Popping the Irish Bubble

In compliance, you need to learn from your mistakes so you can prevent future problems. There were many mistakes that lead to the 2008 financial crisis, not just in the United States, but also abroad. Michael Lewis wrote The Big Short, taking a look at the Unites States financial crisis and has written great stories on the financial crises in Iceland and Greece.

His latest story in Vanity Fair focuses on the troubles in Ireland: When Irish Eyes Are Crying.

He makes this one look easy. Ireland’s banks made too many bad real estate loans and the Irish government foolishly guaranteed the obligations of the Irish banks.

Lewis quotes Theo Panos, a London hedge fund manager: “Anglo Irish was probably the world’s worst bank. Even worse than the Icelandic banks.” The bank faced losses of up to 34 billion euros. A big number, but the sum total of loans made by Anglo Irish was only 72 billion euros. This one Irish bank had lost nearly half of every dollar it invested.

The signs of an immense real estate bubble sound obvious. A fifth of the Irish workforce was employed building houses and the construction industry had become a quarter of the country’s GDP. As for prices, since 1994 house prices in Dublin had risen more than 500 percent. As a measure of affordability, rents had fallen to less than 1 percent of the purchase price. Your $833 in rent would be for a home with a sales price of a $1 million.

There was a tight link between the Irish banks and Irish real estate. Lending to construction and real estate has risen from 8% to to 28% since 2000.

The Irish government stepped in to help save the banks from their poor underwriting and poor investments. Instead of merely standing behind the deposits at the Irish banks, the government guaranteed all of their obligations. Investors who were looking to dump bonds issued by the banks for pennies on the dollar, were rewarded for holding on to them.

There are plenty critics of TARP and the bailout of the US banks. But it was a significantly smaller intervention than what happened in Ireland.

It’s worth your time to take a few minutes and read When Irish Eyes Are Crying.

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