Lenihan on Two-Part Payments

Quoted in the Sunday Tribune, Minister Lenihan discusses two part payments:

A levy on bank profits is still planned if NAMA leaves the taxpayer with a shortfall, and there is the idea of paying for the banks’ loans in a two-stage process—possibly 80% up front and the remainder later on, depending on how the loans perform.

But Lenihan has a warning about all these ideas. “There comes a point where you leave so much contingency and risk in the banks that there is no confidence in them. There is a balance you are trying to strike,”

It is becoming increasingly clear that the government is engaging in its own two-stage process in relation to Patrick Honohan’s risk sharing plan. Stage One involves re-interpreting the original plan, which makes a lot of sense, as something completely different which is very flawed—giving the contingent second payment to the banks instead of the bank shareholders as Patrick proposed. Stage Two is to then point out that this reinterpreted plan is flawed and can only be implemeted in a very limited form.

This statement is also the best indication yet that the government’s commitment to its levy idea is, at best, half-hearted.

32 replies on “Lenihan on Two-Part Payments”

The logic for not enshrining the proposed claw-back levy in law appears to be that such definiteness would undermine shareholders’ confidence in the banks.

Surely the corollary to such reasoning is that leaving the levy as a vague aspiration with no legislative substance is to give a not-so-subtle signal to these shareholders that the levy will never in fact happen. That it is purely a fig-leaf to help sell this scheme to a sceptical public.

@School Marm

The drip drip leaks suggest that any idea of a levy is off the table.
My guess is that we will see some form of convoluted windfall tax to keep the Greens on board.

There is no other way they can sell Nama to their membership.

im confused on the windfall tax. What windfalls are in prospect from property and development in the mid term? I hear a stable door clanging while the distant neighing of liberated equines echoe from the far distance

“There is a point where you leave so much contingency and risk in the banks that there is no confidence in them”

My translation: nama plans to overpay. Banks have no faith in the nama valuation process, but really like the answers.

My current valuation scam watchlist:
1. Paying face value for “performing” loans.
2. Fixing the “current market value” methodology. The minister has his cronies in place.
3. LTEV. Sliding down my list. The “fix” is likely to be the Current Market Value.
4. Cashflows and nama bond coupons. Coupons likely to be floating and exposes taxpayer to ecb rate hikes. The claims that cashflows from “performing” will cover coupon needs verification and stress testing. Good loans can go bad (some might be bad already, just polished to make them look good). Good loans tend to pay down faster, bad loans can’t, again adding to a potential shortfall. These 3 elements could result in a large loss. Loan transfer values should be reduced to reflect this.
5. [deliberately left blank] i’m sure i’m forgetting something 🙂

@Brian Lucey

That is the purpose of it being suggested.

I hate to bring politics into it, but I beleive the Green party membership will be gullible enough, or desperate enough to cling to power to swallow it.

Much like their idea of a land grab for the benefit of society.

They fail to realise that can only happen if a developer defaults.

@Karl & Brian
Your constant analysis and commentary on the NAMA proposal has been excellent and a tremendous public service.

Even if the government accepted all of your proposals I, and many other people, would not trust this Fianna Fail led government to deal with the banking, fiscal, unemployment, etc … crises, full stop. They have lost the confidence of majority of the public to act openly, fairly, without favour to developers and bankers.

Trust is an economic asset which has been abused by the parties in government over the last 12 years. I believe the “cute hoor” culture in government, in business, in banking and in other areas of Irish public life in recent years has seriously undermined the principles of ethics and morality which an economic system depends on. It may have seemed for a few years during the expansion phase of the housing boom that ethics and morality were old hat, laughable even.

The Fianna Fail and PD elements of the present government have betrayed the trust of the citizens of Ireland. They were the cheerleaders for the recent catastrophic financial/building boom with their tax breaks and light touch regulation.

The resolution of the mess the country is in will be very difficult and will take time. It is not the kind of mess any of the opposition political parties may wish to tackle right now, possibly wishing to see the present parties in government stew in their own juices for longer. This approach on the part of opposition parties would be irresponsible. A general election is required so that a new government can get a mandate to get the country on the road to recovery. A renewed appreciation and promotion of shared principles of ethics and morality should also form part of this road to recovery, for economic purposes as well as for their intrinsic value.

