Every evening, there is a little ritual in our house. Our young children, having been settled by their mother, demand dad tells them a story ‘‘from your head’’ before bed. This lark involves all classes of adventures, heroes and implausible tales starring themselves as central characters.
There are usually myriad frequently unpleasant baddies who are vanquished by our brave and incorruptible champions.
This nightly Jackanory session ends with the younger child mumbling while fighting back the tiredness: ‘‘But that’s all not true in real life, is it dad?” The older one, just eight, interrupts: ‘‘Of course it’s not true, dad makes it all up.” Sadly, by next year, they’ll both be too old for these stories. Children grow up and they stop swallowing their dad’s made-up yarns. Someone should tell the Irish banks the same applies to the rest of us. There are only so many made-up yarns we can take.
This week, two of our main banks – Bank of Ireland (BoI) and Irish Life & Permanent (ILP) – tried to spin stories to the world, yarns a dad wouldn’t tell to a six-year-old.
Not surprisingly, as a direct result, their share prices fell again. Shares fell after the chief executives of both banks indulged in more financial Jackanory, telling us there was no real problem in their accounts and that a modest bit of provisioning would do the trick.
Investors have had enough of this nonsense. Last week, AIB was at it, now BoI and ILP are at the same game. Bad enough that these people presided over a 90 per cent fall in the share prices of their banks but, to add insult to monetary injury, they are behaving as if nothing systemic has occurred. Let’s cut through this and state one basic truth: without the government guarantee a number of our banks would be in serious trouble – and some would be insolvent.
Not only are our bankers in denial but, more worryingly, their statements give the impression they don’t know what they are doing.
Last week began with the new boss of Merrill Lynch stating that the environment was as bad as it was in the 1930s.
This was followed by news that British mortgage lending in October was at its weakest in 30y ears; sterling plummeted; in the US, General Motors, Chrysler and Ford went cap in hand to Washington pleading bankruptcy. Germany was formally declared to be in recession last Thursday. Meanwhile, Banco Santander – the bank which told investors two weeks ago it did not need capital – announced it would seek to raise â‚¬7 billion immediately. All the while, it is getting more and more expensive to raise money.
Goldman Sachs paid Warren Buffett 10 per cent for money five weeks ago. Barclays Capital paid Arab investors 14 per cent for money two weeks ago. What price now for the recapitalisation of Irish banks?
Yet, despite all this, our banks’ bosses are saying everything is fine and they don’t need any new money. At this point, let’s just look at the numbers again. Last week, this column focused on AIB; this week, we’ll shine a light on BoI and ILP. All the following details of their balance sheets are freely available.
Interestingly, although both banks are in trouble, they have very different problems. ILP faces a funding problem, whereas BoI’s issue is bad debt. ILP has a loan to deposit ratio of a staggering 245 per cent. This means that, for every â‚¬10depo sit it has, it loaned â‚¬24.50.But how, you might ask, did it fund this? Its funding structure reveals that 34 per cent was through deposits, 36 per cent was short-term debt, of which one-third (or 12 per cent of total financing) came from loans from the European Central Bank (ECB).This dependence on the ECB is astounding, as it accounted for only 1 per cent of total funding in 2006.
The rest of its funding (â‚¬6.9 billion) comes from longer-term loans which have to be refinanced at the end of 2010.
This type of funding structure is simply not sustainable when the wholesale markets are shut. As a business model, the ILP approach will never re-emerge as a way to finance banks.
Looking at these figures, you have to ask yourself how they got themselves into this situation in the first place. The answer is very simple: ILP lost the plot at the tail-end of the property boom. Instead of curtailing lending when house prices reached ludicrous levels the bank went mad, giving out 100 per cent mortgages in Ireland’s own version of the sub-prime crisis.
Its loan book expanded from â‚¬21 billion to â‚¬41 billion in the three years to 2008.These loans were given to the young, working, commuting families – the ‘Juggler generation’ – who are now suffering from negative equity. Their ability to pay back these mortgages will be severely affected by rising unemployment.
Yet the boss of ILP who, incidentally, was the boss of the bank – not the life assurance – part of the company during the madness of the past four years, believes that, of ILP’s loans, less than 1 per cent will be bad over the course of the recession.
