BLACK THURSDAY

Dave McWilliams
Contrary to the spin, we do have a choice. In fact, it is probably the most important choice for years

Do you feel like you are sleepwalking into yet another banking disaster? Tomorrow’s stress tests are likely to result in you and me lumbered with another €20bn bill for Ireland’s dysfunctional banks. Why? Will this make a jot of difference to the economy? Is there a cheaper way of doing this? Why do we have to pay anyway? The banks are bust and yes, they can be made solvent by throwing billions of our euros at them, but to what end? To fatten them up for sale so someone else — some investor — gets all the upside?

Remember NAMA was supposed to “get credit flowing”? Now we know it is a fee fest for the same auctioneers, accountants and lawyers whose fingerprints were all over the collapse of the economy, the property market and the banks in the first place. They got paid enormous sums in the boom and now they are getting paid enormous sums in the bust and they are being paid with your money. NAMA hasn’t gone away you know!

Maybe just consider one thought on NAMA: the very auctioneers who overvalued Irish property in the boom and were instrumental in feeding the frenzy have been rewarded for their part in this mess by being made valuers for the very same property that they once overvalued. How does that make you feel?

Now let’s consider the banks. The stress tests will tell us just how bankrupt the banks are now, after five previous injections of cash. So the stress tests give us a chance to decide how are we, in this country of ours, going to deal with the banks. Contrary to the spin, we do have a choice. In fact, the choice is probably the most important policy choice faced by any government for many years.

We are being told from all quarters — by the vested interests who insecure commentators refer to as “serious people” — that we have no choice but to put more money into the banks. This is cobblers and overlooks legislation, which is actually in place to deal with bankruptcy.

There is a different way of doing things and there is a normal business way of dealing with bankrupt banks which doesn’t endanger deposits and keeps the banks’ doors open for business without lumbering you and your children with a huge bill which was never yours to pay.

But as usual the ordinary Joe — who is paying the bill — is being so bombarded by half-fictions, quack economics and financial propaganda by the “insiders” — who will benefit from his largesse — that he is totally confused and doesn’t know which way is up at this stage.

Let’s clarify things. There are three ways of dealing with bankrupt banks. There is the present Government/ establishment’s way; there is the nuclear option of receivership and there is the logical, business-like procedure which is called “examination”.

The present option means that no bondholders will be touched or, if they are, their pain will be modest and you, the taxpayer pays. Even the new language is duplicitous. ‘Burn the bondholder’ was ridiculous when the bondholders burned themselves by their stupid investments. But now we have a new expression ‘burden-sharing’. Think about the meaning of ‘burden-sharing’; I will share a burden with someone if we are both culpable; that sounds fair. But why should I share the burden of a loan that was never mine and was always his? Every cent of citizens’ money given to a bondholder is a subsidy from the poor to the rich. This is corporate welfare for the banking classes — the very people who regularly rail against social welfare for the working classes. It is grossly unfair and financially incoherent.

The second option or nuclear option is receivership. This is where the losses are so big and you conclude that the bank has no future so you close the bank down. Here is where we get into the ranking of who gets paid and in what order in a receivership.

In a receivership, the receiver comes in and looks at a balance sheet and assesses the difference between assets and liabilities. He then tries to sell the assets and pay back the creditors. The creditors form a queue and will be paid in the following order.

The first to be paid in a bank closure are secured and trust creditors. Secured creditors might be other banks that have lent money to the bank in cash. And trust creditors are depositors who deposited money into the bank based on trust.

After secured and trust creditors, if there is more money left, the next in line are super-preferred creditors. These are the employees and the Revenue Commissioners.

If there is any money left after the secured, the trust and the super-preferred creditors are paid, the unsecured creditors will get paid. These are the bondholders and the trade creditors. We know who the bondholders are and the trade creditors are people like the IT supplier or the landlord and the like. Finally, if there is anything left after this, it goes to the lowliest creditor — the shareholder.

The receivership approach is deployed if you think that there is no future for the company. As such, it is the nuclear option. But we know that for some of the banks, there is a future. So why not go down the examinership route?

Examinership is in Irish company law. It is already there. The aim of an examinership is to keep the company open. It is designed to restructure all the debts, clean the company up, find a new buyer and start again. The main aspect of an examinership is that historical debts are not paid in full. The line is drawn in the sand at historical debts. The company undertakes to pay all its overheads and trade through the difficulties.

