The bank bailout just announced is simply not enough to right the wrongs in our financial system. And yet it is all we have.
The saddest thing about the silly boom is that it has enfeebled us to such an extent that, even if we could be honest about the extent of the banking problem, we now do not have the financial firepower to help ourselves. This should make each and every one of us angry because monumental economic mismanagement and national hubris brought Ireland to the brink.
However, the crisis presents an opportunity: now that we are looking into the abyss, it is a brilliant opportunity to change. As Rahm Emmanuel, Barack Obama’s Rottweiler, commented: “A crisis is too good an opportunity to miss”.
Our country has to take the hardest decisions we have taken in two generations, not because we want to but because we have to. We have the chance to re-invent the country, but only if we do the little things right.
One of the first things we need to get right is to acknowledge the extent of our difficulties. The epicentre of our crisis is the banking system and the legacy of the huge property bubble, which has burst. Apart from this, we have a robust economy with good people and a reasonable chance of getting our act together. However, the banks are contaminating us and need to be quarantined.
There are two quite different problems facing the banks and, make no mistake about it, these problems — which threaten to overwhelm the rest of us — are entirely the responsibility of appalling management.
We need to understand that our banking system is bankrupt. Yes, bankrupt. Without the Government guarantee, Irish banks would run out of money in 90 days. The second thing we need to understand is that no-one wants them, because professional investors and others expect much greater bad loans to emerge in Ireland than anything we have come close to admitting. The rest of the world expects the Irish Bear Sterns to be announced any day where a bank is sold for practically nothing to stave off collapse. But who would buy such a thing?
The crux is that the Irish banking system faces two disasters and one problem is driving the other.
The first disaster is a funding disaster where the average loan to deposit ratio of Irish banks is between 150 and 160pc. For the likes of Irish Life & Permanent it is a ludicrously reckless 260pc! This ratio means that for every €160 the Irish banks lent out, they only had €100 in deposits. So they borrowed €60 from the wholesale money markets — which are now shut.
As long as the money markets are shut, the banks are being kept on a life-support machine by the State’s guarantee. The strategy to borrow for growth was implemented by the managements of our banks who — amazingly — are still drawing hefty salaries. Without the State guarantee, the banks, which have been consistently downgraded to close to “junk status”, would have to pay so much for funding that they would go under gradually.
Even with the guarantee, the banks will have to get the loans to deposits ratios down to somewhere around 80-100pc. This is a process called “deleveraging” and can only be achieved by increasing deposits and reducing lending. This contraction of credit will have a monumental knock-on effect on the second big problem for the banks: bad loans.
At the moment, Irish banks are telling half-truths about their bad loans, and given that the management of Ireland’s banks have got nothing right in the past two years, there is no point believing them now.
To get a better idea of what is likely here, we can examine the experience of other countries. Switzerland and Sweden both suffered a banking crisis following a property bust in the early 1990s. In both cases the banks had to write off close to 8pc of their loan book. This was traumatic and the banks lost fortunes, but they recovered.
Given that the Irish loan book is over €400bn, a similar writedown would reveal a black hole in the Irish banks of about €33bn. This figure dwarfs the €10bn recapitalisation fund and deleveraging guarantees enormous falls in asset prices and concomitant rises in bad debts.
So, no-one wants our banks because they are full of bad loans. Banks and investors are afraid to buy because of what they might find.
How do we solve this conundrum? One idea is to divide our banks into good and bad banks. We could set up one or two bad banks, which would be “financial skips” into which we throw all our bad loans. These could then be restructured and traded by the State, using specialist, restructuring experts. The huge land banks, sites and commercial developments that are now worthless could be traded at, let’s say, 20 cent in the euro.
As the economy recovers, these discounted prices would rise. (Many years ago I traded defaulted Brady Bonds of emerging countries on the same basis and the market worked.)
This would have two positive effects. First, it would get all the crud off the balance sheets of the good banks, allowing them to borrow and restart lending to small and medium-sized enterprises. The second positive is that it would allow some liquidity to return to the market for land, not for speculation but to end the uncertainty, which will otherwise cripple the Irish economy for years.
The idea of “bad” banks has the added positive of allowing those who have the skills to restructure debts to do their job, while those with the skills to lend and get the system going can do their job.
Next year is not going to be pretty but we have to think around corners to see things straight.