This means 99 per cent of the Juggler generation will be able, or willing, to payback their huge mortgages. Not likely. While there is little doubt that many older mortgages on the ILP books are absolutely watertight, the risk of default on new mortgages – given out when it doubled its loan book at the top of the market – must be very high. However, the major problem for ILP is that its funding model is a shambles.
Over at BoI, the difficulties are directly related to construction – where it was late to the party and took huge bets on developers in an effort to catch up. On top of this, it has funding problems, too. Its loan-to-deposit ratio is 160 per cent. This is way out of whack with the European average.
However, what makes BoI particularly degenerate is that it also went mad at the end of the boom.
Its loan book rocketed from â‚¬80 billion at the start of 2005 to a whopping â‚¬145 billion by the middle of this year. An enormous 26 per cent of the total loan book (or â‚¬38 billion) has been lent to the property sector.
This is a huge black hole which is bound to yield crippling bad debts as the property market capitulates next year. None of the mollifying nonsense we are getting from our senior bankers is credible – and the markets are responding.
In fact, these types of trading statements are about as believable as a bedtime children’s story. The only problem is that, this time, the financial bogeyman is real.
Well that article blew the invites to several corporate jollies. DMcW dartboards will go down a bomb for Christmas in some quarters. Looks like the lads on here were spot on over the last few weeks. This blog should declare UDI and form an alternative government, methinks. Possible Topics for a lazy Sunday (1)Could someone throw some light on the state of the credit unions? They supplied the deposits for the 92% mortgages. Discounting the declared 100% loans, how many properties were purchased with 8% CU / 92% Bank loans prior to the peak (with 30 grand thrown in for… Read more »
Well done! Telling it just like it is. People form ‘La-la’ land were being interviewed on RTE all last week. Even Shane Ross could identify Brian Goggin as one of those guys trying to make it up for the nation’s ‘kids’. With your two youngsters in charge of B of I some of us might be tempted to pick up a few of their â‚¬1 shares. Way to go!
Keep the weekly reality check going David.! As for Woodsey buying BoI shares at a euro each,I am one of many suckers who have lost virtually every penny- of considerable pennies- I invested in the main irish banks shares. A few friends were drawn in, along the way down, and have also lost heavily. Todays one euro BoI share could be 50 cents tomorrow.! Thats a loss of 50% overnight. Beware penny shares. Considering that we are not going to see any of the bank directors hang with a noose; go to jail; or even pay back their huge bonuses-… Read more »
Without wanting to be too cynical about the whole exercise I think they’d be good value at around 60-70 c/share with the government guarantee in place. That would give a low capitalisation for a bank with reasonable if overstated assets despite a “dodgy” loan book. You’d have to feel at that price they’d either a) get bought/merged with a profit to the 70c investor b) recover c) collapse. I don’t think it will collapse. They were too busy playing house in Ireland to expose themselves to some of the “liquidity enhancing” (meaning explosive) investment instruments around. So they’re problems are… Read more »
Do banks all use the famous Iraqi Ali Hassan Abd al-Majid al-Tikriti aka “Chemical Ali” to write scripts for the head of banks: Ali : “So, Mr. Big bank man, you tell peoples that there is nothing to see and victory for us is assured” Mr Bankman: “When do I mention the lack of liquidity, massive jump in bad loans and the fact that once the property market sorts itself out we will be missing a few billion” Ali: “Ha,ha, you entertain me greatly. This is all a cloud of smoke Mr. Bankman created by the american oppressors. We have… Read more »
Soldierofdestiny: “we must be thankful that they are at least companies with limited liability and their creditor banks in Germany etc cannot come after us wasted shareholders, to strip us of our remaining assets.!!”
My current favourite revenge fantasy (requires a certain amount of dictatorial power) is to strip the banks of their limited liability status then ask them “D’yis wanna rethink that bad debt provision?”. It’d make for an entertaining AGM anyway.
