What have Brian Lenihan and Donald Rumsfeld got in common? Why “unknown, unknowns” obviously! The security dilemma outlined infamously by Rumsfeld in February 2002 sums up our minister’s dilemma perfectly. What most people fail to realise about the recapitalisation is that it is an exercise in reassuring the rest of the investing world that it is safe again to invest in Irish banks and, by extension, Ireland.
To achieve this, the recapitalisation needs to satisfy sceptical investors that the share prices of Irish banks constitute a “once in a generation” bargain.
Certainly on a historic basis or in terms of the banks’ assets, the share prices look unbelievably cheap. A successful recapitalisation leads to a rapid increase in the banks’ share price and ultimately bond investors flock back to the “clean” bank. This way, the share price rises and the Government can sell its stake — now worth considerably more than when it bought the stuff last night — at a significant profit. This is why the Government says it has no interest in owning the banks. The State believes that it will be able to profit from the deal.
But the assumption that â‚¬7bn will be enough runs straight up against the Rumsfeldian conundrum of “unknown, unknowns” which is why Mr Lenihan and Mr Rumsfeld are unusual, but desperate, bedfellows.
In 2003, Donald Rumsfeld won the Plain English Society’s “foot in mouth award for garbled speech” for his immortal “known, unknowns” speech. At the time he was ridiculed but when you cut through all the cheap jibes, you realise that he was on to something.
Rumsfeld articulated the investors’ conundrum perfectly and in his words of wisdom lies the fate of last night’s bank recapitalisation.
Let’s recap what Rummy actually said.
“As we know, there are known knowns. There are things we know that we know. We also know that there are known unknowns, that is to say that there are some things we know we don’t know. But there are also unknown, unknowns, the ones we don’t know we don’t know”.
In the Irish bank recapitalisation, the unknown unknowns are the extent of the bad debts. No-one has any idea how big they are and this is why the whole recapitalisation programme is a leap in the dark. The reason they are unknown is that no-one has any idea what other bad news will emerge from the upper echelons of the Irish banking system, its pathetic regulation and its craven cheerleaders in the golden circle.
In many ways, the banks are acting like the Catholic Church when the child abuse allegations arose. The first reaction was to quash the rumours and draw a line in the sand. This was the regulator’s, the Central Bank’s and the Government’s reaction in September. Back then, I remember going on a radio programme with Mr Lenihan and predicting that an Irish bank would be bust by Christmas. The minister warned that such talk was dangerous and irresponsible. The Central Bank declared that the banks were well-capitalised and the regulator stated that its “stress testing” proved that the banks were fine.
This was the same as the Church saying that child abuse was a rare, random isolated incident. Then there were more and more and more revelations.
Efforts to restore the credibility of the Church were irreparably damaged by the unknown unknowns. In the uncertainty, the institution was badly tarnished. Few bishops were trusted and even the good ones were regarded as suspect — or, at best, patsies defending a dreadful institution.
Think of the banks in the same light. The investors in this case are like sceptical but ultimately believing Catholics who want to believe that the system has rooted out the bad eggs but are not prepared to bet on it.
Investors are afraid of the unknown unknowns, which have not even been thought about, let alone quantified in the Irish banking system.
How many more ILP “bed and breakfasting” deposits in Anglo which were exposed on Tuesday, will emerge? How many more ludicrous examples of banking malfeasance will there be, and, more significantly, just how big will the bad debts be?
No Irish citizen has any interest in Lenihan’s great gamble failing, but the unknown, unknowns make the chances of failure extremely high. If we don’t know how much the bad debts will be how can we, with any certainty, say that the â‚¬7bn figure will be enough?
We do know that in 2002 both the Bank of Ireland and AIB senior management were furious that Anglo were hoovering up all the best commercial land deals, and that they vowed to “out-Anglo” Anglo.
Both banks ramped up their loan book, lending to every two-bit eejit who thought he or she was Donald Trump. As JP Morgan once said, “nothing so undermines your financial judgment as the sight of your neighbour getting rich”.
Bank of Ireland and AIB financed the economics of envy in the commercial property and development land game and it follows that their loans books are likely to be worse than Anglo’s. The extent of their bad debts will be horrendous.
Think about it: they doubled their loan books in the final four years of the boom. This means that their bad debts will be considerably more than the 10pc which is common in boom/bust scenarios. Even looking at the past four years, both banks lent close to â‚¬120bn each; 10pc of this means bad debts of â‚¬12bn.
