Brian Lucey on banking policy

Brian Lucey provides a critique of the announcements in this article for the IT.

Update: Brian provides a more detailed explanation for why Anglo should be shut down in this Indo article.

92 replies on “Brian Lucey on banking policy”

You gotta be impressed by this one man orchestra – last night on VB, today in IT and Indo, it can not be said of Brian that he didn’t stick his neck out and shout stop. Excellent pieces.

a pain that theres no edit function.
Its heartening that so many people are interested in things economic and financial. If only the ruling caste were so interested…

Someone should start a collection of Brians colourful turns of phrase ..
How about for a start
“whipped lobby fodder who in the main do not know a subordinated bond from a Smartie”.
“Anglo, the bank that ate Ireland”

Actually Brian I know as much about economics as the said “whipped lobby fodder” .. now what was that you said to VB about the cosine of Jupiter?

Maybe I am misinterpreting BL’s point about the funding, in which case humblest apologies.

My quick read is that BL is suggesting that on a six monthly basis we would need to refinance 50Bn of borrowing and the market sharks will devour us in our predicament. The fact is there is no need to go to the market either initially or six monthly. This is the beauty of NAMA, the ECB has allowed the government to print bonds without going to the market.

Secondly BL makes a big play about the A/L mismatch. I concede that BL is much more informed than me on these matters but again my understanding is that in terms of obligation to repay principle there is a broad match and similarly the obligation to pay floating interest will also broadly match the revenue. If I am right here, the reference to an upward sloping yield curve is irrelevant as the the upward coupon adjustments will be matched on the revenue side. In any case I presume NTMA will use the available swap hedging techniques to eliminate unnecessary interest rate risk.

One notes a slight change in BL’s criticism on AIB’s disinvestment plans. Originally this was criticism levied totally at AIB, now he levels the criticism at the government for forcing AIB to divest, and that is certainly a more accurate interpretation of the situation.

That is the logic of the NAMA haircuts, the new capital ratios and the government’s desire to minimise State ownership of the banks. What would BL think of a plan whereby the State itself bought these foreign gems from AIB. Wouldn’t that square all the circles. AIB would be a well capitalised private sector bank concentrating on its core domestic competency and the taxpayer would own highly profitable foreign assets all for its own account.


I think you have put your finger on the reason why Anglo is kept alive.

When all other rational explanations are ruled out we are left with the fact that putting it into liquidation would expose the dark secrets within.

Thank you.

And I am sorry that you are able to agree that the cost is 100,000,000,000 Euro.

The one thing that may save us is the delay as the funds may be denied to Ireland. Is that our only hope?

@ Brian Woods II

By the by, Moodys this morning described NAMA as an “ingenious mechanism that will help to improve the banks balance sheeets”

You are also right about the funding/yield slope issue. NAMA assets and liabilities will be completely matched on that score, and any mismatches that arise will be hedged out. Its a non argument.

@ Eoin
were these the same “ingenoius” rating agencies that stuck AAA on all the sub prime CDO rubbish? Makes my blood boil….

This Lucey fellow doesnt give up!
On newstalk now!
I’d hate to piss him off!!!
Duracell batteries!!

I can see what Brian Lucey is at but I would take issue with the numbers in the Indo article
Anglo’s Deposits are high cost and contain zero interest current a/cs. Moreover, 50% of them are from non retail -presumably highly sensitive to rates Deposit books trade at a premium to deposits with up to 20% being the paid in the good times. I think you could sell them at a very low multiple-say 10% for the retail (1.5bn).

If you were to sell them on then how would you fund the “good bank” of up to 15bn-assuming there is a good bank. Together this entity of 15bn would be dposit funded with say 1.5bn in equity. Somebody might one day pay 2x book value but not today. I think that is what the govt is gambling.

As regards selling the securities and reducing the deposits in other banks. When you do this, presumably you pay down interbank borrowing or CB funding on the other side with a very small cash effect.

I agree with his sentiments though.

Eh? This is the same Moody’s that put AAA on subprime filth? Taking your Leo Varadkar argument means that Moody’s have zero credibility and listening to or repeating what they say is a waste of time.

PS: Google search on “moody’s subprime sued” reveals oh about quarter of a million results.

Regarding funding/yields, you are assuming that as interest rates rise yields will also rise. A very big assumption and no supporting proof.

What about the suggestion that the mysterious urge to keep Anglo trading is coming partly from abroad? Is it not the case that various EU countries have banking systems which are highly exposed to Irish (non-sovereign) banking debt, maybe enough to rekindle their banking crisis in the event of a significant default? I note that the Deutsche Bank CEO is pretty keen on a Greek (sovereign) bailout, more or less explicitly in order to save the German banks .