Bank directors won’t be able to ‘hide from the crisis’ at the next AGM … will the government ‘hide’ post recapitilisation? To get an ‘insiders’ thoughts it was interesting to read Michael Soden, he had the ‘hot seat’ before Brian Goggin…. http://www.irishtimes.com/newspaper/finance/2008/1115/1226408687623.html If Mr Lenihan had ‘vision’, he would use this as an opportunity to ‘capitalise’ a “substantial Irish banking institution in a European context with its headquarters in Ireland appears to be a more ambitious strategy. This suggestion would give the many shareholders a chance to redress the substantial losses experienced over the past 18 months” As it seems… Read more »
It’s not a question of whether these banks may be insolvent – they are insolvent! And bankruptcy follows.
The government guarantee is a holding game. Note that last week the Swedes went with their early ’90s plan to liquidate and take over. It’s not too late.
If Ireland weren’t in the euro we’d be looking at Iceland to the power of ten. But because Ireland is in the EU, we have the festering sore of the IFSC – which raised the potential blow out to the power of a hundred.
Very quite here today. All must be busy brushing up their cvs.. For an outsider view on the BofI results, this gives a good picture. http://www.investorschronicle.co.uk/Companies/ByEvent/Results/Analysis/article/20081114/f873343e-b18b-11dd-a35d-00144f2af8e8/Profits-slide-at-Bank-of-Ireland.jsp I should point out that the investors chronicle is part of the FT group, and as such does include concepts such as ‘reality’ in its analysis. On the Jackanory theme, I love this line from the IL&P report: “Overall group pre-tax operating profit, including the impairment provision in respect of the Icelandic bank debt, is expected to be down about 30% on the 2007 result. Excluding this provision, the expected group operating profit for… Read more »
shtove wrote: “It’s not a question of whether these banks may be insolvent – they are insolvent! And bankruptcy follows. The government guarantee is a holding game. Note that last week the Swedes went with their early ’90s plan to liquidate and take over. It’s not too late. If Ireland weren’t in the euro we’d be looking at Iceland to the power of ten. But because Ireland is in the EU, we have the festering sore of the IFSC – which raised the potential blow out to the power of a hundred.” Interesting. So will Ireland be the first little… Read more »
During the second world war, when armies were marching around Europe, cities were being bombed into oblivion and millions of people being killed, we quietly closed our doors and called it the Emergency. To be fair, it wasn’t the worst strategy, seeing as the only side we could support had just overstayed their welcome here.
In a way this is similar, When banks, funds, companies and currencies and countries failing around the world, our banks, regulators politicians and government are closing their eyes and are all busy reassuring each other. Wonder how “Emergency 2.0” will work out.
Hi David – plus ‘usuals’, I dont think its a case that the banks dont know what they are saying. Its more of a case that to state the actual status of their financial situation would in fact make their financial situation worse. So, they are going through an ‘act’, a posturing, a performance. But such is the way of our accounting systems and it has ever been thus. Its not the first time that banks or indeed any business has ‘blemished’ the bare facts nor will it be the last. I dont blame the banks for purposefully putting their… Read more »
Can anybody explain how Dan Mc Loughlin still has a job?.What is his next forecast?.West Brom to win the premiership?.The head honchos have screwed up , yet no heads at head office have rolled.A great country!.
Bank of Ireland heading for penny stock, have their lies and spin backfired, or would this have happened anyway. It is tempting to pickup a few of their shares, but penny stock can go either way, you can make a killing, or be stuck with it for life.
Response to Furrylugs
5 year clawback on CGT for First Time buyers was revoked to two in last years budget
OK, so we have busted banks. And the argument is that maybe there was some modicum of responsibility to keep the stories “positive”. I mean, is it always wise to tell the truth of Santa to the children…the market mentality is not that much more mature to be honest.
We need to steer out of the mess. How? Guarantees, capitalisation etc. may not work. Wheels are coming off the cart everywhere. Now what? Can we “reboot” the system in any way aside from recapitalisation (print money).