This means that Lenihan’s â‚¬7bn will be swamped by bad debts. So why would any investor come in until this cash was gone? If they did so, they would risk losing their investment and equity capital in a deluge of yesterday’s bad debts.
The unknown, unknowns …
This article is timely and well written and should put Lenihan to the back of the class while the teachers contemplate his removal from his school and tell his mammy .The other boys in his class know that they know what he only thought he had known .Now that everyone knows he knows nothing anymore all his neighbours now know more than him.His class misbehaviour has caused a serious embarassment among his neighbours and they will tell their own kids not to talk with him anymore .The boys in his class know he is sticking his gum under his class… Read more »
Brilliant. Helpful. Evocative. David you inspire me to remember another model. The new Taoiseach and Minister for Finance in RoI took on their offices in a state of “unconscious incompetence”. They have moved on to a more advanced state of “conscious incompetence”. This is where I think they are right now. The next stage, which I agree we all have an interest in them achieving, is “conscious competence”. However it is, I suggest, very difficult for either of them to achieve this – they are surrounded by advisers who are back at “unconscious incompetence” believing they know best. We have… Read more »
Well done David – good, timely posting again, given what we just heard about BOI. And yes, that phrase “golden circle” crops up again – not that you will hear it used on chat shows on RTE radio on weekend mornings. As per your radio interview yesterday on the 1pm news on RTE – the banking system in Ireland is corrupt to the core.
More of the same old Cosy Irish Capitalism. The same names – Gillian Bowler, Michael Fingleton, and the others – keep cropping up, don’t they?
[…] I’ve been reading David McWilliams on line- all about "unknown unknowns" […]
Spot on, bullet to the brain with this one David. Cowen and Lenihan need to explain why they issued a blanket guarantee to all the sicko psycho Irish banks via the possibility unconstitutional wheeze of ‘incorporeal’ Government decision-making on the fly. “As we know, there are known knowns. There are things we know that we know. We also know that there are known unknowns, that is to say that there are some things we know we don’t know. But there are also unknown, unknowns, the ones we don’t know we don’t know”. Which of these did Cowen and Lenihan map… Read more »
>In the Irish bank recapitalisation, the unknown unknowns are the extent of the bad debts.
Actually, these are the “known unknowns”. We know that they exist, but we don’t know what their extent is.
Good article otherwise though. Six months to nationalisation of AIB & BoI, I reckon.
The unknown unknowns, of course, would be things like the…ahem…”circular accounting” that was going on between Anglo and other banks, at least until we found out about them (when they became either known knowns or known unknowns).
today I witnessed the leprachauns having a picnic on the rocks in ballybunion seafront and they have agreed to travel to iceland to meet their cousins the throlls to protest this saturday and to tell them that our banks are going the same route as theirs – nationalisation – its going to be fun
Hi David, Yes, we (the state) have picked up the tab at AIB/BOI without yet knowing what the tab will be. Not only the ‘recapitalisation’, but also the guarantee. There are parallels with what the yanks did in Iraq. However, I wouldnt use child abuse in the catholic church as an analogy/metaphor. Every man and woman in this country are abhorred by that, but people are not equally abhorred by what has gone on in the banks/regulators/government, etc. At least not yet. If they were, everyone would go on all-out strike and stay out bringing the country to a standstill… Read more »
If only David hadn’t recommended the state guarantee of the banks and Mr. Lenihan hadn’t followed his advice. It appears Mr. Lenihan was dazzled by the youthful and vigorous David, who answers to nobody and can change his opinion at the drop of a hat without any repercussions.
David launches his opinions into the ether and then hammers on forever about the few that are correct. Notice he isn’t boasting about his state guarantee of the banks, coincidentally the single worst decision by the Irish state since the credit crunch began.
Still the articles are interesting….
