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

francish

Fact - Ireland cannot allow it's banking system to collapse.

To all those people who are saying the banks have been bailed about - if the banks have got such a great deal, why has 95% plus of their value been wiped out? If you you invested in banks share 2 years ago, they are effectively worthless today. If the state pays too much for the loans, it will be able to either levy the banks or take more control over them. When the market is failing to provide an essential service, the State has to intervene. It is easy to speak the populist rant but what do people seriosuly propose as an alternative. Also, stopping speaking of 80-90 bn, this is book value, transfer value will be somewhere between 30-50% (though still a huge amount)

Daragh101

ya their share price has also rose alot since the markets new what the govt were going to do!!!!!!!!1 AIB-30cent a couple weeks ago now €1.21
BOI-12cent a couple of weeks ago and now €0.90.........they defo got the deal there.

francish

Daragh101 wrote: »

ya their share price has also rose alot since the markets new what the govt were going to do!!!!!!!!1 AIB-30cent a couple weeks ago now €1.21
BOI-12cent a couple of weeks ago and now €0.90.........they defo got the deal there.

You cant use the above example- they still have over 90% of value wiped out. If people say banks have been bailed out - that suggests shareholders value is being preserved, which is simply not the case.

SkepticOne

francish wrote: »

You cant use the above example- they still have over 90% of value wiped out. If people say banks have been bailed out - that suggests shareholders value is being preserved, which is simply not the case.

It's a bailout. It might be a necessary bailout but it is a bailout nevertheless. Shareholder value is a matter of perception. It might be that the conditions attached to the earlier bailout were not attractive or some other reason. It doesn't get away from the fact that large amounts of money were transferred into the banks in order to have a functioning banking system.

The problem I have with the current "bad bank" scheme is that the public is forced to take on a huge amount of risk and we won't know for years whether it has been worth it. I don't think it is the place of the government or its agencies to gamble on the future direction of real estate.

I would much rather that a known hit is taken now so that the banks are adequately capitalised rather than messing around this way. I suspect there's lobbying by the construction industry federation at work here. That and denial about the state of the market "ah sure it's only a temporary downturn caused by doom and gloom merchants" among decision makers.

Mr.Micro

On paper the banks are worth nothing, no nothing is zero, they are worth about minus 90 billion euro. They have all failed and destroyed the economy and peoples lives. It is only the Governments of the west bid to sustain the status quo of the rotten financial system that has meant that the bank shares are worth anything. We have not even begun to look into the murky world of the banks yet as the effort is still on going to save the global economy.

francish

SkepticOne wrote: »

It's a bailout. It might be a necessary bailout but it is a bailout nevertheless. Shareholder value is a matter of perception. It might be that the conditions attached to the earlier bailout were not attractive or some other reason. It doesn't get away from the fact that large amounts of money were transferred into the banks in order to have a functioning banking system.

To date, €2.5bn has been transferred to Irish banks representing the investment by the State in BOI. I have not said it was not a bailout. People need to understand though what it involves. It is not the case that money is being handed over by the state to bank shareholders, this is not the case and it will not happen.

aare

This is actually the only daring, imaginative move of the whole budget...

If the Government knows what they are doing, they could, honestly, make a killing on behalf of us all...

...not to mention a lot of social housing for half of nothing (which would be handy, considering the rent supplement claimants they should have nice and homeless by then), as the result of inevitable foreclosures.

What people do NOT realize is that even a bad debt has a significant value on the international markets (though brokering them is so "cutting edge" that I genuinely know people who have served time for getting caught doing it in the wrong place at the wrong time).

Even the worst of debts can be produced, and declared, quite legally, in, at least, the Swiss banking system, as "invisible assets" when required, while of course, being disregarded for tax purposes...

To some, extremely wealthy, organizations, that can be more valuable than real money (go away and think about it ).

On the other hand, if the government do NOT know what they are doing, they just flushed us all down the toilet...and then some...

nesf

Right, from David Murphy's reporting here: http://www.rte.ie/news/9news/

• Banks are being too nice to their long term customers with respect to developer loans according to the Bacon Report and that this "crony capitalism" is what is preventing the banks properly dealing with these loans.
• Ballpark figure of 50% mentioned for purchasing these assets versus book value.

No idea on how representative the second point will be but it sounds approximately where the value should be on these loans, and personally I hope they release the Bacon Report for general consumption.

