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Posts tagged ‘The Irish Times’

spontaneous combustion

One of the strangest stories last week was the story of the pensioner’s
death caused by spontaneous combustion. This verdict was that the man died of a
phenomenon called spontaneous human combustion as far as I can ascertain this
is the first time such a verdict has been arrived at in an Irish coroners court.
In case you missed this story here is the link to it on the Irish Times.

full article at source here: http://www.irishtimes.com/newspaper/ireland/2011/0923/1224304578285.html

Fatal road incident in Co Wicklow

Gardaí have issued an appeal for information on a fatal road incident in Co Wicklow.

A 41-year-old man died after he was knocked down at Coyne’s Cross in Ashford at around 1.30am.

A 21-year-old man was later arrested under road traffic legislation and brought to Gorey Garda Station but was subsequently released.

Gardaí have asked for anyone who was on the N11, travelling south between 12.30am and 1.45am, to contact them.

They say they want to speak to people who may have seen the man walking, or who witnessed the collision.

The N11 has now reopened southbound between the Newtownmountkennedy and Rathnew exits following the incident.

All diversions have been lifted, but motorists are warned that conditions remain icy in the area.

Missing persons report

From Adrian Greer
21 December at 10:49 Report
Wall Photos


Friends…. I’m not sure if everyone is aware but my sister Blathnaid has been missing in Dublin since Tuesday December 14th. We now know that Blath was wearing the following clothes; 3/4 length black woolen jacket, red and black scarf, grey jeans and dark shoes\boots. She was last seen getting into a taxi on Sir John Rogerson’s Quay at 8pm on Tuesday December 14th.

Please share this link along with the photo with all your friends particularly people living in the Dublin metropolitan area.

Anyone with information is asked to contact Harcourt Terrace Garda Station on 01-6669500.

State has injected a further €525m into EBS

The Irish Times

CIARA O’BRIEN

The Government has injected a further €525 million into EBS Building Society, it was confirmed today.

The new funding comes through special investment shares issued to Minister for Finance Brian Lenihan. The shares give Mr Lenihan control of the building society, including the composition of theboard and passing of members’ resolutions.

The latest funding means EBS will meet the core tier 1 capital ratio of 8 per cent by December 31st.

The institution was told by the Central Bank in March to raise €875 million by the end of December. However, in November it told the building society it needed to increase its capital ratio to 13.5 per cent by the end of the year, meaning it needs to find an additional €438 million. The Central Bank today said it has since extended that deadline to the end of February.

Other lenders had been given until at least the end of February to achieve new targets, set on November 28th.

EBS, which the government is currently looking to sell, has already received €100 million in funding from the State in the form of a promissory note, and a €250 million injection through the issuance of special investment shares.

Irish Life & Permanent and Dublin-based private equity group Cardinal Asset Management are currently bidding to buy EBS. FInal bids are expected to be in next week.

New legislation coming before the Dáil today will give the Minister for Finance new powers that would allow the Government to inject further funds required if the EBS is not sold.

