McWilliams says he has the solution: could he be right?

[He3]

David McWilliams sets out his plan in today's SBP. It is not up on the web yet, and I don't have time to even summarise it properly here, but if anyone has read it and has views on it, I'd be glad to hear them.

He says we should set up a 'financial skip' and throw all the banks' toxic debts into it. The skip buys the associated assets from the bank for say 20 percent original price. He thinks that could be 40 billion all told. Get that from the ECB at 4 percent. That cleans up the old banks and lets them resume raising money in the money markets, and lending again to good businesses.

Finally clear out all old bank management to facilitate this 'renaissance'

My knowledge of economics blows, but to a layman the whole good bank/bad bank idea seems like a decent way forward. Not because it in any way gets rid of the toxic stuff, which will still need to be dealt with. But rather because it frees up the good banks to get back to normal, restore confidence etc.

The David McWilliams piece is up on the web now here:

Sunday Business Post | Irish Business News

Let’s solve the problem and stop blaming others (there’s plenty of time for that); we must not let the country sink.

We -that is, my generation - don’t want to be the first Irish people who have had to emigrate twice in their working lifetime. Those who were born in the mid1960s tomid-1970s face the very real prospect of having emigrated in the 1980s and early 1990s, coming back in the late 1990s and early ‘noughties’, and now having to go away again. Some might argue there is nowhere to go in a global depression, yet we all know someone who will take his or her chances in a bigger pond than be stuck here, ruled by people who don’t seem to know what they are doing. It is clear that the government is completely out of control. It is also clear that this country is far too important to be left to those with their fake patriotism, which simply masks endemic cronyism. It is not about them, their careers or their political parties any more. It is about us, our lives, our parents’ retirement and our children’s prospects. If these people’s grasp of basic economics is so pathetically challenged that they cannot govern, then they should just go. Leave us alone, please. In the name of Ireland, go.

That's his intro. The plan is spelled out in what looks like plain terms on the link.

He sets the scene by pointing out that AIB has burned through a quarter of the 3.5 billion we gave it in just two weeks.

In the madness of the past few days, AIB’s profit warning, which was announced last Thursday, went unnoticed. It was the most significant news of the week.

Granted, the ‘golden circle’ got more airtime, but the AIB warning told us something about today, not yesterday. AIB -a bank with a chairman and chief executive who are scandalously still drawing salaries -admitted that its loss charge (ie its bad debts) for 2008 was €1.8 billion -o r 1.37 per cent of its loan book. This is up from a figure of €950 million estimated three months ago. The ‘mistake’ -the difference between the original bluff figure and last Thursday’s new estimate - was €850 million. Just to remind you, this represents 24 per cent of the bank’s recapitalisation of €3.5 billion announced two weeks ago. That means 24 per cent of the money -our money - poured in by the government has gone already! (How many A&E wards could we staff, or how many special needs teachers could we fund for our national school pupils, with this money?)

At this rate, AIB will have burned through all our cash in a matter of months just by sticking to the current rate of adjustments to its estimated bad debts.

He has a plan that he thinks would work. Is he wrong?

<Mod> This thread has been merged with "D McWilliams 5 point plan for our survival!" </Mod>

[Conor]

(1) Get cheap money from ECB.
(2) Use money to save banks and solve problems.

He's not really trying, is he?

[weathervane]

I don't understand the "bad bank" idea being discussed by some, including McWilliams here. If the state buys say €40bn impaired assets at 20% of face value this leave a €32bn hole in the banks balance sheet - this needs to be replaced with equity, presumably from the state because no-one else is queuing up to invest.

The problem with most of the bad bank ideas is that they ignore the question of pricing - how do you come up with a valuation of the assets (impaired loans) to be acquired. This difficulty is what ultimately scuppered the attempts in the US to set up a bad bank type fund. The only feasible way, as suggested in the FT a few weeks ago, is to temporarily nationalise all participating banks, transfer the assets and then float the good (and possibly bad) banks. This avoids any questions of pricing since the transfers into the bad bank will simply be transfers between different arms of the state.
Of course in in this country it's entirely possible that the state will decide to overpay for the impaired loans, as an underhanded sop to the bankers and then fail to vigerously pursue the borrowers, many of whom will be have been close friends of FF over the past 20 years.

wv

[mollox]

He sets the scene by pointing out that AIB has burned through a quarter of the 3.5 billion we gave it in just two weeks.

In the madness of the past few days, AIB’s profit warning, which was announced last Thursday, went unnoticed. It was the most significant news of the week.

