Where did all the money go.

MungBean

A few people have asked me this question in relation to the crisis. And I'd like to get a better understanding of it myself. I know its a rather simplistic question but humour me.

I understand the housing bubble was created by banks lending money they borrowed from these bondholders. So Lets start there.

• Bondholders lend billions to the banks.

• Banks lend to anyone and everyone.

• Developers and investors borrow heavily to build and invest.

• People borrow heavily to buy houses .

• House sales slow as too many have been built.

• Developers cannot sell the houses to repay the debt.

• Banks are now overstretched as the loan/deposit ratio is hugely out of balance.

• Government panics and guarantees banks to allay fears.

• Becomes apparent the banks have borrowed too much and will default.

• Government covers all that with state money to save banks.

We have money coming in though the bond holders and money going back out through the banks to the bondholders. The money that came in went to developers and investors in property for the most part. The money that went back out came directly from the state.

When people say where did the money go, they mean people borrowed lots of money and the state had to pay that back. Same amount came in as went out yet we are up to our holes in debt. Where did the borrowed money go ? I'm looking at money as energy here, it can move and it can change but it doesnt disappear. So where is the borrowed money ? Did it all get filtered out from workers wages by multinationals selling the latest bit of technology/ fashion or popular food? Is it sitting all around is in the form of bricks and mortar ? No matter what we have to show for it the money had to go somewhere as we clearly dont have it.

sarumite

MungBean wrote: »

When people say where did the money go, they mean people borrowed lots of money and the state had to pay that back. Same amount came in as went out yet we are up to our holes in debt. Where did the borrowed money go ? I'm looking at money as energy here, it can move and it can change but it doesnt disappear. So where is the borrowed money ? Did it all get filtered out from workers wages by multinationals selling the latest bit of technology/ fashion or popular food? Is it sitting all around is in the form of bricks and mortar ? No matter what we have to show for it the money had to go somewhere as we clearly dont have it.

Some people made a killing during the boom....they still have that money. I don't think the money = energy works personally. Money, unlike energy, can be created from nothing and equally destroyed from something. Much of the money never really existed...it was based on the promise of future money existing. It assumed money would be created and that people would have some of that money available to pay debt at a later period.

ei.sdraob

Where did all the money go.

explained in video below

https://www.youtube.com/watch?v=RAKsMnAM8vk

[MOD]No, it isn't. And this isn't AH.[/MOD]

Scofflaw

The problem is that the money hasn't disappeared - what has disappeared instead is the apparent value which matched it, which was the huge over-valuation of Irish property.

The money - that is, the credit, or debt obligations - was created by the banks through lending in order to allow people to purchase property at ever-increasing prices. The Irish residential property market was worth an estimated €540bn in early 2007. By early 2010, it was worth an estimated €395bn, having lost €145bn in value.

The extent to which the value of Irish property had been turned into money - that is, debt obligations - then dictates the amount of money which was unmatched by a corresponding value in the property market once it collapsed. That's the amount of money hanging around with nothing to match it.

cordially,
Scofflaw

meglome

ei.sdraob wrote: »

explained in video below

I have to say South Park do have a way of spelling something out. Thinking of the episode on the Mormons too.

RichardAnd

meglome wrote: »

I have to say South Park do have a way of spelling something out. Thinking of the episode on the Mormons too.

Or the one about Scientology.

ei.sdraob

Scofflaw wrote: »

cordially,
Scofflaw

Oh where is your sense of humour today :rolleyes: infraction and all

South Park do have a point albeit you seem to fail to grasp it

Casino banking and the idiotic decisions by politicians to bailout/reward bad decision making by certain banks/insurance companies, decision making that was quite rational (and expected) in light of same governments telling the central banks to keep credit cheap, and then the banks and "average" people availing of this cheap credit and getting themselves in deep poop.

Scofflaw wrote: »

The extent to which the value of Irish property had been turned into money - that is, debt obligations - then dictates the amount of money which was unmatched by a corresponding value in the property market once it collapsed. That's the amount of money hanging around with nothing to match it.

Pitty you havent applied the same reasoning when arguing for NAMA as you have done before

same NAMA which is build on a delusion that the property market will somehow recover to a certain level in 10 years with no concern for supply (which it now controls to large extend) and demand (recession more taxes etc etc)

edit: or the Anglo bondholders for that matter, dont tell me they didnt know that they giving their money into a ponzy bank (which of course failed) based on property, and yet now expect to be paid back + double digit interest

Mister Dread

The wealth which was just tied up credit was spread around the economy between the landholders, construction sector and public sectors. This money has largely spent on foreign goods, vehicles, clothes etc. Then 'invested' in foreign property, residential and nonres, foreign shares and a lot of it is sitting in foreign banks.

Scofflaw

Casino banking and the idiotic decisions by politicians to bailout/reward bad decision making by certain banks/insurance companies, decision making that was quite rational (and expected) in light of same governments telling the central banks to keep credit cheap, and then the banks and "average" people availing of this cheap credit and getting themselves in deep poop.

Virtually none of which is covered in the video.

regards,
Scofflaw

MungBean

Scofflaw wrote: »

The problem is that the money hasn't disappeared - what has disappeared instead is the apparent value which matched it, which was the huge over-valuation of Irish property.

The money - that is, the credit, or debt obligations - was created by the banks through lending in order to allow people to purchase property at ever-increasing prices. The Irish residential property market was worth an estimated €540bn in early 2007. By early 2010, it was worth an estimated €395bn, having lost €145bn in value.

The extent to which the value of Irish property had been turned into money - that is, debt obligations - then dictates the amount of money which was unmatched by a corresponding value in the property market once it collapsed. That's the amount of money hanging around with nothing to match it.

cordially,
Scofflaw

I'm not sure I'm getting it. I understand the drop in property value created the shortfall in repaying the debt. But regardless of property being over valued, this would lead to more profits for block making companies, higher wages and more expensive to build a house all round as well as buy one.

