Where is the Anglo €22bn going exactly?

blue_steel

The Taoiseach Brian Cowen has confirmed the €22bn of taxpayers' money pumped into Anglo Irish Bank will not be returned or make a profit.


Can anyone explain to me what this €22bn is being spent on? Call me a cynic but isn't it simply a case of Joe Taxpayer forking out to ensure that golden circle share-holders don't end up out of pocket? Or is there any justifiable reason for this mind-boggling amount of money being flushed down the drain?

Scarab80

blue_steel wrote: »

The Taoiseach Brian Cowen has confirmed the €22bn of taxpayers' money pumped into Anglo Irish Bank will not be returned or make a profit.


Can anyone explain to me what this €22bn is being spent on? Call me a cynic but isn't it simply a case of Joe Taxpayer forking out to ensure that golden circle share-holders don't end up out of pocket? Or is there any justifiable reason for this mind-boggling amount of money being flushed down the drain?

Anglo shareholders have lost 100% of their investment.

There are 2 ways of looking at where the 22bn has gone.

1. If we are down 22bn who is up 22bn - this is the money that developers spent on sites and developments that have not and can not be sold (without making substantial losses anyways). So the people who are up are the landowners who sold property before the crash and the tradespeople and materials suppliers and anyone else who was paid to build a partially completed or unsold development.

2. A tiny proportion of what a bank lends out is actually it's own money (shareholders funds), the vast majority of loans are financed by depositers, the European Central Bank and institutional investors who buy bonds issued by the bank. Because these creditors are covered under the government guarantee scheme they can not make a loss. So you could say that the 22bn has gone to cover their losses.

So why were these creditors guaranteed? Because the banks and the financial regulators were not doing their jobs properly (or lying), it was thought that there was enough shareholders funds to absorb losses at the time the guarantee was issued. Also the government extended the guarantee to investors who would have been unable to remove their money from the banks for the duration of the guarantee, this made possible wind down options more expensive.

blue_steel

So it was the government guarantee that ensured the golden circle didn't end up out of pocket?

Scarab80

blue_steel wrote: »

So it was the government guarantee that ensured the golden circle didn't end up out of pocket?

The golden circle are a group of businessmen who were given loans from Anglo to buy shares in Anglo to the tune of €450m. The loans were secured on the shares themselves. The shares are now worth precisely 0.

The golden circle are still liable for the loans, however many of them do not have the money to repay these loans as they were involved in property development and are now broke.

The frustrating part about the saga is that we do not know all the members of who the golden circle are or what actions are being taken to obtain repayment on the loans, that is until they are brought to court by Anglo.

IIRC 300m of the 450m was provided for as bad debts, so the group is expected to take a 150m loss. The guarantee covers people who the bank owe money to not people who owe the bank money.

jimmycrackcorm

Scarab80 wrote: »

The golden circle are still liable for the loans, however many of them do not have the money to repay these loans as they were involved in property development and are now broke.

They'll still have their nice houses and Mercedes unless you are redefining the meaning of "broke"

eoinbn

This is a very simple way to look at it(but not factually accurate):

People deposit €70bn.
Bank loans out €70bn to developers.
Property market crashes leads to bankrupt developers so only €48bn can be paid back.
Bank rights down the loans so it now has €48bn in assets but €70bn in liabilities- hence the bank is insolvent and needs a cash injection- that is where we come in!

hiorta

eoinbn wrote: »

This is a very simple way to look at it(but not factually accurate):

People deposit €70bn.
Bank loans out €70bn to developers.
Property market crashes leads to bankrupt developers so only €48bn can be paid back.
Bank writes down the loans so it now has €48bn in assets but €70bn in liabilities- hence the bank is insolvent and needs a cash injection- that is where we come in!

Why should the taxpayer be expected to underwrite slack business decisions?

Diarmuid

hiorta wrote: »

Why should the taxpayer be expected to underwrite slack business decisions?

She shouldn't. Now write to your TD and complain.

eoinbn

hiorta wrote: »

Why should the taxpayer be expected to underwrite slack business decisions?

You really can't work that out? REALLY?
When people put money in a bank they expect to get it back. If the bank turned around and said all deposits were been written down by 33% then not only would there be a run on that bank but there would be a run on every bank in this country and that could very easily spread aboard.

Liam Byrne

eoinbn wrote: »

You really can't work that out? REALLY?
When people put money in a bank they expect to get it back. If the bank turned around and said all deposits were been written down by 33% then not only would there be a run on that bank but there would be a run on every bank in this country and that could very easily spread aboard.

Not necessarily. This is the line that gets trotted out by FF, but it's not true.

Just because one company / bank that very few people dealt with is run badly doesn't mean the others are.

jmayo

Scarab80 wrote: »

...

The golden circle are still liable for the loans, however many of them do not have the money to repay these loans as they were involved in property development and are now broke.
...

They are only liable for a portion of the loans since the loans were partially secured on actual Anglo shares, which to some people was an illegal transaction in itself.
AFAIK it definetly would be an illegal transaction in some states.

And AFAIK the bank have written off some of the amounts they actually secured on other assets or gave personal guarantees on.

BTW you will find some of the developers myriad of companies are broke, but not the actual developers. Oh the joy of limited companies.
You will also find in some cases where developers have given large personal guarantees that they are now personally broke, but surprisingly the spouse and family are still very very rich. :rolleyes:

eoinbn wrote: »

This is a very simple way to look at it(but not factually accurate):

People deposit €70bn.
Bank loans out €70bn to developers.
Property market crashes leads to bankrupt developers so only €48bn can be paid back.
Bank rights down the loans so it now has €48bn in assets but €70bn in liabilities- hence the bank is insolvent and needs a cash injection- that is where we come in!

