Advice to Irish: Prepackaged Bankruptcy for Banks
Our story so far: Irish banks went hog tulip-wild, building out a huge residential and commercial boom. The construction was far beyond actual demand for the former Celtic tiger; it was essentially speculation run amuck.
Ireland had briefly found the pot-o-gold at the end of the rainbow: Everyone was making oodles of loot. Banks were lending money, investment firms were underwriting massive bond offerings, construction was booming, accountants and lawyers well well fed, all manner of jobs plentiful. It looked like Ireland had tapped into a massive wealth creation machine. In reality, it was halfway between a nation of greater fools and a Ponzi scheme.
And as these bubbles typically go, so long as the music is playing, all the fools danced the night away. Until the band suddenly stopped, and the reckoning was upon them.
For the first time in 15 years, emigration was greater than immigration. The Irish budget went from surplus to an highest deficit (by far) in the history of the Eurozone: 32% of GDP.
For reasons we have yet to fully learn, the Irish government decided to guarantee the banks’ recklessness. The 2009 bail out, plus the additional monies needed, will put the 4.5 million people in Ireland on the hook for €15,000 each — about $21,337.50 in dollars per person.
I normally am reluctant to offer up advice to sovereign nation as to how to conduct their affairs. But the new Irish government seems so very close to making a leap away from the rest of the bailout driven world and into the correct posture, that I had to add my two cents.
The bailouts in the US are instructive. Giving banks money to rescue themselves from their own actions does not lead to a long term healthy economy in a capitalistic system. Banks take advantage of the easy money, leverage themselves up all over again, and produce record profits.
But the banks are a negative, not positive, contributor to the economy post bailout. Capitalism isn’t a charity, and this was precisely what the US should have expected (and what a few people warned against). The risk reappears, no lessons are learned, moral hazard gets writ ever larger.
The alternative to the Japanese approach, adopted in part by the US, is the Swedish system. This is what the US FDIC does: Insolvent banks have their deposits guaranteed by the government, the banks are then liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.
That is roughly what was done with General Motors. The GM prepackaged bankruptcy saved what was worth saving, reorganized the company, and allowed it to move forward.
This is what the US should have done with their own banks, but refused to. Both the Bush and Obama White Houses ceded their decision making on this issue to the former head of Goldman Sachs (Hank Paulson as Bush Treasury Secretary) and Citigroup Director and prior Co-Chairman of Goldman (Obama’s Economic advisor Robert Rubin).
The Irish politicians who made the bailout decision were tossed out. The new government has a window to not only show some backbone, but to take their country back from the bankers who bankrupted it.
Here’s hoping the Irish are smarter than the rest of the fools who now find themselves indentured servants to reckless bankers.
The Irish could surely use a modern day St. Patrick, to lead the snakes off the Emerald Isle . . .
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Previously:
Forget Nationalizing: An Irish Renege on Bailouts? (March 31st, 2011)
Merrill Lynch’s Horrific Irish Bank Adventures (February 6th, 2011)
Too Bad Banks Missed Out On the GM Treatment (November 18th, 2010)
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April 4th, 2011 at 8:25 am
Mr. Ritholtz, a very nice post. In particular, it is nice to see that you avoid a fetischization of the Irish.
“But the banks are not negative, not positive contributor to the economy. ” I guess I don’t understand the idea behind this sentence.
Also: “Insolvent banks have their deposits guaranteed by the government, they are liquidated, shareholders wiped out, senior management fired, assets than sold off to pay for the losses. Whatever is left over goes to the bondholders.”
You have listed the reasons why the Swedish solution was not applied.
Do the Irish need a modern St. Patrick? I think I would prefer a Saint Joan of Arc, in the form of a courageous artist like Bjork. You see, some could argue that St. Patrick’s conversion of the gaelic heathens was nothing more than payback for his years as sheep-herding slave. In practical terms, he netted a territory for Rome.
As always, thank you for your thoughts and generosity.
April 4th, 2011 at 9:40 am
Concise, correct and compelling essay.
Ritholtz for Taoiseach!
April 4th, 2011 at 9:49 am
It looks like the new leaders are as spineless as the old. Making Gerry Adams look good.
It seems probable that as things get worse in the have-not parts of Europe we will see a repeat of the 1930′s as countries are faced with huge payments to foreign bankers. Think Versailles Reparations and the popularity gained by Hitler in repudiating them.
April 4th, 2011 at 9:59 am
Good advice, but I’m afraid the new Irish government prefers getting invited to all the “cool kids” parties throughout Europe to actually serving their citizens. That was an utter and complete sellout last week.