The Good bank vs Bad Bank worked well in Sweden, but we tried to use this idea of modeling ourselves on Sweden back in the early 1980s – we ended up with a perfect example of a social welfare system not as ruthless as the US nor as generous as France and all the problems in between. We need to face it – we’re more like Japan and the property bust will be big, long and it’ll fester for a generation or two. Our political elite don’t “do” telling us like it is we like the lies and seduction. As… Read more »
David, hard to disagree with your article this morning. The idea of a financial skip for the ‘junk’ loans could be a real winner, if done right. The banks need to reduce their loanbook by about €170 billion in order to achieve the 100% loan to deposit ratio that is needed to reassure any potential investors. As I’ve said here before I don’t see that there is much movement possible on the level of deposits, with a 100% guarantee in place for the past few months. Firstly, the junk skip will need a good name. Let’s call it the The… Read more »
I am no expert on the technicalities of DMcW approach. No doubt I will learn a lot in the coming days.
I can see where he headed with getting clean banks into position which can raise money
Really, the bottom line to the punter is
1) How does it affect mortgages already in bad banks
2) How does it affect savings aready in bad banks
David, I would have 2 comments to make to your article. First, the current problem (to put it mildly) that Ireland is facing today is 50% due to the banks and you say that clearly but also 50% due to the government and this is not so clear in your article. Second, the real issue here is not the monumental mismanagement that has prevailed in Ireland in the past 10 years since most countries in the world are facing the same problems (although with various degree of gravity). The real issue is the system on which capitalistism is based. By… Read more »
8%, €33billion of the loan book.
Total annual profits on the ‘good loans’ going forward is 3-4 billion? 10 years profits, or about 6 years profits if you net of the 10billion new capital.
Not great, but “bankrupt”? The re-capitialisation a long term investment – think a generation. Skips and good banks are a good idea. Lets get new blood in to the banks and the Financial Regulator, so we can move to the solution and away from defensive posturing.
David, Your Good Bank – Bad Bank concept sounds like a good idea, if it is managed correctly. Given the indecision by the current Minister for Finance, I have doubts as to the ability of the government to do this successfully. I also agree with Nono’s view above that our current capitalist system needs to be overhauled. 30 years ago when people would consider purchasing a new car they would ask themselves “do I have enough money to afford this car?”, more recently people would ask “can I afford the repayments for a car loan?”. Given the reckless lending of… Read more »
The government don’t have the balls and the boys in the banks aren’t going to budge. Each solution is going to get knocked as long as they involve the government making tough calls or the bank bosses leaving their posts.
As a layman – or as Winnie the Pooh would say, a bear of very little brain – can someone please explain to me how the top boy in AIB can almost simulataneously i.e. within the space of a couple of months:
(a) Say to Lenihan in the dead of night “We need a bailout and we need it fast”
(b) Say to the media on Monday “We don’t need to be recapitalised”
Either AIB need a load of (our) money or they don’t? It can’t be both…can it?
David said: “One idea is to divide our banks into good and bad banks. We could set up one or two bad banks, which would be “financial skips” into which we throw all our bad loans. These could then be restructured and traded by the State, using specialist, restructuring experts.” This could be a viable solution to the present problems, but to attract the necessary outside investment it needs a sweetener. The government would retain say 49% in the ‘skip bank’ whilst offering the rest on the market. To balance the risk on the loans, Lenihan could offer an overriding… Read more »
Anyone watching Oireachtas report last night could not but be AMAZED that we are, in our leadership, repeating the same mistakes of the 80’s again. It seemed that only Fine Gael on the committees, showed any teeth last night; and yet, in the face of the obvious disparity between the Central Bank’s version of truth of the current loaning environment and AIB /BOI’s acid-tripped view, there seemed to be no concerned attack nor concerted attack by government-appointed committee members. @David McWilliams “We need to understand that our banking system is bankrupt. Yes, bankrupt. Without the Government guarantee, Irish banks would… Read more »
The idea has merit…. Remove the guarantee from the good banks, and move the crud to the bad banks, in return for a 90% shareholding of both. The bad banks would need to be independently run and managed and be ruthless in extracting money from debtors….Time to bring in external management no cozy cartels. ‘Honest’ Tom Parlon’s developer buddies in the CIF then cant go running to the government to get the bad banks off their backs. I’m sure they will be trying to move the houses on to local authorities anyways. If they can find buyers good luck to… Read more »
Nono,
I’m waiting for your manifesto on this new system you are proposing. What will it be called? Will I be allowed to make a critique on it or will curtailment of freedom of speech be included in your new system?
