INDO: Banks must raise rates to improve the economy


Oooh, the people are not going to like this. Not only is Nama going to over-pay considerably (unless anyone thinks that property in Ireland was merely 17-20% overvalued) but banks are going to raise interest rates “for the good of the economy”. Homeowners will be ecstatic that they are doing their bit for the “economy” which in Ireland seems to be another word for shareholders of AIB/BOI.


Yes, for the good of the ‘economy’, we must take more money out of the ‘economy’ and give it to bank shareholders and bondholders. They are the real ‘economy’. This business of making, buying and selling stuff is for the fairies.


That’s the widespread expectation in “the markets”. That the ‘Irish’ banks will be asked to take no more than a 30% discount on the value of the loans, i.e. bearing no real world relationship to any true valuation of the assets.

Blue Horseshoe


The neck of these guys is something else, at least Dick Turpin wore a mask FFS. :open_mouth:


I was at this briefing and for the first time (perhaps I shouldn’t admit this publicly) fully understood the haircut methodology - and the 20% makes pretty good sense on a portfolio-wide basis.

It goes something like this: imagine a loan of €100m on an underlying asset with a peak value of €133m (in other words a €100m loan at 75% LTV). A peak-to-trough price decline of 70% wipes out the €33m in equity and a further €60m, leaving the collateral value at €40m for a 60% nominal loss on a fully defaulting loan. You would expect NAMA to buy that loan at a discount to €40m and then try to recover some value by either getting the borrower to pay up or selling the collateral at some point.

However, NAMA does not assume 100% default on 100% of loans. In other words, not every loan is going to have a 60% nominal loss. If Goodbody’s numbers are anything to go by, the working assumption is a 33% probability of a loan incurring a total loss (or, put another way, there should be an aggregate 33% loss on loan values - which are NOT the same as asset values - across the NAMA portfolio). So 33% of the 60% nominal loan loss on a peak-to-trough decline of 70% in the underlying asset equals a 20% overall haircut. That doesn’t seem crazy to me, whatever the overall craziness of the NAMA concept.

Another thing - and I’ve written about this in the Sunday Tribune - it makes perfect sense for Irish banks to support their margins by raising rates. They can’t service the guarantee costs or the prefs coupons without being profitable. We either want functioning banks or we don’t. Irish banks have some of the lowest margins in the OECD, but some of the highest funding costs. It simply can’t continue like this. We’re not doing ourselves any favours by expecting the banks to behave like charities - unless we’re happy with banks that won’t lend.


That’s exactly how I understood this was going to work and it just sounds like another rerun of the Gaussian Copula function debacle that initiated the credit squeeze in the first instance.

It doesn’t take 100% default, just enough of a similar type and you get the house of cards effect… Perfectly grand if we can pass the toxic parcel onto someone else but I’ve a feeling we’ll be sitting on this shitpile for a number of years in a retrenched economy that won’t have the funds available to provide any internal stimulus to avoid defaults by a growing proportion of the mortgage endowed in this country.

Coupled with a modicum of sense on bankruptcy and perish the thought, debt forgiveness, it could possibly work.


Yes. Nama is in some respects like a giant securitisation alright. I expect, though, that there will be a high degree of differentiation in the assets. Five acres in the arse end of Leitrim is not the same as Sean Dunne’s Ballsbridge fiasco. There will be some level of recovery on the Ballsbridge property, but probably no hope for Leitrim. It doesn’t take much sophistication to understand that, so even if the junk end of the Nama portfolio is a total loss, I don’t see that influencing (too much) all the other stuff.

Essentially, Nama has to recover 66% of the loan values (not the values of the underlying assets) to break even (if the haircut is indeed 20%). Is that out of the question?



Did you understand the presentation to say that
(i) where the security is worth X euros less than the amount outstanding then
(ii) NAMA will assume that, on average, borrowers will only fail to repay 33% of €X???

Where is the other 65% of X, which is not backed by any assets, going to come from and why is this a valid assumption??


The problem with the model, which has been clear from the start, is that the 70% LTV is an extremely suspect figure. The assets have been revalued all the way through the boom. Way beyond their economic value. Even at peak rents, commercial assets were yielding 2%. Given that they ‘should’ be yielding closer to 8%, that implies they are 400% over-valued, so a haircut of 75% is required on the best assets. This takes no account of the really bad assets that have a zero or negative worth.

A further complication is that this mechanism requires that mezzanine investors, who basically comprise the funding for the 30% of equity, need to be wiped out for the valuation to make sense. I don’t see either any mechanism for expropriating their 30% ownership or even any recognition that it exists.


I believe so.

