September 21, 2008

State must act as a safeguard

Posted in Banks · 38 comments ·

Making people’s savings secure is the best way to return confidence to the market.

When ordinary people are flocking to the post office to deposit their savings, we know that we are running out of time. Some Irish banks are in clear and present danger and, as events in the US have shown, when things are moving so quickly, old assumptions no longer hold.

Last Friday’s rally, although welcome, does not change anything. We are still looking at a banking dilemma because the wholesale credit market is frozen. In its simplest terms, the people who lend money do not trust the people who would like to borrow it.

In the Irish case, we have already seen a run on the banks, in terms of investors in any case – foreign investors are trying to get their cash out, and last Friday’s rally will be taken as an opportunity to sell by many investors because the root causes of the malaise are still there.

The question for the state is whether we are looking at a situation of illiquidity or insolvency. Pessimists say the banks are insolvent; optimists argue they are simply illiquid.

If it is insolvency, which is still unlikely, then there are the normal longer-term measures to deal with bad debts. But if it is illiquidity – a short-term crisis of confidence that can be rectified – then the state can manage this with some obvious measures.

Let’s be clear: it would be unforgivable if a situation of illiquidity were to prompt insolvency due to lack of decisive action from the state.

There are two key issues: time and confidence. The banks need more time to work through their loan books to see what is viable and what is toxic. This will allow them to make an accurate assessment. The depositors need confidence to allow them to feel safe in keeping their money on deposit. What happens in banking crises is that time and confidence head towards each other on a collision course.

Ultimately, the banks can’t sort out their bad debts as quickly as depositors can withdraw their money, and thus the banks fail.

Ireland needs to avoid this eventuality at all costs. So what are we to do? We know how we got here – mad over-lending on Irish property. The questions now are how do we get out of this mess and, more importantly, how do we restore confidence.

Three models were tried last week alone in the US. These options are open to us. However, there is a fourth, which might be the most effective for Ireland. Before we explore the different options, there is one argument that we have to settle and this is the argument about morality.

There are many who believe that the banks have been reckless and should not be saved because saving them would reward the bad behaviour of the banks’ bosses. There is obvious political logic to such a view. How can a politician be seen to bail out a fat-cat banker at the cost of delaying building a hospital wing? (One part of me shares this attitude, by the way.)

However, today we have a national crisis and the better part of valour is to sort out the problem immediately and leave recrimination for tomorrow. Heads will roll in time; today is for action, not vindictiveness. After we stem the crisis, we can go back and punish those responsible.

So what are our options? The first approach to dealing with this is the Lehman model. This is where the state allows the bank to fail. This is not an option for Ireland, as only failed states have failed banks.

The collapse of Lehman has done untold damage to the US, but at least the US has the comfort of being the world’s biggest economy and deepest financial market, as well as being able to print its own currency. We are not in that position. If Ireland lets a bank go under – even a small one – panic will follow.

We will get a run on the banks internally, while externally we will scare foreign investors, who are crucial to our economy. It would take years to restore credibility. Countries like Argentina allow their banks to fail with detrimental consequences; Ireland can’t afford to let this happen.

Therefore, the Lehman model is not on, even though some institutions might deserve to go under.

The second option is the AIG option. Last week, the US government nationalised the giant corporation to prevent bankruptcy. This is precisely the opposite of the Lehman approach.

In Ireland, the state could take over a failing financial institution and use a ‘bank bond’ to raise the finance if it were needed. In the past, we have seen this approach in Scandinavia. The state would have to take a gamble on whether it could ring-fence the problem, that is by nationalising a ‘bad’ bank, it would be enough to restore confidence in ‘good’ banks.

The third option is the Merrill Lynch or HBOS model. This is where the authorities broker a deal between a large, more solvent bank and a large, less solvent one. This is the ‘shotgun wedding’ solution.

However, there appears little point in two smaller banks with significant property exposures like Anglo Irish and Irish Nationwide saying they will merge.

What might be interesting is a foreign outfit like Zurich Insurance, which already has an operation here, looking atone of the domestic players, such as Irish Life & Permanent (ILP).This would greatly enhance ILP’s position.

The shotgun wedding scenario will have to involve a foreign bank and one of the big Irish banks. This is because all the Irish banks were at the same game. If we start ‘hiding’ weak banks in not-so-weak banks – as the Japanese did in the 1990s – we will get nowhere, as the weak banks’ balance sheets will contaminate the not-so-weak ones. In the present climate, no bank will do a deal with an Irish bank without some state underwriting of the ailing Irish bank’s balance sheet; the shotgun wedding will cost us cash and, like all marriages, the permanence of any arrangement will depend on the compatibility of the couple.

The fourth option is the most attractive one, but it hasn’t been tried anywhere and would demand a leap of faith from the authorities. Remember what we said before: the two critical elements are time and confidence. The single most persuasive route to take would be for the Irish government to guarantee all deposits in Irish banks. Yesterday’s announcement of a €100,000 deposit guarantee only goes half the way.

In contrast, a full guarantee would have meant full protection for all creditors, all our own deposits and those of the foreign institutions who have lent to the Irish banks. The government could do this for a limited period – let’s say two years.

Straight away all uncertainty would disappear. The deposits, of which there are close to €300 billion, would become sovereign. Peoples’ fears would be assuaged and, if done properly, it would not cost a penny.

The Irish government would be using its well-earned reputation as a sovereign entity, not its hard-earned cash, to solve this crisis. People will not bet against it. This would guarantee the deposit side of the banks’ balance sheets, where there is no problem but uncertainty. Therefore, we would solve the confidence side of the dilemma.

Furthermore, with the return of confidence, the banks would have time to sort out their asset problems. These loans on property will never be paid back in full, and the banks will need to negotiate with debtors.

The banks will have to accept that they will have to take large losses on these debts (with many technically in default already) and, with the property market going nowhere at the moment, these will not recover for some time.

However, financial history is full of such episodes and there are many viable ways of dealing with bad debts. There will always be buyers looking for value, and there can be no doubt that, at deep discounts, Irish property will be a decent bet again.

