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Tuesday, September 30, 2008

Buddy can you spare €100K?


This morning as I slept I possibly lost the house. How could you do that when you’re in deep slumber, you may ask? Well when I woke up I found out that my mortgage provider had been fireproofed against the creditcrunch by our government to the tune of €100K per citizen. Given that I’m 11 years into a 20 year mortgage the chance of me welching on our agreement are pretty slim so it was a shock to find out that not only am I liable for my own loans but potentially liable for dodgy loans that were given to customers who could not maintain their payments and should not have been given these loans in the first place by the banks. So needless to say I’m shocked. I've used figure like 400 B before but in the context of explaining Avogadro to Chemistry students

However, I’m more than shocked to find out that senior fat cat managers in all our banks have now embraced the state intervention so much. Lets mix metaphors and lay off the fat cats but it all sounds like something from the movies where Lassie finally makes it home through the gate, wagging its tail at its faithful master, leaner in the absence of nourishment but back where he belongs. Poor Lassie couldn’t hack it in the real world so back to mother’s apron strings it goes. Lassie doesn’t get to tell the tale and the master is never the wiser, it’s a real happy ending to a tug at the hear strings story.

Except this is the real world and its not the movies, or if it is its Gordon Gecko from Wall St. Gecko double crossed every one he dealt with. In business and politics, information and timing is everything. What the government don’t know is how much bad debt the Irish banks hold. What the government can’t do is protect Ulster Bank, Rabobank or National Irish Bank customers and what happens to those jobs if there’s a run on those banks into banks like TSB, AIB, BOI or Anglo Irish? Is this a ploy to attract cash to these banks at a time of international uncertainty and lack of confidence? Irish banks now look like a relatively safe port in a storm, but what storm? If this goes pear shaped how much will bank customers have to fork out to keep the fat cats in clover? How much is the state going to charge the financial institutions for the country's good name? All that has happened is that the good name of the country can be used to back Irish banks.

The decision to guarantee bank lending without a returning share issue is an enormous risk. Tax payers exposed, national credibility given to financial institutions, nothing in return. What is there to prevent an Irish bank being taken over and the states guarantee being used to protect a third party institution outside the jurisdiction? Not a lot. Those who live by the market die by the market. Markets are not there to preserve but to predate. Sentimentality, sense of community and protectionism are vane and poor reasons to protect those who behaved so greedily in the past. Ironically the building society that lampooned the banks with its “back of you bankers” ads now is itself a bank!

The legislation is being rushed through the Oireacthas as I type. There’s no word yet about guaranteeing those who’re in danger of losing homes because they can’t afford mortgage payments. These people usually don’t turn up in a FF race course tent unless of course they’re working there. Rather than wake us up to the reality of the market place this action by the government will lull us in to a false sense of security. Perhaps a case of buddy can you spare a pig in a poke?


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4 comments:

francis mahon said...

Joe,

The first thing that struck me about whole deal was the idea of 'Irish-owned banks'. How can the notion of a globe-spanning plc having any nationality, least of all 'Irish', square with the fact that the majority of shares are held by investment and pension giants.

For example, according to figures on the AIB website, only 38% of it's shares are held by Irish entities, and I'm sure a major portion of these are IFSC-based, using this base as a flag of convenience.

Francis

Joe said...

Francis
I agree on the question of nationality, most of AIB's profits originate outside the jurisdiction, Poland if memory serves me right is a key market. I wonder what will happen if the banks get beyond themselves and buy a turkey? Who'll carry the can?
I'm pleased Labour opposed the move, even the proposal to freeze senior bank exec's pay to that of the Minister for Finance was rejected, John Browne voting against!

Martin said...

Joe,
I was told at 8pm on Monday evening that this move was been asked for later that evening. As incredible as it may sound I was also told that a particular bank was going to be hit for 17.5B in toxic debt early this week without such a move. The debt is not domestic but has arisen from losses on the international markets by traders the bank had funded. The truth of this has yet to be seen but the source was right about what was going to happen.
I beleive that the Gov are aware of this banks looming trouble and had decided to act to save the bank before it was hit. The new legislation allows the bank to secure loans to cover the losses and hide the problem.
Only time will tell if the source was right but I have to say he has got it right so far.

Martin

Joe said...

Martin you obviously have an inside track that few public reps have and I accept the pressure the banking industry is under for the last 12 months, however I would seriously question the role of the Central Bank and IFSRA in the whole affair. Where were they when the banks took it on themselves to interpret the national interest as 100% mortgages for 30-35 years? It was this type of profligate selling of cash that created the slump in the US & here. My sympathies are with the customers, I remember ICI & PMPA!