The Banks After NAMA

Indeed. Apologies for the technological regress!

“If the €7 billion in government preference shares are converted to common equity (meaning we lose out on the eight percent dividend owed on these shares) then these ratios would be 6.2% (AIB) and 7.3% (BOI)—still below what will be required.”

And we also loose out on the 25% equity stake via warrants + penalty of 25%.

@ Ahura Mazda

Yup. Either domestic banks lend to domestic “playas” or foreign capital buys the underlying security (all nicely finished out at a cost of €10bn).

In my view it has to be foreign as the domestic banks must shrink their balance sheets. And being foreign they won’t overpay as there is a wide world of opportunity in which to invest.

Guys, before we go too far down that route, I want to note that I don’t agree that the Irish banks or foreign banks need to lend to eventual purchasers of property assets from those (assumed small!) fraction of developers who need to be foreclosed on.

NAMA’s business plan admits that the income will only flow in gradually over time. Given this, as far as I can see, there is no reason why NAMA can’t auction off foreclosed properties and provide the credit to the winners of these auctions. In other words, take a particular plot of land, auction it off and if the winning bid is €100 million, then NAMA offers financing so that the purchaser pays NAMA back over time.

Indeed, one possible alternative business plan for NAMA is to foreclose on a few initial developers with a few billion initial value in underlying assets, auction off these assets, and use the prices realised to set the market values for subsequent transfers.

This gets around the objection of “there’s no market price because there’s no market because there’s no credit”. We would get to see what market prices are without the problem of constrained credit.

The other reason I suspect bank lending to NAMA property purchasers isn’t likely to be a big deal any time soon is that draft business plan makes sure that the forebearance is the cornerstone of NAMA’s plan. If they don’t close on any of the major developers, then there’s no underlying assets to sell.

@Karl Whelan
I had been of the opinion that the banks would fool the government and trouser the money. I am now more inclined to believe that Brian Vader will not allow that to happen. The government know the country is in a hole and that their parties are in a hole. This €54 Bn project will I believe result very quickly in a large infusion of credit. If it doesn’t that red light sabre will be swishing furiously in the direction of our bankers.
It may be the first good use he has put it too.

@ Karl

Don’t want to be too picky here, and yes the business plan is badly drafted.

Nevertheless per Table 5 NAMA debt outstanding at end 2012 is €54bn and at end 2020 is zero.

I don’t see any scope for NAMA to act as the provider of credit to potential investors.

Also as (I think) you have pointed out the ECB may not be that comfortable continually funding NAMA or the Master SPV through repo.

“Real” money must come from somewhere to allow NAMA shrink its balance sheet. Otherwise it will be there long beyond 2020.

@ Karl

“1. I don’t see how my suggestion is inconsistent with paying down the NAMA debt over time.”

I’m not saying they can’t do it (behave as a long term bank). But, in my view, it would extend the time frame for NAMA operations beyond what was considered, and into an even more uncertain interest rate environment.

If as has been suggested (but is not still yet clear) NAMA will roll-over its funding every six months or so I can only see problems with NAMA acting as the source of finance.

“2. When you let someone buy something on credit, they pay you back over time in “real” money.”

By “real” money I meant funding provided by a credit system not dependent on the State or the ECB.

@Karl Whelan – “and if the winning bid is €100 million, then NAMA offers financing so that the purchaser pays NAMA back over time”

Is this allowed in the legislation?

Something is troubling me at the back of my mind…… but I can’t seem to get it out. Some kind of ‘double jeopardy’ if the newly financed by NAMA guy also goes belly-up or indeed, if that newly-financed by NAMA guy (or girl) were somehow dumping stuff into NAMA on one side then running round the other side to pick things (back?) up cheaply…..

This doesn’t sound right somehow but I just can’t put my finger on it.

I hope they’ve got really good, independent governance/checks & balances/auditing around this NAMA thing.

They have, haven’t they?

I think it’s important to look at what the nama transfer will do. one thing is that it will put banks back into an area where their loan deposit ratio is workable, BOI was at 162% in sept 08, they got that down to 150’s and then when Anglo was nationalised that scare pushed money out and they were back at 162% again! Once the NAMA transfer occurs they will be at c. 131% which is in the region of the 125% that is seen as healthy, so it won’t ‘make them lend’ but it will help create an environment making it more possible.

restricted lending and a reduction in debt appetite is totally common after any recession, this has been seen several times in the past, in Finland it took almost a decade for borrowing appetite to return to levels similar to the period of time before the bust. obviously banks have to start pricing in risk appropriately and that is partly political so it will occur post-nama.

i would also be wearly of applying recent basel developments prior to their international acceptance, and prior to the timeframe required to achieve them, until sept 2010 when joe taxpayer will (hopefully) be off the hook for the guarantee a degree of forbearance is expected.

you could argue that ‘reduction in lending’ will help things, that is true, but so would wide scale repricing of risk, things have changed, the prices should be reflective of that. essentially bank & aib will have monopolistic opportunity as they are the only ones liquid enough to lend, I can tell you from a working perspective we have essentially three banks doing biz and ICS is owned by BOI so really its two.

PTsb’s interim statement showed their lending is down 80% for 09′ and much of what got through was an 08′ bleed in as AIP’s went to L/o’s over the 4mth period you’d expect. their l/d ratio was c. 300% and margins are being killed on every facet of their business – but no nama for them….

its all a big mess, nobody denies that, but without getting banks to a point where they can act commercial we achieve nothing, having said that, we could ‘force’ lending by methods such as temporary ownership but that would undo future re-privatisation because the margin/risk relationship wouldn’t be reflected in a state owned bank, the entitlement mentality is already rearing its head, friends in collections are telling me about the ‘we saved the banks, so i’m not paying my mortgage’ line that is coming up more and more often. sadly, the path to recovery is going to be ugly and expensive, but

Joseph said:

“Something is troubling me at the back of my mind…… but I can’t seem to get it out. Some kind of ‘double jeopardy’ if the newly financed by NAMA guy also goes belly-up or indeed, if that newly-financed by NAMA guy (or girl) were somehow dumping stuff into NAMA on one side then running round the other side to pick things (back?) up cheaply…..”

