Would it not be better to let the banks fail then a costly program propping them up?

macannrb

If the impending bailout is to be so bad, and if the state would be fine if it were not for the banks, then why not let the 50bn be a sunk cost and let the banks go down instead of putting good money after bad? (two big ifs)

If the banks were to be left to their own devices, and if the reports about their bad finance they would fail, and an orderly process of winding down would happen. It would not be as severe as lehmans, simply because AIB/BOI/PTSB/EBS/INBS are not as big and international.

Bondholders and shareholders would suffer, but given the high cost of insurance against default, and the losses already suffered, I think most people have all but written off their investment.

From the average person's point of view, people could just open bank accounts in other banks, mortgage payers would still pay their mortgage to whoever buys the mortgage assets.

The pain felt in the short term would seem to me far less then the state having to underwrite further injections into what seems like a black hole.

jimmycrackcorm

2 years 2 late...

Sponge Bob

That is what should have been done in September 2008 when Anglo collapsed but then Lenny could never show his face at a rugby bash in Dublin again.

FoxT

At this stage the problem is that if any bank defaults, it will be seen by the market as a sovereign default.
There is some debate over what a sovereign would cost.
Also what impact would a sovereign default by Ireland have on the euro & our membership of the EU,
and on our relationships with our EU partners? What impact would it have on FDI?

I don't know myself.

Leaving these awkward questions to one side, lets see what will happen if we try to nuke AIB.

Summary - If you nuke AIB you will need to have about 100bn in cash handy. Otherwise the country will halt.
NO cash, no ATMS, no employment, no nothing. Straightening it all out would take months. Getting back to a point where
the economy is say 80% of what it is today might take 2 years (wild, wild guess)

Here is why:

I looked at AIBs balance sheet in its 2009 annual report:

ASSETS
Cash 4bn
NAMA 20bn (wording suggests these assets will be sold to NAMA for 20bn)
Derivatives 6bn
loans to banks 9bn
loans to customers 103bn
assets for sale 25bn
other 7bn

TOTAL 174bn

Now, lets liquidate the bank & see what we get.
We must do it quickly so the depositors can be paid. So we will be taking a haircut. Here is a guesstimate at what might happen.

ASSETS
Cash 4bn -> OK
NAMA 10bn -> Assume NAMA dont have 20bn in cash lying around
Derivatives 6bn - > zero.
loans to banks 9bn -> 3bn - The other banks are shagged as well
loans to customers 103bn -> sell loan book for maybe 60bn
assets for sale 25bn - Ha! -> maybe 5bn in a firesale
other 7bn - zero

So a firesale of the assets will net 82bn maybe.



We now have 82bn to pay off the liabilities, which are as follows:

Customer deposits 83bn.
deposits by banks 33 bn

debt securities 30bn -> these guys will get nothing. But how much of these are held by the government/taxpayer? I dont know.

Other - 16bn -> most of these guys wont get paid either I expect.


So on the face of it, it looks like if AIB was liquidated in the morning,
there would be enough cash (83bn)to pay off the customer depositors.
However, what about the 30bn that other banks have in deposit?

It will HAVE to be paid up.(see below)


The other thing that would happen is this:
If AIB was liquidated there would be an immediate run on deposits to the tune of 116bn.
Assuming the deposit guarantee MUST be met, the liquidator would have only 14bn on hand to pay them off.
So about 100bn would have to be found while the bank sold off its assets.

Now , we said the assets would make 82bn. But, If you want to sell 82bn worth of ANYTHING, it will take a couple of years.
So somebody somewhere will have to find 100bn to pay off the depositors in the short term.

If you do not pay off the depositors (the bulk of deposits most likely being operating cash held by businesses)
then very, very bad things happen.

- many depositors will cease trading. Economic slump. Massive unemployment. This will be pretty much immediate.
- there will be a run on all the other banks once depositors realise
the Govt G'tee isnt working. Those depositors will get maybe 10c on the euro.
( to prevent this & reassure other banks, the 30bn above would HAVE to be paid, and pronto)
- This will lead to more unemployment & general mayhem.
- Companies who do manage to continue trading will have difficult making purchases,
paying employees, paying other creditors etc.
- ATMs, Visa etc., would stop working.
All of the above would happen very very fast - within say a week.

- Foreign investment would HALT. And it would not return to say 80% of 2009 levels for say 5 years.


This is my understanding of the situation. I am not a finance person & many of
the assumptions above are likely to be inaccurate or plain wrong.

Can anybody fill in the gaps here?

Scarab80

FoxT wrote: »

We now have 82bn to pay off the liabilities, which are as follows:

Customer deposits 83bn.
deposits by banks 33 bn

debt securities 30bn -> these guys will get nothing. But how much of these are held by the government/taxpayer? I dont know.

Other - 16bn -> most of these guys wont get paid either I expect.


So on the face of it, it looks like if AIB was liquidated in the morning,
there would be enough cash (83bn)to pay off the customer depositors.
However, what about the 30bn that other banks have in deposit?

The deposits by banks are almost exclusively ECB and central bank deposits, these are deposits are secured on specific loan assets, so in the event of a liquidation they will get paid first.

Next in line to get paid are depositers and senior bondholders (they rank the same in payouts) so they would get 82bn - 33bn = 49bn split between them, thats about 14bn for bondholders and 35bn for depositers.

FoxT

Thanks scarab, I knew that some of the above was probably wrong. Do you agree with the general thrust of my post? ie that

- Bank deposits Must be guaranteed or everything will break down
and
- If you were to nuke AIB whilst protecting depositors you would need about 100bn in cash at hand?

This has always been my understanding iof why the Govt is propping up the banks - ie it is cheaper to do that, than let them fail.
Is that a realistic assessment?

Count Dooku

It would mean collapse of British economy
UK banks exposed for $230bn on loans in Ireland

THE UK would be facing the biggest losses if Ireland, its banks or mortgage borrowers defaulted on billions of euro in debts, economic statistics show. The UK's total exposure to Ireland comes to $230bn (€186bn), far higher than the approximately $175bn exposure of Germany.

Fat_Fingers

Ah, the good old AIB again destroying Ireland courtesy of Michael Buckley, Tom Mulcahy and Gerry Scanlon. Where are they now.

newman10

Fat_Fingers wrote: »

Ah, the good old AIB again destroying Ireland courtesy of Michael Buckley, Tom Mulcahy and Gerry Scanlon. Where are they now.

Lest we not forget that this is the 3rd major incidence of pure and utter recklesness by AIB.

IMO it has to be broken up and sold off

dan_d

That's assuming one bank would be let fail.....I think we'd be looking at a situation where 2 or 3 banks could be let go to the wall, and well, that's the end of Ireland Inc, really.

Also they are all intertwined, since they all lent money to each other (the incestuousness of the Ireland). I'd imagine if you let one go, you'd badly hit the rest aswell. Banks aren't just all about people's bank accounts and mortgages, there's a whole lot more to them.

It's a bit late at this stage anyway to look at that. 2 years ago, and Anglo, maybe...now...we're sinking in this crap with no easy way out.