The Irish mess (II)

One of the striking features of a really slap-up financial disaster is the immense scale on which those hackneyed old stages of grief (Shock, Denial, Bargaining, Guilt, Anger, Depression, Acceptance and Hope) are worked out.

With an eye to illustrating this progression one more time, my last post on Ireland was just a snapshot of the dubious official story about the state of Irish banks. I had a little feeling that the snapshot would soon be out of date; in the most important respect, the likely Irish loan losses (initially touted as 30% of EUR 70Bn, though the first set of loans were transferred in at 50% haircuts), it was already bordering on stale. When one observes that those loans were ~50% “investment property” and ~28% land, 50% haircuts look pretty darned optimistic, too. Any guesses on appetite for investment property and development land in Ireland, for the foreseeable future? Those loans look like zeroes, on any reasonable timescale.

Based on the latest news, for the Irish government, the stages of Grief seem more likely to be Denial, Bargaining and Oblivion. Two years into the Irish crisis (for the Irish banks, the music stopped, dead, in September 2008) we may be glimpsing the end of the Bargaining phase.

First of all, the second set of transfers into NAMA, at haircuts around 60%, pretty much extinguishes any hope that the average losses will be anything like 30%, even bearing in mind that after the second transfer, only one third of the loans (23Bn of EUR 70Bn) have been transferred.

Also, since NAMA has changed its mind about what to disclose (the first summary report included a breakdown by categories, the second doesn’t), we don’t really know what’s backing the loans in that second tranche; it was supposed to be yet more development land. One hopes they will catch up with a separate disclosure and confirm that.

But the real killer is the scale of new losses coming out of Anglo-Irish Bank. It just keeps getting worse, justifying the gloomiest suspicions. Perhaps the most alarming thing is this glimpse of Anglo-Irish Bank’s balance sheet. Why is the cost of immediately closing Anglo-Irish calculated to be EUR70Bn? That must be based on firesale valuations of its assets. Why would the EU commission suggest such a course of action: is a firesale valuation the best that can be hoped for? Unfortunately, that sounds very possible, looking at the NAMA valuations, and with so many other recent precedents (Lehman, and Iceland’s banks, for instance).

The Irish government opted to press on with its good bank/bad bank split and a slow (hah, 15-year) wind-down, instead.

That won’t be the last time Lenihan has to reassure the markets, and it will get harder each time.

In the mean time, sleuths are discovering new ways to portray just how tiny the pool of Irish business talent is, and by implication, how well-connected with the Government. The more of this mess is dropped in the laps of tax payers, via ‘austerity’, by the very politicians who corruptly facilitated its creation, the angrier those taxpayers will get; a sampler in the article and comments here.

Oblivion for the Irish Government, in due course. Not much Hope for Irish taxpayers for the foreseeable future. And continuing Shocks for the Eurozone, whether triggered by political instability in Ireland, or some final admission that the Irish economy simply can’t guarantee the Irish bank losses.

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  1. Ben Jardine

    Unlike the UK/US crunch, at least no one can say that they didn’t see this coming! Bubbletastic…

  2. leroguetradeur

    The public policy implication is simple: no country must ever allow its banks’ exposure to exceed what it can prudently guarantee. You need some sort of limit that says bank sector size in relation to GDP cannot exceed X.

    1. Gary Anderson

      Lol Lerogue, Basel 3 wants, as I wrote at Seeking Alpha, even more easy money and guarantees for loans built in. Please read my article about Basel 3 on Seeking Alpha.

      I have a question. Who thinks securitization of 30 year mortgages can exist without boom and bust and corruption. Should we stop securitization or should it be allowed to continue. I noticed that Yves wrote on the Roubini site that European investors are going to be banned from a lot of Wall Street bonds. How will this effect the future of the 30 year mortgage?

  3. Dutch Steve

    Rules do not matter. Continuing to focus on ‘better rules’ is just distraction from the substance: ever further concentration of power. At this point it is plainly a political issue questioning the self righting ability of democratic institutions.

    Until popular psyche accepts that the current ‘democratic / capitalist’ system is distilling an ever more concentrated parasitic elite nothing will change. Maybe it’s inevitable that *any* society structure eventually breaks down, just like a forests burn down every now and then and then regrow.

    I think the hardest part is letting go of all the promises and hope this system gave us: liberty, autonomy, fairness, justice, progress, continuity, etc. Accepting failure of the system means letting go of all these wonderful gifts, it’s the way you *want* to see your world.

    Can parallels between Jeltsin’s Russia and Ireland, Iceland, USA be drawn. Is the popular psyche ready? Will similar Putin-like solution be needed or will there be less drastic turning points?

    At a certain point all these stories are just little fractal repetitions of the larger theme and you have to step back and ask yourself the question if the system can be fixed or if it needs to be replaced. Can change be gradual or does it have to be abrupt?

    1. charcad

      Can parallels between Jeltsin’s Russia and Ireland, Iceland, USA be drawn.

      With respect to the USA I think a more informative parallel is with Gorbachev’s USSR circa 1987-1988.

      1. Anonymous Jones

        Do you think that because it’s accurate or because you spent a lot of time in Russia after the fall of the Soviet Union and you have little other context from which to construct other analogies?

    2. John

      I also like your post. Though the hardest thing to give up may be comfort. The collapse of Russia occurred completely under the radar here in the West, in terms of the effect it had on people there. You might be interested in the writings of Dmitri Orlov.

