WHAT HOPE IRELAND’S BANKS?

On the 17th March that great American financial institution, Bear Sterns, effectively collapsed and had to be bailed out by the Federal Reserve in a scenario not entirely unlike what happened in the UK with Northern Rock bank. It has been dubbed as the Paddy’s’ Day massacre

The difference was that while the Federal Reserve - the American equivalent of the European Central Bank (ECB) - done so in partnership with another giant American bank, JP Morgan, in the UK the British Government stepped and actually guaranteed the depositors funds. Northern rock is now probably the safest bank in the world in which to put your money. It also has an Irish branch in Dublin and this British guarantee applies to Irish depositors whose savings are lodged there.
You may well ask what has all this to do with the ordinary Joe and Joan Mc Soap in Ireland. They are going about their business, putting some money away in various institutions and stocks, bonds and ordinary savings. Some may be on company pensions. Some may have their cash locked up in a capital-guaranteed product with some of the Irish banks, earning a low but steady return and allowing them to sleep peacefully at night.
Yet others, who may consider themselves more financially astute, have invested in complex products with their broker or financial adviser.
So, the current meltdown in the world’s financial markets has everything to do with the future of the Mc Soaps in rural or city Ireland. It is time to head to the pharmacy and get some strong sleeping pills. You may need them if cold sweat interruptions to your sleep are to be avoided.
Two weeks ago, Irish investors in a Friends First bond which was packaged by the now defunct ITSC lost every cent of their investment when ITSC ran into liquidity problems caused in no small measure by the sub-prime lending crisis that started in America.
This crisis erupted when greedy American banks issued mortgages to people at very high interest rates because the borrowers were high risk. The banks however figured that they had weighed the risk correctly and, while there would be a higher level of defaults, the high interest rates on those loans that were repaid would more than compensate for that downside. Just to be sure, however, they securitized (sold on) these loans to other banks worldwide to reduce their exposure.
It is a bit like a bookie laying off a big bet that they cannot handle if it were to come off.
The American banks were wrong. Defaults were huge. The NINJA’s, as the borrowers were known, (No Income No Job No Assets), didn’t pay the money back and never will. And when that happened banks all round the world, including Ireland, were left holding the baby as these securitized loan packages became weapons of mass financial destruction. Billions and billions were lost by banks.
Lack of trust and confidence has now developed to the point where wholesale banks are refusing to lend to each other - an essential trading activity that keeps the wheels of commerce moving.
The knock-on effects are potentially disastrous for everybody from the greatest movers and shakers to the ordinary Joe and Joan.
Share prices in banks and construction companies have nose-dived. That pension you were planning on to retire to Spain is shrinking away. The actions of greedy and irresponsible banks in offering loans to people who had a poor credit history will destroy the value of your pension.
Here in Ireland, the PR people are spinning soothing expressions of confidence in our main banks. We have no problems, they say. We are not exposed to any possible liquidity problems, they murmur calmly. This at a time when the stock market value of Irish banks is a third of what it was a year ago. No problems?
What nonsense!
It is of course a front designed to keep the confidence of their customers. In the back office, you can bet your life there is panic.
And if they are panicking, then you should be having heart attacks.
If a run comes on an Irish bank and it collapses you get between 5% and 20% of your deposits back at most. And you will wait for it.
It is laughable at times to see how institutions and politicians delude themselves into thinking that Ireland is somehow insulated from the problems of the world because of our great economic achievements as a small nation in the last 15 years. The accidental Celtic Tiger has coated us with the lacquer of invincibility, it seems.
Let us spell out the reality. One week ago, Bear Stearns had assets under management equal to eight times the GDP of Ireland! Today they are no more.

Our advices is take your money from your bank and lodge it in Northern Rock.
The British taxpayer is paying to guarantee you that it is safe.
It will save you a trip to the pharmacy for those sleeping tablets!