At long last the powers that be have taken decisive action to head of a certain catastrophe.

No I don’t mean the co-ordinated actions of the central banks to provide unlimited dollar liquidity silly, no, Sunderland have sacked Steve Bruce.

Some media pundits (largely former team mates) will say he deserved more time and that the team he assembled in the summer needed time to gel, but any poor season ticket holder who has seen only two home wins in the calendar year, will tell you enough is enough.  Its not as if the the new chairman has been trigger happy (despite being from Texas), in the last two season Sunderland have had two major slumps in form that would have had Abramovich calling for the Spanish archer.

The publicity shy American that owns SAFC is called Ellis Short and he made his fortune as a partner at our friends Lone Star, the major property equity fund managers.

His pragmatic, but ultimately ruthless decision making was no doubt honed turning around defaulting loan portfolios of the kind that desperately need sorting out now.

Not for the first time Morgan has today been described as punchy.

However this was not in respect of an altercation late at a rugby dinner, but in respect of his pulls-no-punches article in Property Week.

We are however quite confident that it is the first time his looks have ever been described as “smouldering.”

One of the deputy editors at PW needs to have a serious word with himself…..

We live in strange days.

The most left wing American president in my lifetime lurches so for to the left that he declares open warfare on the banks; the reaction from our labour government is appeasement, George Osborne agrees to join in the crusade unconditionally.

You would have thought that British politicians would have learnt recent lessons about declaring unswerving support for our American friends when they get all jingoistic, but plus ca change, as the cheese eating surrender monkeys would say…..

No one knows the details that these hostilities will take;  but it won’t be the shock and awe of our bonus tax, rather, it seems, more the returning of the lucrative pastures of “prop trading” to hedge funds and private equity that had been annexed with the overthrow of Glass Steagall Act in 1999.

But there is always the danger of the law of unintended consequences, or to overdo the military analogy, collateral damage.  Although, what is “prop” trading?  Put simply it is using the bank’s cash to bet alongside, or even against, the activities of it’s customers.  But it’s never that simple, General Volcker’s surgical strike at casino capitalism, could also nuke quite legitimate activities that are needed now more than ever to work through all of this bad debt.

For example, if a bank is banned from private equity participation, how does it undertake and manage a stake acquired through a debt for equity swap?  Where does this leave a bank who wants to take non-performing property loans onto it’s own balance sheet?  If that is not “prop” trading what is?

I am sure the next government will think these issues through before sending the boys over the top, but their biggest enemy could be the two banks it already largely owns.

Ellandi and K&L Gates hosted a restructuring lunch on 20th November. The objective was to create a forum for discussion in regards to how banks should approach distressed property loans. We were delighted to be joined by representatives of Barclays Capital, Bank of Ireland, Houlihan Lokey, National Australia Bank, Nationwide and Grant Thornton.

There was wide ranging and at times passionate debate but the general conclusion was that there is very little consensus between banks. Some organisations are taking a proactive stance and looking to enforce covenants whilst others are willing to show patience to borrowers providing that interest is serviced. Some banks view LTV as a “technical default” that can be waived whilst others take the view it is a key contractual term that must be enforced. Certain people thought that the loan servicer model applied in the CMBS market is a robust structure whilst others argued it was incapable of making decisions and would lead to paralysis following a loan default.

The only universal opinion was that we are in uncharted waters and that 2009 will be see the banking and property industries having to learn how to cope with major challenges and a new environment. Although, it seems that lenders will address these issues in very different ways.

Ellandi has been covering a lot of miles of late. We have been assisting an international bank in reviewing its exposure to the UK residential market and specifically a number of mid size regional builders.

Having made numerous site inspections, some with the developers and some as mystery shoppers, we were able to produce a comprehensive report that allowed the bank to develop a realistic view of its current security position. We provided advice on potential realisation options and assisted in formulating specific business plans with those lenders that the bank intends to support.

This project required us to work under a tight frame and with absolute discretion. Our small team, extensive experience in the house building sector and background as a developer allowed us to produce a comprehensive and practical report for use by the credit team, relationship managers and senior management at the bank.

“Developers haven’t turned bad overnight” was an expression I heard twice in meetings with bankers last week.

To be fair I think they were completely wrong; it’s just hard to disagree with them.

“Many developers weren’t that good in the first place” is probably how I would have put it. 

Many industry professionals will have laughed condescendingly as time after time clueless amateurs on Property Ladder were bailed out by a rising market, despite having bought in the wrong location, “over-spec’ed” and over spent. 

One of the saddest effects of a prolonged housing slump might be seeing the back of Ms Beeny, especially as she has such a pleasant front; even if, as Mrs R regularly points out, she does have terrible hair.

But aren’t many of the companies in trouble, guilty of exactly the same thing?

As an industry we have all looked good in the soft focus of an ever improving market, and like the over flattering close ups of the old hags in Sex and the City, all it has done is covered up some deep and unattractive flaws in the market’s facade.

It would be an interesting exercise to review a sample of both residential and commercial developments to see what the returns would have been, stripping out the effects of excessive gearing and the underlying market improvements.

The banker’s predicament is not unlike the guy (or girl for that matter), that wakes up on a Sunday morning in an unusual bed with a throbbing hangover.  Unfortunately their arm is pinned to the sheets by a less than pulchritudinous lump that they would be less than happy to introduce to their parents, never mind their friends.

Rather than Morgan’s “Prisoner’s Dilemma”, this is the Stumper’s Dilemma.

Do they take the cowards way out and gently try to remove the arm and so risk waking the monster? The potential result being a relationship, marriage kids, divorce recrimination and a premature, lonely, alcoholic death; or, take the short term pain and chew their own arm off?

Acknowledging that there are some bad developers out there also means admitting that some credit decisions were pretty poor too, but far better that than continuing with relationships that frankly would never have got off the ground if they hadn’t had their beer goggles on.

Until this happens, the weak won’t be allowed to go to the wall and one of the most important parts of capitalism, creative destruction, cannot help build better and more robust companies, and banks, going forward.