<strong34. Promissory Note

“A promissory note to be provided by the Minister to a credit institution providing for periodic payments by the Minister to the credit institution, and which will constitute Core Tier 1 capital of the Credit Institution at the time of issue of
the note.” (Page 70)

Where is the Money Bill that authorised the Minister to commit the State to these promises?

Or to put it another way.

Show me the Money (Bill).

The Minister does not have the right to spend the State’s Treasure as he sees fit.

That’s why Articles 21 & 22 were written into the Constitution.

Article 22 Section 2 Subsection 1

2. 1° The Chairman of Dáil Éireann shall certify any Bill which, in his opinion, is a Money Bill to be a Money Bill, and his certificate shall, subject to the subsequent provisions of this section, be final and conclusive.

Did the Chairman of the Dáil certify any bill giving the Minister authority to write promissory notes on behalf of the State?

Show me the Money (Bill).

Pardon mt ignorance…but in the Indo piece BL mentions receiving €21bn for a €28bn deposit book….why would anyone pay that value for a liability book such as this??? even making a clear 4% return per annum on the funds you bought(????) you stand to return just over €1.1bn a year. Unless I am missing something serious here, we must be looking for an even bigger sucker than we are being taken fo ourselves???

Any chance of a quick tutorial on the whole concept of selling the deposit book? Deposits = liabilities. So how do you manage to persuade someone to pay you €21bn in return for giving them debts of €28bn?

I can see that getting a load of new customers (who will be depositing cash with you in the future assuming they go with the flow once their accounts are shifted to the purchaser of the deposit book) is a nice thing, but this nice? Anyone willing to ease my painful ignorance much appreciated.

“I am imposing specific lending targets on AIB and Bank of Ireland. They will make available for targeted lending not less than €3 billion each for new or increased credit facilities to SMEs in both 2010 and 2011. This in particular must include funds for working capital for businesses.”

Remind me again what is the purpose of the Anglo “Good” Bank?

If the Minister can strong arm AIB & BofI into lending €6bn a year to the SME sector why does he need Anglo “Good” Bank?

@ Eoin

“You are also right about the funding/yield slope issue. NAMA assets and liabilities will be completely matched on that score, and any mismatches that arise will be hedged out. Its a non argument.”

So you can confirm without equivocation that all of NAMA’s assets (the loans it acquires) have variable interest rates linked to EURIBOR?

And if not, that hedging instruments can be put in place every six months at no cost?


Agree with you. Presumably the net return on these funds would be about 0.8% per annum after all taxes and charges. Even assuming you could earn that on the corporate book, that would give you profit of 230m. Put that on a P/E of 10 and it would be worth about 2.3bn. I think there must be a decimal point missing in the article.

@ Greg,

The lending targets are vague in their meaning. There is a world of difference between 3bn of new loans and increasing your SME loan book by 3bn.

I have been speaking to a colleague of mine in a capital markets area and he reckons BL may have mistaken pricing deposits (liabilities) for assets. Our thoughts are that a depo book like this may net €1.5 or €2bn. This is being generous as unlike many of its peers the Anglo book is not based on a branch network, “walk in off the street” type, but a more flighty internet and rate sensitive type. I remember from a previous experience in the UK, these guys were known as “rate tarts”. This profile would further decrease the price of the liability book. The price would have to be based on the return you would expect to get on the assets you purchase with these liabilities or the cost saving you would make if you replaced existing liabilities with this depo book. The book itself would have a shelf life of 5 years if you are lucky, depending on the maturity profile of the individual depos. In my quick example of a clear 4% per annum after you pay your depositors (you would have to be real good to achieve this!!) you have no hope of ever making a return on your €21bn.

@ Ahura Mazda

Well God save us from all harm.

Your surely not suggesting the Minister was being economic with the truth?


@ Garo

“This is the same Moody’s that put AAA on subprime filth?”

I love this. When we talk about Ireland having much bigger “real” debt than normally referred to, we say “wait until the ratings agencies get their heads around this”, but when they talk positively about something, its all “sub prime!!”….cant have it both ways folks…

“Regarding funding/yields, you are assuming that as interest rates rise yields will also rise. ”

What im saying is that as rates rise on NAMA asset reference rates (ie euribor/libor), then rates will rise on NAMA liability (bonds) reference rates (ie euribor). What are you disputing here, that the assets and liabilities are on a wholly different basis?

@ Greg

“So you can confirm without equivocation that all of NAMA’s assets (the loans it acquires) have variable interest rates linked to EURIBOR?”

