(Part) Nationalisation of Irish Banks
I knew it was going to be bad but I didn’t think it was going to be as bad as this. And personally, I’m disgusted at bailing out the banks. The same banks that threw suitcases of cash at the housing developers that made first time buyers life hell during the boom years.
The first problem – it’s a bailout but people are pretending it’s not real money
Ah-hah, you say – it’s not really a bailout. The state is guaranteeing the deposits in banks (some Euro 400 Bn worth, or 300,000 Euro for every taxpayer in the country) – but no money has changed hands. What a stroke by the Paddys - not.
No money has changed hands - ‘yet’. Experience in the US (who have been through this a couple of times in recent decades) suggests that 20% of the loan book will go bad. Because of gearing banks can lend out far more money than it takes in deposits, so 20% of bad loans = a lot more than 20% of our deposits needing rescued.
If the banks were hunky-dory, then why are other banks refusing to lend to them? Why couldn’t they go to their shareholders for more funds (like Royal Bank of Scotland did in recent months, raising 12 Billon Sterling)? And if these two groups (who know far more about banking than I or the average taxpayer does) are refusing to lend, then why should we? Fear is one factor, but fear is normally there for a good reason.
The second problem: Meet the new boss of the six largest banks in the country.
I’m sure Mr Lenihan is a fine man, competent and full of integrity. He’s got a good CV – politician, lawyer, family man. Strange that – no mention of banking on his CV.
The new boss of Irish banks – minister for finance Brian Lenihan - image from Agent Provocateur
If the state is underwriting the banks, then they’ll be kept on such a short leash that they can’t go to the toilet without asking permission. And if they’re not being kept on a short leash, then why not – that’s 300 grand of my money that they’re playing with. So Mr Lenihan, as the person making the guarantee, is now the ultimate boss of not one, but six Irish banks.
Bit of a dilemma there: Who will run the Banks the best? The current management who made the loans to developers that got us into this mess? Or a politician without any banking experience (although I’m sure he’s learning fast)? Answers in the comments section at the bottom please.
The third problem: Moral Hazard
When we get through this and growth starts again (and despite my pessimism, we will get through this pain, with Ireland coming out in a competitive position) we now have a problem; The very same bankers that we are now supporting / bailing out will start making loans again. And making risky loans, knowing that the state will (probably) bail them out if they fail. So the state intervention now means that Mr Lenihan and his successor politicians will be regulating the heart of the banking system for years to come.
And who do you think will win? Well intentioned regulators on a fixed salary, or highly paid highly motivated bankers who get paid bonuses for finding new ways of bending the rules?
The finale
Can we roll out all the estate agents / politicians / brokers / other talking heads that popped up on TV predicting a ‘soft landing’? Yep, the same ones that critisied those who dared sound a warning as unpatriotic and ‘talking down the economy’?
(Tumbleweed)
Do I have any better answers? No. But it would be good to stop pretending that this bank rescue carries no cost to the Irish Taxpayer.
Update: Actually , this thing might be cost free - but in a beggar-my-neighbour kind of way. Loads of capital is flowing into Irish Banks and out of UK and European Financial institutions. Great for Irish banks (loads of lovely money to fund existing loans), but I can’t see the other countries being too happy about it if the withdrawals cause a collapse there. Still, it will stop them complaining about our low 12.5% corporate tax rate.
So we bail out the institutions which pushed up the price of shelter to extortionate levels (what deluded white collar gangster thought that bog-standard two-beds in the Dublin suburbs should start from €500,000 and that this was affordable?) - but we leave the little guy struggling to make the repayments in Negativity Equatity.
A little balance would include reform of the bankruptcy laws so that banks have no recourse beyond the value of the home the reposses. It may mitigate some of the moral hazard introduced by this guarantee. (Banks would have to be more careful in future, and developers wouldn’t get delusions about house prices). My main concern now is the government will introduce a top-up loan system for ‘first-time buyers’ so that they can ‘afford’ to buy overpriced houses, beyond the level at which the banks will lend to them. The real purpose of which is to bail out the developers. Socialism for rich people, wha?
Anyway, I don’t think we can sustain our level of borrowing, and it’s going to bite someone, one way or another. Eventually, short and sharp or long and drawn out. Some mood music might help..
http://www.youtube.com/watch?v=YWPE_VkssEw
Or maybe we should listen to Jimmy Rogers :-
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vTl1McjXM2JA.asf
But then again, what do I know. The alternative could be much worse. It just doesn’t feel quite right..
Comment by John McClean — October 1, 2008 @ 4:51 pm
John,
I think the bankruptcy laws that you suggest (can only be sued for the value of the house and no more) are already in place in many states in the US (e.g. California).
What’s happening there is that people are coming off the equivalent of 3-year introductory offers, their mortgage payments are going up 3-4 times yet the price of the house has been halved. Most simply walk away and leave the house - the first thing the bank knows is that the monthly mortgage payment is not made.
Paul
Comment by Paul Browne — October 4, 2008 @ 9:50 am
Yeah, those laws didn’t help at all in the US. If they were here in future, we’d have the benefit of being able to look back at their experience. Bankers would know, that borrower behaviour will accentuate the bust (the same way irrational execuberance accentuates booms).
A quick bust in itself isn’t a bad thing. I mean if we had developers going bust now, they’d have to liquidate their landbanks (and houses). The increase in supply should lower land prices (and house prices) significantly and quickly, allowing more prudent developers to purchase land at reasonable price and get building homes at non-bubble prices.
I think those laws were introduced in the US in the aftermath of the 1929 stock market crash and the beginning of the greate depression. This is probably the first major crash they’ve been tested in.
I wouldn’t be a fan of any type of bailout normally. These are extraordinary circumstances though. And I’m shocked to see the bankers thus far are unrepented. Even if their balance sheets work out ok (because of the profits they made moving from such a low base) - they’ve still benefited from being protected.
I’ve got friends who purchased a 2 bed for 500k in June 2006. Deep, deep NE for them now. That was their own adult choice. But if the downturn takes their job, and someone has to be bailed out - I’d rather it was people like them than the bankers (ideal world).
And ideally, I’d like the government to make sure the banks can never, ever cause this kind of misery and destruction again.
Interesting times. I’m pretty much a spectactor in all this myself though..
Comment by John McClean — October 4, 2008 @ 3:01 pm
Quick bust (as in London in the early 90’s and over in 2-3 years) is definitely better than long protracted drawn out denial (as in Japan, starting at the same time, but still going after 15 years).
Despite being a ’spectator’ as well, I think we’ll both get hit as ‘collatoral damage’. If this damage is ‘only’ higher taxes and fewer places to get a good Cappuccino, then we’ll be lucky (at least compared to those deep deep into Negative Equity).
Still hurts to get affected by this, despite not maxing the credit card, not buying 10 houses and passing up the chance to buy a Range Rover SE!
Paul
Comment by Paul Browne — October 6, 2008 @ 1:22 pm