More correctly I reckon appears to be like this.

• People (often very well connected people i.e. golden circle) & companies deposit €40bn into Anglo.
• Bank borrows €40bn through bond issue, interbank loans, ECB loans, etc.
• Bank loans out €80bn primarily to developers.
• Credit crunch means no further interbank lending so a bit of liquidity problem.
• Property market crashes leads to developers not repaying loans.
• Depositors take money out so bank has funding issues.
• Other bank deposits €7bn, even though should be recorded as interbank transfer.
• International investors and markets smell a rat.
• Government guarantees everything including the interbank lending and bonds.
• Shareholders loose everything, state takes over bank.
• Bank does not chase developers for amounts outstanding.
• NAMA buys developer loans at big discount.
  (taxpayer coughs up money or is responsible for the borrowing necessary to fund these purchases)
• Bank has to write down the losses on the loans.
• Bank still needs money to pay off interbank loans, bonds holders and depositors.
• Bank needs recapitalisation to stay afloat and keep everyone happy (well almost everyone except taxpayer who coughs up again).
• NAMA still doesn't chase developers for loans.
• Most assets securing loans now worthless in comparison to amount loaned originally or discounted price paid to bank for loan.
• Developers now bankrupt if they gave personal assurances on loans.
  
  But the silver lining is it will all work out when the property bubble is reinflated. :rolleyes:

Scarab80

jmayo wrote: »

They are only liable for a portion of the loans since the loans were partially secured on actual Anglo shares, which to some people was an illegal transaction in itself.
AFAIK it definetly would be an illegal transaction in some states.

I would doubt that it is illegal, i'm sure it's highly regulated in that the shares could not be used as 100% security. Afterall this is pretty much how CFD's and leveraged hedge funds work.

jmayo wrote: »

And AFAIK the bank have written off some of the amounts they actually secured on other assets or gave personal guarantees on.

When a bank writes off a debt it does not mean that they do not try to collect on it, it means that they believe that the money can not be collected. If there was a write off secured on other assets or personal guarantees it would be because the assets or guarantees have deteriorated in value so that they are not sufficient to meet the full costs of the loan. Have you got a link for this?

jmayo wrote: »

BTW you will find some of the developers myriad of companies are broke, but not the actual developers. Oh the joy of limited companies.
You will also find in some cases where developers have given large personal guarantees that they are now personally broke, but surprisingly the spouse and family are still very very rich. :rolleyes:

Indeed the use of limited companies as special purpose vehicles are a problem which should be legislated for.

Anglo are in the commerical court trying to get the transfer of David Drumm's home into his wifes name to be overturned, hopefully that will set a precent. Further scope for legislation in relation to this practice.

jmayo wrote: »

More correctly I reckon appears to be like this.

• People (often very well connected people i.e. golden circle) & companies deposit €40bn into Anglo.
• Bank borrows €40bn through bond issue, interbank loans, ECB loans, etc.
• Bank loans out €80bn primarily to developers.
• Credit crunch means no further interbank lending so a bit of liquidity problem.
• Property market crashes leads to developers not repaying loans.
• Depositors take money out so bank has funding issues.
• Other bank deposits €7bn, even though should be recorded as interbank transfer.
• International investors and markets smell a rat.
• Government guarantees everything including the interbank lending and bonds.
• Shareholders loose everything, state takes over bank.
• Bank does not chase developers for amounts outstanding.
• NAMA buys developer loans at big discount.
  (taxpayer coughs up money or is responsible for the borrowing necessary to fund these purchases)
• Bank has to write down the losses on the loans.
• Bank still needs money to pay off interbank loans, bonds holders and depositors.
• Bank needs recapitalisation to stay afloat and keep everyone happy (well almost everyone except taxpayer who coughs up again).
• NAMA still doesn't chase developers for loans.
• Most assets securing loans now worthless in comparison to amount loaned originally or discounted price paid to bank for loan.
• Developers now bankrupt if they gave personal assurances on loans.
  
  But the silver lining is it will all work out when the property bubble is reinflated. :rolleyes:

Agree with nearly all of that except what evidence do you have that NAMA is not chasing developers for loans. The private investors in the NAMA SPV clearly have a financial motivation for maximising the returns on the NAMA loans. Just because they might think that taking a longer term and more pragmatic approach to maximise returns does not mean that they are writing off debt.

Also what evidence do you have that NAMA assets are now worthless?

A reinflation of the property bubble would certainly help the banks once they offloaded their loans, the cost would then move to the property purchasers who would suffer massive negative equity once the market corrects. NAMA does not assume a reinflation of the bubble, hence the discounts, LTEV assumes 11% rise over 10 years which is expected to be lower than inflation in that period, so for NAMA to work we need a modest deflation in the property market in real terms.

Liam Byrne

Scarab80 wrote: »

A reinflation of the property bubble would certainly help the banks once they offloaded their loans, the cost would then move to the property purchasers who would suffer massive negative equity once the market corrects. NAMA does not assume a reinflation of the bubble, hence the discounts, LTEV assumes 11% rise over 10 years which is expected to be lower than inflation in that period, so for NAMA to work we need a modest deflation in the property market in real terms.

The market has corrected. Anyone proposing a rise in prices (even if they hide it as "deflation in real terms" is going against the facts.