Im confirming nothing. However, that would appear to be the situation from talking to people working in the banks transferring loans to NAMA. What else would they have rates linked to? These aren’t tracker mortgages we’re talking about here. However, even if they were (which they are not!), that risk could also be hedged out very simply.

@ Eoin

“These aren’t tracker mortgages we’re talking about here. However, even if they were (which they are not!), that risk could also be hedged out very simply.”

I didn’t suggest they were tracker mortgages. But thanks for the clarification. You are kind.

“hedged out very simply”

I didn’t ask about the simplicity or otherwise of putting a hedge in place. I have no doubt it is the simplest of things to do. You lift up the phone.

What I asked was if hedging instruments can be put in place at no cost.

But you prefer to hedge the question.

Fair enough.

@ Greg

if they are not on a variable rate euribor, what are they on? Before you suggest “a fixed rate”, i believe that all loans were taken onto NAMA’s books as floating rate loans (and the banks dealt with any fixed rate issues themselves).


Yes, hedging of fixed/floating is at no cost (other than the very trivial admin costs). Hedging is perhaps the wrong term – suggesting insurance or the purchase of options which does cost money. In this case we are simply talking about a swap program to align the revenue interest profile with the liability profile. These are done at the market i.e. with no transfer of cash upfront between the parties.


and what if a large portion of NAMA’s reference pool isn’t making interest payments.

on Moody’s, later in their comment they make reference to reviewing the sovereign rating in light of the new information on NAMA. They do expect Ireland to retain the Aa, but is open to a downgrade from Aa1.

@ Eoin

“What im saying is that as rates rise on NAMA asset reference rates (ie euribor/libor), then rates will rise on NAMA liability (bonds) reference rates (ie euribor). What are you disputing here, that the assets and liabilities are on a wholly different basis?”

You are making a big assumption that NAMA’s assets (the loans it acquires) are perfectly match with its liabilities (the Bonds it issues).

You have no evidence for this.

The closest thing we have to evidence is,

“Based on data supplied by the institutions, it is estimated that 40% of the loans to be acquired by NAMA will be cashflow-generating (interest and principal) and that these loans typically pay an average spread of 2% over Euribor. Assuming no major adjustment in average margins, this will produce interest income of €12 billion over ten years. Interest paid by NAMA on its outstanding debt is estimated at €16 billion over the same period: in general, cashflow-producing assets are expected to mature prior to the realisation of assets which do not currently produce cash flows. Interest inflows and outflows have been calculated by reference to the forward € swap rate curve.” (Page 10)

At best it can be said that only 40% of the loans acquired are reasonably matched with NAMA bonds.

The rest are not cash-flow generating. And that was in October 2009. I imagine the situation has deteriorated since.

So more than 60% of the assets are not matched with the liabilities.

How much will it cost to hedge 60% of €54bn given that the loans are not producing cash flow.

@ Brian Woods II

Yes, hedging of fixed/floating is at no cost (other than the very trivial admin costs). Hedging is perhaps the wrong term – suggesting insurance or the purchase of options which does cost money. In this case we are simply talking about a swap program to align the revenue interest profile with the liability profile. These are done at the market i.e. with no transfer of cash upfront between the parties.

That is precisely the point.

The revenue interest profile does not match the liability (expense) profile.

60% of the “revenue interest” on the assets (the loans acquired) will not produce a cash flow.

It cannot be swapped. There’s nothing to swap.

“wait until the ratings agencies get their heads around this”

I never said that. I have been consistent in my ridicule of the ratings agencies so please don’t confuse me with someone else. Regardless, the point remains, Moody has no credibility.

@ Ahura/Garo

isn’t Ahura basically verifying my point? When the ratings agencies have something negative to say, their opinions are selectively used (without suggesting that Garo personally is doing this), when they have something positive to say, sure its all baloney…and to say that they have “no credibility” would be a personal opinion of yours Garo, rather than a generally held belief of the market.

@ Eoin

One of the great paradoxes. The rating agencies long term track record is crap. Yet asset mangers will continue to use them.


Nama strategy backed by Moody’s ratings agency

“Speaking on Newstalk this morning economist Peter Bacon described Anglo as “a Celtic Chernobyl”. “You couldn’t get credit flowing again without this kind of measure. Banks can’t lend if they don’t have capital.” But he said Nama, and the massive State recapitalisation of the banks, would not mean that banks would immediately begin lending again.”

Methinks this is one side of well bought bacon!

“The State is expected to take a minority stake in AIB.” WOW from 70% only 48 hrs ago!

The SPINNERS are out in force ……….. nice work if one can get it – geddit!

@JL “One of the great paradoxes. The rating agencies long term track record is crap. Yet asset mangers will continue to use them.”

