Lucey on Micawbernomics

Today’s IT carries an article by Brian Lucey on recent banking developments. You can read it here.

77 replies on “Lucey on Micawbernomics”


The article doesn’t make clear (or at least not to me) what the benefits would have been of nationalising the banks months ago.

At the very least, the NAMA process has compelled the Banks to provide the State with an accurate picture of the key troubled loans- which appears to have been a massive administrative task.

You would be further down the road towards creating a functioning banking system. You wouldn’t be tying yourself up in knots over the pricing of NAMA bound loans. etc. etc.

If no NAMA and nationalisation
how would you have funded the sovereign when the bank assets were added to the national debt. Lenny is right on this, we would have faced a mssive run on the sovereign?
how would you have funded the banking system in the face of massive deposit outflows that would inevitably have occured?
How would you have recapped the banks with out access to the bond markets?
In the absence of NAMA, where would you have got 54bn in cheap liquidity?

Thanks simpleton for that.
In essence its a technical, administrative, issue – like leaving the Euro sounds good in theory but cant be done in practice.
We already have a bad bank – a rotten festering black hole of a bank – into which the toxins could be placed and worked through. And as was the case with First Active accounts its doable by letter IF all the banks are owned by the same entity.
But, hey….maybe something will turn up.

Not sure you followed the debates last year – i think we kinda addressed these issues….do you REALLY think a la Frank Fahy we are getting €54b in “cheap liquidity”

@property gal
“how would you have funded the sovereign when the bank assets were added to the national debt.”
Assets don’t get added to the national debt, I presume you mean liabilities. Anglo’s liabilities haven’t been added to the national debt as it is still considered a going concern. Should it enter wind-down it may be added, although I imagine a pretend SPV will be set up.

There’s no bar from the EU to nationalised banks buying sovereign bonds provided they are at market price.

“massive deposit outflows that would inevitably have occured?”
I don’t see that it would be inevitable. Most of the retail deposits are sticky and would have to end up somewhere. The institutional depositors have already run – nobody likes uncertainty. Nationalisation would be more certain than the uncertainty we’ve had for the past year.

“How would you have recapped the banks with out access to the bond markets?
In the absence of NAMA, where would you have got 54bn in cheap liquidity?”
NAMA is not going to the bond markets. NAMA is directly issuing debt without intermediation. This is a suggested (by the EU) method to recap banks through equity purchases. This is what is likely to happen with the state recapitalisation the banks with NAMA anyway…

By the way, nationalisation is the second worst idea after NAMA… 😉

Concubhar O’Caolai
God bless your innocence, your honour! Accuracy is easy.

Preparing for NAMA takes time! Stories, missing paperwork, paper work that has to disappear and be replaced! All takes time!

Property Gal
The 54,000,000,000 is not for liquidity, it is to pay off foreign and domestic holders of obligations by the bust banks….. Where have you been the last 18 months?

Brian Lucey
Good article. I see you wear size 16 boots! The government can do nothing. Should do nothing. They should allow the guarantee to run out. Softly…. Then the markets will reset.

They should also tell everyone that there is nothing they can do what with Brussels and lack of revenue.

We will also be more competitive, once we get rid of the fixation of having an expensive house…… notice that Australia is also noticing that houses are a little less affordable!


I take it as an insult to be compared to Dep Fahey. I think you are rather dodging the point as you have been doing for a year. NAMA brings with it a facility of 54bn it a loan to the Banks from the ECB. its not magic money. Nowehere in your nationalisation plan is that present or if I am missing something plaeas enlighten me.

Now now…FF is a grand fellow.
NAMA doesnt bring a facility of 54b. It goes like this (simplified)
Assets go down by 77b (thems the loans)
Assets go up by 54b (thats the nama money)
Assets have fallen by 19b so liabilities (capital /reserves/ deposits/ ib lending) must also.

Now – under nationalisation or whatever, assets go down by say, oh, 50b say. So too must liabilities . So yes, there is greater deleveraging under nationalisation. Both end up with smaller banking systems. But, I contend, under nationalisation we end up with a cleaner as well as leaner system, one thats well able to be easily restructured and moved off the state asap.

Of course if you think that 54 is a fair and true price for the loans, you prefer NAMA. If you think its a wild overestimate….

@ Brian

“Nama is proposing to pay €54 billion of taxpayers’ money to transfer €77 billion worth of loans secured on assets worth some €47 billion in mid-2009. This fall of over 35 per cent in asset values bears no resemblance whatsoever to reality.”

Once more this innaccuracy crops up over loan values vs asset values. The original loans of 77bn were secured against assets valued at ~103bn (ie ltv of 75%, which although lots of people don’t believe, the govt has claimed is the situation). As such, the NAMA valuations/purchases reflect a 50% fall in property values.

@Brian Lucey

‘Ideological Obsession’. Yes.

Bleak House and Ferengi Economics also come to mind.

Interpretation of present ‘policy’ re citizens and credit-starved small business: ‘let them eat less than zero’. The Ferengi have taken over the country …………

@Property Gal

Eat my abstractions! The Homer Simpson School of Economics.