source http://www.irishtimes.com/newspaper/breaking/2010/1215/breaking8.html

The Irish Times (above) reports this morning that the State has injected a further €525m into EBS. This is in addition to the €100m in cash injected in the building society in May 2010 and the €250m injected via a promissory note in June 2010 (Ciara O’Brien gets the two mixed up in her Irish Times article).
What this means is that the €875m that was flagged as the additional capital requirement in the Financial Regulator’s PCAR in March 2010 has now 100% been provided by the State whereas previously there had been a suggestion that a third party, perhaps one of the two remaining bidders for EBS (Irish Life and Permanent and the Cardinal Consortium) might stump up some of the requirement. The €875m was provided as follows (a) €100m in cash in May 2010 (b) €250m in promissory notes in June 2010 and (c) €525m in cash in December 2010. The PLAR published by the Financial Regulator on 28th November, 2010 signalled that EBS would need raise a further €438m by 28th February 2011 (that’s on top of the €875m) and the betting would be that the State will need pony up that also. And where did the €525m just now injected in EBS come from? That would seem to be from either the NTMA cash balance (the “fully funded until the middle of next year” money) or from the NPRF (whose €17bn unencumbered funds might have been made available for running the State but instead are being shoveled into the banks).
The €875m that has been shoveled into EBS so far (and the additional €438m that will be burned there by the end of February 2011 – shoveling and burning imply some sort of constructive locomotion but alas it’s merely loco as the money is unlikely to be even partially recovered) are as nothing though compared with Allied Irish Banks (AIB) which will require a further c€3.7bn in the next two weeks to meet the PCAR (Sept 2010 version) and will need an additional c€2.5bn by the end of February 2011 to bring the overall State investment in AIB to €12.745bn approx (€3.78bn already invested in preference shares and share acquisition costs, €3.7bn in the next two weeks and €5.265bn by the end of February 2011 and that’s on top of €3.4bn generated by AIB through disposing of its Polish Bank Zachodni and US M&T stakes). The €3.7bn in the next two weeks is also likely to come from the NTMA strategic reserve or the NPRF.
I think it is noteworthy that EBS has been provided with its 31st December 2010 PCAR requirement two weeks early whereas AIB which is in the wars with its bonus controversy will seemingly wait until the fuss has died down before it is gifted its €3.7bn.
Bank of Ireland appears to be okay for the next two weeks though my strong view is that NAMA’s absorption of the sub €20m exposures will create a further, thus-far undeclared, hole in BoI’s capital. NAMA, BoI, the Financial Regulator and the Department of Finance seem to be working on the basis that the remaining tranche for BoI would attract a 42% (40% in one ministerial statement) haircut. Confidential messages received here indicate that there will be some horror stories that will be uncovered by NAMA and that there is no genuine reason for BoI’s smaller exposures to have a lesser haircut than AIB’s (which according to the September 2010 estimates, the latest available, is to be 60%).
Irish Life also appears okay for the time being and has exceptionally been given until May 2010 to find €243m of capital and the betting is that it can do this without recourse to the State.
And that leaves the two lead-zombies in our financial landscape – Anglo and Irish Nationwide Building Society (INBS). The bailout cost for INBS went from €2.7bn in April 2010 to €3.2bn in August 2010 to €5.4bn in September 2010. The €5.4bn is on the basis that NAMA applies a 70% discount to INBS’s last tranche and that there are no additional unprovisioned losses on the remaining €2.6bn of non-NAMA loans (the last recorded provision on these was €0.2bn). You would hope that at this stage there is limited further downside with INBS but (a) their non-NAMA loan provisions look low and (b) as with the other banks there is concern over undiscovered losses with derivatives.
And so to the chief-zombie, Anglo. My understanding is that NAMA has transferred practically all of Anglo’s NAMA loans though NAMA has not issued a statement on the matter (it found the time to issue a lengthy reply to the CIF-comissioned hatchet job on the agency but not the time to report on a transfer that was flagged as urgent at the end of September 2010). Paddy McKillen’s estimated €900m of lending is still with Anglo pending the outcome of the appeal which is starts today in Dublin’s Supreme Court, but my understanding is practically everything else has been absorbed. So is NAMA able to confirm the final (estimated, pending full due diligence by the end of March 2011) discount? Is it 67% (I understand it is) or as high as the worst case scenario of 70%? And how is Anglo getting on with its €38bn of non-NAMA loans? Has the outlook improved on these (mostly commercial property non-land and development, half located in Ireland and one third in the UK and remainder in the US) loans?
 
