Fact checking Governor Honohan

Gadfly

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As reported in the Irish Times, Patrick Hohohan said yesterday that about half of the cost of dealing with the Irish banking crisis had fallen on shareholders and about half on the Exchequer.

Anglo costs less than what was 'touted around' - The Irish Times - Tue, Sep 21, 2010

This eyecatching claim came in the question and answer session, and does not feature in the speech he gave, which is available here:

Address by Governor Honohan to the SUERF Conference

Interesting comments here on the Icelandic and Latvian responses, among other things.

The quoted remark is hardly off the cuff, and we are likely to hear a lot of this claim in the continuing effort to justify Ireland's truly unique approach to the bailout.

But has it any basis in reality? What kind of assumptions would have to be made in order to make the case that the shareholders are coughing up as much as the taxpayers? I can't imagine that a calculation based on the decline of share prices in advance of 30 September 2008 is relevant, because the costs of dealing with the crisis arose after this date. Is he lumping bondholders together with shareholders? If not, the implication is that they have escaped without bearing any of the cost.

Perhaps the Bank can share the calculations behind this claim with the much put upon taxpayer.

And while they are at it, they could disaggregate the figures to show what share of the burden on the taxpayer is down to the two that should have been let fail, Anglo and ILP.

Edit (mmclo factchecking Gadfly): Not ILP.

Nationwide.
 
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paulp

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I guess he means market cap of main banks was ~30 billion - this has now been wiped out. So shareholders are out of pocket by ~30 billion.

And he is estimating final cost to tax payer will be similar.
 

mmclo

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I thought ILP didn't get any financial assistance? Well apart from an investigation into propping up share price of Anglo
 

Gadfly

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I stand corrected. That should be Nationwide, not ILP.
 

Gadfly

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I guess he means market cap of main banks was ~30 billion - this has now been wiped out. So shareholders are out of pocket by ~30 billion.

And he is estimating final cost to tax payer will be similar.
Was this the market cap on 30 September 2008?
 

GJG

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I guess he means market cap of main banks was ~30 billion - this has now been wiped out. So shareholders are out of pocket by ~30 billion.

And he is estimating final cost to tax payer will be similar.
I'm not at all sure that this (if it's the one) is a valid way of calculating where the cost fell.

First of all, Anglo had spectacular share price growth in the 90s and 00s, so very many shareholders would have bought in at prices far below the pre-crash price (wherever you set that point). Those shareholders may have viewed that share price as money in the bank, but it wasn't. Shares are essentially a gamble. They have upside and downside, both of which Anglo shareholders experienced.

It is not valid for Anglo shareholders (or Honohan on their behalf) to psychologically bank their gains and then claim their losses as taking part of the pain for the collapse. The gains were the seeds of the collapse. This logic is the equivalent of buying a €2 lotto ticket and then claiming that the numbers not coming up 'cost' you €3m or whatever.

The cash paid by the taxpayer is, however, just that. Real hard cold cash, paid for by increased taxes and debt.
 

Gadfly

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I'm not at all sure that this (if it's the one) is a valid way of calculating where the cost fell.

First of all, Anglo had spectacular share price growth in the 90s and 00s, so very many shareholders would have bought in at prices far below the pre-crash price (wherever you set that point). Those shareholders may have viewed that share price as money in the bank, but it wasn't. Shares are essentially a gamble. They have upside and downside, both of which Anglo shareholders experienced.

It is not valid for Anglo shareholders (or Honohan on their behalf) to psychologically bank their gains and then claim their losses as taking part of the pain for the collapse. The gains were the seeds of the collapse. This logic is the equivalent of buying a €2 lotto ticket and then claiming that the numbers not coming up 'cost' you €3m or whatever.

The cash paid by the taxpayer is, however, just that. Real hard cold cash, paid for by increased taxes and debt.
This hits the nail on the head. It seems to me that Honohan is misrepresenting the actual nature of the burden-sharing that is involved. This may be a viewpoint that banking interests would like us to believe, but that does not make it accurate.

