Bank bailout vs Stimulation

RichardAnd

I was just reading through the RTE news website and I came across this article:

http://www.rte.ie/news/2010/0501/ictu.html

In a nutshell, it's the ITCU accusing FF of ignoring the unemployed and focusing on the banks. Now I pay no heed to unions as, to be honest, they don't give a crap about the unemployed either but it did spark a thought; just why is the government so focused on the banks.

Now, not for a second do I hold to the belief that the recession was cause by FF and the bankers alone, 90% of the Irish played their part too. However, bailing out banks would seem to be an utterly unpopular move by FF which is contrary to any politician's agenda, that of being re-elected.

Granted we are too far into the bank bail out to stop now but why did FF not take a different course of action, that of economic stimulation. To be honest, I'm actually glad that they didn't underpin jobs as that could have results in the tax payer fuelling the building boom and keeping hundreds of thousands of people in superfluous jobs but I think it's a safe bet that Joe and Jane Normal would have liked this.

So why did FF not take this action? It would have kept people in jobs (albeit, false jobs), kept people spending and would probably have gained them votes. Yet they choose the option of spending billions on banks when most people don't even contemplate how or why this was done?

For the record, I do understand the logic behind a bank bail out and that isn't the purpose of the thread. Instead, I thought a good topic of discussion could be why stimulation was passed over and what might have happened if this route had have been taken.

Also, can we PLEASE avoid this becoming a shouting arena for PS wage and numbers being cut. Honestly, there are enough threads devoted to that already.

Head The Wall

Interesting point alright, I think the countries that have instigated stimulus packages had wages and costs at sustainable and realistic levels. In our case they knew there had to be a major adjustment made and this is the way to get it done.

It's not nice but it has to be done. I don't know would there have been any better way to get people to realise they have to get realistic

Peanut

RichardAnd wrote: »

So why did FF not take this action? It would have kept people in jobs (albeit, false jobs), kept people spending and would probably have gained them votes.

I think they realised how quickly that approach could unravel, leaving them even more unpopular after the fallout.

If you remember back to the bank guarantee at the end of Sep. 2008, things were changing drastically on a day to day basis. It seems that there was a real risk of social disorder, maybe more so than we know about even now.

I think the shock at the precariousness of that event put the wind up them and set the course for bailouts & cutbacks regardless of union/popular opinion.

Amhran Nua

RichardAnd wrote: »

just why is the government so focused on the banks.

Its so they can continue to borrow and not need cuts until after they leave office. Of course sparing their blushes makes the situation exponentially worse for the rest of us, but how and ever.

I think its important to differentiate between stimulus and investment also.

Sleepy

In effect, isn't this what they were doing for a number of years prior to the global recession finally sticking the pin into the balloon?

danman

Without a banking sector, there can be no business sector, and no jobs.
It would have been pointless to stimulate jobs that couldn't exist through lack of banks.

I don't honestly think there was even an option of a stimulous package if the banks hadn't been bailed out.
If there was a more populist route that could have been taken, the government would have taken it, of that I'm certain.

ei.sdraob

danman wrote: »

Without a banking sector, there can be no business sector, and no jobs. .

that is so wrong its not funny, business existed long before banking

if a business is so badly reliant on credit in order to function then it really is not viable

ive been in business for 4 years now thru fairly tough times (20% fall last month alone, tho I managed to cut costs in line) and still manage to operate without bank credit, my relatives operate small supermarkets & bakery for last 10 years and do fine without bank credit, if things get tight like a sudden delude of invoices or capital purchase like new fridge or cookers then turn to each other for short term loans instead of going to the bank


call me old fashioned but a business that cant operate without constant access to credit is based on a flawed model and is bound to fail

MaceFace

ei.sdraob wrote: »

that is so wrong its not funny, business existed long before banking

if a business is so badly reliant on credit in order to function then it really is not viable

ive been in business for 4 years now thru fairly tough times (20% fall last month alone, tho I managed to cut costs in line) and still manage to operate without bank credit, my relatives operate small supermarkets & bakery for last 10 years and do fine without bank credit, if things get tight like a sudden delude of invoices or capital purchase like new fridge or cookers then turn to each other for short term loans instead of going to the bank


call me old fashioned but a business that cant operate without constant access to credit is based on a flawed model and is bound to fail

This is the ideal scenario and I agree with the principle of this, but the truth is that it simply is not reality.
Take a car dealership (as it is one to have a stimulus). They have the €1500 scrappage scheme. The problem is that the government have not even started processing the refund applications from the dealers for this scheme. Therefore, the dealers have to somehow come up with short term funding of €1500 for every car that is sold under this scheme. Where does it come from except from either their own pockets or a bank loan?