A write down of debt is an acknowledgement that someone else has profited at your expense, say NAMA buying cheap debt off the bank. Is that the bank taking a loss, NAMA selling to break even/small loss all to cover the money that was spent by someone else ?. Somebody got the money, others are left with paying it back. So who got the money ? Has it all been filtered out of our economy my multi nationals and such or in the bank accounts of the investors of the profiting business's while we are left paying it back ?

MungBean

Mister Dread wrote: »

The wealth which was just tied up credit was spread around the economy between the landholders, construction sector and public sectors. This money has largely spent on foreign goods, vehicles, clothes etc. Then 'invested' in foreign property, residential and nonres, foreign shares and a lot of it is sitting in foreign banks.

We may as well have handed out 100 Billion to everyone to spend on foreign goods as what has actually happened then ?

MeisterG

Pretty much - major exporting nations (China, Germany etc.) but not just that. Every single ghost estate in the country represents a loss-in-value without the corresponding reduction in debt.

WalterMitty

MungBean wrote: »

We may as well have handed out 100 Billion to everyone to spend on foreign goods as what has actually happened then ?

yes.
Think about it, GNP per capita was probably something like 20% higher because of the bubble. so thats 20-30billion a year at height of boom being lashed into economy, over even 5 years thats more than a hundred billion in bubble spending. It was like a fiscal stimulus on steroids when it wasnt needed.
The money went into foreign trips(huge numbers people on multiple hols a year, trips to NewYork ,stags in Prague etc), cafes provdiing breakfast rolls, shops selling italian leather suites and designer kitchens that a large number of people !had to have". It went in higher pay for public servants who also spent in economy, it went into foreign property, higher old age pensions way ahead of UK , higher dole and disability benefits,loads and loads of building materials like cement ,wood, marble copper etc etc. Lots of it sitting in the materials in the buildings on ghost estates that have little value now.
We spent that money , it didnt dissapear, it wasnt really our money as it was all really debt, but we now have to pay for all that consumption in 2001-2007 that we werent really entitled to or wealthy enough to afford.

Scofflaw

MungBean wrote: »

I'm not sure I'm getting it. I understand the drop in property value created the shortfall in repaying the debt. But regardless of property being over valued, this would lead to more profits for block making companies, higher wages and more expensive to build a house all round as well as buy one.

All of which it did. So a fair bit of the money poured through the Irish economy, creating all that lovely employment - breakfast roll shops in the middle of Roscommon to serve the Roscommon builders building estates in the middle of Roscommon.

MungBean wrote: »

A write down of debt is an acknowledgement that someone else has profited at your expense, say NAMA buying cheap debt off the bank. Is that the bank taking a loss, NAMA selling to break even/small loss all to cover the money that was spent by someone else ?. Somebody got the money, others are left with paying it back. So who got the money ? Has it all been filtered out of our economy my multi nationals and such or in the bank accounts of the investors of the profiting business's while we are left paying it back ?

NAMA buying debt below par from the banks is the banks taking a loss...and potentially NAMA taking a loss too, if NAMA have misjudged the risk involved. The developers whose loans have gone into NAMA are also probably taking a loss, because they may not ever recover the full value of their loans from the use of the properties they acquired with them.

At the moment, then, most of the surplus money that you're asking about it sitting in the hands of debtors to the banks and NAMA, whether through hundreds of loans worth millions of euro in the case of developers, or thousands of loans worth hundreds of thousands of euro in the case of mortgage holders and smaller property investors.

That's where the money is - in the huge 'debt overhang' that's owed by anyone who invested in property to anyone who loaned them the money to do so. It's not really gone, but the rate at which it can be extracted by the lenders is very much smaller than the rate at which it needs to be paid back to their lenders, which creates a temporary but huge crisis.

See, the thing Anglo did that was so 'clever' was source its funds on the short-term wholesale markets and lend it on in long-term loans. The rate you get charged on a short term loan is very small, because the likelihood that anything will change much between today and next week is usually small. The rate you can charge on long-term lending, on the other hand, is much higher, because much more can change.

So let's say you come into me looking for a 20-year loan of €10m. I offer you an APR of 3.5%. Over the lifetime of the loan, you'll be paying me back about €14.6m

Now I don't actually have €10m, but I can get it on the money markets. If I were to go and source the money for the full 20 year period, then I could expect an APR rather similar to yours. Say I get an APR of 2.5%, I'll make a bit of a profit - about €62,000 a year - on the loan.

But what if I don't borrow the money for 20 years? What if, instead, I borrow it for a month? Well, I'll be charged much less of an APR pro-rate, because a month is pretty predictable, very much lower risk than 20 years. The APR for the year might only be 0.75%, or less - the shorter term the loans I take, the lower the interest rate. Call it 0.75% - how much profit do I now make on your loan? Answer - about €162,500 a year.

By sourcing my money on the short term markets and lending to people long term, I can make much larger profits. Happy days!

So on one end we have huge piles of cash rolling quickly out the door but being constantly rolled back in again - on the other end we have a huge pile of cash that slowly generates the wherewithal to actually pay off those short term loans bit by bit. So bit by bit I reduce my exposure to the short term markets. But I need to keep rolling the loans over...and if the short term credit market dries up, then I am well and truly buggered.

And that's what happened with the credit crunch. As a result, a huge gap suddenly opened up between Anglo's debts on the short term markets, which fell due very fast, and the income stream they had from long-term lending that would allow them to cover those debts. Suddenly, neither they nor the other banks who had followed them into this new world of banking were interested in new lending, because they already had this huge gap opening up. Whether that was what caused the property bubble to burst is debatable, but the bursting of the bubble meant that in addition to this rather horrible credit gap, the whole income stream from long-term lending itself was in danger, because suddenly the developers who they were lending to weren't able to sell the properties they'd borrowed to build, and so their repayments were in doubt, while the value of the assets they in turn had pledged as security was plummeting.

