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Kelly, SME debt and some bigger fish March 13, 2014

Posted by Oireachtas Retort in Business, Capitalism, Irish Politics.

Rates! cried Ibec

Rent! cried Isme

Wages! cried the Sfa

Regularly and unopposed since 2008 until Morgan Kelly this week pointed to SME debt. Mark Fielding

The Association called on Minister Noonan to address the fears of vulnerable Irish SMEs and to give assurances that the Irish Government will not allow the ECB to use the Irish economy as an example of strict deleveraging

Perish the thought.

It is just not sufficient for Minister Noonan to ask Prof Kelly to chat to the Central Bank and compare figures. The Minister must be much more forthright and confirm that the SME sector will not be targeted by our bailed-out banks whether under orders from the ECB or not.

Time for the Finance Minister to stand up to the ECB and the market. He will be changing his name to ‘Stop the water tax Fielding’ next.

Last year Fiona Muldoon, formerly of the Central Bank, warned that at least twenty-five billion euro or half the total loans to small and medium firms are “non-performing”. That is just shy of another Anglo and more should the worst of Kelly’s claims come true.

SME arrears throw up complex issues and there is a high-level of property related borrowing.  In effect, in Ireland, literally and figuratively, all roads lead to property.

Given 70% of people in private sector employment are employed by SMEs there is a further direct knock-on for these employees (& past employees) into the whole area of household debt and mortgage arrears in particular.

We have had five years of kicking the can down the road domestically and EU level and it probably a reflection of just how many are up to their neck in bubble property that the obvious SME issue has run under the radar for so long. The austerity agenda was a convenient parallel for all concerned. No one wants to peek at the horror below. It runs right across eurozone, multiples of the kind figures we have quickly gotten used to.

That 70% figure of Muldoon’s relates to another point of Kelly’s where he noted that Ireland is “peculiar” in having lots of multinational and very few large Irish companies. It’s almost as the country has been run in the interest of a very small few.

Last month on Primetime we had the usual adversarial debate on wages increases and tax cuts but I wondered how many at home would notice that it was much venerated entrepreneur vehemently opposed to private sector workers taking home more pay. Similarly,  as lobbying is back in fashion, it is worth drawing attention to this story from 2012. Ireland First, an all star cast

Michael Berkery, John Bruton, Leslie Buckley, Pat Cox, Dermot Desmond, Frank Flannery, Ray MacSharry, Denis O’Brien, Sean O’Driscoll, Michael O’Flynn, Mike Soden, Michael Somers, Dick Spring, Peter Sutherland, Brendan Tuohy

One item of particular concern was upward only rent reviews, something almost unanimously acknowledged to have cost thousands of jobs up and down the country.

[A] discussion document to be submitted to Taoiseach Enda Kenny by Ireland First by a high-powered group of the country’s most successful businesspeople who came together last autumn to try to think of ways to restore Ireland’s economic fortunes.

Outside of Nama’s remit, but still in the area of property, the same source said the new Government needed to move to end the uncertainty surrounding the future of upward-only rent reviews for commercial premises. Under the Programme for Government, the Coalition has given its commitment to end upward-only rent reviews for existing leases.

Commenting on this, the source said: “The rent review issue has to be addressed now. The uncertainty surrounding this is having a serious and direct impact on our potential to attract foreign direct investment. Nobody wants to put their money into commercial property in a country where the goalposts can be moved overnight.”

Michael Noonan had removed this ‘uncertainty’ on budget day the year before citing advice from the Attorney General. “Susceptible to constitutional challenge on a number of fronts” but ongoing pressure saw government suffer defeat in the Seanad just last month and Fergal Quinn’s Bill on the issue now heads for the Dáil.

So who was it doing the leg work against the great many hardpressed, downtrodded, real world, lifeblood, private sector SME?

It is understood that the co-chairs of Ireland First — One 51 chief executive Philip Lynch and Rehab chief executive Angela Kerins — will lead the various delegations once meetings can be agreed with Taoiseach Enda Kenny and the Government.


1. CL - March 13, 2014

Kelly is right about the banks. They still contain too much of what Marx called “fictitious capital”.
Not so sure that Kelly is right about Draghi and the so-called “recovery”. Unlike the Fed in the U.S. the ECB has not pumped trillions into the financial system to try and counteract the massive deficit in aggregate demand. Draghi merely said he would do so if needed and this seems to have worked and kept interest rates low. Joan Burton says “ECB President Mario Draghi’s promise of a bond-buying programme had staved off the eurozone crisis and there was no reason for him to depart from his overall approach now.”

But while the promises of action may have ‘staved off the eurozone crisis’ promises are not money and do not affect aggregate demand. So Burton’s statement that there is no reason for Draghi “to depart from his overall approach now” is a view not shared by many including the IMF. Because the ECB has not engaged in ‘quantitative easing’, i.e expand the money supply, the threat of deflation looms.
“The ECB is by definition ferociously tight. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, is right to berate the bank for betraying its primary duty, demanding €60bn of bond purchases each month before it is too late. “It is high time for the ECB to act. Otherwise Europe risks falling into a dangerous downward spiral,” he said.”