One of my mantras that I used back in 2006/07 to try and talk to people about the craziness of the property situation in Ireland was by saying the only real booked value at the end of the day is the mortgage book. Given the leveraging going on, nevermind in residential but in commercial, it would be interesting to see the proportions that were lent within this 90bn tranche of “bad” loans.

I fear it would be somewhere closer to the 100% than any prudent criteria.

EDIT: Nevermind the rolling up of interest that has been going on evidently!!! :open_mouth:


I am afraid it is . Too many empties and no realistic chance of a workout save in Dublin/Galway/Cork , and that is only the residential portion .

The complete oversupply of Commercial and Retail will overhang the market for decades and nobody will pay ‘par’ for a then 20 or 30 year old office block in Park West or Sandyford or a shop/bulky retail in Dundrum or Blanchardstown or Naas.

Sorry, for me it is out of the question , yes . Thank you very much for the briefing but as TUG said somebody has evidently run a Gaussian Copola on the probabilities in the abstract . Based on what model or precedents one should also ask.

It is time to find this idiot mathematician and to loudly shout “It’s the Empties Stoopid” in his ear.


Is that assuming that banks put forward 75% towards the development loans?
Is this what actually happened?
Sounds suspiciously prudent to me…


+1. Do we think for a second that Carroll for example borrowed 70m to buy building x for 100m. at 70%LTV. Does anyone think that he put his hand in his pocket and paid the 30m himself? Did he feck. He either borrowed it from " investors" or from another bank secured on another property. Its a web a deceit and greed and there is no easy way out of it.

To say that all of these assets have a 70% ltv is, imho, laughable.


My chief reservation is that the Irish banks have "demonstrated a capacity NOT to lend save for property lending " ( to quote me). If you give them all this money they have no capacity to lend it productively or sensibly . 65% of their entire lending in 2002 -2008 was property related .

With €70bn burning a hole in their pockets they will simply blow it on commodity speculation or Brazilian bonds or some other manifest stupidity that only Irish bankers seem capable of . It will exit the state so fast our heads will hurt.

That is why they must get scrip , not cash, and must account for every penny they say they need :frowning:


Well, if he got it from investors it’s not our concern. That’s just wiped-out equity. The stuff borrowed from another bank and secured on other property is a concern, I admit.


Is that necessary? Why shouldn’t they be wiped out?


You don’t think, then, that avoiding this 30% loss is the whole function of NAMA?

If it is just a 20% haircut, then the banks could easily manage this themselves, given, as you have been told, the portfolio losses look small according to the models. The banks can easily just model this, park the assets in a vehicle, look for state/private equity recapitalisation. There is no need for NAMA if it is just a matter of writing down the loans.

The problem comes solely with this 30% equity stake. To wipe out the equity investors, you have to bust the loan, i.e. take possession of it. There is no evidence that NAMA is going to do this either. This is the matter that moves NAMA from the realm of a bad idea to a conspiracy. Who are these equity investors? Sarge? No. Rosemary the telephone operator? No. Henry, the mild-mannered accountant operating on behalf of the great and the good? Could be!


And do we really think that this didnt happen. Sure , some mezz investors will get wiped, but I suspect nearly all of his "asset " portfolio is leveraged nearly 100% in one way or another.

Look at the smaller scale stuff ala Lynn. Several mortages on single properties, mortages not cleared. I am not saying that the " Big " guys were up to this but if a relativeley small guy like Lynn can run up 165m without the banks knowing what the feck he was up to what could all of the others have done. And would our Banks have noticed. XX


It’s necessary if you want to realise your 70% LTV. Otherwise the asset underlying the loan is 100% owned.

From the looks of it, many of the assets are set up as companies, some based in Ireland, some overseas. The companies are interlocked with each other. Some of the equity investors are other companies in the group, some are pension funds, some are individuals. For the other companies, their equity stake is collateral on other loans. So suddenly the LTV that was 70% doesn’t look so smart, because another 10% of value is equity securing another loan to make its LTV up to 70%.

The problem with a pyramid scheme is that as you lay each layer, the amount of real equity (clear space with no blocks on top) diminishes. Until you reach the apex and there is only the clear space on the top of the last block and the very this edges of the lower levels. While projects built ten years ago may have had 70% LTVs, as soon as the remaining equity was pledged to another project, the LTV becomes 100%. Not for the specific loan, but for loans in toto.

This, after all, is the most efficient way of making money. It’s all about leverage. Until it bends.


Perhaps I’m a bit thick, but I don’t think the whole function of Nama is to avoid losses to equity investors. The DoF has been pretty explicit in its assumption that the equity has already been absorbed in the assumed writedowns. Am I missing something? In what way do you imagine equity investors being made whole via Nama?

Remember, the 20% haircut represents a 33% portfolio loss. Not small by any means. Certainly not small enough for the banks’ balance sheets to absorb, anyway.