It’s human nature – if something goes wrong they can blame them and in the meantime they don’t have to do the work themselves. At the end of the day it’s not their own money so they don’t care. Despite their record ratings agencies are still in business as are the ‘thorough’ auditors who are presumably now advising NAMA along with their old clients.


Particularly disappointing interview with PWC Prof Eamonn Walshe of UCD on RTE 1 right now. Is Eamonn waffling for the Establishment line these days?

Kept discussion on Close_Down/Keep_Open when he could have discussed wind_down .. and didn’t … “no data, no information, particularly difficult to say – small amount of senior debt in Anglo-Irish etc “

@ Edgar
The brilliance of the rating agencies is to give an air of authority to the markets and then put a kill all disclaimer on the bottom in small print, essentially saying that anything say is worthless…..when the analyst goes to his/her boss and admits they have lost the bag on an institution, he can use the rating agency to legitamise his/her mistake and everyone must just move on….the same goes for auditors, one audit firm (i wont name em) as far as I know, had the honour of being auditor to both Anglo and Lehman, what an exalted client list!!! but what does it say about the standard of their skills. No one seems to mention their role in these problems that I can see. Surely, accountability must be spread across the entire system, yeh the banks have made massive, massive mistakes but their were so many others involved, rating agencies, government, regulators, accountants, lawyers, developers and there are more….the review needs to be across every part of the spectrum until we get it right…

sorry to go on about the price of deposit books again, but I would like an explanation of the figures in the BL Indo article today…its the easter weekend and I will spend a lot of time with the arm chair experts whiling away the hours drinking pints….these experts quote their newspapers like encyclopedias….now all the experts will have the answer to the Anglo problem and when I disagree, they will hit me (literally) with today’s paper…..


Surely the message from Gov to ‘external’ Bond_holders[&rating agencies] is – no need to bother – we cover all. Is this nearly correct? & are the local 10-20 simply wasting their money?

Is this the message?

I agree with both your points.
The Rating Agencies are a mere comfort blanket for capital markets. When they blow up they hide behind the first amendment and and thus have never been sued. They offer comment not advice.

Nobody, I have spoken to today places any credence in BL numbers. However that said he is on to something. Moreover, the authorities in the EU seem to be moving in this direction. The new Anglo will be
NAMA portfolio of 15-17bn marked down impaired loans funded by NAMA bonds. There will be further losses here as the recovery will not cover the principal
Bad bank of 10-15b funded by 2bn subbies and more govt bonds
Rest in a good bank funded by deposits, seniors and some real equity. In 2-3 years, this might have a value of 2bn or so but not now.

Glad you and your mates think im onto something. Isnt it funny how when someone TRIES to think of a solution it can be crowdsourced and improved? Imagine…And we could have let the “anglo closure will cost us 100b (that was our taoiseach, talking about a bank with a liability level of 85b….) and more” go unchecked. Now its a pity that more people , such as market participants and others who do this for a living (note – us guys have day jobs as well as trying to save the state from the black hole of anglo) couldnt put their minds to it.
As I said on another thread, im mostly offline for the next two weeks. Debate on….

One of the things that our situation has highlighted is that the tent method of governance doesnt work and should be discontinued.
Your either on the outside pissing in or on the inside pissing back out.

It is a poor use of talent.

Wouldnt it make sense to have economic and business advisory councils for experts willing to do it pro bono?

Good luck Brian


The NAMA business plan says that its interest income will exceed its interest outgo. What I am saying is that if there is any floating/fixed mismatch between the two that is easily swapped away.

Your comments suggest that you might misunderstand what “swap” means in so much as you state “there is nothing to swap”. I think you are confusing it with swapping bubble gum cards, where indeed one needs possession before entering a swap. An interest rate swap can be entered into totally irrespective of what cashflow you do or do not possess. It is merely a device for countering mismatches in your interest rate profile.

@ Brian Lucey

‘Now its a pity that more people , such as market participants and others who do this for a living (note – us guys have day jobs as well as trying to save the state from the black hole of anglo) couldn’t put their minds to it’

True for you, but we need to overcome the stultifying influences of colonialism and consumerism. The first says that someone else is ultimately responsible, while the second implies that only a fool worries about the welfare of others.

Tents come and go. Whether one is outside or inside, the important thing is to keep on pissing. We may not have the world’s greatest economy, but , thanks to you and your colleagues. we have a most enlightening and engrossing debate.

We are again in the ‘bearna baoil’, but talent will win out in the end. Fair play to The Irish

Happy Easter and enjoy a well-earned break.

Okay I’ve looked at the Balance Sheet.

Total liabilities – €81b so worst case scenario is the cost to shut down Anglo is €81b ie we pay 100% of the liabilities and get nothing for the assets.