And remember that Anglo and INBS have thus far been mostly funded with promissory notes (IOUs signed by the Minister for Finance and deemed good enough for Core Tier 1 capital by our Financial Regulator). These IOUs need to be converted to real money and a long-held concern on here was that there would be frontloading of the conversion to cash, not a convenient 1/10th per annum for the next 10 years. So what will the shoveling profile be for the promissory notes?
The great concern with the present shoveling is that it is depleting real money from the NTMA (the “fully funded to the middle of next year” reserve) and the NPRF. And should the actual cost of rescuing the banks increase and we need an additional bailout, we may find that we have sacrificed our strategic reserves and will be left effectively seeking funding from a “beggars can’t be choosers” position or a messy default.

source https://mail.google.com/mail/?hl=en&shva=1#inbox/12cea0c727190daf

If you thought the bank bailout was bad, wait until the mortgage defaults hit home

The Irish Times – Monday, November 8, 2010

If you thought the bank bailout was bad, wait until the mortgage defaults hit home

THE BIG PICTURE: Ireland is effectively insolvent – the next crisis will be mass home mortgage default, writes MORGAN KELLY 

SAD NEWS just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover. 

It will be remembered that, after a lengthy period of poverty following her acrimonious divorce from her English partner, in the 1990s Ireland succeeded in turning her life around, educating herself, and holding down a steady job. Although her increasingly riotous lifestyle over the last decade had raised some concerns, the Irish Patient’s fate was sealed by a botched emergency intervention on September 29th, 2008 followed by repeated misdiagnoses of the ensuing complications. 

With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life . . . 

WHEN I wrote in The Irish Times last May showing how the bank guarantee would lead to national insolvency, I did not expect the financial collapse to be anywhere near as swift or as deep as has now occurred. During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.

It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela.

September marked Ireland’s point of no return in the banking crisis. During that month, €55 billion of bank bonds (held mainly by UK, German, and French banks) matured and were repaid, mostly by borrowing from the European Central Bank.

Until September, Ireland had the legal option of terminating the bank guarantee on the grounds that three of the guaranteed banks had withheld material information about their solvency, in direct breach of the 1971 Central Bank Act. The way would then have been open to pass legislation along the lines of the UK’s Bank Resolution Regime, to turn the roughly €75 billion of outstanding bank debt into shares in those banks, and so end the banking crisis at a stroke.

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.

The Government has admitted that Anglo is going to cost the taxpayer €29 to €34 billion. It has also invested €16 billion in the other banks, but expects to get some or all of that investment back eventually.

So, the taxpayer cost of the bailout is about €30 billion for Anglo and some fraction of €16 billion for the rest. Unfortunately, these numbers are not consistent with each other, and it only takes a second to see why.

Between them, AIB and Bank of Ireland had the same exposure to developers as Anglo and, to the extent that they were scrambling to catch up with Anglo, probably lent to even worse turkeys than it did. AIB and Bank of Ireland did start with more capital to absorb losses than Anglo, but also face substantial mortgage losses, which it does not. It follows that AIB and Bank of Ireland together will cost the taxpayer at least as much as Anglo.

Once we accept, as the Government does, that Anglo will cost the taxpayer about €30 billion, we must accept that AIB and Bank of Ireland will cost at least €30 billion extra.

In my article of last May, when I published my optimistic estimate of a €50 billion bailout bill, I posted a spreadsheet on the irisheconomy.ie website, giving my realistic estimates of taxpayer losses. My realistic estimate for Anglo was €34 billion, the same as the Government’s current estimate.

When you apply the same assumptions about lending losses to the other banks, you end up with a likely taxpayer bill of €16 billion for Bank of Ireland (deducting the €3 billion they have since received from investors) and €26 billion for AIB: nearly as bad as Anglo.

Indeed, the true scandal in Irish banking is not what happened at Anglo and Nationwide (which, as specialised development lenders, would have suffered horrific losses even had they not been run by crooks or morons) but the breakdown of governance at AIB that allowed it to pursue the same suicidal path.

Once again we are having to sit through the same dreary and mendacious charade with AIB that we endured with Anglo: “AIB only needs €3.5 billion, sorry we meant to say €6.5 billion, sorry . . .” and so on until it is fully nationalised next year, and the true extent of its folly revealed.

