We are now in a bad-debt cycle, where a credit crunch is exposing reckless loans that will never be paid back. Make no mistake, millions of euros in loans will never be honoured.
An “Irish” bank has already gone under this week. Merrill Lynch, founded by two Irish Americans — Charles Merrill and Ed Lynch in 1915 — was known as the “Irish Bank” on Wall Street. On Sunday, Merrill Lynch — the bank that had such a network of brokers that when it started selling or buying an asset, it was called the “thundering herd” — ceased to exist. The bank was bought by Bank of America to avoid possible bankruptcy.
Irish Americans have long been associated with Wall Street and financial speculation. In the 1920s, when Merrill Lynch began to prosper, outsiders like the Irish and the Jews, who were not accepted by the WASP establishment, constituted leading cliques of speculators. Irish operators like Charles Mitchell, Mike Meehan, Bernard Smith and, of course, Joe Kennedy, cornered many markets and made fortunes. These men came from nothing and they conformed to the phrase that “he who values not his neck, because he is conscious it is worth nothing, may take the boldest leap”.
Maybe our collective recklessness in the past few years can be put down to something similar. We got access to cheap credit for the first time ever and we went for it. Many companies who have set up here have noted this weakness for speculation as a positive point. When asked, many managers of foreign companies suggest that the Irish willingness to take a risk and to gamble marks us out from some of our more prudent neighbours.
However, like some of the great Irish Wall Street speculators, when assets fall in value, the game changes dramatically. Tragically, Charles Mitchell ended up in jail for tax evasion in 1934, while Mike Meehan was committed to a lunatic asylum in 1936.
While these men fell spectacularly, everywhere in America people’s circumstances changed. Most significantly, in the 1930s, banks failed and failed stunningly. And this brings us to the question on everyone’s lips: what will happen here and what can be done to prevent an implosion of the Irish banking system?
The first myth to dispense with is the idea that Ireland is in some way different. When house prices were going through the roof, practically every economist in Ireland bought (at least publicly) into the canard that Ireland was different. Yarns were spun wholesale, such as we had better population growth, less debt, more immigrants, less houses.
We now know that Ireland is not different. We are the same as every other country. In recent days I have heard commentators suggest that Ireland does not have a subprime crisis and, therefore, have less severe financial problems. This is clearly nonsense.
If you believe lending people money to buy starter homes valued at 14 times the average income is not inviting a financial calamity, then you should stop reading now. If, on the other hand, you believe that we are facing a real crisis, then we must map out what form that crisis will take and how it can be minimised?
We are now in a bad-debt cycle, where a credit crunch is exposing reckless loans that will never be paid back. Make no mistake, millions of euros in loans will never be honoured.
So will an Irish bank go under? If Lehman Brothers can go bust and Merrill Lynch can be swallowed up, there is little doubt this can happen here.
Yesterday, Irish banks lost another huge chunk of their value on stock markets. This is likely to continue over the course of the next few days because the financial markets do not believe the gamble that Hank Paulson, the US treasury secretary, took over Lehman Bros this weekend.
This market reaction is important to appreciate. Mr Paulson thought that by letting Lehman Bros go to the wall he could draw a line in the sand. He gambled that the financial markets would react by thinking: “ok, Lehman was very badly run but that was one bank and now that the authorities are not going to bail banks out, the financial community will have to sort its own act out”.
Had this gamble worked, stock markets would have rallied as the market distinguished between “good” and “bad” banks. Instead, they have all tanked and they are likely to fall yet further. Indeed, next weekend could easily see another huge failure because the markets are now targeting vulnerable giants by the hour.
With that in mind, let’s come back home to the Irish banks. Our banks are no different from US banks. The only issue is one of degree. Very soon, Ireland will be faced with the same crisis as Wall Street. The reason is simple; we are a superannuated version of America. If you look at the numbers, our situation is actually worse.
Check out the chart. It reveals that residential mortgages in Ireland have risen by 522pc in nine years. In the US, the figure is only a 102pc increase, meaning we have got into debt five times faster that the US — where the situation is supposed to be diabolically unique!