So while technically the Irish banks had the assets to match their borrowing, their assets were, first of all, very much less liquid than their debts - and second, probably weren't worth their face value in any case. Double whammy - liquidity and solvency.

In theory, then, the money is still in the system, or could be, if everything slows down to the speed at which money can be extracted from the huge pool of not very liquid debt owed by mortgage holders, developers, and property investors - the rate at which you can get blood out of a stone, if you like.

cordially,
Scofflaw

MungBean

Scofflaw wrote: »

In theory, then, the money is still in the system, or could be, if everything slows down to the speed at which money can be extracted from the huge pool of not very liquid debt owed by mortgage holders, developers, and property investors - the rate at which you can get blood out of a stone, if you like.

Right. Fair bit to take in from that but I think I'm starting to get it.

Problem arose with short term borrowing and long term loans, this put the banks in a position of not being able to pay maturing bonds as the repayment from the property market begin to slow as sales dropped and the market stalled.

Although the actual money borrowed by the banks and lent to developers has gone through the system as money does and has been spent on crap, and food and other things related to living above your means the money in relation to the banks/developers is still there in the form of debts.

Whats been spent is irrelevant with the actual debt being owed back by people/business's in the country (fair whack of it residing in NAMA) who's assets dont currently cover the debt being the "money". The money is coming back around but its being paid very very slowly, and although it has been spent and the bonds covered it is still a debt payable to the state so the money hasnt just been written off.

So when people say "where did all the money go?" The answer is it has been filtered through the system, majority of it heading elsewhere, en route it paid for the growth of the country, jobs, housing market, increase in standard of living and we are still waiting for it to come back in the form of payment to debts owed to NAMA (for the most part).

Or am I still misunderstanding ?

bbsrs

Scofflaw wrote: »

All of which it did. So a fair bit of the money poured through the Irish economy, creating all that lovely employment - breakfast roll shops in the middle of Roscommon to serve the Roscommon builders building estates in the middle of Roscommon.



NAMA buying debt below par from the banks is the banks taking a loss...and potentially NAMA taking a loss too, if NAMA have misjudged the risk involved. The developers whose loans have gone into NAMA are also probably taking a loss, because they may not ever recover the full value of their loans from the use of the properties they acquired with them.

At the moment, then, most of the surplus money that you're asking about it sitting in the hands of debtors to the banks and NAMA, whether through hundreds of loans worth millions of euro in the case of developers, or thousands of loans worth hundreds of thousands of euro in the case of mortgage holders and smaller property investors.

That's where the money is - in the huge 'debt overhang' that's owed by anyone who invested in property to anyone who loaned them the money to do so. It's not really gone, but the rate at which it can be extracted by the lenders is very much smaller than the rate at which it needs to be paid back to their lenders, which creates a temporary but huge crisis.

See, the thing Anglo did that was so 'clever' was source its funds on the short-term wholesale markets and lend it on in long-term loans. The rate you get charged on a short term loan is very small, because the likelihood that anything will change much between today and next week is usually small. The rate you can charge on long-term lending, on the other hand, is much higher, because much more can change.

So let's say you come into me looking for a 20-year loan of €10m. I offer you an APR of 3.5%. Over the lifetime of the loan, you'll be paying me back about €14.6m

Now I don't actually have €10m, but I can get it on the money markets. If I were to go and source the money for the full 20 year period, then I could expect an APR rather similar to yours. Say I get an APR of 2.5%, I'll make a bit of a profit - about €62,000 a year - on the loan.

But what if I don't borrow the money for 20 years? What if, instead, I borrow it for a month? Well, I'll be charged much less of an APR pro-rate, because a month is pretty predictable, very much lower risk than 20 years. The APR for the year might only be 0.75%, or less - the shorter term the loans I take, the lower the interest rate. Call it 0.75% - how much profit do I now make on your loan? Answer - about €162,500 a year.

By sourcing my money on the short term markets and lending to people long term, I can make much larger profits. Happy days!

So on one end we have huge piles of cash rolling quickly out the door but being constantly rolled back in again - on the other end we have a huge pile of cash that slowly generates the wherewithal to actually pay off those short term loans bit by bit. So bit by bit I reduce my exposure to the short term markets. But I need to keep rolling the loans over...and if the short term credit market dries up, then I am well and truly buggered.

And that's what happened with the credit crunch. As a result, a huge gap suddenly opened up between Anglo's debts on the short term markets, which fell due very fast, and the income stream they had from long-term lending that would allow them to cover those debts. Suddenly, neither they nor the other banks who had followed them into this new world of banking were interested in new lending, because they already had this huge gap opening up. Whether that was what caused the property bubble to burst is debatable, but the bursting of the bubble meant that in addition to this rather horrible credit gap, the whole income stream from long-term lending itself was in danger, because suddenly the developers who they were lending to weren't able to sell the properties they'd borrowed to build, and so their repayments were in doubt, while the value of the assets they in turn had pledged as security was plummeting.

So while technically the Irish banks had the assets to match their borrowing, their assets were, first of all, very much less liquid than their debts - and second, probably weren't worth their face value in any case. Double whammy - liquidity and solvency.

In theory, then, the money is still in the system, or could be, if everything slows down to the speed at which money can be extracted from the huge pool of not very liquid debt owed by mortgage holders, developers, and property investors - the rate at which you can get blood out of a stone, if you like.

cordially,
Scofflaw

Similar to a Ponzi scheme

antoobrien

bbsrs wrote: »

Similar to a Ponzi scheme

Not really.

The similarity between what Anglo were doing and a Ponzi is that both require a continuous supply of credit (in a Ponzi it's new investors).

In a Ponzi scheme, you pay profit to investor A from investor B's equity/investment. It's similar to a pyramid scheme in that respect.

Anglo weren't doing this.

