Sunday, March 20, 2011

"When Irish Eyes Are Crying": The Michael Lewis Vanity Fair Article About Ireland's Bank Bailouts

I meant to post the Michael Lewis article about Ireland's bank bailouts that ran in Vanity Fair last month:

In any case, if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government.

In retrospect, now that the Irish bank losses are known to be world-historically huge, the decision to cover them appears not merely odd but suicidal. A handful of Irish bankers incurred debts they could never repay, of something like 100 billion euros. They may have had no idea what they were doing, but they did it all the same. Their debts were private—owed by them to investors around the world—and still the Irish people have undertaken to repay them as if they were obligations of the state.
I expect that in the next leg down, there will be a bigger push back against the idea of socializing the losses created by incompetent bankers. Maybe I am too optimistic about the public, but I like to think that after demanding bailouts, then pretending everything was fine and paying themselves huge bonuses and undertaking risky lending again, that the banks will have no political capital for bailouts next time.

You may remember my recent review of Michael Lewis' book, The Big Short.


EconomicDisconnect said...

One can dream that the next time there will be too much pushback on bailouts, but then I woke up.

CP said...

Channeling the other commenters on this blog:

"Being a bailed out bondholder works, until it doesn't."