Do you remember the concept of the ‘free house’? When I was a teenager, one of the greatest gifts a parent could give a child was a ‘free-er’. Parents who went out on a Saturday night and left their 16-year-old son or daughter in charge had no one to blame but themselves for the state of the place when they came home.
In Dun Laoghaire in the 1980s,the news of a free house could travel miles, with all sorts turning up at the doorstep to be let into someone’s house to drink Stag or flagons of whatever was going.
The free house was a mystical place. It was much better than hanging around with nowhere to go, and infinitely better than going to Wesley, where you would have to run the gauntlet of the bouncers – and then figure out how to get home.
Most of the time, there were enough sensible people – mainly teenage girls and a keen bloke waiting for favours based on good behaviour – who cleaned up the freer after everyone was gone. They made the place look as if only the daughter herself was there all night doing her French homework.
Anyway, for many of us, the free house was a rite of passage, a wonderfully chaotic place where all sorts of carry-on passed for normal teenage behaviour. The golden rule was that, if you were snared or if things got out of hand, the free house wouldn’t happen again. Parents who rumbled a melee made sure that was the last. A kind way to look at our delinquent Irish banks and the mess they have left us with, is to regard them as the equivalent of out-of-control teenagers who were mistakenly treated as adults and acted like little children. Over the past ten years, the government gave them the equivalent of a financial ‘free house’, and they made a hames of it.
Worse still, they gave us the bill. Like dumb teenagers who couldn’t see that if they just kept the lid on things, they could have free houses every week, they blew it – and their chance of ever being left on their own again.
Last Friday, US President Barack Obama closed down the ‘Wall Street free house’. What will our toothless government do to penalise and rein in our economic adolescents?
‘‘Never again will the American taxpayer be held hostage by a bank that is too big to fail.” With these words, Obama did what almost everyone outside Wall Street had been hoping he would do for at least a year. Obama has pulled American – and by extension global – investment banking back to the 1930s.Like errant children, they were given the run of the house when the parents were away, and they messed up.
He has told banks that they must get back to the knitting and stop running their own private trading desks, investing or owning hedge funds or private equity firms.
At the stroke of a pen, he has taken a huge amount of the risk off the balance sheets of the banks so that, in the future, if there is a market meltdown like last year, it will not threaten the banking system. It is not that there won’t be the same trading and risk-taking; it is just that the traders will not be risking ordinary depositors’ cash, and therefore there will not be a risk for the taxpayer. By taking this risky stuff off the balance sheet, the US government hopes that the risky speculation of the few will not be paid for by the many – which is now the case in Ireland with Nama.
Before we get back to our own case, let’s examine what Obama is trying to do by explaining these shadowy-sounding entities like proprietary trading desks, private equity outfits and hedge funds – and how the banks ended up owning them.
Many years ago, I worked on one of these proprietary trading desks at French bank BNP. We traded the government debt of emerging market countries, such as Russia, Brazil and the Asian tigers. We also traded debts that had defaulted, such as those of Argentina, Venezuela and Brazil.
The idea was that we would bet on these risky but very high return markets, using the bank’s (depositors’) money. By doing this, we would drive the profits of the bank through the roof and everyone would be happy.
Over the next ten years, international banks extended these types of operations to include hedge funds. These were again trading operations taking risky bets on listed stocks and bonds to make more money than the average stock. In later years, private equity operations emerged which took large positions in existing private companies and then sold them either to competitors or to the market by way of a flotation. In many cases, the banks themselves financed the acquisition of their own companies by lending to the potential buyer. All the while, profits increased.
Then, of course, the hedge funds started buying all sorts of property-related derivative products, as did the proprietary trading desks, taking bigger and bigger and riskier and riskier bets to make the more elusive ‘home run’.
When the market collapsed, so did these bets, and the depositors of the banks had to make up the shortfall. But they couldn’t, as the banks had been borrowing many times the deposits on the books due to deregulation. The free house was out of control.
