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News : Irish Economy Last Updated: Nov 11, 2010 - 3:38:32 AM


Wall Street Journal says Ireland's fate tied to doomed banks
By Michael Hennigan, Founder and Editor of Finfacts
Nov 10, 2010 - 5:22:41 AM

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The Wall Street Journal says in an extensive article today on Irish economic woes that  Ireland's fate is tied to doomed banks.

Meanwhile, The Washington Post reports that EU economic and monetary affairs commissioner Olli Rehn told a reverentially silent crowd of politicians, business figures and economists in Dublin on Tuesday at the Institute for European Affairs that the EU will help guide Ireland back from its debt crisis and the continent's worst deficit.

"You are smart and stubborn people. Time and again, you have proved you can overcome adversity. And this time you do not face the challenges alone. Europe stands by you," Rehn said at the end of a two-day fact-finding visit.

The Journal article says Finance Minister Brian Lenihan proposed last Thursday shrinking the country's 2011 budget by €6bn. Proportionally, that's as if the US suddenly eliminated the Defense Department.

In a familiar background detail, the Journal says from the outset, the government was hobbled by faulty information from outside advisers, from a trust-and-don't-verify regulatory culture and from the troubled banks themselves.

The result has been calamitous: Bad loans at five once-sleepy banks have snowballed into an existential threat.

Ireland launched the bailout Lenihan would dub the world's cheapest, guaranteeing every deposit and nearly all debt issued by Irish banks. Dublin hoped that would free others to lend to Irish banks, and Ireland would muddle through without shelling out a dime.

A small team at the National Treasury Management Agency (NTMA) debt agency, including Brendan McDonagh, pulled together a plan for a new 'bad bank' toxic property loans entity, the National Asset Management Agency (NAMA), to buy €77bn worth of loans for €54 bn, a 30% discount.

Those estimates shaped public expectations about the rescue bill. But they were based on information from the banks, which told NAMA their loans were well collateralized.

In early 2010, McDonagh's team got a rude surprise upon diving into the books.

"We opened it up and said, 'Oh, my God,"' McDonagh said in an interview. "What they are telling us is not the reality."

The Journal says the banks had said they had loaned 77% of the value of a property, on average. The other 23%, put up by the borrower, would cushion a default.

Several times, a developer pledged future profits on other ventures. Many loans were riddled with flawed documentation, leaving banks without solid legal rights to the property they had believed was backing up the loans.

Patrick Honohan, Ireland's central-bank governor, says the government is fighting on two fronts. While wrestling with the banks' bad loans, it must repair state finances badly damaged by a deep recession and a swift erosion of the tax base. The bailout bill, he says in an interview, "is not Ireland's only problem."

Brendan McDonagh must have lived a sheltered existence at the NTMA during the boom.

Finfacts said earlier this year that it was clear that the period from the initial announcement of NAMA in April 2009 to October of that year that the Department of Finance (DoF) had not insisted on hard facts from the banks.

However, an LTV (loan-to-value) of 75% was used to spin the official line.

This was my comment on the Irish Economy blog on an Irish Times article of Sept 05, 2009, by Minister Brian Lenihan's economic adviser, Alan Ahearne of NUI Galway:

AA: “First, the estimated average loan-to-value ratio of 75% will have to be verified by examining each loan individually, as required by EU Commission guidelines.”

"Alan Ahearne represents the Dept of Finance in the article but it’s unclear how much he knows about the loan situation.
 
There is anecdotal evidence that many residential mortgages were topped up with other loans.  
 
It’s likely that the same applied with commercial lending.  
 
It is assumed the the average loan-to-value ratio of 75% based on the original value of the deal but it may be based on a more recent value.  
 
It’s hard to believe that 25% of the value of big deals in the period 2004-2007, was paid in cash - - in particular in respect of Anglo Irish deals.  
 
Security is on both domestic and local property.  
 
It is likely that many transactions involved complex tax shelters and other vehicles - - not a bog standard €75m loan on a €100m purchase deal.

What does AA know about such deals?

The DoF have had a 6-month lead time to check the facts.

Given AA’s public statements, there should be more clarity on the loans in advance of the Dáil debate and vote i.e. before Sept 16th.

AA should state that he is satisfied that the 75% average applies to most of the loans on the basis of the original purchase price/stamp duty basis price and includes top up loans.

Simply, as a representative of the Minister for Finance, it’s his duty to provide clarity on this issue.
 
How confident can he be regarding the risk that the same security was not used for multiple loans?

Keep in mind, that many of the later deals were ego driven as the top developers competed for prime sites.

If they were paying 25% of the site costs in cash, were the banks providing 100% of the development costs?"

Image of the 37 storey tower for the site of the former Jurys Hotel, Ballsbridge, Dublin. Developer Seán Dunne was refused planning permission for the tower. He had paid €379m for the Jurys and Berkeley Court hotels sites in Ballsbridge in 2005. An adjacent 2.2 acre site was purchased by Ray Grehan for €171.5m. Developer Bernard McNamara bought the Burlington Hotel and the adjacent Allianz building in 2006 for €388m. Also in 2006, a consortium led by Bernard McNamara and including the State-owned Dublin Docklands Development Authority, paid €412m to buy the former Irish Glass Bottle factory in Dublin. In 2006, Seán Dunne bought the front garden and four of the office blocks at the Bank Centre in Ballsbridge for €200m. Ireland's then biggest bank, Allied Irish Banks (AIB) was in effect selling off its headquarters to a financially stretched developer, to fuel the property bubble.

On Tues, Nov 09, 2010, AIB's shares rose 16% in Dublin and the bank's closing market capitalisation was €4070m.

Finfacts articles:

Lenihan says failure of Anglo Irish Bank would "bring down" the country

Ireland' system of slow-motion government and the lingering death of Anglo Irish Bank

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