Budget Part II - Buying debt from the banks, how does it work?

lukasbasic

basically it works like that
- the bank prints non-existing money
- the bank lends the money to the people
- the bank earns additional money by selling those loans to investors (shares)
- the people stop paying (some)
- the government takes the money of all people to pay the banks so the banks and investors are happy (tax increases like yesterday)

happy days

edanto

nesf - you have a lot more training in economics than me. Can you poke holes in my idea suggestion, please?

http://www.boards.ie/vbulletin/showpost.php?p=59734338&postcount=21

nesf

edanto wrote: »

nesf - you have a lot more training in economics than me. Can you poke holes in my idea suggestion, please?

http://www.boards.ie/vbulletin/showpost.php?p=59734338&postcount=21

The problem is this. The banks at the moment can't borrow money at reasonable prices because everyone is worried about how many loans will fail. This is a long term problem that needs to be sorted, it isn't just about banks lending to SMEs in the short term.

This is actually a lot more serious than SMEs not being able to get loans. If any of the major banks fail (i.e. BoI or AIB) it would destroy an enormous amount of wealth that the Government would then have to cover. You really don't want this to happen, the last time widespread banking failures were allowed to happen was in the Great Depression of the 1930s in the US when there was no deposit insurance. This would a) screw over everyone who had deposit accounts, and more seriously b) screw over all the businesses that pay these people in the first place. Very bad stuff. Some people argue that banks should just be left fail, I don't think this is a realistic option given the nature of our banking system.


Giving the money straight to the SMEs doesn't solve the banking problem. We need to deal with the distressed debt in the banks. There are two main ways to do this, a) buy the debt at a discount from the banks and manage it in a separate entity or b) insure the debt so the Government covers the cost of any failed debt. a) while initially more expensive is far preferable to b) since at least with a) any performing debt will earn the tax payer a return while b) only subjects tax payers to the losses.

faceman

Nesf has really addressed the questions very well.

Something that hasnt been mentioned yet is that Sweden did this in the 90's when they were in financial crisis (and their housing market collapsed)

Sweden spent 4% of GDP to rescue their banks. After the returns were factored in the actual cost ended up being less than 2%. It was a succes for Sweden and I would argue their situation was worse than ours. (They had over 100 banks at the time)

However there are key points in their crisis that we are missing out on:
* They held banking officials to task over mismanagement.
* The government forced the banks to write down their losses immediately prior to recapitilisation.
* The government and opposition had a public face of solidarity when this was all going on. They got together for the greater good.

Basically they forced the banks to drain share capital before they recapitalised. They took control of the banks. When things started to pick up, the returns for the country were great as they were able to make now healthy banks public again.

InReality

amcalester wrote: »

My understanding is that the govt will buy the 80bn of bad debts at a reduced value allowing the banks to write off the rest and move on while the State is exposed to a smaller amount.

If its done correctly then it shouldnt cost the State too much. It all depends on what the debts are assed at whether its todays market value, the amount outstanding or a future projected value taking into consideration falling property values.

I think Richard Bruton was right yesterday when he said there was absolutely no reason to expect it to be done correctly.
Thats the huge & real risk here.

The Govt is saying that the NTMA will do a good job and are the best govt agency in the country, and they have brought down the national debt from 120% to near 30%.

This is pure spin in my opinion.

Firstly the task is valuing property based loans
The NTMA would have no more experience of valuing property loans than I have.

Secondly being the best govt agency in Ireland is not exactly a high bar.

Thirdly they NTMA did not bring down the debt "by magic" or financial trickery. Taxpayers money was used to pay off the national debt over the last few years. The NTMA had feck all to do with it.

NTMA - National Treasury Management Agency

InReality

Nerf could you see what are the holes in my "suggestion" post ?

http://www.boards.ie/vbulletin/showpost.php?p=59741603&postcount=13

nesf

InReality wrote: »

Nerf could you see what are the holes in my "suggestion" post ?

http://www.boards.ie/vbulletin/showpost.php?p=59741603&postcount=13

Anglo was a different situation to AIB/BoI because it wasn't a big clearing bank. It could have been left fail I think. It would have still cost us a fair bit to clean up. The Government had a point in that by nationalising it they can go through its books with a fine tooth comb to examine for irregularities. Whether that made it worth saving is an open question.

It doesn't address the problem being addressed by NAMA which is toxic debt in AIB, BoI etc.

InReality

nesf wrote: »

Anglo was a different situation to AIB/BoI because it wasn't a big clearing bank. It could have been left fail I think. It would have still cost us a fair bit to clean up. The Government had a point in that by nationalising it they can go through its books with a fine tooth comb to examine for irregularities. Whether that made it worth saving is an open question.

It doesn't address the problem being addressed by NAMA which is toxic debt in AIB, BoI etc.

Where would the cost occur be if anglo failed ?

nesf

InReality wrote: »

Where would the cost occur be if anglo failed ?