I can’t resist jumping in here and offering you the point of view from the property developer’s end. Basically what you have to keep in your mind is this. The circular that Joseph described is indeed an interesting one.

But by the far the most problematic circularity or double-something or other, in the property game was: People always focus on the availability of cheap credit to developers and speculators during the land/building boom. But people often only see half the story. It is important that we don’t allow our brains to keep on playing optical illusions on ourselves.

Basically, the really toxic thing in property during the Celtic Tiger was not at the front end of the property development cycle, but at the back end, where the future rents of commercial space where forwarded on as collateral to extend the credit reach of the developer even further.

It is a bit like what Karl talked about with the ECB – the ECB is still ‘substituting’ or stepping into the vacuum left by the collapse of the global credit system, by offering banks credit in return for suitable collateral. The suitable collateral that property developers needed in Ireland during the boom was tenant-ed real estate.

Bearing in mind, that the tenants were sometimes the banks themselves. If you think about it, the bank lends money to a property developer to build them a new headquarters. Then lends the developer more money on the basis that the developer now has a rent roll from the bank as a tenant! Now you have to admire that. Good old Seanie and North Wall Quay.

But when this ‘push and pull’ effect when it is set up in a property market it is deadly. From my own perspective at ground zero, what it amounts to is otherwise sensible property development companies do, is get sucked into this roulette wheel game, where they put everything down and spin it once more. They shoulding be standing at the roulette wheel.

An awful lot of Irish builders would be fine today and self-sustaining, had the banks not set up this roulette wheel game for them. Whereby they got lots of credit up front to buy land at inflated prices. And then could use the future rents from their development as collateral to invest even more back into the game. Most developers keep spinning the wheel until they were past €1.0 billion and more. It became addictive to them and most of them forgot about their core business.

The best thing that NAMA can do, is remove the punch bowl, and smash the roulette wheel. That circularity between front side finance and back end collateral creation needs to be squashed. That should be NAMA’s biggest mission of all. Only then can builders get back again to focussing on their businesses. Sorry for the length of this. B.

Karl, any thoughts on the use of derivatives by the Irish banks to try and lay off risk – your analysis didn’t include any exposures here ?

best wishes
Chris

Allied Irish IMS out this morning. They’ve increased the impaired loans guidance within the €24bn NAMA loans to €10.5bn from the €6.7bn guidance they gave in July. That’s nearly €4bn of difference in 4 months! Surely this will show up in the govts NAMA due diligence and the amount paid for the loans will be slashed? Surely they govt cant fudge this hole too?

@ CM

That’s quite some change. The impaired portion has risen from 28% to 44% of the NAMA transfer value.

Provisions on these loans have increased by 82% to €4.2bn or put another way from 9.5% to 17.4% of the €21.4bn transferring.

If Anglo Irish were to follow suit their provisions would rise from €3.7bn to €6.7bn. I wonder who’s picking up the tab on that.

@ Greg/CM

the derivatives issue is a non-event, they’re vanilla IRS for the most part. Mentioning AIG in the same sentance won’t change that. The same goes for mentioning Enron/Worldcom when discussing the Master SPV.

The Irish bank problem is a good old fashioned excess leverage, poor credit standards and sectoral overlending issue.

@ Eoin

About the impending discount for AIB, it looks like you’re right on that. I may have made the foolish mistake of actually believing AIB when they had given guidance on having lower discounts. Of course, “doesn’t fall significantly outside” has a pretty elastic meaning.

@ Karl

“doesn’t fall significantly outside” could simply be them changing the wording on the back of legal advice, in that they could have been accused of suggesting a discount that they ultimately still have no certainty over. So even if they do actually believe that its going to be 25%, they may have been told to tone down the language until they get physical sign off from DoF/NAMA. Still something to consider.

(sorry about duplicate)
In the presentation Karl says:

“But the ECB’s unlimted lending policy is likely to come to an end over the next year”

combined with a drying up of inter bank wholesale markets and the irish banks dependance threreon it is suggested that this poses a problem for Irish banks.

However,

1 Will the Irish banks not still have access to the ECB’s discount window, albeit at higher rates to the main refinancing rate – moreover they will have a lot of eligible collateral

2 Have interbank markets dried up to the extent that irish banks cant repo irish government debt at anything like the main refinancing rate?

@Eoin

Thanks for that

If I get it right, the banks will be able to private repo at least a good chunk of their gov bonds + get some main refinancing (albeit for progesssively shorter terms)+ in a pickle borrow at the marginal lending rate from the ECB

You say that the ECB will start restricting their liquidity operations and this will reduce the availibility of liquidity.

However, would this shortage not drive up long rates (and maybe shorter private rates)

Will the ECB tolerate significantly higher, say 12 month rates, compared to their 3 month refinancing rate. Would this not defeat their monetary policy stance.

In other words, at any given time, is the ECB not commited to an interest rate, and thereby commited to providing what ever liquidity is required to achieve that rate, and if so, is talk of a liqiudity problem for irish banks (in the absence of a solvency problem) misguided.

@Eoin,
“question – the general concensus has been that the discounts on NAMA loans would be bigger for Anglo/IRNW than they would be for AIB/BoI (lets say 35% vs 25% or thereabouts).”

Not sure about the general concensus. I think two issues are being mixed up 1. the proportion of a bank’s book going to NAMA and 2. Loss severity (my proxy as the driver for discount).