“The original loans of 77bn were secured against assets valued at ~103bn (ie ltv of 75%, which although lots of people don’t believe, the govt has claimed is the situation).”
That was the original claim. It dropped to a blended average of 80% within weeks. Then it became 85%. As it rounded cape horn it encountered heavy seas and is believed to have foundered in the southern ocean…

You seriously telling me you believe this?

Sure eoin. The LTV was 75%….the cheque is in the post…i’ll respect you in the morning….it’ll only hurt a bit.
Sure the banks would never have lent the equity now would they? As for “which although lots of people don’t believe, the govt has claimed is the situation” – thats the same government that last year claimed it had conducted a detailed analysis? Forgive my scepticisim

@ Brian

so what are you suggesting the ltv really was/is? It looks like 100% per your figures, which i think is a pretty significant claim to make on this. And what exactly are you using to back up this claim? It wouldn’t be mere speculation would it?

I dunno. I have yet to talk to anyone who thinks its on average 75% (your good self apart). Speculation is too strong – working in a business school i prefer to call it a mixture of participant-observation studies (chatting to fellas in the business in the bar), ethnographic (chatting to fellas in places other than the bar) and bootstrapped estimates (extrapolating whats in the public domain).
But hey, I would LOVE to be proven wrong on this. I would love to be told with impeccible evidence show that the loans were all backed by bonds held in escrow, or gold bars in fort knox or anything other than other liened on properties, bank shares etc

@ Brian

You nationalisers have never answered the following questions
I) how do you replace the wholesale deposits that would inevitably flow out of the banking system post nationalisation
2)how dow you replace the retail deposits that might flow out of the banking system post nationalisation
3) the loan deposit ratio would still be over 100% post nationalisation and everthing would be on the Sovereign Balance sheet-how do you fund the excess
4) the dependence on short term liquidity is too high, can the sovereign term out successfully if the banks are nationlaised. There is only a limited pool of money out there
5) how do you raise the 20bn necessary to recap the system.

To me these question have never been successfully answered by either party. So we are asked to chose between a carefully crafted plan created by DOF/ECB/EC/IMF which might or might not work or a plan created in the coffee dock or worse still over a game of pool in TCD/UCD. As Clint might say “Well Punk do you feel lucky”

@ Karl

that document states an ltv of 77% – loans of 68bn (excluding roll ups) on assets of 88bn.

But we’re going over some old ground/arguments here – my essential point was that the maths used in the article either (a) completely fail to take into account the ltv, or (b) assume an ltv of 100% (ie absolutely no equity invested or built up whatsoever). Its via this rationale that we get the “assets values have fallen by only 35%” reference.

I think you really really need to read the posts on this. Im sorry if you havent been convinced. They have at least been well discussed.
And its snooker in TCD, not anything as plebeian as pool….

Im glad you think its a cunning plan….

Brian Lucey writes about an “ideological obsession at the heart of Government against the notion of the State as the majority shareholder in the banks, even if required and even if temporary.”

Could Mr Lucey (or anyone else for that matter) point to statements by the Government saying it is against majority State ownership? The only statements I can find is Brian Lenihan on 6 September saying “I have made it quite clear, a majority state stake is not a problem.”

and here on 30 August: “Minister for Finance Brian Lenihan has given the clearest signal yet that the state is prepared to take a majority shareholding in one or both of the main banks.”

and several similar statements last year.

Come clarity please?

@ PG

Your comments don’t seem to factor in the fact that the state — via deposit gurantees, capital injections, NAMA and whatever else it takes — is propping up our main banks at present and we’re stumbling towards a high percentage nationalisation. The depositors you’re referring to know this as do the people lending to the Irish banks.

@ simpleton

You seem to be suggesting that the processing of individually valuing the loans that is required by NAMA is a disadvantage. Surely this process is actually a positive aspect of NAMA. Nationalising Anglo at a time when there was a severe lack of information about the true state of the bank has hardly moved us “further down the road towards creating a functioning banking system”.

Great article.

We were told that it was different this time – the classic sucker line.
The demographics proved that the property market could suffer nothing worse that a soft landing
Every day confirms that NAMA will never work.
Whether it is a necessary condition (but not sufficient) is also a moot point.
12 months on and no progress.
FG were scorned last year for their policies because they didn’t suit the interests of Irish big money.
Slowly but surely the wheel is turning and we will eventually see a solution based on what FG proposed 12 months ago.
Its like the 80s all over again where ineffective policies were followed until all that was left was what should have been done first time around.
Which goes to show that it is not so different this time.
It never is.

Unless we talk about the EU and the Euro.
Sin sceal eile.!

@ kw

I am aware of that. You are correct. We are stumbling towards nationalisation and when we get there we fill find that we don’t like the outcome. There will be deposit outflow -possibly even retail outflows, difficulty in raising debt capital for both the banks and the sovereign. Banks will be under the wing of the state for longer than you think. The state will also control the property market for a generation. Do not even think about what happens if FF get control of management of the banks or possibly even worse if Labour get control.

What Lenny tried to do with NAMA was restore banking in a number of stages
I) maintain a fiction that banks were off the state balance sheet and outside state control through keeping a stub on the market.
2) recap currently through a mixture of overpaying, haircutting subbies and hopefully raising equity
3)sell assets and raise more equity in time to get the state out.
4) use 54billion of govt bonds injected into the bank & repod to the ECB as a way of replacing expensive liquidity

It was the messy road recommended to us by ECB/EU/IMF and the road chosen by every other country. This is messy political economy. Now as we are on the road to nationalisation, we are heading fr a full blown sovereign crisis and widening of credit spreads and an even worse tihhtening of liquidity conditions than under the current status quo.

