No Losses Imposed On Senior Bondholders of Zombie Banks

Oh God.  It’s just depressing, and I apologise most sincerely for banging away at this, but someone has to do it.

Professor Patrick Honohan, Governor of the Central Bank, is an excellent fellow.  A straight talker and a man fully in control of his brief, Honohan has pointed out that the socialisation of losses, as he put it, has been rightly criticised.

What does he mean?

Simple.  The Irish people were forced to pick up the tab for the failure of two badly-run businesses, Irish Nationwide and Anglo, at a cost of something like €34 billion.

That word, failure, is very important.  Public money was poured into AIB, Bank of Ireland and Permanent-TSB as well, but at least — in the long term — those companies had the potential to earn profits and pay us back.

Nationwide and Anglo were different, in the sense that they were dead.  They were never going to make a single penny in profit ever again, and had no chance of reviving. Therefore, the money  handed over on our behalf was not a bailout of those banks.  It was, by definition, a bailout of investors who had made a very bad business call.  Those investors were ready to accept their losses and walk away, but somehow, through the intervention of the ECB and the pusillanimous, craven attitude of the two Brians, instead they won the banking Lotto and treated the bailout as manna from Heaven.  It had already been written off as a loss, and here was the Irish government giving them the biggest profit of their lives.  Result!

In recent times, we’re starting to get to the bottom of the whole stinking mess that characterised the 2008 bank guarantee.  We saw some correspondence between Trichet and Lenihan, showing how much pressure the ECB put on the two buffoons in charge of our government, and in time, more will emerge.  Already, we can see that the ECB, since Trichet has gone, is willing to contemplate the unthinkable, buying up government bonds of those countries that apply for a bailout programme.  And you know, a bailout is not the worst thing that ever happened.  After all, a programme is simply a scheduled series of loans at rates we’d never get on the open market.

It’s true that the interest rates initially were punitive, but they’ve come down, and there is a strong case for rebates on that money.  Furthermore, it’s looking more and more like Ireland will be in a strong position to demand relief on the Anglo promissory notes, and I think that eventually some sort of fudge will be devised.  Perhaps some sort of long-term loan whose value will be rendered minuscule over a century due to inflation, or some other device.  After all, it seems to be accepted now throughout the Eurozone that we had inordinate burdens placed on us, including the requirement that this tiny country should single-handedly save the common currency.

It all gets so confusing, doesn’t it?  Promissory notes, bailouts, troikas, central banks.  You want to run around with your hands over your ears screaming Lalalalalala!!!  The good Prof Lucey did his best to explain it here, but I suspect people are still utterly baffled, as I am myself.

As far as I can work it out, the whole thing comes down to this.

First, the government is spending too much.  It hands out more than it takes in, and the difference every year is about €15 billion.  That can’t go on and we have to try and balance the books.

Second, some of the banks are nearly dead, but still have a pulse.  If the government puts money into them, we hope they’ll eventually get better and pay back what they were lent.  This is the bank bailout.

Third, two banks, Anglo and Nationwide, never had a hope of surviving.  They were stone dead but the government gave them money anyway.  None of this money will ever come back to us, none of it benefited the Irish people, but you and I, and our great-grandchildren,  will spend the rest of our lives paying it off.


Well, that’s the €34 billion question, and that’s the question we’ll be expecting the ECB to answer in coming months.  Some people suggest that the collapse of Anglo and Nationwide would have led to an unravelling of the entire European banking system with catastrophic results, so why was Ireland expected to save the Euro on its own?  Was it not a common threat?  I hope the government has some dirt to dish on the ECB, and on Trichet in particular.

Honohan says the ECB would never have approved burden -sharing on senior bondholders, regardless of whether a guarantee existed or not, and that in itself raises very difficult questions.  Does it mean that a bank is never a private company in Europe?  Are governments always responsible for the actions of their management?  And if so, why are private individuals accorded such power?

If banks are not private companies, if their losses can be imposed on European taxpayers, then why are they not at all times subjected to the most minute scrutiny imaginable? That certainly didn’t happen here, or in Britain, or anywhere else for that matter.

Does it happen now?  Could the whole disaster erupt all over again?

I think so.  Lessons learned: zero

12 thoughts on “No Losses Imposed On Senior Bondholders of Zombie Banks

  1. Banks are private companies. They just get unlimited government support.

    If this is confusing, it is because you are suffering from a Disneyland world view. The reality is that the banks are well connected with the same people who control the public treasury, and can persuade those people to empty the coffers on demand. If their friends baulk, the banks can always threaten to, say, implode or shut down the ATMs, which is always good for a few billion.

    The whole disaster HAS to happen again. There’s no two ways about it. These guys have an unlimited government back guarantee to bet as much money as they like, keep the profits if they win, and send us the bill if they lose.

    This is unlikely to change as the banks control the government and the media though a sophisticated form of mind control known as “Having piles and piles of money to throw at people who support you”.

  2. Quite simple – as the saying goes “If you owe the bank 100 euros, it’s your problem, if you owe them 100,000 euros, it’s their problem”

    The same principle applies to banks and governments/taxpayers … and of course it can happen again

  3. It will happen, sooner than we think .I think Mutant Zebra hit the nail on the head. The sooner the better, then all this nonsense will end.

  4. “Professor Patrick Honohan, Governor of the Central Bank, is an excellent fellow. A straight talker and a man fully in control of his brief”

    That’s where you went wrong.

    Everything after this is bullshit.

  5. “Honohan says the ECB would never have approved burden -sharing on senior bondholders, regardless of whether a guarantee existed or not, and that in itself raises very difficult questions.”
    That’s an odd comment for Honohan to make. I haven’t had a chance to read his comments in detail, but I don’t see why ECB approval would matter. If there’s a shortfall, the lenders in general are impaired. I don’t see how a private bank has an implicit state guarantee. Or was the ECB just that sure that our policitians were jellyfish? I think we’d have been a lot better off if Lenihan had played hardball, but we’ll never know now.

    If we’re back to virtually unregulated private lending with an apparently explicit government guarantee per Holohan, then it’s only a question of time before this all happens again. Gambling with other people’s money – sure what could go wrong?
    At least make the bonuses contingent on returns over several years – its what Buffett does with his insurance companies to prevent people writing business that only looks good in the short term.

  6. ” I suspect people are still utterly baffled, as I am myself.”

    It’s good that you admit to your personal bafflement. It’s not good that you project your personal condition onto your fellow members of society.

    I said it before and I’ll say it again – we are being fed a line of bullshit a mile long. You can persist in calling me a Troll but in the meantime, can you please stop pushing the Official Ireland line and do some critical thinking for yourself.

    The dogs in the street know we’ve been ripped off.

  7. You haven’t been commenting here too long. What I suggest you do is go back and read all the other posts on this subject before you accuse me of pushing the official line. Can you manage that much?

  8. Block the Blobber — Stop being such a tool. While you were some place else, Bock has been calling bullshit on the bank scam for the last 5 years.

    And get yourself a better handle. It just makes you look like a bigger tool

  9. ………….but of course if you have bankers (banksters) running the ECB they will ensure the vested interest they represent namely the banks and financial institutions and of course will ensure they get the windfall they deserve. If they took a loss then the sky would fall in…………..of course..

    We’re fed on bullshit and hype…………….What eejit ever said ‘Honesty is the best policy’………….They must have meant it for the other guy……………….sheesh

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