On the first point, Anglo and INBS would be expected to transfer a greater portion of the books. If this is the general consensus, then I’d agree. On the second point, it’s not clear why BOI or AIB should have a lower expected loss severity on loans. If anything, it could be higher as they entered to the construction/developer lending sector later than Anglo.

I take the presentation at face value. It argues that NAMA is not a silver bullet. We have a serious economic problem which will not be solved overnight simply by cleaning up banks’ balance sheets.

For the avoidance of doubt, the presentation does not in any way argue that NAMA is a bad thing. IMHO without NAMA we would be hopelessly lost, but even with it we have a long slog ahead of us.

@Eoin,
I think I’d say “according to AIB & BOI” rather than “general concensus”.

On loss severity, AIB’s growth for ROI Construction & Property was dramatic in recent years. They loaded up much of it after 2005. Thankfully AIB provided this info in their last annual report.

2005 Eur 14,863
2008 Eur 33,290

So that’s a change in outstanding balance of 18bn. As some of the 2005 loans would have paid off during this time, you’re looking at 20bn+ originated over this time (ignoring interest roll-up). That’s a whole pile of debt at peak bubble prices.

It is quite reasonable that the a fair and true discount for AIB could be high. Do you have Anglo figures?

@ Eoin

It’s half time now. Ireland 1 France 0.

Who thought AIG was a counterparty risk before they became a counterparty risk?

@ Eoin

It’s extra time. Penalties?

I’m not talking about Irish Banks or the glorious risk averting derivative market.

I just want to know who the counterparties are.

It’s simple and so am I.

Who is going to pay the pied piper?

“The fact that the derivatives are “plain vanilla” will be of little use if the counterparty can’t pay.”

How do interest rate swaps work in a ZIRP environment?

Nobody knows Eoin, not even you.

What is the natural rate of interest in the USA or Germany now?

Who’s the bag holder Eoin?

@Brian
“I am wondering though, it may be pure dumb to ask, but why doesn’t the ECB issue debt?”
It is not permitted to issue debt.

None of the Central Banks are (I believe). As they do not have tax raising powers, they do not have the ability to pay back debt. They are not sovereign. And sovereign debt is the issue of IOUs backed by taxpayers.

Which is why it is always disingenuous of a government to say that because some guaranteed debt issuance is off-balance sheet it shouldn’t be counted as part of the national debt. It is always national debt if it is guaranteed, because it is always based on future tax payer’s ability to repay.

@ Eoin

Hand ball.

“These derivatives were (a) hard to value at times and (b) were seeing their underlying assets blowing up at the time.”

(a) How hard is it to value interest rate derivatives in a zero interest rate environment?

(b) Are we? I haven’t seen interest rate derivatives blow up yet, have you?

(c) What are the underlying assets you refer to? NAMA assets including €14.6bn of derivatives?

I know this is too long winded, but it might be worth a lash. I am linking together a couple of recent newspaper articles for your benefit. The point I am trying to make is as follows:

The extent to which the construction and development community can invent sustainable models is more dependent on the type and quality of finance they are lightly to receive – and much less to do with computer simulations designed by architects and planners.

Brian Vader, (with light saber no doubt) our wonderful minister for Finance even understands that much. He is on record saying he hopes that through NAMA, the construction sector can benefit from a proper financial structure as we advance and try to modernise our country.

Mortgages

Kathleen Barrington in the Sunday Business Post wrote on the subject of IBF’s Pat Farrell’s unreserved apology lately for the banking crisis. Kathleen’s article is very comprehensive and explains quite a number of things I didn’t understand before, in terms of the dynamic of how banking and property economics worked in Ireland for a time.

http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=THE+INSIDER-qqqs=themarket-qqqsectionid=3-qqqc=3.7.0.0-qqqn=1-qqqx=1.asp

The only thing I would comment on, is maybe in Ireland we shouldn’t beat ourselves to death too much. I mean, is it all bad if a modern developed country such as Ireland wants to have nice residential property, and aspired to own nice homes? To have a good job. We shouldn’t lose sight of that. Many of the aspirations of the Celtic Tiger were good and departed from the aspirations of earlier generations.

Municipal Bond Auctions

I really did enjoy the article by Karl Deeter and Stephen Kinsella in the Sunday Business post.

http://www.sbpost.ie/themarket/municipal-bonds-could-be-the-solution-to-many-problems-45601.html

I had waffled a lot about finding alternatives to ‘bricks and mortar’ for someplace to put savings of private individuals in Ireland. Indeed, as Deeter and Kinsella point out, if the municipal bond scheme had a proven track record it might attract funding from further affield again.

In fact, I cannot see what Charlier McCreevy or Brian Cowen could not have put their tax surplus into municipal bonds during the construction boom. Especially as the ‘windfall’ was coming from construction related activity anyhow. Because the big trouble trouble with the Irish variety of the ‘property developer’ is that they were over leveraged. They hadn’t got a seat in their pants. Development levies went unpaid and development happened in areas where there wasn’t money to pay for street lights not to mind anything else.

Land Value Taxation

The development levy accruing to the local authority, as Bill Nowlan described it in his Sunday Tribune article is a form of land value tax.

http://www.tribune.ie/article/2009/nov/08/we-need-to-design-a-workable-land-tax/

The function of a land value tax being very different to that of a municipal bond. The function of a land value tax is rather like what Eoin above described the function of the ECB – price stability. Or in this case, price stability of land and ensuring that ‘windfalls’ did not accrue to private developers who sat on land, which was serviced by the public sector. Why do you think Battersby power station has no roof. The land owner didn’t want to pay rates. Rates are related to buildings on land, not on land itself.

The function of the municipal bond is to remove savings flooding into the property market in search of a home, literally, as a store of wealth. I.e. That you have people looking for somewhere to put spare cash in competition with first time buyers for the same bricks and mortar.

