Irish Mortgage Brokers Blog

Section 23 properties have had their tax treatment changed, in effect the buyer honoured their side of the contract from the outset and after the initiation of this the Government reneged on their side of it. This is contrary to the idea of fairness, the concept of contractual obligations, and it undermines the faith any taxpayer can have in the state.

The state recently cut many people with income tax and reductions in entitlements, but these were never contractual and people certainly didn’t leverage up to obtain them. Landlords may not be a group worthy of sympathy, but at the same time recent changes to taxation on rent (Case V income) mean the amount of financing expense the business can offset has dropped by 25% (mortgage interest you can offset has gone from 100% to 75%), this is contrary to the rules of accounting when you look at any other business.

The only solution is a reversal of this policy, and perhaps the only way to ensure this is to apply the idea of mutual assured destruction. If there were 10,000 section 23 owners who all signed up to a commitment to go into 100% default on the 1st of April if this is not changed then you would see that the state would reverse this policy because it is flawed and because the 60-100m in savings that they would make would be eradicated by the ensuing mess the banks would be left in because of it.

When default becomes discretionary then a solution becomes necessity, and at this point, for many landlords default is becoming an option because they are being hit from all sides. Banks are looking for capital and interest payments at a time when rents are dropping, subsidizing the capital payments is often coming from earned income which is being subjected to more taxation, landlords are making imaginary profits because they can’t offset their expenses fully and now a lasing commitment regarding property taxation has been grabbed because it was easier than making the right decision.

The right thing would be to tax all property rather than just attacking those who hold investment property, they made this move before with the NPPR tax (€200 p.a.), and there was no resistance despite the fact that a flat tax of this nature was grossly unfair and didn’t distinguish between a mansion and a one bed apartment. Now there is an extension of this approach because it’s easy, because landlords don’t fight back, but that forgets the fact that you reach a certain point and people simply roll over or opt out, Atlas can always shrug.

Perhaps it was time that the Government found out that we do have an ace up our collective sleeve, and that it can be used to destroy the system they have fought so hard to save.

We have been shaken, and the markets are stirred. Why not have fun in our final days? When asked what I’d do if I was on a plane that was going to crash, my simple answer is ask somebody for a shag and drink champagne until it all goes bang, what a pity that during the bond market equivalent of this all we can do is shake in our boots, I say crack open the bubbly.

O.k. So we can’t afford to drink champagne, and with any flight/sex innuendo I’ll become the blog version of Prenderville so we’ll leave that alone too.

What could we do with our bond market to sort out this mess? The issue we currently have is that there is capital depreciation on our bonds leading to higher yields, when you hear that our yields hit 8% it doesn’t mean that we are paying more, it means people are selling at a loss and new buyers get a higher yield on the indexed mix of bonds (explained this here).

So why not take advantage of those discounts to buy back debt? Our next bond issuance will likely be primarily to roll over debt, so the plan would be as follows:

1. Snap our fiscal fingers and bring out a new bond, it is sovereign issued but called a Tax Anticipation Bond and it is underwritten by whatever new taxes come out in December, so while the sovereign owes whatever it owes, this is a sovereign bond but it only relates to (recourse restricted to) certain aspects of our taxes, so if they bring in water charges then whoever buys the bond gets that, a carbon tax, more income tax, whatever comes along, write off the future incomes and crystallize it today in a new bond.

2. Offer these to existing bond holders but only if they are willing to sell at today’s capital price and in exchange they get a far more guaranteed (1st lien on new taxes) issuance, so you are paying €96ish for €100 and keeping the €4 difference. This reduces our deficit straight away by c.4% on whatever we can get out the door under this new bond.

Doing this is playing with fire, but is it any worse than what we’ll get anyway? We are going to increase the tax burden so why put that into the common pot - given that holders of that debt are not trusting us, and say ‘we’ll sell the increased tax take to you for your old bonds’ and in that fashion offer only specific recourse while reducing our need to roll debt.

It may be only a marginal solution, and it could cause a bigger sell off as existing debt holders figure that there will be no money left for them, but if it was allocated on a specific tax anticipation then all you are doing is ring-fencing those taxes for this purpose and therefore it shouldn’t cause too big an issue. At this stage we advocate trying anything. What’s the worst that could happen?

We have been talking about this for a while (28/01/09, 11/03/09, 23/04/09), it was a popular topic on this blog in 2009 but well covered and for that reason we have not revisited it much, but the alignment of the stars warrants a look at the symptoms of the disease because now they are ever more present than before. At this point we can see a clearer path; which is still leading to a bond bust destination.