As the risk of wandering off topic, here is an article looking at how the US banks hyped the crisis in order to get losses shifted to the US taxpayer. In this at least we are still closer to Boston than Berlin.

Wall Street's greatest heist: the Tarp | Dean Baker | Comment is free | guardian.co.uk
 

Libero

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paulp said:
I guess he means market cap of main banks was ~30 billion - this has now been wiped out. So shareholders are out of pocket by ~30 billion.

And he is estimating final cost to tax payer will be similar.
The IT report doesn't make clear if he's referring to the loss in shareholder equity, or the actual trading losses of shareholders, or the fall in the market capitalisation.

He would be very, very wrong though to look to either of the latter two measures. It is seriously misleading to label those losses as contributions to the physical cost of the banks' troubles.

Assuming the shares are fully paid-up, equity investors provide capital directly to the bank when the bank issues the shares.

After that, the share price will rise and fall on the secondary market.

In the context of a bank failure or near-collapse, the true measure of the contribution of equity investors is quite simple: how much they (or their predecessors in title) paid for the shares at issue.
That's what's been wiped off the actual equity of the bank as a company.

Falls in the market capitalisation of a bank stock are not a measure of equity investors' contribution. They're not even a measure of investors' trading losses, since only the marginal investor ever paid the share price that formed the record high market cap.

To see the fallacy of looking ot the fall in market cap as a measure of equity investors 'contribution' to the banking crisis, consider if AIB shares had risen to €50 rather than touching a high of just (!) €24. Would it then be true to say that equity investors had made over twice as large a contribution? Of course not. Some of them would simply have suffered larger trading losses as result of chasing the price even higher, and that's a matter between them and whoever sold them the shares.

So does anyone know what figure Honohan was referring to? How much shareholder equity has been wiped from the main banks?
 

cyberianpan

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The shareholders reckoned the banks were worth c €40b+ close to peak (iirc AIB's market cap was over €20b alone)

This was as they saw something like {assets exceeding liabilities} + {future earnings potential}

They were the owners of those institutions, and €40b was the market cap

So yes, they did lose €40b (though this loss was distributed over many deals, and few shareholders took a 90+% loss)

People's problem on this thread appears to be that this €40b was not on the bank's balance sheet... perhaps only say €10b (original + subsequent rights issue monies) was. That's true... but still doesn't deny the c €40b wipeout.
 

adrem

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The IT report doesn't make clear if he's referring to the loss in shareholder equity, or the actual trading losses of shareholders, or the fall in the market capitalisation.

He would be very, very wrong though to look to either of the latter two measures. It is seriously misleading to label those losses as contributions to the physical cost of the banks' troubles.

Assuming the shares are fully paid-up, equity investors provide capital directly to the bank when the bank issues the shares.

After that, the share price will rise and fall on the secondary market.

In the context of a bank failure or near-collapse, the true measure of the contribution of equity investors is quite simple: how much they (or their predecessors in title) paid for the shares at issue.
That's what's been wiped off the actual equity of the bank as a company.

Falls in the market capitalisation of a bank stock are not a measure of equity investors' contribution. They're not even a measure of investors' trading losses, since only the marginal investor ever paid the share price that formed the record high market cap.

To see the fallacy of looking ot the fall in market cap as a measure of equity investors 'contribution' to the banking crisis, consider if AIB shares had risen to €50 rather than touching a high of just (!) €24. Would it then be true to say that equity investors had made over twice as large a contribution? Of course not. Some of them would simply have suffered larger trading losses as result of chasing the price even higher, and that's a matter between them and whoever sold them the shares.

So does anyone know what figure Honohan was referring to? How much shareholder equity has been wiped from the main banks?

Interesting point but on that same basis could you not also argue that house prices haven't fallen by the amounts reported because many people bought earlier in the cycle and therefore didn't lose the full peak to trough amount.

I think it would be normal practice to calculate the collapse in value of equity holdings as being equal to the cost to the equity holders of the collapse. Not sure if thats what he is doing but it is actually a reasonable position.
 