So Obama had to come in and buy all this stuff that was on the banks’ balance sheets to make sure the banking system didn’t collapse, even before the traditional runs on the banks occurred. These schemes, where the Treasury paid good taxpayers’ money for rotten derivative products, were nicknamed ‘cash for trash’.
In Ireland, we have our own ‘cash for trash’ deal. It is called Nama. Here our government will buy trash from developers to keep the banks afloat and try to tell us this crud is worth something.
Imagine the government went one step further and, like Obama, vowed ‘‘never again’’. What could it do? Well, it could prevent banks from ever again getting involved in property and move back to a building society model. Remember: our ‘derivatives’ equivalent was commercial property,100 per cent mortgages and speculative development land deals. If we were to follow the US, the next move after Nama would be to ban the banks from getting involved in property again.
We could also change the rules associated with how much collateral we extend against property. In order to make sure that a property boom never happens again, we could restrict the collateral given against property to the ‘average’ price of the property for the last 30 years. We would never have a property boom again.
But such moves would imply learning from our mistakes. Is this something we do in Ireland? Or, putting it another way, are we, the parents, prepared to make the out of control teenagers pay for their mess? Nah, never, that would be too sensible.
The lesson from the Irish financial free house is: don’t worry, you can do whatever you want. These parents are a walkover.
David says: “In order to make sure that a property boom never happens again, we could restrict the collateral given against property to the ‘average’ price of the property for the last 30 years.”
That makes a lot of sense, so long as the collateral property wasn’t built within the past 10 years.
Full Public National Banking Investigation NOW
Thanks David.
Great article and personally I think I am beginning to understand things better, thanks to your latest article. I am lost for words and guess many of us will be.
I just have one ignorant question: So many are against NAMA and if there is an unlikely event of a general election in the next couple of months that brings a new government; can this new government undo NAMA. What does it take to undo NAMA? Maybe we can open this discussion.
Hi David, NAMA is an attempt to recreate bubble prices. The Irish government couldnt exactly come out and say – you can’t do that again. Property alone is not the problem or even banks betting on it. Its a government whose single idea for the economy is house prices. Similarly for the US. House prices cannot fix the economy. The problem with US and Irish banks have always been symptoms, not the cause. The US needs to stop undermining its home grown industries. Real wealth is always kicked off from innovation. So where is the new growth going to come… Read more »
Nobody learns, everything is done ‘according to process’ and where the misdeed is blatent, there is no punishment. 10 years on, we just had the inspectors report on one of the biggest cases of insider trading in Ireland. (It took 10 years, think about it.) Mr Flavin had a case of ‘bad judgement’ resulting in a profit of EUR 85M. http://www.independent.ie/business/irish/after-years-of-digging-jim-flavin-makes-a-great-escape-2029293.html In the paper today, there’s also a story about the president of UL appointing his wife to senior position in the university without appropriate interviewing or consideration of other potential candidates (why bother when you know who you’re going… Read more »
Fergal73, Leaving the country and quitting is the first thing on the agenda for these perpetrator when things get too hot. Or maybe most of the year they won’t show their faces anywhere. They will only be here to see their aunts and uncles and off they go again. Many don’t have that luxury to quit. Believe me, I reluctantly came to Ireland in the early 90s due to family circumstances. It took about 5 years for my children to climitise as we have to take 10 steps back in living standards, social life and education. We often think of… Read more »
Good article David and as always it was an enjoyable and colourful read. The banks could be reigned in and put in a straight jacket. It could be done if the political will was there but I wont be holding my breath because there are too many money maniacs in influential positions and the politicians and a large percentage of the Irish public have the let themselves be programmed into the money, money, money mindset. Are there any people left in this country who are incorruptable? Where is the fighting Irish spirit now that the country is being held to… Read more »
David. Good read. There is a problem though with the solutions article puts forward. In Irish society there exists a mindset, a mindset we term gombeenism. It is a contagion and many suffer from its creepy symptoms. Symptoms such as the following: – if you work in a position of power or influence you can hide from any dereliction of duty through your crony networl contacts accrued from childhood, university and family. – If you find yourself with an opportunity to make a quick buck and it is bad news long term wise you merely just stick your fingers in… Read more »
Serious Berroca ‘hangover’ piece of writing. I read a similar, though ‘high brow’, article earlier today by Joseph Stiglitz which seems to apply as much to Ireland as it does to the USA / UK: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7061058/Joseph-Stiglitz-Why-we-have-to-change-capitalism.html The ‘what happens in the IFSC, stays in the IFSC’ party days and nights are over. Unless future generations of Irish citizens are ready to back-stop the Casino and the ‘golf’ enclave in the Algarve. But shouldn’t they be asked formally before the roulette wheel starts spinning again? Explicitly. Via an election / referendum? The ‘Volcker Rule’ is genius in that it brings the… Read more »
Folks, here is the announcement of the ‘Volcker Rule’ by Barack Obama. It gives notice of the reforms David refers to in his article. This is worthy of real discussion.