If I'm reading Scofflaw's post right they were getting profits on the difference between what they borrowed on the short term markets vs what they lent on the long term markets.

Nothing illegal about that. Was it wise - in hindsight no.

It would appear that the remaining banks are suffering from something like this with low fixed rate (shouldn't be many left) & tracker mortgages - which they'd have to re-finance at higher rates of interest.

bbsrs

antoobrien wrote: »

Not really.

The similarity between what Anglo were doing and a Ponzi is that both require a continuous supply of credit (in a Ponzi it's new investors).

In a Ponzi scheme, you pay profit to investor A from investor B's equity/investment. It's similar to a pyramid scheme in that respect.

Anglo weren't doing this.

If I'm reading Scofflaw's post right they were getting profits on the difference between what they borrowed on the short term markets vs what they lent on the long term markets.

Nothing illegal about that. Was it wise - in hindsight no.

It would appear that the remaining banks are suffering from something like this with low fixed rate (shouldn't be many left) & tracker mortgages - which they'd have to re-finance at higher rates of interest.

Got it .

recedite

Scofflaw's posts address the question of why the debt overhang has arisen, mainly from the lender's perspective.

But the OP's question was about where the money went; Every time a bank created a new mortgage, somebody took responsibility for that debt, but somebody else got paid that money. If we follow the trail of that money, it has been suggested that the price of concrete blocks might have escalated. That is not the case. It has been suggested that tradesmen's wages increased, and that they spent it on breakfast rolls and imported consumer goods. But the money for the breakfast rolls was recycled throughout the economy, so that is accounted for. That leaves the flatscreen TVs and the new cars as the culprits (making the last govt's car scrappage "stimulus package" look even more foolish in hindsight) but this only accounts for a small % of the money. More of it was spent by the govt. on new motorways etc, and some of it is represented in the extra housing stock we now have.
The biggest profit margins obtained by anyone were in the increasing prices of land (I won't use the word values here) Where Developer X sold land to Developer Y and creamed off say, €10 or €20 million, he was able to stash that cash. Nowadays Developer Y has passed the debt to the taxpayer via the company's bank loan. Developer X claims he subsequently lost his €10 or €20 million profit to a third developer, but this is a circular argument. In fact one or other developer retained the money and spent part of it on his own equivalent of the TV & car; a villa in Tuscany and a helicopter. The rest was salted away in offshore bank accounts, and will return when Nama starts selling property at the bottom of the market.
So there we have it; new infastructure, foreign imports and offshore bank accounts. All covered by EU/IMF loans, and to be refunded by the taxpayers of tomorrow.

Scofflaw

recedite wrote: »

Scofflaw's posts address the question of why the debt overhang has arisen, mainly from the lender's perspective.

I'd have to respond that this starts well, but deviates into what is essentially unfounded in the second part.

recedite wrote: »

But the OP's question was about where the money went; Every time a bank created a new mortgage, somebody took responsibility for that debt, but somebody else got paid that money. If we follow the trail of that money, it has been suggested that the price of concrete blocks might have escalated. That is not the case. It has been suggested that tradesmen's wages increased, and that they spent it on breakfast rolls and imported consumer goods. But the money for the breakfast rolls was recycled throughout the economy, so that is accounted for. That leaves the flatscreen TVs and the new cars as the culprits (making the last govt's car scrappage "stimulus package" look even more foolish in hindsight) but this only accounts for a small % of the money. More of it was spent by the govt. on new motorways etc, and some of it is represented in the extra housing stock we now have.

So far, so good.

recedite wrote: »

The biggest profit margins obtained by anyone were in the increasing prices of land (I won't use the word values here) Where Developer X sold land to Developer Y and creamed off say, €10 or €20 million, he was able to stash that cash. Nowadays Developer Y has passed the debt to the taxpayer via the company's bank loan. Developer X claims he subsequently lost his €10 or €20 million profit to a third developer, but this is a circular argument. In fact one or other developer retained the money and spent part of it on his own equivalent of the TV & car; a villa in Tuscany and a helicopter. The rest was salted away in offshore bank accounts, and will return when Nama starts selling property at the bottom of the market.

No, not really, and not really founded on anything more than a narrative of "it's the rich what gets the pleasure, it's the poor what gets the blame". I'm not saying this is untrue, but it's definitely exaggerated, and like the stories told during the Celtic Tiger itself, gives the rich far too much credit for good business sense. Let's be more realistic, and assume they could afford good accountants, but weren't any smarter than the politicians they hobnobbed with.

First, why on earth would a developer buy a helicopter personally, when it's far far more tax-effective to have it in the company's name? If you want to buy a €1m helicopter for yourself, you need to take about €2m out of the company to do so, and give half of it to the taxman. You're now responsible for the upkeep, maintenance, etc, because that's your helicopter. If it wears out, you replace it. If, instead, the helicopter belongs to the company, then the company is responsible for the upkeep, maintenance, replacement, etc - you have exactly the same value in terms of helicopter, but at far less cost.

As for 'salting money away in offshore bank accounts' - yes, I'm sure some of this was done. But if the money is earned in Ireland, it's going to have been seen by the taxman at some point, so when you want to turn it from company profits into personal savings, it gets hit with a tax charge. So it's something that you'd only do a lot of when you're cashing out of the game, because it reduces your stake heavily - and most developers do seem to have still been in the game when the music stopped. To cash out effectively from the property bubble would have involved starting to wind down your involvement in about 2005, when most people believed that the bubble would last forever. So, on the contrary, most developers would have still had a large property development stake in play when the music stopped.

That's why NAMA exists. If the developers had all cashed out, there wouldn't be any NAMA, because the developers would have wound up their loans with the banks as part of cashing out. So we can safely say that a large number of developers - at least the 850 of them in NAMA, holding €71bn in 11,000 loans - were very much still in the game, and got burned. That won't be the full number of developers still having a property position when the bubble burst, though - it's only the ones who were sufficiently badly burned to make their ability to repay their loans doubtful. There are a lot of small ex-developers out there who haven't entered NAMA - the sub-€20m loan book (€12bn of it book value) wasn't transferred into NAMA, and the sub-€5m loans were never considered for it.