@property gal

OK. I see now that you are not a ‘spinner’ in the usual sense. I humbly withdraw me ‘Homer Simpson’ jibe.

IMHO – time matters – time is crucial. Yes, nationalisation of ALL late 2008 v. painful – but we would have at least one re-created functioning bank at the mo – right now we have none and an economy cannot live without one – so while all this is going on we are sinking deeper into the black hole …

I’ll comment on your implied suggestion of a FG/SF coalition later on.


Don’t despair. Much of the prep work for the valuation and transfer of loans, which is key to succesful nationalisation if it happens, has been done and the process is underway. The modular nature of NAMA means that we are better prepared for nationalisation if it happens now. The process can be progressed rapidly and credibly if such an exercise has to be completed within nationalised banks.

In fact, we are possibly better off because than we would have been with a straight divvie of loans between good banks and bad banks within a nationalised banking system. This is because the danger of people walking out of failing banks with deeds and guarantees in their brief-cases as flagged by Morgan Kelly has been avoided. Instead, all the banks are having to report on every aspect of securitisation to NAMA with any shortfall possibly affecting the loan valuations/transfer. Thismeans the banks as private entities have a strong incentive to make sure everything is in order. Does this benefit outweigh the dangers of asymmetry of info with banks selling to NAMA? Possibly.


To paraphrase PG, do you think institutional and retail deposits might have walked, as they did in Anglo, in the event of pre-emptive nationalisation of BoI and AIB? If so, how much money would have been required to fill the hole in terms of (a) deposits and (b) recapitalisation and where would we have got it?

@ PG

Well, we’ll see I suppose. I’m more inclined to think that since people pretty much know what’s coming, anyone who would be pulling their money would already have done so.

Property gal
If we let the market function, after the banks reduce in size, the cost to the state will be less than otherwise. It will still be more than 54,000,000,000 and interest. Borrowing money we did not have got us into this situation. It will only be worse if we borrow more.

This is nothing other than a generational disaster. A depression.

To end all depressions, possibly, but given the example that is Japan, I hesitate to predict that humans will cease to gamble like drunken monkeys on their homes and pension funds, when pitched correctly by the FIRE hos. We need the experience it seems, as we cannot take on board the origin of another’s economic problems…..

Not every other country used this road. Australia did not. Ireland is no longer sovereign. The EU stripped Greece of votes…… a warning to others not to “maintain a fiction” about anything to them. They also have not finished with them. The rules have changed PG and those who did so well will now fail unless they undergo a resurrection.


In the article you say that the Govt is eschewing nationalisation on ideological grounds. This contradicts the Minister of Finance’s previous statements to the Dail that the reluctance to nationalise is not based on ideology. I think that if you are goin gto impute ideological motives in contradiction to the Minister’s statement then you should at least make it clear that it is your interpretation of the government’s actions and is not based on any statement of ideology.

You also purport to express a view on the nature of security in “resting in contract” situations where a developer has not taken title. I would expect the banks to have non-recourse mortgages registered against the sellers lands in such cases meaning the banks would have full and effective security against the lands. Do you have any knowledge of this area or have you taken advice or instruction from somebody who does have knowledge? If not, I don’t think the following paragraph should have been included (noting that this may bave been edited by a third party):

“Recently it has been suggested that a major problem exists, in that in many cases of development land the title was not actually transferred to the developer; rather, they took out a licence to develop. This was, it seems, a scheme to minimise tax, but it leaves open the incredible scenario that rather than being secured on an asset, these loans were secured on what is technically a derivative whose value has now collapsed to zero. If the underlying assets are worth zero, the hole in the banking system is that much larger. “

“As such, the NAMA valuations/purchases reflect a 50% fall in property values.”

Rob Kitchin says today: “It therefore seems likely that both zoned and serviced development land and unzoned land in Ireland has dropped substantially in value, probably somewhere between 70-98% depending on the site and the original amount paid.” See



On ‘ideology’ – ‘actions’ are much better evidence than ‘words’ …….. with ‘words’ one has to deconstruct all the ‘spin’ ….

The policy goal is to use NAMA to clean up the systemic banks and maiintain them in private hands albeit with substantial private ownership,along the lines of the UK. Deposits have remained in the two banks and some long term debt has been raised on this premise. It is my contention that sovereign funding costs have alos come down in part due to a “market view” that the fiscal & banking crisis is being sorted, however glacial that progress. The wheeze of using the NAMA bonds as eligible collatoral with the ECB has improved the attitude of liquidity providers.

Nationalisation will provide a horrible demonstation effect that all is not well. It will upset the delicate balance and cause funding armageddon for both the sovereign and the banks. If you do not believe me look at Anglo. Since Nationalisation, liquidity has fled and it is now being propped up by emergency ECB funding and expensive deposits.

@ PG

It is good to see some counter argument here.
JTO will be missed.

Does the issue then become timing of when to shine the light into the mess?
Shouldnt this be done to suit the national interest??

