Bacon on Pricing Assets and Nationalisation

I was somewhat heartened by the overall tone of Peter Bacon’s comments about NAMA on Morning Ireland yesterday. He talked pretty tough about the need for NAMA to pay market prices for loans and correctly argued that indexes for property prices showed that one could put market valuations on these assets that would involve steep write-downs.

That said, I’m still not encouraged to think the plan will work out well for the taxpayer. Bacon himself won’t set the valuations for the loan portfolios—I’m guessing this will be done by a major accountancy firm. And I am concerned the accountants hired will value the portfolio according to conservative rules so that currently impaired loans are written down but all other property loans are valued at book value.

For me, however, what was more interesting than the tough talk on valuations was Bacon’s detailed explanation of why he did not favour nationalisation (starts at about 6.50 in). I think it is important that a full debate is had about nationalisation. To help with this, I’m going to write a few separate posts over the next few days to discuss the arguments made by Bacon and some others and to put forward a defence of nationalisation. Doing these as separate posts will facilitate interaction with our readers on specific issues and I’d be happy to take suggestions on which issues to discuss.

And before any our more excitable commenters start getting too worked up, I would like to emphasise from the outset that I view myself as politically moderate: A brief perusal of my research scribblings will uncover lots of boring arcane technicalities and no track record of radical left wingery. So, it is only with reluctance that I am advising this approach.

Without further ado, the first nationalisation post is just above this one.

6 replies on “Bacon on Pricing Assets and Nationalisation”

Surely there is a conflict of interest – Peter Bacon worked for Ballymore Properties for 5 years – he did bank loans and bought land for them

A couple of points i’d like to make. Lengthy but worth considering.

The issue of overpaying for assets is relevant, but there are ways that this is mitigated to a certain degree. The clawback levy is one possibility, but an overlooked fact is that the governement by way of its €7 Billion recapitalisation is a stakeholder in both AIB and BOI.

It has warrants for 25% of the enlarged share capital of both insitutions.

* This would consitute 334.7 Million shares of BOI at exercise price of 40 cent and

* Also roughly 330 Million shares of AIB at exercise price of 70 cent.

For every euro increase in the share price of the healty bank the Government stake will increase by roughly €650 Million.

So, for arguments sake. If a healthy AIB and BOI could return to profitabilty of around €1.2B for AIB and €1B for BOI then they would be providing EPS of 92 cent and 77 cent. Extrapolating this out and applying a price earnings of 10 to these good banks and dividend payout of 40% this would leave the government sitting on an investment of something along the likes of:

AIB 330 Miillion shares x €9.20 (share price) €3 Billion
BOI 330 Million shares x €7.70 (share price) €2.5 Billion
Combined value = €5.5 Billion
Initial cost of warrants = €364M

Profit on invesment for Government = €5.14 Billion

Annual ividends accruing to government

3.5B pref x 8% = €280 Million
330 Million Ordinary x 37 cent €122 Million

3.5B pref x 8% = €280 Million
330 Million Ordinary x 31 cent €102 Million

Annual cumulative dividends = €784 Million.

So assuming that the NAMA scheme runs for 10 years.
That would be a whopping €7.84B in dividends for the goverment.

All of this assumes that a healthy AIB and BOI can reach a combined profit on their healthy operations of €1.2B for AIB and €1B for BOI.

Total return on investment for government in this scenario is in the region of €13 Billion or 21% of a porftfolio of €60B to be transferred to both insitutions.

I also would like to add that the estimates for AIB and BOI profits are conservative in my opinion as both have varied income streams (both product range wise and geographically) and would be free from signifcant impairments. I could conceivably see AIB and BOI at double the share price i have used (€18 for Aib and €15 for BOI) and the net gain to the government from this happening would be €10.25 Billion on share price appreciation alone.

All-in-all not such a bad deal for the taxpayer if you ask me.

Thisis very much an overlooked point in my opinion and worth considering.
The government if already a stakeholder in AIB and BOI and further punitive dilution at low share prices could end in an RBS type situation where the goverment is already sitting on a significant loss in that insitution and has limited upside.

Something I can’t figure, and may be missing, in coverage of this plan is exactly why it’s so crucial that the banks start lending again. I mean, I’ve digested all this stuff about the necessity for credit for our industry to power sell its tremendous products abroad. But if 90% of our exports come from the FDI sector, presumably they do not depend on or particularly seek credit from our banks.

The firms that are depended on our banks for finance are (as we’re discovering to our cost) either property firms or mickey mouse service companies that don’t trade internationally. Hence, the idea that “We have strong companies with strong products and strong markets” only waiting for banks to start lending again to compete abroad is just wrong. If Irish banks start lending again, will they not be lending to much the same people? I honestly don’t see what this NAMA thing achieves, apart from transferring risk and losses from banks and developers to the taxpayer.

Am I mad, or is this whole ‘credit is the lifeblood of our economy’ not a load of gas? (Credit isn’t our lifeblood anyway. Its just us spending tomorrow’s income, which is presumably how we got into this mess.)

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