Month: April 2009

Scope of NAMA

Much has been written about the pricing of the NAMA loan purchases and the consequences for shareholders (including by myself in tomorrow’s Sunday Business Post), but less on the scale and scope of the proposed purchases.

The announced plan is that

“The eligible land and development loans of each bank involved will be transferred – that is the eligible loans secured on development land and property under development. In addition, the largest property-backed exposures of all the banks in the scheme will be transferred.”

Ignoring, for a moment the undefined word “eligible” — which allows an attractive degree of flexibility — what about the two other distinctive features of this proposed scope of purchase:

First, it is not limited to non-performing or impaired or problem loans. Second, it excludes a large swathe of property-related and other loans, including problem loans.

Inclusion of performing loans
I can see that it is an attractive simplification for NAMA’s management to sweep in all of a clearly-defined category of loans, not least because that way you are sure of covering even those loans that have not gone bad yet.

I am less impressed by the argument that including performing loans is good for the taxpayer because they will be serviced. The inclusion of performing loans increases the gross scale of the NAMA operation, and with it the size of the National Debt. It may also, I suppose, complicate the operation inasmuch as both the banks and their non-delinquent borrowers may be very unhappy to be separated.

Exclusion of non-development-property loans
If the goal is to end up with unquestionably clean bank portfolio, should one not also be considering inclusion of other non-performing loans, given the deterioration in the overall economic prospects?

At this stage, I am not sure what to conclude, except that the scope of the purchased assets is an important issue. Clearly, that word “eligible” could come in very handy as the scheme moves towards statutory definition.

Meanwhile, another question worth considering is whether NAMA needs to wait until it has identified all of the loans to be purchased. Here the answer seems clear: best to go ahead with an initial purchase of the most problematic loans as soon as the agency is up and running (assuming, of course, all of the pricing & financial restructuring,  governance and transparency issues also sorted).

Arguments Against Nationalisation, Part 2: Baconian Equivalence

Probably the most common argument I have heard from influential Irish commentators when they argue against nationalisation is to quickly dismiss it on the grounds that it simply does not help in “solving the problem” or reducing the cost of the banking crisis for the taxpayer.  Yesterday’s Irish Times article by Scott Rankin provides one example of this argument.  Let me provide three other examples.  Here are two examples from Prime Time on March 19.

Continue reading “Arguments Against Nationalisation, Part 2: Baconian Equivalence”

Arguments Against Nationalisation, Part 1: Politicisation of the Banks

Let’s start with what I see as the single best argument against nationalisation. The vast majority of economists get very worried when public ownership of banks is brought up because, as Frank Barry discussed yesterday, nationalised banks are particularly likely to be subject to abuse by politicians and their crony capitalist mates.

Continue reading “Arguments Against Nationalisation, Part 1: Politicisation of the Banks”

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.

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.