Also, is it reasonable to expect ECB/EU/IMF to act in our national interest as opposed to their specific factional interests or viewpoints??



“To paraphrase PG, do you think institutional and retail deposits might have walked, as they did in Anglo, in the event of pre-emptive nationalisation of BoI and AIB?”

In relation to walking deposits, I’ve pointed out before that Anglo was a pretty sui generis case. In any case, if the nationalisation is done in conjunction with a NAMA (as I had suggested) then the banks would have plenty of liquid securities that could be repod to pay off walking depositors. Loan-to-deposits ratios have to come down anyway and I always saw NAMA plus nationalisation as a way of achieving this.

Also, I’m not sure I fully understand the phrase “pre-emptive nationalisation” — has a bank ever been post-emptively nationalised? If so, post what? Banks get taken over by regulators all the time when they are still, on paper, solvent. BOI and AIB last year were well past the point where the, in the US, the FDIC would have arrived on a Friday afternoon. Are the FDIC a rash and irresponsible outfit because of their fondness for pre-emptive stikes.

@Property Gal:
“Since Nationalisation, liquidity has fled […].”

I thought the sequence was the other way around ….



I was just using “pre-emptive” as shorthand for last year. I didn’t mean premature.

I note you have always said that nationalisation would involve an AMC.

One might criticise the set-up of NAMA has been overly slow for reasons to do with DoF capacity, legislative promulgation, EU regulation and approval, and legal due diligence.

However, is it not hard to imagine that, even with all going well, the equivalent of repo’able NAMA bonds could have been made available quickly enough for those bonds to be used to plug the gap of (possibly) fleeing deposits?

“I would expect the banks to have non-recourse mortgages registered against the sellers lands in such cases meaning the banks would have full and effective security against the lands.”
That appears not to be the case (I presume you mean to say ‘recourse’?). We can only go on appearances, but, like the LTV issue, the suspicion has abounded since the troubles at the Irish banks became evident, that the collateral underpinning the loans was poor.

The historical experience is that collateral in property bubbles is poor, linked (so declines at the rate of the market), and exaggerated. The mechanisms for doing this vary by bust, but the overall effect remains. Why should we think Ireland is any different?

Even within Ireland we have already seen the effects of solicitors undertakings with multiply mortgaged residential properties supposedly underpinning property empires. A rank amateur was able to get away with it. Why should we think the serious players would not do it either?

We could be left with the appalling vista of developer a who sells land to developer b (to avail of the special tax rate), but the land is left resting on contract… the land could then be collateral for both developers as one of them owns it and another has license to it…

I wasn’t joking when I said 183% loan to value…

“is it not hard to imagine that, even with all going well, the equivalent of repo’able NAMA bonds could have been made available quickly enough for those bonds to be used to plug the gap of (possibly) fleeing deposits?”
If you don’t mind them appearing on the state’s balance sheet, then it is a matter of getting the NTMA to print them up and issuing them to the banks. (Okay, there’s a little bit more to it than that, but not much).

In any case, a panic announcement following an all-night session could have been made. Sure what harm did the last panic announcement cause?

Which brings us to the nub of our problems – the guarantee. We, as a state, have to pretend that NAMA is going to work until September. The fiction can be abandoned then…

Great article Brian, I agree with all your points.

The new point that you brought up about some (or most) of the development loans being funnelled into NAMA being unsecured and having no value makes this scary situation even more scary, if that were possible!

Part of the problem here is peoples’ continued refusal to face reality.

“Nationalisation will provide a horrible demonstation effect that all is not well. It will upset the delicate balance and cause funding armageddon for both the sovereign and the banks.”
You forgot the plague of locusts…..

“Since Nationalisation, liquidity has fled and it is now being propped up by emergency ECB funding and expensive deposits.”
post hoc, ergo propter hoc….. I think I wrote on this also.

@zhou, PG, Eoin:

Let us look at some evidence of what happened when banks have been nationalised in previous financial crises shall we? This IMF study came out in September 2008 but was unfortunately forgotten in the ensuing crisis. The money quote:

“Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.”

And here just substitute the Irish government for central bank:
“All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.”

And this:

“Special bank restructuring agencies are often set up to restructure distressed banks (in 48 percent of crises) and asset management companies (AMC) have been set up in 60 percent of crises to manage distressed assets. Asset management companies tend to be centralized rather than decentralized. Examining the cases where AMCs were used, we find that the use of AMCs is positively correlated with peak non-performing loans and fiscal costs, with correlation coefficients of about 15 percent in both cases. These correlations may suggest some degree of ineffectiveness in AMC’s, at least in those episodes where asset management companies were established. In line with these simple correlations we find Klingebiel (2000) who studies 7 crises where asset management companies were used and concludes that they were largely ineffective.”

“Recently it has been suggested that a major problem exists, in that in many cases of development land the title was not actually transferred to the developer; rather, they took out a licence to develop. This was, it seems, a scheme to minimise tax, but it leaves open the incredible scenario that rather than being secured on an asset, these loans were secured on what is technically a derivative whose value has now collapsed to zero. If the underlying assets are worth zero, the hole in the banking system is that much larger. “

Nice 🙂

But, but, but the IMF fully endorses what we have done… so does the ECB (the, eh, Central Bank…).