Most businesses operate on credit, and it is always the small guys who get paid last. Therefore, they need lines of credit to operate.
(Don't the government have a promise to pay their creditors within 60 days but they are now up to a 90 day period?)

Take away the banks and you take away a huge numbers of business. A recent enquiry into the US financial problems had a claim made that if the banking system did fail, they would see unemployment of 25%. Considering the traditionally low level of unemployment in the US, you would expect Ireland to see at least this level also if the banking system failed.

I also posed the question before - if the banking system collapsed, how would people get paid during the time of the failure and the time that new banks absorbed the custom?

danman

I think the last point that Maceface made, would be my main concern.

It isn't credit I'd worry about, but normal banking practices, paying wages, suppliers etc.

ei.sdraob

MaceFace wrote: »

This is the ideal scenario and I agree with the principle of this, but the truth is that it simply is not reality.
Take a car dealership (as it is one to have a stimulus). They have the €1500 scrappage scheme. The problem is that the government have not even started processing the refund applications from the dealers for this scheme. Therefore, the dealers have to somehow come up with short term funding of €1500 for every car that is sold under this scheme. Where does it come from except from either their own pockets or a bank loan?

Most businesses operate on credit, and it is always the small guys who get paid last. Therefore, they need lines of credit to operate.
(Don't the government have a promise to pay their creditors within 60 days but they are now up to a 90 day period?)

Take away the banks and you take away a huge numbers of business. A recent enquiry into the US financial problems had a claim made that if the banking system did fail, they would see unemployment of 25%. Considering the traditionally low level of unemployment in the US, you would expect Ireland to see at least this level also if the banking system failed.

But that's the thing
if a bank fails another one or more come in to take its place
If there's money to be made banks wont shy away from getting good customers

MaceFace wrote: »

I also posed the question before - if the banking system collapsed, how would people get paid during the time of the failure and the time that new banks absorbed the custom?

How are countries like US where hundreds of banks have failed in last few years getting on?

The bank fails the customers and their accounts are bought and absorbed into another bank

You swear banks have never failed before and are somehow "sacred" and "different"

thats just bull**** peddled by 2 Brians so they can avoid making difficult decisions, we wouldnt be in this **** now if Brian didn't put in his brain-dead total guarantee, thats now forcing him down a very dark path with Anglo

A bank failure is the closing of a bank by a federal or state banking regulatory agency. The FDIC seizes a bank's assets when its capital levels are too low, or it cannot meet obligations the next day.[2][3] After seizing a bank's assets, the FDIC acts in two capacities—first, it pays insurance to the depositors, up to the deposit insurance limit, for assets not sold to another bank. Second, as the receiver of the failed bank, it assumes the task of selling and collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit. The FDIC insures up to $250,000 per depositor, per insured bank, as a result of the Emergency Economic Stabilization Act of 2008, which raised the limit from $100,000

ei.sdraob

MaceFace wrote: »

This is the ideal scenario and I agree with the principle of this, but the truth is that it simply is not reality.
Take a car dealership (as it is one to have a stimulus). They have the €1500 scrappage scheme. The problem is that the government have not even started processing the refund applications from the dealers for this scheme. Therefore, the dealers have to somehow come up with short term funding of €1500 for every car that is sold under this scheme. Where does it come from except from either their own pockets or a bank loan?

What you just described is an un-viable business in a low bank credit availability scenario, with added government interference sprinkled on top (dont get me started on the stupidity of a car scrapage scheme in Ireland)

Why should viable businesses and taxpayer be forced to rescue unsustainable businesses and in the process putting their good enterprises/livelyhoods at risk?

Why should my relative with his bakery have to suffer so the likes of Bill Cullen can sell more cars?



im sorry but this whole concept of "redistribution of wealth" concept is gone to a new retarded low

There is no reason why businesses, any business is of "vital importance" and should be allowed to become a drag on the rest of the economy

We are only in a bad position today because a series of bad decisions have been made

digging a deeper grave springs to mind :mad:

danman

ei.
Can the US banks be compared to the Irish situation though?

The bank failures in the US only count for a very small percentage of the overall banking system, where as here, the big 3 count for maybe 80%.

I'm not an economist, so I'll bow to you greater knowlage, but it doesn't seem to be camparable.

ei.sdraob

danman wrote: »

ei.
Can the US banks be compared to the Irish situation though?