Daragh101

francish wrote: »

You cant use the above example- they still have over 90% of value wiped out. If people say banks have been bailed out - that suggests shareholders value is being preserved, which is simply not the case.

the banks have lost 90% of their value because they gave out risky loans that wont be paid back, this has nothing to do with the govts idea to save banks.
obiously the govts plan has fovoured the banks because their share price has rocketed over the last week. the markets are not often wrong.
maby its not a silver bullet for the banks, but its far better than some of the options the govt could have taken.

Mr.Micro

aare wrote: »

This is actually the only daring, imaginative move of the whole budget...



What people do NOT realize is that even a bad debt has a significant value on the international markets (though brokering them is so "cutting edge" that I genuinely know people who have served time for getting caught doing it in the wrong place at the wrong time).

Even the worst of debts can be produced, and declared, quite legally, in, at least, the Swiss banking system, as "invisible assets" when required, while of course, being disregarded for tax purposes...

..

Correct me if I am wrong, but is it not the case that debt was parceled up by all the banks and istitutions and sold and bought to/by each other that created this massive bubble and these very debts treated as assets to balance their loan books?(when it should have been hard cash) In reality it was massive debt parcelled up as assets countering massive debts as loans. So do the same again?

deadhead13

Brian Lenihan stated on newstalk today - the potential loss an asset could make in the longterm will be factored into the price paid for it to the banks.

LostinBlanch

Brian Lenihan said in September that the €7 billion he used to liquidify the banks would get them to start lending to small business and enterprises1

That worked didn't it?

SkepticOne

francish wrote: »

I have not said it was not a bailout.

It sounded like from what you said earlier ("If people say banks have been bailed out - that suggests shareholders value is being preserved, which is simply not the case.") that you had a problem with people saying the banks had been bailed out.

aare

Mr.Micro wrote: »

Correct me if I am wrong, but is it not the case that debt was parceled up by all the banks and istitutions and sold and bought to/by each other that created this massive bubble and these very debts treated as assets to balance their loan books?(when it should have been hard cash) In reality it was massive debt parcelled up as assets countering massive debts as loans.

I am no expert (I just know a few, and listen) but that sounds about right to me...

Mr.Micro wrote: »

So do the same again?

Except this time, hopefully, foreclose on useful assets (such as property for social housing), and sell the rest OUTSIDE the country...and don't buy it back this time...

I never said it was nice...just potentially profitable...and right now, we need the money...

SkepticOne

aare wrote: »

I never said it was nice...just potentially profitable...and right now, we need the money...

I don't think we can expect anything right now. We are buying stuff off the banks that the banks themselves can't sell and so the state can't immediately offload the stuff and in any case the whole idea is to improve the capital base of the bank. The whole point is to buy all the rubbish leaving the bank with the good stuff. The hope is that years down the line there may be a sufficient recovery that the public may make a profit. It reminds me of a gambler putting his last bit of money on red on the Roulette wheel in the hope it pays off ("ah sure we're all ****ed anyway" attitude).

aare

SkepticOne wrote: »

I don't think we can expect anything right now. We are buying stuff off the banks that the banks themselves can't sell and so the state can't immediately offload the stuff and in any case the whole idea is to improve the capital base of the bank. The whole point is to buy all the rubbish leaving the bank with the good stuff. The hope is that years down the line there may be a sufficient recovery that the public may make a profit. It reminds me of a gambler putting his last bit of money on red on the Roulette wheel in the hope it pays off ("ah sure we're all ****ed anyway" attitude).

Ah but see, the banks have no use whatsoever (and certainly no market) for any property they foreclose on...but the government HAS...

When the international markets recover (which some predict will happen in the US from now, and the UK by August) it could be a staggeringly good investment...with a relatively fast return (certainly well within 5 years), meanwhile the banks will have the liquidity to function again...

But yes, unless there is "inside information" it is one heck of a gamble...

Trouble is, in real terms, what else is there right now?

Humria

The government put billions of tax payers money into the banks a few months ago. We have got nothing in return. While the European Central Bank lowered interest rates, Irish banks raised them. They agree to give loans but attach impossible conditions so few can actually take them.

In theory the bad assets agency is a good idea but practically it's a difficult balance.

So if we bail out the banks, I hope the government [FONT=&quot]negotiate some tough[/FONT] conditions in return. Though given their track record, it's doubtful.