We are depressingly undifferent to any other country that has had a fiscal crisis and a banking crisis and a property bust at the same time. We are not even unique or different in having all three at the same time.


“That appears not to be the case (I presume you mean to say ‘recourse’?). We can only go on appearances, but, like the LTV issue, the suspicion has abounded since the troubles at the Irish banks became evident, that the collateral underpinning the loans was poor.”

I mean to say limited-recourse, i.e. Developer buys from Farmer resting in contract. On getting his money the farmer grants a limited-recourse mortgage to Developer’s bank. It is limited-recourse because it does not allow the bank to go after any of the farmer’s assets other than the lands.

I agree that security can be worse in bubbles. Banks may not ask for the level of security they should ask for or they may not take care to make sure itis actually in place. However, until Brian Lucey tells us whether he has information to suggest (a) that banks did not require adequate security or (b) that the banks asked for the requisite security but did not get it, we will not know what he is on about (or indeed if he himself knows what he is on about).

@ Brian,

then why do you advocate a policy that a) will likely constrain liquidity even further and b) front load the recap unto the current period.

You write the same article periodically with a slightly differant slant and yet when anybody points out the shortfall or problems in your thesis you appear thin skinned and dismisses the counter arguments with little quips. I am begiining to think that honest difference is not welcome on this website anymore. Group think now is required.
Accordingly, I formally sign off and return to a forum with relatively speaking more rational and reasoned debate. By which I mean will still read Colm McCarthy.

@ property gal,

Hmmm, constraint liquidity. From my blog entry linked above.

“I remember how farmers in my childhood years, would realise their excess manure into a water course in times of high flood-ing. Property developers became the ‘stream’ through which junk assets were released from ‘old money’ Irish companies. The land speculation bubble was merely the distraction and the flood.

Us poor, pathetic, punters on the river bank with our mortgages were like people with fishing rods hoping to land a salmon!”



Thanks for the link. However, there is nothing in that article as to what the banks are supposed to have required or accepted in terms of security in those cases.

@Brian Lucey

Can you clear this up for us? Do you have information on the types of security which banks required in resting in contract cases?

No, beyond the stuff in the examiner, and what Joan Burton and others have raised in the dail. Hey, maybe its not an issue – but its been raised

@ Zhou,

From the blog entry I linked above,

“The ‘the build-ers’ undertook a sort of clean treatment of waste material. Build-er(s) would convert places such as Sheriff Street into ‘yuppie territory’. In the process of doing so, Sheriff Street would disappear from the map. The name was never used on any developments, for fear of association.

That is what men such as Pat Honohan do need to understand about property development in Ireland. Property development is not ‘evil’, but is a necessary part of the re-cycling system for cities and for capitalism.”

You are not asking the right question Zhou. The point is, the ‘assets’ had to be removed from the balance sheets of ‘old money’ Irish companies. Things like paper mills in Glasnevin, sugar plants in Carlow and so forth. That in turned would enable to the ‘old money’ capitalists of the Irish financial scene to release funding, so that they could re-invest in more lucrative projects. The point is to get your sequence correct in time, otherwise, you can see nothing clearly. All of what I describe happened prior to the collapse of the property bubble. It is comical now to suggest, that NAMA is now going to be the bad bank. The ‘bad bank’ has already been set up, and the dozen or so, biggest Irish property were it. Like I said, follow the trail, and understand the correct sequence. BOH.


High time to take planning out of the hands of the local clientelist politcos ……….. I …er … agree with the GP on this one …….

@property gal

Aw c’mon – we’ve had enough of the georgeleese – at least he lasted most of a year – to huff’n’puff in less than a day doesn’t do much for your cred – fight your corner – then again, anonymity has its advantages.

@property gal

Which one of you appears thin skinned?


I think the article does come across as alarmist. Some of the conclusions are extrapolations based on innuendo and very little data – obviously the government has fed speculation by its refusal to be transparent about the whole thing, but I’m not convinced by Brian Lucey’s conclusions.

” Some of the conclusions are extrapolations based on innuendo and very little data ”
Which ones Dave?

@ Karl Whelan

I heard you on Today fm.

While I agree with what you are saying, I don’t think phrases like “no for equity holders to maintain a positive valuation” or something like that appeal to Joe Soap.

I think it should be made clear that the choice is who pays, the taxpayer or the shareholder, and this point must be hammered home.


Having gone back over it again, I think that what Mr. Lenihan was quoted in the Examiner (link above) as saying is actually quite informative:

“Mr Lenihan said: “Each loan eligible for transfer to NAMA will be valued individually by NAMA, with the value placed on that loan taking account, inter alia, of the underlying security to the loan.

“In other words, any doubts or defects in the underlying security will affect the value placed on the loan by NAMA. Therefore developers are having to resolve these resting in contract issues”, he added.

In some cases developers have been declared bankrupt and will not have the money to clear the stamp duty liability. In such cases, the banks would have to sort out the security on the loan and would be paid a fraction of what it was worth, he added.”