The bank failures in the US only count for a very small percentage of the overall banking system, where as here, the big 3 count for maybe 80%.

I'm not an economist, so I'll bow to you greater knowlage, but it doesn't seem to be camparable.

Big 3?

I am specifically yet again talking about Anglo (and of course Nationwide), BOI and AIB seem to have been stabilized for a comparatively small investment

all we get about Anglo is lies and fud, We still havent seen figures for the amount of "normal" customers Anglo had before the guarantee

take a read of this > http://trueeconomics.blogspot.com/2010/04/economics-30042010-anglo-irish-bank.html

MaceFace

ei.sdraob wrote: »

But that's the thing
if a bank fails another one or more come in to take its place
If there's money to be made banks wont shy away from getting good customers




How are countries like US where hundreds of banks have failed in last few years getting on?

The bank fails the customers and their accounts are bought and absorbed into another bank

You swear banks have never failed before and are somehow "sacred" and "different"

thats just bull**** peddled by 2 Brians so they can avoid making difficult decisions, we wouldnt be in this **** now if Brian didn't put in his brain-dead total guarantee, thats now forcing him down a very dark path with Anglo

There is a difference between banks failing and a banking system failing. Just as the US got involved in Fannie and Freddie aswell as AIG - they were deemed to be of systemic importance.
Rightly or wrongly, the government made the decision that Anglo was of systemic importance and jumped on board.
If Anglo had of got into this trouble 5 or 10 years ago, they probably would have been allowed to fail gracefully, but not with the economy already on life support.

ei.sdraob wrote: »

What you just described is an un-viable business in a low bank credit availability scenario, with added government interference sprinkled on top (dont get me started on the stupidity of a car scrapage scheme in Ireland)

Why should viable businesses and taxpayer be forced to rescue unsustainable businesses and in the process putting their good enterprises/livelyhoods at risk?

Why should my relative with his bakery have to suffer so the likes of Bill Cullen can sell more cars?



im sorry but this whole concept of "redistribution of wealth" concept is gone to a new retarded low

There is no reason why businesses, any business is of "vital importance" and should be allowed to become a drag on the rest of the economy

We are only in a bad position today because a series of bad decisions have been made

digging a deeper grave springs to mind :mad:

But this is how most businesses operate around the world today. Very few operate on a cash basis, and especially when there is a downturn in an economy, the smaller the operator, the more difficult it is to get paid on time by your creditors.
Wishing it was different doesn't solve the problem we have.

ei.sdraob

MaceFace wrote: »

There is a difference between banks failing and a banking system failing. Just as the US got involved in Fannie and Freddie aswell as AIG - they were deemed to be of systemic importance.
Rightly or wrongly, the government made the decision that Anglo was of systemic importance and jumped on board.
If Anglo had of got into this trouble 5 or 10 years ago, they probably would have been allowed to fail gracefully, but not with the economy already on life support.

But Anglo never was of "systematic" importance

I challenge anyone to provide figures and facts that can show that Anglo was in anyway important

MaceFace wrote: »

But this is how most businesses operate around the world today. Very few operate on a cash basis, and especially when there is a downturn in an economy, the smaller the operator, the more difficult it is to get paid on time by your creditors.
Wishing it was different doesn't solve the problem we have.

Business circumstances change all the time, if a company can not survive such a shift then it is not viable

"Wishing it was different doesn't solve the problem we have"

oh and btw we only have a problem because the two Brians made it "our" problem

Amhran Nua

What we need is a common investment market so people can put their money directly into shares in local businesses, thus sidestepping the need for bank loans and credit. Also I'd split off the enterprise lending section of banks from every other part of them, and provide limited state-backed insurance to give them a bigger appetite for risk.

ei.sdraob

Amhran Nua wrote: »

What we need is a common investment market so people can put their money directly into shares in local businesses, thus sidestepping the need for bank loans and credit. Also I'd split off the enterprise lending section of banks from every other part of them, and provide limited state-backed insurance to give them a bigger appetite for risk.

Good idea and I agree (local level stock market of sorts, hmm the possibilities...)