This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?

What is driving our bond yields to record levels is not the Government deficit, but the bank bailout. Without the banks, our national debt could be stabilised in four years at a level not much worse than where France, with its triple A rating in the bond markets, is now.

As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.

For a country or company, insolvency is the equivalent of death for a person, and is usually swiftly followed by the legal process of bankruptcy, the equivalent of a funeral.

Two things have delayed Ireland’s funeral. First, in anticipation of being booted out of bond markets, the Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.

Secondly, not wanting another Greek-style mess, the ECB has intervened to fund the Irish banks. Not only have Irish banks had to repay their maturing bonds, but they have been haemorrhaging funds in the inter-bank market, and the ECB has quietly stepped in with emergency funding to keep them going until it can make up its mind what to do.

Since September, a permanent team of ECB “observers” has taken up residence in the Department of Finance. Although of many nationalities, they are known there, dismayingly but inevitably, as “The Germans”.

So, thanks to the discreet intervention of the ECB, the first stage of the crisis has closed with a whimper rather than a bang. Developer loans sank the banks which, thanks to the bank guarantee, sank the Irish State, leaving it as a ward of the ECB.

The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce. This time the bad loans will be mortgages, and the foreign creditor who cannot be repaid is the ECB. In consequence, the second act promises to be a good deal more traumatic than the first.

Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages. Between negotiated repayment reductions and defaults, at least 100,000 mortgages (one in eight) are already under water, and things have barely started.

Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.

People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke. In a society like ours, where a person’s moral worth is judged – by themselves as much as by others – by the car they drive and the house they own, the idea of admitting that you cannot afford your mortgage is unspeakably shameful.

That will change. The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording. Facing a choice between obligations to the banks and to their families – mortgage or food – growing numbers are choosing the latter.

In the last year, America has seen a rising number of “strategic defaults”. People choose to stop repaying their mortgages, realising they can live rent-free in their house for several years before eviction, and then rent a better house for less than the interest on their current mortgage. The prospect of being sued by banks is not credible – the State of Florida allows banks full recourse to the assets of delinquent borrowers just like here, but it has the highest default rate in the US – because there is no point pursuing someone who has no assets.

If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency. There is no shame in admitting that you too were mauled by the Celtic Tiger after being conned into taking out an unaffordable mortgage, when everyone around you is admitting the same.

The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.

Along with mass mortgage defaults, sorting out our bill with the ECB will define the second stage of the banking crisis. For now it is easier for the ECB to drip feed funding to the Irish State and banks rather than admit publicly that we are bankrupt, and trigger a crisis that could engulf other euro-zone states. Our economy is tiny, and it is easiest, for now, to kick the can up the road and see how things work out.

By next year Ireland will have run out of cash, and the terms of a formal bailout will have to be agreed. Our bill will be totted up and presented to us, along with terms for repayment. On these terms hangs our future as a nation. We can only hope that, in return for being such good sports about the whole bondholder business and repaying European banks whose idea of a sound investment was lending billions to Gleeson, Fitzpatrick and Fingleton, the Government can negotiate a low rate of interest.

With a sufficiently low interest rate on what we owe to Europe, a combination of economic growth and inflation will eventually erode away the debt, just as it did in the 1980s: we get to survive.

How low is sufficiently low? Economists have a simple rule to calculate this. If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time. After a massive credit bubble and with a shaky international economy, our growth prospects for the next decade are poor, and prices are likely to be static or falling. An interest rate beyond 2 per cent is likely to sink us.

This means that if we are forced to repay the ECB at the 5 per cent interest rate imposed on Greece, our debt will rise faster than our means of servicing it, and we will inevitably face a State bankruptcy that will destroy what few shreds of our international reputation still remain.

