Make the depositors who were bailed out contribute to the retrospective guarantee?

[Brendan Burgess]

Arguments with no logical validity
I welcome the criticisms, challenges and refinements.

Here are some of the arguments which make no sense at all and make no contribution to advancing the discussion.

I have left a sample of the abuse on the thread. I would have deleted it had it been said about any other poster. I have deleted the most offensive and posts containing bad language.

Brendan said the banks were safe back in 2008 so he has to be wrong now
The fact that I have been wrong on some occasions in the past, does not mean that everything I say is wrong.

Brendan’s analysis in Sept 2008, was correct, so he must be correct again now.
People love quoting selectively from the interview where I said that the banks were safe. They never quote the following bit. But because I was right then, doesn’t mean I am right now.

There is no such thing as a free guarantee. If you raise the guarantee to 50k which the Danes provide, in the end consumers are going to pay for that. So all of the banks contribute to that fund.

If an Irish bank goes to the wall , which is very unlikely, the rest of the Irish banks will bail them out and personally , I would be more concerned about someone with €10k on deposit than someone rich enough to have €100k on deposit.
…

Me: I don’t think it’s inconceivable at all. The Government regulates Irish banks but the government does not and should not guarantee Irish banks and that is a very , very important distinction.

If banks behave badly in their lending or if they are reckless in their management or whatever, they should be allowed to go to the wall and that is a fact of economic life.

It would have an effect on the economy but giving some sort of soft guarantee to a badly managed banks would be irresponsible and very bad news for the long term

Brian Lucey thinks it’s a stupid idea
The idea should be judged on its merits. Not on who proposed it. Not on who opposed it. The fact that Brian Lucey forecast in 2006 that the [broken link removed] or that he suggested selling the deposits of Anglo Irish Bank does not make all his analysis now wrong.



This is the most stupid idea I have ever heard.
What a fantastically terrible idea! You've outdone yourself Brendan!
The idea itself is poorly thought out never mind completly wrong. It is a bit worrying if these are the types of ideas that are being discussed.
Pure and simple begrudgery Brendan. Nothing intellectual there at all. Your suggestion is offensive, and immoral. It encouarages begrudgery and this incessant blame game, find a scapegoat mentality that pervades Irish society at the moment.

Personal abuse doesn’t make the argument right or wrong

you see the mortgage holders as the victims, others see them as the idiots that caused this mess by spending more than they could afford on property with inflated prices.
I have sympathy for the mortgage holders, but I don’t see them as victims.

I will leave the last word to Canice…

Indeed; it's a topsy-turvy country where,…"eminent" economists are saying we should bail out people who, as Primetime shows last night, invested (not saved, invested) in multiple properties in places like Dubai.

And just a few posts later

Brendan, have you run this idea by any economists? Brian Lucey for one things it's a "stupid" idea.

Brian Lucey being the prime “eminent” economist proposing mortgage debt forgiveness. Canice – at last I agree with you. It’s indeed a topsy-turvy country when you can damn Brian Lucey in one post and then use him to damn my proposal in another.

 

[canicemcavoy]

Brendan said the banks were safe back in 2008 so he has to be wrong now

Brendan, that wasn't the point I was making. To reiterate; you yourself convinced depositors that their deposits were safe and they should not withdraw. You are now proposing that these people you convinced should be penalised. Do you feel no moral responsibility or shame over this?

I'm no Brian Lucey fanboy; he's been right sometimes, wrong others. He thought the property bubble would last, for one. And his debt forgiveness scheme is untenable - I agree with you on that point.

My point is - does _any_ economist think this is a good idea?

 

[JoeB]

The argument that people would (may) have lost everything in the past is not valid as an excuse for a retrospective tax now.

On those grounds a neighbour who prevented a breakin into your home would have a claim on all your possessions, 'as you'd have lost them anyway'.


There is no certainity that the banks would have failed, how can we be so certain? (although I would concede this point to a degree). But there can be no certainity.

'Not living in normal times' is not an excuse for state theft., .. unless we are entering into a totalatarian type regime. .. where confisacation of private property is the norm.

 

[Duke of Marmalade]

Boss your argument seems to be that the retrospective nature of the gauarantee was a mistake and should now be reversed. So let us wind back to Sept '08. Let's say the government announces a guarantee on all future deposits but doesn't guarantee existing deposits. So what would happen next? Existing depositors would simply switch their deposits into new deposits.

So nobody "gained" from the retrospective nature of the guarantee unless you are arguing that the right thing to do was to actually let the banks fail. For INBS/EBS maybe but not for any of the others. Ireland's economy, meaning us all, needed the systemic banks to be kept in business. Depositors, existing and new, were an essential contributor to that process.