Put simply, we are looking into the precipice. However, there is a solution. The first should be a shotgun marriage between two of our banks. For example (and in no particular order as this could be any of them), Bank of Ireland and AIB should be urged to take over one of the smaller banks. The objective of this is the same as the Merrill Lynch takeover — it is to shore up the balance sheet of the weaker banks before everything unravels. This marriage should be forced by the Central Bank to save the system.
At the same time, the Central Bank needs to go around Europe with a “Bank for Sale” sign and entice in a big player to take over one of our bigger banks if necessary.
In addition, and as part of a merger deal, the Central Bank should stop acting macho and provide as much credit to the banking system as it needs. This means that banks have to make public just how much money they need. At the moment, the banks are playing chicken with the market, pretending that they don’t need to go the Central Bank for money.
If we don’t see these moves quickly, there will be serious trouble. It is highly likely that a bank will go bust and the entire financial system could come crashing down. Let’s not wait for this. Let’s not repeat the mistakes of our Irish American cousins. We can act now and do it decisively.
Not only did the Central Bank here fail in their duty to regulate our banks during the boom, by stopping them from the excesses of 100% mortgages and demanding tighter lending criteria, now, as we tip into recession, what are B.Cowen and Co up to? Why planning to give their old chums in the construction industry yet another dig out, of course. Under the shameful mask of “lending a hand to poor unfortunate first-time buyers”, they are about to meddle in the market again – on behalf of the builders – allowing them to live in denial of the market… Read more »
Hi David, The financial events that we are in the midst of are certainly food for thought for professional economists and amateur commentators. You have no shortage of material ideas to work on. Things are moving very quickly, which may be a good thing when we get a chance to look back at it in years to come. > Merrill Lynch ceased to exist. The bank was bought by Bank of America to avoid possible bankruptcy. It didnt cease to exist in business terms, it has been bought/merged/acquired by BOA, and a deal done in parallel to when Lehman was… Read more »
The central bank spent the last 10 years telling us all to stop spending and telling the banks not to give out 100% mortgages and all the time every said they were just cranky because they no longer had any power. Now that everyone has ignored the central bank and we are all in trouble we are moaning at them for not being tough enough and not doing enough to save us from ourselves. The bigwigs on the top floor of the central bank are looking down on Dublin now with a bitter taste in their mouths and thinking “I… Read more »
Mk and I are on the same page on this one. > The first should be a shotgun marriage between two of our banks. I don’t think this is a good idea, for two reasons. Firstly,as MK says, why risk two banks when one is in trouble. After all, wasn’t this global credit crisis started by banks spreading their risks into the market? We need the law of the jungle to apply here. The banks that survive this crisis (and it could be all, or none, of the domestic banks) will be leaner and hopefully smarter after their time in… Read more »
Let’s assume the financial system survives – which I think (probably naively) it will because there is an all too heightened awareness between all key powers that the alternative is simply not tenable – it will be a lot smaller than it is now. I think it was Soros who recently gave an analysis that the whole financial sector consumed far too much of the capital and intellectual resources for perhaps the last 25 years and we may see a move to a more contained and regulated systems similar to that of the late 70s. The good side to this… Read more »
agree with Lorcan. Rurai, the central bank bottled it. They weren’t the only ones but lets not go there, theres nothing to be gained right now from a blame game or self flagellation. We are where we are; the key now is to ruthlessly prioritize where we want Ireland to be when things settle. I would submit healthy public finances should be top of the list followed by ownership of some valuable financial institutions should we have to risk any taxpayers money. We are in a very dangerous time, swimming with sharks with blood in the water. We can end… Read more »
BOI hovering over 4 euro, it is still tempting to get back in there now. But will they tank further over the comings months. So many rumours, so little time to take it all in, so exciting and depressing at the same time.