Intervening to spread out the mortgages held by ordinary people from Anglo to other people (i.e. sell them onto other banks, the Government might have to incur some of the cost here, more logistical than anything else). The Government would also have to cover the cost of any money lost through deposit accounts or through bonds issued by the bank after loans had been sold on to other parties. This would have been substantial given the deposit insurance that was put in place on the Government guaranteeing all accounts.

There is a cost to the taxpayer in leaving any bank fail unfortunately.

Akrasia

nesf wrote: »

From the One O'Clock news it appears that the 90 billion includes both performing and non-performing loans (i.e. not only distressed debt).

This is looking like less of a good deal for the banks.

from the one o clock news? And who said that?

Why would the government set up a 'bad bank' and put performing assets into it. It completely misses the point.

edanto

Nesf I'm learning a lot about the banking industry in this thread.

I never realised that the feckers were guaranteed to be given our money to allow their companies survive even if they acted recklessly.

It's absolutely bonkers and I don't understand why you're not fuming about it. (I mean, I'm assuming you don't own a bank because you have time to post online)

eoinbn

edanto wrote: »

Nesf I'm learning a lot about the banking industry in this thread.

I never realised that the feckers were guaranteed to be given our money to allow their companies survive even if they acted recklessly.

It's absolutely bonkers and I don't understand why you're not fuming about it. (I mean, I'm assuming you don't own a bank because you have time to post online)

It was to stop a run on the banks which would of sunk them. People/companies were getting worried about their money in certain irish banks so they were taking it out. This of course was making the problem worse. If this was left happen to Anglo then you can be sure that the first thing everyone would do was to run down to their local bank and demand their money from AIB/BoI resulting in it also going under even though it wasn't really in danger.

SkepticOne

It will be spun as the government taking on those assets at a 'discount' from the (largely irrelevant now) book value of those loans. Therefore the majority of people will not see it as money being handed over. That is why people aren't fuming.

nesf

Akrasia wrote: »

from the one o clock news? And who said that?

David Murphy reporting on what was said by Lenihian this morning.

Akrasia wrote: »

Why would the government set up a 'bad bank' and put performing assets into it. It completely misses the point.

Easy, by taking both performing and non-performing loans of this type the tax payer can turn a profit. Think of it as punishment for the banks. If we're going to be taking on some of their bad loans we're going to be taking some of the better ones too to compensate the taxpayer for the expense.

nesf

edanto wrote: »

I never realised that the feckers were guaranteed to be given our money to allow their companies survive even if they acted recklessly.

Eh no, reread what I said. The banks can be left collapse, the Government isn't required to do anything to stop this by law. The problem for the Government is that there is a guarantee on all deposits with Irish banks (and a few other forms of debt/loans to the banks themselves).

So if a bank collapses the cost to the tax payer is covering the deposits in the bank that aren't covered when the assets of the bank are sold off. This would range from ordinary people's savings to the accounts of companies (which is even more problematic, imagine a company losing the account it had the next three months wages stored in...).

This wouldn't be of any benefit to bankers themselves except if they had money deposited with the bank like anyone else.

deiseman21

the foreigners aint buying ithttp://www.cnbc.com/id/15840232?video=1085923367&play=1

SkepticOne

nesf wrote: »

Easy, by taking both performing and non-performing loans of this type the tax payer can turn a profit. Think of it as punishment for the banks. If we're going to be taking on some of their bad loans we're going to be taking some of the better ones too to compensate the taxpayer for the expense.

Most of the assets they will be taking on will be performing but nevertheless they will be taken on at a vast premium to their market value due to the perceived risk of default. Hardly punishment.

The unfortunate thing is that we may never know the amount that we're handing over to the banks since these assets will never be tested against the market. This is what makes it the politically easy approach.

I think most people accept the need to improve the capital position of the banks but it needs to be done in a more transparent way. The current approach forces the people whether they like it or not to take a massive (tens of billions) punt on the future value of these assets or the underlying land.

nesf

deiseman21 wrote: »

the foreigners aint buying ithttp://www.cnbc.com/id/15840232?video=1085923367&play=1

Personally I've a sinking feeling that they haven't given the markets enough details of the actual mechanism which is most of the problem above. Plus the whole 90 billion figure was a mistake. It's the present book value of all the assets of this class rather than what the NAMA agency will actually spend on assets.

nesf

SkepticOne wrote: »

The unfortunate thing is that we may never know the amount that we're handing over to the banks since these assets will never be tested against the market. This is what makes it the politically easy approach.

Yeah except there is no functioning market for these assets right now. Which is part of the whole problem. There isn't really a market to test these assets against right now.

Personally I'm reserving final judgement until they give us details of the pricing/acquisition mechanism.

deiseman21

nesf wrote: »

Personally I've a sinking feeling that they haven't given the markets enough details of the actual mechanism which is most of the problem above. Plus the whole 90 billion figure was a mistake. It's the present book value of all the assets of this class rather than what the NAMA agency will actually spend on assets.

doesn't matter perception is the be all and end all on the international markets

SkepticOne

nesf wrote: »

Yeah except there is no functioning market for these assets right now. Which is part of the whole problem. There isn't really a market to test these assets against right now.