 

[Raskolnikov]

Brendan, your proposal while well-intending, seems difficult to implement. Could we not make a case for allowing Anglo Irish Bank, and Irish Nationwide to fail? Someone on The Property Pin estimated the costs to depositors in Anglo Irish Bank as follows.

If we had had a liquidation, or a wind down of Anglo without the government guarantee, depositors would have lost money. I will outline how using the 2007 annual report as a guide as it was the last report issued before the Guarantee. [broken link removed]

Anglo Irish losses are now expected to be in the order of €35 billion. If it was not for government intervention, the Anglo Irish capital structure would have had to take losses in this order.

1. Shareholder equity - €4 billion - that's the shareholders getting wiped out
2. Debt securities - €23.5 billion - that's ALL the debt/bond holders getting wiped out
3. Depositors - €7.5 billion - this is the hit depositors would have had to have taken

Given that the Anglo had €46.7 billion on deposit, that means depositors would have had to have taken a ~15% hit in the wind-down.

I do not have a detailed understanding of the figures, but is it too late to consider this measure at this stage?

 

[Duke of Marmalade]

Rasko that is not how our liquidation laws work. Bondholders rank equally with depositors. That is why they were persuaded to take an interest rate slightly above deposits. If they knew that they would rank behind depositors they would be slipping into equity country rather than debt and would be demanding a much higher coupon.

Merkel and others want to change this state of affairs going forward but not retrospectively. The buzzword is a "resolution scheme". The problem is that if you weaken bondholders' ranking they will simply demand higher interest.

I support introducing a future resolution scheme (not a retrospective one). It will change the nature of banking and will severely limit the scope for countries like Ireland to leverage off foreign lenders. That would be a very good thing because it seems to me the real source of our problem is that we had access to cheap foreign funding to the point that we were grotesquely overweight with it. It was this cheap funding that fuelled the bubble.

 

[Brendan Burgess]

Hi Duke

Let's say the government announces a guarantee on all future deposits but doesn't guarantee existing deposits.

I don't understand this. It could not be done without freezing the existing deposits.

So nobody "gained" from the retrospective nature of the guarantee unless you are arguing that the right thing to do was to actually let the banks fail. For INBS/EBS maybe but not for any of the others. Ireland's economy, meaning us all, needed the systemic banks to be kept in business. Depositors, existing and new, were an essential contributor to that process.

It's hard to know what the "right" thing to do was.
We did give a retrospective guarantee. The banking system has survived in some manner and we have gained from this. But at a huge cost.

If the guarantee had not been raised, there would have been a run and the banks would have collapsed. So, whatever way one looks at it, the depositors who got a retrospective guarantee, have benefitted hugely.

This guarantee has weakened the "guarantees" to given in advance to others. Those who held savings certs or Irish government bonds. They have been hugely disadvantaged by the retrospective guarantee.

 

[Bronte]

Not much incentive there for people who have moved their deposits outside the state to move them back again.

Conversly those looking for a safe place to deposit their money would prefer a bank with an insurance guarantee on the savings even if the interest rate was slightly lower.

 

[Bronte]

My point is - does _any_ economist think this is a good idea?

Does anyone actually care what any economist says. For each one that says it's a good idea you'll get 10 saying it's not. Economists differ all the time and no one economist has been right most of the time. Personally it's pure luck when they get something right, usually after the fact.

 

[Firefly]

Conversly those looking for a safe place to deposit their money would prefer a bank with an insurance guarantee on the savings even if the interest rate was slightly lower.

Very true!

 

[Duke of Marmalade]

Hi Duke

I don't understand this. It could not be done without freezing the existing deposits.

Okay, technically possible if existing deposits were frozen but in a sense this is the same as a retrospective resolution scheme.

Prof Holohan, in his report, mildly rebuked the blanket guarantee for covering existing bondholders which in other jurisdictions had not been the case. But I don't think he was suggesting freezing existing bondholders; that would be, as I say above, a retro change to the legal basis on which the funds were lent.

 

[canicemcavoy]

If the guarantee had not been raised, there would have been a run and the banks would have collapsed. So, whatever way one looks at it, the depositors who got a retrospective guarantee, have benefitted hugely.

You have this completely backwards. It was actually the banks who benefitted from the depositors who left their deposits there; the banks would have collapsed otherwise.

You're now proposing that the depositors be punished for preventing the banks collapsing.

 

[Duke of Marmalade]

The bottom line is that nobody has benefitted from the guarantee as it hasn't been invoked. Existing depositors and bondholders have benefitted not from the guarantee but by the fact that the banks were kept alive. They were kept alive by a variety of means, guaranteeing funding, namafying toxics and recaps. The retro nature of the guarantee is an irrelevant part of the mix and will only become relevant when a decision is made to withdraw the other life supports and let the banks die. Then maybe one could say "oops! never meant this guarantee to apply to pre '08ers gotta confiscate half of it back".