What proportion of developers were burned? Well, we can take some very rough figures from the Revenue: in 2008 there were 1,447 people earning over €1 million. By the end of 2010 there were only 796, and of those only 188 earned over €2 million. In terms of personal fortunes, as well, we know that some of the property tycoons have taken large hits - Sean Quinn's fortune dropped from €3.3bn to €1.7bn.

So, while a good number of property developers retain substantial personal wealth, a lot of them didn't, because most of them were still in the game, and their accountants will have quite rightly advised them that a champagne and helicopter lifestyle is far more affordable through the company's chequebook than your own for as long as you think the party is still going.

The "offshore bank accounts" as a repository for a large amount of the missing money, as per your post:

recedite wrote: »

So there we have it; new infastructure, foreign imports and offshore bank accounts. All covered by EU/IMF loans, and to be refunded by the taxpayers of tomorrow.

makes a nice story - the rich are still rich, while we're poorer - but is fundamentally just a narrative. The facts of the matter suggest that the rich in Ireland were no smarter than anybody else, and while they're still richer than most of us, they're proportionately no less poorer than the rest of us. To put it another way, they don't have the missing money.

A useful read: http://www.centralbank.ie/publications/Documents/The%20Rise%20and%20Fall%20of%20Sectoral%20Net%20Wealth%20in%20Ireland.pdf

And from the source above, something that summarises what happened:

The reliance of Irish financial sectors on the rest of the world for funding, particularly in 2007 and 2008, is noteworthy. Essentially, domestic residents were accumulating financial liabilities with the rest of the world, largely for the purposes of investment in domestic non-financial assets (primarily property). These financial liabilities, largely in the form of bank borrowing, have not been impacted to a significant degree by valuation changes, in contrast to the non-financial assets they funded.

In other words, we borrowed money from the rest of the world to buy each other's houses. Ordinary households borrowed in the hundreds of thousands, developers borrowed up to the hundreds of millions - but virtually everyone was still holding when the bubble burst.

And the scale:

In total, we estimate that net wealth has declined by €281 billion since Q3 2008, equivalent to approximately 1.8 times Irish GDP. This contrasts with an estimated loss in wealth of three times GDP during the Japanese recession of the 1990s and one year’s GDP during the Great Depression for the United States (Koo 2008).

cordially,
Scofflaw

[Jackass]

MungBean wrote: »

Where did all the money go?

It never existed in the first place.

recedite

Scofflaw wrote: »

I'd have to respond that this starts well, but...

I was hoping to evade scathing criticism with my sycophantic opening, but alas..

First, why on earth would a developer buy a helicopter personally, when it's far far more tax-effective to have it in the company's name

It makes no difference in the strange "Case of the Disappearing Money" which one of the limited companies the money was channelled through, or whether it was drawn out into a personal account, so long as we see where it went.
Also, I used the term "developer" loosely, to avoid being mired in unnecessary detail. I include anyone from a an ex-farmer who cashed in and no longer farms, to a builder, to a speculator.

and most developers do seem to have still been in the game when the music stopped.

Again, its a circular argument. Somebody, somewhere, was left holding the parcel. That "somebody" may well be a company still having a land bank, and controlled by a developer whose other companies have non-performing loans taken over by Nama.

Essentially, domestic residents were accumulating financial liabilities with the rest of the world, largely for the purposes of investment in domestic non-financial assets (primarily property). These financial liabilities, largely in the form of bank borrowing, have not been impacted to a significant degree by valuation changes, in contrast to the non-financial assets they funded.

While true, the quote above is still only dealing with the reason for the debt overhang. So, lets take an example;

Suppose I take out a bank loan for €1 million and buy land/property. The person I buy from puts the €1 million back in the bank. Property values drop to half of what they were; so I default. The bank is now in trouble, it has an asset worth €500,000, but it owes the other guy €1 million.
Nama takes over the loan. Nama applies a haircut and pays €600,000 (slightly over the odds to allow for upswing in the market) to the bank for the loan. Govt. then recapitalises the bank for the €400,000 shortfall.
At this stage I have nothing, but equally I owe nothing.
Taxpayer has an asset worth €500,000, and a debt of €1 million hence the debt overhang.
But the elephant in the corner is the €1 million credit resting in the other guy's bank account.

antoobrien

recedite wrote: »

But the elephant in the corner is the €1 million credit resting in the other guy's bank account.

It's not resting there, it was used as collateral to leverage the next deal.

There's a shopping center in Galway that's a good example of this. An auctioneer bought the site several years ago for a couple of million (£/€ I'm not sure, it's that long ago). Got PP etc and sold it on for something like €20m, with part of the deal that the auctioneer is the letting agent.

There's supposedly about €15m-€17m in profits there but there are also some existing "investments" that were badly handled and money was lost on them. So there's some money available, but not the notional (up to) €17m that according to your premise should be there.

davoxx

this baffles me .. honestly why can't people follow this?

the actors: A and C
the mark: B
the con: ...
A gives B a loan of 5 pounds, with zero percent interest ..
B buys 'asset' from C. (C now has 5 pounds)
B wants to sell asset, but "poof" it's worth 0 now ...
A wants money back ...

A has -5
B has 0
C has +5
total = 0


where is the money gone? => answer C the guy who sold the asset.
where did A get the money from? nobody knows if A actually had the money or if they made it up when they made they loan.

are C and A the same people? could be ...

but who has the money? answer = C ...

the money did not disappear ...

