Bailout - Builders or Banks?

Reading up on the latest events in Ireland I just started thinking of something. Could it be that this is something that has been planned for some time, and the supposed “Help the FTB” in the upcoming budget is something entirely different than a bail-out for the developers. (Although they probably won’t mind anyways)

Here’s what I am thinking about. Please excuse me for two things, 1) English is not my native language and 2) I am by no means edcumacated in economics.

A bank has three main legs to stand on. The first is its deposits, the second is its share value, and the third it’s assets or loan book. A failure of one can bring almost any bank down. Two almost certainly will, three is game over for sure.

As the events over the last few weeks have unfolded, and the actions of the Irish government really got me thinking.

First the deposit protection, I am almost certain that this was what prevented a run on an Irish bank (or more) when the share prices dropped. Luck or coincidence?

Second the government guarantee – Albeit a little rushed and maybe not completely ironed out, it is a pretty impressive feat to get something like that on the table so quickly. The framework must already have been drawn up. Luck or coincidence that is was “ready” the same day the shares plummeted - and so protecting the share value. (That’s two out of three)

This brings us to the third – the loan book. With the upcoming budget, will there be any measures to prop up the house prices? Given what’s been done to prop up the deposits and the stock price so far, I would be very surprised if something isn’t done to prop up the loan books. But I would say that it might not be to help out developers (even though they will of course benefit) it will be to prop up the banking system. Any such schemes will of course be dressed up as to help the first time buyer – there will be uproar on this site at least of it being to help the builder buddies – but might the ulterior motive be to prop up the banks loan books?

I think so.

It is more efficient to let the banks go bust, create a good bank/bad bank, capitalise it and then get what you can for the remaining (toxic) assets.

It’s the same thing really.

The “FTB Bailout” we were all protesting about last week was nothing of the sort. The “thinking” behind it was that money could be funnelled to FTBs, who would use it to buy up loads of empty shoeboxes from de builders without them having to slash their prices, so that then in turn the builders could pay back at least a good chunk of the billions they owe the banks, so that the banks (and in particular Anglo-Irish) would not collapse.

Somebody else said somewhere on the Pin today: “We don’t have a banking system, we’ve got a developer/mortgage financing system”

If the builders collapse, so do the banks, if the banks collapse so do the builders. It’s all one big cosy rip-off colluding cartel of FF/Builders/Banks and the fortunes every one of them are completely and utterly tied up in the property bubble.

More speculation:

If the Irish government decide that the loan books need propping up, let’s assume that someone slams on the breaks and says: “Hang on, we can’t shoulder the entire loan book, the banks need to do a bit of tidying (i.e. writedowns/writeoffs) before we step in”

What are the percentages of the loan books - developer loans vs. existing home loans? Isn’t it an entirely feasible scenario that the developer loans are small - percentage wise - and that becomes the “forced writeoff”?

Seeing as such an event would effectively set some sort of new market value of all the other banks loan books, I’m suspecting that this is something very carefully considered.

If anyone has the numbers, it would be very interesting to see them.

That just about sums up what’s going on with this guarantee and why, etc.

So, combing through that article, we have about:

€110 billion to the builders (figure that’s been mentioned repeatedly in last 2 days)
€80-90 billion or so to ordinary punter mortgages
€25-30 billion or so on BTL mortgages (assuming BTL was 1/4 or all mortgage lending, and punter mortgages, the other 3/4, are around €80bn

And if mortgages to individuals total €110bn or so, then there’s about €90bn in other private debt (overdrafts, car loans, credit cards etc), which is about €200bn in total, yes? :open_mouth:

But that means, if the €400bn number being bandied about is correct, there’s a further (400- (200+110) ) = €90bn in commercial lending to companies out there. … llapse.pdf

and where did they get the money to build these… … lopers.pdf

Anyone know what this guys name is?

I find this unbelievable…no wonder this f****ng country is such a complete shambles.
You couldn’t make this stuff up.

Wow - I’ve been a reader of this site ever since the old AAM thread. The reason I started this thread was to see if there would be any evidence of what I suspected might play out as a likely scenario, especially with the latest actions from Irish government. (If anyone wonders, I am Swedish, hence the reference to “the government” as “the Irish government”)

Here’s what I was thinking:

  1. Initial set of “help the FTB” schemes in budget.
  2. These do not have any significant effect on propping up house prices (and subsequently, the value of the bank loan books)
  3. Target the loans to the developers as I thought these might make up a smaller portion of the loan book total.

From the numbers presented here - that looks unlikely to happen :neutral_face:

One last attempt at this one then: Out of the €100 billion (if we agree to use this number) it would be interesting to know what these consist of. More to the point, whats the spread between land banks (yet unbuilt) , “in progress” and finished construction. This will probably be crucial in determining what room to maneuver there will be when the write downs begin in earnest.

Yup. Land values have already fallen probably a third, and may fall another third? So a shortfall of 60odd% less whatever the developer had in it less probably a bit depending on location?
Completed properties have fallen 20%ish and may fall 50% - given that the reputed margin of developers is 35%ish, that’s a shortfall of 15% less whatever skin the developer had in?
Part constructed are the hardest to value?

I think dirtysquatter was asking who the Central Bank wingnut is…

So using these numbers, and the numbers for mid-size regional banks losses during the S&L fiasco (eventual losses around 30% if I remember correctly) we are looking at an absolute minimum of (110 + 25 + 90) * .3 = 75. The ordinary punters will only account for a loss of a few billion, due to the punitive bankrupcy laws.

So the boys in Dame St have just socialized a minimum of E75B in losses…

That’s about 60% of Irelands GNP.