Houses were overpriced, and they are now at realistic prices.

jmayo

Scarab80 wrote: »

I would doubt that it is illegal, i'm sure it's highly regulated in that the shares could not be used as 100% security. Afterall this is pretty much how CFD's and leveraged hedge funds work.

AFAIK in some jurdisdictions it is illegal for a company to lend money to people to buy shares in the company.
Now AFAIK there are differences when it is a bank doing the lending, but when you throw in the fact that they were accepting the purchased shares as part of the security for the loans just makes it very dodgy.

Of course we have very lax laws and/or corporate regulation in this country where insider trading is seen as par for the course and just means someone is in the know. :rolleyes:

Scarab80 wrote: »

When a bank writes off a debt it does not mean that they do not try to collect on it, it means that they believe that the money can not be collected. If there was a write off secured on other assets or personal guarantees it would be because the assets or guarantees have deteriorated in value so that they are not sufficient to meet the full costs of the loan. Have you got a link for this?

There was a link somewhere but not sure how much, they definetly had to write off the amount secured on the shares.

Scarab80 wrote: »

Indeed the use of limited companies as special purpose vehicles are a problem which should be legislated for.

No use legislating if authorities turna blind eye. :rolleyes:

Scarab80 wrote: »

Anglo are in the commerical court trying to get the transfer of David Drumm's home into his wifes name to be overturned, hopefully that will set a precent. Further scope for legislation in relation to this practice.

Yeah that is draggin on a bit now isn't it.
Are they chasing ould bernie mac for the loans taken out on Brulington, Ringsend Glass Bottle plant ?
Oh wait it appears it is the Davy's investors who got burnt that are the ones chasing for that. :rolleyes:

Scarab80 wrote: »

[/LIST]
Agree with nearly all of that except what evidence do you have that NAMA is not chasing developers for loans. The private investors in the NAMA SPV clearly have a financial motivation for maximising the returns on the NAMA loans. Just because they might think that taking a longer term and more pragmatic approach to maximise returns does not mean that they are writing off debt.

Also what evidence do you have that NAMA assets are now worthless?

Ok NAMA have stated that they intend to fund certain projects to completion.
Also they appear to have continued the system where the banks had a moratoriumon both capital and interest repayments.
Perhaps you can provide evidence where they are actually calling in the loans ?
Remember how Zoe were been given a pass by AIB and other banks whereas Rabobank (ACC) actually wanted to see some of their money back.

When I say worthless I mean the assets are now valued at perhaps 20% of their origainal book value when loan approved.
See Ringsend site for example.
Of course you may counter with fact that NAMA only paid 40%of original loona book value so not so bad.
Except either way the taxpayer gets it since they have to recapitalise the bank for the losses.
BTW what evidence do you have that the secureing assets are worth anything near amount NAMA valued loans at ?

Scarab80 wrote: »

A reinflation of the property bubble would certainly help the banks once they offloaded their loans, the cost would then move to the property purchasers who would suffer massive negative equity once the market corrects. NAMA does not assume a reinflation of the bubble, hence the discounts, LTEV assumes 11% rise over 10 years which is expected to be lower than inflation in that period, so for NAMA to work we need a modest deflation in the property market in real terms.

Ah a NAMA believer I see.
Do you believe in fairies at the end of the garden as well as the premises of NAMA as laid out by messers lenihan, bacon, cowen and fahy ? :rolleyes:

The banks are ok whether property goes up or not because we the taxpayers are buying the toxic loans off them and we the taxpayers are continously pumping capital into them.


It is we the taxpayers who might benefit through NAMA if property went back up, but of course the flip side would be we would have to pay over inflated prices for property.
Erither way we are the ones getting screwed.

Liam Byrne wrote: »

The market has corrected. Anyone proposing a rise in prices (even if they hide it as "deflation in real terms" is going against the facts.

Houses were overpriced, and they are now at realistic prices.

Correction : houses are still overpriced or at least the asking prices are.

Of course we can't see the real prices being paid.

Scarab80

Liam Byrne wrote: »

The market has corrected. Anyone proposing a rise in prices (even if they hide it as "deflation in real terms" is going against the facts.

Houses were overpriced, and they are now at realistic prices.

If you read my post properly I was referring to a hypothetical reinflation of the bubble, and the enivitable subsequent correct. Clearly this is not going to happen.

The ECB tries to control eurozone inflation at below but close to 2% per annum, once we have completed our correction of property prices and wage levels, this level of inflation pressure will still exist. Property is not immune to this inflation pressure. For property prices to remain constant in absolute terms there would need to be a corresponding 2% deflationary pressure per year - there may well be a case to be made for this as NAMA release extra properties onto the market, but that does not invalidate my original point.

Scarab80

jmayo wrote: »

AFAIK in some jurdisdictions it is illegal for a company to lend money to people to buy shares in the company.
Now AFAIK there are differences when it is a bank doing the lending, but when you throw in the fact that they were accepting the purchased shares as part of the security for the loans just makes it very dodgy.

Of course we have very lax laws and/or corporate regulation in this country where insider trading is seen as par for the course and just means someone is in the know. :rolleyes:

It's not much different from lending to someone to buy a house, the purchased house is used as security for the loan. Obviously shares are historically more volatile than fully built houses but then it is just a matter of risk management and we don't know what kind of extra security was sought. I would imagine that it was insufficient or possibly criminal given the nature of the arrangement.