Tom Dunne also wrote about land value tax for the Sunday Tribune.

http://www.tribune.ie/business/news/article/2009/nov/15/a-yard-stick-for-working-out-property-taxes/

The danger without a form of land tax, is that the tax payer gets hit twice. First he or she is hit for the cost of servicing the land, the benefit of which ends up in the pockets of land owners. Secondly, the taxpayer is hit later for the price of over-priced property sitting on the land which becomes over-priced, they having paid for that rise in value, in the first place.

I thought it might be useful for you to have these couple of analyses side by side, in determining how to think about finance and development going forward.

All the best, B.

@ Greg

“Is “Derivative” your new God?”

Eh, no, but neither are they your version of the devil incarnate. They’re more like the kid next door who sometimes gets in trouble and throws stones through windows, but who is generally a good kid who doesn’t get into trouble.

@ Ym

I think the opposite – its more a case of availability than price in terms of repo (though definitely price for normal wholesale deposits). Because a repo is collateralised, in this case by a government-backed security, the default risk is incredibly low. The major issue for Irish banks with 60bn or so in Irish government debt is that a lot of banks will put a limit on the maximum amount of Irish government debt they’ll be willing to take on via repo for concentration and liquidity reasons. They might be willing to, say, do 1bn in total repo with an irish bank, but they might limit the Irish government collateral to 25% of this, for example. And I know of certain Irish banks doing repo right now at virtually no premium to other banks, they’re getting it at pretty much market prices.

As for SVR’s, well i agree they’ll go up, but thats because they’ve generally been too low to start with. Irish bank margins in general need to increase.

@ Eoin

Do you get it Eoin?

Interest derivatives in a zero environment?

There is no theory or practice in this.

If the FED (the US failing government) raises rates to 2% (hallelujah savers) the kid next door is now 25 years old and is a Maoist with a Kalashnikov.

@ Ahura Mazda

You are absolutely correct.

Who is going to take NAMA assets?

Whether loans or security for loans where is the CASH coming from?

I’m calling it at €100bn.

Where is the cash?

Ireland doesn’t have it.

Who does?

@ Greg
“Derivatives are “in the mix”, €14.6bn notional value per page 9 of the NAMA business plan.”
.
Are any of these derivatives going to be Collateral Debt Obligations (CDO’s)?
If so, these will have to be unwound and is that legally possible?
Because it will involve removing the insurance policies, Credit Default Swap’s (CDS’s) that served to wrap the CDO deals that have plunged in market value.
Commutation would normally involve the policyholder receiving some fixed payment in exchange for tearing up the swap agreement; essentially, the bank counterparty would release the insurer from its guaranty in exchange for a cash payment from the insurer for so doing.

Is the CDS issuer going to be legally liable if the ownership of the CDO has changed (to NAMA)? I doubt it.

So if the CDO derivatives are transferred to NAMA this would leave the Irish taxpayer in a position of being unable to cash in the CDO.
I wonder were the bank planning to do that PRIOR to transferring the CDO’s to NAMA, if not, then they should AND the sums realised deducted from the value of the derivative.
If AIG is the insurer then the US Fed will cover the policy.

There is a huge problem with transparency in all of this.
It’s really vital that NAMA’s workings are reviewed on a monthly basis before a bipartisan Dail committee, failure to do so will cast a very dark shadow over the entire project.
The abandonment of ‘regime change’ at AIB does not leave one too confident that Mr. Lenihan is that concerned about transparency. Such a laissez faire attitude will end up costing Ireland’s reputation dear.
The feeble diversion of bankers pay, as he allowed an ‘insider’ to take over from Sheehy was insulting to the taxpayer, to say the least.

@ Greg,

We all might be taking the piss to a certain or to a large degree. I am unsure myself sometimes. What I do know is that one conversations happens over in one area between architects and planners who believe they have the perfect prescribed solutions to all our problems. Then another conversation happens between bond traders, bankers and economists (auctioneers in fairness to them, do pay attention to that conversation) who believe they are at work, to come up with the solution.

The net result of it all?

A lot of people work extremely hard and miss the whole point. Because of the absence of joined up thinking. Peter Bacon is only one of those folks who seems to have crossed many divides in his time. It is little wonder then, he was given responsibility to draft a recovery plan for the nation. We can all moan and groan about this, standing in our own particular camps. But unless someone somewhere comes up with a joint effort, joined up solution – and I don’t think the Greens are quite there – there is no hope of a comprehensive alternative to the NAMA direction.

I may not like Peter Bacon’s approach, but I have to hand him the credit he deserves for walked across so many different borders. That is key in my opinion to how one learns how to add value. My ‘cigarette box’ article on the Zoe group for the Sunday Tribune really was an attempt to show how cheaply and efficiently you can achieve results if you can embody all of the current thinking, across the spectrum, in some way. Zoe’s contribution to the built environment is no more loved than the NAMA approach to solving the lending crisis is.

But both shared the trait of originating from someone or somewhere, where ideas and disciplines joined up and managed to come together. There is an entire ‘grey area’ between what we know in terms of finance, to do with banking. And on the other side, construction economics and development. These are entirely different cultures, but both dependent on the other. Sometimes pathetically dependent on one another as the Zoe court case this summer demonstrates.

The grey space should be explored more. Things like land value taxation, municipal bonds, mortgage regulation, multiplier effects. It is an area that should be studied, by people wearing many different hats. We aught not to fall into the trap of looking at finances purely through the lense of banks and bonds. If I may be so bold as to make that suggestion here.

All the best, B.

Chris Cook and the ‘Limited Liability Partnership’ or Middle Eastern financial structure, is another one of those strange creatures that live in the same ‘grey area’. Cook’s lecture is available at Feasta’s multimedia section.

Rather than getting too caught up with derivatives technology, there are other worthwhile and potentially useful financial systems which should be worked a lot harder – by the financial industries – to make property work for us rather than against us.