Why can’t the elitists and liberals running our country get it into our head, the simple solution to our economic woes is to LEAVE THE EUROPEAN UNION and regain control of our borders, and (politely) returning people to Poland etc etc- the European Union, including the Freedom of movement, in conjuncture with German banks is destroying Ireland. We are different from the Europeans, and we can never join or integrate with Europe. The only reason people liked it was because gobshites in countries like Germany we’re giving money out for nothing, its all dried up now so why not leave.… Read more »
Why can’t the elitists and liberals running our country get it into our head, the simple solution to our economic woes is to LEAVE THE EUROPEAN UNION and regain control of our borders, and (politely) returning people to Poland etc etc- the European Union, including the Freedom of movement, in conjuncture with German banks is destroying Ireland. We are different from the Europeans, and we can never join or integrate with Europe. The only reason people liked it was because gobshites in countries like Germany we’re giving money out for nothing, its all dried up now so why not leave.… Read more »
*Why can’t the elitists and liberals running our country get it into our head, the simple solution to our economic woes is to LEAVE THE EUROPEAN UNION* Want to to take bets how much the neo-punt would get shorted in the first week? Plus, we get most of our FDI because we’re an English-speaking country in the Eurozone. We’re going to need Europe’s help to get ourselves out of this mess so let’s not be so quick to send Trichet “jingle mail”. Money was being handed out for nothing in Germany too and you didn’t see them go nuts. Stop… Read more »
David, I think a lot of people are confused between the powers of the Central European Bank and our own Central Bank in Dame street. Does anybody out there know if the one in Dame street can still act as ‘lender of last resort’, ‘banker’s bank’ and does it implement any monetary policies at all or does the ECB hold all the strings? Secondly isn’t it true that our banks owe a lot of money to the Arabs? This time last year in your article you said ‘Over four euros in every 10 lent to you and me is now… Read more »
Gaius, even if we introduce our old currency (maybe even shillings, haypences- also abolished to please the bueraucrats in Brussels back in 1973), we can still peg it to sterling. Ok so we don’t have full control of it, but we’ll still have our currency. Anyways we don’t need the European Union because we are an island between 100-200 miles from continental Europe, and are therefore not tied to rest of them geographically, thank god for the seas that seperate us, Europe has been nothing but a trouble spot for centuries. Actually i’m beginning to miss the old pennys and… Read more »
David: Do you know that in the UK the ordinary consumer can go to a site like http://www.ourproperty.co.uk and find out what the house next door really sold for (direct from the land registry data bank), free of charge. As far as I know this kind of service is not avalable in Ireland right now. So the Irish consumer is expected to buy blind. It would be interesting to consider what effect such a service would have on the stalemate the irish property market is currently experiencing. This would expose where EA’s are secretly knocking 50K off the price to… Read more »
What if the stupid banks do go under?. Can the state put them through bankruptcy at least in the short term to prevent chaos and runs, and allow them to still provide the banking functions communities need, because at the end of the day this is all that is required, banking functions that is. Let the old banking institutions go but preserve the services they provide, depositors accounts would be frozen but at least they would be the first in line to get their money back, the Arabs would be last in the line. If you are a depositor you… Read more »
To protect themselves from possible bankruptcy I think the time is right for a merger between Bank of Ireland and AIB. As you said David, If Merrill Lynch can go under, so can our banks. Charlie McCreevy was labelled a mad man for suggesting this merger several years ago for different reasons but I believe there is a lot of merit in his idea. Create a strong Irish Banking Corporation that can fend off Global predators and become a player in Europe itself. The synergies of such a merger in Ireland would be colossal. They could close a branch office… Read more »
Longlivetherepublics,… I could not agree with you more , we need to get back to old fashioned grounded economics, and your suggestion with starting with our energy supply is simplicity it’s self. The trouble we are currently in here is America sneezes and We get the Cold ! The present financial marketing system that we are been run under just had to fail , it functions on promises and speculation and does not create anything only paper assets , simply take a look at the playing with figures from Bank of Ireland today and what they have their land banks… Read more »