Insider trading didn't work out too well for Sean Quinn and the golden circle given the subsequent performance of Anglo shares.
There was a link somewhere but not sure how much, they definetly had to write off the amount secured on the shares.

jmayo wrote: »

No use legislating if authorities turna blind eye. :rolleyes:

Of course there is, if laws were broken you can sue the person in question. At the moment the use of special purpose companies are legal and therefore there is no recourse to the person behind the corporate structure.

jmayo wrote: »

Yeah that is draggin on a bit now isn't it.
Are they chasing ould bernie mac for the loans taken out on Brulington, Ringsend Glass Bottle plant ?
Oh wait it appears it is the Davy's investors who got burnt that are the ones chasing for that. :rolleyes:

http://www.independent.ie/business/irish/anglo-puts-a-receiver-into-mcnamarabacked-killeshin-2192878.html

jmayo wrote: »

Ok NAMA have stated that they intend to fund certain projects to completion.
Also they appear to have continued the system where the banks had a moratoriumon both capital and interest repayments.
Perhaps you can provide evidence where they are actually calling in the loans ?
Remember how Zoe were been given a pass by AIB and other banks whereas Rabobank (ACC) actually wanted to see some of their money back.

They are running projects to completion because there is more value in a completed property than an unfinished shell. Some of these projects have contracted tenants to take over once completed however the banks turned off the taps on funding due to their own lack of funding.

Frank Daly wrote:

NAMA has also begun to engage directly with borrowers. As their loans are acquired by NAMA, borrowers are being asked to produce business plans which will set out detailed and credible targets for reducing their debt. A panel of advisory firms has been set up to advise NAMA in its appraisal of borrower business plans. We are not interested in business plans which envisage borrower debt stabilising or reducing modestly over the medium-term. A borrower must set out how he plans to reduce his debt significantly over a three to five year horizon and, for most borrowers, this means producing a list of assets which can be sold to raise cash which will, in turn, be used to repay debt. Let there be no confusion about this: in NAMA’s terms, viability is not a matter of survival on taxpayer life support until the good days come again. Rather it is a matter of setting out a debt reduction target, identifying the assets which will need to be sold in order to achieve that target and convincing NAMA that the borrower has both the will and the managerial capacity to deliver on the target. Where a borrower cannot convince NAMA that he can meet the target, the only option is foreclosure.

AIB and the other banks (including Bank of Scotland) did not give Zoe a pass, they considered that they would get more of their money back through a structured repayment agreement rather than a liquidation. The courts agreed.

jmayo wrote: »

When I say worthless I mean the assets are now valued at perhaps 20% of their origainal book value when loan approved.
See Ringsend site for example.
Of course you may counter with fact that NAMA only paid 40%of original loona book value so not so bad.
Except either way the taxpayer gets it since they have to recapitalise the bank for the losses.
BTW what evidence do you have that the secureing assets are worth anything near amount NAMA valued loans at ?

Yes but in recapitalising the main banks we get a shareholding in return, we could have just recapitalised the banks without NAMA of course but then we would be left with a difficult to value loan book. NAMA's main function is to attempt to seperate and correctly price development loans to remove that uncertainty from the banks balance sheets.

There is no direct evidence on the reliability of the discount due to the lack of FOI over NAMA, however one could look at the fact that the discounts were far in excess of what the audited accounts of the banks had provided for and that NAMA actually did due dilligence on each loan and that the private investors in the SPV would have no interest in overvaluing the loans. Evidence in the opposite direction is merely pessimistic speculation.

jmayo wrote: »

Ah a NAMA believer I see.
Do you believe in fairies at the end of the garden as well as the premises of NAMA as laid out by messers lenihan, bacon, cowen and fahy ? :rolleyes:

Care to make a point?

jmayo wrote: »

The banks are ok whether property goes up or not because we the taxpayers are buying the toxic loans off them and we the taxpayers are continously pumping capital into them.

I'm sure Anglo shareholders would disagree with you.

jmayo wrote: »

It is we the taxpayers who might benefit through NAMA if property went back up, but of course the flip side would be we would have to pay over inflated prices for property.
Erither way we are the ones getting screwed.

Indeed. The banks, developers, regulators and government screwed up big time, the money is gone. The question is what is the best way to manage these losses and maintain our economy.

jmayo wrote: »

Correction : houses are still overpriced or at least the asking prices are.

Of course we can't see the real prices being paid.

Sure you can, PTSB/ESRI house price index.

myrak

Have scrolled through replies to Blue Steel and still can find no answer to the original question...where has the money gone? We are told it is lost but vanished would seem a better word. Money does not melt like snow or dilute like mist.It goes from place to place, person to person, account to account. Somewhere, we know not where, these billions are either lodged or in use. From state coffers to where next? From there to whose account? Before any more is poured into this seeming 'black hole' surely those who decide these things need to outline its destination. Before the Dail rubberstamps another transfer from taxpayer to Anglo et al, surely the Dail needs to ask about its destination. 'Gone' is not an answer.

Sand

The money goes to Anglos bondholders and depositors who are getting the hell out of dodge. Thats where it goes. Its cash being sucked out of the Irish economy and being exported abroad whilst the debts remain on Irish taxpayers shoulders. Its theft on a scale so grand its almost legal.

exaisle

It seems to me that the prudent course would have been to guarantee depositors in Anglo but to let everybody else including bond holders swing.

Capitalism implies a risk/reward mechanism. You take a risk and if youre right, you get a reward, but if you're wrong there has to be a penalty. No-risk investments are not capitalistic.