@Brian
“- you could drop a small object the size of a wall nut onto a building site. In this wall nut, is contained all of the instructions for how to build a project. You wouldn’t require builders or labour etc. This wall nut would get to work and over time it would produce the project you wanted.”

This works already – you just drop a walnut sized object – containing the instructions, like the man said, on a peice of waste ground – come back later, and hey presto a walnut tree!

@All
NAMA is just a rescue of interest groups from the collapse of the bubble.
No interest group will be left behind. If the derivatives lose money – well, that’s just another thing we are rescuing interest groups from. If they are likely to make money for the banks they won’t give them to NAMA. So we will end up with the loss makers. The public are stuck on the sinking Titanic that is Ireland, while the interest groups make off in their luxury NAMA life boats, half empty because they are more important than us and they really need their space. You wouldn’t be so vengeful as to demand they take the rest of us with them would you? How dare you. Anyway, they have no choice. The banking system will “collapse” if we are not left to freeze while they escape in luxury. How convenient.

@ E20bn

“If the derivatives lose money”

Sweet Jesus on a crucifix, this needs to stop, now…

@ Cearbhall,

I had forgotten to mention your approach to the problem in my quick tour of different ideas and solutions above. Thanks for the contribution and explanation of some of your big ideas, which are very useful.

@ Cearbhall,

What do we replace debt with? What do we fill out our economy with, in its absense?

My whole point above, was that we could use a series of different tools which aren’t banking related per se, but would be systems of taxation and money collection, which could be built over time and eat away at the problem from the edges.

In other words, we need to look beyond the immediate panic and see what kind of country we hope Ireland to be when our kids take over, in 2040 or 2050 etc. We tackle the problem in lots of different ways, rather than in one big way – NAMA. NAMA won’t work anyhow, because it is a silver bullet. There is no silver bullet solution to this problem.

We only want to think there is, because we derive comfort from that belief and we paid Peter Bacon to make us feel better. A doctor who gives us a pill, even though it is a Placebo.

Chomsky’s point about the 1950’s taxpayers in the US is useful. What did they receive in return for their taxes? What would they like to have received? It would be nice if taxes could be used to fund systems, that secured funding in a sensible way.

Taking the point about the ‘Limited Liability Partnership’ as it relates to property. It tries to solve 2 no. problems in the economy. That in order to create money we need to create debt. A lot of the debt being very expensive private debt in Ireland’s case.

Also, that multi-dwelling residential developments are occupied by very few owner occupiers. Therefore it is very hard to make sustainable management of the developments work. The limited liability partnership does away with the polar concepts of rent and ownership and offers the occupants equity in an asset pool instead.

Wealth is created which will not diminish in time or create asset bubbles in the way that debt fuelled systems do.

@ Aidan,

That is a very interesting post Aidan, tanx for that. I am glad you are able to play around with my metaphor a little bit. You are right of course to make the connection with LTCM, a company of ‘wizards’ who also probably stayed up too late, to use the Hafner Lyons book title. I was hoping that someone here might be able to make the connection, and you certainly did. Indeed, the walnut has already been tried several times in financial ‘engineering’, by brains much better than ours no doubt.

A book I would recommend is by Neil Gershenfeld, When Things Start to Think. It is a funny little book. I like his chapter about ‘smart’ money etc. What I like about Gershenfeld’s book too, is it offers a comprehensive menu of new ideas and technologies. What the taxation and public spending reports got was a ‘menu’. McCarthy is a menu. I think that property and banking deserved to get a menu compilation, but didn’t.

What I have endeavoured to do in this thread really, apart from confusing a lot of people no doubt, was suggest subtly, that the discussion on NAMA should move more towards the menu type format. Where the group here (my other studies beckon, so my resources and time are running short) might compile many 10 no. different things that should and could happen in various sectors and at various levels within the Irish economy, to try and solve the property/banking difficulty.

What Cearbhall suggested above might be 1 no. component of such a strategy. I was looking at Eirgrid’s all island grid study for Ireland and I noticed they looked at different ‘portfolio’ options for electricity generation. Mixing up different kinds of technologies for generation, and seeing how the different portfolios would suit Ireland’s case. I think the banking and property difficulty in Ireland requires a portfolio option, rather than ‘a’ solution.

I was reading a paper on air quality in buildings the other day. It noted 4 no. main culprits as far as air quality goes. They tend to get worse exponential with temperature, humidity, UV light and ozone exposure. When you have those 4 no. things acting together, you get synergistic effects too. So the air quality situation can get worse exponentially and in synergy with each other.

We should look at the economy in the same way – if we don’t tackle property and banking in different sections and different levels, we will not be able to un-ravel the problem a lot faster. Of course, if we got the portfolio mix wrong, we might end up making things worse. Which is all the more reason to look at various portfolios of options and run battle simulations over periods of decades.

I believe that is what Napoleon would have done before going into battle. No matter what way the situation on the real battle field changed, he was never perturbed. He was always ready to react and seize the opportunity. We need to prepare ourselves in the same way regarding the battle facing us regarding property and banking in this country. Debate on a single solution is misguided.

On the computer history

You are of course, correct to point out the over simplicity of Chomsky’s reference to the ARPAnet. You are completely correct on all points above. I could go on for the evening talking about the history of computing, so I had better stop straight away.

You obviously know your way around that history also. Unlike Aidan McGrath however, many who listen to Chomsky do not possess the ability to see where his examples don’t quite work.

The over-simplistic use of computer technology invention though, by Chomsky, was useful and serves a purpose, in that it focusses an intense light on the fallacy of ‘capitalism’ as we believe it to be.

Chomsky’s over simplistic use of the computer example throws into harsh relief, this notion of taxes and inter-generation-al transfers of wealth. I think Chomsky himself knows he is over-simplifying history. But I allow it to him, because he did so in order to throw into sharp relief a very interesting point about ‘time’ and economics.