This thread seems to have moved away from discussion of David’s article, instead becoming a forum for airing ‘alternate’ views. So here are mine. I should probably preface my remarks with the proviso that even though I’m following Davy22’s and longlivetherepublic’c lead, I have very little in common with their views. I have felt that Friedman’s economic ideas, as implemented, have been failing for some time. Supply and demand driven free markets work well at a local level. But they start to unravel when the market becomes large enough to change the fundamentals on which it is based. There has… Read more »
Too little too late lads. Ireland is staring down the barrel of a slow-mo gun whose trigger has been pulled. In the aftermath, it would be comforting to think that some clarity of thought in Govt, financial and social circles might lead to a radical overhaul of our commercial, social and political mindset; but unfortunately the cute-hoor, parochial, feck-you factor that has been lurking in the shadows during the good times, is about to re-emerge and pick over the carcass of your misfortune. The Irish establishment is, quite simply, not up to the job of building a truly ambitious, entrepreneurial,… Read more »
JJ, I have already moved abroad. I count my blessings everyday that I’m single, have no kids, no mortgage, and no shares. We have as a people always been on the move and done well out of it in general. Its just from 1995 – 2007, we had the option to stay. Even then, plenty of our young people decided to leave for UK, Australia, the continent and God knows where else. There was a huge myth in operation between 1995 & 2007. What was it? It was that Ireland was the best place to live in the world. And… Read more »
Considering the highlighted ‘risks’ with banks, any suggestions where people should put their cash (besides under the mattress!) ?
BOI @ €3.65 today !!! yikes ……….
For me, the problem with David’s article is that it presents an idea which needs some more explanation. Why would merging 2 banks make the situation any better? Is this based on the premise that a bigger institution would have a better overall balance sheet and may be harder to impact by speculative activity? I think in terms of scale, even if we merged all our institutions we would still be a relative minnow in the international scene – so they would be hit anyway leading perhaps to a nationalisation process by the CB. Also, merging banks in Ireland to… Read more »
A bank is a curious conundrum in itself- and the banking system in the western World needs immediate scrutiny and reassessment.. A bank is a business entirely geared towards reaping massive profit for the benefit of private individuals only. When the heads of these banks plummet the world into such current disaster, they are not prosecuted nor detained but are awarded massive settlements? The businesses which they-through negligence, mismanagement, incompetence (and corruption) have allowed to disintegrate are then “saved” by the government who support them- with taxpayers money! The ordinary citizen thus suffers both ends. There is something very wrong.… Read more »
Lorcan Roche Kelly > My solution? Currently I’m leaning towards abandoning stock markets. Instead of offering stock, companies would offer a bond type instrument. I think there is some validity that the system that stock markets/exchanges provide have in and amongst themselves grown out of all proportion of what their original intention was meant to be. There are more people/money buying and selling shares in a company than most companies do within their business. Imagine if a corner shop was likewise, with a queue of 1 person inside buying 1 euro worth of goods and a queue of 10 or… Read more »
David said: “So will an Irish bank go under? If Lehman Brothers can go bust and Merrill Lynch can be swallowed up, there is little doubt this can happen here.” For twenty years or more small and mid-size listed firms in America have complained to the SEC and NSCC that the failure to require delivery of securities against short position settlements has promoted a culture of unrestrained speculative short selling. Some firms have observed over 30 times their market capitalisation being shorted by a handful of hedge funds. There is no penalty for a settlement failure imposed by NSCC or… Read more »
Is Northern Rock now safe for our Savings? Backed by the UK Government.
or
Would the credit union be safe.
Malcolm McClure, the snag with these liquidity pools is that they are global in nature. So just because you clean it up and make it transparent in one place, does not stop the problem.
But then again, this could be an opportunity for reputation building where if our CB insisted that all transactions had to be transparent, we could suddenly find ourselves being the most trusted comms hub…word would spread…only trade here as this is where the volatility could be calmed – all trades are guaranteed cleared prior to a security resell. This could spread…
Thoughts?