In effect, the Boss is saying that if we knew then what we know now the correct announcement in Sept '08 was "we are going to keep these banks open come what may but to enable that we are applying a one off tax of 50% on existing deposits and bonds, to the extent that they are within our tax jurisdiction".

 

[Raskolnikov]

Rasko that is not how our liquidation laws work. Bondholders rank equally with depositors. That is why they were persuaded to take an interest rate slightly above deposits. If they knew that they would rank behind depositors they would be slipping into equity country rather than debt and would be demanding a much higher coupon.

Are you sure about that? I have read that Irish Nationwide bondholders have been trying to persuade the UK courts that depositors ranked below bondholders as they were technically shareholders, but I have never heard of depositors ordinarily ranking with bondholders.

 

[Raskolnikov]

The bottom line is that nobody has benefitted from the guarantee as it hasn't been invoked. Existing depositors and bondholders have benefitted not from the guarantee but by the fact that the banks were kept alive.

Are you sure? When David McWilliams met with Brian Lenihan on that famous, garlic-fueled night before the guarantee was instated, he found out that...

We had weeks at best, days at worst. My own reckoning was that the banks had a few weeks' financing. The minister indicated that the problem was more acute. The most revealing thing about our conversation was that it was AIB, not Anglo Irish, that had the most severe funding problems.

After the guarantee was introduced, the markets calmed and the rot stopped, so that surely suggests the banks would have went bust otherwise?

 

[Brendan Burgess]

Are you sure about that? I have read that Irish Nationwide bondholders have been trying to persuade the UK courts that depositors ranked below bondholders as they were technically shareholders, but I have never heard of depositors ordinarily ranking with bondholders.

Hi Raskol

This is one of the problems with the discussion generally.

There are two types of bondholders:

Senior bondholders are, in effect, depositors and they must be treated equally.

Subordinated bond holders are, in effect, shareholders, and they can be burnt.

Sunny did an excellent Key Post on it here.

Brendan

 

[Duke of Marmalade]

Are you sure about that? I have read that Irish Nationwide bondholders have been trying to persuade the UK courts that depositors ranked below bondholders as they were technically shareholders, but I have never heard of depositors ordinarily ranking with bondholders.

Rasko that is a different debate. Depositors as members of a mutual buidling society are indeed technically the "shareholders" of the society and indeed would and have benefitted from carpetbagging de-mutualisations. So yes I could see an argument that bondholders rank above share deposits, an interesting and perverse twist. I admit that I had a humble deposit in INBS in the hope of a windfall, seemed like a one way bet. I can see an argument that I lost my bet. Ironically this line of thought would "punish" the lower deposits disproportionately, the opposite of the Boss' suggestion.

In the case of Anglo, AIB, BoI this doesn't arise. Depoitors and senior bondholders are both creditors of the company and rank equally in a liquidation.

 

[Duke of Marmalade]

Are you sure? When David McWilliams met with Brian Lenihan on that famous, garlic-fueled night before the guarantee was instated, he found out that...
After the guarantee was introduced, the markets calmed and the rot stopped, so that surely suggests the banks would have went bust otherwise?

Not bust, illiquid. And this has happened big time despite the life support mechanisms. When a bank goes illiquid rather than bust the Central Bank provides liquidity of last resort. This is now happening to the massive tune of €130bn

Anglo would now actually be bust as opposed to merely needing ECB support if it were not for the support mechanisms. That is because it would have run out of elligible collateral to tap the lender of last resort.

 

[canicemcavoy]

Do you feel no moral responsibility or shame over this?

[...]
I
My point is - does _any_ economist think this is a good idea?

Brendan, I'm wondering if you have any responses to these points?

 

[Brendan Burgess]

Hi Canice

Do you feel no moral responsibility or shame over this?

You might have missed this post? where I dealt with the question. Whether I was right or wrong on any particular issue on previous occasions neither adds nor detracts from the merits of the suggestion. But to answer your specific question - I am very happy with my overall record of getting things right and I have no problem with getting things wrong. But please don't take this or any other thread off topic - stick to the issue.

My point is - does _any_ economist think this is a good idea?

I don't really like seeing people +1'ng posts, but, I will make an exception as I can't improve on Bronte's answer to you

Does anyone actually care what any economist says. For each one that says it's a good idea you'll get 10 saying it's not. Economists differ all the time and no one economist has been right most of the time. Personally it's pure luck when they get something right, usually after the fact.

+1