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

Politics Society

The Mendicant Classes

There was a time in Ireland when it was normal to be excluded. It was usual, if you weren’t among the privileged, to be outside the loop if your circumstances were wrong and you were trapped in the middle.  Neither rich nor poor.

You might be an honest, hard-working Joe, well able to feed your family, whose children never wanted for clothes or Christmas presents or a week at the seaside, but you didn’t know the bank manager on first-name terms, or the doctor. You were afraid of your own lawyer, who instructed you what to do. You didn’t play golf with the local auctioneer. If you went to hospital, you weren’t looked after by the consultant — you were “under” him.

There was another class of people too. People who expected and got everything they demanded, from healthcare to housing, because they were perceived to belong to the mendicant classes, who for generations had thrown themselves on the State to support them in all their needs.

You didn’t expect to receive anything, even when you were entitled to it, and most of the time you didn’t ask, because you were brought up to pay your way. When times got hard, you didn’t understand the system. You thought the Services would step in and rescue you, but you found out the hard way that there were no Services for people of your sort. You learned to stand in line and wait, to hand in your form and sit down until you were summoned. To call to some politician’s house after work and tell him your story of desperation in the hope he’d fix it for you. The house you needed from the council. The operation you couldn’t afford. The academically-gifted daughter you couldn’t educate because your factory-worker’s wages placed you above the earnings threshold for a university grant.

You knew nothing of investments or shares. Stock-market reports on the radio had as much meaning for you as the shipping forecast. You didn’t put money into anything in the hope of a high return because you didn’t have any money, but your children were warm, and well-fed, and you worked yourself to the bone so that your daughter or son could get the education you didn’t have.  They’d do better than you, if you had anything to do with it.

You despised the mendicant classes with their swagger and their sense of entitlement, their feckless, irresponsible waste of money, their gambling, their drinking and their sheer vulgarity, but you worked hard and you got on all right in the end. Your children made it through university, alongside the children of rich farmers and businessmen who were able to reduce their paper earnings so that their kids got the grant.  Kids with cars.

In the end, you got on ok, and now you have a nice home, grown-up kids and a good life. You’re retired and you have grandchildren. Maybe a great grandchild on the way.

And suddenly, they’re back, the mendicant classes. They still have that sense of entitlement, the belief that the government should pick up the tab for their gambling, and their overspending, their vulgarity, their drinking, their partying and their drug-taking.

You despise them. Why? you want to know. Why after all these years of hard work, should my money support these gambling wasters?  I didn’t buy shares in banks and I didn’t buy bonds, because they were too risky.  So why the hell should I have to pay for the gambling debts of the bank manager and the auctioneer and the consultant surgeon?

You don’t care about the poor any more.  These days you have eyes only for the insider classes.  The new beggars.  The people who expect the government to step in and rescue them from their ill-judged gambles, using your money. The people who can’t believe anyone would question their right to suck your country dry.

You remember how they made you stand in line all those years ago but not this time.

Not this time.