“In the fourth quarter of last year, euro zone real demand was 5 per cent below levels in the first quarter of 2008. In Spain, real demand fell 16 per cent. In Italy, it fell 12 per cent.Even in Germany, real demand stagnated from the second quarter of 2011: this is no locomotive. The failure to offset this has made recovery of crisis-hit economies more difficult, lowered investment and created long-term unemployment. All this will deeply scar the euro zone.”


2. sonofstan - March 13, 2014

The funny thing is that ISME and IBEC actually do a really bad job of representing their constituency. It’s not the minimum wage, or the ‘bloated’ public sector that’s their enemy, but, just like the rest of us, it’s the super-rentier class. To paraphrase Marx, in The Class Struggle in France, ‘the finance aristocracy’ is a lumpen bourgeoisie that preys upon the class that, blinded by the bling, mis-identifies its interests with their own.


sonofstan - March 13, 2014
doctorfive - March 13, 2014



Enya Rand - March 14, 2014

+10 Spot on!


Brian Hanley - March 14, 2014

But they do a good job of channeling the resentments and hates of their constituencies, the tuppence hapenny looking down on tuppence dislikes of the self-employed for public servants, or the snobbery of the shop keeper towards people on social welfare, or the inflated sense of self-worth of the ‘self-made’ businessperson over what he/she sees as ‘wasters’. Keep that up and nobody notices the dodgy economics.


3. Enya Rand - March 14, 2014

Same old story with neo-classical economics.

Nobody is modelling debt in a dynamic way and the economists who do pay attention to it (like Kelly) are the only ones who notice the viciously deflationary nature of Frankfurt-driven economic policy.


4. Ghandi - March 14, 2014

Something that struck me recently which I don’t have an answer to, the banks securitised a lot of mortgages, that means that after they were taken out they were sold in a block – This is what led to Lehman’s collapse as they had blocked loans together which were never going to be paid.

If the bank has sold on a loan it has got the initial money it lent back plus a profit and thereafter collects the monthly payment from the customer and passes them onto the new owner of the loan, they just act as a conduit. If they have sold the loan then they have got their money back.

2 questions then arise, what happened that money, and why did those loans have to be bailed out.

Surely the banks should be saying we sold that loan it not our problem (leaving aside it possible contractual relations under the sale) collect it yourself.

Am I missing something here?


Gewerkschaftler - March 14, 2014

Very good questions.

I think it depends on how they were sold on – as simple bonds or as CMOs. In both cases I also don’t see why original usurer should have an obligation to collect the debt.

“what happened to the money?”. The thing to remember here is that ‘money’ flickers in and out of existence a bit like quantum foam due to the creation and paying down of private debt. But you can bet the intermediaries took massive fees and speculative profits in the process.

“Why did these loans have to be bailed out?” So a small, politically well connected elite didn’t loose their over-extended shirts.

Finance, in the end, is politics.


Ghandi - March 14, 2014

I don’t think they were sold as bonds, that’s the thing, if I undertand it correctly a bond is were X agrees to lend a sum for a time and a fixed rate of interest, the inerest is paid at intervals throughout the term, and those bonds change hands a number of times during the term.

Where loans are securitised I think they are sold a collection of loans for a price, (what the banks lent and some profit) the buyer makes his money over the term as that interest is more than the profit amount paid to the bank.

I don’t disagree with your points above I am trying to work out how they justified it, if they even bother to do so.


hardcorefornerds - March 14, 2014

Suggestion here in the comments from Conor McCabe that “what was securitised was the income stream from the mortgage not the mortgage itself. It may seem like a technical difference but unfortunately that is how securitisation works.” (http://dublinopinion.com/2012/04/02/irish-mortgage-backed-securities-initial-notes/) Though he warns he’s not a lawyer – which is especially pertinent since so many people are looking for answers and ways out of debt but get distracted by specious quasi-legalism, such as Freemanry. I couldn’t find a quick answer to Ghandi’s question online, and I’m intrigued – it needs a technical clarification as well as a more political critique.


RosencrantzisDead - March 14, 2014

From what I have read, the mortgages are packaged by the financial institution (FI) and then assigned to a Special Purpose Vehicle (SPV).

The SPV then issues bonds to investors and pays over the proceeds of these bonds to the FI. If this is correct, then the FI owes a debt to the SPV, which in turn owes a debt to the investors.

The assignment is (usually) equitable (roughly, it is not a formal legal transfer) in nature, so the legal relationship between FI and mortgagor/home-owner does not change.


RosencrantzisDead - March 14, 2014

Also, I see that the Minister is given the power to make regulations regarding the sale, transfer, securitization of housing loans under the Housing (Miscellaneous Provisions Act, 1992.

