PrimeTime RTE1@9.35 - Examining the Property Pyramid Collapse

Dannyboy83

aphex™ wrote: »

They were under the Asset covered securities act 2001, updated 2007. They're called Covered Bonds IIRC and a quick Google says AIB and EBS were into it.

I'm guessing this was negligible in scale tho.
Assuming it was wide scale, surely they wouldn't be in such big trouble, as everything would have been sold on to hedge funds etc.?

jmayo

Sand wrote: »

Bad banks got involved in sub prime, good banks like Goldman Sachs won. Hence why they are inducing rage in the US for being...successful and stuff. The US situation is far more complex than the Irish situation - loans were given out by ex pizza sales men, but they didnt have to worry about the risk because they sold the loan almost straight away to one of the big US banks who didnt have a ****ing breeze whose loan they were buying but liked the return they were seeing - not to mention most of those securitised products were rated AAA, as good as sovereign debt when they were actually junk.

Hence the sheer terror that siezed the banking system when it dawned on these morons that they had no idea who owed what, when, where or to whom.

Irish banking is and was far more straightforward: a lot of the commercial loans were given on almost a friendly, face to face basis.

I dont argue that incentivising banks to manage their own risk will prevent any and all banks from failing - but it will mean bad banks die, and good banks succeed. By a process of darwinian selection, they system will improve because bad banks wont remain part of the system for long. Shareholders will look to invest in the strong banks with the strong risk control, the same for deposit holders.

Letting a bank fail is not costless, but pain upfront is better than simply storing up another, even bigger problem 20 years down the track by convincing them that the government is ready to throw the taxpayer under a bus for them.

I've dealt with regulators.

Here are the insiders...the banks. Way back there, miles and miles and miles behind them are the regulators. Way back there...that little speck. Thats them. Thats how far behind they are.

Regulation plays a role. We definitely need regulation. But we always have to assume the bankers are smarter than the regulators, that they know more than the regulators, that they can hide what they want, and deceive the regulator. Because they are, they do, they can and they do.

Remember, the regulator colluded with Anglo Irish in deceiving shareholders with their little swaperoo on their balance sheets with Irish Permament. They were bleating to everyone who would listen how well capitalised the banks were...

What really needs to be done is to give the banks every incentive to regulate themselves:

Step one is removing moral hazard: dont bail them out in the unquestioning fashion that have been bailed out. That means bankers being led out of Anglo Irish in handcuffs, stakeholders who accepted risk being wiped out, investigating the links to Davy and Goodbodys who were relentlessly, almost politically fanatical about bank stocks and so on.

Step two is forcing them to ask if they are lending money sensibly: allowing "jingle mail" style bankruptcy forces banks to consider if they would consider the property to be worth enough to cover their loss on a bankruptcy. If banks believe the property prices are sensible, then its no real loss if they get "jingle mail". They just sell the property at market rates and cover their loan, possibly even make a profit. But if theyre lending money into an overheated market...then they will have to refer to their risk teams, their economic analysts, their strategists and start considering if they would be happy to buy the same property at the price their borrower is willing to pay. Its actually not too far away from Islamic banking principles on mortgages, which most banks could learn some lessons from.

I think most Islamic banks remains relatively strong, if you need a positive example.

And I understand the desire to crucify borrowers. As they have sowed, so shall they reap. Great.

But the average individual is a moron who can barely spell economics. Banks have all the systematic information, the number crunchers and the analysts on big pay packets for being so smart: the best incentives will work on their side.

Restrospective cant and shouldnt happen. You cant rewrite a contract with the banks. Moral hazard works both ways. I have said as much when people propose a NAMA for borrowers. I'm sympathetic to the eejits who bought a 450K 2 bed down in meath, but moral hazard is moral hazard.

You are right, if the govt nationalised the banks, there might be political pressure to do so as the govt would then *be* the banks, but given a lot of the stakeholders in our banks are Germans Id really really doubt the government could do so without attracting the ire of the the EU in general, or Germany in particular. It would be Cuban style stuff. Letting the banks live or die on their own merits, with knockon effects for the guys who lent them money is one thing as we retain plausible deniability, but actually taking over the banks and rewriting contracts to force losses on the guys who lent the banks money...I wouldnt be one to go looking to piss ze Germans off tbh.