Rakeline

Theres nothing you can do about it the banks are the real rulers of everywhere, central banks that is. They print the money and give it out and charge a small % so your always in debth to them no matter what!

I could ramble for hours here about this but just search and watch esoteric agenda its a really good movie that makes you think. The recent budget done nothing to help create jobs it infact took alot form people that still have one. I think its redicoulasthat were not like the likes of France who strike/riot over things but we let them get away with it with ease.

I bet this year we'll be made do another Lisbon treaty vote and it will some how be passed! Were gone to easy where is the 800 years of occupation spirt gone? Sad but as soon as i can im outa here!

Akrasia

nesf wrote: »

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



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.

But that's just optics, because these banks are going to need to be recapitalised after the writedowns anyway (if the 'toxic assets' are indeed bought at discounts on the 'book value'.

We're going to be taking loan assets out of the banks so that we have borrow more to pour more cash in?

Akrasia

nesf wrote: »

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

By which time it will be far too late to do anything. (they'll probably announce those details after a tribunal after an enquiry after the IMF have been brought in after the state went bankrupt.

The irish are far too happy to 'wait and see' and give the politicians who have proven themseves to be disasterously corrupt and incompetent the benefit of the doubt.

There should be a general election before this bill, which has the potential to destroy the country, is passed into law.

Akrasia

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.

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?

There are houses in america for sale for a dollar each. These are houses in abandoned neighbourhoods with no prospects of regeneration.

There are properties in the U.K. for 500 quid each. (mostly in old mining towns) where the prospects of development are practically zero.

Property is perfectly capable of falling to a zero value. It can even turn into a liability if the state takes over half built estates that need to be either completed, or worse, demolished.
As owners of these properties, the state will become responsible for them and it could cost a very large fortune to restore brownfield sites.

Akrasia

Daragh101 wrote: »

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.

And what are you basing this on? the race by the rating agencies to downgrade irish prospects? the flight in investors away from the irish financials?

The current best practise example for how to deal with this kind of crisis is Sweden in the 80's, They nationalised the banks and totally cleaned out the boards of management. If we emulated them we we would be looked on much more positively by the international market, instead however we have demonstrated that we are a backwater tin pot banana republic who will gladly spend the savings of future generations on bailing out the friends of the government against all better judgement.

Akrasia

aare wrote: »

Ah but see, the banks have no use whatsoever (and certainly no market) for any property they foreclose on...but the government HAS...

Nonsense, what use has the state for massive empty commercial developments on the outskirts of towns? or for half built estates on the outer suburbs of cities and towns, or for holiday homes on the west coast, or for hotels and strip malls and golf courses that are not commercially viable?
Or for 'prime development land' on flood plains where there is no demand requirement for further development.......

andrewdeerpark

In the previous 2 banking crisis encounters the past year the banks have made a fool of the government:
- The blanket guarantee scheme
- Forced nationalisation of Anglo Irish Bank

The signs are with this scheme (NAMA), the minister, legislators and senior civil servants will be conned when it comes to the fine print detail of the scheme, just you wait.

Remember Larry Goodman still fly’s around in his helicopter managing his huge beef empire thanks to Charlie Haughey's emergency examinership legislation that saved his butt. Expect more of the same here, developers keeping their heads down or fiddling ownership of companies, transferring land around to avoid paying full price on the asset with the taxpayer picking up the tab. Then in 10 years time all the McNamara's, Dunnes and Carrolls of the world will be back in the Sunday times rich list while we will still be paying the income levy.

What should happen is overstretched developers and businessmen (companies, car dealers etc) that cannot pay their way should be made bankrupt and not allowed setup another company for 10 years. They should then be stripped of their assets and the market economy should prevail, unlikely in our little "who you know" country.

The devil will be in the detail and here is the governments weakest link.

Akrasia

andrewdeerpark wrote: »

Then in 10 years time all the McNamara's, Dunnes and Carrolls of the world will be back in the Sunday times rich list while we will still be paying the income levy.

Yep, and whats worse, is they will then have an even more messianic ego this time around as they will have 'risen from the ashes'. They'll all be writing books and memoirs about how they faced the worse economic crash in the history of the world, 'lost everything' but bounced back.

And the financial media and the 'light entertainment' shows will fawn over them and tell us all how great they are

And the majority of people will believe them and idolise them and call them 'great men' for 'generating employment'

faceman

Akrasia wrote: »

By which time it will be far too late to do anything. (they'll probably announce those details after a tribunal after an enquiry after the IMF have been brought in after the state went bankrupt.