But there are €85b of assets. But take off the €8.3b due from shareholder i.e us and forget the €3.2b inter group stuff.

What else
€13.2b of loans and advances to banks should be retrievable 100%
Loans for sale of €25.5b is the amount coming in for Nama and agreed after €10.1b write off.
Of the financial assets €6.5b are gilt i.e government stocks
Then let’s take 50% of what’s left of the loans (sell to Nama as well) and we get another €15b

Add that lot up and you have €13.2b+€25.5b+€6.5b+€15b = €57.2b.

Difference between €81b and €57.2b is €23.8b, add a couple of 100m to wind it up and we can shut Anglo down for €24b

Compare that to €8.3b+est€10b = €18.3b to keep it going.

They’re my estimates for shut down – how do they work out theirs.

You are taking the fair values of the derivatives book at face value…

But your logic is inescapable and has been done a number of times over the past year and a half. At the time of the last recapitalisation, I worked out based on the same method you’ve used that shutting it down would cost about 17 bn.

Neither of our figures makes any allowance for interest income – we are told that the bank will recover in time and start making money. This would be true in a wind-down as much as it would in a stay alive.

There is something we are not being told, what is it?

@ Brian Lucey

“Churchill had a famous saying about something being “the beginning of the end”. Alas, despite the cheery and unwarranted optimism of Cowen and Lenihan on Tuesday, this package represents in my view merely a holding operation.”

I think they are right about it being “the beginning of the end”, but not “the beginning of the end”, which they are wishing for.

Because, what is likely to happen is that Ireland will be unable to finance its sovereign debt at affordable rates and and then it will be a case of, off we go, cap in hand to the IMF.

@ Brian Woods II

“The NAMA business plan says that its interest income will exceed its interest outgo. What I am saying is that if there is any floating/fixed mismatch between the two that is easily swapped away.

Your comments suggest that you might misunderstand what “swap” means in so much as you state “there is nothing to swap”.“

You are correct Brian II. My use of language was inaccurate.

Of course if I have an asset producing a revenue stream at a variable rate and you have an asset producing a revenue stream at a fixed rate and for whatever reasons I wish to fix and you wish variability we can swap.

You want my fixed. You are the Receiver. I want your float. I am the Payer.

At the point of swap there exists both a credit risk and an interest rate risk.

At the settlement date either I pay you or you pay me.

Everything is tickety-boo.

Conducting the swap does not cost anything. All it requires is settlement.

I allowed my concern of the credit risk of the “developers” conflate with the credit risk of the State.

I had in mind that no sensible counterparty would dream of engaging in an interest rate swap with the bankrupt developers that have loans outstanding with NAMA.

I forgot that the State has already undertaken all of the credit risk of these developers. So there will be no problem finding counterparties. The State has endless access to tax revenue should the swap go the wrong way whether or not the (developer interest) revenue stream it is relying on produces the goods or not.

Yes you are correct. “There is nothing to swap”. There is only settlement to be made.

A sensible man like you would not engage a “developer” as counterparty in an OTC swap but you’d bite the hand off a AA Sovereign, as I would.

Now. To more serious issues.

I’ll swap my Roy Rogers for your Lone Ranger.


@ Robert Browne

Which would make what Grianna Fail did by guaranteeing Anglo and Irish Nationwide the end of the beginning of their destruction of the Republic of Ireland.

@ Brian Lucey,

I am listening to a Paul Romer, Stanford economist podcast. He is making a point about funding for research. Is it best to provide funding for quite basic graduate education? Or is it better to provide funding for specific targeted research which the person would do when they leave education altogether? If you move towards the later, it instantly sets up a whole pile of lobby groups for specific technologies, specific projects. Paul Romer’s point was, he doesn’t trust the political system to choose the best project or the best technology to invest in. He rerferenced the example of Cuba, how it had so many great scientists and people produced out of education – who were applied on projects, which had very little return. It was a waste of resources.

The reason I mention this, is in giving subsidies to the banking and financial industry in Ireland, which are we doing? Are we providing funding for something which will provide basic banking businesses? Or are we providing the kind of funding which will steer the whole financial industry in Ireland in the wrong direction? In your Independent newspaper article which I read, it suggested shutting down Anglo sooner rather than later. But my point is, even if we had an Anglo today which had a business plan, which complied with all of your five points for writing a business plan – is it still wise for politics to dictate the eventual shape of the financial industry (at least a very large chunk of it) on the island of Ireland? We need good regulation of the financial industry in Ireland in order to allow good banks and institutions to survive. Be it Quinn or whatever else. But we need, I guess, a lighter touch by politics and planners in another sense. BOH.