Of all the options, the deposit guarantee is the most attractive. The guilty parties will be punished in time. This means the heads of the top brass at some of our biggest banks. Over time, consolidation can occur with a well-planned marriage rather than the hasty shotgun affair and, most importantly, the state will be seen as being in charge. The crisis will pass, and Ireland will become a model of financial innovation.

Most crucially, the government must act quickly because, with the property market in tatters, the main engine of growth for Irish banks will splutter for the next few years. This implies that the bailouts we have seen internationally will not offer a lasting liquidity solution.

If we act now, quickly and with confidence, a potential insolvency won’t escalate beyond a temporary problem of illiquidity and will be sorted without panic or long-term consequences.

  1. Skin


    Where are you getting the 300 billion deposit figure from? From my calculations that equates to about 75,000 euro for every man woman and child in the country!! Not bad for a country that has saddled its twenty/thirty something generation with pvervalued and unaffordable mortgages.
    I think the figure is more in the region of 250 million on deposit. Most of these deposits are small (by that I mean less than 20,000) and were already protected prior to Minister Lenihans recent announcement.
    The Minister is in a win-win situation, he gets to look like he is acting decisively, it makes Ireland look like a country that can afford to take on bank failures and ultimately if a bank does fail then the real cost to the exchequer would actually be negible.

    Does anyone really think that the Government would have increased the Deposit Protection to 100,000 if there were serious amounts of money involved (300 billion)?

  2. “The War of the Words”, (with apologies to Orson Welles,)
    The run on the banks fiasco.
    The ability to confuse audiences en masse may have first become obvious as a result of one of the most infamous mistakes in history. It happened in September 2008, when millions of irish citizens tuned in to a popular radio program that featured real life drama.
    The mischief maker/famous broadcasting celebrity, Joe Duffy, took calls from panicky customers of the irish banks who had seen their shares plummet almost below the horizon ,due to the banks rapacious exploitation of the property bubble phenomenon . As the stock market collapse, the real fears of citizens instigated a run on the banks,which threatens to destroy the economic fabric of the nation.
    Joe was meanwhile stoking the fires and listening on the airwaves,to Grannies etc. worried about all the cash they had hidden under wardrobes mattresses etc.
    As the show unfolded, politicians and bankers panicked and the Minister for Hardship Brian Lenehan,danced on the table in government buildings (as his padre was known to do before him) only this time, it was not entertainment-it was anger.!
    .Thousands of listeners hurriedly donned their coats and rushed to their local bank branch ,withdrew their life savings and hid them wherever they could find a spot which robbers might not easily locate.
    News of the panic (which was conveyed via genuine news reports) quickly generated a national scandal. There were calls-which never went anywhere-for government regulations to ensure that the banks would never be permitted to lend 350 million euros to Joe Ballsbridge and his Fianna Fail cronies countrywide-nor give 100% loans to the mugs who were hooked on property cocaine-nor cause such chaos again
    In a prescient column, only one commentator David McWilliams foresaw that the dreadful fiasco revealed the way politicians, auctioneers, and property developers could use the power of mass communications to create illusions, & manipulate the public into borrowing sums of moneyfar in excess of what they could afford to repay.!.
    “All unwittingly, Joe Duffy and RTE have made one of the most fascinating and important demonstrations of all time,” one commentator wrote. “They have highlighted how a property speculator, financed administration, can mishandle an economic boom, can convince masses of people of a totally unreasonable, completely fantastic proposition (they must buy at any cost ,as prices are rising and rising..) as to create a nation-wide panic.
    Joe has demonstrated more potently than any argument, demonstrated beyond a question of a doubt, the appalling dangers and enormous effectiveness of popular-almost theatrical- demagoguery….
    Mr. Duffy was able to scare thousands into demoralization with nothing at all except interviews with real people and potential victims of-not just negative equity-but judging by the collapse in confidence in our banking system-the real possibility of losing their life savings as well.
    One might say that “War of the Words” between the government and RTE ( the Joe Duffy show) was the aftermath of the age of simulation and dissimulation .
    Allowing for a little poetic overstatement, it can be said that we now live in an age of simulation and political “spin” intended to create confusion, and bury the truth. Our tendency to mistake fakes for what they imitate —particularly in the world of politics-has become one of the characteristic problems of the age.
    More to the point, we live in a time in which the ability to create deceptive simulations, especially for television, has become essential to the exercise of power. And the inability to see through these deceptions has become a form of powerlessness. Those who let themselves be taken in by the multiple deceptions of politics, news, advertising and public relations, are doomed, like the more gullible members of the radio audience of “The War of The Worlds”in 1938, to play a role in other people’s dramas, while mistakenly believing that they are reacting to something genuine.

  3. Malcolm McClure

    David: If your figure of €300 billion of deposits in Irish banks is accurate, it implies that the multinationals are using Irish Banks in a kind of ‘Reverse Ansbacher Account’ US tax avoidance ploy.
    If that is indeed the case, they raise a number of interesting moral issues, including whether the ECB regards us as having double standards, or at least a three monkeys attitude to competition on a level playing field.
    Leaving that aside, those hypothesised deposits might account for the complacently inert response of the government and Central Bank to the ongoing liquidity crisis. Sums of that magnitude are unlikely to flee or evaporate overnight.