MungBean

recedite wrote: »

Suppose I take out a bank loan for €1 million and buy land/property. The person I buy from puts the €1 million back in the bank. Property values drop to half of what they were; so I default. The bank is now in trouble, it has an asset worth €500,000, but it owes the other guy €1 million.
Nama takes over the loan. Nama applies a haircut and pays €600,000 (slightly over the odds to allow for upswing in the market) to the bank for the loan. Govt. then recapitalises the bank for the €400,000 shortfall.
At this stage I have nothing, but equally I owe nothing.
Taxpayer has an asset worth €500,000, and a debt of €1 million hence the debt overhang.
But the elephant in the corner is the €1 million credit resting in the other guy's bank account.

You would owe the full 1 million to NAMA though. NAMA didnt buy the assets they bought the loans. So that 1 million in the other guys account is trackable straight to the 1 million debt that you have.

The bank took a loss on the loan and swapped equity for capital. So the bank as taken the loss in regards to the value of the property. But your loan hasnt disappeared just been transferred. Right ?

recedite

antoobrien wrote: »

It's not resting there, it was used as collateral to leverage the next deal.

Circular argument again... somebody always has the parcel when the music stops, it doesn't disappear.

davoxx wrote: »

A has -5
B has 0
C has +5
total = 0

are C and A the same people? could be ...

but who has the money? answer = C ...

the money did not disappear ...

Exactly, but in this case A is "the banks" and the -5 gets "recapitalised" temporarily courtesy of the IMF, but taxpayers are the ultimate suckers.

MungBean wrote: »

You would owe the full 1 million to NAMA though. NAMA didnt buy the assets they bought the loans. ?

No, Nama now hold one of the biggest property portfolios in Europe.

MungBean

recedite wrote: »

No, Nama now hold one of the biggest property portfolios in Europe.

The debts have not been written off though have they ? I was under the impression NAMA bought the loans and the developers who's names are on those loans now owe NAMA.

Your saying thats wrong ? That developers who's loans have been bought by NAMA owe nothing ?

SBWife

Yes, NAMA bought the loans originally but some of those loans are non-performing and the business plans associated with them unacceptable. In these cases NAMA has carried out "enforcement actions" which have resulted in the underlying property assets being transferred to NAMA. The developers in these cases still owe the original value of the loan less any amounts NAMA recovers from selling the enforced upon properties.

antoobrien

recedite wrote: »

Circular argument again... somebody always has the parcel when the music stops, it doesn't disappear.

Exactly, but in this case A is "the banks" and the -5 gets "recapitalised" temporarily courtesy of the IMF, but taxpayers are the ultimate suckers.


No, Nama now hold one of the biggest property portfolios in Europe.

davoxx wrote: »

this baffles me .. honestly why can't people follow this?

the actors: A and C
the mark: B
the con: ...
A gives B a loan of 5 pounds, with zero percent interest ..
B buys 'asset' from C. (C now has 5 pounds)
B wants to sell asset, but "poof" it's worth 0 now ...
A wants money back ...

A has -5
B has 0
C has +5
total = 0


where is the money gone? => answer C the guy who sold the asset.
where did A get the money from? nobody knows if A actually had the money or if they made it up when they made they loan.

are C and A the same people? could be ...

but who has the money? answer = C ...

the money did not disappear ...

There's something the two of you are missing - the money never physically existed. It was a set of numbers on a computer system somewhere.

A negotiable instrument (cheque/draft) has no value until its value is negotiated (effectively something written on it). This should be backed up by something but remember the cheque guarantee card only backed you up from €100 or something. You could write a cheque for €1000 - and it was accepted on the premise that had money was in the account the cheque was drawn against.

What happens when the cheque bounces? The "money" disappears as if it had never existed.

The banks never really had the money to loan out, they were borrowing it from other banks. The property developers backed up their borrowing with assets that they said had a value (which it now longer has, if it ever had). The money is question was mostly going between property developers, who rolled it into the next project. There will be a few cases where this did not happen, but the people involved didn't see the end coming so the majority of the money will have been rolled into other projects or paid out in things like wages, materials etc.

Now the developed properties are worth less than the cost of buying and developing the land. The money has effectively disappeared because of the market pressures involved - or rather the acceptance of market value as collateral for the loan. How is this so hard to comprehend?

Example, a site was sold near Galway city in 2007 for €500,000. It's worth far less than that now. Is the site worth 500k now?

No.

If the owner goes bankrupt and can't pay up and the site sells for say €200k can the bank demand the other €300k from the original owner?

Hell no, we're not responsible for the finance of things after we've sold them.

So 300k will effectively disappear unless the bank can make €300k in profit on reselling the site.

Scofflaw

recedite wrote: »

I was hoping to evade scathing criticism with my sycophantic opening, but alas..

And I totally respect that sycophancy, but alas...

recedite wrote: »

It makes no difference in the strange "Case of the Disappearing Money" which one of the limited companies the money was channelled through, or whether it was drawn out into a personal account, so long as we see where it went.
Also, I used the term "developer" loosely, to avoid being mired in unnecessary detail. I include anyone from a an ex-farmer who cashed in and no longer farms, to a builder, to a speculator.

Accepted.

recedite wrote: »

Again, its a circular argument. Somebody, somewhere, was left holding the parcel. That "somebody" may well be a company still having a land bank, and controlled by a developer whose other companies have non-performing loans taken over by Nama.

Yes, but they weren't left holding a parcel of money. They were left holding a parcel of land now worth a fraction of its former price, and owing the bank for the money they borrowed to finance the purchase of that land.

In terms of "where's the money gone?" the answer is not "the developer". It's the developer's "money" (wealth) that has disappeared.

So it's not the case that the money was going round the system there. What was being transferred in one direction was assets, and in the other direction debt, because, as antoobrien says, developers leveraged the proceeds of sales to make bigger purchases.

Farmer A sells a parcel of land for €1m to developer B, who borrows €900k to do it. Developer B sells on the parcel to developer C for €5m, who borrows €4.5m to do it. Then comes the crash, and the land drops in value to €200k. If we just look at that chain we'd say that Farmer A and Developer B did well. But - and I don't think this is unrealistic - Farmer A used his €1m to build a really fancy house on his land plus another house for his daughter, which together are now worth only €400k, while Developer B used his €4m profit to get into a €20m development which is now worth next to nothing (call it €1m), borrowing a further €6m to do so.