It has also becoming a mainstream topic, recently it showed up in an article titled ‘Currency, the weapon of choice in a world of lower demand‘.

If something can’t happen it won’t, and what can’t happen is a world in which we see century bonds (bonds with 100yr terms) becoming commonplace, they will probably be (as is the benefit with all hindsight) the poster-boy of the time when the bond market was in full insanity. To give an Irish context we can all relate to: property prices mid 2006, that’s where bonds are now.

Investors are not stupid, it could also be the case that we see a world of deflation and they will be able to sell these centuries at a profit, but when you consider the counter trends it doesn’t scream ‘deflation’ to the same degree.

Take a look at some of the offerings (signs):

Goldman Sachs 50yr bond issuance-longest bond issued in their history.

Mexico issued at century and it cleared. Note: ‘cleared’, and this is from the same country that suffered two currency crises and one sovereign default in the last 30 years!

Norfolk Southern - “NEW YORK (Dow Jones)–Norfolk Southern Corp.’s (NSC) reopening of its 100-year bond, first issued in March 2005, has launched at 5.95%, inside price talk of 6%, according to a person familiar with the sale. The sale has also been upsized to $250 million from original guidance of around $100 million”. So they not only issued a century, but they more than doubled the debt issued and it was ALL bought!

Rabobank also issued a 100yr bond. It’s great that they have a triple-A rating (today) but in 100 years will that still be the case? This is a bank let us not forget, and anybody who can see 100yrs out in banking is either a liar or deluded.

They said on their company site that “Until now only a few rail roads and power stations have conducted a bond issue of this type. It’s a real confirmation of the strength of the credit, and obviously, it’s borrowing 100-year money at historically low levels,” I’d go a step in the other direction - it’s a sign that investors are yield hungry and making mistakes, the market doesn’t lie but it equally doesn’t create winners only - time will tell but when a bank issues and clears a 100yr bond it means something isn’t right.

TIPS trading negative 0.55% - this is a bond that has inflation protection built in, it is a proxy for inflation expectation in the same way that gold is (more on that later). People are literally willing to buy in at a loss in order to get that insurance. That is a sure fire sign that inflation is expected

History is interesting, in 1910 nobody was backing the Wright brothers, they were backing the makers of airships, yes, airships, the same craft which spawned such maxims as ‘lead balloon’ and ‘it’ll fly like a lead Zeppelin’, and some awful tragedies as well such as the Hindeburg Disaster, a lot can change in a year, never mind 100 years! The hunt for yield is relentless, but at the same time you have these inflation indicators screaming out (TIPs & Gold) so somebody somewhere is going to get badly burned.

Inflation? Yes, it will be artificial, because QE will bring it about, the latest approach seems to be a currency play-ground tactic along the lines of ‘if you print a trillion then I’LL print a trillion too!’ . Sad but true, and it is being done both as a competition and for competition.

Gold, yes, the boring metal of a decade ago that is now back in the halcyon vogue it enjoyed in the late 70’s. Will it last (this time)? Comfortably trading over $1,300 the difference now versus then is the structural movement of the metal. It isn’t to say this trend can’t die, but it is a slower build up, and broadly in line with the massive increase in money supply that has been a hallmark of the last thirty years.

When the bond market falls it will fall ugly, even on the municipal bond front, the stalwart of private investors, there is trouble brewing, recently Meredith Whitney authored a 600 page report titled “The Tragedy of the Commons” stating “Municipalities receive one-third of their revenue from the states. If the states hold back that money for their own stricken budgets, towns and cities won’t have the funds to make their interest payments. “It has to happen,” says Whitney. “The states will secure their own shortfalls, and leave the cities to fend for themselves.” It’s all about inter-dependency, she says, with the federal government aiding the states, and the states funding the last and most vulnerable link, the municipalities”.

Combine that forecast with the fact that the insurers who (apparently) back it up are no longer high investment grade material, The public finance market no longer has a triple-A rated bond insurer. Bond Buyer lead with this story yesterday - “Standard & Poor’s on ­Monday downgraded Assured Guaranty Ltd.’s two insurer platforms to AA-plus with a stable outlook from AAA with a ­negative ­outlook. Stock in the parent company fell 8.3% to $19.52, but response in the ­municipal market was muted”.