  4. Deco

    Based on previous property busts, there will be a large drop in property values, an increase in bankruptcy rates amongst business, an increase in interest rates, rates of inflation that will not be stable, and a lot of bad debt to be digested some where in the financial system.
    The Irish Banking system only has one conservative bank-the ACC Bank. The ACC Bank did absolutely nothing during the property boom. Completely missed the entire event !! The other banks were laughing at the dullards in the ACC Bank. The highest level of banking activity in Irish history. And what did the ACC Bank do ?? They ignored it. They continued to loan to famers and small business operators. The dumb fools never caught onto the property boom. They stayed conservativeand cautious. The branches remained in the 1970s with dust everywhere, dull brochures, and understated staff. They never trained the staff in customer service. You got a genuine encounter, but if they did not want your business, they were direct and often rude. It turned away NINJA loans. Instead every customer was greeted with complete scepticism. If you were there for years then maybe they might trust you. The ACC only seemed interested in niche groups that nobody else seemed to notice -farmers, a small operator, rural businesses, or pensioners. It is like as if the ACCBank only want the most conservative elements of Irish society. And they are stuck in the countryside. Exactly where there was no boom. In fact I don’t even know if they have bank cards. They don’t issue credit cards.
    I remember going there on the recommendation of Shane Ross during the SSIA savings scheme. And it was like as if the staff were overwhelmed by business. And I seen the other brochures. And I thought to myself this place is very quaint. Brochures for agricultural loans. Business for small business operators. Savings plans. And that was it. I cannot remember seeing any mortgage brochures. No effort to get people to release the ‘equity in their homes’, to take out lifestyle loans. Definitely no brochures for credit cards. I thought to myself this is the only bank that is different. They were the only conservative bank. No loud ads. In fact no advertising at all. Very rural. Understated. Dust in the corners. Cheap furniture. No sweets, free pens, or free newspaper. Very old-fashioned. Everything that the Celtic Tiger and the Bertie Ahern years were not. It was like a trip into the early 1990s when the Beef Industry and the Dairy Industry gave us exports that were 40% of the strength of the Irish pound. It made no attempt to bring in the Celtic Cubs.

    The way things are headed, the ACC Bank will continue to stand still or move slowly for another five years. While all the other banks and building societies duck and dive, sweat it out, lay employees off, cut costs, take pay cuts, fight with unions, call in the government, drop business lines, merge and even get bought out. The ACC Bank will continue staying still, staying conservative, and probably be loaded with archiac work practices. The unions will ensure that the bank will exist for years. Because the unions in the ACC Bank want state style employment, and they don’t want anything that threatens that. They want long years, and no adventure. There is no incentive scheme in the ACC Bank. If there was the customers would probably be disgusted. Even the website has one page on loans and the loans are for business. They are no in the residential loans sector. They have more offices in Counties Cork, Galway, Waterford, Mayo, Louth, and Westmeath than in Dublin…..and the office in Dublin doubles up as a branch of Rabobank…..It is half an office.
    But one thing is certain the ACC Bank will survice. That is about the only certainty in the Irish Banking industry. Everything else is all up in the air. But the ACC Bank will still be around. The “Bank of Dust and Scepticism” remains in most large county towns…with a very simple business plan. It is extremly successful. Turn away risk. Only work in your area of competence. If you don’t know the business, then don’t give the loan. The slightest doubt results in a No. Only deal with people who are able to handle money. Confidence is never a consideration in the ACCBank. In fact scepticism is the core value. Every member of staff is like a civil servant. The paperwork is heavier than elsewhere. There is a less for all of us, concerning management of finances and irrational exhuberance. The lesson that Aesop called the Fable of the Snail and the Hare. The real kicker is that the ACC Bank is 100% owned by a Dutch Agricultural Bank… you can’t buy the shares. It it had been retained under state ownership it would have been swamped with appointments from Bertie Ahern and friends. It would have been loaded with cronyism, layered management, silly decision making, interest group meddling, and government interference to make it a liberal banking institution. It would have become a Freddie Mac. And that was the plan. But McCreevy didn’t want to go down that road. So he just sold it off. And no capitalistic bank wanted to have anything to do with farmers or unions. In the bankers and stockbroker community, they put their fingers to their nose at the thought of it. So it was sold to the Dutch. And the ‘professionals’ figured must have laughed at the niavity Dutch to get the most archiac part of the Irish financial services sector. The new Irish post Thatcher bankers knew better. They knew about market share and about expansion. They knew about bonus and incentive plans to get the business. But the ACC Bank remained in the 1970s. They were completely about the Celtic tiger mentality. They never heard of the Reagan revolution. The two biggest influences in the ACC Bank are cautious unions and cautious Dutch Bankers. If it was an independent bank it would be the most likely bank to survive the crisis without any bleeding. And when the other banks try to de-unionise…..the workers in the ACC Bank will continue as before. Unionised, understated, conservative, brutally honest, with no advertising effort. And most of all notoriously sceptical. A survivor. The only one that we certainly survive. A unique and modest formula for success in the Irish financial sector. The pillars that got it to where it is, will keep it going. The ACC Bank will still be financing the companies that will keep rural Ireland ticking over in ten years time. But by that time their competition will be much weaker. Long term thinking for the private sector. Now we see how the Dutch do banking.

    • George Bumblebee

      ACC were bought out by Rabobank almost five years ago David, They don’t “Share” the office in Dublin. As Yoda might say “cutting edge information above is not”.

  5. Deco

    The point I was trying to make was this. The capitalism of Schumpeter has triumphed over the capitalism of Reagan-Thatcher. It is in the work of Schumpeter and the Austrian Economists that we will rebuild the economic system. Watch the US Administration try to sustain the capitalismof Reagan-Thatcher as it is in on it’s death bed. The lifesupport system is powered by Beijing. Beijing can switch off the power and leave the corpse cold. This is not a situation that we in the West should welcome. It is no healthy for the basis of Western Civilization. But nobody seems to grasp. In fact it would seem that there are more interests in the Media interested in attacking any alternative to the Reagan-Thatcher model of speculative-capitalism. But it is up to each citizen to ensure that this does not occur !!!!

  6. JH


    Unfortunately in reading your fine article you seem to have missed one I think overlooked sector in the irish economy .That is The famous Credit Union area. It operates very quietly in the backround but there are millions stashed away in those accounts. What happens if they go belly-up ? Now as far as I know most Credit unions are affiliated with the Irish League of Credit Unions (ILCU). The ILCU have in effect what is called a Savings Protection Scheme where each Credit Union pays in a certain amount each year into a fund . If a Credit Union was heading for the rocks which would be monitored by its manager The ILCU would step in and give money from the fund to the Credit Union where needed.and would step in at an early stage. Now in the case of a Credfit Union going bust altogether whatever debts they could reclaim would be added to money from this fund so that its members would get some money back but it is not guarenteed. It would be up to the discretion of the manager of the Credit Union and the ILCU. If anybody saw Mr Eddie Hobbs on the Late Late Show on Fri evening he bought up this very point.

