financial implications in the literal way you seem to be doing. Structuring deals to convert different types of assets and liabilities into each other is basic bread and butter stuff for a bank.

Straight off the top of my head; say I'm an exec in one of the 6 banks with a bunch of sh*t loans that in reality are worth about 10% of their book given most of them are non-performing. Bundle 'em up wrapped as a zero coupon bond with as long a maturity date as you can get away with. Easy to sell these because even if you go bust or the assets behind aren't worth a penny, our government is guaranting that the purchaser will get every penny of the face amount at maturity. Bingo - toxic loans off the books (you don't even have to worry about trying to sort out the mess) and another bundle of cash to keep the bank going a bit longer even if it's losing money hand over fist.

It's a win-win for the teathering bank and the institutional purchaser. Tell me with a straight face deals like this aren't going to happen? If I was a bank exec why would I even try to do something difficult like struggle to turn around my profitability in a tough environment (e.g. by slashing costs, providing better services to REAL customers, making people redundant, etc.) or even do the brave thing like try to wind things up before things get worse knowing that no turn around was possible? Why attempt any of this when I could spend my days dreaming up deals like this to convert sh*t into gold?

Now if they just had a straight equity injection then the writing on the wall would be stark and clear. These guys can do sums and would quickly work out how long the equity is going to last if they keep losing money the way they are. And when it's gone that'd be it. Like what the Swedes did.

You couldn't create a more perverse incentive scheme if you tried. Well actually it's not surprising; the bankers rang rings around the two Brians.

What amazes me, reading the papers, is that they've managed to sell this ticking time-bomb to the public. I even read a letter which said they were "inspired" no less by the governments actions. What a bad joke.

 

[horatio1]

Are you feeling a lot more secure in your bed? I certainly am not.We are now being asked to put our trust and worse our money in the people who:
1. Could not keep the water out of a tunnel or keep the water in an aquatic centre.
2. Currently are paying storage for e-voting machines than will never be used in this country.
3. Up to a couple of weeks ago were telling us there was no need to increase the deposit guarantee,Then they increased it to 100,000 euro because of Joe Duffy,but said that it was a cosmetic measure as our banks were fine and dandy,then go and bring in a full guarantee for € 400 billion because our whole financial system was about to crash but don't worry it will never have to be used because (and you may recall hearing this before) our banks are perfectly safe.
4 Predicted a few months ago that the public finances would be € 3 billion short,and now look like being at least double that amount.Yes folks the people who are promising us that they have done the math on this guarantee predicted that the tax take in the second half of this year would be greater in the second part of the year as history had shown we earn more/pay more tax in the secon part of the year,priceless.
5. Basicly get a kicking from the C&AG in his report every year as they are spectacular in the incompetance they show when budgeting even the smallest projects.
I could go on but you get the drift,Whatever disaster may have been on the horizon on Tuesday,just watch and see what comes down the line.We expect the people responsible for all the above to join forces with the people who systematicly defrauded the state,who at every opportunity have overcharged customers,and who having been bailed out by government before failed to(or were not forced to) learn the lessons, to now guide us through to calmer waters.
You have the regulator on prime time tonight evading the tough questions and spitting out the same vague cover lines we have been hearing for years.Nobody accepting any resbonsibility it was all down to Global credit crunch.Does it not seem strange to anybody that it was the banks that had to call the regulator and the minister in to tell them we were at the edge of the abyss? Surely if they were both doing what they are paid for they should be calling the banks in?
And finally the people who frowned at us for being so anti-european have turned around and given the biggest 1 fingered salute to the rest of the Union,alienated the banking communities and may have broken the competion and state aid laws! Remember folks "we can not live on the edge of Europe we are either in it or we ain't".Mr Lenihan or Mr Roche I believe.
So sleep tight we are all great lads/lasses sorting out that auld banking thing there the other day.

p.s I have voted Fianna Fail since I could vote and voted yes on Lisbon.

 

[Duke of Marmalade]

Straight off the top of my head; say I'm an exec in one of the 6 banks with a bunch of manure loans that in reality are worth about 10% of their book given most of them are non-performing. Bundle 'em up wrapped as a zero coupon bond with as long a maturity date as you can get away with. Easy to sell these because even if you go bust or the assets behind aren't worth a penny, our government is guaranting that the purchaser will get every penny of the face amount at maturity. Bingo - toxic loans off the books (you don't even have to worry about trying to sort out the mess) and another bundle of cash to keep the bank going a bit longer even if it's losing money hand over fist.