Not sure if the windfall tax will mean anything, the only reasoning I could see behind it would be if the government is serious about putting a pricefloor. If the costs of construction have been reduced since the boom then there might actually be profits to be made by constructing even more due to the possibility of producing cheaper and better and then the guaranteed price would guarantee a profit.

If it is, then it is kind of interesting that this would mean they are suggesting to tax the benfits of the government subsidy (the price floor). It could be one way of restarting the construction industry and increasing employment 😉


Sounds like an arguemnet for subsising another construction boom.

Let demand dictate future supply

@Aidan C

It should not be forgotten that it is not long since the last election.
We cannot in all seriousness just blame polticians bankers and developers for all the mess we are in.

We got the government, and the system we deserved. A large proportion of Irish citizens actually believed their property was double what they paid for it a few years before.

I have been reading your brilliant blog over the summer and thank you very much for standing up to the govt steamroller on NAMA
I hope you keep this up and not forget the real human reasons why we should not do this. this is not just a debate about who knows more and who is smarter
for me the question that never seems to get answered by the government is this
is nama not just simply a way to get property prices reinflated?
why is this a good thing?
I used to work as international sales manager for a company manufacturing in Ireland and witnessed the steady erosion of our competitiveness due to principally the cost of house ownership and thus De LAND, this company closed in 2008.
I know plenty people, with children who were never able to get on the “property ladder” (^&%*!!!) due to the extortionate pricing charged for housing
basically our manufacturing sector has been crucified for the sake of the landlords.
Our so called irish society has been been divided into those who have a few acres and/or a few houses, and the rest of us, bond slaves.
what price the future economic value of landless people?

@Brian Lucey

Exactly, imposing a windfall tax now is a bit like Minister Gormlay improving building insulation standards after we have built enough houses for 10-20 years.
Worthy but useless.

The lads in FF must really love the GP.

@Maurice O’Leary

Has nobody told the Greens that developers and banks won’t be paying tax for many years due to losses being offset.

Brian Lenihan also makes the bizarre claim in the Tribune interview that we must do right by the bank investors, as they are the _good_ guys … credit unions, pension funds and oh I dunno, an endowment fund for the donkey sanctuary.

Reminds one a little of Michael Noonan’s crackpot scheme to compensate punters who lost money on the Eircom flotation. The state couldn’t stand idly by while lil’ old grannies lost their life savings. The moral hazard argument falls away when one considers the inherent goodness and deserving nature of the investors.


I agree absolutely that the proposal of a contingent bank levy is a very bad idea. It leaves a nasty liability on the bank’s books (which works against cleaning up their risk profile) and smacks of political shenanigans, it seems like a method to hide an overpayment and claim the overpayment will be returned (unlikely).

Potentially underpaying by forcing a big discount on the loan purchases, but then giving the banks a contingent asset on NAMA profits seems like a good idea. However I am not sure that it is necessary to force the banks to release this contingent-claim asset to shareholders immediately. It might be better to let them keep it on their books as an asset. That seems ok or perhaps even better. These banks have some shareholders who are not knowledgeable about valuing contingent claims and there will have to be a secondary market. Perhaps better to let the banks leave it on their books as an asset, with suitably low book value.

I think I have posted something similar before, so apologies for the repetition.

The bank levy will never happen.

If it is required in ten years time it means that the banks are still in the dog house. Because if after ten years the inflation tax has not covered the bank losses nothing will. The banks would just be crawling along like zombies in a sub performing economy. Of course, in the real world they will be long gone, oh, and that means with our money. They will have been replaced by foreign ownership and the then Government will waive the levy. They’ll have to.

The bank levy is nothing more than a sop for Joe Public.

@ Michael Harvey

“I hate to bring politics into it, but I beleive the Green party membership will be gullible enough, or desperate enough to cling to power to swallow it.”