You still have not clearly defined who a rich person is. Can you fill in the blank please in the following sentence?
“A rich person is someone who has net assets worth _______ and whose average annual earnings are _______ .”
Davids article has tremendous logic to me but what do I know about banks, high finance and economics.?
Flaw is Davids remark:
“The huge land banks, sites and commercial sites that are now worthless could be traded at say 20 cents to the Euro.”
This would cost the developers dearly..and given that they are the backbone of the Fianna Fail Party,-their very reason for existence- such a course of action will not happen while the present government is in office.
As we all notice there are what we can call the ‘good’ banks and the bad ones. Would reforming the banks include major redundancies? As I understand it, the personel in these banks were hired and expanded in the same way the builders were hired and subsequently fired, when and and only when the property bubble was growing. Would I be right in saying that a lot of personel employed in the current banks who would have dealt with property investment, commercial property (as Anglo only does) and mortgages (as they all do) would be working very little at the… Read more »
I think we must organise a major protest in Dublin against the Banks as they are the root of the evil. People need to protest, to be heard as this government is about to throw us all in the deep end, this is no joke. Or as mediator wrote once the ‘peeple’ dont really understand and care.
Adapt – the altruism of water is amazing showing unselfish love & devotion to all that want to see it .Are there any more fountains to be seen in front of Irish Bank Headquarters ? Or have they dried up too ?
Let’s face it two banks, shallwe call them Bank C and Bank D are empty holes that will suck upmoney. Because that is there business model. C and D have a business model built on shifting around money. The management of both C and D should be sacked. The business model is rubbish. It is exactly the same as Northern Rock. The taxpayer should not have been exposed to those two lemons. They should have been let disappear into the sewer, liquidate their assets, and sell them off. By the sounds of things, compensating the depositors is about the cheapest… Read more »
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This is correct. The base of the economy is sound. But saving the banks, will contaminate the entire economy with taxation, or lost resources that could be better employed for economic, infrastructural and social purposes. Like retraining unemployed construction and retail workers for example, so that they can work in factories/workshops or any other sector.
I meant to say the following statement by DMcW is the basis of the real economy.
{One of the first things we need to get right is to acknowledge the extent of our difficulties. The epicentre of our crisis is the banking system and the legacy of the huge property bubble, which has burst. Apart from this, we have a robust economy with good people and a reasonable chance of getting our act together. However, the banks are contaminating us and need to be quarantined.}
Maybe the IDA will instruct the two Brians that this is in fact the case.
Good/bad is probably too lumpy a differentiator. A graded system would be better from A for best banks to F for not the very best banks. Creating black and white dividers will be resisted and be costly. If we are going down the divide and conquer route, then make sure the communities of interest are smaller and more easily managed/ bullied. I also think this allows one to offer a range of risk to investors with differing timing needs and the sweetener ideas mentioned above can be balanced more finely. I would also incorporate a variable level of regulation depending… Read more »
As you pointed out some time ago the Minister for Finance effectively is in charge (or should be) and being responsible for the investors (tax payers) money supporting the bank guarantees he is well within his rights to remove the executive management of the banks and install alternative (not cronies) who are skilled in turn-around operations. There is no reasoning with management who are seeking to maintain their positions at all costs as this is likely to be their last CEO positions in banking. It must be recognised that at least they should go, at worst they should be paid… Read more »
Gerry Brandon – Bulls Eye We are dancing around the Effective Voice of The Truth and doing nothing when we know what should be done / do we issue a written Proclamation and hang it on the Door of the Minister and or the Banks Headquarters …I am listening to proposals from the room what should be done
Given his qualifications, Brian Goggin might actually struggle to get a job at all in the current market. Every week survived enriches him by 40K. What else can he do but spoof, hope something turns up,hang on grimly and ……keep cashing the cheques.