Local "currency/vouchers" are also an excellent idea to help local business along same lines


Unfortunately the current reality is rather ugly

for example lets say you want to issue 100,000 shares at €1 and "sell" it to new shareholder, theres quite a bit of paperwork involved, you also have to go down to the Revenue Stamp office and pay stamp duty on this (was 1% last i checked :eek:) and fill out and sign more forms, you also need to inform CRO, and finally whoever gets these shares will find they will now have to early complete a tax return to the Revenue, oh and god help you if you want to sell these shares down the road, that entitles you to more paperwork

so alot of paperwork, bureaucracy and hassle if you want to invest in a small ltd company, im no accountant just past experience, im probably forgetting something too (i think the small co also needs to hold an AGM)

If you were an investor then it just be less hassle to go an invest with a large bank then than jump thru all the hoops

MaceFace

ei.sdraob wrote: »

But Anglo never was of "systematic" importance

I challenge anyone to provide figures and facts that can show that Anglo was in anyway important

And I could equally ask for figures that prove it was not of systemic importance. The fact is we don't know either way and you are quite entitled to your belief that it was not, but that doesn't make it fact.
That is why I used the words "rightly or wrongly", as we simply don't know the truth.

ei.sdraob wrote: »

Business circumstances change all the time, if a company can not survive such a shift then it is not viable

"Wishing it was different doesn't solve the problem we have"

oh and btw we only have a problem because the two Brians made it "our" problem

Lets step back a moment here. The bank bailout and the Anglo problem is not our major problem. The whole fiasco will cost us in the region of €25bn over an extended period of time.
The big problem is the deficit which is the equivalent to an Anglo bail out every year.

ei.sdraob

MaceFace wrote: »

And I could equally ask for figures that prove it was not of systemic importance. The fact is we don't know either way and you are quite entitled to your belief that it was not, but that doesn't make it fact.
That is why I used the words "rightly or wrongly", as we simply don't know the truth.

So because you dont know the facts you side with the fluff being peddled to us by the very same people managed to do a great job at ****ing up the country?

one word springs to mind: gullible

since its our tax money being used the onus of proof is on the people making a claim that our money is being spend to save a bank which is "systematically important"

MaceFace wrote: »

Lets step back a moment here. The bank bailout and the Anglo problem is not our major problem. The whole fiasco will cost us in the region of €25bn over an extended period of time.
The big problem is the deficit which is the equivalent to an Anglo bail out every year.

if you read the earlier linked article you would see it would cost 25 billion to wind down Anglo "now", would have been much less two years ago before they started trying to get foolish people to deposit money with them

and it only has to cost that much because of the complete guarantee, if this was left at the old 20,000 level the figure would be much less

Drumpot

I find bailing out the banks unpalatable and disgusting . . . For that I find it difficult to accept any arguments that try to justify why it was done . .

However . . To coin a phrase from a complete moron we are not sure of what "the unknown unknowns" may be in terms of possible knock on effects to our economy. . I couldnt guarantee that things would be any better for us, so I dont understand how anybody could say with complete confidence that there is a certifiably full-proof alternative.

Rightly or wrongly, in a capitalist system, the markets hold a very strong bat over the heads of entire countries . . You need only look at Greece to see the costs simply to get loans (12%), because the world see's them as a basket-case. With that in mind the perception that the bond markets have of a country can multiply any potential default by an organisation as big as a bank & can end up costing far far more then the potential bailout. .

So how could letting Anglo default on its loans destabilize our economy and increase the cost of borrowing ? Im no economist and wont pretend to have all the answers to that, but ignoring the potential impact of letting a rogue bank like Anglo default appears to be a risk that our government were not prepared to take . . .

A bank failing in the US is not as bad as a bank failing in Ireland. Quite simply, the markets are comfortable in the idea that the likes of the US have a far greater chance of weathering a financial storm then Ireland, particularly as everybody now knows that we had a property bubble that was propping up our very impressive growth over the last 15 years. The perception of Ireland in the markets is already weak enough without a bank collapsing.

To the outside investor Ireland is a country that will protect bondholders from default . . In principle, this is just wrong on so many levels because they are getting paid premiums for their risk . But . . If it means that we can get more investment/loans at cheaper premiums, it may very well be worth it. .

danman

A question for those more knowledgable than me.

Would it have been possible for AIB and BoI to have capital tied up in any way with Anglo?
I'm wondering if all 3 were in some way connected?

Or did they all operate completly seperately?