Why would the ECB impose such a punitive interest rate on us? The answer is that we are too small to matter: the ECB’s real concerns lie with Spain and Italy. Making an example of Ireland is an easy way to show that bailouts are not a soft option, and so frighten them into keeping their deficits under control.

Given the risk of national bankruptcy it entailed, what led the Government into this abject and unconditional surrender to the bank bondholders? I have been told that the Government’s reasoning runs as follows: “Europe will bail us out, just like they bailed out the Greeks. And does anyone expect the Greeks to repay?”

The fallacy of this reasoning is obvious. Despite a decade of Anglo-Fáil rule, with its mantra that there are no such things as duties, only entitlements, few Irish institutions have collapsed to the third-world levels of their Greek counterparts, least of all our tax system.

And unlike the Greeks, we lacked the tact and common sense to keep our grubby dealing to ourselves. Europeans had to endure a decade of Irish politicians strutting around and telling them how they needed to emulate our crony capitalism if they wanted to be as rich as we are. As far as other Europeans are concerned, the Irish Government is aiming to add injury to insult by getting their taxpayers to help the “Richest Nation in Europe” continue to enjoy its lavish lifestyle.

My stating the simple fact that the Government has driven Ireland over the brink of insolvency should not be taken as a tacit endorsement of the Opposition. The stark lesson of the last 30 years is that, while Fianna Fáil’s record of economic management has been decidedly mixed, that of the various Fine Gael coalitions has been uniformly dismal.

As ordinary people start to realise that this thing is not only happening, it is happening to them, we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America. Within five years, both Civil War parties are likely to have been brushed aside by a hard right, anti-Europe, anti-Traveller party that, inconceivable as it now seems, will leave us nostalgic for the, usually, harmless buffoonery of Biffo, Inda, and their chums.

You have read enough articles by economists by now to know that it is customary at this stage for me to propose, in 30 words or fewer, a simple policy that will solve all our problems. Unfortunately, this is where I have to hold up my hands and confess that I have no solutions, simple or otherwise.

Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.

From here on, for better or worse, we can only rely on the kindness of strangers.

Comment :

What can I say that I haven’t already said!

How Cowen and lenihan are still in place boggles the mind and I must conclude that the people around them are as guilty as they are!

 Retribution can’t come soon enough for them!

Time to build a guillotine?

A highly realistic portrait of Marie Antoinett...

Image via Wikipedia

MIRIAM LORD

Ireland entered the Twilight Zone yesterday – tipped into another dimension by a gaffe-prone Government’s cheesy attempt to butter up the electorate.

Do not be alarmed, for there is Philadelphia light at the end of the tunnel. Jaws hit the floor at breakfast time when the Minister for Agriculture proudly informed Morning Ireland listeners of the great news.

“Free cheese for the needy,” trumpeted Grand Fromage Brendan Smith, having spent the previous few minutes side-stepping questions about the publication of the dreaded austerity plan.

A budget from hell may be on the way, with €6 billion in cuts and tax rises planned for next month. We are living beyond our means, cautions the Minister for Finance, reprising Charlie Haughey. The future looks grim. But at least we have cheese. Cavan’s answer to Marie Antoinette sounded very pleased with himself.

Have they no sense? Did nobody think that boasting about handing out a bit of free cheese – laudable as the scheme is – might seem a little crass when set against the financial tsunami on the way? Did the Cabinet sit in silence, bereft of ideas, at their meeting in Farmleigh and wonder what they might possibly come up with to comfort a worried nation?

Then somebody shouts: “Jesus . . . cheesus . . . cheeses . . . cheese . . . that’s it. Cheese! Let them eat cheese!” And so the low-profile Brendan Smith gets his big moment on Morning Ireland and launches into one of the most absurd radio performances since Joe Jacob’s memorable interview on what to do in the event of a nuclear accident.

photo  Machholz

The free cheese scheme has been running for well over a decade, but no minister ever felt the need to make a big deal about it until yesterday.

By mid-morning, Brendan’s announcement had made it to the international cheesewires.