So if things go wrong, their assurance is about as good as the mono-liners who backed sub-prime mortgages! Everything is falling into place for a proper bond market blow out. It doesn’t have to happen, but when all of the dominoes are in place it would be stranger if it didn’t.

We have been talking about the idea that the Chinese ‘miracle’ could not last indefinitely, in this clip from Bloomberg, Harvard Economist Kenneth Rogoff (co-author of ‘This time it’s different’) talks about China having a real estate bubble in the making, the bursting of this bubble is not about ‘if’ but when… Watch this space! [If the clip doesn't play for you then follow this link ]

I was interested in the front page of today’s Independent in which Charlie Weston broke a really big story about Irish banks being in advanced stages of designing ‘Negative Equity Mortgages’ (this is vastly different than the Negative Equity Loan/Short Sale Loan we have discussed previously). Essentially the bank will allow an individual to carry negative equity out of one property and move that onto another one within certain parameters.

This practice has already existed in the UK and is offered by Nationwide, Coventry and RBS, the schemes have not proved to be very popular, in part because of the stringent underwriting required. It is one thing for a client to fall into negative equity but another to actually facilitate them in compounding that fact and taking a further bet on their ability to repay. What do I mean by that?

First Loan: €200,000
Value: €150,000
Neg/Eq: €50,000

Then the €50,000 shortfall is passed into a second loan of (for example) €200,000 (which by nature will essentially be a 100% mortgage) and now they owe €250,000 with €50,000 negative equity in place the day they close.

In this case the borrower now owes more but they have a different property which they are more happy with and underwriting will ensure that they can still service the loan, but how many people will be willing to take up such a product? And who will the bank be willing to lend to on this basis? Credit is already tight, to trust a person with yet more money and negative equity in advance is a gamble, this beast is the evil love child of 100% mortgages - the very brand of lending that was a factor in the property bubble.

The sole saving grace is that people won’t opt for it, in the UK the uptake has been incredibly low, it is a niche product with little in the way of demand, it will help the people who are happy to use it and will be of little use to the average borrower, having said that, the Regulator recently said that banks have failed to learn their lessons from the crisis and that they don’t lend enough to business and rely to heavily on property, if this is the latest in financial innovation can we truly say they are learning anything at all?

I used to be in a Chess Club, and one thing it taught me (apart from how to lose using the Kings Gambit) is that you can often see a general result long before you see it exactly, when you are a piece down and can’t control the centre of the board you know you are in trouble, but how and where the checkmate occurs is unknown, game theory can’t tell you precisely and reverse integration from the end game may not bring you to where you started from, but the player knows instinctively that they are up against the wall.

Sometimes appearances can be deceiving, you might think you are fine and you are not (2003-2009), other times you can get caught up about losing a pawn but you are in fact gaining ground (2010), albeit painfully and slowly.

I believe the same can often apply to markets. Today we will look at the reasons for why we believe the banks are going to survive and furthermore, what the results will be of their survival.

The core belief in this firm is that market rules should apply, the banks should have to stand on their own or or shut down or find a buyer, its just that simple, however, we have not allowed that to occur so we now have to find our way through having avoided that option. In chess this is the equivalent of trying to save the Queen instead of Castling - the Queen is just too important, or is she? Depends on who you ask. We think not, but the decision makers made the play.

Our primary belief is that the banks will survive. Sometimes the noise is hard to ignore, but this time last year there were many commentators saying that our banks would be nationalised within a month or two, then the we should leave the Euro, last month the Euro was going to collapse and now we are once again on the road to hell minus the Chris Rea soundtrack, the truth is we’ll muddle through and come out the other side one way or another.

So why will the banks make it? For no other reason than because we have pinned the hopes of this country upon their survival, to the point of no return. In the absence of a ‘Plan B’ the success of ‘Plan A’ becomes highly incentivised. The current big issue that some people are pointing to is that of the bond credit that has to roll over by the end of 2010, the figure was c. €74bn (previous calc’s said €71bn) which is made up of Interbank Lending €16,405m, Senior Debt €57,791m and Subordinated Debt €866m.

We’ll focus on the bond holders as they represent a foundational risk to the system, so… Will the bond holders stay the course and support Ireland? I would imagine the answer to be ‘yes’, but I’ll qualify it.