Which means that it works out like this:

|Cash|Assets|Debt|Lost Equity
Farmer A|0m|€0.4m|€0m|€0.6m
Developer B|0m|€0.5m|€6m|€4m
Developer C|0m|€0.2m|€4.5m|€0.5m


Bizarre, right? Everyone has lost out. That's because what happened was that the assets in question were hugely mispriced, and the bank created money in the form of debt to match the valuation of those assets. But it was never liquid money, and when the assets were revalued in the crash, all that was left was the debt.

I'd certainly accept that the Farmer did best there, and I think there has been a huge transfer of wealth to those who were in possession of desirable land before the boom - but because they were usually at the very start of the chain, they didn't make that much - and if they were foolish, they borrowed against the supposed value of their assets rather than selling them outright.

cordially,
Scofflaw

recedite

Scofflaw wrote: »

Yes, but they weren't left holding a parcel of money. They were left holding a parcel of land

One person was left holding the land, another was left holding the money.

Farmer A sells a parcel of land for €1m to developer B, who borrows €900k to do it. Developer B sells on the parcel to developer C for €5m, who borrows €4.5m to do it. Then comes the crash, and the land drops in value to €200k. If we just look at that chain we'd say that Farmer A and Developer B did well. But - and I don't think this is unrealistic - Farmer A used his €1m to build a really fancy house on his land plus another house for his daughter, which together are now worth only €400k,

Great post Scofflaw, but you confuse the cost of building the 2 luxury houses with the cost of purchasing 2 such houses. So if the farmer spent the €1 million on construction, his houses were valued just before the crash at, say, €2 million.
After the crash the houses are only worth half, so €1 million. There's your missing money right there. He hasn't lost anything. He swopped land (now worth very little) for 2 luxury houses worth €1 million at today's prices.

while Developer B used his €4m profit to get into a €20m development which is now worth next to nothing (call it €1m), borrowing a further €6m to do so.

It gets more complicated now, as you have introduced a second layer of intrigue, but if we keep on following the money trail, we are likely to find that the previous owner of the €20 million development got away with some cash, more of it is tied up in the value of the "ghost estate" that it has become, the govt. took some in stamp duty and capital gains tax (spending it on motorways and a bloated public service) and various middlemen took out their fees and sweeteners along the way.
The point is; the money did not just disappear.

Godge

Scofflaw wrote: »

Yes, but they weren't left holding a parcel of money. They were left holding a parcel of land now worth a fraction of its former price, and owing the bank for the money they borrowed to finance the purchase of that land.

In terms of "where's the money gone?" the answer is not "the developer". It's the developer's "money" (wealth) that has disappeared.

So it's not the case that the money was going round the system there. What was being transferred in one direction was assets, and in the other direction debt, because, as antoobrien says, developers leveraged the proceeds of sales to make bigger purchases.

Farmer A sells a parcel of land for €1m to developer B, who borrows €900k to do it. Developer B sells on the parcel to developer C for €5m, who borrows €4.5m to do it. Then comes the crash, and the land drops in value to €200k. If we just look at that chain we'd say that Farmer A and Developer B did well. But - and I don't think this is unrealistic - Farmer A used his €1m to build a really fancy house on his land plus another house for his daughter, which together are now worth only €400k, while Developer B used his €4m profit to get into a €20m development which is now worth next to nothing (call it €1m), borrowing a further €6m to do so.

Which means that it works out like this:

|Cash|Assets|Debt|Lost Equity
Farmer A|0m|€0.4m|€0m|€0.6m
Developer B|0m|€0.5m|€6m|€4m
Developer C|0m|€0.2m|€4.5m|€0.5m


Bizarre, right? Everyone has lost out. That's because what happened was that the assets in question were hugely mispriced, and the bank created money in the form of debt to match the valuation of those assets. But it was never liquid money, and when the assets were revalued in the crash, all that was left was the debt.

I'd certainly accept that the Farmer did best there, and I think there has been a huge transfer of wealth to those who were in possession of desirable land before the boom - but because they were usually at the very start of the chain, they didn't make that much - and if they were foolish, they borrowed against the supposed value of their assets rather than selling them outright.

cordially,
Scofflaw

A good example and one that was no doubt replicated in real life.

The one I heard, from a reliable source (and I posted about this a few months back) was very similar except that the farmer bought shares in Anglo and AIB with the money, so everyone got wiped out.

recedite

antoobrien wrote: »

There's something the two of you are missing - the money never physically existed. It was a set of numbers on a computer system somewhere.

Yes, I know that "money" is simply a notional system of keeping track of credit. And equally I know that where there is debt, there is a matching credit.

recedite

Godge wrote: »

The one I heard, from a reliable source (and I posted about this a few months back) was very similar except that the farmer bought shares in Anglo and AIB with the money, so everyone got wiped out.

The person who sold the overpriced bank shares has the money.

ianuss

recedite wrote: »

The person who sold the overpriced bank shares has the money.

Not unless they decided to stockpile cash, which is unlikely. Most people would reinvest in whatever.......stocks, land, commodoties etc etc.

davoxx

antoobrien wrote: »

There's something the two of you are missing - the money never physically existed. It was a set of numbers on a computer system somewhere.

exactly ... it never existed ... do you know what else i don't miss? my ferrai that never existed ...

if it never existed, how can they expect it paid back?

but it think what you meant to say was that it was created ... and now that money is somewhere else ...

recedite

ianuss wrote: »

Not unless they decided to stockpile cash, which is unlikely. Most people would reinvest in whatever.......stocks, land, commodoties etc etc.