    Now there is another problem. Most Credit Unions use Banks in various shapes or forms to store money , or to lodge money. If say a Credit Union has €10 Million
    in working assets this will not be lodged in the safe in the local Credit Union beside
    Johnny Macs pub ! It will be stored in Banks and other financial institutions.

    What happens if these banks get into severe financial trouble ? what happens those savings ?

    Now Brian Lenehan has come out and has said that the Credit Union accounts are now state guaranteed. Really how safe is this guarantee if there were to be a serious run on funds from the Central Bank due to Banks being in trouble , would the money come from Europe ? , if the banking system here really hit the rocks ?
    Would the State nationalise those Banks ?

    Its seems that we always hear about Banks and the trouble that they might be in but very often is it forgotten about the vast portion of the market ther Credit Union movement have. How many people went to their local Credit Union for the home improvment loan , their car loan and then their job went and find it hard to make the repayments , I’d say even credit union money paid for a lot of boob jobs( Imangine the red faces when asked to write down when applying for the loan what the money would be used for !)

  7. Philip

    David, are you not thinking here in terms of a solution to a local problem with no reference to the outside world. There are 2 issues…The immediate one of the world financial system collapsing and then the local one of banks property related bad debt.

    Ignore the outside global issue for a moment, the local banks here are going to find a lot of bad debt needing a solution. That’ll take 2 years to come to its peak and certainly your solution has merit in providing the necessary breathing space required to ensure international credibility. When you start bringing in the global unravelling – we are in a completely different ballgame. The US Fed are hoping it can raise enough debt to counter the ever widening black hole. I think it will fail. They are hoping to get approval to raise another trillion of debt to buy breathing space and sell it on to the international community that their fundamentals are fine. I think there is only so much the intervention CBs can do to keep pumping the dollar. What has happened here is that the “fundamentals” and the financial system have become completely disconnected. My guess is that the dollar will be 10 to a Euro in a few weeks – and that will crucify everyone as the world’s largest consumer will be turned off. Question is…who’ll jump first in the sell off?

    Hope I am wrong.

  8. Lorcan Roche Kelly

    Deco > It is in the work of Schumpeter and the Austrian Economists that we will rebuild the economic system.

    This idea, along with education and social and environmental renewal, form the central strategies of the Lisbon Agenda, which was adopted for a ten-year period in 2000 by the European Council.

    2000? You may wonder why, if this is the european economic strategy for the past eight years, you’ve heard little or nothing about it. Honestly, I’m not sure, but I suspect the source of the idea may some of the problem. Irish economic thinking has naturally been more influenced by Anglo-American ideas than European ones. We may have a European currency and central bank, but our principal market is Britian and our principal source of inward investment is US.

    But the current financial crisis should give the Lisbon Agenda renewed imputus. There are increasing numbers who worry that the crisis might be a symptom of something much more serious. It may just be that Friedman was wrong, and Reagan and Thatcher backed the wrong horse. Has Schumpeter’s ideas time come? Maybe, but new ideas are never big sellers.
    As John Maynard Keynes said “The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

    Philip > What has happened here is that the “fundamentals” and the financial system have become completely disconnected.

    Absolutley, as my brief adventure with BoI last week proved. An explaination of current volatility cannot be found in the writings of Friedman, so maybe we should be looking to Freud. Rational actor economic models may be sound on paper, but they seem to break down when subjected to people and their irrational panic, greed, pride, hate and love.

    > My guess is that the dollar will be 10 to a Euro in a few weeks – and that will crucify everyone as the world’s largest consumer will be turned off.

    Maybe not in a few weeks, but it is possible. If it does happen it would fundamentally change the way the world works, not only economically, but politically. It would end the US hegemony which we have sheltered under for a generation.

  9. Johnny Dunne

    Is there any data available for the % of deposits over €100k ? Assume it’s the vast majority by numbers of citizens and SME’s accounts (~99%). There may be very large € amounts from a small number of high net worth’s, large companies and MNC’s. Make sense for the Government to publish this data if it shows ‘voters’ are guaranteed ??

  10. Bob

    ?? Seems to me that at some time we have to get real and accept that ALL of the property related assets on the banks balance sheets do not reflect any kind of reality. Currently, an average house is what… 300K… but it should really be 2.5 times average salary which comes out at 95K… 2.5 is the only realistic value in light of moral and ethical considerations (ie. current 35 year enslavement of first time buyers), and the amount banks will be able to lend in a climate where micky mouse economics and free money disappears…

    David has been driving at this truth in the past… Sounds to me from this article that he’s been finally ‘got at’, and has shifted the debate to another realm… One where the truths focused on are more hazy… I suppse as a responsible economist it is incumbent on them to conservatively guide the system back to health. But the thing that upsets me about this, is that this method protects the boom gains of the rich and greedy at the expense of the people who just live day to day.

  11. Bob

    Also, 95K still leaves a profit of at least 100% over pure building and material costs (using current pre-fab technological practice) to be divvied up among developers, government, auctioneers and all the other property parasites.

  12. MK

    Hi David,

    The financial crises have hit the mainstream (and main st) and now everyone including the cleaning lady is an ‘expert’ on the doom and gloom, the why’s and the wherefore’s, etc. I know some in the banking community here who even have suspended their personal spending as they dont know whats going to happen and fear, even if slight, that their job could in theory go.

    The scenario’s you outline are interesting, and I would be in favour of the AIG model, whereby the state nationalises the ‘bad banks’, taking on their debts but pays very little for it. Of course, this pre-supposes that our banks are going to go down a precipice. Not all of them will (certainly not ACC by the above account), and like the US it will be one at a time. The US property market started devaluing before ours did and the toxicity of their loans is certainly much higher than most at our banks will be. And banks have no way of knowing which loans will go toxic until they do. Its a bit like a teenagers face and acne. Where will the next spot be? Impossible to tell. Will it be a major break out or will the kid grow out of it? Again, no-one can tell. Better get off junk food, get healthy, play sports, etc. And that’s what our banks need to do.

    So it wont just be a case of nationalising them, but also a case of running them efficiently whilst they get the job done and work out through the bad loans. This is not easy for our governments to do because of the union stranglehold. One advantage of a government owned bank being bailed out is that the propoerties would NOT have to be firesold. Indeed, the government could look on it as a property bank. They could rent as much as possible, anyone still interested in decentralisation could have even cheaper options, etc, keep the things until the values start picking up. Of course, we are not at the bottom of the asset correction yet so it will need to be for the long haul.