Reasons:

1. Guarantee
2. What failure would mean
3. ECB support & approach thus far
4. Shareholder support
5. Euro implications
6. Effect on cost

1. Guarantee: We have made a guarantee to world markets, world markets like that kind of thing, the state will ensure that no institution will not be able to come good on their liabilities and it is underwritten by the state guarantee (taxpayers), this kind of ‘can’t lose’ situation is preferable to fixed income markets, it is the reason the USD is a safe haven when you can’t trust much else (bar gold or perhaps Yen). No bondholders have been burned and they are generally satisfied that their capital values are safe, over and above coupon payments, bond buyers want to know that they are going to get their capital back (in full and on time). No bank has yet defaulted nor will they, as a default on a state guaranteed bank is essentially a sovereign default - it ain’t gonna happen.

Some people think a sovereign default might be just the answer, it is hard to disagree in many cases, it sounds like a nice plan to go and shaft those big faceless bond-holders, and many countries do, Greece (for instance) has made a career of it - which is why everybody there is so angry at the concept of actually having to get their house in order. Would it be a good idea for Ireland?

I doubt it - there is not only the implications of default to consider, firstly, the ECB would likely force non-default, taking up the slack and forcing us to pay eventually anyway, secondly, we export a lot of financial services and nobody wants to deal in serious finance services with a country that defaults (except of course those that make a profit from restructuring etc.).

Uruguay is a country that people point to as being evidence of the ‘correct’ way to default, having been to that country six times and studied it extensively I can safely say that we don’t want to go down that path (yet). The guarantee will stand and thus the Irish banks will stand. The one outlier in this is if there is some substantial credit event (either large institution or sovereign).

2. What failure would mean: An inability to refinance would be read internationally as a country being broke, believe it or not Ireland doesn’t matter to the international marketplace as much as we’d like it to. I speak to traders in the US regularly enough and they don’t know the difference between Anglo, BOI or AIB - nor do they really care, something bad happens in Ireland and the whole place is tarnished. Oddly we actually have earned great respect internationally for how we are handling our issues (I’m not talking about the OECD/IMF/WorldBank etc. - I’m talking about the opinion of the people who actually buy our bonds as opposed to those who make economic forecasts/comment), a credit event now would spell disaster, we wouldn’t be even be able to finance our public services.

Strangely, the Public Sector Unions are quite vociferous on how ‘angry’ the are about the ‘bank bailout’, failing to see that if the banks fail that their paymaster won’t be able to borrow to pay them, they didn’t cause the crisis but they are one of the primary beneficiaries and if one domino falls the next will follow, it isn’t different this time. Uruguay is testament to that.

3. ECB Support & approach thus far: Name a bank in Europe that was allowed to go to the wall? … Still thinking? After Lehman the banking bluff was seen for what it is, namely a ‘fairly real threat’, banks are not joking when they say ‘if we fail we can bring down the system’, that type of event may not bring the four horsemen charging out of the sky earth-bound and ready for destruction, but it can cause systematic distress which is far beyond the price of avoiding it.

This may not have been the case if we went for this option originally, but certainly now - as it would involve breaking our sovereign promise -it would ensure a far larger bank run than necessary and likely collapse. Bailouts sicken me, especially when I see competitors bailed out who are then able to unfairly chase the same clients we chase, trust me, nobody is angrier than intermediaries when it comes to life support to banger businesses that should have shut down but are instead artificially supported.

4. Shareholder Support: Bond holders are at the very end of the risk queue - the most senior ranking on par with depositors, shareholders on the other hand are the ones playing with dynamite, and despite this, the BOI rights issue was 93% subscribed with buyers for the remaining 7%. That means that people are more than happy to take the most risky asset available, that is the market speaking loud and clear that they trust in BOI’s ability not only to survive but to prosper, if people and institutions are willing to back the equity you can be damn sure they’ll back the bond debt. While the buyers are often of different mind sets (shares v.s. bonds), the fact is that it means there is a bigger buffer of safety for the bond holders, and a pre-auction phone call from the desk will likely help to assuage any fears ensuring that the debt rolls. Saying otherwise is like thinking a person wouldn’t drive a car when there are people trying to get to the same destination on uni0-cycles, the bonds are safe and will remain as such.

CDS’s are often news makers, hard to think that only a decade ago almost nobody even knew what they were, and a decade and a half ago they didn’t exist. CDS’s are like a secondary thermometer: let me ask you - is 30 degrees hot? Yes if you are in Ireland, yes if you are in the North Pole, but no if you are in Brazil and definitely no if you are trying to cook a turkey, but we often see CDS’ prices reported as if they are the one cooking the goose, it isn’t the case, often issuers realise that higher yields players will happily sacrifice some coupon for a hedge, and almost all the CDS’s are settled materially or manually (the actual asset passes to the issuer) rather than via a direct insurance payment.

