Ireland asset purchase proposal

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On Mon, Sep 21, 2009 at 7:38 AM, Greg wrote:

Hi Warren

What are your thoughts regarding the scheme in Ireland announced this past week whereby the government takes real estate assets from the big banks in return for bonds (at a discount implying some sort of bank subsidy) and whereby said banks can in turn repo those bonds at the ECB for cash?

Of course the devil will be in the details but it seems to me this will require all of us to rethink garlic belt sov. risk, the Euro, and the ECB if it comes to fruition.

Haven’t seen the details but reads to me like the govt is simply purchasing real estate assets?

That leads to the usual questions of pricing, etc. the proved unworkable in the US and probably a lot of other places.

Banks are already public/private partnerships with govt guaranteeing the deposits.

So there are several other things the govt might do to get to the same end.

For example, allow the banks to put the designated assets in segregated accounts with specified capital set aside for those assets, wherein losses that exceed that capital specified for the seg account are covered by the govt and not the rest of the banks capital.

That way the govt still functionally owns the assets it’s trying buy but doesn’t have the servicing and accounting and brokerage issues associated with an actual purchase by the cb. and the banks are fully regulated and supervised.

The US govt could have done same with the mbs it has bought for itself and saved itself the accounting nightmare and expense and substantial fees to brokers from buying those secs directly.

And, as you say, in the Eurozone this adds a risk to the national govt itself. So far it seems markets aren’t disposed to challenge their liquidity, and the Fed rescued them last year with the unlimited dollar swap lines (unsecured loans) to the ECB that totalled maybe 600 billion globally.