Granted, the ‘golden circle’ got more airtime, but the AIB warning told us something about today, not yesterday. AIB -a bank with a chairman and chief executive who are scandalously still drawing salaries -admitted that its loss charge (ie its bad debts) for 2008 was €1.8 billion -o r 1.37 per cent of its loan book. This is up from a figure of €950 million estimated three months ago. The ‘mistake’ -the difference between the original bluff figure and last Thursday’s new estimate - was €850 million. Just to remind you, this represents 24 per cent of the bank’s recapitalisation of €3.5 billion announced two weeks ago. That means 24 per cent of the money -our money - poured in by the government has gone already! (How many A&E wards could we staff, or how many special needs teachers could we fund for our national school pupils, with this money?)

At this rate, AIB will have burned through all our cash in a matter of months just by sticking to the current rate of adjustments to its estimated bad debts.

McWilliams neglects to point out that

(a) AIB are forecasting Profit Before Bad Debts (PBBD) of €2.6bn - so that, after absorbing that €1.8bn Bad Debt provision for 2008, they'll still report a PBT of c. €800m, without having touched a penny of our €3.5bn.

(b) If AIB can continue to produce PBBD of, say, €2bn p.a. (which allows for reduced activity because of recession) from ongoing activities, they can fund quite substantial annual bad debt write-offs over the duration of the 3-5 year cycle, without having to erode our €3.5bn.

(c) In addition to ongoing profit generation (pre-bad debt), AIB already has capital reserves of c. €8-9bn, a kitty to meet future anticipated bad debts, which will be substantial, before they have to use any of our €3.5bn.

[edifice.]

Nationalise all the banks, have a merciless cull and start afresh.

[rhonda15]

I have to say I like McWilliams idea.
A plan very like this worked for Sweden.
But we really need to act quickly - the water is beginning to swirl rapidly around the sink hole - someone needs to put the plug in!

[SPN]

The problem with most of the bad bank ideas is that they ignore the question of pricing - how do you come up with a valuation of the assets (impaired loans) to be acquired. This difficulty is what ultimately scuppered the attempts in the US to set up a bad bank type fund.

Won't work.

The only variant that will work is to set up clean new Banks. They can buy assets from the zombie Banks so as to allow the zombies to meet their obligations to Bond holders and other loan notes that fall due.

This model also has the massive benefit of allowing the Bank Guarantee to lapse on it's 2nd anniversary.

Whatever is left in BOI, AIB or AIBC on that date gets to stand on its own two feet, or go belly up - that will be a Banking decision.

The only thing we, as taxpayers and citizens, need to know is that we have a clean Banking system to meet our daily needs, and our liability for the zombies has passed.

[anewbeginning]

Eamonn Ryan's solution is better. It's time we started taking into state ownership the properties that are used for security on the bad loans and these should also include houses.

The properties should be repossessed and sold again the debts paid off.

Of course that would mean inconviencing some prominent FF supporters. Can anyone see FF inconviencing some of their wealthier and most generous backers?

[seabhcan]

McWilliam's plan leaves a lot of questions unanswered.

How do the banks decide what's a bad debt? Whether a debt is bad, or will turn bad, depends on how bad the economy gets - whether loans to companies and developers get repaid depends on whether their products sell or their retail space gets let. So will AIB/BoI have to estimate how bad the economy will get and then decide which assets they make an 80% loss on? Do they only get one go at this, or can the continuously off load anything they don't want to the bad bank over the next few years at a guarenteed 20% valuation?

Because if they only get one chance to offload their 'bad debts' and the recession proves deeper than expected, then they will not be 'clean'. 6-12 months from now we could have the bad bank and AIB/BoI still layed low by bad debts.

If they can continously offload bad assets to the bad bank, its likely they will hang onto stuff they are unsure about until its clear they are worth below the 20% guarenteed price, in which case the uncertainty will continue and the state will end up loosing lots of money as we will overpay for bad assets (paying 20% for assets worth 5-0%)

I think McWilliam's plan is nice in theory, but in reality just investing in the banks to keep them afloat is a more practical plan. The Nordic countries were lucky that their housing crash in the 90's was at a time of general world boom, and prices recovered quickly. In Ireland's case there is a general world slump likely to last 15-20 years coupled with the fact that Irish property prices will likely never recover to the peak values - There is simply too much property in Ireland and too few people and businesses. We have cronic oversupply and no hope of demand ever rising high enough.

[crocked]

The properties should be repossessed and sold again the debts paid off.

and who do you think is going to buy the properties?