Amhran Nua

ei.sdraob wrote: »

for example lets say you want to issue 100,000 shares at €1 and "sell" it to new shareholder, theres quite a bit of paperwork involved, you also have to go down to the Revenue Stamp office and pay stamp duty on this (was 1% last i checked :eek:) and fill out and sign more forms, you also need to inform CRO, and finally whoever gets these shares will find they will now have to early complete a tax return to the Revenue, oh and god help you if you want to sell these shares down the road, that entitles you to more paperwork

so alot of paperwork, bureaucracy and hassle if you want to invest in a small ltd company, im no accountant just past experience, im probably forgetting something too (i think the small co also needs to hold an AGM)

If you were an investor then it just be less hassle to go an invest with a large bank then than jump thru all the hoops

I'd agree with all this, which is why we need a secondary streamlined market. Get your credit card, go online, buy shares, and done. Even taxation can be handled automatically, or even at source. Open that to other countries as well, and you potentially have a serious amount of grassroots FDI.

ei.sdraob

Amhran Nua wrote: »

I'd agree with all this, which is why we need a secondary streamlined market. Get your credit card, go online, buy shares, and done. Even taxation can be handled automatically, or even at source. Open that to other countries as well, and you potentially have a serious amount of grassroots FDI.

yeh it surely can be done if there is will

heres something analogous > http://www.kiva.org/

Amhran Nua

ei.sdraob wrote: »

yeh it surely can be done if there is will

It can't be done without changing the legislation, unfortunately, thats why its one of the cornerstone party policies.

Scarab80

Amhran Nua wrote: »

I'd agree with all this, which is why we need a secondary streamlined market. Get your credit card, go online, buy shares, and done. Even taxation can be handled automatically, or even at source. Open that to other countries as well, and you potentially have a serious amount of grassroots FDI.

There is a reason we have a publicly traded stock market and there is also a reason that small companies do not enter and would not be suitable for a market such as this.

In order to maintain a level playing field for all investors it is necessary for the company to jump through a lot of stock exchange regualtions which become prohibitively expensive for smaller companies. Also entrepreneurs who are growing their companies generally prefer bank credit as opposed to equity funding as it allows them to maintain control of their business. Equity funding is only suitable where banks are not willing to accept the risk associated with the investment.

I understand your anger with the the way irish banks operated in the past few years but it is no reason to throw out the whole idea of banking in this country. The banks simply accepting too much non-diversified risk in the past decade, either they learn from this experience and accept and price risk appropriately or regulation should be enacted to force them to do so.

The fact remains that companies need credit, and in many cases quick expansion through the use of credit is preferable to slower expansion using retained earnings if the gap between a companies return on capital and the bank interest rate makes sense.

Though a market for investment in private companies does not seem feasible perhaps a public forum which facilitates communication between companies and private individual investors may be appropriate.

Amhran Nua

Scarab80 wrote: »

There is a reason we have a publicly traded stock market and there is also a reason that small companies do not enter and would not be suitable for a market such as this.

No, the stock market was originally intended to be a common investment market along the same lines as this proposal, which has since developed into an exclusive club for extremely wealthy companies. In these days of instant access to information and high tech interconnectivity, there is no reason not to produce something like this.

My only concern is if someone else does it first in a larger market.

Scarab80 wrote: »

In order to maintain a level playing field for all investors it is necessary for the company to jump through a lot of stock exchange regualtions which become prohibitively expensive for smaller companies. Also entrepreneurs who are growing their companies generally prefer bank credit as opposed to equity funding as it allows them to maintain control of their business. Equity funding is only suitable where banks are not willing to accept the risk associated with the investment.

Again, this is not the case - most entrepreneurs prefer investment since if they can't repay a loan, they lose the whole lot, and investors take a very real stake in the company, unlike a bank, which only wants its money back. Not to mention that an outstanding loan is an ongoing liability for a company, continually eating into profits until repaid. If what you were saying was accurate, nobody would ever float a company.

Maintaining maximum public investment levels at 49% would probably be neccessary with such a project anyway, to prevent massive dissociated foreign ownership of Irish firms. As for regulations, thats part of the legislative red tape that would need to be pruned away. Keep in mind that this would be at a lower level than the main stock market, and as such would involve lower amounts.

Have you any specific objections to the proposal?

Scarab80 wrote: »

I understand your anger with the the way irish banks operated in the past few years but it is no reason to throw out the whole idea of banking in this country.

From the end of the last depression to the late 90s, banking operations were carefully segregated anyway, breaking up segments of banks would be a return to normality, albeit a slightly larger step. See for reference the Glass-Steagall act

Scarab80 wrote: »

The fact remains that companies need credit, and in many cases quick expansion through the use of credit is preferable to slower expansion using retained earnings if the gap between a companies return on capital and the bank interest rate makes sense.

Is it not clear that a profitable company selling shares to the public achieves the exact same end though?