There was no justification whatsoever in guaranteeing the bond holders. Their investment was clearly a risk and their reward was a higher return than the ordinary investors. The ordinary depositors in the bank on the other hand were probably putting their money where they thought the risk was negligible and it is this section that should be protected, because if they lost their money, the chance of a run on the other banks would be very much magnified.

Citizen_Cutback

As far as I can see the bulk of the €22 Billion going to Anglo is covering the exposure of both the ECB and the Irish Central Bank in addition to €4 Billion for Bondholders.

The Irish Central Bank may have been remiss in it's governance of Irish Banks but the taxpayer has to pick up the tab.

I was under the impression that the Irish Central Bank historically had funds of it's own and it also has 5.5 tonnes of Gold; Why doesn't it take the hit itself? Likewise for the ECB.

Scarab80

Citizen_Cutback wrote: »

As far as I can see the bulk of the €22 Billion going to Anglo is covering the exposure of both the ECB and the Irish Central Bank in addition to €4 Billion for Bondholders.

The Irish Central Bank may have been remiss in it's governance of Irish Banks but the taxpayer has to pick up the tab.

I was under the impression that the Irish Central Bank historically had funds of it's own and it also has 5.5 tonnes of Gold; Why doesn't it take the hit itself? Likewise for the ECB.

The Irish Central Bank is part of the state, it remits profits to the Exchequer on an annual basis. Letting the central bank take the hit is exactly equivalent to the taxpayer picking up the tab.

The CB has about 120m in gold reserves and has overall capital reserves of about 1.5bn - as i said profits it makes on lending to banks is returned to the exchequer.

I believe any funding received from Europe would be routed through the Irish Central Bank, so what you would be advocating is for the Irish state to default on it's liabilities to other European governments. Bye, bye Europe.

Regardless central bank loans to banks are secured on loan assets and are ranked above depositers and bondholders, therefore would be the first to be paid, so your initial statement that the 22bn is covering central bank loans is incorrect. It is covering depositers and bondholders.

Citizen_Cutback

Scarab80 wrote: »

The Irish Central Bank is part of the state, it remits profits to the Exchequer on an annual basis. Letting the central bank take the hit is exactly equivalent to the taxpayer picking up the tab.

Touche!

Scarab80 wrote: »

The CB has about 120m in gold reserves and has overall capital reserves of about 1.5bn - as i said profits it makes on lending to banks is returned to the exchequer.

I believe any funding received from Europe would be routed through the Irish Central Bank, so what you would be advocating is for the Irish state to default on it's liabilities to other European governments. Bye, bye Europe.

The Central Bank makes profits! This is a revelation for me.

What you don't seem to realise is that Central Banks use "Funny Money"; It is created out of thin air by the ECB on an annual basis. I wonder how much did they create this year?

Why don't we just pretend to pay it back, write an IOU or such-like.

Scarab80 wrote: »

Regardless central bank loans to banks are secured on loan assets and are ranked above depositers and bondholders, therefore would be the first to be paid, so your initial statement that the 22bn is covering central bank loans is incorrect. It is covering depositers and bondholders.

What about the Deposit Guarantee Scheme? Doesn't that protect the majority of depositors?

I'd love to see the ECB and the Irish Central Bank fight over the entrails of Anglo Irish Bank. It would never happen. Never!

Scarab80

Citizen_Cutback wrote: »

What you don't seem to realise is that Central Banks use "Funny Money"; It is created out of thin air by the ECB on an annual basis. I wonder how much did they create this year?

When we joined the euro, we gave control of monetary policy (the amount of money in the system) to Europe. Europe aims to keep euro area inflation below but close to 2%, it is pretty close to that now, therefore will not be increasing the money supply substantially.

Citizen_Cutback wrote: »

Why don't we just pretend to pay it back, write an IOU or such-like.

Or maye the man who owes us the money will forget about it? There's a lot of zeros involed!

Citizen_Cutback wrote: »

What about the Deposit Guarantee Scheme? Doesn't that protect the majority of depositors?

The Deposit Guarantee Scheme is backed by the state, together with the ELG Scheme, that is why the state has to put money into the bank - because the state guaranteed the depositers and bondholders liabilites!

Citizen_Cutback wrote: »

I'd love to see the ECB and the Irish Central Bank fight over the entrails of the Anglo Irish Bank. It would never happen, Never!

Didn't I already point out that the central banks are arms of the state? Just because something has got bank at the end of it's name doesn't mean it is a corporate behemoth with giant reserves of ill gotten gains who could soak up 22bn without batting an eyelid.

Citizen_Cutback

Scarab80 wrote: »

When we joined the euro, we gave control of monetary policy (the amount of money in the system) to Europe. Europe aims to keep euro area inflation below but close to 2%, it is pretty close to that now, therefore will not be increasing the money supply substantially.

But the ECB causes inflation by increasing the money supply on an annual basis by approximately 2%; this amounts to over €200 Billion extra cash in circulation every year with the wave of it's Magic Wand.

Scarab80 wrote: »

Didn't I already point out that the central banks are arms of the state? Just because something has got bank at the end of it's name doesn't mean it is a corporate behemoth with giant reserves of ill gotten gains who could soak up 22bn without batting an eyelid.

As I said the ECB has over €200 Billion in it's Magic Purse this year.

Scarab80 wrote: »

The Deposit Guarantee Scheme is backed by the state, together with the ELG Scheme, that is why the state has to put money into the bank - because the state guaranteed the depositers and bondholders liabilites!

I was only talking about the Deposit Guarantee Scheme guaranteeing deposits up to €100,000.