Who knows, maybe he’ll follow in his father’s footsteps and one day remember reading the report after “mature recollection”…
Good article David. Nice to see you’re getting some over-time out of this! For any that are interested, here’s the statement to the stock exchange re the capitalisation. http://www.londonstockexchange.com/LSECWS/IFSPages/MarketNewsPopup.aspx?id=2089397&source=RNS If all is so rosey why are the banks down 5-10% this morning? I posted this note from Dresdner a few weeks ago, but I think it’s worth a re-run. “The announced nationalisation of Anglo leaves questions over what happens to the other Irish banks. We do not count the government prefs as core Tier 1 as they do not appear loss absorbing in the course of normal business. This leaves… Read more »
For Brian Lenihan, there are an awful lot of unknown unknowns. And the unknown unknowns than known knowns and more known knowns than garden gnomes. And just like garden gnomes, they pop up all over the place, in all sorts of scenarios. Basically Lenihan is not in the know. In fact nobody is rightly in the know. The people who are most in know aren’t telling anybody. The IFSRA chairman seems to be a case in point. We have learned that we cannot trust any of the banks. What was going on between ILP and ANIB was much more dangerous… Read more »
David, the Saturday afternoon radio programme is indelibly etched into my mind, along with the pusillanimous performances of all others when at last you made the assertion regarding the banks for which you were immediately gang mugged, with no doubt instructions issuing from outside the studio to silence your voice. The ongoing revelations about what Lenihan read, didn’t read and would not have noticed if he had bothered to read about the ILP transfer to Anglo has now achieved notoriety beyond these shores and has succeeded in rendering , and I use that word in all its horror, the Irish… Read more »
“In the Irish bank recapitalisation, the unknown unknowns are the extent of the bad debts.”
That is not correct.
The extent of the bad debts are the ‘KNOWN unknowns’
The UNKNOWN unknowns are more possible events along the lines of the ILP scandal. And it’s likely that there are many more ‘unknown unknowns’ imo. Never mind the ‘known unknowns’.
Johnny Dunne> Could some of these decisions be unconstitutional – any legal experts see issues with Artcile 45 re providing social and economic rights to all not the few ? I am not a legal expert, but I would ‘hazard a guess’ that going down the legal constitutional route would be slow and nigh on impossible to stick. Looking at the said article: “The principles of social policy set forth in this Article are intended for the general guidance of the Oireachtas. The application of those principles in the making of laws shall be the care of the Oireachtas exclusively,… Read more »
To quote Vincent Browne (from a different issue): “It simply ain’t credible.” I think Mr Lenihan DID read all that report. He commissioned it.
On the subject of legality, I think you will find it’s a constitutional requirement for Mr Lenihan not to act on his own….
How much is the recapitalisation of ILP going to cost?.How much bad debt will be found in the two building societies?.Between everything, I reckon 30 billion euro will be needed.Ireland will be bankrupt within 18 months thanks to FF cronyism.It has taken 80 years for this miserable windswept shithole to finally face the music.Were it not for the net emigration of 1 million people the day of reckoning would of come sooner.What happened to the idea of a bad bank?.Compare the standard of debate in the House of Commons with Leinster house!.
What about Unknown knowns? The thing Lenihan et al should’ve known a) becasue he did not read the full report or b) did not want to read it. I believe a lot was known and kept unknown. I cannot help get the feeling of cover up. Why? many if not most of the politicians on this land have big accounts in AnIB. Probably big debts as well. Their nesteggs are gone or seriously compromised. 7Bn a last ditch effort to rescue the situation? Or maybe the 7Bn is just our 1st tranche of EU funding we are giving back to… Read more »
We have at the moment a problem beyond the foolishness of the banks. Our leading politicos are not Lucky. And I do not mean unlucky, that is when your horse in the Grand National falls at Beachers. Not Lucky is when the stirrup leather breaks having jumped the last in the lead and the jockey falls off. Mind you it would help a bit if they checked the tack for damage before the race. But I have the feeling that if it was not this it would be something else.
Was Rumsfeld trying to say “Argh, beware me hearties , there be Black Swans about!”