    > Last Friday’s rally, although welcome, does not change anything. We are still looking at a banking dilemma because the wholesale credit market is frozen. In its simplest terms, the people who lend money do not trust the people who would like to borrow it.

    That is not the sole problem. That is a mere symptom. It is the bad lending practices in the first place where assets bought on loan were not going to be paid back on a required basis, which is the cause, and now the resulting asset value depreciation.

    I agree that the moves of the US Fed is really just moving debt from financial instutions to the state. The US government debt has soared as a result. We could have a Japanese-style late-80′s problem replicated there. The US may be acting quicker though and more decivisely as culturally it is easier to accept disgrace and bad debts there than it was in the Japanese culture, which meant the JP bust was dragged out over a decade and a half.

    Philip, I agree that there are two aspects, the local problem and the global problem. We have some tools at our disposal to work our way through the local problem, not that it will be easy although we have no idea how bad a problem it really is going to be, but the global problem is outside our control, although the effects of it could certainly batter our MNC economy.

    In terms of whether the finacial models in use are collapsing, I dont know as yet. Its something that I think certainly could happen, but I think this is not the storm that will break it, although it is a major hiccup. Its certainly removed the US investment banks from the model, and the US debt has ballooned as well. So there is certainly change and things now are not the same as they were pre-2008.

    The times they are a changing ……


  13. David,

    Nice article. I just have two quick questions, both of which I’m asking moreso out of ignorance than trying to poke holes or trip you up:

    1. What if it fails? Can options 2 or 3 be implemented after we go for option 4? Is it something the state can afford to do (i.e. payout on all deposits held)? I understand that insurance policies like this never intend to pay out on the full amount, but are deemed to be feasible if we can afford to cover one bank failing, but what if the doomsday scenario of AIB, BOI and ILP failing were too occur, could the state cover it? I know this is unlikely to happen, but would the fact that the state couldn’t cover it cause concern, and if the media point this out could that not also cause a run on a bank. What I’m getting at is, is there a point at which a guarantee becomes meaningless if the state promises to pay up on way more than it can afford.

    2. And the opposite, what if it goes really well? Will Ireland become a place where international companies/foreigners move their deposits, much like Irish consumers have been moving to Northern Rock/Rabbo Bank? I imagine this 100% guarantee acting like a golden carrot for deposits much like our low corporate tax rate did for FDI. Would there be negative consequences to this?

  14. shtove

    Where does the money come from for this new level of deposit insurance?

    The principle behind schemes like this is that government licensed market players pay a premium to build up a fund to cover the odd system failure. Like the insurance companies committing to the Motor Insurers Bureau for losses caused by uninsured drivers.

    How are cash strapped banks going to pay a premium now, when most of them are at risk of system failure? This is a thundering announcement from the government, but are we sure it’s not just pinning the tail on the taxpayer???

    The big media game at the moment is to maintain that issues of insolvency are really only about illiquidity. Sorry – there’s too much debt that can’t be repaid, and it’s the state that’s screwing things up by not letting the failures fail.

    Time to let the market have its say. And taxpayers should start taking things seriously by using their votes for their own good instead of the welfare of the banks. Rather sweet that the first Oireachtas party to go down the tubes was the hypocritical PDs. Next!

  15. Malcolm McClure

    David: Your headline “State must act as a safeguard” forgets that the basic function of any State is to BE a safeguard, not merely to wake up one day and resolve to ACT as a safeguard.
    The crisis in banking is caused by their undertaking lucrative but unwise levels of risk. Those who successfully negotiate these risky investments are rewarded with bonuses running into millions annually. Of course, all this lucre doesn’t leave the bank in a swag-bag but quickly finds its way back home, or to some other bank after being rinsed through a house, car or boat purchase. It’s just a zero-sum game from the banks point of view, which is all fine and dandy so long as the bank remains solvent.
    If it fails, their risk negotiator usually escapes with his bonus intact. This is the point where the State needs to enforce restraint. Instead of giving portable cash bonuses, banks should be required to offer equivalent interest payments based on the nominal Bonus principal, at say Libor + 2%. This would continue in perpetuity –so long as his employing bank remained solvent, but would cease if its risky investment branch went sour. That would promote a culture of restraint so noticably absent from the present investment banking scene.

  16. Mr Lenehan has just played a super ace in a game of “bluff poker”.!
    In my opinionThere is no way that customers of a failure by one of our largest banks could-or would-be fully compensated by this government.
    Remember-they are as bankrupt as the institutions they are purpoting to shore up.!
    It would take emptying the “national pension” fund, to even attempt it.

  17. MK

    I took a look at the latest Central Bank report:

    And my reading of it indicates that the level of Household deposits is around 34 billion (table B2.1). That’s household. Non financial businesses have 31 billion.

    Table C3 indicates deposits of around 340-350 billion in total from Irish entities, and about 918 billion in total including euro area and Rest-of-World depositers. The 100k deposit guarantee only applies to households.

    There is 146 billion of debt on consumer mortgages and a whopping 396 billion of
    private sector credit.

    Lorcan Roche Kelly, you were interested (and many of us are, including myself) in BOI’s balance sheet and exposures (figures to 31st Mar 2008).

    Deposits: 86 billion
    Loans provided: 136 billion (about 60% are perceived as high quality, with 0.8% impaired)
    Debt (wholesale): 75 billion

    Exposure to dodgy assets (eg SIVs, CDOs): low, about 250 million of which the current estimate is that 47 million of that will be ‘lost’.

    So BOI is nowhere near the same profile as a Lehman Brothers. It did borrow to play in the property loaning market, but it didnt do so at a frenzy rate or level.

    What happens next will depend on whether those loaned keep paying back. If impairements should go to 10%, that’s 13 billion and a sizeable chunk. Whether our residential and commercial property market will go that sour though remains to be seen. BOI state that the have available for sale (AFS) assets of about 30 billion so seem covered.