If the "stocks, land, commodoties etc" maintained their value, that's where the money is.
If the "stocks, land, commodoties etc" lost their value, then somebody in the stockmarket profited from the "play" and that's where the money is.

davoxx

[QUOTE=Scofflaw;75363275
Bizarre, right? Everyone has lost out. That's because what happened was that the assets in question were hugely mispriced, and the bank created money in the form of debt to match the valuation of those assets. But it was never liquid money, and when the assets were revalued in the crash, all that was left was the debt.[/QUOTE]
how can everyone loss?

even if they created the money in the first place, they still would not loss out, they would just return to zero ...

the problem with your example is that it is not a closed system ...

ianuss

recedite wrote: »

If the "stocks, land, commodoties etc" maintained their value, that's where the money is.
If the "stocks, land, commodoties etc" lost their value, then somebody in the stockmarket profited from the "play" and that's where the money is.

But my point is that the profits are continually reinvested, as in non-stop. Cashing out of positions would generally only be a short term option. There is little point in having large sums of cash just sitting around. By not reinvesting you are leaving yourself open to opportunity costs.

recedite

SBWife wrote: »

NAMA has carried out "enforcement actions" which have resulted in the underlying property assets being transferred to NAMA. The developers in these cases still owe the original value of the loan less any amounts NAMA recovers from selling the enforced upon properties.

Nobody expects that debt to be repaid, and it will be discharged automatically a certain number of years after bankruptcy. In the unlikely event that they repay it, I think there was some talk in the early days of Nama about some mechanism whereby the banks would be looked at again in 10 or 20 years and asked to refund some of the recapitalisation money. This would make the taxpayer slightly less of a sucker if it happened.

recedite

ianuss wrote: »

But my point is that the profits are continually reinvested,

You keep telling me what the profits were reinvested in, and I'll keep telling you where the money is, but sadly it grows tiresome now....

ianuss

recedite wrote: »

You keep telling me what the profits were reinvested in, and I'll keep telling you where the money is, but sadly it grows tiresome now....

Indeed. Where exactly do you think this money is, under a mattress somewhere?

SBWife

recedite wrote: »

Nobody expects that debt to be repaid, and it will be discharged automatically a certain number of years after bankruptcy. In the unlikely event that they repay it, I think there was some talk in the early days of Nama about some mechanism whereby the banks would be looked at again in 10 or 20 years and asked to refund some of the recapitalisation money. This would make the taxpayer slightly less of a sucker if it happened.

I'd didn't say the expectation was that it would be repaid. I said it continued to be owed.

There are also two levels of bankruptcy to consider, that of the development company and those of the developer who in many cases had personal guarantees on the loans. In time the individual cases will go though the courts and/or individual settlements will be negotiated.

But for the moment the developers continue to owe the monies as set out in the original loan documentation.

The recapitalisation was structured as a preference share issue by the banks and purchased by the government. These shares could theoretically be called by the banks in the future and the government could receive a return on the recapitalisation in this way.

SBWife

ianuss wrote: »

Indeed. Where exactly do you think this money is, under a mattress somewhere?

How about the money was all invested in Anglo shares which were being sold by hedge funds run by Goldman Sachs. So all the money is in the pockets of the bad guys at Goldman.*



*Not necessarily my belief but it seems to satisfy the rubes elsewhere so why not here?

nesf

There's a second component to what Scofflaw was talking about, the velocity of money in the economy.

As an example, imagine A has €100, B and C have nothing. So our money supply at the start is €100.

A buys some stuff from B for €100, then B buys some stuff from C for €100.

The total amount of money that has been spent is €300 even though we only had €100 to begin width.


Now imagine there is a recession. So A buys €50 off B and B buys €25 off C and everyone saves the excess. The total amount of money that has been spent is €75 even though €100 is in the system.


Now, under normal conditions this isn't a problem because the banks will lend out the saved money to (say) C and C goes off and spends it increasing the amount of money being transacted in the system. But in a recession like this one the banks won't do that so the savings are held as capital against losses.



Now, in both scenarios we have an identical money supply €100. But the amount of money for transactions is €225 less in the recession, so it appears like there is less money in the system.


Now, on top of this we have a smaller money supply now than we did in the boom years, and very few people are spending a lot, so we have a much more magnified effect going on that makes it seem like a load of money has just disappeared.



That make sense?

SBWife

You're describing the reverse of the multiplier effect (which isn't called the divisor effect?) which is in essence why the credit crunch has had such an impact on the "real" economy worldwide.

davoxx

nesf wrote: »

That make sense?

i think i understand what you are saying.

are you saying that the money has not vanished and that A is hoarding it?

nesf

SBWife wrote: »

You're describing the reverse of the multiplier effect (which isn't called the divisor effect?) which is in essence why the credit crunch has had such an impact on the "real" economy worldwide.

I think it's simpler to just use the velocity of money as a term here but they're one and the same really, just different ways of looking at the same thing.

nesf

davoxx wrote: »

i think i understand what you are saying.

are you saying that the money has not vanished and that A is hoarding it?

It's more that everyone in the system is saving more money now out of their disposable income than they did back in 06 say. The result is that far less money is transacted in the system making it appear that the amount of money in the system is smaller than in 06 even though (this is not the case here) the actual money supply could stay the same.

Look up the Paradox of Thrift if you want more info on what I'm describing.

davoxx

nesf wrote: »

It's more that everyone in the system is saving more money now out of their disposable income than they did back in 06 say. The result is that far less money is transacted in the system making it appear that the amount of money in the system is smaller than in 06 even though (this is not the case here) the actual money supply could stay the same.

Look up the Paradox of Thrift if you want more info on what I'm describing.

okay, so it is a different thing you are talking about so.

this thread is about where did the vast sums of money (that we now owe to the banks) go, right?

antoobrien

davoxx wrote: »

this thread is about where did the vast sums of money (that we now owe to the banks) go, right?

it was used to leverage funds for new projects, re-invested and effectively lost.