The historical debts are treated like a receivership. The new owners decide who gets what and how much. The same priorities apply. So the secured creditors and trust creditors get most. In the case of a bank, deposits could be guaranteed by the Government. After that a haircut is applied to all the other creditors. It could be 40 cents in the euro or 10 cents depending what the stress tests reveal.

This is exactly what Obama did with General Motors. In the US examinership is called “Chapter 11″. There are various different ways of sweetening the pill for the creditors who get whacked. For example, you could give them 20 cents on the euro and then a ‘kicker’ later if the banks’ profits improve in a few years. So you tie payment to future profits. You could involve debt-for-equity swaps in this too.

There is always a buyer.

Ask any liquidator whether they have ever failed to get a buyer after a proper examinership. Who wouldn’t buy an Irish bank if it were cleaned up? There will be any number of suitors both from Europe and further afield, and the taxpayer doesn’t have to pay a cent more. The depositors would be safe and one part of the great Irish financial crisis would be solved.

This is the way out. It is the business solution to a business problem and it works all over the world.

Tomorrow’s stress tests only reinforce the logic of examinership for the Irish banks. Let’s hope the new Government is open to persuasion.

The unbelievable truth about Ireland and its banks
Robert Peston | 00:00 UK time, Wednesday, 30 March 2011
Ireland's central bank and new government will confirm on Thursday that the hole in the country's banks is even wider, deeper and darker than seemed to be the case last November, when those bust banks forced the country to go with a begging bowl to the European Central Bank (ECB) and the International Monetary Fund (IMF) for 67.5bn euros (£59bn) of rescue loans.

Regulators at the Irish central bank have conducted a review of how much extra capital - as a buffer against future losses - is required by Bank of Ireland, Allied Irish Bank, EBS and Irish Life and Permanent.

Unless something unexpected happens in the next 24 hours, the total amount of additional capital that will need to be injected into these banks will be a bit less than 35bn euros - including 8bn euros that was supposed to be injected into them at the end of February, but was postponed because of Ireland's political turmoil.

Anyway, let's assume that the total amount extra that these banks need is circa 30bn euros. That would take the total quantity of state investment in Ireland banks to a breathtaking 75bn euros (actually a tiny bit more than that).

That is an almost unbelievably large number. When I think about it, I have a small panic attack - because it represents 45% of Ireland's GDP and 55% of its GNP.

(Irish GNP is usually thought to be a better measure of Ireland's useful economic output, because the GDP figure contains a sizeable chunk of profits exported abroad by all those multinationals that settled in Ireland for the exceptionally low tax rate).

Or to put it another way, if Britain's banks had gone bust to the same extent, British taxpayers would have invested something like £700bn in them - or more than 10 times what we actually invested in Royal Bank of Scotland, Lloyds, Northern Rock and Bradford & Bingley.

Nor is that the end of the exposure of the eurozone and the Irish state to these stunningly failed banks.

No financial institution or bank will lend to them. Ireland's banks can't borrow from anyone except the Irish people (who, poor souls, have nowhere much else to put their deposits). But even if they wanted to, Irish households could not possibly put money into the banks fast enough to allow those banks to repay all the institutions - such as German banks - which lent far too much to Ireland's banks in the boom years.

So when these wholesale lenders to Ireland's banks have been demanding their money back (as they have been in a run that has been huge and inexorable), the money has come from the European Central Bank and the Central Bank of Ireland - or, indirectly, from the taxpayers of Ireland and the eurozone.

To prevent Irish banks toppling over one after another, the European Central Bank has lent 117bn euros to them and the Central Bank of Ireland has lent them a further 71bn euros. So that's 188bn euros of loans from the eurozone's taxpayers to Ireland's banks - which makes the 67.5bn euros lent directly by the eurozone and IMF to the Irish government look like peanuts.

And a further 20bn euros of bank bonds - another form of bank debt - is still guaranteed by the Irish state through the Eligible Guarantee Scheme.

So that is 208bn euros of taxpayer loans to Ireland's banks - equivalent to a remarkable 154% of GDP.

To ask the inevitable dumb question, what on earth went so spectacularly wrong?

First, in the frenzied party years before 2008, the banks borrowed too much from other institutions - especially from German banks - and lent far too much to housebuyers and property speculators.

However, to date Ireland's banks have only properly owned up to the losses on the property developments.