Based on what he says:
1) Resting in contract does raise issues over the underlying security, so presumably lenders must often have security over something other than the underlying asset. My guess is that the security might often be over the developer’s interest in the asset.
2) Developers and lenders will be penalised for the defects in their security, to an extent which gives them an incentive to resolve the issues by paying the stamp duty, implicitly meaning that they will typically resolve the matter by taking full ownership of the underlying property asset prior to passing it to NAMA.
3) While there will be a cost to developers and lenders in clearing stamp duty, which could presumably add to recapitalisation requirements, any damage this causes to the public finances will be at least offset by greater stamp duty receipts.

While the security in these cases may be defective legally, the more I think about it the more difficulty I have in imagining that this will turn out to be a major problem in practice. Property developers seem to have been using “resting in contract” and “license to develop” mechanisms without running into major problems, so there can’t be insurmountable legal problems under normal business conditions.

Of course, business conditions are not normal.

I understand from a Goodbody report for the Department of Finance that developers usually take control over “resting in contract” and “license to develop” properties through a power of attorney. I gather from the report that the death of the vendor complicates matters, so that these mechanisms are mostly used for projects that are ready to go, and where the vendor is not elderly. Presumably, with construction seizing up, these complications are becoming more common. However, if the problems are surmountable (as they seem to be) when the number of cases is small, they should presumably still be surmountable when the number of cases increases.

What could be a bigger issue would be if the developer’s cooperation was required to exercise the power of attorney, or to otherwise exercise his/her interest in the property on behalf of the lender. I would hazard a guess that this may be part of the reason why NAMA is keen to resolve resting in contract cases prior to taking over any loan. It might also provide a business reason for forbearance on the part of lenders in dealings with defaulting developers.

Have a look at this extract by Ben Lloyd from the ” Bondvigilantes ” blog of 12th November 2009, to see how Lloyds Bank managed to keep on paying the subordinated debt holders, despite the EC:
On top of ordering the two banks to sell parts of the businesses, the EC has
also ordered that the two banks [Lloyds and RBS] cease payments of all discretionary coupons on
subordinated debt (to not pay coupons on senior debt or lower tier 2 is,
currently, an event of default) from January 2010 to January 2012. This is a
very substantial development, and one that we have been expecting to be imposed
on problematic banks for quite some time. It appears that large numbers of
deeply subordinated bank bonds are going to become non-coupon paying for the
next two years, and there will be no calls over that period either. We are a
step nearer to zero coupon paying perpetuals!
So the response from Lloyds? Astonishingly, the bond exchange has been designed
to take out some of the bonds that the EC would have enforced non-payment on,
swapping instead into a must-pay security. But the EC’s push to enforce
non-payment of coupons was presumably justified by the need to preserve cash
within the business rather than leaving it? So either you hold your old Lloyds
hybrid notes and take a 2 year payment and call holiday, or you exchange into
the new contingent capital, or CoCo, bonds, that must pay coupons unless
converted to shares. And in our view, from the banks’, regulators’ and the
taxpayers’ perspectives, the new capital notes are a very good idea. Simply put,
you get a bond that must pay coupons each year, and that have a definite
maturity of 10 to 20 years (like a senior bank bond or a corporate bond). But:
if the bank gets into trouble, and its core capital falls below a certain level
(5%), then your bond gets automatically converted to common stock. We here think
that this is the future of the hybrid capital note market. In times of trouble
these subordinated bonds will actually convert to equity (just when banks need
it most!). We got into this banking crisis thinking the banks were ‘well
capitalised’, and we soon found out that most of their capital was more
bond-like than equity-like, which wasn’t much of a help at all to a severely
under-capitalised banking system. These CoCo’s would correct that. Good.
But there is a plethora of problems and inconsistencies with these new bonds.
Regulators have agreed to allow these CoCos to be mandatory pay securities, so
cash will continue to exit the business to pay coupons, which is exactly what
the EC wanted to stop. Furthermore, to entice old bondholders to exchange into
the new notes, and to reflect the increased risk of a mandatory conversion to
common equity, Lloyds is offering coupons on the CoCos that are 1% to 2% higher
than the old subordinated bonds. So even more cash will be leaving the business
than before! Moreover, the bonds have been classifed as lower tier 2 for
purposes of seniority of payment and in liquidation, but regulators will
consider them at the same time as contingent core tier 1 capital: isn’t that a
contradiction in terms? It seems to us that regulators are being overly
accomodative to get this deal done, and to help recapitalise Lloyds, and to open
this new CoCo market. We do expect other banks to explore the feasibility of
similar issuances once the market has got used to this one. From bond investors’
points of view, though, these look like bonds until distress, in which case you
are automatically converted to common stock (unlike convertible bonds, where it
is generally your right, not obligation, to convert). So they don’t naturally
fit into the fixed income universe. At the point of conversion, given distress,
the shares will be worth very very little. And the risk of Lloyds-HBOS’ core
capital falling to or below 5% is non-negligible, in our view, especially in the
next 3 years. Finally, given how high the coupons are going to be, isn’t a
management team or regulator at some point going to be incentivised to
manipulate their capital levels to force conversion of this expensive debt into
cheap equity?
We don’t think that these bonds naturally fit into the fixed income space,
although the yields do look attractive. Thus, if other, stronger banks bring
similar deals, where there is a premium paid for potential equity conversion
over existing tier 1 yields, and where we feel the risk of exchange to equity is
sufficiently remote, we will consider them carefully. However, there are still
several potentially large issues for these notes, nicely exemplified by a
certain index provider’s excluding them from the index on Tuesday, then
re-including them, and then yesterday re-excluding them. This shows how
difficult is it to know whether they should be classified as fixed income or
equity. And that would suggest that the powers that be are worried about who
exactly will buy these new CoCo The Clown notes. Are these clowns happy, or are
they sad? Are they bonds or are they shares?


