Making Anglo-Irish a "toxic bank" - a solution?

[FutureTaoiseach]

Economists like David McWilliams have suggested a solution to the banking-crisis can be found in transferring all the bad-debts of the banks to the newly nationalised Anglo-Irish Bank. The theory goes that this would kickstart lending from the former. Is this a viable proposition or not?

[ivnryn]

Economists like David McWilliams have suggested a solution to the banking-crisis can be found in transferring all the bad-debts of the banks to the newly nationalised Anglo-Irish Bank. The theory goes that this would kickstart lending from the former. Is this a viable proposition or not?

The US tried that with the government buying up all the bad debt and it had little to no effect on lending.

Banks aren't lending because they are de-leveraging. They need to reduce their loans to reserves ratio. This is arguably a good thing, they never should have given out so many loans in the first place.

Giving them more money just means they will use it to increase their reserves.

(Also it would count as privatising profits and nationalising losses. I am all for the free market, but that means that business must accept both the ups and downs)

[Oppenheimer]

Economists like David McWilliams have suggested a solution to the banking-crisis can be found in transferring all the bad-debts of the banks to the newly nationalised Anglo-Irish Bank. The theory goes that this would kickstart lending from the former. Is this a viable proposition or not?

The saying "What doesn't kill you, makes you stronger" springs to mind. I am not sure it is a solution so much as a reset or "Get out of Jail" card for the current system, i.e., by swallowing all the bad debt the system remains the same. I do believe it is an opportunity to more fundamentally shift the thinking to an alternative "stakeholder" view from the primarily "shareholder" view that has been promoted. The trick will be how far to go towards a complete stakeholder view before business, i.e., the ability to make a margin becomes unfeasible.

[toxic avenger]

It has been done before, in Sweden in the 1990s, and it worked to an extent then.

Both supporters and opponents cite the case of Sweden, which established its own bad bank in the early 1990s. Approximately 4 per cent of Sweden’s GDP was spent buying up toxic assets. These assets were subsequently restructured and sold on again, with the government losing approximately half of its initial investment – a small price to pay in the circumstances, most agree.
That’s not the whole story, however. The Swedish bad bank insisted that banks write down their assets to market value. Banks took the pain up front, with recapitalisation following. In the US and elsewhere banks have preferred to “wait and see” rather than accept market valuations they insist are irrational.
Sheila Bair appears to agree, saying that “we don’t have really any rational pricing right now for some of these asset categories”.

http://www.irishtimes.com/newspaper/...474670959.html

So it's not necessarily the best of a bad lot, it depends on the timing and form of valuations. It might end up minimising losses, but it's a hell of a gamble...

[KingKane]

The problem is the banks don't know which are the really toxic debts.

[wombat]

The problem is the banks don't know which are the really toxic debts.

I think they do but they're afraid to admit it.

[Dreaded_Estate]

So long as the government buys the toxic debt very cheaply we could make a profit from Anglo in the long term............but

The problem with this solution for Ireland is that if we buy the loans very cheaply from BOI and AIB they will be faced with massive losses that they currently cannot absorb. We will quickly have to step in to bailout BOI and AIB.

The blanket guarantee has made the bad bank solution almost unworkable but definitely ineffective. All it does is transfer the assets from one institution to another. But as the government effectively owns all these institutions the bad bank solution is just like internal transfers of loses between the now semi-state banks.
At the end of the day the government has guaranteed to make the loses on ALL loans doesn't matter what bank they are with.

[kellsangel]

The problem is the banks don't know which are the really toxic debts.

Of course Banks know where the toxic debts are

They are within the loans having the interest rolled or not making interest payments.

They are within the loans which have been secured to high LTVs on rapidly depreciating assets.

They are the loans to people who have lost their income stream.

[Clanrickard]

Of course Banks know where the toxic debts are

They are within the loans having the interest rolled or not making interest payments.

They are within the loans which have been secured to high LTVs on rapidly depreciating assets.

They are the loans to people who have lost their income stream.

Of course. If Mick the Builder has a loan and the security is 30 houses in some wind swept bog hole without a bus route, school or shop in sight then it is toxic. At this stage a primary school kid could identify toxic debts.

[kellsangel]

Neither the Government or the Banks want to acknowledge toxic loans

If they do it means that the loss must be capitalised and tier one capital is reduced.

Which means the capital must be replenished by someone