The irish are far too happy to 'wait and see' and give the politicians who have proven themseves to be disasterously corrupt and incompetent the benefit of the doubt.

You might want to elaborate on this. Despite the failings of the governement, they have had an early '08 budget and this emergency budget. Regardless of whether there is bite in it, the desire to take action is there on all levels.

wrote:

There should be a general election before this bill, which has the potential to destroy the country, is passed into law.

And how will that help stabilise things? Please do enlighten us. Has GF or Labour's strategy got more merit than FF?

Akrasia wrote: »

There are houses in america for sale for a dollar each. These are houses in abandoned neighbourhoods with no prospects of regeneration.

There are properties in the U.K. for 500 quid each. (mostly in old mining towns) where the prospects of development are practically zero.

Can you post some links to those properties? Why relevence do they have to Ireland?

wrote:

Property is perfectly capable of falling to a zero value. It can even turn into a liability if the state takes over half built estates that need to be either completed, or worse, demolished.
As owners of these properties, the state will become responsible for them and it could cost a very large fortune to restore brownfield sites.

Again have you real examples, relative to Ireland that demonstrates this?

Akrasia

faceman wrote: »

You might want to elaborate on this. Despite the failings of the governement, they have had an early '08 budget and this emergency budget. Regardless of whether there is bite in it, the desire to take action is there on all levels.

You think those are good things? There is overwhelming public support for a new election, there is overwhelming mistrust in the FF government and a lack of confidence that they will manage this MAMA thing without resort to their usual cronyism, corruption and incompetence.

This is one idea proposed by the people who are responsible for the mess, it is hugely flawed, and if it is allowed to go through it will likely bankrupt the state. Without an election, this will go through because FF have a majority in power (even without the greens) and there isn't a single contientous objector amongst the spineless self serving back benchers.

And how will that help stabilise things? Please do enlighten us. Has GF or Labour's strategy got more merit than FF?

Which is worse, a period of instability resulting in a fresh direction and (the potential of) growth, or a rush to 'stabalise' the system resulting in rash decisions that will act as a noose around the necks of the irish state for decades to come. (Many people are justifying the MAMA decision because 'we're guaranteed the debt anyway', another rash decision, all pain, no gain, or any political will to make the necessary changes to the banks management, that has locked us into a downward spiral of further bailouts, recapitalisations etc until the IMF eventually come in and we are officially screwed.

Can you post some links to those properties? Why relevence do they have to Ireland?

http://www.smh.com.au/news/national/its-almost-a-dime-a-dozen-in-detroit/2008/10/17/1223750333618.html

The dirt cheap houses in the UK, I got that from top gear.

Again have you real examples, relative to Ireland that demonstrates this?

Theres a huge industrial estate in ennis just off the gort road that has probably a dozen warehouse units with 2 occupied. (and it has been completed for years) There are other developments on the other main roads on the outskirts of the town that are just as empty. Ireland has more retail space per head of population than almost else in the world

www.independent.ie/business/commercial-property/ireland--has-third-highest-shopping-centre-space-per-capita-in-europe-1300396.html

We were over supplied with commercial space in 2007, and they still built another 360000square metres in 2008

Hotels are closing at a rate of something like 1 a week, there are countless examples of ghost estates www.ghostestates.com that are practically worthless and will be a significant drain on the state to maintain/complete/demolish

aare

Something else has just occurred to me...

Does anyone realise that some of the bad debt bought from the banks will be mortgages that people hit by the recession default on?

This can definately be a good move all round...giving the government a chance to delay recessionary demographic destabilisation (which can make for a very expensive recovery if this recession is as short as many predict), by extending sufficient time for defaulters to recover and resume their mortgages and/or taking homes at risk into partial or full state ownership to avoid the cost of eviction and state rehousing (that would, likely cost a great deal more).

aare

Akrasia wrote: »

Property is perfectly capable of falling to a zero value. It can even turn into a liability if the state takes over half built estates that need to be either completed, or worse, demolished.

That last (demolished) is actually a point.

The rest of your thoughts are composed of some significant hyperbole...but thought provoking, for all that...

SkepticOne

One group that will be very pleased with this "bad bank" thing is the construction industry federation. It will present them with a great lobbying opportunity playing on the fact that the public now carries the can if the CIF's membership goes bust.