Then the market value is zero. However I suspect they are worth something however small. Even if you assume 100% chance of default the underlying land upon which the loan is secured is worth something. This would be the case even if there's no centrally traded bundled debt markets.

Regardless, it is the amount above market value however low that the public need to be concerned about (and also those who are going to lend the money to the country to buy these assets at a premium).

Personally I'm reserving final judgement until they give us details of the pricing/acquisition mechanism.

I'm reserving judgement too but it is not looking good.

nesf

SkepticOne wrote: »

Then the market value is zero.

No. It means the market mechanism has broken down. It happens during economic shocks. Be glad our problems are with real estate which at least is tangible.

Market value just doesn't exist when there's no market. We can reasonably expect that this situation will change over the medium term no?

SkepticOne

nesf wrote: »

No. It means the market mechanism has broken down. It happens during economic shocks. Be glad our problems are with real estate which at least is tangible.

You may be correct in a certain technical sense, but from the practical point of view of someone trying to offload the assets...?

However, and this was my main point, l also said that the assets are worth something even if you assume a 100% chance of default. Say the loan was secured against land in Leitrim where the developer was hoping to build a high density development of apartments combined with gym and swimming pool with associated retail units. Even though this will not now happen and it is more than likely that this loan will default, there is some value to the land securing this loan. Even I would buy it if it was going for a sufficiently low figure. Therefore it has some market value even if there's a lot of uncertainty as to what that is.

I agree that the situation will eventually improve somewhat but I don't think the lunatic prices at the height of the boom will ever be achieved again in real terms. Unfortunately there's a lot of people who think a recovery to these levels is only a few years away. I don't like the idea of the government taking this sort of gamble with the peoples money.

At least with the previous recapitalisation there was an agreed upon rate of return for the money given to the banks. Here were handing over an uncertain amount with no guarantees as to the future value of what we're getting in return. Meanwhile the politicians that have set this thing up will be drawing their guaranteed pensions far away.

Helix

would you all rather let the banks collapse?

nesf

SkepticOne wrote: »

You may be correct in a certain technical sense, but from the practical point of view of someone trying to offload the assets...?

The question becomes one of what is a piece of land worth now when there's not really a functioning market despite the fact that you don't want to sell it right now. Which is more complex.

SkepticOne wrote: »

I agree that the situation will eventually improve somewhat but I don't think the lunatic prices at the height of the boom will ever be achieved again in real terms. Unfortunately there's a lot of people who think a recovery to these levels is only a few years away. I don't like the idea of the government taking this sort of gamble with the peoples money.

From my understanding of it, it will be a substantial discount from the boom time highs. That seems to be what they are signalling. Again, I'm waiting on details of the exact mechanism here before judging it either way. If they turn around and say they're going to buy them at 90% of boom time prices then we've been sold a pig in a poke.

RealityCheck

Helix wrote: »

would you all rather let the banks collapse?

Theoretically they should be allowed to collapse. But the real world operates differently. We have no choice. Its a case of bail out the bankers and the developers or a long "nuclear" winter.

SkepticOne

RealityCheck wrote: »

Theoretically they should be allowed to collapse. But the real world operates differently. We have no choice. Its a case of bail out the bankers and the developers or a long "nuclear" winter.

Why do developers need to be bailed out?

SkepticOne

nesf wrote: »

The question becomes one of what is a piece of land worth now when there's not really a functioning market despite the fact that you don't want to sell it right now. Which is more complex.

Nevertheless there is some value to these assets as I argued in my main point above. The notion that something might have zero value was merely taking a point to its logical conclusion. Whether it is correct to regard the market value of something as zero in a situation where the market is not functioning as we might like is a side issue.

The main point is that Land is selling throughout Ireland albeit at reduced prices and volumes from the peak. In five years time the value could well be less or more than it is now. I'm inclined to believe it will be less and other's are entitled to disagree with me but the real problem is that the risk is being foisted on the public.

Here's what I said earlier:

However, and this was my main point, l also said that the assets are worth something even if you assume a 100% chance of default. Say the loan was secured against land in Leitrim where the developer was hoping to build a high density development of apartments combined with gym and swimming pool with associated retail units. Even though this will not now happen and it is more than likely that this loan will default, there is some value to the land securing this loan. Even I would buy it if it was going for a sufficiently low figure. Therefore it has some market value even if there's a lot of uncertainty as to what that is.

Daragh101

I think the govt have done the correct thing in theory.
confidence will be restored quickly with international investors and in govt.
if the govt went for nationalisation our international confidence would be terrible.

deadhead13

The key to how this will work out is the price paid for the assets. Too high the taxpayer takes a big hit - too low and the government will more than likely have to pump more money into the banks.

As I understand it the government now has 25% stake in AIB and Bank of Ireland and I assume a share in future profits (and loses).

What will happen to Anglo Irish Bank?