For a start, that maturity date can't be any longer than 2 years. More importantly, you may have got them off the books (shame on the accountants if so) but you have not escaped their consequences on profitability. This is the point which you and the good professor are missing (deliberatley?). Not until overall insolvency sets in does the government guarantee kick in. You cannot get the government to underwrite simply the manure stuff while you breeze along happily with the rest.

 

[darag]

So hot on the heals of the EBS product, more shennanigans: [broken link removed]

Obvious Fingleton Jn is a bit slow. By email Micheal? What were you thinking? Having been given a blank cheque by the government, you'd think the least you would do would be to have a bit of political sensitivity for your benefactors. Do you not realise we have to convince the public that this is a reasonably deal?

Of course Cowen's naivity is almost touching too. Surprised Brian? What did you expect to happen? And what will the regulator do? Tell him not to do it again? The regulator and government have no teeth to do anything.

And so it starts.... Loss making Irish banks with more liabilities than assets flashing the platinum credit card generously supplied by Daddy Cowen taking on even more debt. That wasn't hard to predict was it? Why wouldn't they? It's much easier to stretch the party on a little bit more than face the horrible inevitability. The problem for us is that some of these banks will never be in a position to pay back some of the money they currently owe so this is just piling more cash on to the taxpayer's already huge tab.

Imagine the sorts of deals the smarter bank execs are working as we speak on the basis of this guarantee? The ones who will use things like phones and meetings instead of sending bulk mail on the internet where it could fall into anyone's hands. It's simply scary.

Does anyone still think this was a good idea? I know I've been effectively ranting here but I haven't been as outraged by a government decision in my lifetime. I mean you expect various forms of inept government interference with various markets - that's politics - but the level of idiocy and scale in terms of cost to the public finances of this decision is unprecedented. This is potentially a bust-the-public-coffers type policy that I assumed only happened in poor South American and sub-Saharan African countries.

 

[darag]

Oops - just saw that this was covered in another thread.

 

[darag]

For a start, that maturity date can't be any longer than 2 years.

Is this sort of nitpicking the best you can come up with? You claimed it was impossible for a bank to offload toxic assets using this guarantee; in about 10 seconds I described a way of doing it. What I described was crude and blatent but I suppose if you gave me say an hour I'd have crossed the Ts and dotted the Is a bit better.

More importantly, you may have got them off the books (shame on the accountants if so) but you have not escaped their consequences on profitability.

Eh what are you talking about consequence on profitability? That's the whole point; there is no incentive to address profitability in this plan. The lads will be concentrating on balance sheet exercises to avoid marking their bad assets to market thus hiding their true position.

And yes I'm sure our regulator will say "shame on you" in a very angry voice. At least I don't know what else he will be able to do and frankly after watching his performance on Prime Time on the rte web site, I am even more depressed.

This is the point which you and the good professor are missing (deliberatley?). Not until overall insolvency sets in does the government guarantee kick in. You cannot get the government to underwrite simply the manure stuff while you breeze along happily with the rest.

Deliberately eh? Why would I do that? I am pretty much certain to lose my job if banks collapse. But I also happen to be an Irish citizen and it's in the latter position that I'm outraged by this. What's your motivation for cheering this on?

And absolutely no-one is talking about breezing along happily. This is a nightmare situation for all involved. Even the execs in the bad banks know that eventually, unless they can magic up billions of real assets to add to their balance sheets (this can only happen by becoming profitable), that they are doomed.

Like I said above, the effect of this are not at all hard to predict. If you think that a bank has to go bust before the two year window closes for the tax payer to be scr*wed by this, it demonstrates to me that you are (deliberately?) unwilling to actually contemplate how this is going to pan out.

Let's say one of these profitless "negative equity" banks survive in true Ponzi fashion on deposit money and institutional borrowing for a year and a half. What do you expect to happen as the guarantee window starts coming to a close? Unless it's extended, it will trigger a real old fashioned style run on these banks (and not just a freeze out from the money and bond markets) as the institutions scrable to withdraw funds start before the expiry of the government guarantee.