    A year ago, group impairments were 17 million, and to Mar 31st had increased to 232 million )of which 146 m was from Retail Ireland). Where this will rise to is unknown even to BOI themselves.

    Their immediate demise is surely exaggerated ….


  18. Philip

    “Making people’s savings secure is the best way to return confidence to the market.” – eh…No. Confidence comes from have a secure revenue stream to keep body and soul together along with looking after dependants and a few modest perks. Confidence came because people “felt” they had a reliable source of disposable income – irrespective of it shaky or otherwise its origins.

    Savings are now starting to show their real value in terms of the productivity of the area on which they are based. That means their purchasing power is reflected in the productivity of that area/ region. If you have savings in USDs, then you hope that your needed goods and services remain relatively price stable in USDs and so it is with any currency. The poor USD is now seen to be totally disconnected from the true productivity of the US as the debt generated is beyond practical repayability in the medium term. We have a ridiculous situation where the most modern and industrialised nation cant pay its way out of a debt which was created by the unregulated need to generate more commission/admin fees for rich investment bankers. So, all we are seeing are the games of wealthy gits trying to stablise the purchasing power of their considerable nest eggs. Nothing more. They care not for USDs or Euro or anything else. Trying to paste terminology of illiquidity/ insolvency etc on these events is pure deceit on the part of these wealthy and greedy entities that caused the issue in the first place.

    In any event, the majority of people here have few if any savings. They need to keep living and hence be productive as their educational attainments and ambitions allow. Just as in the US, the banks here were allowed (even encouraged) to do the exact same thing of unregulated lending. What has happened is that costs climbed and killed our competitiveness and so now people are loosing jobs left right and centre and it’s exaserbated by events in the US.

    Confidence was falsely pumped here by the nonsense of property speculation. Same thing happened in the US. It is property centric. The wealthy gits are running for cover protecting their positions. That lovely term…”Crystallisation” of losses or gains is what is happening right now. Governments the world over are being lobbied to keep the show going until these rich gits have discovered their escape route and leave us all behind with zero or wortless savings, broken financial systems and broken economies. Rest assured that the governement here and elsewhere is being lobbied intensively not to foreclose on these guys – just shore it up with taxpayers money until they ave converted all their savings to gold…watch the price of precious metals rise…

    So what does one do? Ireland can probably do very little beyond David suggestion or we could find ourselves targetted as a bad risk relative to other countries. Any ideas?

  19. Lorcan Roche Kelly

    MK > Their immediate demise is surely exaggerated ….

    The bank’s demise certainly is, but I think what we are seeing here is the demise of the way they do business. I also read their balance sheet of 31st Mar 2008 and their comprehensive statement of last Thursday. The major difference between the two was the excessive use of the word ‘dislocation’ in Thursday’s statement. This banking euphemism is certainly worrying for their bottom line, but I don’t think it will threaten their medium-trem viability. More depends on whether the bank is willing to turn the clock back to 1985 or not. It, like AIB, will get burnt by the crisis but I feel they have been sufficiently conservative (just) to survive.

    To look at the stock-market now it would be easy to say that has been driven by noise, confusion and panic. It always does when we are seeing a bubble burst. In Ireland we are in the habit of calling it a ‘property bubble’, I think there is a argument for calling it a ‘banking bubble’. The rise in property prices was a function of the availability of easy credit from the banks. We could have had a banking bubble without a property bubble, but the converse is not true.

    Philip > In any event, the majority of people here have few if any savings.

    This is probably true, and considering considering current interest v inflation rates, savings are probably loosing value in ‘real’ terms.

    > So what does one do? Ireland can probably do very little beyond David suggestion or we could find ourselves targetted as a bad risk relative to other countries. Any ideas?

    We need banks that work, and we need to be confident that they will continue to do so. David’s suggestion, if implemented, should make us more confident about our savings and the banks more secure. The extra risk involved for the tax-payer between a €100,000 guarantee and a full guarantee for all (IRISH) deposits is small.

    Confidence, as Philip points out, is a fickle friend. Whether it can be controlled through financial governance is a moot point.

    What Ireland needs is another Italia ’90 type round of national exuberance. Let the rising tide that lifts the banks come from outside the financial sector. It may sound crazy, but a national success that energises the national conciousness energies the entire nation. So instead of spending €X billion acting as guarantor for the banks, we should spend €X million on making us successful where we can succeed.

    A little of the wall maybe, but it’s my 2c for today.


  20. MK

    Philip > Confidence was falsely pumped here by the nonsense of property speculation. Same thing happened in the US. It is property centric.

    Lorcan Roche Kelly > In Ireland we are in the habit of calling it a ‘property bubble’, I think there is a argument for calling it a ‘banking bubble’. The rise in property prices was a function of the availability of easy credit from the banks.

    It clearly was a credit binge on a grand scale across multiple countries and geographies. Not only was credit afforded to those that were property flipping but businesses too by Private Equity, Hedge Funds, etc. The leveraging levels were astronomical, yet many who were getting loans to the hilt did make a lot of money from it. That money, was easy money, not equivalent to work produced money, “money for nothing”, yet it is money taken out of the system. Its gone, its spent. Lack of productivity was being rewarded by the system. Hedge Fund staff were buying Maserati’s on their bonuses alone. Ironically, they were also pumping it back into property in leafy parts of London, fuelling the bubble further. We have some of tat affect here in the Dublin region.

    Confidence can be brought back in many ways. Whilst I enjoyed Italia 90, and I did suggest on another of David pieces that we (Ireland) should get into the Oktoberfest tourism business, something which we know we are good at(!), but I would suggest other things ias well:

    – Let any stressed banks get stressed, and only save them with exchange of equity/ownership at the very last moment (Goverment’s role)

    – Change the system, put strategies and monitoring and rules in place so that future credit binges and the problems that result can be avoided (Central Bank and IFRSA)

    – Change the government (not that a new crowd would have performed any better, althogh we have no way of knowing, but it would be folly for the populace to reward the incumbents when they did little to prevent the buble here from occurring and by many accounts inflated it) – (People)

    Stand up and be counted …..


  21. Lorcan Roche Kelly

    MK > Change the system.