Scarab80

Amhran Nua wrote: »

Again, this is not the case - most entrepreneurs prefer investment since if they can't repay a loan, they lose the whole lot, and investors take a very real stake in the company, unlike a bank, which only wants its money back. Not to mention that an outstanding loan is an ongoing liability for a company, continually eating into profits until repaid. If what you were saying was accurate, nobody would ever float a company.

I work with SME's and the only companies that would be willing to exchange their bank credit in exchange for giving up a portion of their company to an unknown shareholder/(s) are those that are having severe difficulty in repaying these loans. Clearly this is not an investment that an investor seeking a return would want to make. There are inherent differences between bank credit and equity capital, the two are not interchangeable.

A company which is operating profitably still needs bank credit in order to make capital purchases. Credit is there too smooth out the differences between profit and cash flow, this is normal business practice and is not a sign of a company in trouble. The credit a bank advances to a company allows the company to earn a return on that capital which should exceed the capital and interest repayments to the bank. The loan is also secured on the assets of the company.

Equity investments are unsecured and therefore require a higher rate of return to the investor, it is the most expensive way of financing and therefore is not used in companys which can avail of bank credit. Equity investment is used where the risk is too high for banks or where the company is unable to leverage any more debt from it's assets - as is the case with stock market flotations.

Amhran Nua wrote: »

Have you any specific objections to the proposal?

In relation to the market aspect of the proposal, SME's current reporting obligations are not nearly as detailed as Plc's. Further they are only required to submit accounts once a year, six months after their year end. Further many SME's qualify for exemption from audits. All of these mean that a market price could not be accurately determined for a company's shares.

So change the rules so a company seeking this investment must make timely information public? This gives a competitive advantage to other companies who can see this information and increases the cost of financing for the company seeking investment as they will have to have audited information available for investors along with quarterly reporting. There is no incentive for a company to seek this type of finance.

Amhran Nua wrote: »

Is it not clear that a profitable company selling shares to the public achieves the exact same end though?

Indeed it does but at a much higher cost.

If you are looking to get rid of banks, Zopa is probably the closest thing i have seen so far.

http://uk.zopa.com/ZopaWeb/

Amhran Nua

Scarab80 wrote: »

I work with SME's

Hey, that makes two of us.

Scarab80 wrote: »

and the only companies that would be willing to exchange their bank credit in exchange for giving up a portion of their company to an unknown shareholder/(s) are those that are having severe difficulty in repaying these loans.

This is both anecdotal and the exact opposite to the feedback I've been getting. There's a lot more to selling shares publicly than just auctioning off a lump of the company, there are a wide variety of methods that could be used to leverage capital from that.

Scarab80 wrote: »

A company which is operating profitably still needs bank credit in order to make capital purchases.

Nope, I've run several companies in various sectors which have had zero need for credit due to conservative (or more accurately competent) cash management.

Scarab80 wrote: »

Credit is there too smooth out the differences between profit and cash flow, this is normal business practice and is not a sign of a company in trouble.

You seem to be under the impression that I'm advocating the disbandment of the banks and the abolition of all credit forever. This is not the case.

Scarab80 wrote: »

Equity investments are unsecured and therefore require a higher rate of return to the investor,

Ah ah stop right there. Investments require nothing except the investor putting money into the company, end of story. Caveat emptor and all that, but doing due diligence before investing should make life a lot easier, in addition to a colour-coded risk/reward chart. It would be up to the company to make people aware of its performance as it goes along, in terms of new ideas and growth. Happily this can be achieved via the very same investment market mechanism.

Scarab80 wrote: »

So change the rules so a company seeking this investment must make timely information public? This gives a competitive advantage to other companies who can see this information and increases the cost of financing for the company seeking investment as they will have to have audited information available for investors along with quarterly reporting.

Eh first off the rules in terms of time to account are not that much different for plcs. Secondly why aren't you terrified that plcs will lose their competitive advantage to private limited companies, which can be just as large if not larger, if that were the case?

A slight increase in ongoing accounting should be involved, but nothing that most companies wouldn't be able to adapt to. Indeed, it might be beneficial, since it would increase their focus on the performance of their business.

Scarab80 wrote: »

If you are looking to get rid of banks, Zopa is probably the closest thing i have seen so far.

You keep referring to this desire to get rid of the banks. These companies have made themselves an indispensable part of the economy nationally and globally, which is a very dangerous place for any company to be.

The general idea is to reduce reliance on banks and break up their responsiblities a bit so that if one part of the banking operation falls down, the rest doesn't follow, with the country being dragged down with it. On top of that, a common investment market just makes good sense, as well as reducing the dependency on a few monolithic companies.

