Monday, 9 February 2009

Bank bail-out, part two

David McWilliams relates a story about a liquidator friend of his in yesterday’s Business Post. It seems that a “desperate man” arrived in said liquidator’s office last week, with debts of €48 million for which had had put up “a total of €400,000 cash".

All the debts were - of course - a result of property speculation over the past years, in a boom driven by careless lending / borrowing and Government property-based tax incentives and shelters. It seems that his string of paper properties were all cross-collateralised against each other, but the banks had been more than happy to hand the man out more money on this rather precarious basis.

Now the Government is to re-capitalise the banks with another bail-out, with figures of €7 to €8 billion of our tax money being quoted, to make up for the bad debts and losses incurred in cases similar to the example above.

McWilliams, who warned about the property bubble when other commentators maintained that there was none (and that the boom was driven by sound economic factors!) predicts that the bail-out will be a waste of our money, and that the banks will have an "even bigger hole in the balance sheets by summer". To give some idea of the scale of the mess, Bank of Ireland had a total of €145 billion owed to it last year, and €38 billion of that was in property.

This means that people have borrowed recklessly to buy properties that are now “worth” a fraction of the prices paid for them in the frenzy, and with house prices still nowhere near the bottom yet, there is no way these debts will ever be paid. Then factor in more defaulted loans as people lose their jobs, and it looks as though that money has simply disappeared into the ether, along with Ireland’s reputation in the financial world.

We are often told that top executives are paid the fortunes they are paid because we need to attract “the cream” to positions of importance and responsibility. But cream, we should know by now, can very often be rich, thick and chock-full of clots.

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Sven said...

"You Germans think you know it all" - that is what people said to me two, three years ago, when I told them my opinion about the construction industry and the crazy prices for houses and apartments in this country.
No, I am not proud now, having been dead-right at the time. I feel sorry for the poor sods who believed what the builders and bankers told them when they got their mortgage installed, with one or two cars included in the total figure and the whole lot based on a 40-year-calculation. Many of them will now pay back for 60 or more years - well, obviously not them personally, but their children and grandchildren ...

Harald75 said...

"""We are often told that top executives are paid the fortunes they are paid because we need to attract “the cream” to positions of importance and responsibility. But cream, we should know by now, can very often be rich, thick and chock-full of clots."""

Never read a sentence that is more true. :-(

Ella said...

Hi GM, Sven, choking over my cornflakes here reading your post/comment. It's sickening.

Fianna Fail is the political wing of the construction industry and that's why all this has happened. That and irresponsible lending.

The Gombeen Man said...

Thanks for the comments, folks. Yes, the worst thing about all this, is that it was blindingly obvious what was going to happen. Did they really think they could fund an economy on credit and asset-price inflation? Irish entrepreneurship my butt.

The funny thing is, I know someone who is in a position to trade up houses, and she phoned up to make an appointment to see a house on a new development, where they've been trying to sell houses at 2006 prices for the past two years. No latitude on price, when my friend asked if the prices might be more reflective of the current market. The estate agent was to get back about a viewing, but they haven't even bothered to do that.

Harald75 said...

Just found on the Independant-Website:

"""BANK of Ireland chief executive Brian Goggin is set to suffer a massive €1.5m drop in salary.

The cut, amounting to 50pc of his pay and perks, applies to Mr Goggin's package for 2008. The bank only declares salary details of senior executives in March of the following year."""

A drop of 1,5m, almost half of his 3m-Salary for 2008. What a poor, poor man...

The Gombeen Man said...

How will the poor chap manage? I'm going to get my violin out for him, Harald!

Harald75 said...

Great Idea, Gombeen Man.
I try to find my old hat to collect all the coins for him, and then we play a "Goggin-Session" in front of the BoI ;-)

But yet, another idea: How about taking a further 1.4m from him and spend it for some unimportant things lik education or heating oil for the poorest?

Bernd said...

One thing to remember ... it is easy to blame the wan ... er ... bankers, Fianna Foul and any convenient scapegoat that comes along. But, and this is a big BUT:

Ultimately the downfall of the Irish economy and the cloud-cuckoo-dream-advisors are less responsible for individual debts than the pure stupidity and unbridled greed of the Padraig and Mary, wanting to cream off the Celtic Tiger as if there was no tomorrow. Now tomorrow is here.

Many a crisis is home-made in the most immediate sense of the word. Instead of conservative savings, investment was the motto of the day. And pulling a fast one by accumulating property value on paper, giving other paper as collateral. The Michael Lynn Secret of Success, copied by middle-class and even working-class Irish because they did not think for themselves and were relying on projections and fictions ... that had already been proven wrong in the UK and the US.