Folks, on top of the hinted-at unknown, unknowns here, The Brians are actively creating new ones: How many debt-defaulters are they planning to create by taking money out of the pockets of their own employees to give it to the banks? How many PS workers will default on the car loan, the mortgage, the credit card? ….. and that’s on top of the loss of this spending to the private sector small businesses which will let more people go due to lost sales and create more unknown, unknowns of numbers on the dole. Put money into people’s pockets to stimulate… Read more »
Hi Tim, > How many PS workers will default on the car loan, the mortgage, the credit card? Hopefully not many. Yes, I agree that the ‘additional tax’/pension contribution on the PS workers recently introduced will hit many and take some money ‘out’ of the economy. But its money the government doesnt have otherwise. Which is better, the government borrowing money to pay people so that they can borrow more on their “wealth”, or realistic wages? A negative multiplier effect and a false economy results if we borrow to pay people. Granted it keeps people in jobs (and further down… Read more »
Is there no EU regulation or procedure or law to come into force in times like these for Ireland? For all the bureaucracy and red tape the EU is famed for, is there no action plan for a state that behaves like us? We have acted like a rogue EU nation and it could be argued that we would not have got ourselves into this mess were we on our own outside the EU. Considering the strict criterion we had to meet before joining the EU, economic stability with low levels of unemployment, inflation and public debt etc. Once we… Read more »
A bit off topic…over 1400 jobs axed around the airport today between SR Tech and Ryanair. I figure you only have a few more days left before you can escape by air. Contracts are drying up. Loss to competition or simply cost cutting by airlines as they take more and more of their fleets offline. The SR Tech says Dublin is no longer part of their strategy – meaning…”make us an offer and we might accept”. A bit of that 7bn could have been used for that. But the vision is not there and EU regulations would stop them anyway.… Read more »
First david it is an insult to the Irish to bring Romsfieldminto a seriosu and correct conversation as Donald behaved badly and history will be judge. As for going on about gloom and doom, please stop this David. Cowen mayhave dragged his feet re the rescue and Lenihan is now admitting he did not understand Anglo Irish exposure but the whole situation is about scam, fraud and pending criminal charges aginst selct bankers , customers and possible civil servants – If you wish to discuss the Independnent Inspector as proposed by Labour fine ! but lets keep it simple as… Read more »
Mr Lenihan is a slow reader. He can’t read between the lines.He is a man of special needs. Mr Cowen doesn’t read at all. Mr Lenihan has no concept of reputation, honour and public morality. Both he and Mr Cowen have learned their trade from Mr Haughey, Mr Reynolds and others who went to the same school. I feel myself to be an alien in their company. When I came to Ireland, to Cork, in November 2005, I’d lived in UK for 30 years. I’d kept out of Ireland as much as possible for reasons it would not be appropriate… Read more »
Listening to the George Hook show-RyanAir are providing an explanation concerning their transfer of planes to lower cost airports. He is making a very tough point concerning the airport tax.
Not sure if that affects tourists – another peice of stupidity if this is true – deliberately charging tourists – as if Ireland does not have already have enough of a cost problem.
E&Y should be sued by the state and any other nitwit auditors involved should be included in this suit as well. This is Enron style account cooking at a national level. Th electorate are been treated like fools.
This case of malfeasance is being dressed up as misfeasance. This is slight of hand being dressed up as accidental clumsiness. We, the electorate are being treated as idiots.
What about Known Known’s ? did the goverment know what was going on and know it was wrong ,but turned a blind eye.What does Sean Quinn Know ? . Why can’t we let the banks go bust why is Keynes in favour over Schumpter? Politicially correct solutions aren’t necessarily the best. Would the last person to leave the country please switch out the lights.
‘WHAT THE DIFFERENCE BETWEEN ICELAND AND IRELAND? ONE LETTER AND 6 MONTHS’ This was the lead in an article about Ireland in this weeks Economist….. We’re a laughing stock and I believe it’s a matter of time before we have some kind of social unrest… Our media can only concentrate on government blaming, expecially trash media like the tabloids or Newstalk all of whom are doing the country a diservice with their lack of journalist acumen. The biggest talent in Ireland is the blame game. We need solidarity to get through this only then start ripping reputations and heads from… Read more »
More abstract thinking from McWilliams – God help us if he was running the country we would be have different plan everyday. I think I even prefer the cast of Police Acadamy that are currently in charge – and that’s saying something. Let’s get real for a change and stop killing at birth every effort of the government (no matter how bad you think they are they are we are stuck with them for now). It seems that once McWilliams has a brain wave and goes to print with it once govt follow with the idea David then rubbishes the… Read more »
Well maybe we should think about the known clown who knew a lot more known knowns than the rest of us – and told no-one !!
He should have his pension and ‘pay-off’ taken off him – and it should be spent on more necessary areas of public expenditure.
Furrylugs – you brought up the topic of known knowns a few weeks ago. You are the known gnome of known knowns, known unknowns, and unknown unknowns.
Deco – you could say it easier – we know furrylugs
Lorcan, “I think all that be said about the â‚¬7bn is that it is all we can give. It has to be enough, if it isn’t (for the record I don’t think it is) we will certainly have to resort to unconventional unconventional methods. Contingency plan, anyone?” How about this contingency plan: Identify the the former land-owners who sat on re-zoned land that they bought at agricultural prices per acre and waited for a starved market to multiply its value and then made a financial killing; Take 90% of their profit from them. Identify the solvent and highly profitable (because… Read more »
Folks, “..a large number of persons…..” in the Dept. of Finance have been working for MONTHS on the investigations/reports/banks issues.