I'm delighted to have this discussion by the way, most people aren't familiar enough with the details of both bank and market operations to make qualified comments on the proposal.

Scarab80

Amhran Nua wrote: »

This is both anecdotal and the exact opposite to the feedback I've been getting.

Well as your information would also be anecdotal let's just say opposite.

Amhran Nua wrote: »

There's a lot more to selling shares publicly than just auctioning off a lump of the company, there are a wide variety of methods that could be used to leverage capital from that.

What methods are you thinking about, i assume you are talking about the issuance of preference shares which would adjust the risk / reward ratio bringing the investment closer to secured credit?

Amhran Nua wrote: »

Nope, I've run several companies in various sectors which have had zero need for credit due to conservative (or more accurately competent) cash management.

I understand that some companies can operate and perhaps should operate without credit however capital intensive or rapidly expanding companies do need credit and it is nothing to do with how competently they are run. Indeed most of the most competently run companies in the world use credit as they can employ this capital to gain a return far in excess of interest rates.

Amhran Nua wrote: »

You seem to be under the impression that I'm advocating the disbandment of the banks and the abolition of all credit forever. This is not the case.

What we need is a common investment market so people can put their money directly into shares in local businesses, thus sidestepping the need for bank loans and credit

Yes i was under that impression, apologies.

Amhran Nua wrote: »

Ah ah stop right there. Investments require nothing except the investor putting money into the company, end of story. Caveat emptor and all that, but doing due diligence before investing should make life a lot easier, in addition to a colour-coded risk/reward chart. It would be up to the company to make people aware of its performance as it goes along, in terms of new ideas and growth. Happily this can be achieved via the very same investment market mechanism.

Ok well let's say a higher return is expected and if it was not forthcoming either through dividend payments or capital appreciation then investment in this market would dry up. I don't understand how due dilligence fits into an ongoing traded share, is this done when the share first enters the market and then reliance is placed on audited accounts? The colour-coded chart sounds spiffy though

As regards ongoing information to the market, i really think that this is a major disadvantage as opposed to a company not involved in this scheme, an an aspect i can't see too many company directors being too enamoured with but entirely necessary for the operation of an accurate market.

Amhran Nua wrote: »

Eh first off the rules in terms of time to account are not that much different for plcs. Secondly why aren't you terrified that plcs will lose their competitive advantage to private limited companies, which can be just as large if not larger, if that were the case?

If a private company is as big as a public company i believe it does enjoy a competitive advantage over a plc, however most plc's are larger than private companies and enjoy that advantage. Regardless reporting requirements for small and medium companies are far removed from that required for large and plc. In these cases the information needed for the market becomes a lot more valuable as otherwise reporting requirements decrease.

Amhran Nua wrote: »

A slight increase in ongoing accounting should be involved, but nothing that most companies wouldn't be able to adapt to. Indeed, it might be beneficial, since it would increase their focus on the performance of their business.

As an accountant i agree 100%

Amhran Nua wrote: »

You keep referring to this desire to get rid of the banks. These companies have made themselves an indispensable part of the economy nationally and globally, which is a very dangerous place for any company to be.

The general idea is to reduce reliance on banks and break up their responsiblities a bit so that if one part of the banking operation falls down, the rest doesn't follow, with the country being dragged down with it. On top of that, a common investment market just makes good sense, as well as reducing the dependency on a few monolithic companies.

Then shouldn't we be going down the American route of making it impossible for banks to be "too big to fail". I would like to see banks being split into various divisions which are not under one umbrella with tighter control from the Financial Regulator to make sure that they are not taking on too much risk or undiversified business.

Can i also make another few points.

1. Loan interest is tax deductible, dividend payments are not.
2. What is to stop a company director obtaining this funding and then using the money to increase his director's salary. Even if he has given himself a deserved raise this could lead to disagreements with the investor.
3. If this market was restricted to Ireland wouldn't liquidity be a major concern?

Amhran Nua

Scarab80 wrote: »

Well as your information would also be anecdotal let's just say opposite.

Indeed, and the plural of anecdote is not data.

Scarab80 wrote: »

What methods are you thinking about, i assume you are talking about the issuance of preference shares which would adjust the risk / reward ratio bringing the investment closer to secured credit?

Thats a part of it, the interaction between share price and the activities of a company is complex and sometimes not intuitive. The question really is how much of the complexity we would need to import from existing markets (short selling yes, naked shorting no, for example) to maximise returns without impairing responsibility.

