Thursday, April 2, 2009

Bad Bank - Bad idea

The idea of a "bad bank" to solve the Irish banking crisis is one of the biggest mistakes the Government has made.

This idea makes some sense where banks have complex assets (CDOs etc.) which the market cannot value at present. The Irish banks have a rather simple problem: they lent absurd sums to developers for real estate which is plummeting in value. The loans are secured on property which is not worth a fraction of the loans and the developers are removing their other assets outside the reach of the banks.

If the "bad bank" were to pay the banks a realistic rate for these bad loans, the banks would be left insolvent. So the State will pay well over the odds for these "assets" but there is a bigger issue. I can think of no better guarantee that the developers will not repay these loans than the transfer of these liabilities to to State agency.

One suggestion: call in the Criminal Assets Bureau for those who default on the loans.

We learn from Simon Carswell in the Irish Times today that Allied Irish Banks and Bank of Ireland have submitted preliminary responses to the Government’s "bad bank" proposals. naturally, both banks "are understood to have accepted" this idea. Well, of course! They'll be popping the champagne corks in Bank Centre when this deal goes through.

The two banks have loans worth almost €35 billion which would be transferred to the "bad bank" and altogether there are some €56 billion in such loans across the six state-guaranteed institutions (ultimately, it's all about that guarantee)

It will all be revealed on maxi-budget Day.

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