The likelihood of a qualifying credit even for the reference entity doesn’t have to occur, it just has to be perceived as ‘a risk’, prices can be a reflection of yield sacrifice for a hedge, CDS’s are a secondary measurement, they are not the reference entity and cannot be seen as such, capital values are a better tool in our opinion than looking at the derivative values or bids where that capital value is the reference entity. If an LT2 bond is paying c. 11% then a CDS of 5% isn’t the end of the world, having said that, you would always wonder what might prompt an 11% payment to begin with! However, the main thrust remains - Shareholders have stepped up and that is like a wave of infantry charging over the top, which makes the bondholders who are still in the trenches feel much safer.

5. Euro Implications: Despite the hullabaloo being caused, the EU and even Germany all want a devalued euro, granted, German savers will be angry, but everybody else wins, low rates, quantitative easing and monetary policy that encourages exports will be of benefit to everybody, Germany gets their exports and output back up, Greece gets their bailout, everybody else gets some inflation which will hopefully feed into new employment faster than wage increases for existing employees and we all muddle on through.

This latest test isn’t testament to the failure of the Euro, it is rather testament to the success that it represents in converging largely disparate nations and economies- the USD does the same thing. While the current issues represent a test, it doesn’t represent a ‘failed test’, if a member leaves it won’t be the end of the world, but don’t bet on it, if you could just kick people out of monetary unions then Louisiana would have been kicked out and California would have seceded long ago, don’t doubt the staying power of EU members.

6. Effect on Costs: Far from seeing the present storm as a sign of imminent collapse, I see it as a signal that we are in for a period of much higher financial costs on any credit or financial transactions, banks are going to have to retrench, build deposits, build assets carefully and find operational gains (fire lots of people). The most likely outcome isn’t that a bank will fall, it is that they will find a way through via operational profits and price increases. Much of the past losses are paid for, NAMA has taken away a huge amount and they are jacking up mortgage rates to cover the lagging residential issues. It’s easy to cry ‘Uncle!’ now, or to believe it is upon us, but the fact is that we made it this far and both Ireland, and its banks are probably going to find a way to stagger through, punch-drunk and beaten, to the other side of this mess, I’m not saying it won’t hurt in the mean time, or that there won’t be further slaps to the head, but we’ll muddle through in spite of it, the markets have already spoken, it’s time to listen.

I have maintained for some time that new world orders don’t occur overnight, and that even trends that may appear to be secular don’t necessarily work out if you extrapolate them into the future. Let me explain, in the 70’s everybody said Brazil was going to rule the world by the late 1980’s, they came up with all of the reasons for this, demographic, growth, the education and markets in place etc. then it just didn’t happen.

By the end of the 80’s when Brazil was meant to be the new world power they had been usurped, this time by Japan, now it was the turn of the Japanese to be ruling the world within the next 20 years, then far from taking over Japan imploded and they have struggled ever since.

Today we are told that it will instead be China who rule the world by 2020, and frankly, I don’t believe that this can happen without massive painful adjustment that would set them back years, and it also doesn’t accommodate for the fact that the USA views the world as having only one power, theirs, and they will find ways to dethrone any who stand to pass them by.

In this video there is some commentary you may or may not agree with, in terms of the bet on China, time will tell who is right or wrong, but it is important to remember that for every reason ‘for’ there is an ‘against’ and conversations on the Chinese economy are often lacking in the latter.

In the first clip, James Galbraith (son of the famous JK), economics professor at University of Texas, discusses whether a new tax on big banks is justified. Ken Bentsen, of the Securities Industry & Financial Markets Association, and Mark Calabria, of the Cato Institute, share their insight as well.

In the second clip Mark Walsh, of ‘Left Jab,’ and Dan Mitchell, of the Cato Institute, discuss taxing banks based on their risk to the system.

Financial innovation has meant you can make money from many things which may or may not be considered morally correct, there are ’short sellers’ who make money when the price of a stock drops, some people consider that a bad thing, others feel that it is proof of an efficient market working correctly. Then you have the likes of ‘vice funds’ which invest only in things considered immoral such as weapons manufacturers, liquor distilleries, beer brewers and gambling. Then there are those that literally make money from death and today we will consider that group of investors, the SLS traders [naturally there are other non-market groups such as those dealing in blood diamonds but they are not tradable and fall outside of the remit of our description].

