Michael Lewis article on the Irish financial crisis

[Corth]

This would, I guess, be the third in a series. He previously did similar articles on Icleand and Greece. If you haven't read any of his books (Liar's Poker, Moneyball, The Blind Side, etc), you are missing out.

http://www.vanityfair.com/business/feat ... table=true

[Ragorn]

Maybe my favorite author of the last ten years. I'll have to give this a look when I have the time.

[Corth]

One of my favorite current writers as well. Truth be told, this one on Ireland is the least well rounded of the three country specific articles that he wrote for Vanity Fair - but it's still an incredible read. In this article you see probably the worst example of a country being fooled by the "we are too big to fail" mantra and causing their people unspeakable pain as a result. Whether this was true for US financial institutions is subject to debate. But in Ireland it definitely wasn't true. Basically, international investors got a huge windfall - thanks to Irish politicians - which will be paid for by the blood sweat and tears of Irish workers for god knows how long. Truly unbelievable.

[Kindi]

i thought it was socialism that caused all the problems of the world?

[kiryan]

What do you think a bail out is?

its not capitalism.

[Kindi]

i thought the bailout was the fix, not the problem?

[Corth]

You weren't posting here when the bailouts were happening. It seemed like most of the guys on the left, such as Ragorn, were defending the bailouts, while the guys on the right were very much against it. The bailouts are anathema to capitalism. Capitalism works by rewarding good decisions and punishing bad ones. Protecting large financial institutions from the consequences of their bad decisions is about as anti-capitalism as you can get.

[Ragorn]

You weren't posting here when the bailouts were happening. It seemed like most of the guys on the left, such as Ragorn, were defending the bailouts, while the guys on the right were very much against it. The bailouts are anathema to capitalism. Capitalism works by rewarding good decisions and punishing bad ones. Protecting large financial institutions from the consequences of their bad decisions is about as anti-capitalism as you can get.

No, I was actually against the bailouts from the start. BAC should have been allowed to fail.

[kiryan]

I just finished the article. Wow. Having been in Ireland in 1997ish, I recall some of the culture they mentioned.

The Irish I encountered in bars at the time were extremely big on real estate and technology (and supportive of tax reductions to bring technology firms to Ireland). I got into a long argument with an Irishman who suggested he was a big wig and might hire me to help him out with a high speed Internet via satelite; he tried to tell me it was faster than fiber and going to make him rich as I tried to explain to him the issues of latency and speculated that shooting a satelite into space was not something to be taken lightly... he did claim to already have millions in bank financing (which I figured was just drunkedness exaggeration).

I was also already flabergasted about the price of houses in Dublin in particular. Where a pair of what I would call crappy 2000 sqft townhouses commanded a 500k and 800k euro price tag respectively while there were hours upon hours of undeveloped land throughout the country (I drove the entire coast). Yes everytime I go somewhere, I pickup and actually look through a real estate book and discuss real estate with the locals; its just something I do. A dozen guys who owned houses worth more than a million US dollars were drinking in a dive in a dirty part of town (the houses were nearby).

Despite the crazyness of some of the conversations, I developed a high degree of respect for the Irish's work ethic, pride and moral sensibilities. I am not at all surprised that they accepted the incredibly stupid business move of making all their bond holders whole. I find the Irish in general to be prideful and have a strong sense of community. They were one of the first countries I am aware of to ban plastic bags. They just all over the course of like 3 months decided that they ought to take cloth bags when shopping made it a law and went forward.

I wonder if prices are low enough I could afford something there! Downside, it really does rain all the time.

[Kindi]

property values know no bounds. the japanese emporer's palace was supposedly worth more than the entirety of new york city before their big economic correction (still ongoing 20 years later)

[Corth]

If I was Irish I don't even think I could even get angry about this. I think my reaction would basically be to hell with it - I'm out. It isn't really surprising that the government got duped into placing the entire population into indentured servitude (a sensitive topic for the Irish) in order to bail out English, German, and US banksters. More or less the same thing happened over here. The crazy part is a) what an enormous burden they placed upon themselves and yet unborn generations - far worse than in the US relatively speaking; and b) the fact that the bondholders who were bailed out had already recognized enormous losses on their investments and basically got an unforeseen windfall out of it. The Irish people suffer enormously so foreign investors can win the lottery - and their leaders did this to them. Insane.

[kiryan]

...

According to the article, it was basically foreigners giving money to Irish banks who made loans to Irish people to buy Irish properties. I don't think you can portray the Irish as victims.

The investors were the victims and or just plain stupid. Gambling, investing... I think its a fine line.

[Corth]

Well here's the rub Kiryan. The foreign investors were not making loans to the government of Ireland. They were making loans to privately owned Irish banks. The government of Ireland, and by extension the people of Ireland, had absolutely no responsibility towards those foreign investors - either moral or legal. And then the Irish government, in exchange for nothing at all - inconveivably agreed to make good on those loans - at a staggering cost given the country's size. Talk about being sold out by your government.