@ Brian Woods II

“I haven’t got the Lone Ranger. What about Wayne Rooney?”

I’m shocked. 😯

It’s all very well to trade paper cards as commodities.

But you cannot be suggesting that a God of the people is a mere commodity.

This is heresy.

The next thing you’ll suggest is that people should stop watching X Factor.

This simply won’t do.

How are we expected to attain the GNP growth necessary to pay for the bank (and oops the insurance) bailout if the people do not believe in, and then consume their Gods? Tax revenues require all of us to believe in Wayne Rooney. I pray to Wayne Rooney every day. I ask Wayne Rooney to score another goal so the stock market will go up (again). Wayne always answers my prayers. We must have Wayne God. We are all lost if we do not consume Wayne God.

I will not trade Wayne God for paper.

Got Gold?

So presumably Alan Dukes is in on this fourth secret of Fatima concerning Anglo and, being a evil bastard who is happy for the country to face financial ruin for the sake of the couple of hundred grand he makes as an Anglo director, has decided to keep schtum??

We could also chose to believe that everyone in Irish political life is – all of a sudden – fully financially capable, numerate, honest and working in the public interest.

I cannot find any evidence to support the idea that there has been any transformation in Irish public ethics or integrity, and there’s LOTS of evidence from the last 30 years that Irish public ethics largely operated at a level slightly below that of dodgy 2nd hand car salesmen.

So, for the govt to roll Alan Dukes out is not a sufficient proof that bad decisions were not taken.

Brian, why does the Independent article read as if the Anglo deposit book is an asset worth 21bn when it is a liability of 27.2bn? Is this a misprint?


Yes on Mr Gillen – worse than drivel. And the Minister on Iceland, again, seasoned up with a bit of Argentina …. further obfuscatory fear-mongering …. this is really dire stuff.


Alan Dukes has stated that until NAMA revealed on Monday the discount on the loans being transferred, they were working off 30%.

He says this as Chairman designate of the bank with full access to all its resources.

And we are expected to believe his estimates of how much it would take to close the bank.

Can’t see what is wrong with Gillen article.
He says that it was wrong to rescue Anglo and INBS and that bondholder should havebeen wiped out in addition to shareholders.

But more than anything else he points that the only way we can afford this disaster is to restore competitiveness to the economy. And with so many in the public sector still stuck in the victimhood of the problem not being of their creation (while overlooking that their pay increases and enormous expansion was based on those self same problem revenues), though this attitude is changing in the face of enormous private sector based long term unemployment, how much misery do we the public need to suffer from these selfish public sector union members before they finally get it.

OK – so…. now the dust is settling and our beloved government have conveniently gone off on holiday for 19 days (they do time these things so well), what are all the outstanding (big) questions?

Can we have a go at putting them all in one place (here)?

Obviously, “who are the bondholders?” seems to be on a number of lips.

What are the real losses at the banks and how long is it going to take to disclose them?

What’s the real cost of shutting down Anglo and where’s the proof of that?

I’m wondering (like BL) what the state of the rest of the loans going over to NAMA are like if this first tranche is supposed to be the best of the bunch… and I’m wondering if the financial regulator has really done a stress test on ‘worst case scenario’ should those remaining loans waiting to go over turn out to be a right basket case…. and do they need a further worst case scenario stress test on the non-NAMA loans e.g. how higher than expected mortgage/personal loan/cards/etc. default rates might impact things.

Why did Lenihan ignore Seelig’s (IMF) advice last April – NAMA wouldn’t get credit flowing into the economy – and how did he come to end up on the board at NAMA after that advice?

What are the other big questions we want to see answered?

And am I the only one who thinks all that’s been happening this week plus arrest of Fitzpatrick last week and administrators going into Quinn this week….. is all looking a bit….. orchestrated?

I thought the first tranche of the NAMA stuff was supposed to be the dodgiest.


According to what I’ve been reading, it’s probably got the best paperwork, best title, etc. because they came from professional developers and not from some hick builder in partnership with his local councillor in Ballybogoff??

Good hard data seems so hard to find when you start looking at NAMA. I wonder how much of the stuff to go over still is land that’s only worth a fraction of what was actually paid for it.

But that’s by the by, what outstanding questions do you think still need answering?

In asking who the bondholders are, I take it that we are trying to identify the constituency who have had the value of their claims bolstered by the actions of a craven and prostrate executive of a sovereign state.

The mechanism through which this transfer of value is to occur is essentially the securitision of a dwindling taxation base.

It has been clear from the outset of this scheme that the executive have deemed the health, education, social welfare and infrastructure needs of the nation to be subordinate to those of the bondholders.