Directly or indirectly we are paying interest on loans of at least €50 Billion to shore up Anglo Irish Bank and it's loan transfers to NAMA which costs us up to €2.5 Billion per annum in interest charges but we are not supposed to realise this. If this process is called a Capital Injection then we can hope that the money is being used productively.

No chance!

Scarab80

Citizen_Cutback wrote: »

But the ECB causes inflation by increasing the money supply on an annual basis by approximately 2%; this amounts to over €200 Billion extra cash in circulation every year with the wave of it's Magic Wand.

As I said the ECB has over €200 Billion in it's Magic Purse this year.

Errr, care to provide a link for any of this.

Inflation is caused by increases in productivity, inward investment and trade surpluses, the ECB attempt to control this by changing the rate at which it lends money. Recent actions by the ECB have increased liquidity in the market ,purchases of bonds by the ECB have been funded by an increase in deposits held, additional money has not been released to the market, therefore it does not currently have an inflationary impact.

Citizen_Cutback wrote: »

I was only talking about the Deposit Guarantee Scheme guaranteeing deposits up to €100,000.

I don't understand your point, i originally stated that central bank debt is secured on assets and will therefore be repaid before depositers and bondholders. Yes the DGS guarantees depositers to €100,000, the state must fund shortfalls. If your point is that the ELG scheme should not have been introduced I refer you to the Honohan report.

Citizen_Cutback wrote: »

Directly or indirectly we are paying interest on loans of at least €50 Billion to shore up Anglo Irish Bank and it's loan transfers to NAMA which costs us up to €2.5 Billion per annum in interest charges but we are not supposed to realise this. If this process is called a Capital Injection then we can hope that the money is being used productively.

No chance!

Directly we are paying interest on 4bn injected into Anglo, that is what has been funded from the exchequer. Our total interest payments on all borrowings last year was 2.5bn so i think your figures need a recheck.

By indirectly i assume you mean that the markets should demand a higher interest rate on our bonds because of all of the irish guaranteed debt out there, and i agree it should, however since the announcement of the bank bailouts in March bond yields have fallen relative to the other PIGS nations.

Sand

Errr, care to provide a link for any of this.

He is probably referencing the ECB target of 2% inflation per year.

Inflation is caused by increases in productivity

No, its not. Its caused by an increase in the money supply. Money supply being determined chiefly by the ECB in our case. Productivity gains increase wealth, inflation decreases wealth. That said, in moderation its a useful economic carrot in that it encourages people to invest as opposed to simply hiding their gold in their mattress.

Citizen_Cutback

Scarab80 wrote: »

Errr, care to provide a link for any of this.

You would expect to find the information you require here at the ECB.
It failed me, so I Googled "Euro Monetary Supply" and found this article at Wikipedia.
The attached graph shows that by 2007 there was €8.5 Trillion in existence; I rounded this up to €10 Trillion for 2010.
360px-Euro_money_supply_Sept_1998_-_Oct_2007.jpg

Scarab80 wrote: »

I don't understand your point, i originally stated that central bank debt is secured on assets and will therefore be repaid before depositers and bondholders. Yes the DGS guarantees depositers to €100,000, the state must fund shortfalls. If your point is that the ELG scheme should not have been introduced I refer you to the Honohan report.

Honohan didn't recommend guaranteeing the Bondholders.

Scarab80 wrote: »

Directly we are paying interest on 4bn injected into Anglo, that is what has been funded from the exchequer. Our total interest payments on all borrowings last year was 2.5bn so i think your figures need a recheck.

By indirectly i assume you mean that the markets should demand a higher interest rate on our bonds because of all of the irish guaranteed debt out there, and i agree it should, however since the announcement of the bank bailouts in March bond yields have fallen relative to the other PIGS nations.

My point is that we have had to capitalise the Banks in order to allow them to service their interest repayments.

In the case of Anglo Irish our capital will never be repaid.

This capital is in effect being used to allow Anglo Irish Bank to pay the interest on it's loans from the ECB and ICB.

We are paying more interest than you realise!

chalkitdown

So, WHO is the money going to? 'The bondholders' doesn't answer the question.

Citizen_Cutback

chalkitdown wrote: »

So, WHO is the money going to? 'The bondholders' doesn't answer the question.

I have given the answer. The ECB (European Central Bank) and ICB (Irish Central Bank).

Chalk is probably your writing instrument of choice since you probably have to erase your ill-judged comments regularly.

Scarab80

Citizen_Cutback wrote: »

You would expect to find the information you require here at the ECB.
It failed me, so I Googled "Euro Monetary Supply" and found this article at Wikipedia.
The attached graph shows that by 2007 there was €8.5 Trillion in existence; I rounded this up to €10 Trillion for 2010.

You said that the ECB prints 200bn in new cash every year, where did you get this figure from or did you just make it up?

If you look at the amount of currency in circulation (M0) in the graph you linked you will see that it is relatively constant. The expansion in M1 - M3 is generated by the provision of credit under the fractional reserve system. Esentially expanding the money supply today by borrowing from the future.

Citizen_Cutback wrote: »

Honohan didn't recommend guaranteeing the Bondholders.

He only said that subordinated bondholders should not have been covered, specifically dated subordinated debt, undated subordinated debt was not included. Dated subordinated debt amounted to 2.4bn in Anglo and INBS, or 11.4bn out of the total funds guaranteed of 440bn.

Citizen_Cutback wrote: »

My point is that we have had to capitalise the Banks in order to allow them to service their interest repayments.