    I’m watching Ben Bernanke explain himself to Congress at the moment. He is using ‘change for the future’ to avoid explaining the mistakes of the past. I’m sure we’ll be fed (no pun intended) the same line here.

    > Stand up and be counted …..

    We must.

    Democratic politics is a game of lowest common denominators. I do have sympathy for the politicians currently in power because their jobs depend on their popularity. Any politician that tried to preempt the current property/credit crisis by reducing the availability of mortgage credit last year would have been committing political suicide. We needed this crisis to allow us to accept ‘change for the future’. Let us judge the politicians on how they lead now when leadership is required, and acceptable.

  22. Philip

    Shane Ross/ Eddie Hobbs were on the Late Late the other night. I got 3 ideas out of it…start checking out the SemiStates (I see Fas are under the microscope), Freeze Pension Payment into the NTMA for 24 months and best of all – give 20K to every household for energy saving. Now for my bit…All the above cost buttons and the 20K per household should be paid to the government via PAYE back over 5,10, 20 years depending on a means test etc. The savings to the country in energy savings would be huge and it would give a massive stimulant to the manufacturing/ R&D industry. I’d make that stimulant initially weighted to Irish R&D and products and it would be audited by the BER testers who have bugger all to do at the ,moment. It would place ireland on the map as the country that dropped it’s oil demand by 50% (say) in 5 years and it would give the country a brand name in this game. I am fed up to the teeth hearing about austrian, german swedish products – (actually I am very envious of them) – in the green industry. We should be producing electric bikes to solar panels for a fraction of the price of the imports and the guys in Governemnt should be figuring out how this can be doen with loosing too much on consultants / advisors eating up the cash.

    If the banks were encouraged to have some skin in the game in the eco side (by regulatory arm twisting if needed), they’ll find themselves pleasantly surprised methinks.

  23. Philip

    And I would turn our revolution in the eco / green buiz into a tourist attraction and a silicon green valley. 20K per home represents 20% of the outstanding mortgage debt at the moment by my rough calculations. or less than 10% of total residential/personal debt. It would cause a 200bn into the economy based on a 10:1 churn and the Givennment would have it’s money back 2-3 times over and any fceker cauth flipping his investment within 5 years would be subject to murderous capital gain.

  24. Lorcan Roche Kelly

    Philip > The savings to the country in energy savings would be huge and it would give a massive stimulant to the manufacturing/ R&D industry.

    There is an easier way to stimulate the market. All that has to be done is the introduction of Net Metering, thereby allowing small scale renewables to become more cost effective, and stop the current situation where any excess power produced has to be given away to the national grid without any compensation.

    According to 2007 Carbon Fund report (available from the NTMA website) Ireland has committed €290million to purchasing future Carbon credits to meet our Kyoto commitments. This, in my opinion, is money wasted. There will never be any return on this ‘investment’, the money would be better spend on R&D and developing indigenous green energy alternatives.

  25. Deco

    People are talking about the energy savings. I would take a different perspective – look at the expensive current system. If the government wanted to bring down the oil/petrol/diesel full bill, then I have one very simple suggestion. And it would result in the state saving money.

    Give all the state employees who work in DublinCity free bus passes on Dublin Bus. And take the free car spaces off them. Because the free car spaces are costing the state 4,000 Euro per state employee. But a free bus pass would cost 800 – 1200. Less Pollution. Would save the country a fortune. And would help us towards Kyoto. The fall off in construction will also help us towards Kyoto – as construction is a very energy intensive activity – look at all the sand lorries, cement plants, equipment.
    Another way of reducing Ireland’s fuel expenses is to enable a fair market in terms of access to electricity production. Currently the barriers to entry are prohibitively high. Despite all the money in Celtic Tiger Ireland, no village or town ever considered building it’s own wind turbine system like they do in Denmark. Because in Ireland the cost of connecting to the grid acts as a protection/barrier to entry in favour of the ESB. And the ESB are bloated, inefficient and provide excessive salaries to people who do very little. This is a cost that is affecting every part of the private and public sector. Therefore to improve Ireland’s competitiveness, the Electricity market needs to be made fair. At the moment none of the players have any intention of doing this with respect to enabling small local competitors onto the market.

    I think the best way to get people to improve their insulation in their houses is via grant aid for the materials. Grant aiding the labour element of the bill is ridiculous because the specialists involved will only increase their rates. Besides it is a DIY activity. Most people who have insulation did it themselves. Obviously Eddie Hobbs did not do his own insulation – he got somebody else in to do it :))

    • Garry

      Far from being one to defend the public sector, dont make them take the bus for the craic! i dont think they are renting spaces for them? but maybe there making this happen would guarantee better public transport then remove the car park in Leinster house or make it so theres only a few spaces.

      Eddie Hobbs doesn’t need insulation, he needs cooling fans like an intel processor … … obviously because his brain is working so fast it could overheat…. nothing to do with hot air at all…. we should try to harness the energy from people flogging foreign property or if it proves to be an erratic source of power, maybe we should export them all to Cape Verde where they can contribute to some other countries emissions….

  26. Malcolm McClure

    Sorry if this is a bit off-topic but it may be of interest to some participants in this blog that the world’s economic recent economic turmoil seems to be largely controlled by two guys called Paulson.
    Henry M Paulson, former CEO of Goldman Saks (Creme de la creme of finaglers) who became US Treasury Secretary in 2006, is currently proposing to spend $700 Billion of US taxpayers money to support failing US banks. (Goldman is scrambling to become a depositing bank so that they can benefit from his largesse.)
    John Paulson is manager of a Hedge Fund who started warning his investors back in the middle of 2006 that the frenzy to build and sell housing was a bubble about to pop. His New York-based firm, Paulson & Co., made big bets predicting the edifice would soon come crashing down. The wager paid off in the first nine months of 2007, when Paulson’s Credit Opportunities funds rose an average of 340 percent.
    That gain earned Paulson an estimated $1.14 billion in performance fees for the nine months ended on Sept. 28 2007. Fees on Paulson’s other eight funds bring his total to $2.69 billion, which put Paulson at the top of Bloomberg’s ranking of best-paid hedge fund managers.
    Following his success in USA, this year John Paulson started shorting banks in UK. Under new disclosure rules coming into force today, the hedge fund said it had “short” positions in Lloyds TSB and HBOS totalling 1.76% and O.95% of their shares.
    Paulson is shorting shares in Lloyds worth £260 million, while he has taken a £92 million gamble on HBOS.
    Shares in the two banks fluctuated wildly in the financial turmoil last week before Lloyds announced a £12.2 billion takeover of HBOS.
    I am intrigued by the coincidence in surnames, despite the fact that these Paulsons are unrelated. US Census statistics say that there are just 21,000 people called Paulson in USA. The physicists keep looking for the ‘god particle’. Perhaps biologists should check these guy out for traces of “Midas DNA”.