http://www.youtube.com/watch?v=NfiD3N267ok
Is this real reform, or window dressing? Personally, I think it’s the former. How will this ‘financial climate change’ effect the world, and little old Oirland?
Paddy
There was not just one adolescent house party in the last ten years. The entire decade was a house party. It was full of illusionary coolness and the sophistication that comes from selfishness and arrogance. It was a revolting amount of nonsense. Of course if you were not there, involved, there just had to have been something wrong with you. It was the epitome of cool to take part in Ireland’s house party. Those who opted out were traitors to the new Ireland, a new society that congratulated itself repeatedly on it’s “achivements”. I don’t even know what they are… Read more »
“Last Friday, US President Barack Obama closed down the ‘Wall Street free house’.” No he didn’t. He said he wanted to. Given the bizarre nature of the United States Congress, we are a long way from here to there, especially now we have to factor for the effects of the Supreme Court decision in Citizens United vs. FEC. Those banks ain’t going to give up that revenue without a fight and their way of fighting will be to bolster Republicans and dissuade Democrats up for mid-term election in November. If he wanted a ban, the time to do it was… Read more »
With regards to servicing debt, here is something to watch on a Sunday evening. It is about New York in the 70’s. Interesting comment at the start “New York is where the future comes to rehearse”
http://www.youtube.com/watch?v=Ex-iMzSNcrE
I have a slightly different read on David’s analogy. We sold off our family silver (our competiveness); we had a massive party on the proceeds (property boom) trying to emulate the World Party Players (USA and UK). Party got out of control as intoxicating substances we didnt understand became the norm. Somebody died (Celtic Tiger); We were left with a massive bill for damages (NAMA). The more I follow this crisis the more I see that a sustainable strong property market is key to our future; and that Government interference in the 00’ies property market altho for good intentions (to… Read more »
Aoulde Dublin : Oh those memories I remember them well when a pint of plain was your only man.
Smoking might have to be re-introduced to preserve the sanity of the good olde tymes .No money woes then as long as you had the price of the fags and your plain the world was perfect .Re-introduce laughter and expand musicals and more symphony and learn to forget what you can and remember what you want .
My take on David’s article is that we were like the neglected children of wealthy parents who could lavish other people’s money on them to keep them out of sight. Such kids are spoilt and never develop a sense of responsibility. All come crying to mammy when things do not work to their tantrum filled satisfaction. The recent flooding and freeze up together with unions whose wealthy members are all too ready to commit economic harm highlight a malaise eqivalent of unruly overweight youngsters who never got the wooden spoon (yes I am a great supporter of the flagrant use… Read more »
TYME – in my days there was no such thing as allowing the house become free in fact if my parents went out so did I – with them .So there were never parties unless family get togethers etc . I like the term David uses ‘ tidying up’ .I believe this is the key to what we need to reform in our understanding and mindsets .If you think about it Money is not about money .Money is about Time . Time and money do coexist but thats all .Life is about Time .The more Time you give the more… Read more »
Teenagers earn or receive pocket money, try this with bank staff, many of whom are a lot more culpabable than we have been wrongly led to believe.Same goes for staff @ the central bank and dept of finance.