I claim only a rudimentary knowledge of sovereign debt instruments, which I have gleaned from the FT, the economist etc. I suspect, but cannot confirm, that some of the bondholders may have offloaded the risk by purchasing credit default swaps.

If this is indeed the case then the bondholders would have nothing to lose if Richard Bruton and Willem Buiter called them in for a chat. They would simply call up XYZ Captial in Mayfair or Greenwich and present them with an ISDA notice asking them to make good on the CDS.

Accordingly, it follows that Lenihan, Bacon, the Department of Finance and HSBC’s Financial Institutions Group have effectively allowed these deserving fund managers to take the Swiss Chalet off the market for now and forestall that oh so tiresome conversation with the trophy wife about her credit card bill; shame about those with medical conditions that necessitate state support.

It was argued (unconvincingly, in my view) ad nausuem that any attempt to limit the bondholders recovery to the value of the assets they financed would have a detrimental effect on the market for government debt. How is this argument squared with the decision of the UK Government to deny any taxpayer bailout for the Northern Rock bondholders? Or the weekly bank closures by the FDIC?

At this stage the only options available to the incoming government that is intent on providing some minimal level of social service will involve retrospective legislation in some as yet to be determined form and repudiation/restructuring of sovereign debt.


Consider this. No Western European developed country has in this crisis repudiated the claim of senior bond holders in systemically important banks. Now, I suspect we agree that Anglo was not systemic and its liabilities should not have been guaranteed.

No major bank was nationalised 100%. Every trick in the book was pulled to ensure this was the case. You had shotgun weddings in the case of Wachovia, Fortis etc. You had asset protection schemes in BofA, Citi , RBS and you had injections of capital into the Lloyds, RBs, Citi etc.

You might not like it but our Govt is actually following international best practise in the case of AIB/BOI. To repeat Anglo is differant, the actions of FF here were at best incompetant and at worst medacious.

No as regards defaulting on senior debt here and now and even in Anglo. The Irish banks need to raise about 40bn of senior debt from the market over the next couple of years. Anglo has a loss of 22bn and about 5bn of senior debt. Do you think it is wise to gamble that defaulting on Anglo now will not harm the effort at borrowing this money?

Now as regards defaulting on sovereign debt as you suggest, how do you fund the 25billion deficit if you do that. How many public servants do you want to lay off to close the gap?

@ tull.

What do the banks need to raise 40 bn over the next few years for? To refinance their existing bondholders?

I’m not advocating a sovereign default. I’m pointing out that the government’s actions in paying off the bondholders have pushed the fiscal capacity of the state beyond breaking point and therefore make a default more rather than less likely.

If this seems alarmist, please don’t cite plaudits from commentators such as Moody’s in support of a more sanguine view. I can well recall reading their assessment of Ireland in 2006 and being mystified by their bullish assesment.

“I thought the first tranche of the NAMA stuff was supposed to be the dodgiest.”

They are the biggest but not necessarily the dodgiest. In fact they could be better than the amateur property developers. Also Nama is only looking at loans over €5m. There will be plenty under €5m which will be pretty dodgy also.

No expert on banking but I think you can sell the deposit book. Someone else should be able to clarify this. I’d have thought you just let the liabilities mature and pay them off as they do. Most will be pretty short term.

But it doesn’t undermine the argument. Anglo has €85b of assets on its balance sheet and €81b liabilities. The €85b has some value. I’ve worked out my figures earlier on (in 10 minutes), I’d like to see theirs.

@Brian Lucey

Excellent article in the Indo, but is there two third questions and no second question in the “Are you sure you have a strategy” questionnaire?

Or is that just a deliberate error to check if any of those dozy freshers are still awake?


The Irish banks need to raise 40bn plus debt in the next few year to match the duration of the assets and liabilities. They do not have enough long term funding and are too dependent on short term borrowings. They could reduce this amount by withholding credit or running off some loan books.

I would point out that if you did not pay off the bondholder s then loan books would have to shrink, the economy would contract and taxation receipts would not grow. It is also poosible theat the sovereign might have problem refinancing, although that is theory rather than fact.

Apologies in advance for my lack of ALM sophistication – my banking experience was solely financial restructuring (which perhaps explains my antipathy toward the use of the political process to privilege the bondholders) – am I to understand that the 40bn is required solely to finance new lending and withdrawals that are in excess of interest income i.e. these amounts are not earmarked to refinance existing short or long term debt?

If that is the case then it would seem to me (and, if I am not mistaken, Joe Stiglitz) that the government should have used its balance sheet to issue a prospective guarantee i.e. of all future borrowings by BOI/AIB. While it is purely academic at this stage, I’m curious to know whether this option was ever considered.