The Opposition rushed to condemn what they saw as the Minister’s insensitivity. Stung by the avalanche of derision, Mr Smith fought back, saying Fine Gael’s reaction to his free cheese announcement was “deeply offensive, especially to the many charity organisations which rely on it each year”.

If there were free wine on offer, which there isn’t, John Wilson, Irish Times wine expert, recommends “a nice Chateauneuf du Pape to go with your Coalition cheddar.

It would be funny, if things weren’t so damn serious.

source http://www.irishtimes.com/newspaper/breaking/2010/1106/breaking1.html

Comment:

we all know what happened to Marie Antoinette and things are now getting to a state I might just start to build my own guillotine and I know who will be first in line to get the chop! 

Related Articles

18 months later!

uploading image of Irish Govt buildings. My im...

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Ireland’s leading academics recommend ‘Nationalising banks is the best option’

Date: 17 Apr 2009

The following commentary has been written by a group of Ireland’s leading academic economists, including faculty from UCD Smurfit School: John Cotter, associate professor of finance, Don Bredin, senior lecturer in finance, Elaine Hutson, lecturer in finance and Cal Muckley, lecturer in finance

Published:  Irish Times

Twenty of Ireland’s leading academic economists argue that the Government has got it badly wrong. Nama is not the way to clean up the banking mess created by the property bubble: temporary but full-blooded nationalisation of the banks is the only way

OVER THE last number of months extraordinary changes have occurred in the Irish banking and financial scene. We believe that we are now at a critical stage in Irish economic history and that it is crucial that the Government take the right course of action to deal with the problems in our banking sector.

The banking system is widely perceived to have seized in terms of lending, and whether correct or not this perception needs to be addressed. We believe that the correct action to take now is nationalisation of the banking system, or at least that part of it that is of systemic importance.

We do not make this recommendation from any ideological position. In normal circumstances, none of us would recommend a nationalised banking system. However, these are far from normal times and we believe that in the current circumstances, nationalisation has become the best option open to the Government.

Furthermore, we explicitly recommend nationalisation only as a temporary measure. Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.

In introducing its proposals for the National Asset Management Agency (Nama), Government Ministers and Peter Bacon, the consultant who recommended this plan to the Government, have stressed that they see their current plan as likely to produce a superior outcome to nationalisation (though they concede that majority State ownership may be required).

We disagree strongly. We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer.

We can summarise our arguments in favour of nationalisation, and against the Government’s current approach of limited recapitalisation and the introduction of an asset management agency, under four headings. We consider that nationalisation will better protect taxpayers’ interests, produce a more efficient and longer lasting solution to our banking problems, be more transparent in relation to pricing of distressed assets, and be far more likely to produce a banking system free from the toxic reputation that our current financial institutions have deservedly earned.

PROTECTING THE TAXPAYER

Our banks have made an enormous quantity of bad loans, mainly to property developers, and realisation of these losses will see a substantial erosion of their capital base. International financial regulations require that banks maintain certain levels of capital to be allowed to stay in business.

In addition, as the recession mounts, so too will bad debts in consumer and other commercial loans, and so our banks need outside capital investment to make up the losses on these loans. The highest grade, and most desirable, form of capital is ordinary share capital, and in the current circumstances the Irish Government is the only conceivable investor willing to provide this capital.

The Government has put forward Nama as a vehicle to take these bad loans off the banks at a discounted rate. To the extent that the realisation of losses on these loans erodes the capital position of the banks, the Government has indicated that it is willing to supply equity capital in return for shares.

Crucially, however, the Government’s current descriptions of the range of outcomes from this process suggest that they are badly underestimating the scale of losses at our banks, and as such may end up substantially overpaying for bad assets.

