IT Head to Head on NAMA Plan

Today’s Irish Times contains a head-to-head set of articles from me and Scott Rankin of Davy’s about the NAMA plan.

As is often the case, the articles are accompanied by a weirdly misleading headline—“Will NAMA aid the ailing banks?”.    I am listed in the “No” column because I don’t like the NAMA plan.  But my problem with this plan is not that it won’t “aid” the ailing banks.

The problem with the banks is under-capitalisation.  Of course, any plan that injects enough money can solve this problem by re-capitalising the banks.  The relevant question is how is this done and at what cost to the taxpayer—my concern is that this plan may “aid” bank shareholders considerably at the expense of taxpayers. More generally, I hope the Irish financial media will move on from their focus on “Will the plan work?” to examine the question of how it operates.

Scott Rankin’s final sentence is worth a short comment.  He writes:

One important point to understand is that if nationalisation is not an option, then the liability to the State from these assets does not necessarily diminish if a bigger haircut is agreed on transfer, that is, if it’s 35 per cent rather than 15 per cent. If Nama achieves a bigger haircut on day one (and hence saving for the taxpayer) this probably means more government capital required to recapitalise the banks.

This argument makes it sounds like the “haircut” (the discount over book value at which the state purchases the bad loans) simply doesn’t matter.  One way or another, we need to provide the funds to re-capitalise the banks.  But look carefully, folks, is it really the case that the composition of these funds doesn’t matter?

The bad loans will end up returning some concrete amount of money to the state and this amount will be completely independent of the haircut we apply now. The state gains nothing from reducing the haircut by a euro.  But it loses a euro of equity capital investment.

And contrary to Scott’s argument, this equity investment is not a “liability” for the state: It is an asset and can be cashed in for a return at a later date.  In calculating the long-run cost of this program for the taxpayer, the size of the haircut matters greatly.

10 thoughts on “IT Head to Head on NAMA Plan”

  1. Karl, As you say, overpaying for the assets will clearly entail a net cost for the taxpayer. To deal with this problem I suggested back in September. in the context Paulson’s original plan, giving the purchasing agency an equity warrant to compensate for any overpaying. (This idea was later independently proposed by Jeff Sachs).

    Now, however, there is so little value in Irish bank shares that such an approach has become infeasible. That is why I am now advocating underpayment for the assets to be compensated by giving risk capital providers some form of equity stake in NAMA’s portfolio.

  2. Regarding Patrick’s suggestion, the phrase ‘underpayment’ is maybe misleading. Rather, the proposed payment consists of two parts: a upfront payment which includes a risk discount, plus the equity-type stake in NAMA’s portfolio. Taken together, this deal is the ‘appropriate’ payment for the transfer of the loans.

  3. If we have the money.
    And for reasons connected to previous posts of mine, we should examine each “asset” and the bank records relating to it and the bank personnel who dealt with the “asset”.
    We will know what we are talking about only after months of examining the “assets”. If we do it properly. Remeber the DIRT enquiry? Something similar to that. There is no guarantee of that.
    Will it be done overnight? Then we will know that there are people who are so brazen that they believe that they can steal money from the taxpayer to benefit their cronies.

  4. Has anyone considered NAMA’s operating costs and structure. Securum (Sweden) had only 400 customers and 3000 loans to contend with from one bank. NAMA it appears will have thousands of customers and loans coming from at least six banking systems and their differing lending processes etc. The NTMA may have expertise and standing in its narrow files of sovereign treasury mangagement but what of expertise in operating what will become one half of a very large banking portfolio of active loans.

  5. @James

    The short answer to your question is Yes. The long answer is — As I said, look carefully. Do you really think taxpayers would be just as well off buying the assets for €90 billion?

  6. How much independence does Scott Rankin have in relation to his views on bank bailouts?

    Davys was 90% owned by Bank of Ireland until about 2 years ago when BoI facilitated a management buyout. Davys, Goodbody and NCB, the three largest stockbrokers who all have strong links to the banks, put forward a joint budget submission recently. Apart from the signal that such a coordinated move must send to the Competition Authority, the Irish Times should put a “health warning” on the such opinions: they are anything but impartial.

  7. @Karl Whelan
    You’ll have to set it out for me.

    Either way I think we will own €50B of loans and about 70% to 80% of the Irish banks. The write down will be so large that we could extinguish all equity but for political reasons we will stop at the level.

    What else is in it for the taxpayer?

  8. @ James

    I think Karl’s point would be (using your figures):

    option A): pay €50b for assets previously valued at €90b and recap the banks to tune of €40b – taxpayer owns the banks (hence the “upside”)

    option B): pay €90b for same assets – banks end up just as recapitalised as in A), but the private shareholders own the banks and the upside

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