Paris – I have had businesses in Paris / Nice since the 80.s and I can verify that their system is communist and / socialist it depends how you look at it …and believe it or not they love it
David, having extended the deposit and inter-bank lending guarantee it shouldn’t be up to the banks to be honest about their debts anymore. Brian Lenihan has apportioned financial responsibility for this right at the taxpayers door. So Lenihan should be giving us an accurate picture of the real state of the banks finances. He’s put our money on the line so, as belated due diligence, he should be able to look at the financial forensics of the bank’s balance sheets and give the taxpayers a realistic view. Currently, everyone thinks Anglo is a train wreck. The market is as sure… Read more »
As Mr B has said roll on January when the fun will really start !, at this present moment in a twisted way I’m beginning to feel sorry for Biffo and Briano as they are looking like two schools boys who have been caught pulling each other off behind the bike shed by the school bullies they simply don’t know what to do now !!. The system has been rotten and so corrupted over the last decade we are going to have to now wait till the market simply closes one of our Banks and then watch the domino effect.… Read more »
I’ve read and reread that article. With the height of respect to David, it struck me of a man who had to get a document out to meet the print deadline but who couldn’t think of anything more to say that hasn’t been said before, and said with extreme malice. They’re not for listening David. Take the points; “a robust economy” – no we haven’t. I’ve been struggling for over a year now and so has every other self employed professional I know. So have small farmers, shopkeepers, local joinery workshops. We’re sinking much faster than the banks. “dwarfs the… Read more »
@ John Allen What I think we should do John is first of all we should organise a mass protest at Leinster House, not a once off protest march but an ongoing and open ended massive protest at Kildare street and bring the country to a entire stop, along the lines of how they got their house in order in Thailand recently, until we get the following: (A) A general election, because we are going nowhere with this government. As thing stand, we are stuck in a moment here that we can’t get out of with each month being more… Read more »
David,
Politicians such as Brian Cowen and former colleagues of yours at the central bank, were involved in creating this mess and have shown themselves to be inept in responding to the crisis.
Cowen is going to engage in a PR exercise today with the launch of a “framework” plan and the Dail will be shuttered for 40 days.
Don’t expect much change from these people!
http://www.finfacts.ie/irishfinancenews/article_1015561.shtml
I thought the recent protests outside Batte O’Keefe’s house on lack of proper schools are an example of things to come. These guys think they have private lives and can turn off the public at the whim of a legalistic switch.
As a nation our record on large scale protests is low and ineffective. That’ll change and it may get nasty before the winter is out. Summer 09 could get very hot indeed.
‘Thinking ‘ – imagine the people in North Korea , now think of the people in Zimbabwe ,now move along to the people in Dafur and allow your mind to drift to other areas .Did you think of the people in the Republic of Ireland ?
In all those places they have no voice ,no vote and no choice .We do.If we do not exercise what we believe to be our own then we lose it and we only have ourselves to blame.Our Time is NOW .
‘Thinking’ – is a tax free exercise we all love to do to feel good .And when we do some people resent you .We know who they are .
It’s difficult to see where we go from here when the present politicians in government are the same ones that perpetrated this appalling fraud in the first place. Since nobody has the right to do wrong in a civilised society, we’re not going to get an admission of guilt from any of them and they’re now operating in incremental mode – little moves here and there, in the belief that the public can’t see how disastrous the situation really is – a classic mushroom treatment approach. This is going to be defining time for Ireland and we will either emerge… Read more »
I couldn’t agree more with John Allen, looking at Cowen managing this country at the moment is like watching the final part of the film, “Flight 93”, when the passengers on the aircraft finally realise they are doomed to die if they do nothing and decide to storm the cockpit in a gallant effort to overpower the hijackers. While I’m not suggesting lethal force or anything like that, there is clearly a time after which all the action in the world can serve no purpose. Are we going to wait until “time of death” is being called on our economy… Read more »
Biffo lauches his boat ” Building Ireland’s Smart Economy: A Framework for Sustainable Economic Renewal” at 2.30pm this afternoon. If its as successful as the Smart car we are in for an exciting ride. See:
http://www.metacafe.com/watch/240685/smart_car_vs_ferrari/
Michael Hennigan – I had a look at your link. The Central Bank chief and the Financial Regulator have to go. The question needs to be asked about the competence of the Oireachtas. It has become a talkshop, with lot’s of acting and dithering between diffent blocks of power magnates and careerists. People who have even the slightest amount of integrity or intelligence get pushed out of the political parties, and become independents, like Shane Ross, and Joe Behan. We have journalists who assist the party system by ridiculing any independent candidate. The plan for Dublin Airport’s second runway was… Read more »
Would love to be there, I’d throw my shoes at him.