On Thursday for the first time they'll be forced to admit that they also face colossal losses on residential mortgages. In February, for example, official Central Bank figures showed that 5.7% of Irish mortgage accounts were more than 90 days in arrears - which means Ireland banks then were owed 8.6bn euros in unpaid interest and principal.

It is pretty extraordinary that it has taken so long for the banks to be forced to recognise their mortgage losses - since house prices have more-or-less halved over the past few years, the economy was in deep recession after the 2008 crash and has subsequently been pretty stagnant, and unemployment has been rising.

Does the phrase "better late than never" apply in this case? Possibly not.

Second, the Irish government probably chose the worst of all strategies for propping up the banks.

By guaranteeing all their liabilities in the autumn of 2008, they turned the bloated liabilities of the swollen banks into public sector debt.

And because the Irish government didn't secure a bottomless borrowing facility from the European Central Bank, it then became impossible to force losses on any of the banks' creditors, even those which lent most recklessly: Ireland did not have the financial resources to pay back all those wholesale lenders that would inevitably have demanded their money back the moment any of them were instructed to swallow a loss.

So some of the guilty parties, namely the wholesale creditors of Ireland's banks - including banks and investors in Germany, France, Spain and the UK - have got away without taking their share of losses. All those losses have fallen on Ireland's citizens, who are not blameless for the mess (they didn't have to borrow too much) but aren't the only ones at fault.

And for the Irish people, there is a second source of possible injustice. The money they've been lent by the IMF and eurozone carries an interest rate of 5.8% on average - which is significantly greater than Ireland's economy and tax revenues can grow right now, and therefore forces Ireland into a potentially never-ending vicious cycle of public spending cuts and low growth.

What's more, the banks may also be trapped in a cycle of forced asset sales and losses, because they are paying out an estimated 2.5bn euros a year for the emergency loans from the ECB and Irish central bank, to finance mortgages and other loans which are falling in value and are not yielding interest.

Perhaps worse still, the 188bn euros of central bank loans could be withdrawn more or less at the ECB's pleasure. So Ireland's banks will continue to feel under relentless pressure to dump assets at punitive fire-sale prices, unless and until the ECB can be prevailed upon to deliver what its officials say it is cooking up, which is a new, longer stable lending facility for banks - such as the Irish ones - that need to reconstructed.

What will be the end of this sorry saga?

By default, it now looks as though almost the entire Irish banking sector will be nationalised.

Allied Irish is already in state hands. Anglo Irish and Irish Nationwide have been crunched together and are being wound up by the state. It will be tough for Bank of Ireland and Irish Life and Permanent to avoid being taken over by taxpayers too.

It will therefore be fascinating to hear what the Irish premier and finance minister lay out as their vision for the future of Ireland's banks. That will be presented at 4.45pm on Thursday, 15 minutes after the Central Bank of Ireland announces the precise, hideous amount of extra capital the banks will be forced to raise.

It will be another momentous day for Ireland and for the Eurozone. But whether it will be a day that sets both on the road to financial recovery, or nudges them nearer catastrophe, cannot yet be assessed.

I'd have a stab at fookin' Dublin.....In fact I'd swear to it....Dublin.

Boxtyeater wrote:I'd have a stab at fookin' Dublin.....In fact I'd swear to it....Dublin.

Your swear is worthless

Much like your opinion....

Is that the same McWilliams that suggested we need to do like in Finland or Uruguay or some fookin place and put all the Toxic debt into a "bad Bank"

Well thats what they are doing - its all toxic and the taxpayer has it all.

Mcwilliams also has some soothsayer wisdom about the diaspora riding to our rescue - Don't know if Ryanairs €2 levy is the best start.

OMAR wrote:Is that the same McWilliams that suggested we need to do like in Finland or Uruguay or some fookin place and put all the Toxic debt into a "bad Bank"

Well thats what they are doing - its all toxic and the taxpayer has it all.

Mcwilliams also has some soothsayer wisdom about the diaspora riding to our rescue - Don't know if Ryanairs €2 levy is the best start.

So Omar does that make him right or wrong..

Boxtyeater wrote:Much like your opinion....

Your a violent man boxty

mc williams the man the irish government failed to listen to

omar read your history books the irish from all around the world kept this country afloat and when we could stand on our 2 feet we fu,ked up

mullins wrote:
Your a violent man boxty

I'm a peaceable fellow Mullins...the Dauber is prone to violence tho'....here's his reaction his grandaughter not winning gold at a recent Feis....A violent man..