I would love to see Kevin O’Rourke or someone take it on and work with it.

These are things we should bear in mind, I suppose, when thinking about NAMA. There will be kids in 40 or 50 years time reading history books about Lucey and Whelan etc, and this strange beast called NAMA. A bit like we view old IBM mainframe pictures today, or photos of the whirlwind computer system. Dusty old relics of the past.

I think I linked Nick Tyler, the professor from University of London, who is very aware of this difficulty in designing transportation systems. Transportation system depend heavily on technology no doubt.

For instance, the old tram system competed with horses and buggies for the same space on our streets. Then buses competed with trams. Now Luas’s quite literally compete with buses for space as we saw recently. It is hard to define what kind of transportation future generations will require.

We have as many transport museums as computer history museums no doubt.

@ E20bn

“Britain’s banks were fixed long ago”

Seriously, can you stop this crap? You can tell me the British way of repairing their banks is, in your opinion, a “better” way or whatever, or that they are in a better condition than the Irish banks, but given that Lloyds are about to undertake the biggest rights issue in UK history, given that RBS are going to have over €300bn in assets guaranteed by the UK government, and given that both banks are about to be broken up by the EU, its quite clear that the UK banks are anything but “fixed”.

@ Brian
“What do we replace debt with? What do we fill out our economy with, in its absence”

We replace debt with equity, as a means to avoid the coming wave of residential mortgage foreclosures.
Instead of having the banks sending out hate mail to distressed homeowners, threatening court action and inevitable foreclosure, the government should force the banks to go and say to these people, for example, “we are going to reduce your monthly repayments from €2,000 to €1,000 but we are going to take ownership of 50% of your house.” For the mortgagee this is preferable to losing the family home.

The same action could be taken in relation to any asset backed economic activity that has a high level of debt and convert a portion of it to equity. This is surely preferable to the ‘dead end’ of foreclosure which in itself will only lead to more problems. Once the home owner is no longer choking on debt and has some spare cash at hand consumption will begin to rise again.
To me, this makes a lot more sense than shovelling billions into bank debt that we know absolutely nothing about. In the course of the past year, with taxpayers having been forced to accept liability for the bankers gambling debts and the transfer of billions in taxpayer’s money to those same bankers we have no hard evidence as to the actual profile of any of these individual loans.
It’s interesting to hear what Bo Lundgren, the man who successfully sorted out the Swedish banking crisis in the 80’s, has to say how they handled the banks debts.
http://celticmeltdown.webs.com/swedensbankcrisis.htm

If the Irish banks were not immune from the consequences of their actions, as a result of having panicked the government into making the Irish taxpayers liable for their debts, they would have worked out equitable and just solutions to this whole problem long ago.

In relation to your comments on AirGrid Brian, you may find this story interesting:
http://www.timesonline.co.uk/tol/news/world/ireland/article6907745.ece
.

@ Cearbhall,

“Instead of having the banks sending out hate mail to distressed homeowners, threatening court action and inevitable foreclosure, the government should force the banks to go and say to these people, for example, “we are going to reduce your monthly repayments from €2,000 to €1,000 but we are going to take ownership of 50% of your house.” For the mortgagee this is preferable to losing the family home.”

Cearbhall, I understand now. Thanks for explaining it to me. I suppose my question is why can’t we set up this arrangement to begin with, and allow people to pay rent at affordable rates. If they overpay their rents, they can earn equity. If they lose their job, they can use up equity instead of paying rent. This kind of a proposal may work in some situations. If you decide the leave the property for good, you leave with some equity as opposed to nothing. This might appeal to some younger people who are unsure what to do.

I like your idea of converting debt back into equity. It is like the ‘retrofit’ approach to finance. There is no need to stop at 50% though, in some cases. I would convert the 100% into equity and issue the mortgage holder with equity renumeration for the part of the mortgage paid down. Then enter into an ‘affordable rent agreement’ with the occupier, and allow them the earn back equity in the scheme as time goes on, as they can afford to pay.

My understanding is that institutional investors would be interested in buying into such plans, as the ‘affordable’ nature of the project, would ensure a steady income at modest rates over the long haul.

I see your point about 50% debt to equity is linked back to an entire plan, to create competitiveness and keep the economy underpinned on a much wider scale. You have explained that very well in writing I have read before.

A word on competitiveness

In fairness, we ourselves create the context in which banking institutions operate. It is ourselves, the consumers who demanded free competition and better deals for credit etc, to begin with. We are probably seeing our own chickens coming home to roost.

I mean, how many people in towns around Ireland refused the easy credit they obtained in the boom years? How many people protested that money was too easy to borrow?

It was competition in the marketplace which created that situation. Students benefitted from loans, young people bought cars etc. Entrepreneurs sought to start up businesses.

Yeah, the mortgage thing spun out of control. What the banks will probably try to do is sit on their fist rather than come up with some ‘work-out’ solution. A work out solution such as the 50% debt to equity plan.

Why don’t bank propose solutions?

The banks are not going to waste one single iota of resource deployment in trying to fix the problem. It doesn’t work for them on any level. Banks are comprised mainly of human resources who only know how to operate within a competitive environment.

You would have to helicopter in a different management ethos, a different DNA strand at this stage, in order to change the culture sufficiently to underpin a real plan such as 50% debt to equity.

Banks have their own business-centric point of view, which stresses attributes such as lean-ness and competition in the market-place, between rival banking competitors.

In other words, banks are caught in a kind of prisoner’s dilemma with other banks and they all have to obey strict competition guidelines as set out by the EU. There is a stalemate in other words.

This is the market place, this is the wonderful world of free competition we all talk about. You have to see the bank’s point of view, it is operating within those pre-set conditions.