There can be problems with resting on contract form a developers point of view if the vendor dies or will not honour the obligation to transfer title. If a vendor has died then the developer may well have to enforce the contract and take a stampable conveyance of property.

However, from a bank’s point of view, the issue is whether they have the first legal charge over the land. I would be very surprised if banks did not require a first legal charge or mortgage on the property where any substantial consideration was involved.

Note Brian Lenihan’s statement that the valuation can be adversely affected by faulty security. This is what I was alluding to when I said the NAMA process is stopping documents walking out the door.

Whilst I think Brian Lucey might have done better to avoid speculation on this pointed, not having the any specific knowledge or insight himself, it appears that the concerns have been prompted by statements by Joan Burton and Minister Lenihan.

A reasonable interpretation of Minister Lenihan’s remarks might be that in such cases where resting in contract has caused complications then that will have to be cleared up, including by taking a conveyance of the property if necessary. This does not imply an across the board problem of the type suggested by Joan Burton and as further suggested by Brian Lucey’s article.

“So the response from Lloyds? Astonishingly, the bond exchange has been designed to take out some of the bonds that the EC would have enforced non-payment on, swapping instead into a must-pay security.”

Eh, what do you think our banks have been doing? They have been widdling away their recapitalisation money in exactly the same manner – exchanging new dated bonds for old undated ones. (The dated ones require a coupon payment). The reasoning for this? An accounting gain that makes their balance sheet look better. In reality, they have spent money they didn’t need to and made any debt to equity swap more savage and difficult (i.e. it will have to include the agreement of senior bondholders at this stage to have a chance of making solvent companies).

Has anyone addressed Noel’s post above – I think it takes the teeth out of this article. If there is anyone who is obsessed, it is Brian Lucey waiting for a moment to be able to say “I told you so” about nationalisation. Brian, its gonna happen, you will get your moment. The article could be great if it didn’t sound so tabloid and sneary and if it gave two sentences to how things could have been better if we did it Brian’s way. Not good.

“[…] it appears that the concerns have been prompted by statements by Joan Burton and Minister Lenihan.”

===item of evidence 1=====

From an Irish town planner’s blog February 2007

“Gillian Nelis in the Sunday Business Post tells us that Minister for Finance Brian Cowen has proposed changes to close stamp duty avoidance schemes in which property developers leave site purchases ‘‘resting on contract’’ or enter into licence agreements with landowners.

Minister for Finance Brian Cowen has proposed changes to close stamp duty avoidance schemes in which property developers leave site purchases ‘‘resting on contract’’ or enter into licence agreements with landowners.

The changes were introduced by amendment at the committee stage of the Finance Bill last week and affect both the purchase of land and agreements for leases.

Until now, land purchase transactions could be structured in such a way that developers could pay no stamp duty on the purchase of multi-million-euro properties.

Among the changes proposed are that if the holder of an interest in land enters into a contract or agreement for its sale, and payments amounting to 25 per cent or more have been made, an executed conveyance or transfer must be presented to the Revenue Commissioners for stamping within 30 days from the date of the contract.”

===item of evidence 2=====

From the Independent, April 2008: “The Revenue survey found that 40pc of all land deals by value exploited the loophole.”

===item of evidence 3=====

From Matt Cooper *Who really runs Ireland?* (Penguin Ireland, Dublin, 2009), following a description of how resting on contract worked:

“Although the use of the above tax reliefs [RoC, licensing, long leases] was perfectly legal, the Revenue Commissioners took the view that significant amounts of tax were being lost — €40 million was the estimate for 2006 and over €200 million between 1999 and 2006. The Revenue Commissioners suggested to the Minister for Finance, Brian Cowen, that the relief be removed from the legislation. He agreed and made late changes to the Finance Act of 2007 […]. But then, following lobbying from the industry, Cowen did not sign the necessary commencement order to put the measure — Section 110 — into law.”

Goodbody were commissioned instead to report on the extent of use of these clever dodges; they found that ths cost to the exchequer was €251 million in 2006 alone and that about 40% of all transactions were structured “to dramatically reduce the amount of stamp duty paid to the exchequer […]”. I cannot say what proportion of those transactions reduced the security provided to the lender.

This article suggests that there are many problems:

And see also articles about AIB’s defective security, drive-by valuations etc. In short, these are not problems invented by the centre-left coalition of Brian Lucey and Joan Burton.


Can someone explain the part where the bank had to pay shares instead of cash because otherwise this would be seen as a direct transfer of cash to private individuals? I thought the preference shares issued to the government were specific in their dividend payment terms, ie that it would be to the owners of those shares only (ie the government). So its not like the dividend payment would be paid to the ordinary shareholders (private individuals). Is it not the case that the payment could not be paid in cash because that cash from BOI to the govt is coming from the ECB to assist with BOI’s liquidity, not to be paid back to the govt. Sorry if I’m missing something very obvious, would be grateful if someone could clear that one up for me.

