Risky Business

2008 saw a global recession resulting in the Irish banks being bailed out by their Government (and later by the IMF and ECB). The Irish banks had lent money to property developers who used it to build housing estates with the idea that the houses would be sold at a huge profit and the loans would be paid back with interest. The banks had done these types of loans since the housing market boom, it had a great interest payback and was considered 'as safe as houses'.
Risk assessment for property development must have been calculated during the housing market boom. The risk has been calculated on the assumption that this boom would be a perpetual moving market, or at least not ready to fail so soon.
Merrilll Lynch conducted research months prior to the crash and commented;
"(the) lending practices of several big Irish banks are the riskiest and most reckless in Europe".
Had this research been commissioned by the Government the whole scenario could have been avoided, as it was the research had to be removed due to complaints by their clients (the banks they had analysed).
The paradox of this statement is that it prewarns of a cataclysmic financial event but it also creates anxiety in the markets and can create no confidence in the banks which is equally damaging.
Christensen, Kaufman and Shih argue that the chance of innovation is reduced if the main driver for shareholder wealth is the earnings per share. This is true in the case of the Irish banks. Less risky investment projects could have been chosen but this would not MSW and were not used. The loans given to the developers were relatively short term for high yield. The NPV would have been the highest on these projects and these are the ones that have been approved. Calculating risk in this way does not allow for fluctuations in the economic environment as David Grundy stated in Lecture 9 that expected NPV 'assumes constant states'.