Philip: It would be quite easy to abolish liquidity pools if the identity (code number) of each successive owner of each share was recorded in real time by the issuing company registrar. These owner codes would be issued by each recognized stock exchange and only transparent transactions through the recognized exchange would be legally valid. The exchange would automatically pass new ownership details back to the issuing company. This method would eliminate both liquidity pools and short selling.
If Bank of Ireland and AIB were to merge, how many people would lose their jobs ?, and what would happen to BOI or AIB shares ?.
+1 Malcom, Changing the market back to being a stock exchange where people exchange shares in a company for money, novel concept!. With computers, each share can be digitized and ownership tracked/recorded, and the trade can be recorded in milliseconds. However forcing all trades to be recorded and settled by actual exchanging stuff, stops all the paper nonsense which ultimately relies on not having to deliver securities upfront. To sell a share you have to prove ownership of that particular number of shares in the transaction and the share ownership transfer is managed by the exchange. When buying shares you… Read more »
David said:
“We are now in a bad-debt cycle, where a credit crunch is exposing reckless loans that will never be paid back. Make no mistake, millions of euros in loans will never be honoured.”
Surely you mean “hundreds of millions”?
By the way, “Maureen” above, should have no more than 20,000 Euros in any one bank at present. If she is lucky enough to have more.. spread it around.In today´s climate only a fool has all their eggs in one basket.
(PS I love the cartoon at the top.!)
MK > I didnt scrutinze JPMorgans published figures. I presume you mean MorganStanley. If so, Citic, the Chinese soverign wealth fund have been looking. They are (maybe) increasing their stake in the bank from 10% to 49.9%. > So, are all the main wall street firms gonna go bust? They are going to be completely changed, even of they do survive. There’s even a chance that some of them might actually return to being investment banks, rather than hedge funds marquerading as banks. Philip > trade here as this is where the volatility could be calmed. I like this idea,… Read more »
Garry: My suggestion above could also provide reassurance for investors in Unit Trusts/Mutual Funds that the managers actually possessed the full spread of shares that purported to form the foundation of their funds, and proof that those, too were not just another Ponzi scheme.
The banks, the banks, the banks? Ah lads, sure they’re all great little institutions. Why else would we encourage our employers to transfer all our money into their safekeeping. They’re grand little private institutions and don’t they send us out the odd statement telling us what they think they’re holding for us? And don’t we believe them? So we spend all this virtual cash and, at the end of the month, our employers send them more. And the banks charge us for keeping it all and we pay them. So they invest 90% of all they get for their own… Read more »
Rang BOI about deposits today.A lovely charming young girl came back to me about 4.30pm .She spoke solid on the BOI mantra for ten minutes and then basically dried up.I asked what I should do and she said” I don’t know really”.Says it all .Anybody know of six banks still in existence that I could quickly open up deposit accounts with.There used to be a lovely bank in sleepy town of Trumpton but its probably gone too.
Lorcan Roche Kelly > I presume you mean MorganStanley. No, I did mean JPMorganChase, as I’m checking the books of the ‘good’ banks. MorganStanley looks like it may be a ‘bad’ bank! Its down 20% today and a brief scan of its balance sheet indicates to me that it is potentially a bad one. It has played in the credit game but it has been unwinding its positions from long investments to short term ones, and reducing its debt and consequential interest payments. Its also been burning some of its cash. But the devil is in the detail, it all… Read more »
MK > BOI and AIB may be as well. I will need to trawl through their accounts to determine that though.
I’d better say this very quietly.
I bought Bank of Ireland today.
I think your idea is correct Malcolm, Forcing actual transfer of securities on every settlement makes it harder to game the system. And complete visibility & transparency solves a lot of problems, whether its reassurance on what someone actually owns, what a shareholder or fund is up to, even rouge traders don’t have anywhere to hide.
It is all possible with current technology, maybe not with current mindsets, they were doing OK from the way it is now.
Meanwhile, back at the ranch, the Irish bank bailout has started, though its dressed up as helping house buyers.