Hopscotch – is a tyme machine when you could run and jump in the middle of a main road in your city and sometimes only to have to stand aside to allow a car pass by .Our Tyme was measured by the distance you walked ,jumped or hopscotched.We had our own celestial clock and watches were only for grandads .
Tidying Up is about ‘Empowerment ‘ and belief in yourself and those around you. And thats the beginning.
What I find pathetic about this work to rule by the public service is their lack of analysis of our deficit problem. It’s some knowledge economy when our teachers and administrators can’t add and subtract.
There’s no tidying up, it’s only more chaos until we reach the bottom and that could be sooner than we think.
Let’s not get ourself into believing too much that the Celtic Tiger is such a big decadent time. The Celtic Tiger happened all over the EU countries and not only Ireland. Ireland has the ability to make this phenomena unique due to high levels of narcism in the country. We all believe that Ireland became a mag-rich state because of the property prices people are foolish enough and willing to pay for. Tourists are allured by the so called “friendly Irish” and the “green island”. We make out that the Irish are so friendly because we live on this so… Read more »
We are still in the mode or led to believe that property prices will come back up again. Just look at who actually gives the impression/illusion that it will come back and rise again some time. Property market as we knew it is dead. Most of us can’t come to terms with death. We all have lost a loved one in our family. Just ask yourself how long it actually takes to come to terms with it. That the person is not coming back. Some of us have visions of the deceased loved one, some of us still communicate with… Read more »
Dad’s Army
I was reading the new Obama/Volcker proposals, and it reminded me that Great Depression changes came out of the 3rd effort the US Congress made – the Pecora Commission – that was 4 years after the 1929 crash.
It also made me think of the BBC comedy series Dad’s Army.
For those who don’t remember, or never saw it, look at http://en.wikipedia.org/wiki/Dad's_Army.
One way of looking at the last 15-30 years is that Captain Mainwaring is now a ‘Customer Services Associate’ at the Tescos, and Private Walker now runs the bank.
http://news.sky.com/skynews/Home/Business/Tony-Blair-To-Join-Hedge-Fund-Managers-Former-PM-To-Act-As-Paid-Speaker/Article/201001415535259?lpos=Business_Carousel_Region_1&lid=ARTICLE_15535259_Tony_Blair_To_Join_Hedge_Fund_Managers%3A_Former_PM_To_Act_As_Paid_Speaker
Well, well, well!
Look at the man who rewarded ACTUAL incompetence in his private bank with taxpayers’ millions, now pontificating to us on punishing ALLEGED incompetence in public sector education! Ladies and Gentlemen, I give you Mr Peter Sutherland, of Goldman Sachs:
http://bit.ly/6eACyC
An example of what is happening here in the States with rental property… http://online.wsj.com/article/SB10001424052748703415804575023483097973538.html Key take-away…”The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments. ” And By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors–including the California Public Employees’ Retirement System, a Florida pension fund and the Church of England–and many of the debtholders, including Government of Singapore Investment… Read more »
More taxes. http://www.breakingnews.ie/ireland/water-charges-could-raise-1bn-for-govt-443421.html We are currently getting the shock doctrine on water. It is bucketing down in this country, and the Minister for Environment wants to make a water quango, and appoint GP activists into plum state jobs. What is really amazing is that Gormless is able to quantify this water supply issue not in terms of metres of pipe, or litres of water – but only in terms of cash retrieved from ordinary citizens. And it is being presented as some sort of Keynesian stimulus package. Like as if the one thing that Ireland needs more of, is water.… Read more »
For some strange reason I am reminded of the staff party of Anglo Irish Bank – with them all wandering out of the Four Seasons hotel in Ballsbridge and passers by – taking photos of them. And this was just after Lenihan decided to take over Anglo Irish bank.