Libero

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The shareholders reckoned the banks were worth c €40b+ close to peak (iirc AIB's market cap was over €20b alone)

This was as they saw something like {assets exceeding liabilities} + {future earnings potential}

They were the owners of those institutions, and €40b was the market cap

So yes, they did lose €40b (though this loss was distributed over many deals, and few shareholders took a 90+% loss)

People's problem on this thread appears to be that this €40b was not on the bank's balance sheet... perhaps only say €10b (original + subsequent rights issue monies) was. That's true... but still doesn't deny the c €40b wipeout.
It's a wipeout alright. But actual trading losses suffered by Irish bank shareholders are a lot less than the notional €40bn figure. After all, only some shareholders purchased at the peak.
(Trading losses are also offest, at least in part, by dividends received in years gone by.)

As for the trading losses, whatever sum that figure is, nobody denies those are losses. But the only contribution the bank ever received from those shares was the amount raised when the shares were issued.

If the shares later traded at a much higher price (producing larger subsequent losses for whoever bought them at the higher price), those gains and losses are between the buyers and sellers of the shares.

I mean, do BP shareholders look upon their recent losses as a direct contribution to the cost of the Deepwater Horizon disaster? Of course not. BP shares could have stayed constant in price, or dropped even further than they did, and it would have made no difference to the actual physical cost of it all.

The only way in which BP shareholders made a contribution is that when their shares were issued, they (or their predecessors in title) paid the subscription amount to BP. And some of those funds would have found their way, in a roundabout way, to meeting the costs of the gulf disaster. Same with Irish banks.
 

Libero

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adrem said:
Interesting point but on that same basis could you not also argue that house prices haven't fallen by the amounts reported because many people bought earlier in the cycle and therefore didn't lose the full peak to trough amount.
Of course.

adrem said:
I think it would be normal practice to calculate the collapse in value of equity holdings as being equal to the cost to the equity holders of the collapse. Not sure if thats what he is doing but it is actually a reasonable position.
Cost/loss, yes. "Contribution", no.

The exchequer is contributing in a very real sense to the cost of the crisis. But it's wrong on all sorts of levels to look upon the losses suffered by equity investors and consider that a similar sort of contribution.

Like I've said, look at the money flows.

And consider if AIB shares had risen to €50 before collapsing. Shareholders' losses would be even higher; higher in notional terms for all, and higher in real terms for those who bought at the high price. But could anyone look at the higher losses and say that shareholders had borne an even greater share of the burden of the banking crisis? I think not, since the losses suffered are a matter between those who bought and sold shares, and the underlying amount paid to AIB at the share issue remains the same.
 

He3

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As reported in the Irish Times, Patrick Hohohan said yesterday that about half of the cost of dealing with the Irish banking crisis had fallen on shareholders and about half on the Exchequer.

Anglo costs less than what was 'touted around' - The Irish Times - Tue, Sep 21, 2010

This eyecatching claim came in the question and answer session, and does not feature in the speech he gave, which is available here:

Address by Governor Honohan to the SUERF Conference

Interesting comments here on the Icelandic and Latvian responses, among other things.

The quoted remark is hardly off the cuff, and we are likely to hear a lot of this claim in the continuing effort to justify Ireland's truly unique approach to the bailout.

But has it any basis in reality? What kind of assumptions would have to be made in order to make the case that the shareholders are coughing up as much as the taxpayers? I can't imagine that a calculation based on the decline of share prices in advance of 30 September 2008 is relevant, because the costs of dealing with the crisis arose after this date. Is he lumping bondholders together with shareholders? If not, the implication is that they have escaped without bearing any of the cost.

Perhaps the Bank can share the calculations behind this claim with the much put upon taxpayer.

And while they are at it, they could disaggregate the figures to show what share of the burden on the taxpayer is down to the two that should have been let fail, Anglo and ILP.

Edit (mmclo factchecking Gadfly): Not ILP.

Nationwide.
Forgot this thread - would have been useful material for a question by Vincent Browne last night when he was interviewing 'the most powerful man in Ireland' (his description).
 

He3

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Bump.
 


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