Take our two leading banks, AIB and Bank of Ireland. Analysts have repeatedly estimated the extent of bad loans at these banks to be of the order of at least €20 billion. Losses of this sort would wipe out virtually the entire €27 billion of Tier 1 capital of these banks. This means that if the Government purchases these loans at fair market value, it will end up having to provide funds to replenish fully the equity capital of these banks and, in consequence, would end up with essentially full ownership of these banks.

There is thus a fundamental internal contradiction in the Government’s current position. The Government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership.

These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if Nama purchases the bad loans at a discount – but still well above market value.

With €90 billion in loans to be purchased, the consequences to the taxpayer of overpaying for bad assets by 10 to 30 per cent are truly appalling. To put these figures in perspective, the effect in a full year of the Budget measures taken last week was to save the exchequer €5 billion.

Peter Bacon and others have argued in recent days that the question of who owns the banks does not matter, because the ownership structure does not change the underlying size of loan losses. Frankly, this is argumentation by distraction.

Nobody is claiming that nationalisation changes the underlying loan losses on the bank balance sheets. However, what it does change is who owns the equity and also who has first claim on any increase in value in the new banks after they have been recapitalised. If nationalised, the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years’ time, and this would substantially reduce the underlying cost to the taxpayer.

Furthermore, nationalisation offers an opportunity, should the Government see such a need, to share directly with the taxpayers the upside in restoring banking sector health. Such an opportunity could involve a voucher-style reprivatisation of the banks and could be used to provide economic stimulus at a time of scarce resources, at no new cost to the exchequer.

A MORE LASTING SOLUTION

With the Nama process charged with meeting the three mutually contradictory objectives above, it is also possible that objective (b), recapitalising, will not be fully met. In other words, a Government that needs to be seen to purchase the bad assets at a reasonable discount and that does not want to take too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, this process may continue to leave us with zombie banks that still require the State-sponsored life-support machine that is the liability guarantee.

However, once nationalised and with the promise of future returns for the State, the incentive for the Government will be to create well-capitalised healthy banks that can be privatised and allowed to operate independently from the State, as quickly as possible. We believe that full nationalisation now will end up getting the State out of its involvement in the banking business faster than the current approach being taken by the Government.

In contrast, a circumstance where a drip-feed of recapitalisations is required would be the worst of all possible outcomes.

TRANSPARENCY

Peter Bacon and Government Ministers have stressed that it is necessary to keep the banks out of public hands so that the process is a transparent one.

The truth is exactly the opposite.

Every additional euro that the State pays for bad assets is an additional euro for the current bank capital holders and one euro less of valuable equity investment for the State. For this reason, the process by which Nama purchases the bad assets is going to be an extremely controversial one. Already, analysts are citing ranges from 15 per cent to 50 per cent as appropriate for the discount on these loans.

However the Government decides to price these assets, whether it be via accountancy firms, auctioneers or economic consultants, the process is going to have an element of arbitrariness to it and is unlikely to be one that will be widely seen as fair and transparent.

By contrast, nationalisation per se requires no such controversial asset-pricing process. Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.

However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter. The Swedish bad bank experience (widely mis-reported in this country) involved an asset valuation board that set the price for assets transferred from nationalised banks, but the process was not a controversial one.

A related argument that Government officials have made against nationalisation is that it would remove the stock market listing and market monitoring function, rendering opaque the quality of the State-owned banks. However, the experience of recent years is one that would have to cast doubt on the ability of markets to effectively monitor financial institutions.

TOXIC REPUTATIONS

The Government’s plans seem likely to keep in place the current management at our biggest banks.

For instance, the smaller discounts on bad loans being cited would, if paid, likely allow Bank of Ireland to maintain its recent levels of equity capital without taking more funds from the Government than the €3.5 billion it has already taken (in return for preference shares which give an option for a 25 per cent State share.)

This type of incremental change will do little to restore the battered reputation of Irish banking. It would be difficult to avoid claims of crony capitalism and golden circles were billions of State monies to be placed into the banks with minimal changes in their governance structure.