But it would appear that Michael Noonan was happy to ‘talk to the buyers’ and reach an informal deal.


Ghandi - March 14, 2014

The mortgage deeds allow the Bank to sell it on, so that’s not in question, but if they have sold it on then it’s gone isn’t it? they just collect the payments and pass them on. as for selling on the interest stream only, I don’t think so, from a layman point of view that may well be the outcome, but its the right to the income stream which are capital and interest payments generated by the loan.

As this was regular practice are we to assume that the money raised was all piled into new loans which they had not securitised in 2008?


RosencrantzisDead - March 14, 2014

But they haven’t sold them. It is an equitable assignment. The bank still legally holds on to the asset


Gewerkschaftler - March 14, 2014

Aha – now light begins to dawn. Thanks Rosenkrantz.

So the moribund Banks still own the loans but someone (presumably the Irish citizen after the bank guarantee) has to meet the additional income due on them to speculators leveraged through the SPVs. Or have these these SPVs still paying out?


Gewerkschaftler - March 14, 2014

Or have the SPVs stopped paying out?


RosencrantzisDead - March 14, 2014

I presume most of them are. An SPV is just a company used by a bank for a single purpose. Failing to pay their investors would trigger a default and insolvency. This insolvency would trigger liquidation. Liquidation would, presumably, trigger an event that would require the FI to complete the assignment. (Again, it is hard to generalize as this will depend on the legal structures and contracts in place, which differ for each company)

With the assignment complete, the SPV’s assets (the mortgages) would either have to be sold off, enforced or handed over to the investors (depends on the type of security each investor has). In a property crash, this would invariably mean that the bondholder/investor would take a hit.

Obviously, this last bit must not happen under any circumstances. This is where I think the bank guarantee would come into play.

Still, if we have any financiers about who have first-hand knowledge of this, I would be very grateful for any corrections.


Ghandi - March 14, 2014

And I am a Lawyer but it doesn’t seem to help.


5. Gewerkschaftler - March 14, 2014

I don’t know (and I don’t think we were ever meant to know) how much of the unpayable commercial and private mortgage debt was collateralised and sold on. Or sold on as bonds.

The stuff that was sold on as CDOs & CMOs flickered out of existence effectively – or went into the twilight of junk bond status, possibly to be picked up by vulture capitalists. I don’t know how much of this debt is owned and worked by vulture capitalists? I don’t think we are meant to know.

Is NAMA anything more that an vulture capitalist?

I tend to believe Conor McCabe’s account that much of it was held in banks as ‘assets’ by a small Irish owning elite who were very close to government. This elite also held bank bonds in the effected banks.

These people were threatened with apocalypse (i.e. a loss of wealth) when said banks went into meltdown. Someone had to step in and make sure the capital in interest continued to be paid.

That someone was us either as perpetual debt-slaves or the victims of cuts in social services. Also ongoing for ‘the foreseeable future’.


Gewerkschaftler - March 14, 2014

and interest.

This was meant as a reply to Ghandi above.


6. Ghandi - March 14, 2014

RID I thought the SPV’s were a fairly recent invention (since 2008)?


7. Ghandi - March 14, 2014

RID I note your point about equitable assignments, but are we sure that is the way it was done? It would seem as from the way that they proceed that that is the case butthat may be slight of hand.

Either way, the question still remains that the bank have received the amount loaned to the original borrower plus a profit where did that go and why did they need to receive a cash injection for that.

We know the politically and social answers, trying to reason out the financial / accounting reasons.


RosencrantzisDead - March 14, 2014

I cannot say for certain that every transaction operated the way I have described but it appears to be quite common. See the prospectus for Start Mortgages here

A relevant paragraph (at page 22):

Equitable Interest

Legal title to the Loans and Mortgages in the Mortgage Pool has, since origination, remained, and will remain, with SML in its capacity as Origination Agent. The sale by SF1 and the Origination Agent to DACS 1, and the subsequent sale by DACS 1 and the Origination Agent to the Issuer, of such Loans and Mortgages will take effect in equity only, since, save in the circumstances set out below, the transfer of legal title to
such Loans and Mortgages to the Issuer will not be completed and notification of such transfer will not, in the ordinary course, be given to the Borrowers.

Bank of Ireland’s subsidiary, ICS, has a similar provision in its prospectus (at page 27).


hardcorefornerds - March 14, 2014

“the bank have received the amount loaned to the original borrower plus a profit where did that go” – I would assume much, if not entirely all, went out again the form of more home loans (and retained profits). Given that the banks were also borrowing more cheap money to make further loans, they clearly weren’t squirrelling it away.

In a sense then it would seem to be ‘eaten bread’ although the contractual obligation still exists and the income stream is flowing elsewhere. Disentangling that would mean accounting for money that has already been spent (by the banks) but not yet paid back by the borrowers. It does kind of make a mockery of the supposedly moral obligations of debt, even on the financal world’s own terms.


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