There is a thing called a ’secondary life settlement’ (SLS), and it is a financial trade where an investor buys a persons life insurance policy from them and continues to pay the premiums on it, then when the seller dies the buyer gets the money from it. Naturally this sounds pretty grim, especially when you see some of the buy side criteria - such as looking for ‘medically impaired’ policies, translation: the seller has cancer and is unlikely to survive for long.

SLS’s are therefore portrayed as a fairly macabre way of making money, even more so than the companies that sell insurance for death, and that is an odd thing, because a SLS investor is really only seeing out the duration of an assurance policy to its natural end of contract (and payout) that may have occurred anyway and in the meantime the seller makes some money from it.

Secondary settlements are actually a good idea for several reasons, first of all is that it infers certain property rights onto the owner of a policy, currently an insurance policy isn’t considered property that you can sell and that undermines the value of even paying for it in the first place, it is after all a type of asset albeit one that most of us never want to cash in!

It would be a good thing if people who were old were able to realise a cash settlement in life from a utility point of view, so rather than look at the example of paying off a granny with 6 kids who is dying of cancer, consider it another way - what if getting a cash payment for selling her life insurance gets that granny the best palliative care available that the kids (who may not have the money to pay for it) can’t afford, and this means that despite the inevitable conclusion, that this person passes away in the best and most comfortable surroundings possible.

Some might say - well… this isn’t really any different to ‘reversionary loans’ [which I jokingly call 'revulsionary loan' because people are so put off by them] where a person sells a stake in their home that they never pay back and then when they die the reversionary lender sells the property (offering it to next of kin first) and gets their money plus interest back.

The key difference is the asset, and in particular the validity of the asset, you see, a house can be used long after a person is dead, it can be rented out if they are in long term care and passed on as an asset that may eventually appreciate etc. A life insurance policy on the other hand stands several serious risks that may prevent it from realising a meaningful end, mainly that of premium cessation, where the person gets ill or in old age can’t afford the indexing premiums (many SLS are on policies where they get more expensive as you get older) and if they stop paying it becomes void and invalid.

In that example the policy now becomes worthless, you could argue that an old sick person might miss mortgage payments and get repo’d but experience tells us that the majority of people don’t have a mortgage after age 65 so while one asset becomes increasingly expensive to service (life policy) the other becomes less, and then negligible (house).

Take this example a bit further, imagine the person who is old and sick wants to give children a gift of money while alive but they only survive on a pension, a secondary settlement can do that, it can also help to cover the gap left by financial storms such as our 2008/09 crash which have left many who held dividend paying equities or other investments with catastrophic capital and cash flow losses.

When you consider every facet of a secondary settlement you can start to see that far from being a mercenary thing, it is in fact the market finding a way of offering people what they want. A person may have many perfectly good and rational reasons for wanting to take the money now rather than leaving it as a benefit to others after they die, most simplistic of all: what if they have no beneficiaries?

The secondary settlement market may be a partial solution to our pending pensions crisis, if the funding for this is not available in the public purse perhaps there is a market solution to providing income for the aged and this could be a part of that. Obviously, not everybody will ever continue to pay premiums or hold a policy large enough to provide a meaningful payout in the future and there are some restrictions that will weed out some participants, but SLS’s are not ‘bad’ by nature, they merely reflect a transaction between a willing seller and buyer, each have their motivations and each take from the transaction what they can but it is not inherently ‘wrong’ or ‘right’, if it is wrong then explain that to the buyer and see if they change their mind?

There are some important controls in place such as an auction system which ensures that people are not underpaid for their policies, and the buyers are regulated heavily as well. The one thing that could cause big problems in what is a totally uncorrelated investment market (to markets, there is obviously correlation to actuarial longevity tables) would be something like a cure to cancer, but frankly, I think even the losers in that example would be pleased with that because it would serve them in the future better perhaps than their profits would.

Roger Bootle notes that markets do quite well at the end of a recession and at the start of a recovery by drawing the benefits of the future down into the present. Roger has a lot to say on the topic of banks, in particular that of banker bonuses - he states (and we agree) that when banks become ‘too big to fail’ they essentially are oligopolies and hence they are able to pay so well. From an Irish perspective the domination of AIB and BOI put some stock in this theory.