Deflation seems to have been called. close to 1% for 09.
while perusing all the comments from yesterday and today it seems the viewpoints of the contributors are accurate nevertheless insular in the way of strategic thinking ….. Germany is in a recession …….this matters a lot more …..Germany contracted by 1.2% ….Germany is the World biggest Exporter ….our only reason we have not gone the way Iceland did is because of our saviour Germany – because that country underpins the strength of the Euro and makes us feel sane at the moment …presently the litmus test for the functioning of the euro is being tested – the glue that holds… Read more »
I have my mortgage with ILP and all my savings with BOI. Is it worth me closing my account with BOI in view of the fact that their share price has dropped below â‚¬1 today.
I’m also concerned that the BOI will go bust leaving my savings locked in the account and me having no access to same. Advice please!!!!
Odd how a 2007 report on contaminated bottled water was released today. Nothing to do with more bad news from the banks???
Ah God no Lorcan. I want to watch Bertie finishing off his pitch for the Aras.
The useful website http://www.wikinfo.org rates Ireland thus: ” Ireland is among the richest, most developed and peaceful countries on earth, having the fifth highest Gross Domestic Product per capita, second highest Gross Domestic Product (Purchasing Power Parity) per capita and having the fifth highest Human Development Index rank. The country also boasts the highest quality of life in the world, ranking first in the Economist Intelligence Unit’s Quality-of-life index. Ireland was ranked fourth on the Global Peace Index. The state also has high rankings for its education system, political freedom and civil rights, press freedom and economic freedom; as a… Read more »
Yes Wikinfo needs updating, actually the Family Guy Wikia site has far more upto date information on our Island…..
“Ireland has more drunks per capita than people”
Today we watch in horror as the shares in the Bank of Ireland dive once more to near Zero eliminating a lifetimes savings for many trusting families and in particular pensioners .Their employees are worried that their future is now at stake .The tragedy is made worse when we realise that some of their Captains have been a bunch of chancers ,unqualified and suspiciously criminal in behaviour .Their reign of terror has finally become transparent and must be arrested immediately .The tax paying public must now seek full transparency into their activities because they now are becoming the new shareholders… Read more »
The big concern is the damage being wrought on small and med sized businesses. Again, we blame the banks. But they are not totally to blame. There is a culture of poor ethics in business dealings here that is prodominately championed by the public service and the semi-states. I refer to the cavalier fashion in which 30day payment terms are ignored and stretch to 60, 90 and 120 days. The Banking crisis is now exposing this nonsense. I wonder what else will come out. The injustice is becoming plainer to see each passing day. Good leadership just needs a chance.… Read more »
CDS I dont think the CDS ‘stack of cards’ is stable quite yet. We have just toppled a few cards off it and the shockwaves of Lehman falling was more than 6 billion and more like 60 billion of counter-party losses. The mantra circling in the financial sector is that Lehman should not have been ‘allowed’ to fail. If AIG would have gone bust that would have triggerred perhaps 450 billion of counter-party losses. The US Government stepped in (several times now) with financial supports to keep AIG and its CDS risks and liabilities afloat. And of course all of… Read more »
Government will recapitalise. Probably before this time next week. Expect to see a lot of trophy directorships going out the window (figuratively speaking). And then a few resignations or reassignments after that. Has to happen.
“CDS is a balancing act. It may topple down at some stage, but it may be unwound carefully step by step. The authorities and the institutions involved are trying to unwind it. Its still the elephant in the room, along with other derivative ‘exotic’ instruments.” Re property bubbles,Japan was where Ireland now is. Japan successfully survived a 10 year period of stagnation (and deflation). The whole world (almost) now is- where Japan once was.! Add to this situation, the global CDS debacle. The so called re capitalization of the global banking system, is an unprecedented dilemma. In my view,at the… Read more »
I am proposing to print my Federal European Currency Units. I’ll issue a favourable 1 per 10 euro – this week only. Next week, who knows. All are solidly backed up courtesy of the small world theory of handshakes – we are 6 away from anybody we choose.
Must ramp up that still of mine again. Non-traditional revenue streams beckon…
Hey if you want to make some real money buy some bank stock now and watch the bounce come from the recap plan…
Federal European Currency Units. also knows as – FEK U could work!