Of course, the bury your head in the sand for 2 years option is far more comfortable than facing the unpleasant reality.

 

[Duke of Marmalade]

Sunny, please help ajudicate between me and daragh, as you seem to know what you are talking about.

daragh is arguing that with this guarantee the banks can effectively walk away from their manure, leaving that to the government.

I am saying, no way, their shareholders will as before take the full hit if the toxic assets collapse. Only when the capital base has been eroded will the government step in. The shareholders are no better off than before in this particular respect.

 

[PaddyW]

Are the sh*tbags that got us into this mess gonna take wage cuts or even get the door?? Sounds ridiculous to think that after getting us into these situations that they should be allowed stay at the helm of the business' they are destroying. Read somewhere today that the six heads of the banks take home 13 million a year between them? Can they not be forced into taking a wage cut and putting some of this scandalous wage back into the banks? Or are they just gonna be allowed to carry on as normal and put this nations welfare right up sh*t creek? Cos that's what it looks like right now and it's a disgrace.

 

[darag]

Duke, just because you don't agree with me doesn't mean I don't know what I'm talking about. As I alluded to, I work in this sector.

There is simply no way, beside micro-managing every aspect of day-to-day operations to prevent banks from offloading the toxic stuff effectively wrapped in the tax payers' guarantee.

The government have made it clear that, except from some silly populist "cap on bonuses" cr*p, they have no intention of micro-managing the banks. Instead they will trust that clown of a financial regulator to start doing what he has singularly failed to do over the last 10 years - i.e. stop the banks from behaving recklessly. Note that the regulator's staff are - like himself - career civil servants and most have never worked in a bank.

 

[bren48kelly@]

While this is good for shareholders and depositors, it must put the financial stability of the government at risk.

It will also result in an unprecedented level of intervention in Irish banks.

Some possible implications/what should be done:

1) Banks will be told not to pay dividends
2) Irish Nationwide (and Anglo?) may be told not to make any more loans until further notice.
3) All banks will be told to stop lending to property developers
4) Loan to value ratios for home loans may be set at a maximum of 70%.
5) The government will appoint directors to the financial institutions
6) Some limits may be put on executive remuneration.

 

[bren48kelly@]

The ultimate value of deposit accounts

Should all depositors with accounts over 5000 euro unite and demand free shares in the bank to leave their deposits with the respective bank as we have seen the banks are only sound when it has deposits and at this moment deposits are king

 

[Duke of Marmalade]

Duke, just because you don't agree with me doesn't mean I don't know what I'm talking about. As I alluded to, I work in this sector.

Darag, I believe you know your onions and maybe I am misunderstanding your point. The following is how Anglo chief described it on RTE.

Only if a bank fails, i.e. the shareholders have been wiped out, does the guatantee kick in. In the first place this bail out is by the other still standing banks. (That for a start should help the sector put manners on itself.) Only when every one of the six banks has failed will the taxpayer be required to step in.

I simply fail to see how shareholders can ever gain from this at the taxpayers expense no matter what clever dickery their corporate finance departments dream up. You admitted to needing an hour to actually cross the "t"s and dot the "i"s on such a scam. Can you now outline for me a scheme which would do as you say i.e. dump the manure on the taxpayer and keep the sweet stuff for the shareholders?

 

[darag]

Ok. I am calming down a little bit - I've read a bit more about it and some of my earlier claims were not accurate. However this deal still stinks.

To think about the problem clearly we have to consider the problems faced by the banks separately: solvency and liquidity.

Solvency is easily understood it applies to all businesses. A business is insolvent if it has no future - its liabilities exceed its assets and it's not expected to produce profits at sufficient rate to shore up this shortfall.

It seems quite clear that one - maybe two - of the banks are in this state. They just haven't admitted it publicly.

They have not published marked to market figues for their assets but given what we know of the composition of their balance sheets and what has happened to the value of property in the markets they are exposed to, it is reasonable to assume that their balance sheets are shot. The fact that they refuse to even try to publicly explain where they stand is all the confirmation we need.