The funding of the Irish system balance sheet as it is is too short in maturity/duration and has become too dependant on the ECB and wholesale money market. Two things will happen i) external operations in the UK etc will be sold or run down and the funding will not be needed ii) ECB etc funding will have to re reduced to be replaced by more stable long term borrowings. I am not sure how NAMA bonds count in all this. However to your point, these longer term bonds will have to be issued to correct the current mismatch.

The govt has issued a guarantee to cover all borrowing by AIB/BOI on Sept 30th 2008. It is not open ended and matures this Sept but it will be extended. The issue of excluding Anglo and nationalising and putting into deep freeze was advocated by the offficials on that night. However, the Taoiseach is believed to have vetoed it.


I see that Brian O’Neill (Comms Officer at NTMA/NAMA) has had a pop at Brian Lucey in today’s Irish Times (letters page). Now there’s a public argument I wouldn’t mind seeing go back and forth in the pages of the IT but sadly BL is away.

@ Stuart

In your calculations you wrote down Anglo’s assets to c. 50 bn, but of that sum, c. €40 bn comprises NAMA bonds

The big issuie is whether NAMA bonds are tradeable or not and if so what are they worth. In my view they would be worth substantially less than face value because there is no promise to pay cash for them at maturity. And even if there was a promise to pay cash, their trading price would reflect the Irish sovereign risk discount of c. 4.5% at least. So, they would not seem to be suitable instruments for paying off the liabilities of Anglo

Of course, the bonds can be used to raise short term borrowing from ECB. But only short term and even that facility may not last longer than a year or so, and it is a facility offered only to Euro zone banks.

So, Brendan Keenan may well be correct in saying that these bonds may never be redeemed in cash and they might be comparable to UK War Loan, never to be redeemed but only useful for their interest payment guaranteed by the Queen. In the case of the NAMA bonds, however, the interest rate is not a long term rate but the lowest available short term euribor rate, normally available only inter-bank. In return for this paltry payoff, the banks’ shareholders (AIB/BOI) have to pass over real property, including performing loans, at an average discount of 47%, and are then told to go and raise real cash equity themselves, and it must be real cash and not including promissory notes

However, as citizens and taxpayers they benefit from their own, never acknowledged, generosity, because it saves their Governors having to borrow equivalent amounts of (tens of billions of) real cash at a proper interest rate of 4.5%, assuming the market could even contemplate making loans of that size available to Ireland, which it would not

Ergo, the real benefits of NAMA. And ergo, in my opinion, why we cannot let Anglo go (- we can’t pay off its creditors with NAMA bonds or promissory notes). (But, to go on too long perhaps…I doubt that the EU will accept the promissory note solution for the recapitalisation of Anglo…That, now, is a real distortion of the Irish banking market…making the other banks show real equity and letting Anglo show only promises of equity…!…It also violates international banking rules, Basel Agreements, etc…but, of course, maybe they have real equity that I’m not aware of., tell the truth I have not looked at their BS)

Guys, the Indo article was obviously an April Fools joke. Anglo swaps 28bn of deposit liabilities for 21bn of assets – 49bn miracle cure. Anglo pays NAMA 16bn for 18bn which NAMA owes it, so that’s 34bn of the miracle reversed. Nonetheless, the end result is that Anglo owes the ECB 17bn and has 30bn of loan assets to back it, and we all live happily ever after.

The problem with April Fools jokes is that not everybody is a university professor. Both the Sunday Times and the Irish Times didn’t spot the joke and are calling for Anglo to sell its deposits!! April Fool is dead and gone; it is time for Brian to let these two organs of the media in on the “joke”.

I wouldn’t rush to judgement on whether Brian (Lucey) is wrong on his figures for the value of a sale of the deposit book. They also seem puzzling to me – but I heard him on a Newstalk chat discussion which included Alan Dukes and Moore McDowell at the weekend. He said the deposit book could be sold for 95c in the euro – and none of them disputed it. But I will leave it to Brian to substantiate the claim.

@ Aidan

See today’s Indo for an expose of BL’s absolute howler.

I heard that radio debate. The others could be excused for thinking that BL meant selling the deposit book i.e. liabilities + assets. That happens, for sure, might pick up a few quid. But his article in the Indo the next day left no doubt about what he actually meant. He really did mean you could get someone to pay 21bn to take over their 28bn of deposit liabilites. A 49bn miracle that makes loaves and fishes look amatuerish. Absolutely unbelievable.


It’s not online. But the author Brendan Burgess has posted it on his website You will find it under the NAMA section

The Indo article is quite incredibly damning of Prof Lucey, I do hope he posts a refutation, please say it isn’t so Brian.

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