The debt of the banks now rests firmly on the back of the poor Irish citizens and nothing short of riots in the streets and a revolution will change it.
April 4th, 2011 at 10:08 am
The Irish Republic has clutched a tarbaby with their open-ended guarantees of their banks. The guarantees benefit the European bond holders (and lenders to the the Irish banks which allowed them to (over) leverage themselves with construction loans) not the ordinary depositors.
As the bubbled-up Irish property values continue to decline they keep pulling the banks books to ever lower (always “unimaginable”!) levels which require additional guarantees from the state, they’re on their fifth helping now. The debt burden on Irish taxpayers is unsustainable already and the odds that the bottom has been reached are slim.
Lets pretend that the mortgages written in Florida in the bubble years were issued by Citibank of Florida, Chase Bank of Florida, BAC, Wells etc and these state chartered banks had their deposits insured by the State of Florida up to $100K and then Charlie Crist after a private meeting with the New York and Charlotte based bank CEOs expanded the guarantees from 100K for depositors to unlimited guarantees for all borrowings by these banks. Then as the Florida chartered banks loan portfolios went sour (especially real estate loans) the taxpayers of Florida were taxed to make up the banks losses – with the Florida chartered banks being used as conduits to keep the Chase, Citi, BAC and Wells parent banks whole. This is essentially the Irish situation since Europe doesn’t have a fully integrated banking system and 4.5 million Irish are being forced to cover the losses of the borrowing of the Irish banks from European banks.
The great unanaswered question is how could the previous Irish government make such a foolish commitment (what was in it for them?) and how can the current government continue down the same path? The Irish are known to be stubborn but this goes beyond the pale. Eventually the debt load will prove unbearable and they’ll be forced to default but not until the European bankers continue field stripping the Irish of all their assets.
They Irish should have consulted with their cousin Hugh Hendry who would have advised them them to panic and panic early and cut their losses with a default.
April 4th, 2011 at 10:10 am
Predictably, the new government caved.
Time for the Irish people to take matters into their own hands, since their leadership is so completely captured and corrupt.
April 4th, 2011 at 10:13 am
Is Barry the modern day Ben Briscoe?
Briscoe is one of Ireland’s most famous Jewish politicians, the Briscoes hold the distinction of being the longest serving family in the Irish Dáil.[5] The small Irish Jewish community have been enthusiastic and active participants in political and legal world. Briscoe’s father was one of several Jews involved in the War of Independence and Sinn Fein movements, which led to the Jewish community being targeted by British occupation forces. In Briscoe’s time each of the three main political parties had a Jewish member in Ireland’s 166-member Dáil. Ireland was the first country to specifically guarantee the rights of the Jewish religion in its constitution, significantly drawn up in 1937.[6] Jack Lynch later introduced the Fifth Amendment of the Constitution of Ireland Act of 1973 officially removed the Roman Catholic Church as the state church in equal recognition of other religions including the Jewish Congregations.
April 4th, 2011 at 10:30 am
@rktbrkr
thanks for that bit on briscoe
Past is prologue:
Leaders in Ireland? The true ones like Collins get the shaft, and the rest run for the continent. Cladhairean.
http://en.wikipedia.org/wiki/Flight_of_the_Earls
April 4th, 2011 at 10:37 am
Like here, the ears of the leaders of the Irish republic are beholden to the bankers who assisted them to their position, and no one else; certainly not the citizenry.
Riots (and the resultant police crack downs) or financial indentured servitude for decades to come are the choices being proferred by the state to its people. The headlines just don’t refelect that reaility yet.
April 4th, 2011 at 10:44 am
Did the Briscoe’s inspire the famous Yogi Berra line … when informed that the Lord Mayor of Dublin was Jewish, Berra shook his head and replied, “only in America.”
April 4th, 2011 at 11:56 am
“Everyone was making oodles of loot.” + the next sentence .. I was going to do a localized tit for tat. But rktbrkr did a much better job than a plain old rag-on. And beyond that – thanks for the history.
April 4th, 2011 at 12:51 pm
Once again, Barry is right to suggest the best loss, is the quickest loss, and the best thing for Ireland (and, presumably the US) is to take the Too Big To Fail Banks away from their shareholders, since their shareholders haven’t shown they are willing to correct the problem (going to Wall Street and raising sufficient capital to cover their unreported losses). The FDIC doesn’t put up with this B.S. with the Small Enough To Fail Banks, and had closed hundreds. Why should their be one rule for Wall Street supported banks, like Bank of America, and another rule for our local community bank? Isn’t everyone equal before the law in the US? Iceland has shown the way. Its government allowed bankers to bankrupt the country, the voters through out the government, the new government submitted a plan to the voters that would have forced them to pay foreign banks, and they rejected it, and are going to reject another, revised plan. Let’s hope the Ireland (and the US) refuses to use domestic labor to support foreign banks.