@Brian J Goggin / Brian O’Hanlon

You are both off the point that was made by Brian Lucey.

None of what you have quoted suggests that resting in contract gives rise to specific problems for securitisation.

You have both referenced general problems with banks not making sure security was in place. That is a different problem which may have arisen on a case by case basis due to lack of oversight or negligence. It is not the same as an across the board problem which may affect all resiting on contract cases which make up a large block of the development land portfolio.


The Minister has consistently said that he has no ideological oppostion to taking a majority stake in the bank. He accepted some time ago that it is very possible that this will happen as a result of the NAMA valuations.

He has said that the state, for practical reasons not ideological reasons, wishes to avoid wholesale nationalisation meaning taking 100% ownership of the bainking sector, probably meaingin AIB and BoI. However, he has said the state will do so as a last resort if necessary.

Brian Lucey says the Government is avoiding nationalisation for ideological reasons. He should actually say that the Govt is avoiding nationalisation for what what he perceives as ideological reasons based on an ideology which the Govt secretly holds, like a dirty secret, despite having disavowed such ideology in public utterances.

The problem is that other subordinate debt has been stopped. This has the effect of stopping cash dividends to ordinary and preference shares because the other subordinate debt is higher in the food chain – ordinary shares are krill, preference shares are sprat, other subordinate debt is various sizes of tuna… there’re sharks about somewhere too!

So when the tuna don’t get paid, this stops the sprat and the krill from being paid. It’s sort of demarcation for debt instruments.

@ Zhou_Enlai,

I just wanted to lay out some real cases for your eyes to see. I have noticed debates here can stray off into a territory, which can only be described as very academic, argumentative etc. Without recourse, to some practical application in reality. That tends to undermine the position of economics in the entire debate, as something with a positive, useful contribution to make. In terms of NAMA, we will continue to thread a very fine line between politics and economics, as we go through that process. Brian Lucey understands that better than anyone here. But I do understand, the sheer difficulty of bringing real world examples into the debate. While on the other hand, running the risk, the debate runs into heavy going, and becomes largely academic. I think, this is what George Lee meant yesterday, when he addressed a church: “An economist is like a man who knows 100 ways to make love, but doesn’t know any women.” I also refer back to Karl Whelan’s post earlier this year, where George Lee acquired proper information, which demonstrated how little employment is offered to economists, working in the state bureaucracy. BOH.


if you’re still there, thanks for that – just getting around to checking on this now. Karl Whelan’s piece on this really clears things up.

Yup! TPTB have completed their preparations so now it is look out below! Greenspan, although I actually prefer Goldspan, is a busted flush but as he was an enabler (!) he clearly would not lie about the downside of the depression…. having caused it, loike! So he is the perfect trumpet …. still useful at his age….

I just wanted to link this few scribbles I made in relation to the Oireachtas committee on transportation, with relation to Hangar no. 6.

Isn’t it interesting, how in that case, so much hassle and confusion came about as a result of a ‘legal construction’, and the leasing of the hangar space. Which seems to be of obvious commercial importance to both airlines in question. There is quite a lot in what Hernando De Soto has suggested. That a lot of the problems today, in the first world, are to do with in-ability to trace lines of legal entitlement, ownership etc. That whole system, which became the basis for wealth creation in the first world, has been allowed to fall into disrepair. Advocat of ‘land taxation’ in the UK, David Wetzel described the current crisis, not as a banking, financial or economic one – but as a land crisis. He has put a huge amount of study into how we should tax the rental value of land. (I won’t make the assertion I understand it fully) But there was this question of DAA own-ing the land, Ulsterbank owning the building, Aerlingus owning the lease, which DAA acquired, and a suggestion of a ‘sweet heart deal’ between DAA who leased Hangar 6 back to AerLingus. (Who owned the lease to begin with) If this does not smack of financial/legal magic making, I don’t know what does. It goes to the heart of the issues and problems in the western world, I believe. BOH.

If Kevin O’Rourke will allow me to be this arrogant, I wish to leave you all with a quotation from my blog entry, of Monday, August 10, 2009. Back when I first learned about NAMA, and indeed submitted my curriculum vitae to the NTMA, because I thought I had a better grasp of this, than anyone employed there has. (I still do)

What should NAMA do?

We could use profit from developing central and strategic land banks in order to offset the losses in the NAMA portfolio in locations where use reverts to agricultural. I would disagree with that approach. I believe we should take the hit up front where it reverts to agricultural values.

But then use the profits which NAMA can generate in order to ‘buy out’ any joint venture partners, legal deed interests or other charges against ‘abused’ land banks that are in the prime and sustainable development locations.

It would allow us to work with a cleaner canvas, which is what an architect really needs. You would have to work with developers on a daily basis to know how capable they are of ruining a perfectly good asset with all kinds of messing.

But in some cases unfortunately, like a true pyramid scheme of things, the scandalous complexity of ownership and legal rights associated with our land banks may have began with the third last previous ‘owner’ of the lands.

I believe, my suggestion for what ‘NAMA should do’, is basically what Dublin Airport Authority should have done regarding Hangar no. 6, if they had the foresight, and the personnel on board, who trully understands land and development. BOH.

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