Now, supposing we impose a new element in the game. Rather like in Formula One racing driving competition, where they alter the terms of agreement between teams, the basis on which they compete each season. This is certainly something we could do. But we are still working within the same basic structure of competitive players.

Banks will still want to ‘race’ one another no matter what. That is what they do. That is what motivates them.

We could do more if we national-ised the banks. Maybe we might do more damage too. Because every think tank and concern group who has an opinion would want to rush in and ‘fix the bank’. Myself included no doubt.

Maybe we would end up doing more long term damage than good. That is not to say that in principle the ideas of Cearbhall O’ Dalaigh and many others, are not bang on the nail, in terms of identifying problems and proposing solutions.

You have a similar cat and mouse problem with property development. If you allow too many concerned citizens into the arena of property development – I mean, via planning authorities and local development plans etc – I notice, that you can lose chunk loads of competitiveness in a very short period of time.

You can go from okay competitiveness and okay products on offer, to very over-designed, over-featured products on offer with poor market uptake and overall very poor competitiveness.

Competition in other industries

I understand the competitive instinct, because working for a property development company is the very exact same. It is about running a business and gaining back every last cent, to remain competitive relative to other players in the game. So one property developer is not going to stick out its neck and give away a square inch of extra floor space, in case it might give away something its competitor would not.

It is unfortunate I suppose, but nothing short of hypnotism or brain transplantation, would change it. In the future, if we can build institutions which are comprised of people who have attended several different ‘schools of experience’ we might have some chance.

The kinds of skills in competition that served property development companies so well, when they sought to struggle up from the bottom, renders them a little bit too one-sided in their view of the world, when they do reach the top. I fear it is a lot like that in banking. People who move up the ranks within banking probably understand competition better than anyone else. But that is a very limited and one-sided way to view the world.

The reality of the matter today is that banks and property development companies are struggling to develop new models. But all they have to draw upon in terms of human resources is a collection of people with very well developed competitive natural instincts. That will not be good enough. The process we are seeing at the moment is the old guard in banking and property development grinding away with their mental machinery in vain.

The executive summary of the above long diatribe, is that human beings respond well in competitive situations – when there is something at stake and up for grabs.

It is easy to ‘harness’ people when you organise them in that fashion. You only have to look at the interest in the Ireland – France football match to see that Ireland is still a nation with a lot of competitive energy left in it. There is something about competition that focusses and combines the concentration of so many people together, in a way nothing else can.

Organisations are often assembled together to create a common competitive purpose, and no greater ajenda than that. In the absense of competition I wonder are human beings able to manage at all. I suspect, many would simply lie down and die, or worse.

@ E43BILLION,

Thanks for the contribution interesting.

I believe this debate about insiders and outsiders is mis-leading a small bit.

I mean, as I tried to explain above, whether you work for a bank or a property development company, the trouble isn’t the fact that someone is an ‘insider’ per se. But rather someone who was an insider for a significant period of time, began to define their job as one of competition with other banks or other property development companies.

Their creativity and talent became funneled in that general direction and nothing else was important. I suppose we could call it tunnel vision. It would be real helpful, if in banking and property circles we could get a sudden injection of a different point of view. It would go a long ways towards breaking the stalemate. But that individual or individuals need to come in at the top, where they can affect change now.

But we have to be very clear about what we are looking for. It is not an ‘outsider’ for the sake of it. Because many of the insiders know an awful lot about running a company in a certain way. What will happen though, is it will take so long for the human resources transformation to take place, that the recession cycle will have passed on in the meantime. In other words, we may well have ‘wasted a crisis’ after it all. That is what the old guard is no doubt hoping for.

I have a lot of respect for the old guard btw. I am no doubt in a minority there. Even though I think the ideas of the old guard are out of date, I can at least see the context in which those ideas were born and developed. As consumers we asked for greater competition in all areas of the economy and society. Competition is what we asked for and competition is what we got. It appears as though competition itself has to be ‘guided’ to keep it on track. I use the word ‘guided’ in an attempt to convey an interference which is arms length but present, and does affect the right kind of direction.

@ yoganmahew,

Thanks for that. I was very curious to know some of your opinions as to what the banking culture is like. I am not familiar with the culture myself, despite casting some assertions etc about it further up the thread. Your assessment is very educational to me.

I always feel though with the emphasis on ‘greed’ as a prime cause of economic turmoil in Ireland, it avoids us having a deeper debate as to what went wrong. I mean, for example, if I am a journalist and I want to sell newspapers or books, a start with a quite basic story – how greed got the better of us and flesh that out as much as is required to reinforce that basic story.

While the greed might be a useful ‘hook’ upon which to hang the story of banking in Ireland, I am not so approving myself of the use of ‘greed’ as a lense through which to view the rest of Ireland’s population. I think it greatly distorts the reality. The reality is, we wanted more competition and organisations to compete (credit card companies for instance) to offer us financial ‘products’. Be they for personal use or otherwise.

But why stop at financial products? Why not look at the position of the average employer during the Celtic Tiger? For arguments sake, someone who is running a very viable business and trying to build up a strong presence in the market. The individual employer was also competing with other employers. The other employers despite the fact they were ‘flush’ with money, didn’t have good viable business models, but didn’t go out of business.

In other words, employees got things their own way a lot of the time during the Celtic Tiger and employers had to do a lot of pandering to employees to attract them to work. I hired a student 2 years ago. He phoned me on his second day of employment at 9.00am and told me over the phone, he wanted better pay and better hours.

I told him good luck. With all of the debate now about greed, some stories are not being told at all. Like the story of the employer who ran a good business and had to compete for a workforce which really didn’t know what end of them was up.

@ E43bn

how long do you think it’ll take to flog the Newbridge apartments at those prices? My guess is they’ll all be gone by Tuesday morning. The term “priced to sell” has never been more apt. And that’s why its stupid to use them as a benchmark.

Re UK banks. So you’re admitting the UK banks weren’t fixed “long ago”?