It's irrelevent that the end borrowers were Irish That was between the bank, it's investors, and it's borrowers. As of yet unborn Irish children will be breaking their ass to pay off a debt bestowed upon them by their government for no reason at all. As far as I'm concerned, the Irish are absolutely victims of their incompetent leadership.

[Kifle]

Well here's the rub Kiryan. The foreign investors were not making loans to the government of Ireland. They were making loans to privately owned Irish banks. The government of Ireland, and by extension the people of Ireland, had absolutely no responsibility towards those foreign investors - either moral or legal. And then the Irish government, in exchange for nothing at all - inconveivably agreed to make good on those loans - at a staggering cost given the country's size. Talk about being sold out by your government.

It's irrelevent that the end borrowers were Irish That was between the bank, it's investors, and it's borrowers. As of yet unborn Irish children will be breaking their ass to pay off a debt bestowed upon them by their government for no reason at all. As far as I'm concerned, the Irish are absolutely victims of their incompetent leadership.

It sounds similar to the US bail-out except the lack of interest being generated by the loans and instead of giving the loans directly, it was more of a three party trade. In essence, what happened would be the same as the Irish government borrowing the money from, say, China, and then giving it to the banks. Unless, of course, the banks are not repaying the Irish government so that they can repay the loans to foreign investors -- which I will wholeheartedly agree is insane.

[kiryan]

Except the scale... it would be like our government doubling the national debt to pay off foreign investors. We just spent a trillion to make investors whole (some foreign banks).

I wouldn't choose it. It is a stupid from a practical perspective. I'd be pissed off at my government, but I'm not surprised the Irish didn't protest in the streets over it based on my visit.

However, it is pretty likely that the tax base will flee Ireland and they'll at least a decade of depression. The only saving grace might be a renewed interests in Irish properties after several years of depression. it really is an amazingly beautiful country and quite quaint.

[Corth]

The US government did something similar with Fannie Mae/ Freddy Mac. Prior to the financial crisis there was an implied government backing of Fannie/Freddy debt. When it became apparent that Fannie/Freddy were insolvent the government made the backing explicit. Kiryan is correct that there is a big difference in terms of scale. Last I heard the Fannie/Freddy fiasco cost the government maybe 150 billion or so. That's like $500 for every man woman and child in the US. In Ireland you are talking about a LOT more money per capita.

[kiryan]

To be fair, you mentioned scale first.

and Freddie / Fannie are not what I was thinking of although elements are similar. I was thinking more of AIG and the 100+ billion given to them to keep them from failing. That money basically paid off AIG creditors at full value which included Goldman Sachs and several foreign banks like Credit Suisse (the french bank that had that trader scandal issue). There were congressional hearings I believe on why they (especially Goldman Sachs) didn't get a 'haircut'. We made them whole on their investments.

and then months later for the auto companies we shafted senior secured creditor/investors who LOANED money (not invested) to automakers in favor of unsecured union creditors (much closer to being thought of as "investors").

[Corth]

Fannie/Freddy is more analgous - the government assumed the debt of a private company. With AIG I believe it was structured such that the government loaned money to them so that they could cover their debts. I guess if you assume that the AIG money never gets repaid then it's more or less the same thing. Either way, as we agree, there is a big difference in scale. The US would have had to have assumed $10 trillion dollars in private debt.. something like $30,000 for each citizen... in order to duplicate the scale of what Ireland did. Fannie, Freddie and AIG all together comes to about $300 billion, or $1,000 for each citizen.

[kiryan]

Yes I suppose you are right. We guaranteed Freddie/Fannie's debt vs just paying off some urgent debt.

Revisiting the scale... maybe its not as far off as we think. I believe "experts" said freddie/fannie losses will be over 1.5 trillion and could be as high as 2.5 or so depending on how the markets perform. Combine that with 1 trillion $ bailout of the banks and well we're starting to get up there. Finally add in buying government bonds / inflation and well if you wanted to prop up the housing market, you might make some policy based decisions on what mortgages to buy at Freddie/fannie. Maybe our politicians just did a better job of hiding the cost.

[Corth]

Well as Ragorn pointed out, the TARP money is being repaid in full. You might have a point concerning the trillion plus dollars of toxic mortgage backed securities the federal reserve has purchased in a misguided attempt to backstop the mortgage market. If you mark those down by half then maybe the government loses 500 billion or so. And between AIG and Fannie/Freddy that's another 300 billion so far, and as you mention, perhaps a lot more down the line. But still, put all that together and you don't come anywhere near the 10 trillion dollars of assumed debt which would put us at the same place as Ireland per capita.

Also, there is a fundamental difference between the US explicitly backing Fannie/Freddy, which it had implicitly backed for decades, and the Irish government backing debt that it never had any real connection to in the first place. If the US government had allowed Fannie/Freddy debt to default it would have been viewed as a de facto US government default - as the government has made it known (without actually saying so) for decades that this debt was as safe as US treasuries. On the other hand, if the Irish banks defaulted it would not have effected the credit rating of the Irish government at all. It would only have effected the foreign investors who loaned money to the Irish banks and obviously the Irish banks themselves.