  4. armand eddon

    Dutch Steve – great post, one of the most intelligent and well-articulated I have seen in months – this is certainly the crux of things. Only problem I see is any change will likely be in the direction of even more concentration / facism. Despite some singular blips, the trajectory was set at the dawn of agriculture. It is our destiny.

  5. Spike

    @leroguetradeur, you miss the point here. What screwed Ireland is NOT that the banks grew the balance sheets to a ridiculous size with duff loans, it’s that the damn government decided to put the taxpayers on the hook for the losses from those loans (which had NO explicit government guarantee) to protect the private bondholders from the risks that they had signed up for. If we would let capitalism take its natural course, do an orderly debt-for-equity swap along with a writedown of the assets, the Irish taxpayer would be doing just fine. Unfortunately, the Irish government has a long history of putting its pals before the public – and why not, since they seem to get re-elected regardless (see Charles Haughey).

    This is a tragedy and a complete betrayal of the public interest to benefit a connected few. Not that different to what has happened in the US, but magnified in a smaller country. Let the bondholders take the risks they signed up for. As for NAMA – it was and is an abomination. All of these things have been raised and protested by academics and independents, but the government, quoting scary scenarios espoused by banks and bondholders, have sold the public interest down the river – as usual.

    I’m a capitalist through and through, but this ain’t capitalism and it’s a gift to those on the wild fringes of politics looking for a cause to rouse a rabble behind. To make it worse, the best and brightest are back emigrating.

  6. Dave of Maryland

    The five stages of grief are supposed to result in Heavenly Life Ever After.

    But that’s if you have a soul.

  7. kstills


    Well said.

    Investing involves risk. And sometimes one loses. Unless the Government steps in.

    No guarantees of risk by the Government. End of problem.

  8. agog

    Further to Dutch Steve’s excellent comment above, this interview (podcast) with Joseph Tainter sheds much light on the matter of whether the system will be fixed or replaced.

    The popular psyche, it seems, is not going to have much of a say in the matter because it will not be offered the choice of gradual or abrupt change. It is going to get collapse, like it or not.

    We are all Soviets (circa 1985) now.

    1. charcad

      I think we’re well past 1985 on the Soviet time line. Gorbachev II has been sitting in the White House for almost two years now. And Gorby II’s latest versions of Glasnost and Perestroika are failing just as spectacularly as they did before. And they’re failing for the same reasons. A leading reason is Gorbachev’s perennial weakness in confronting incompetent, corrupt but well-entrenched power centers.

      He refused to do it last time and he’s behaving the same way now.

      Watch the Tea Party business closely. Yeltsin II is or will soon be lurking in that milieu. Boris might have already appeared in the form of Sarah Palin. Adjusting for circumstances, Putin II is probably on his 4th or 5th deployment to Iraq or Afghanistan.

      1. Gary Anderson

        How can you say that the Tea Party is Yeltsin? The Tea Party wants no bank regulation. I view that as giving free reign to the casino. The question becomes can securitization work as a viable process, especially, as I wrote at SA, Basel 3 wants to make the taxpayer forever on the hook for loan guarantees of GSE mortgages? Add to this Yves article on Roubini’s site where she says that European investors will be forbidden to invest in a lot of these exotice bonds coming from the USA.

        1. charcad

          Yeltsin was a low-level system player who was temporarily bounced out of the system, turned dissident and then returned to overthrow the system and take supreme power at the head of revolutionary forces. Openly nationalist Russian forces, incidentally.

          Nearly all of Russia’s 1990s leaders began conventional careers within the Communist Party, gravitated to the hyper-reformist “Democratic Platform of the CPSU” during the Gorbachev period and then finally broke with the CPSU entirely towards the end.

          The parallels between this evolution and the “Tea Party” and its distant and strained relations with the GOP are striking. I’m surprised more people don’t comment on it. I spent a lot of time in Russia in the 1990s. And this past decade for that matter.

          Gorbachev’s two slogans were “Glasnost” (openness) & Perestroika (restructuring).

          Obama’s signature line is “Hope & Change”.

          Plenty of entertainment ahead, kids. That long slow climb to the top of the first roller coaster hill is almost over.

          1. Gary Anderson

            The leadership of the Tea Party is very status quo. Lets return to an America where the average Joe pays his bills, even thought the lending rules have changed and we corporate types have turned into thieves.

            The Tea Party frowns on walking away from ponzi loans, and a new false morality is born.

  9. Bernard

    i gather the Masters will slowly suck America dry. milking what they can. They’ve done so well so far.

    how greedy? only on how long before they kill the golden goose(us). that’s when the fun begins.

  10. Robert Browne

    Unemployment rate in Iceland is less than 8% in Ireland it is 14%. Socializing the losses is the government strategy but the population is to small and the shrinking labour market spells serious trouble ahead. It is as if you wanted to borrow a very large sum of money from a friend but did not realize that they were already in hoc up to their neck. You cannot socialize losses if the target fall guys are already about to topple over under the weight of their collective private debt burden.

    The play by the politicians and unions in Ireland is “what we have we hold, regardless”. That “regardless” is quickly turning into state bankruptcy.

    Anyone with money in BoI shares or AIB shares are playing with folly. First AIB will be nationalized followed more reluctantly by BoI. Meanwhile, our government have all but resigned themselves to the EU and IMF package similar to Greece.

    Iceland had the national pride amongst its population to say no let the banks burn they are not taking the country with them. In Ireland the banks are the government.

  11. gordon

    I had trouble with the link through “new ways to portray just how tiny the pool of Irish business talent is”. This one worked for me:

    Scroll down that page till you get to the report “Mapping the Golden Circle”, then download.

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