@Brian
“I always feel though with the emphasis on ‘greed’ as a prime cause of economic turmoil in Ireland, it avoids us having a deeper debate as to what went wrong.”
Indeed, that’s why I started with incompetence!

“In other words, employees got things their own way a lot of the time during the Celtic Tiger and employers had to do a lot of pandering to employees to attract them to work.”
I agree to a point. Particularly the tax giveaways and social partnership that reinforced the view that net pay only ever goes up (never stays the same, never goes down) and that it goes up quickly (more quickly than inflation).

It should be the expressed mandate of banking institutions now to help to build back up such long term businesses. Preferrably ones that can compete on the world stage in project development of all kinds. Like NTR, airtricity, Eddie O’Connor’s mainstream renewables and so on.

These kinds of companies are not overly depended on the Irish market whims and can continue, while still adding value back in Ireland, no matter what the economy can consume at one or other point in time.

@All
I posted this on another thread but I think it is most relevant here:

Brian Lenihan is working hand in glove with the banks. Both of them believe that Irish property would have had a soft landing if it wasn’t for Lehman’s collapse. Why should he clear them out? He believes that the government, developers and bankers were all victims of outrageous foreign misfortune. Politicians are a key part of this triangle. FF/PDs are just the political wing of the banker/developer complex. Lenihan is being wrongly depicted as the slave of the banks when really he is their partner and leader. Vader can choke the banks boards and management any time he wants – he doesn’t even have to use his hands. Expect a token gesture to show he is in charge (which he always has been) in the near future.

Finally, remember the correct standard of proof for the NAMA lobby:
No assertion by the NAMA lobby should be believed unless it is in writing, legally binding, irrevocable and available for inspection.
No commitment by the NAMA lobby should be believed unless it is legislated for, implemented and is being policed by an independent expert of huge experience and unimpeachable integrity.

This especially applies to the “deal” with the ECB.

Another quick piece of history. That time, in the late 1990s was when Frank McDonald of the Irish Times would stay up late at night to study and read the published Bacon reports on housing and affordability.

Now Frank spends a lot of his time studying the moves of stakeholders involved with the upcoming conference on climate change in Copenhagen. This is another example of how times have changed. When the Dublin Docklands development association was formed, there wasn’t the same worldwide awareness of the climate change issues.

Ireland was a country 10 years ago, much more focussed on its own problems. We were not part of this larger global effort to decide our planetary future well bieng.

The rest of the developed world seemed to be doing okay and racing ahead of Ireland. All that seems to have changed. Anyhow, it is useful maybe to look at things with the long view. Where will we be in another 10 years compared to where we are now?

I do have some ideas or notions. But if the last 10 years have taught me anything. Nothing stays as it is, things improve, things dis-improve and faces and places do change.

@Brian O’Hanlon
Your point about the DDDA is well made. From affordable housing in Ringsend to the unfinished Anglo Headquarters is a sad journey for an organisation to have made.

Regarding the elite who caused all this.
“I think at the end of the day, the reality of the situation will be brought to bear on them, just as much as it is bearing on everyone else”.
The only justice we will ever get is to make sure the elites take the financial consequences of their actions, rather than on dumping them on us through NAMA. This is Ireland. There will be no custodial sentences or almost none. That is why NAMA is so important. With NAMA there will be no justice at all.
Our elite are now more corrupt than Italy’s. Our civil service is going the same way. Soon we will be living in a rainy Rome – but our ruins will be ugly and very recent. Some people in the media are waking up though. This article by Matt Cooper is excellent. The last 4 paragraphs on the bondholders are especially good.
http://www.timesonline.co.uk/tol/news/world/ireland/article6926806.ece
There is still hope.

Who is going to be the brave person to knock NAMA on the head in ten years time?

If we cannot deal with a ‘feather-weight’ walking zombie like DDDA today?

I noticed that story emerge in yesterdays Sunday papers.

@ Eoin,

I am simply glad to see some movements of the ‘geological plates’ of Irish finance. Its taken a whole year to get to take even.

I know from my own point of view, a lot of other stuff beckons, which was put on hold, delayed or otherwise shoved aside starting about this time last year, when my s*** hit the fan.

I think I have come to terms better now with the scale of it. I am looking ahead more.

What has occured to me from this thread in particular – Is the fact that I have been involved in, and following the progress of this economic bubble to bust from the first quiet meetings about the Dublin docklands etc way back.

I have witnessed the entire thing and observed a lot of players as they partook. Although, I am sure I was missing the ‘window’ into the financial side of a lot of things.

I remember standing on a pile of rubble with a film crew doing a documentary about the old Sherriff St flats. Now there was quite a sight. You really had to walk around it to believe it. A lot of that has changed.

Property investment receives a lot more attention nowadays. Not least, at blogs like this one. But there was a time when financial investment and re-development was not on the public’s radar at all. That is what has changed in 10 years. We have more eyeballs now on things.

That was the vacuum into which Sean Fitzpatrick and Fingleton moved into. I can remember it like it was yesterday. There was nothing happening in Dublin. It was dead, empty. The Fitzpatricks and the Fingletons filled the emptiness. Anything seemed good, because there was nothing there before.

Ireland/Dublin was a nation/town which had been desperate for some action for so long.

But I wonder if any of the ‘architects’ (I mean financiers, planning officials, governments) of the whole escapade have anything to say now. How we could have managed the roll out better.

I know in my opinion, the pay back was very poor compared to what it should have been. I am less sure though, how to re-address that. How do we define pay back. It is far from straightforward. The green movement has offered some clues, which are very welcome to myself at least. What we need is better clues and more.

Do we need more political intervention, better planning, better finance or a combination. My mind is still un-resolved as to where the ‘failure points’ really were.

Best of luck to everyone in the financial world anyhow. I hope we can work out of this.