If the newly-affluent Irish had invested in their own homes and spent the money left over on conservative pension plans, dabbled in conservative investments and NOT taken out further credit for the new third car and three holidays every year ... maybe now they would not have these huge, unpayable debts?

Don't tell me I'm being wise after the fact ... I was before.

Ella said...

Hi GM, Bernd. Bernd you are quite correct. Paddy & Mary are getting their communpance. They were quite happy to play their part by irresponsibly borrowing for houses, thereby pushing the prices up for the prudent among us. I know a couple of people who bought apartments for their children, because they reckoned when their kids time would come they would not be able to afford to buy. These individuals are now in trouble because they can't let them out and the price of their "asset" has now fallen and they are in a negative equity situation. Apartments on Monopoly really. And no, I don't feel sorry for these people, these are the very individuals who pushed house prices beyond reach for the rest of us. As I chose not to take part in this insanity, I'm hoping to get my just rewards by being able to purchase a home this year. I guess blaming your financial woes (assuming you've not lost your job) on the bank/government is akin to blaming being over weight or obese on chocolate manufacturers or fast food outlets.

Bernd said...

As an obese person suffering from diabetes I wish to point out that it all is the fault of Ritter Sport, namely the Rum & Raisins bar! I'm not to blame!

Can I get compensation now?

Ella said...

Hey Bernd, I'm sure there's an unemployed sympathetic solicitor in your neighbourhood!!!!

aonghus said...

But if there is, he'll get all the money Ritter pay you.

Anonymous said...

Letter to Mr Meyers based on his current articles - mouth peice of the corrupt establishment

Dear Mr Myers
While in a Newtonian world cutting government costs by slashing wage costs to fill a budgetary hole makes sense one must assume no other dynamics are at work. Cutting the pay checks of middle class civil servants will neither resolve the current issue nor fill the ever expanding budgetary hole, which of course will continue to grow.

The national debt is ompounding itself due to ever larger national debt, wideninging interest rayes and falling tax receipts as the economy implodes (CDS insurance spread on Irish debt is widening and the "prized" AAA rating from the highly disgraced rating agencies is in grave doubt) . All of this will result in deeper cuts in government services / spending resulting in severe austerity measures across the country all the while the banking industry will likely require further public funding to maintain the illusion of solvency and thus increasing the likely hood of a default on our national debt.

By guaranteeing loans and handing over vast sums of tax payers money to intrinsically insolvent institutions. (AIB BOI et al). The 2 Billion "saved" in cost cutting measures has, in my opinion, already been lost and has vanished down the black hole that is the finance industry. The situation of course under current policies will only get worse (negative feedback loop) as the crisis in Ireland is directly linked to the crisis elsewhere the same force at work here are working elsewhere compounding a already severe situation.

Governments in many other Western countries are following the same corrupt and highly flawed policies as in Ireland, addressing the symptoms rather the the root of the problem.

The root of the crisis is debt (it is unsuitanable and bad, frictional reserve may be reaching its limits) and unless the debt issue is addressed there can be no recovery either in this country or elsewhere. There are many people whom have predicted this crisis and offer plausible solutions to the crisis and yet the people who caused this mess are the very people who are proposing to fix the problem and continue to grip tightly to the levers of power and influence. The people who warned of the issue and dismissed as doomsayers, now continue to sit on the outside (of course the proposed solutions would result in moneyed interests having to accept their losses and sop are not even discussed).

All the while governments are determined to make insolvent institution and money interests whole at the expense of the people in Ireland and elsewhere. The press are guilty of a severe dereliction of duty to hold these people accountable and inform people of the true nature of the crisis, they are as much part of the problem as of any of the corrupt politicians and bankers / corporations where blame for this crisis squarely rests.

So while it may well be necessary to cut government spending and wages let us not pretend this is the solution to the problem through highlighting this one measure or omission of the root of the issue - people may not fully grasp the economics of the situation but they fully feel in their gut the unfairness and hypocrisy of this position and hence the visceral reaction to it.


The Gombeen Man said...

Sorry Anon... who's this Myers you're addressing this to?

Anonymous said...

Kevin Myers of the Irish Independent - felt compelled to post a letter (could not think of anywhere else to post and this blog seemed the most relevant place to so) based on his current articles which just divert attention from the real culprits of this crisis by playing on the (in many repects justified) anger in the private sector at the public sector v private sector pay inequalties (aka goverment waste) it is a classic way to divide the population and divert attention from the real villans

The Gombeen Man said...

Fair enough, Anon.