April 4th, 2011 at 4:31 pm
Unfortunately, in what I have read of this up till now, those suggesting that Ireland might default are outside well-wishers and those who are on the ground seem to all agree that none of the major existing Irish political parties will do even consider any such thing.
I wish that were not the case.
April 4th, 2011 at 6:03 pm
Jessica,
What do you suggest?
April 4th, 2011 at 6:25 pm
Fred C Dobbs,
The Fed just covered 84% of US borrowing last Q and the Fed is controlled by the money center banks which control an increasing share of US banking activity (like 75% by the Big 4) soooo thats why there are different rules for the 19 TBTF banks (some of which weren’t really banks until the crisis hit – like GMAC and GE Capital) and everybody else.
http://www.zerohedge.com/article/how-fed-sourced-834-treasury-cash-needs-start-qe2
April 4th, 2011 at 7:16 pm
No haircuts will be taken. The banksters win again.
April 4th, 2011 at 8:05 pm
If Ireland does a pre-pack BK, will the EU have to make jilted bondholders whole?
What is the business case for not following the Swedish model? It all sounds so easy and sensible, is there a reason (besides regulatory capture) why more countries don’t follow this path?
April 4th, 2011 at 11:58 pm
rktbrkr,
I don’t know enough about Ireland to know what it would take for them to have a democratic rather than bankster government.
Don’t know how we get there in the US either.
I do know it is important that we do.
I think we are lost in a way that we have not been since maybe the 1830s or so. Things have changed so much that no one really understands how things really work now, what is actually happening. The models we are using to understand things are not accurate to help very much. That is true for both the models that we know we are using and talk about and the implicit, unconscious ones.
The banksters are not the main disease. They are an opportunistic infection.
April 5th, 2011 at 9:55 am
Lookout Ranch;
The reason is that they have a substantial budget deficit that has to be financed by external borrowing even if they defaulted on all debt (bank and national debt). The blackmail by european governments and banksters is that they would immediately halt all flow of credit into the nation. Since the Irish do not have their own currency they could not just print more money to fill the gap (i.e., use inflation to pay back their debt). They need to play hardball and convert all debt into IOU’s with a rate of 0% and no expiration date. That way they would not sink the european banks but at least give themselves a fighting chance of getting out of this problem.
April 5th, 2011 at 11:20 am
Back for some more pounds of flesh
http://www.irishtimes.com/newspaper/breaking/2011/0405/breaking7.html
April 5th, 2011 at 11:43 am
Jessica,
In broad strokes politicians have absolved bank owners and managers from the consequences of their actions. When times are good they keep their profits, pay and bonuses and when reckless business practices result in show-stopping losses the politicians transfer the losses to the taxpayers saying the banks are “too important” to suffer the consequences of their actions. Insulating the banksters from the consequences is the #1 moral hazard which Paulson turned around 180 degrees to justify their Sunday night bailouts.
Ireland will be paying for their generosity to foreign bankers for decades if not generations. The jury is still out here in the US, the big mortgages lenders are headed to another round of Sunday night deals with Tim & Ben when their millions of bad mortgages come home to roost. At this point it’s inevitable, not a surprise like a couple years ago and we will either see an orderly reorganization of the biggest name banks or the taxpayers will be stuck with trillions of mortgage related losses.
With Ireland as a guide the costs of taking on the banks losses will be made up by cutting entitlements like social security, medicare , medicaid etc. and raising taxes.
April 5th, 2011 at 9:58 pm
jessica,
I agree with you that things are bad now, but I’m optimistic about the future. I’m naive enough to think that the Middle East is a canary in the coal mine for the rest of the world. Increased availability of information, and increased connectedness will enable people to ask more from their governments. Just because Obama’s change turned out to be more of the same, doesn’t mean we can’t have real change in the future. We just need to care enough to demand it.
April 20th, 2011 at 10:02 am
[...] Advice to Irish: Prepackaged Bankruptcy for Banks (April 4, 2011) [...]
April 20th, 2011 at 8:24 pm
Wouldn’t an Irish bank (not sovereign) default endanger the Euro and the European Union?
The Irish, desperate for European (that is, German;/French) approval, have chosen austerity and there is no indication that they will do otherwise. Austerity is just another name for leas for the middle class and poor and more for the rich.