Boxtyeater wrote:

mullins wrote:
Your a violent man boxty

I'm a peaceable fellow Mullins...the Dauber is prone to violence tho'....here's his reaction his grandaughter not winning gold at a recent Feis....A violent man..

I don't like violent people boxty....Their is no such thing as a hard man..

he looks like my thearapist

hipster 2 wrote:he looks like my thearapist

A fella I know qualified as a therapist once and got himself this fancy office and his name on the front in brass and his occupation. After two months not a soul had crossed the door.

What'll I do sez he?

Well sez I your name is grand on the brass plate but I think the gap between e and r in the therapist bit is doing you no good at all ....

Jayo Cluxton wrote:

hipster 2 wrote:he looks like my thearapist

A fella I know qualified as a therapist once and got himself this fancy office and his name on the front in brass and his occupation. After two months not a soul had crossed the door.

What'll I do sez he?

Well sez I your name is grand on the brass plate but I think the gap between e and r in the therapist bit is doing you no good at all ....

hipster 2 wrote:omar read your history books the irish from all around the world kept this country afloat and when we could stand on our 2 feet we fu,ked up

I was referring to McWilliams grand vision in 2008 of an Uruguay type property crash and that the diaspora would save use - That was his forecast in early 2008.

I'm struggling to see the relevance of history or otherwise.

mullins wrote:

OMAR wrote:Is that the same McWilliams that suggested we need to do like in Finland or Uruguay or some fookin place and put all the Toxic debt into a "bad Bank"

Well thats what they are doing - its all toxic and the taxpayer has it all.

Mcwilliams also has some soothsayer wisdom about the diaspora riding to our rescue - Don't know if Ryanairs €2 levy is the best start.

So Omar does that make him right or wrong..

To be honest Mullins I haven't a clue - The solution to this problem is well above my pay grade - but a restructure of the debt is inevitable - The growth forecasts used in the IMF plans are as optimistic as Boxty block booking Citywest for the last Sunday in September
The point I was making is that


I will give McWillimas some credit for giving a health warning on the property bubble in circa 2007 but other that that - he constantly comes up with a scattergun of alternative solutions and then moves on to the exact opposite.
e.g The "toxic Bank" ie NAMA was the one he was banging the table with two years ago.

as regards his proposal above and "Examinership" - where examinerships normally work best is that the "company"
is viable but its contractual terms e.g Rent or loan interest is crippling it so the examiner manages to reduce the burden and the other parties agree to "take less"

If you take Irish Permanent - what is crippling the bank is tracker mortgages - I have one myself with them @ 1.9%
- so what the examiner needs to do is make me agree to pay 4% despite the fact that I have a contract saying I only have to pay 1.9%. Asking someone to accept less is a totally different ballpark from asking somone to pay more.

OMAR wrote:

mullins wrote:

OMAR wrote:Is that the same McWilliams that suggested we need to do like in Finland or Uruguay or some fookin place and put all the Toxic debt into a "bad Bank"

Well thats what they are doing - its all toxic and the taxpayer has it all.

Mcwilliams also has some soothsayer wisdom about the diaspora riding to our rescue - Don't know if Ryanairs €2 levy is the best start.

So Omar does that make him right or wrong..

To be honest Mullins I haven't a clue - The solution to this problem is well above my pay grade - but a restructure of the debt is inevitable - The growth forecasts used in the IMF plans are as optimistic as Boxty block booking Citywest for the last Sunday in September
The point I was making is that


I will give McWillimas some credit for giving a health warning on the property bubble in circa 2007 but other that that - he constantly comes up with a scattergun of alternative solutions and then moves on to the exact opposite.
e.g The "toxic Bank" ie NAMA was the one he was banging the table with two years ago.

as regards his proposal above and "Examinership" - where examinerships normally work best is that the "company"
is viable but its contractual terms e.g Rent or loan interest is crippling it so the examiner manages to reduce the burden and the other parties agree to "take less"

If you take Irish Permanent - what is crippling the bank is tracker mortgages - I have one myself with them @ 1.9%
- so what the examiner needs to do is make me agree to pay 4% despite the fact that I have a contract saying I only have to pay 1.9%. Asking someone to accept less is a totally different ballpark from asking somone to pay more.

Come on Omar even you would have had a better handle on things, than the tulips getting paid millions to tell us lies..