Secondly it is well known that their profitability is shot as they took a strategic decision a few years ago to concentrate on borrowing in the money markets and investing in property development and commercial property here and in the UK. This business model (a variant of the Northern Rock model) is finished - it basically doesn't exist anymore - so whatever profits they were making by doing this are gone; this leaves their neglected retail banking business as their sole source of future profits. This is a reasonably mature business so it is relatively easy to estimate how much money can be made on current accounts, car loans, mortgages, etc and as it turns out there is simply no way that they can squeeze the sort of profits they need out of their customer base to support their survival.

My analysis above does not require a PhD and the stock market and other financial institutions have come to the same conclusions and were pricing the shares and credit accordingly. If the analysis was wrong, it would be almost trivial for Anglo to publicly refute it by simply publishing the relevant details of the balance sheets and their profit centres. The silence is damning.

As far as I am concerned these insolvent institutions are zombies - the walking dead - and should have been folded straight away. Directors of an ordinary business which is insolvent who continue to trade - in particular increasing their liabilities knowing their position - can be prosecuted. There is good reason for this law and the contrast with what the government guarantee encourages the banks to do is stark. Notably the Japanese attempted to keep their zombie banks alive after their property bust and as a result created more than a decade of economic stagnation.

The other problem, liquidity, is particular to banks as their day to day operations depend on participating in the money markets. An analogy with an ordinary business would be a perfectly profitable shop, for example, which was shut off from its suppliers - say due to bad weather or some infrastructural disaster - was about to have it's business collapse as a result. Now apparently it looked like ALL the banks not just the two basket cases were going to be shut out of the money markets. This situation did require intervention but I think the correct action would have been to solve the short term liquidity problem - perhaps with a direct injection of equity (i.e. buy shares) but to immediately initiate the winding down the insolvent banks.

The unfortunate thing about the government's choice of action is not that it was made in haste but that they left themselves no room for subsequent manouver. There was obvious pressure to do something about the liquidity problem; there would have been huge knock on effects on the rest of the economy if the sudden shut down of a couple of banks caused the flow of money - which is essential to commerce - to stop. So I think they should have addressed the short-term liquidity immediately but they should NOT have committed themselves long-term at that stage. They are stuck with this guarantee because if they change their mind having committed themselves, it would create so much uncertainty that it is likely to devastate the positions of the other banks.

To answer your question regarding shareholders Duke, the shareholders are going to get it in the neck - guarantee or no guarantee. Anglo's share price will continue on a downward spiral for example. It won't go to zero because there is always a chance of a miracle or the government forcing one of the big boys to take it over.

Also I want to correct some of the claims I made in earlier posts which were wrong. It wasn't just that Anglo were being refused funding in the markets they were also experiencing the start of a "run" - over 100m had been withdrawn in the week prior to the crisis. The problem is that while it is claimed that 100k guarantee for retail deposits meant 97% of accounts were fully protected, the problem is that the remaining 3% actually held a hugely disproportionate amount of funds - maybe up to half of all the deposit money. The way to stop this of course would be for the government to guarantee all retail deposits.

What I find interesting is that the economists who also dislike this plan - Morgan Kelly, for example - are the ones who predicted exactly what has happened. At the time he was lambasted for "talking us into a recession" or being too negative and other such nonsense. The clowns who are fans of it - take Damien Kiberd, for example, has been predicting that our economy was just about to take off like a rocket again and that at least our banks were sound every couple of weeks for the last year; he was also saying that there was great value in Irish residential property a few months ago even as the average house price stood at 8 times avereage industrial wage.

 

[Duke of Marmalade]

Well hats off to you darag good post I still think Morgan Kelly in particular was way offside in saying that banks can dump their manure on taxpayers whilst leaving shareholders with the sweet stuff. Why does he say that?

 

[z109]

DoM, I presume because it is possible. The banks could issue two year notes backed by land-loans they know are not going to be worth much at the end of two years, use the cash in the hope that there will be a miracle turnaround, but meanwhile they have to come good to buy these loans back at the end of two years. If they can't the taxpayer is on the hook.

To be fair, it's not really necessarily anything to do with toxic stuff. The banks can sell two year notes backed by anything and use they cash they receive as they wish with the taxpayer providing the guarantee.

The question to me is not so much what the banks sell as what they do with the money they get from the sales!

 

[darag]

Excellent point yoganmahew. It is not at all necessary for them to explicitly link their toxic loans to any bonds they issue - the effect is the same.