Who is working on helping our economy in general? How many “persons” in the Dept. of Finance are focussing on how to generate production in the economy? How many are working on “cuts”? How many are working just to save the banks?
Answers to these questions will tell us much about the real priorities in play.
….. just a thought…….
@JohnD15 I would agree with you to a degree what has been done needed doing to survive the need of further financing the next step is begin criminal proceedings. If Brian could not tell his Boss Biffo then he must now publicly begin the shooting of his banking friends how Goggins could calmly state he will be earning just under 2 million this year is baffling, why does he think he deserves such rewards ? We have gone full circle here politically now and both FF and their counterparts FG are finished through the greed of the sons of the… Read more »
oh and to the room , watch Bank of Ireland this Friday the 13th , Shakespeare couldn’t write this play
Perhaps I’m missing something, but it seems painfully obvious that the only thing that will get the world economy going again is inflation. If the value of money is going down, people will happily borrow and, more importantly, they will spend it now, rather than later when prices will be higher. And all that nasty debt will shrink to almost nothing. I’m not alone in thinking this, the US and UK governments amoungst others regard deflation as a disaster and are desperately trying to create inflation. But our government is trying to bring prices and wages down, and increaing taxes… Read more »
David just departing briefly from the current subject matter, my missus and myself were watching you on Prime Time tonight and she thought you had put on a few pounds around the face since she last saw you, I think it’s all in her head though!
Mk1, Thanks for the engagement on this issue. I call your further attention to this: “hitting all 300,000 could take out spending power in the economy and drive things down further. However, mathematcially if by extension it means that the other 1.7m non-PS workers pay an equivalent less amount of tax, then the money isnt actually being taken out. All the measure does is move it from one cohort to another cohort of the population.” The point I am making is that the 1.7m non-ps workers, then, never pay the money IN; thus, the PS workers cannot pay it back… Read more »
Casey and Bowler of IL&P need to resign full stop. Enough of the spin about salary and bonus reduction two days before this broke. We’re not stupid.
BrendanW > Shakespeare couldn’t write this play at least shakespeare would have given them better lines.. Tim > Identify the solvent and highly profitable (because they were smarter and knew when to stop, or had insider information) developers who have moved their ridiculous profits off-shore; Not to defend the developers, Tim. But they didn’t have insider information, the information was all in the public domain. It was some of the most blatant outsider information for those who choose to listen. Poor David was going blue in the face telling all and sundry that it was a bubble and it had… Read more »
Its the underlying fear of the unknown that is the cause of so much anxiety in Ireland and the World at present.Trust me when I say that fear of the unknown is an irrational fear and has no place in a mature approach to problem solving.Whats passing itself off as “unknown” in the financial world today is an attempt to disguise what is indeed known by people who do know, and their biggest fear is losing money,its as simple as that.When you combine that fear with the fears of being found out and found wanting its is understandable that these… Read more »
furrylugs – i am in c’ote d’azur nice until 21 st feb……..hope to contact you afterwards …..best of luck
In Iceland you can enjoy their national dish ‘ pickled ram’s testicles ‘ that’s exciting ! Maybe we should include our own version now that we all are in the same club. Any suggestions?
Ram’s testicles eh? Reminds me of an Irish version of Russian Roulette practiced in country fairs. Called tickling the asses balls. Basically, you tie a string to the genetalia of an ass and a chancer puts down a bet that he can pull the string (while reaching beween the hind legs) 3 times (good tugs now!) and walk away without a few broken ribs or worse. I think some level of catharsis is needed andI have an idea for a daily TV program just after the Angelus. You have your line up of the wrong doers Being the chancers they… Read more »
David – you can’t tell us what the unknown unknowns are because then they become the known unknowns and we all know the future is an unknown unknown regardless of any known knowns you believe are unknown unknowns. We know there are unknown unknowns and Brian Lenihan knows thereare unknown unknowns but since they are unknown he knows they can’t be known and therefore he has to act on the known knowns that he knows. Or as Bob Dylan said: “The only things we knew for sure about Henry Porter is that his name wasn’t Henry Porter” I hope I… Read more »
Isn’t there a healthy mix of humour, indignation, thought… going on here. The greater the diversity of expression the better I say. Right now, we have no way of knowing where the best way forward lies. Even though I’m flying the flag for absolutely no litigation or criminal charges for anyone (because that way only lawyers win) I love it when someone screams ‘jail the bastards’. That is catharsis in action. Looks as if there are a few honourable men among bankers: two senior heads to roll in the bank that passed billions over to Anglo to bolster their balance… Read more »