I recall hearing an interview with Lenihan about the upcoming report by the taxation commission.

Don’t have a link. It was on RTE Radio One.

He discounted the idea of introducing a property tax or increasing income tax (I think). But the important thing was that he said a Carbon Tax would be introduced.

This is a plain bribe to the Green grass roots to support NAMA.

@ All

I know you like to hold Minister Lenihan responsible for this mess, but really he didn’t create it. Yes, in hindsight, as Minister for justice (??) he should have been more vocal against the creators of this financial mess … but I don’t think he is the only guilty party … I personally think we are very lucky to have someone of his talent and ability trying to manage this (please keep in mind the position of Minister of Finance, by definition will always be a politician). He is surrounding himself with respected talent, and balancing the country as best as he can. It is easy to criticise when you personally don’t have the responsibility of future generations of Irish people. I think Brian Lenihan gets this, and to drag out the tiresome crony capitalism and bailing out the builders lines is uneducated and frankly unimaginative. What votes are you going to win by doing this in a country with too many buildings ??? … Note anyone that is thinking they will win the builders votes really needs to take a holiday … its not worth that much anymore!


1. I can only speak for myself but I can’t imagine that any of the contributors to this site hold Minister Lenihan responsible for our current condition. It’s a fact that he was a junior minister until 2007.

2. “It’s easy to criticise ….” This line of argument is, of course, one step away from “You shouldn’t criticise”, i.e. “You should shut up”. Actually, though, I can assure you it’s not always that easy to criticise, particularly when you know that to do so leaves you open to the kind of partisan hack journalism that we have seen directed against the 46.

3. Who on this website has been dragging out “tiresome crony capitalism and bailing out the builders lines”?

I think the worry is that while BL did not create the mess he might be about to create one that is much bigger and indeed be remembered for that.
I don’t claim to understand all the issues surrounding the banks but paying today for a future value that may not happen just doesn’t make sense to me. People are suggesting various sorts of safeguards that are worth considering. Hopefully they will be as the Nama bill goes through the Dail.

@ Gregory Connor

“I agree absolutely that the proposal of a contingent bank levy is a very bad idea.”

Please excuse my shorthand here.

We can say contingent this and contingent that for the next ten years.

And what have we got now. A probability of this or that happening.

The probability of this or that happening can be defined as the risk of this or that outcome.

In this case the Citizen (including your grandchildren) cannot possibly know the outcome. It is contingent on other outcomes most, if not all, of which will be subject to political influence.

Why should your grandchildren take this risk?

Is it not more logical that your grandchildren should be assured that if the bet goes wrong at least they own the assets associated with the risk?

Your grandchildren are reluctantly being dragged into a casino where their futures are used as chips at a crooked roulette wheel.

In any event the levy will never be implemented unless your grandchildren pay it.

“….and there will have to be a secondary market.”

Yes. And as your grandchildren are led from the casino someone else plays with their futures.

I think it is best just to take an upfront share of the upside now. If the downside happens, so what, it happened? That after all is what Fianna Fail & the Green Party have promised. Why wait ten years to find out if Fianna Fail & the Green Party are right or wrong?

The prospect of throwing my grandchildren on a roulette table designed by Fianna Fail and the Green Party is horrific.

I want to know that if it all goes wrong my grandchildren own the circus.

Just read Brian Lucey’s IT article (I’m an early riser).

Left my comments on the IT website.

Well done. Good stuff.

The idea of paying the bank the second payment does indeed seem to defeat the certainty provided by an AMC approach. This is precisely why Honohan’s NAMA 2.0 stipulates a payment to shareholders.

I see legal difficulties with NAMA 2.0 simpliciter as one must deal with the property interests of multiple legal entities (shareholders + banks). Furthermore, a payment of the balance to shareholders will not compensate fully if NAMA 2.0 caused their shares to be wiped out, i.e.

(Post NAMA 2.0 share value + assets uplift) != Post NAMA 1.0 share value
– Post NAMA 2.0 share value = 0; and
– Post NAMA 1.0 share value >0

The fact that NAMA bonds can be funded more cheaply than ordinary Govt bonds is also skewing the debate as how we can fund this in the short term seems to be a huge consideration. Lastly, the fact that the States holds warrants for shares in BoI and AIB is has further queered the pitch.