In the case of Anglo Irish our capital will never be repaid.

This capital is in effect being used to allow Anglo Irish Bank to pay the interest on it's loans from the ECB and ICB.

We are paying more interest than you realise!

My point is that the amounts promised to the banks have not been put in in cash. The majority has been given as promissory notes, these are not direct borrowing and therefore do not generate interest liabilities. The banks can use these promissory notes as security on which they can then go to the market and borrow money.

The amount of interest we pay is a matter of record, just look at the exchequer returns.

Scarab80

chalkitdown wrote: »

So, WHO is the money going to? 'The bondholders' doesn't answer the question.

See post 2 in this thread. I don't think it can be explained much simpler than that.

Scarab80

Citizen_Cutback wrote: »

I have given the answer. The ECB (European Central Bank) and ICB (Irish Central Bank).

Chalk is probably your writing instrument of choice since you probably have to erase your ill-judged comments regularly.

Your answer is incorrect.

Pot, kettle.

Boskowski

Correct me of I'm wrong but I was told that these bond holders are to a large degree Irish pension funds and that's why the bonds were guaranteed because we would have had the same size black hole, just elsewhere.

Scarab80

Boskowski wrote: »

Correct me of I'm wrong but I was told that these bond holders are to a large degree Irish pension funds and that's why the bonds were guaranteed because we would have had the same size black hole, just elsewhere.

According to the Hoohan report 1/4 of senior debt was held by irish companies and about 3/4 of the deposits - not including the IL&P loan to Anglo.

You have to remember that at the time of the guarantee the consensus view in the banks, central bank, regulator and the department of finance was that we were not faced with a solvency crisis but a liquidity crisis - ie. banks would not have to be bailed out, they just needed government support to be able to maintain their funding from depositers and bond holders. There was a view in the department of finance that subordinated bondholders - who would not usually be covered - were also holders of irish government debt and that not covering them would impact negatively on government bond rates.

oceanclub

I've taken the already damning graph from the Herald, showing the top 12 losses of 2009:



...and converted it to show the amount per capita:



Belgium comes third to Ireland, but isn't even in the same ballpark, while all other countries are almost statistically insignificant.

P.

bunch of muppets

maninasia

eoinbn wrote: »

This is a very simple way to look at it(but not factually accurate):

People deposit €70bn.
Bank loans out €70bn to developers.
Property market crashes leads to bankrupt developers so only €48bn can be paid back.
Bank rights down the loans so it now has €48bn in assets but €70bn in liabilities- hence the bank is insolvent and needs a cash injection- that is where we come in!

I think it needs elaboration.
No bank loans only their deposit book, they have a 'fractional reserve' meaning they often loan out 10 times their deposit base. They can literally create money out of thin air.

Then if they reach the limit of the amount they can loan out (e.g. 10 X the deposit base) and still want to loan out more they have to borrow money. In Anglo's case and most Irish banks cases they borrowed money from banks and investors overseas.

This is where the government guarantee comes in. The government guaranteed that these foreign investors and banks would get paid. How did they do that, by sticking it on taxpayers. So, why guarantee to pay back 100% of these foreign investors monies instead of negotiating with them to pay 1/3 or 1/2 etc or just telling them tough and go jump in a lake for dealing with a dodgy bank like Anglo?

You have to ask the government that question.

maninasia

eoinbn wrote: »

You really can't work that out? REALLY?
When people put money in a bank they expect to get it back. If the bank turned around and said all deposits were been written down by 33% then not only would there be a run on that bank but there would be a run on every bank in this country and that could very easily spread aboard.

Well it wouldn't spread if they guaranteed AIB and BOI but not Anglo. Anglo is a non-functional bank, would have been better to go to the wall. Now the question becomes, was the rescue of Anglo worth 22 billion and up of taxpayers money, or should the shareholders and depositors in the bank, who are the ones who invest and supposed to take the risk, have taken the hit.

Scarab80

maninasia wrote: »

I think it needs elaboration.
No bank loans only their deposit book, they have a 'fractional reserve' meaning they often loan out 10 times their deposit base. They can literally create money out of thin air.

Then if they reach the limit of the amount they can loan out (e.g. 10 X the deposit base) and still want to loan out more they have to borrow money. In Anglo's case and most Irish banks cases they borrowed money from banks and investors overseas.

This is where the government guarantee comes in. The government guaranteed that these foreign investors and banks would get paid. How did they do that, by sticking it on taxpayers. So, why guarantee to pay back 100% of these foreign investors monies instead of negotiating with them to pay 1/3 or 1/2 etc or just telling them tough and go jump in a lake for dealing with a dodgy bank like Anglo?

You have to ask the government that question.

Bank's can't loan out 10x their deposit base, they can loan out 10x their equity base, or 90% of their deposit base. They add to the money supply by giving out depositers money as loans repayable over a number of years while at the same time telling the depositers that their money is repayable on demand. Same with bondholders.

The guarantee was issued at a time when the banks were considered to be solvent and would be able to repay their debts once provided with liquidity, clearly they were wrong by a large magnitude.

Scarab80

maninasia wrote: »

Well it wouldn't spread if they guaranteed AIB and BOI but not Anglo. Anglo is a non-functional bank, would have been better to go to the wall. Now the question becomes, was the rescue of Anglo worth 22 billion and up of taxpayers money, or should the shareholders and depositors in the bank, who are the ones who invest and supposed to take the risk, have taken the hit.