Nationalisation provides the opportunity for a fresh start for Irish banking. The State should run the temporarily nationalised banks as independent semi-State operations headed by highly independent boards of senior figures of the utmost integrity. Executives for these banks should be sourced through an international search, and remunerated accordingly.

These executive boards should be charged with a clear mandate to improve risk management practices, restore the brand image of Irish banking and finance, and return the banks to private ownership in a reasonably short time frame, for as high a stock price as possible.

This would certainly see substantial changes in senior management and board members in these banks, and allow for a rebuilding of the reputational capital of these institutions.

To conclude, we consider that the Government’s approach of limited recapitalisation supplemented by Nama represents only a partial solution to our banking problems, and one that is unlikely to protect the taxpayer. A nationalised banking system with a mandate to restructure and reprivatise would be a preferable approach at this time.

List of signatories

This commentary has been written by a group of Ireland’s leading academic economists, several of whom have analysed and commented on the banking and financial crisis on these pages and elsewhere over the past year. They are:

Karl Whelan, professor of economics, dept of economics, UCD; John Cotter, associate professor of finance, Smurfit School, UCD; Don Bredin, senior lecturer in finance, Smurfit School, UCD; Elaine Hutson, lecturer in finance, Smurfit School, UCD; Cal Muckley, lecturer in finance, Smurfit School, UCD; Shane Whelan, senior lecturer in actuarial studies, school of mathematics, UCD; Kevin O’Rourke, professor of economics, Trinity College Dublin; Frank Barry, professor of international business and development, school of business, Trinity College Dublin; Pearse Colbert, professor of accounting, school of business, Trinity College Dublin; Brian Lucey, associate professor of finance, school of business, Trinity College Dublin; Patrick McCabe, senior lecturer in accounting, school of business, Trinity College Dublin; Alex Sevic, lecturer in finance, school of business, Trinity College Dublin; Constantin Gurdgiev, lecturer in finance, school of business, Trinity College Dublin; Valerio Poti, lecturer in finance, DCU business school; Jennifer Berrill, lecturer in finance, DCU business school; Ciarán Mac an Bhaird, lecturer in finance, Fiontar, DCU; Gregory Connor, professor of finance, department of economics, finance and accounting, NUI Maynooth; Rowena Pecchenino, professor of economics, department of economics, finance and accounting, NUI Maynooth; James Deegan, professor of economics, Kemmy School of Business, Limerick; and Cormac Ó Gráda, professor of economics, UCD

source http://www.smurfitschool.ie/aboutsmurfit/news/newsarchive/title,31429,en.html

Comment:

It’s hard to believe but it is now 18 months since these academic economists called for the government to do what I would have thought was the most obvious route to go regarding the Banking crises

18 months later we see these people were right all along!

On the 01.10.2010 the Irish government has effectively nationalized 85% of the banking system and has wasted billions by not taking the advice of these leading academic economists. In fact it has emerged the two Brian’s have wasted millions on advice from international firms like Morgan Stanley only then to ignore it

In the video clip above we hear about Derivatives and a possible 14,000,000,000:00 exposure

For  the last 18 months I have consistently tried to expose  these losses and I must now conclude that 14 billion is far short of the eventual figure, baring in mind what has emerged since the video was first shown across our TV screens

I suspect that the eventual figure is many times this figure and could be up to 100,000,000,000:00

This Derivative market has collapsed with the bankruptcy of AIG in the US

and there is no sure way in valuing these particular financial toxic tools

there is no market so there is no value !

Last Friday in the irish Times I picked up this article and it appears we are taking on another 200 billion in Bank debts??Doc132010  (last paragraph) are these the derivate losses I am talking about?

The banks are continuing to hide these huge losses and the government is colluding with the banks with this fraud!

We are saddled with an obviously incompetent corrupt Government hell-bent on clinging to power at all , and any cost to the Irish people. We as a people must stand up and challenge these economic terrorists any way we can. It’s time the people had their say

We need a general election.

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