Why have a house party, when the state will put you up in the top hotel in D4 ?
I just wonder – who invited Patrick Neary to the house party, and how much booze did he bring ??
I would like to know where all the money to repay debt is going to come from. The Government keep replacing debt due with more debt, hoping the economy will start to emerge from recession. Or perhaps they just don’t care anymore, they are fly-by-nights only worrying about getting elected for another term. This tidy up will last decades, it is a downward spiral. What is the exit strategy for NAMA who will buy the assets from NAMA ……more developers ……with more borrowed money. I bet NAMA will still have these toxic assets in 20 years time. Until the Germans… Read more »
Meanwhile over in New york AIB have become a Landlord’, or is that NAMA have become a Landlord?
http://www.irishcentral.com/story/news/kellys_corner/irish-bank-aib-now-landlord-of-stuyvesant-town-in-new-york-82587922.html
To extort the maximum value from a population, when one has control of monetary system, leverage the laws of supply and demand. Use deflation, inflation, and hyperinflation all as tools to transfer wealth. All have a place and a purpose. 1. Become majority lender in an economy of people with assets you want. 2. Encourage indebtedness by loaning generously while securing on assets of interest. 3. Loosen lending standards until the assets you seek to capture are attached. ( this makes the economy debt dependent) 4. Once debts are significant for the bulk of the population, sharply tighten lending standards.… Read more »
This is a detailed reply to StephenKenny. It’s lengthy because I’m waiting for the car, the flight to Davos for a couple of days on the piste before pressing the flesh, etc. Everyone else just press ‘page down’ a few times. Stephen, just read wot u wrote on a previous article about the ‘family silver’ as follows: ‘Perhaps we should simply ask what kind of leader should we look for, and is there one available? Few offer from the current ranks of FF or FG; AndrewGMooney seems to bang the drum for a Alistair Darling/Barrack Obama model. Anyone else? It… Read more »
Some ramblings… Anyone heard of Boston Tea Party, apparently some Americans are waking up?.. As for here in the UK, interesting development http://www.dailymail.co.uk/news/article-1245599/David-Kelly-post-mortem-kept-secret-70-years-doctors-accuse-Lord-Hutton-concealing-vital-information.html I’ve being reading newspeak in 21st century from media lens, some useful analysis of corporate media. Was back in Ireland over weekend, seen the opinion poll, Fianna Fail still doing ok. It got me thinking about who in there right mind would vote for them, then I said to myself that a certain percentage of the population smoke – even though the know it will kill them, more drink themselves into an early grave, a percentage suffer… Read more »
Good evening all, First post here, I’m interested in how we might get out of this mess. Have a look at Niall ferguson’a rticle from Feb 2009 suggesting what i might call a little nama for the USA, or how to give the ordinary indebted mortgage holder some relief. See http://www.niallferguson.com/site/FERG/Templates/ArticleItem.aspx?pageid=203 One section is worth quoting in full and echoes some of what David is saying: “The second step we need to take is a generalized conversion of American mortgages to lower-interest rates and longer maturities. Currently around 2.3 million U.S. households face foreclosure. That number is certain to rise.… Read more »
Wills, I’ve no background in Finance but following the comments on this site over the past few weeks it seems to me that Govt policy can’t be changed regarding Nama. However, it could be seen as part of a solution if the ordinary mortgage holder could see some personal relief from the debts that they were encouraged to buy into during the boom if a “little nama” was put in place to take their repayments down by 10-20%. The banks won’t do this off their own bats, but nationalistaion of two of them is virtually inevitable and that is a… Read more »
Cautious-optimist., I reckon ferguson know’s his stuff, but, if one traces back his literary projects back to a fascinating book of his titled ‘cash nexus’, an excellent read on the origin of the ‘central banking’ system which now runs the world of course, one will discover ferguson s scholarly leanings weigh too far over toward the idea that the economy can only really get going on the back of financing war. Where as my assertions come from a hope for an economy which can be agreed upon and organized at least where all citizens have right of ownership on a… Read more »
wills – I think the Borneo Jungle tells us more what will happen.Its survival of the fittest .That usually means War of The Jungle.