The shareholders in Anglo have taken a 100% hit on their investment.

maninasia

So if the shareholders have all lost their money why don't the bondholders lose the money...dumb.
Are you sure they can only loan out 90% of deposit base, I was under the impression banks can loan multiples of their deposit base.

Scarab80

maninasia wrote: »

So if the shareholders have all lost their money why don't the bondholders lose the money...dumb.
Are you sure they can only loan out 90% of deposit base, I was under the impression banks can loan multiples of their deposit base.

Because shareholders and bondholders are not the same. Shareholders own the company, bondholders lend to the company.

Bondholders don't lose money as they are guaranteed by the state. Most of their funding is on a relatively short term roll over basis, therefore if they were not guaranteed they would not roll over their lending.

From a payment point of view bondholders, other than covered bondholders and subordinated bondholders (a minority) are ranked the same as depositers. When you leave money in your bank account you are esentially a bondholder in that you are lending that money to the bank, the bank won't hold your money in a vault for you.

Banks can lend out 90% of their deposit and bondholder debt. Just check out the balance sheet of any of the published banks, you will see something like....

Loans to Customers 100
Deposits/Bonds 90
Equity 10

The problem arises either when the demand depositers pull their money out of the bank (run on the bank) or when the value of the loans to customers falls below 90. At the time of the guarantee the government thought it was just the former, which does not represent a problem from a solvency point of view, just a liquidity point of view.

maninasia

To be honest I don't think they have a clue what they were doing. But can they not stop the blanket guarantee from being rolled over for companies like Anglo?

Scarab80

maninasia wrote: »

To be honest I don't think they have a clue what they were doing. But can they not stop the blanket guarantee from being rolled over for companies like Anglo?

Sure they can, but by an amazing coincidence all of their bonds fall due for repayment the day before the guarantee expires.

Liam Byrne

Scarab80 wrote: »

Sure they can, but by an amazing coincidence all of their bonds fall due for repayment the day before the guarantee expires.

Please tell me you're not serious ?

Scarab80

Liam Byrne wrote: »

Please tell me you're not serious ?

€74bn of debt needs to be rolled over by the banks by September.

If you were lending money to a bank with a guarantee scheme in place until 30 September when would you be demanding repayment?

The guarantee scheme will have to be extended until all recapitalisation schemes have been completed (by this I mean the sale of bank assets, rights issue for AIB etc..) and the banks are seen as a safe investment.

maninasia

The banks...which banks? Are all banks the same?
In addition, guarantee until they are a 'safe' investment. So the government covers all the bad loans though the taxpayers....

Scarab80

maninasia wrote: »

The banks...which banks? Are all banks the same?
In addition, guarantee until they are a 'safe' investment. So the government covers all the bad loans though the taxpayers....

http://www.karlwhelan.com/IrishEconomy/BankBonds.doc

In BOI, AIB, IL&P and EBS there is enough shareholders equity to absorb the banks losses. The government will have to/has already covered the losses in INBS and Anglo.

maninasia

There's enough shareholders equity after the government took massive stakes in all the banks, what's the chance of seeing a return on BOI/AIB. I know the Anglo part is written off.

Citizen_Cutback

Scarab80 wrote: »

You said that the ECB prints 200bn in new cash every year, where did you get this figure from or did you just make it up?

You have already stated that Euro inflation target is 2%; that means a 2% increase in Euros in existence every year. I did not think that you would take me up literally; The amount of Euros in existence is not the same as the Euros in circulation as notes and coinage.

Scarab80 wrote: »

If you look at the amount of currency in circulation (M0) in the graph you linked you will see that it is relatively constant. The expansion in M1 - M3 is generated by the provision of credit under the fractional reserve system. Esentially expanding the money supply today by borrowing from the future.

I estimate that there is €10 trillion Euros in existence. Are you saying that inflation only applies to M0 money? You will see from the graph that there is a steady increase in the supply of M1, M2 and M3 money.

Please feel free to provide figures to support your arguments and with references please.

Fractional reserve banking has got us into the problem we are in at the moment with the Irish Banks. Who says it is not going to cause the same problems with the Euro and Dollar?

Scarab80 wrote: »

He only said that subordinated bondholders should not have been covered, specifically dated subordinated debt, undated subordinated debt was not included. Dated subordinated debt amounted to 2.4bn in Anglo and INBS, or 11.4bn out of the total funds guaranteed of 440bn.

€2.4 bn is better in our pocket.

Scarab80 wrote: »

My point is that the amounts promised to the banks have not been put in in cash. The majority has been given as promissory notes, these are not direct borrowing and therefore do not generate interest liabilities. The banks can use these promissory notes as security on which they can then go to the market and borrow money.

If they are only promissory notes why are we accepting that the money promised is lost?

Esentially expanding the money supply today by borrowing from the future

I am afraid this is in effect what we are doing. If we are borrowing from the future do we pay the interest now or in the future?

Scarab80 wrote: »

The amount of interest we pay is a matter of record, just look at the exchequer returns.

Sorry, I am too cynical at this stage to accept this explanation.

oceanclub

Roll on Friday:

http://www.irishtimes.com/newspaper/frontpage/2010/0705/1224274035948.html

TAXPAYERS ARE facing the possibility of losing several hundred million euro through the State’s toxic property loans agency, the National Asset Management Agency (Nama).

[...]

Nama will release its first business plan later this week.

[...]

Sources said yesterday that the agency was “shocked” at the scale of repayment problems it had encountered with most of the loans.

Shocked, I tell you, shocked: