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Yes, starve, starve starve, And the externalized scapegoat is the EU, and in the case of Iceland the Netherlands and the UK. The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent. As redstar pointed out, you agitated for the rescue of the Icelandish oligarchs at the cost of dutch and british tax-payers. Indeed, the Icelandish neoliberals thrown out of government, retreated to their positions in the press and engineered this famous referendum to weaken the new left-wing government.

And you supported this neoliberal swindle as some progressive movement. And now you propagate the same model: >Defend "our" oligarchs against the foreigners< for Ireland.

redstar had good arguments. Still posting?

Boycotting german goods: Well, you can buy more Scania and less MAN. That will impress VW mightily. In the age of the multinational company...

by IM on Mon Feb 7th, 2011 at 10:05:21 AM EST
[ Parent ]
The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent.

No, that's not fraudulent. That's how you resolve an insolvent bank: You take all the assets and all the depositors and put them in a new bank, and let the liabilities stay with the old bank, which then gets a 100 % equity share in the new bank. The non-depositor creditors then get to eat shit and die, because they invested their money in an insolvent institution. That's called "taking a bank into receivership." It's a perfectly ordinary process that happens every month somewhere in the OECD.

And it is actually in no way unusual that it's foreign creditors who get to take the biggest haircut: The less able a bank is to fund in its home market, the greater its incentive to fund abroad, among banks who have less detailed local knowledge (and among a wider set of banks, thus ensuring a larger chance of finding a sucker). So quite often the most junior debt of an insolvent bank will be foreign. And the most junior debtholder gets to eat shit and die an a bankruptcy. That's the whole point of bankruptcy: Letting the bondholders eat the losses so you can salvage a going concern at the end.

Now, the Icelandic case was special because the Icelandic banks' assets plus the Icelandic depositor guarantee fund weren't even sufficient to cover their depositors. This is highly unusual, as deposits are normally only a smallish fraction of an insolvent bank's total liabilities, and a single bank is normally only a smallish fraction of the deposits covered by the guarantee. But because there were only three Icelandic banks, and because they had been abusing the lax bank regulation in the UK and Netherlands to conduct € and £ carry trades via depositors (as opposed to the usual case of conducting carry trades via interbank loans), the depositors ended up having to take a haircut.

In the Icelandic case, there's plenty of blame to go around. The Icelandic central bank should have killed the € and £ carry trades stone cold dead ahead of time, by devaluing the currency in proportion to the volume of carry trade (this creates a negative feedback loop that chokes the carry trade). The British and Dutch, for their part, should never have allowed a bank to take deposits from their citizens without forcing it to participate in their own deposit guarantee schemes. So there really weren't any innocents in that game.

Now, given that there were no obvious innocents, why should the Icelandic government protect Icelandic depositors first? Quite simple, actually: Any government has a duty to its own citizens above and beyond any duty to foreign creditors. Foreign creditors have their own governments, who may be presumed to look after their interests, and who are able to bail them out if they need to be bailed out.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 7th, 2011 at 12:57:42 PM EST
[ Parent ]
JakeS:
IM:
The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent.

No, that's not fraudulent. That's how you resolve an insolvent bank: You take all the assets and all the depositors and put them in a new bank, and let the liabilities stay with the old bank, which then gets a 100 % equity share in the new bank. The non-depositor creditors then get to eat shit and die, because they invested their money in an insolvent institution. That's called "taking a bank into receivership." It's a perfectly ordinary process that happens every month somewhere in the OECD.

The general public is in dire need of education on Bank resolution. Refer to VoxEU
VoxEU.org is a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites.
In particular, Zombie solutions: The Good Bank vs Bad Bank approaches by Willem Buiter, 14 March 2009
Zombie banks need fixing. Good Bank and Bad Bank solutions are the leading contenders. This column reviews the implications for distributional, incentive, and financial stability effects. It argues that too-big-too-fail bank should immediately be taken into public ownership and restructured decisively through a mandatory debt-to-equity conversion or debt write-down. The Fed and Treasury have been captured by save-unsecured-creditors reasoning pushed by special interest groups.

...

The Bad Bank solution

Under the Bad Bank approach, the authorities either purchase toxic assets from the banks that made the toxic investments/loans, or they guarantee (insure) these toxic assets.

  • Toxic assets are assets whose fair value cannot be determined with any degree of accuracy.
  • Clean assets are assets whose fair value can easily be determined.

Clean assets can be good assets (assets whose fair value equal their notional or face value) or bad assets (assets whose fair value is below their notional or face value). When the authorities acquire the toxic assets outright, they establish a legal entity to manage these assets - the Bad Bank. The publicly-owned Bad Bank either sells these toxic assets as and when they cease to be toxic and a liquid market for them re-emerges, or holds them to maturity.

The Irish NAMA is a bad bank solution.
The Good Bank approach

Under the Good Bank approach, the state creates a new bank, the Good Bank, which gets the deposits and the clean assets of the old banks. The old bank gets compensation equal to the difference between the (known) value of the clean assets it loses and the value of the deposits it gives up. The state may also inject additional public capital into the Good Bank, or it may invite in additional private capital. Government financial support is given only to new lending, new investment, and new funding by the Good Bank. The legacy (ex-)bank has its banking license taken away and simply manages the existing stock of toxic assets. The legacy (ex-)bank does not get any further government support.

The good bank solution is analogous to the bankruptcy of General Motors, which led to the creation of a new solvent "General Motors Holdings" and the renaming of the old GM as "Motors Liquidation Company", an entity dedicated to liquidating the bad assets (Wikipedia).

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Feb 7th, 2011 at 01:16:42 PM EST
[ Parent ]
The key is in the word "deposits", though
The Icelandish scheme, to put the assets and the domestic deposits in the new bank and leave all foreign deposits with the empty husk of the old, was fraudulent.
In this case the issue hinges on the different between a branch of a foreign bank, and a subsidiary bank of a foreign entity. Subsidiary banks are regulated by the host country and covered by its deposit guarantee, as they are incorporated in the host country. Branches need not be regulated or insured by the host country. In the case of Icesave, the controversy is around whether it was covered by a UK deposit insurance scheme called "passport" which allowed branches of foreign banks to buy into British deposit insurance for a fee.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Feb 7th, 2011 at 03:04:06 PM EST
[ Parent ]
>The British and Dutch, for their part, should never have allowed a bank to take deposits from their citizens without forcing it to participate in their own deposit guarantee schemes.<

But after Iceland was a member of the EEA, other governments had no input in that. Eu-member or in this case EEA member and your banks can operate everywhere. meanwhile they are still regulated and deposit-insured by their national states. And that, as as Iceland and up to a point Ireland shows, is a problem.

And once you have opened for savers out of other EU-countries, they are as senior as your domestic savers and you have to treat both the same way.          

by IM on Tue Feb 8th, 2011 at 10:05:17 AM EST
[ Parent ]
Eu-member or in this case EEA member and your banks can operate everywhere. meanwhile they are still regulated and deposit-insured by their national states.

As Iceland demonstrates, that is a bad rule.

and up to a point Ireland shows, is a problem.

No depositors have so far been in danger in Ireland - only bondholders who should lose their shirts.

And once you have opened for savers out of other EU-countries, they are as senior as your domestic savers and you have to treat both the same way.

No, they really shouldn't.

The British depositors can still petition their own government for restitution. Since the British government is more likely to cover British depositors than Icelandic depositors, the Icelandic government is justified in giving domestic depositors preferential treatment.

Management and bondholders should, of course, lose their shirts no matter their nationality.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Feb 9th, 2011 at 01:07:01 AM EST
[ Parent ]
Wikipedia: Deposit guarantee in the Icesave dispute
The Directive imposes a minimum guarantee of €20,000 per depositor; moves to increase this minimum to €50,000 or even higher had been agreed politically before the Icelandic crisis, but had not been incorporated into EU law, much less into EEA law. The Tryggingarsjóður guarantees 1.7 million krónur on the basis of a fixed euro-króna exchange rate, equivalent to €20,887.[62] The Netherlands and the UK have higher guarantee levels, €100,000 and £50,000 (approx. €60,000) respectively; Landsbanki was a member of the Dutch and British compensation schemes for the purposes of guaranteeing this difference in cover, an arrangement known in Britain as the "passport system",[66] and commonly used by banks throughout the EEA. In addition, the UK Treasury has exceptionally guaranteed retail deposits in excess of £50,000 which were held in Icelandic-owned banks in the UK at the time of the crisis, at a cost of some £1.4 billion (€1.7bn).


Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Feb 9th, 2011 at 02:18:29 AM EST
[ Parent ]

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