@David McWilliams: I think your missing the true cause of the economy crisis to begin with. Interest rates were set far too low (now they are set lower and that will lead to far more serious problems further down the road) and governments offered many forms of grants to encourage a construction bubble. There has always been speculators and greedy bankers. The only difference is excess borrowing was encouraged and saving discouraged, this is still the case. Our Government are clueless and so are the general public, as well as the opposition. They are trying to get us to keep… Read more »
wills :
Swinging in The Jungle :
Tarzan found that the wheel did not work in the jungle so he adapted to the animal way of living .He was Inovative.His needs were to survive and not compromise . Tarzan went to War and had his followers .
The party in commercial real estate is also over. Even officially, it is over. And in contempary Ireland, something becomes official, long after it becomes blatantly and undeniably obvious. Davy, trying to re-establish credibility as an institution of economic forecast have come up with this….
http://www.davydirect.ie/Generic?page=MorningNews1
All of this further clarifies why Anglo Irish Bank cannot be saved, and why INBS should have been allowed to sink. But the doctrine of Marxist intervention to save the rich has condemed the work people to carrying this pup.
Coming around the corner – facing into a General Election, the figures from Britain in respect of the economy should be treated with suspicion. http://www.rte.ie/business/2010/0126/britain.html I would classify Britain’s “recovery” as something within the margin of error. It is tiny.But we should expect lots of boasting from Brown. And our politicos will sit up and take notice. In fact it is quite possible that Britian’s increased GDP figures are entirely related to the annual retail spend before Christmas. A country whose economy is expanding by 0.1% and which is devaluing it’s money by 10% per year – is not recovering.… Read more »
Central banks replicated through out the world.
http://centralbank.monnaie.me/
Did anyone watch Frontline last night? Most speakers talked about the cause of the problem. Some mentioned bulldozing the houses. Who is paying for this? Can this be done by neighboring communities with the help of county counsel? What about the people who bought in these estates? I am wondering if there is a community spirit that can help these people by at least cleaning up the debris and building rubble or is it up to the authorities to sort this out. With so many unemployed and builders out of act, is there a way to use resources like labour… Read more »
Frontline – yes I saw it and was glued to it .I found it frightening and I admired Pat Kenny for once for his assessment of the speakers .
Sean_kelly, Tough Luck attitude is not coming anyway near an answer. But fair play to you it is good example of schadenfreude. Pat Kenny was very good and hopefully there will more of this to come and the lady Jen O’rourke was very brave as PK said to come on TV and explain her situation. G, Ok, we all know it is bad, very bad and gombeens were having a feast and so on. After watching last night’s addition I tried hard to put my “Save the world” thinking cap on but can’t come up with anything. I don’t know… Read more »
Looking forward to your ideas wills.
The Irish banks are knocked down another notch. These credit ratings have a bit of a credibility problem themselves.
http://www.rte.ie/business/2010/0126/banks.html
Bear in mind – the PAYE taxpayer is the majority shareholder in all of these banks. Even if we detest their institutional cultures, their hierarchies, their nepotism, and their cronyism – we are for the most part – the owners.
wills – I agree trust and goodwill need to be established as the bottom line before we can rise again. We had it is gaelic known as ‘meitheal’.
Because we now find ourselves ‘without tradition’ because we threw it away how and where do we begin? Time is Vintage like Gold.
An updated picture(graph) paints a thousand words.
http://www.statusireland.com/statistics/property-house-price-statistics-for-ireland/5/Irish-House-Price-Index-Since-1996.html
Back to March 03 levels now.