While the domestic banks are important its time to look away from whats going on in Ireland and look at the global picture, whether its Iceland cosying up to the Euro, how sterling will cope, how China will cope with reduced demand, what if anything can Obama do…..or even to misquote Rumsfeld “what are the knowns knowns, known unknowns and unknowns unknowns to look out for”.
sue – ur dreaming …never catch a falling knife
garry…its back to the earlier article….the know nothings
the head of the know nothings of a political persuasion is telling merchants bearing flowers that he knows something ……after he tells us he knows nothing…./ my thoughts are on …………the Jacuzi in the Floozie ……………….( I am not a dublinese but I can tell you that the word floozie comes from …French or more precisely – francais a ‘la provencal ……meaning…………..CASH )
Anybody who has not read Shane Ross this week do so now-hes at his effervescent best!
From the Dail: “Fine Gael leader Enda Kenny said if capital was provided it should not sit in the banks’ vaults. He said it should be used to extend credit and should not be used to support ‘delinquent’ developers.” “Mr Cowen said recapitalisation was not a panacea that would solve all ills. He said that if capital were provided to banks, it would be for capital purposes and would not automatically be used for increased credit lines for Irish business.” So the infusion of taxpayers (current and future) money into failing banks wont automatically be used to support developers. But… Read more »
………REVENUE….are letting go ..Staff…..
…..i am playing the …….’new’ hit release from the beatles ……..’ HELP’
This just out from NIB. Makes grim, if unsurprising, reading. http://www.nationalirishbank.ie/en-ie/About-National-Irish-Bank/Press/Press-releases/2008/Pages/Press-release-20081119.aspx The government seems to be looking to private capital to bail out some of the banks – http://www.forbes.com/afxnewslimited/feeds/afx/2008/11/19/afx5713782.html There is a chance that this will work for the ‘better’ of the six covered institutions (as we now have to call them) but I doubt it will be an option for the bad eggs among the half dozen. This, imo, will leave the government/taxpayers holding the can for the worst offenders. It will come down to a question of affordability. There will be costs involved in saving a ‘bad’ bank… Read more »
I know of 2 people who are being let go today becasue the banks will not lend. Guys are working on infrastructure/ road projects – probably are waiting to be paid by Gov. And now I see this nonsense that even if the banks are re-capitalised, they will just sit on it and let small companies die or beg for money based on resubmitted business plans…
Is someone taking in mickey here?
Big delay in getting David’s Indo piece today up for discussion.
“Act now, moderator, or we will all live to regret it”.
@Philip & Malcolm
So the people losing their jobs because of this fiasco are workers for contractors.. typically these are the guys doing the real work. Expect to see drastic reductions in actual public services without a corresponding reduction in cost as the productive element are got rid of.
Whereas in a proper accountable democracy, the Financial Regulator and Central Bank would be under new management and we would have a ministerial resignation along with sackings at executive level in the banks.
Thats the bottom line, incompetence & dishonesty are rewarded which sows the seeds for the next fiasco
We should not bailout the Dublin 4 banking sector. The banks that they have run are no longer worth saving. It would be cheaper to give the depositors their money, and sell Anglo Irish Bank and Irish Life and Permanent to the Saudis. They can ‘rescue’ the Dublin 4 bankers. Bank of Ireland should be forced to sell all non-core assets. And then sack the top three layers of management.
Nepotism has made and destroyed the media/financial/political establishment. We are only now waking up to what these scoundrels are doing and their incompetence.
“We should not bailout the Dublin 4 banking sector. The banks that they have run are no longer worth saving. It would be cheaper to give the depositors their money, and sell Anglo Irish Bank and Irish Life and Permanent to the Saudis. They can ‘rescue’ the Dublin 4 bankers. Bank of Ireland should be forced to sell all non-core assets. And then sack the top three layers of management. Nepotism has made and destroyed the media/financial/political establishment. We are only now waking up to what these scoundrels are doing and their incompetence.” I second that.The thousands of apartments, building… Read more »
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It is very difficult at the moment to take on the role of medium on future movements of the economy. David and people like him are more able than the vast magority. And, that vast magority is trying for all it is worth to keep a continual run calories coming into their houses. What will happen, I wonder to all those who have bought out their motgages and are in a reasonable position housewise? Are they going to have their good fortune turned into loss. The whole situation has been thrown away by an unfetered greed that swept the nation… Read more »
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