I am unsure whether Honohan’s NAMA 2.0 can be achieved on a clean legal basis. If we cannot do it properly as per Patrick Honohan’s proposal then it may not be worth doing at all.

I fail to follow your argument on why there are legal difficulties with NAMA 2.0 Mind you, I usually fail to follow legal arguments, always seekin as I do a kernel of logic and fairness…
Can you explain in simple terms why I as a shareholder in AIB cannot have both my cake (aib shares) and eat it (shares in NAMA) a la PH?


I don’t see why you cannot have it provided you agree to it. The problem is getting all shareholders to agree to it. Otherwise you have to go down a CPO route and that must be fair. The legal issues may be somewhat illusory. It would be good to get a proper legal opinion on them but I guess you can’t do that until you know what is happening. The cleanest route legally is to reach an agreement with one legal entity, i.e. the bank, so there is no dispute about the state acting fairly as long as the State honours the agreement. Otherwise you are into Judicial Review etc and we could all be down the Four Courts for years even if the State is ultimately vindicated.

One solution might be for the banks to set up a separate Co. for the stage two payments with such payments to be immediately paid up by way of dividends to shareholders. That Co. would have to be decoupled from the bank thereafter to ensure the banks’ capital position is clear.

One reason why you may not be able to have both your cake and eat it is that the fact of your eating it (shares in NAMA) might eliminate the cake (shares in AIB) if the solvency of AIB is marginal on hold-to-maturity valuations. This would remove an “existential benefit” as another poster has referred to it :).

Err – all you need is a resolution at an AGM to split the shares two for one, with one being in the NAMA. done all the time in reverse takeovers.


Mea culpa – I had to go back there and check the NAMA 2.0 plan again. Your solution sounds about right. That removes the legal issues if any raised by the ECB in their opinion where they approved NAMA being owned by the state.

The only (non-legal) issues then are, (i) our warrants in AIB and BoI, (ii) the additional cost (if any) of funding recapitalisation as opposed to NAMA bonds, and (iii) the possible non-socialisation of gains.

i) The warrants are derivative products whose value is tied to the shares ( zero value = zero value).
ii) same cost, state debt used
iii) anan?

Why would you assume that the cost of funding for buying loans would be any different to the cost of funding a recap?


Honestly, I really wouldn’t bother on that one. I have tried here countless times to explain this one to no avail. Apparently, you see, you can pay banks for bad loans with NAMA bonds but you can’t use NAMA bonds to swap for equity. No, no, that requires something called “real cash”.

Really, save your energy.


I don’t say it. I just notice that the Minister keeps harping on about the cheap method of funding NAMA with no mention of methods of funding recapitalisation. That is why I included “(if any)” after “additional cost”. I note KW has said countless times that he sees no reason why similar bonds cannot be used for recaps.


i) Just working on the general concept here. Let’s say warrants in AIB were purchased at €0.60 per share. Shares are now at €2.42. That is an increase of 303% making the Govts €3.5bn. That means the warrants are now worth up to €10.6bn subject to AIB’s right to buy back €1.5bn of warrants.

If overpayment by €5bn will avoid 100% nationalisation and therefore leave warrants worth €10.6bn (makey uppy figure) then the State makes a net €5.6bn on the overpayment. Therefore, I see it as a complicating factor. Am I missing something?

ii) As I have said above, you may be right. I am just uncomfortable with the lack of comment from Govt as to how recapitalisation will be funded.

(Perhaps this is because the State will be trying to encourage private capital to come in at the same time and therefore will not be in a position to demand that 1.5% bonds or 6 month equivalent be valued at par vis-a-vis private investors. Perhaps it is because the accounting within NAMA allows performing assets which are based on variable rate loans to be considered as a form of hedging. Perhaps they can issue at 1.5% as will and there is no difference. I don’t profess to know.)

iii) I don’t know what “anan” means?

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