That said, people will still walk away from their mortgages if they have lost their jobs and cant pay their debts. Thats just inescapable, regardless of bankruptcy laws. If you borrowed 500K and are now on the dole, whats to be done except declare bankruptcy? Whats the penalty? Cant have a bank account or a loan for 10 years? No real penalty if you have no money to put in it. They chase you for 500K? No real penalty if youve got no job and no real hope of getting one for the next 4 or 5 years. Probably would cost them more to hire lawyers to send you threatening letters than theyll get back.

Jingle mail is for future contracts either way. Its too late to incentivise the banks on their current loan book - that milk has well and truly been spilt. But we need to do everything to prevent it happening again.

This is the second time we have bailed out AIB. I absolutely guarantee that if we bail them out again, especially on these terms, that we will have to bail them out again in the nest 20 years, at an exponentially higher cost. You are very worried about the moral hazard of borrowers, you ought to be more worried about the moral hazard of systematic actors, those entities "too big to fail".

Yes, letting the current stakeholders in AIB burn will not be painless, but govt policy ought to be focused on minimising this pain, not in rescuing the current stakeholders. I recognise you dont agree with rescuing the stakeholders, but thats the assumption of the current govt strategy. If anyone was to ask me whats the next step, it would be stop doing the dumb tuff thats being done right now.

If I lost the 10K: It would hurt, very badly until my next pay cheque hit. After that though Id rebuild that money fairly quickly. Far more quickly than I will work off the losses on NAMA.

Think about it like this: theres 4.5 million people in this country. Maybe what, 2 million workers? The government is effectively "borrowing" 54 billion to fund NAMA, with a total predicted cost of 65 billion with fees and interest. Given its a government tender, its going to be vastly more than 65 billion.

But at 65 billion, the government is borrowing 32,500 euro in my name to "protect" a 10K desposit? Given the realistic losses on NAMA, Id rather get a kick in the balls now as opposed to several kicks in the head later.

Plus its also a given I wont just get several kicks in the head from that, I'll also get another few kicks when the same bank screws up again and of course the mantra of "too big to fail" is trotted out.

See above - securitisation of sub primes, plus a ready market of banks who had no idea what they were buying but bought the AAA credit rating is the biggest factor in the US troubles - the lenders sold their risk, the big banks didnt know what the risk was. This is not the general practise in Ireland.

Also, it has been US government policy for many years to incentivise banks to lend money to high risks they normally wouldnt.

Incentivising risky lending + percieved riskless securitisation = utter disaster.

Agreed.

I think we agree on certain things, but I think they you are downplaying what a disastrous impact the two main high street banks going under would have.
You are looking at a personal viewpoint that you could recoup your 10 grand relatively quickly, but what about a pensioner with their 50 grand in there put aside for retirement ?
What about a business with a cash acocunt with couple of hundred thousand in there for future development ?
IMHO it would have been disastrous.
Yes eventually we would get over it, but what state would personal savers and business be in ?

BTW just becuase I say save the banks I don't mean save the bondholders and shareholders.
I am saying take the banks into state ownership and eventually refloat onto the market as happened in Scandanavia AFAIK.

Also please note I have never said save Anglo or even IN.
They were niche players and thus could burn.
It would be a lesson to the others.

When I talk of regulation i don't mean along our current lines.
I mean total overhaul of the system with non connnected Irish banking or Irish Dept of Finance management, very strict and enforced laws with big threats of jailtime.
Maybe if we had a few Bernie Madoffs then fitzpatrick, neary, drumm, fingelton, casey would think twice before someof their actions.

I think you are being charitable to some of the US banks and institutions.
It wasn't just the Fannie Mays and Freddie Macs that knew about subprime.
Yep they dished them out but the big banks that took these loans and repackaged them knew damm well what they were doing.
The whole fancy resecuritisation and creation of fancy derivatives were created by the big banks as a way of repackaging all the sh**e loans.
They were hiding the real source of the loan amonsgt fancy economic products.
They were often selling them on to unsuspecting non banking entities, such as that Norwegian council that ended up with 100 million euro of cr**.