Scarab80 wrote: »

I understand that some companies can operate and perhaps should operate without credit however capital intensive or rapidly expanding companies do need credit and it is nothing to do with how competently they are run. Indeed most of the most competently run companies in the world use credit as they can employ this capital to gain a return far in excess of interest rates.

I believe it was Bill Gates who said to keep at least a year's operating costs in the bank at all times, if more companies had paid attention we wouldn't be in the state we're in. As a corollary, MS is debt free.

Lending for companies which need credit from start to finish, notably construction, used to provide good returns, but as we've seen in recent years, that doesn't always work out as planned. I wonder how it would work if a private limited company were to be set up for each housing development and shares sold to the public on that basis?

Scarab80 wrote: »

Ok well let's say a higher return is expected

It can be expected without guarantee though, unlike a loan, where it gets repaid one way or the other. I have relations who lost their shirts on Irish bank shares, incuding one eye-watering loss of over twenty thousand euros.

Scarab80 wrote: »

and if it was not forthcoming either through dividend payments or capital appreciation then investment in this market would dry up.

There is no reason why either appreciation or dividends wouldn't happen though.

Scarab80 wrote: »

I don't understand how due dilligence fits into an ongoing traded share, is this done when the share first enters the market and then reliance is placed on audited accounts? The colour-coded chart sounds spiffy though

You take a look at the market for that company, recent developments, IP held by the group, and so on, and judge if shares will be more or less in demand. For example if my unfortunate relation above had logged on to boards or the property pin and done a bit of research on bank shares, she might have diversified her portfolio a bit. Trends can be foreseen, this is how normal traders make money.

Scarab80 wrote: »

As regards ongoing information to the market, i really think that this is a major disadvantage as opposed to a company not involved in this scheme, an an aspect i can't see too many company directors being too enamoured with but entirely necessary for the operation of an accurate market.

I've been dealing with a business sector over the last few weeks where paranoia is quite high, to the extent that regional businesses won't even allow suppliers to list them as customers. However in other European countries its the opposite case, with no untoward effects; obviously I can't give details so you'll have to take my word for it. I dont feel that information released to the public would be a major detriment to the project, you can after all request any company accounts from the CRO as it stands.

Scarab80 wrote: »

If a private company is as big as a public company i believe it does enjoy a competitive advantage over a plc, however most plc's are larger than private companies and enjoy that advantage. Regardless reporting requirements for small and medium companies are far removed from that required for large and plc. In these cases the information needed for the market becomes a lot more valuable as otherwise reporting requirements decrease.

That plcs are larger in general than private companies is due to several factors - there are a lot more private companies than plcs, and you need to be big and well established to become a plc in the first place. On reporting requirements, again I think thats dealt with above.

Scarab80 wrote: »

Then shouldn't we be going down the American route of making it impossible for banks to be "too big to fail". I would like to see banks being split into various divisions which are not under one umbrella with tighter control from the Financial Regulator to make sure that they are not taking on too much risk or undiversified business.

Thats another area we are promoting as well, and fully support this. The two options are not mutually exclusive however.

Scarab80 wrote: »

Can i also make another few points.

1. Loan interest is tax deductible, dividend payments are not.
2. What is to stop a company director obtaining this funding and then using the money to increase his director's salary. Even if he has given himself a deserved raise this could lead to disagreements with the investor.
3. If this market was restricted to Ireland wouldn't liquidity be a major concern?

Not only would I go so far as to make dividends from companies in this scheme deductible, I'd make earnings tax free to promote investment. No loss to the Irish government since they weren't making it anyway.

Shareholders do have rights, and abuse by a company director could qualify as fraud if it was particularly egregious. This would need to be carefully regulated to ensure that low level fraud doesn't chase low level investment. Some will slip through the cracks, as it does in the mainstream market (Madoff) but overall I doubt it would be a major problem.

Its been said that there is a lot of money still in Ireland, and I believe this to be the case. Rather than having those funds sitting earning interest it might be better to get them involved in something like the common investment market. Also look at the widepread example of the SSIA, quite a success in its day. However the ideal would be to have it available internationally, for the massive potential influx of foreign capital. We'd have the first mover advantage for a few years before everyone else started doing the same thing, until then we'd be the only game in town in this area.

The potential for seed capital for startups is enormous as well, a very important step when encouraging an environment conducive to entrepreneurship. High risk, high return of course, but caveat emptor, each new company would be taken on its own merits.