“Is Northern Rock now safe for our Savings? Backed by the UK Government. or Would the credit union be safe.” “By the way, “Maureen” above, should have no more than 20,000 Euros in any one bank at present. If she is lucky enough to have more.. spread it around.In today´s climate only a fool has all their eggs in one basket.” V True but the Central pot to honour the 20k maximum safety net for savers in Ireland is only 550m deep or in plain English, if more than about 20,000 depositors appear………….the pot runs dry. Bit of a hole… Read more »
Roche Kelly, so you bought BOI shares. If you are in for the long term (5 years) I hope your investment works out for you. Near term, I predict short selling is going to decimate Irish banks. “The trend is your friend”. Don’t swim against the tide, flow with it. These hedge funds are massive and they will drive shares lower. Jump on and enjoy the ride!
William. I’m treating my recent purchase (only a small amount, but enough to be interesting) the same way as I treat my exploration stocks. High risk, but never dull. I know BOI is not yet a penny share, but I do believe it to be under-valued at the price I paid (€3.70). Whether I’m proved right over the coming few days/months/years remains to be seen. I also believe that BOI or AIB will not be allowed to fail, much as I feel that they should sink or swim based on their own actions. Most of my posts here are based… Read more »
For a while I believed most of the subscribers to this site were educated and informed , yet after reading down here I see a few posts bragging about buying Bank Stocks , how dumb are you people ? Every clued in financial consultant in America are telling clients to get out of the Stock market Now ! Our Banks are in a lot more trouble than they are actually telling us at the moment with the melt down presently happening in the USA with investment and merchant banks been shown how strapped they are now, their fourth biggest bank… Read more »
Dow Jones up 600 points since my last post. Closes up 410 on day! L.R.K. you are in for a good day tomorrow! Wasn’t try to be smart with you. (your due dilligence remark! lol) Just offer a different perspective.
Ah Brendan, to be fair you pay your money and take your chances…. and sure money is made on differences of opinion as to the value of something…
Fair play Lorcan, a brave move, but with the UK banning short selling of financial stocks, maybe our brave boys will do likewise for ya!!!
Brendan > If your going to buy anything now buy Gold but investing into the banking establishment which has after all landed us into this economic downturn is foolish folly. Perhaps it is foolish folly, time will tell. I disagree with your assertion that I should buy gold. Gold as been as volitile as everything else. It has had a $140 swing in the past 36 hours. And it is a $ traded commodity, and I’d rather not expose myself too much to $s at the moment. Gold is not the store of wealth it used to be. Even the… Read more »
@ Lorcan no need to apologize just go and do a few sums Bank of Ireland shares at start of year were just over €18 , now into the third quarter their shares at just over €3 they have been ‘investing’ into the commercial and domestic property markets when they had this share value, now they are cutting their return to share holders and are still putting forward unrealistic figures on what their stake in property actual is, but of course it is the dynamics of free will at play that you like anyone else has the right to speculate.… Read more »
It has me hiding under the duvet – What could be seen as tipping points in all of this thats what people need to know. I expect to look out the window and see people running for the hills, cash in tow. Fear and Greed are what drives the markets and among all the stuff people dont understand, the greed will kick back in. There may be less banks at the end of it all, with the ones left standing in a position to exploit customers to the fullest as they will have devoured their foe. Customers will end up… Read more »
I see you have had the decorators in. Don’t you think in the current climate that you might have held off on grigging people with your non-homemade web design. Otherwise, there is not a lot of point putting huge comments, best to sit back and view the fireworks.
Lorcan Roche Kelly > I’d better say this very quietly. I bought Bank of Ireland today. (3.70) Well, you have certainly done well, as its now trading at 5.30 (no make that 5.16, oh wait 5.05)! In heavy volume this morning BIR.IR even went as high as 7.00. When to get in and ‘bottom fish’ like this depends on the appetitie of the investor. It is certainly only to be done with money that can be risked. A few weeks back in July when BOI dropped to 4.41, which then seemed like an impossibly low value, I thought it was… Read more »