Ed – how are we going to emerge from ‘Bolands Mill’ ?? Search for the word British in the following link http://www.southernstar.ie/article.php?id=1034 Some politicians still think there is a market for jingoistic fantasies and bravado. Is this claim substantiated, or was it a wild claim ? Here is background information http://en.wikipedia.org/wiki/Flor_Crowley The datelines and the statement implies that somebody might have been breaking the IRA ceasefires in the 1990s, and never got apprehended. It would also seem to lead to the issues discussed in the 1970s illegal arms trial. In any case, these remarks should be withdrawn, now that the… Read more »
the ‘framework’ better be good…or else we will all be throwing our shoes at it…
Poor Brian and Brian. Just as they are announcing their pipe-dream of an economic utopia the CSO goes and does this.
http://www.cso.ie/releasespublications/documents/economy/current/qna.pdf
David,
I Hope that as bonus time approaches in some of these “We have nothing to hide” Bank’s the like of Mr. Ross and yourself are all over them.
The big cats and their ever present lap-dogs will all be trying to get a few euro for themselves after Xmas.
Though it was intersting to hear that AIB Corporate Banking “cancelled” their big Xmas doo this year.
The level of debt that’s gone bad in places like this will be interesting to read about, if they tell us ?
Great News – the emperor has arrived and declared ‘ we have a plan .’ cut Sorry ‘we have a plan of a plan’ ‘cut’ Excuse me ahem ‘ we have a plan of a plan that we will have a plan tomorrow ‘ ( did that sound ok brian ? )
Lots of numbers Lorcan but what does this mean, in Gods name?
Final paragraph;
The series are adjusted using the X-11 Arima procedure……………Lenihan………………….. seasonally adjusting unadjusted figures…. because of the statistical discrepancy…….the sum of the seasonally adjusted components…do not add to the respective seasonally adjusted series.
Is that another ways of saying ” Shure we had a stab at it anyway?”
‘New Votes’ – there is a way says the dog on the street ‘keep your cash’ and ‘keep your standing orders’- otherwise – put your feet up on the couch and your head in the fire .
In a reply to Furry above I said that there is no such thing as an optimistic economist. Looks like the guys over at Saxo Bank have excelled themselves.
http://www.bobsguide.com/guide/news/2008/Dec/18/Ten_Outrageous_Claims_for_the_Year_Ahead.html
Plan B launch (With apologies to http://www.theonion.com ) During what was described to them as “a look-forward targeted brainstorm to discuss and evaluate the countries event-chain methodology,” journalists stood with mouths agape Thursday as they witnessed the very moment at which the Tee-Shuck attained complete mastery over the fine art of meaningless corporate doublespeak. The Tee-Shucks usage of vacuous administrative jargon reached an almost mythical apex with the pre-lunchtime announcement, during which a string of expertly crafted drivel rolled off the tongue with the confidence of a seasoned turkey. “Due to the increased scope of the downturn vis-Ã -vis statistical descrepancies,compounded… Read more »
Lorcan – that is shocking News. I mean if the CSO can now officially state that we are now in recession, then it has to be true. We never would have known without them. Another useless quango. What were they doing the last 12 months ? No doubt the Irish Times Business supplement will lead with this strartling news, tomorrow morning. Or maybe they will give the ‘framework’ priority instead ? After all the ‘framework’ is less likely to cause people to wake up. Lorcan -you need to be corrected with your statement “no such thing as an optimistic economist.”… Read more »
If I weren’t gone so cynical, I’d say todays Framework was the result of B&B getting wind of Obamas repatriation plans and launching a pre-emptive strike.
Lorcan has a new word for me today autarky http://en.wikipedia.org/wiki/Autarky It’s becoming clear to me that behind the veneer of democracy, Ireland is a kleptocracy albeit a mild one by African standards. http://en.wikipedia.org/wiki/Kleptocracy In an earlier post. “Mary Coughlan gets paid €245,296 plus expenses and misc minister only tax breaks and pensions that somehow are paid when she is still working. Gordon Brown is on £187611, or €200,000. Not sure what she is doing these days, she has gone very quiet, which is a good thing as she is useless. But she is being paid 22% more than the leader… Read more »
Just lend the ten billion to the people through newly established state banks with clean balance sheets and proper lending standards.
Most debtors would switch from their ridiculous mortgages, some savers would go bargain hunting, and it would cut out the rent-seeking middlemen!
Seriously, dipping in to a protected pension fund to pay off these crooks is howling lunacy.