    John Paulson is no relation to Treasury Secretary Henry Paulson, the former chief executive officer of Goldman Sachs Group Inc.

  27. Lorcan Roche Kelly

    Malcolm > Sorry if this is a bit off-topic but it may be of interest to some participants in this blog that the world’s economic recent economic turmoil seems to be largely controlled by two guys called Paulson.

    One Paulson made a lot of money investing other people’s money, the other one has to spend a lot of other people’s money to stop the people that made a lot of money loosing their money.

    Sounds like an ideal time to start a conspiracy theory. Nothing better than a good red-herring to help keep the US tax-payer’s eye off the ball.

    Just as an aside, the current bailout bill ($1.1 trillion) is now greater than the total cost of both the Afghanistan and Iraq wars ($868 billion).

    Off-topic seems to work well here. Off-the-wall can even get through occasionally.

  28. Furrylugs

    my name is Furrylugs………it has been three days since my last deal……I am an Illiquid.

  29. AndrewGMooney

    David, I suspect you’re being slightly optimistic in expecting an iterative re-run of past historic bank runs/scams. Surely the problem with the scenario of ‘The State’ rescuing ‘The Banks’ is the assumption that either/both know what to do…….Is this ‘systemic risk event’ necessarily a repeat of previous crises? How can we be sure past remedies will defibrillate the patient, rather than kill them stone dead?

    Given that inactive/colluding Governments were midwives to this monstrous Frankenstein Banking creation, yet saw no sign of the tragedy before it’s birth:
    How can anyone assume they are competent to ‘rescue’ us?
    Maybe they’re just going to make everything much worse by not letting the ‘Worse Case Scenario’ unfold? By refusing to let the banks fail to allow Schumpeterian forest fires to clear out the Capitalist system for fresh growth?

    “Oh, just shut up and give Hank the money, no questions asked now, later or ever. Or Wall Street will switch on the Doomsday Machine….”

    So says Dubya –The Stoopid President – who ‘didn’t realise’ that the Economy was disintegrating on his watch. Other priorities, presumably.

    Having created these Financial Instruments/Weapons of Mass Destruction (Buffet), the Overlord Banking Class now shamelessly ‘outs’ itself as a parasitic threat to it’s host: Civilisation. Having pretended to be a symbiotic organism, it’s Ebola-type lethalness erupts…..

    Amusing new essay from Nassim Nicholas Taleb who has moved on from discovering Black Swans to imagining The Fourth Quadrant. Money quotes:

    “The banking system (betting AGAINST rare events) just lost > 1 Trillion dollars (so far) on a single error, more than was ever earned in the history of banking. Yet bankers kept their previous bonuses and it looks like citizens have to foot the bills. And one Professor Ben Bernanke pronounced right before the blowup that we live in an era of stability and “great moderation” (he is now piloting a plane and we all are passengers on it).”


    “By the “narrative fallacy” the turkey economics department will always manage to state, before thanksgivings that “we are in a new era of safety”, and back-it up with thorough and “rigorous” analysis. And Professor Bernanke indeed found plenty of economic explanations–what I call the narrative fallacy–with graphs, jargon, curves, the kind of facade-of-knowledge that you find in economics textbooks. This is the kind of glib, snake-oil facade of knowledge–even more dangerous because of the mathematics–that made me, before accepting the new position in NYU’s engineering department, verify that there was not a single economist in the building. I have nothing against economists: you should let them entertain each others with their theories and elegant mathematics, and help keep college students inside buildings. But beware: they can be plain wrong, yet frame things in a way to make you feel stupid arguing with them. So make sure you do not give any of them risk-management responsibilities.”

    It’s amusing that ‘New Paradigm/Blue Sky Thinking’ is so relished in the Boom, but during the Bust, there’s a retreat to the certainties and nostrums of The Past. And it may be that the Catharsis of a (managed) Bank Failure is what Ireland needs to symbolically cleanse itself of the excesses of the mis-spent Boom.

    A Black Swan in Dublin Bay. It’s time for some Black Sky Thinking.

    We have access to so many opinions, calls to ‘resolute action‘, and a tsunami of information on ‘events, dear boy, events: Yet the only credible thing for Bush/Bernanke/Paulson, the Irish Government and the ECB/BoE to say at the moment would be:

    “We’ve fk’d up big time, we don’t know what else to do, this might not work, but there isn’t time for ‘democracy’. Just give us the money. Trust us. We’re the doctors who nearly killed the patient, but we’ll get it right this time.”

    But our ‘leaders’ don’t do humility.
    Never explain. Never apologise. Officer Class Trash.

    It’s been interesting to watch the ‘pariah-crackpot-fringe’ of the Commentariat move Centre-Stage, whether David’s Ides of March about the Irish Economic Miracle Mirage (delete as applicable)- or the elegant expositions of the poison at the heart of American ’Capitalism’ as trenchantly delivered by Mssrs Rogers / Paul / Schiff/ Roubini /Taleb.

    The Past is not necessarily a guide to The Future.


  30. [...] “State Must Act As A Safeguard” – 21 September 2008 [...]

  31. [...] On 21 September 2008 McWilliams outlined four options facing the Irish government, in an article published in the Sunday Business Post: The fourth option is the most attractive one, but it hasn’t been tried anywhere and would demand [...]

  32. [...] the FFcabal implemented on the day. He is on record clearly about that. Are you having a laugh? State must act as a safeguard | David McWilliams State guarantees can avert depression | David McWilliams Sign in or Register Now to [...]

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