Why we can't let the banks go bust

[sunrock]

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.

 

[Purple]

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.

 

[steviel]

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

 

[Shawady]

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'?

 

[onq]

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.

 

[steviel]

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

 

[Purple]

Excellent, succinct and informative posts steviel

 

[canicemcavoy]

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.

 

[steviel]

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.

 

[kaplan]

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.

 

[darag]

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.

 

[Purple]

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.

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.

 

[Shawady]

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?

 

[darag]

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.

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.

 

[Purple]

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.


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.

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.

 

[steviel]

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.

 

[callybags]

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

Well said.

 

[Purple]

Steviel, do you mean FF?

 

[steviel]

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

 

[Bronte]

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?