26 replies on “Alan Ahearne Makes the Case for NAMA”
Alan Ahearne: “Decisions about which development projects are viable and which are not should be made in the taxpayers’ interest, not in the interests of developers and bankers. After all, additional funds will be required to bring viable development projects to completion.”
Am I correct in thinking that this is a radical ideological statement?
This is a clear and useful article by Alan. He is exactly right that the media are focusing too much on legal issues and other distractions being raised by various interest groups. The fact is that AMCs have indeed been used as part of the resolution strategy in many banking crises around the world — some succcessfully, some not.
Alan articulates well the case for the benefits of an AMC — I’m sure the government would have far preferred Mr. Somers to have made these points the basis for his answers last week!
Still, an op-ed can only address so much. And Alan’s article does not address what are more important outstanding issues:
1. Pricing: How are the assets to be priced? And since this hasn’t been answered, why is the government so sure that the losses crystallized in this process will be small enough that the equity capital required from government will not result in nationalisation. The fact that most previous AMCs involved banks that had already been nationalised or liquidated makes this issue much more important here than in previous examples.
2. Economies of Scale: Alan’s right that some AMCs are too small. But is NAMA too big? It is unprecented in terms of the scale of the assets relative to total banking system assets. Somers’s proposal to deal with the assets in a decentralised manner within the banks seems to undermine Alan’s point about centralising specialist expertise.
Pretty average article by Alan A in my opinion. I wonder if he actually really thinks that this NAMA plan will work. I am not convinced.
@Karl
“why is the government so sure that the losses crystallized in this process will be small enough that the equity capital required from government will not result in nationalisation”
a) they have that old chestnut we love, perfect foresight OR
b) they have crunched the numbers (or got, oh, PWC to do it….) and know OR
c) they have made a decision that, come hell or high water they will not nationalise/ take nationalisation level stakes in the banks.
I should note that in case c above this implies wilful overpayment will be required.
@Karl W & Brian L
you can’t over pay or the taxpayer loses out, you can’t underpay or the bank will not be willing to sell. The assets, quite simply have to be priced the same as any marketable object is priced, where the buyer and seller meet at some common ground, profit is not implied so getting what is ‘fair’ is not totally unlikely, expecting automatic haircuts or overpayments is.
The real downside thus far is time, it keeps moving whereas progress doesn’t, getting NAMA operational is vital if it is to work, in fact, any plan, no matter what is agreed upon needs to get up and running sooner rather than later if it is to have any positive effect.
@ Karl : the taxpayer loses out and the banks share/bond holders gain if you overpay. Its a political calculus.
I agree time is of the essence. Im sure that when NAMA falls flat, as I suspect it will, I and others who are probably the “huffing and puffing commentators” will be blamed.
However, the moral of the three little swineflu vectors is to do things right, first time. If anyboy thinks that NAMA has been carefully constructed, im all ears.
Whether NAMA is theoretically a good or bad idea is irrelevant, in my opinion. The very fact that it is the policy of Fianna Fail means that it is already doomed to failure.
Daithí,
Thats my concern. Not that a FF plan is inherently bad but that we are only shadow boxing until the general election is called june-july.
Unfortunately the timing of a bank/economy bailout is secondary to the need to ensure FF can retain as much of their voter base as possible.
We are therefore condemned to another two months or so of inaction
I find this quote from Alan Aherne’s piece puzzling:
“Decisions about which development projects are viable and which are not should be made in the taxpayers’ interest, not in the interests of developers and bankers. After all, additional funds will be required to bring viable development projects to completion. ”
Is Alan saying viability projects need to be completed prior to asset transfer? Will unviable loans be purchased at a discount to agri land? I guess he must as without this information the “but so long as the valuation of loans is roughly correct” can’t happen.
He correctly identifies the difference between the nature of German and Irish bank’s toxic assets. But I don’t agree with what he infers from this. It does not mean that nothing would happen for twenty years. If you were to adopt the German plan to Ireland, I’d suggest the creation of an NPL-type structure for each bank. Operating terms and trustees would be used to ensure appropriate functioning.
With regards to Japan, they didn’t have a NAMA. It’s not reasonable to deduce such a different outcome on something that didn’t happen. And, maybe, he should also consider that our bubble burst 2years ago.
In addition, I find that Alan Aherne waves away one of the most crucial elements of this proposal:
‘These bonds will add to the gross stock of public debt, but so long as the valuation of loans is roughly correct, there will be no change in net public debt. Nama’s assets and liabilities will roughly match.’
That is a major assumption to make, and one which is very doubtful to occur. If we find that the assets we have just purchased are overvalued, then we will find our balance sheet in even bigger trouble than it is already. Of course, it would help a great deal if someone would tell us just how we will be valuing these loans…
@Daithi
the only way that they can “roughly” match is if , at a very first approximation, the yield on NAMA assets is the same as the cost of borrowing for same. Im doing the figures right now and hope to have something for the weekend reader….
@ Brian
In preparing your piece it might be worth considering the underlying meaning of a sentence in Simon Carswell’s piece on page 20 of the IT today ” the ECB had set guidelines for valuing impaired assets on an “economic value” over time rather than at distressed prices and that this had guided the bank’s view”
Quick lclarification
The above statement was attributed to the head of a capital markets division so it may have nothing to do with NAMA but may relate to other assets (debt securities?)
@Joe
Mark to myth eh, mark to market having given us all such indigestion.
@Joe
And of course, like any good analyst I do have a nice spreadsheet with loads of excel colourdy cells for inputs, outputs and shakeitallaboutputs, so any scenario we like can be analysed.
If the banks were forced to sell the assets and current market values of the assets were paid then we would not need NAMA. NAMA is the tax payer paying more for the assets than they are currently worth.
People seem to be forgetting this.
Therefore Alan Aherns comment “Decisions about which development projects are viable and which are not should be made in the taxpayers’ interest, not in the interests of developers and bankers.” is complete emotive rubbish that will not have a hope in hell to standing up to what will actually happen (almost by definition).
Dave Mc williams says property values need to halve from current levels.
Roubini sees a very real danger of a second US economic dip in 2010 due to several factors, so any overpaying over market value seems to just put the tax payer grossly overpaying current prices in a falling property market.
All the talk of making long term gains for the tax payer seems very long term or far fetched.
All the talk of making sure we dont pay to much for the assets is disingenious.
This is quite simply socialism for rich powerful elites and generational poverty (as earnest and young predicted today) for the rest of us
add
The only way out of this mess I see is by using our Kerry cute hoorism.
Set up one national lender through an post or Anglo to keep domestic businesses ticking over and Let the banks zombify till the day after the gurantee is over and then let the private institutions fail and allow international credit institutions take the hit instead of us, then we live with the consiquences.
It’s disappointing that, rather than addressing specific criticisms of the Government’s proposals, Alan Ahearne confined himself to defending the concept of an toxic asset management solution, which everyone accepts has worked elsewhere but in different circumstances.
He does not throw any further light on the fundamental question: the level of discount that will be applied to the loans. But here are some other questions which are raised in a Department of Finance FAQ: I have summarised the very vague FAQ answers in my blog. Alan Ahearn does not advance our understanding. For example, he doesn’t explain:
What will happen if the banks or the borrowers who have performing loans do not want their loans to be transferred?
Will Anglo be able to participate in this scheme?
Will the Government need to put more capital into banks, and on what conditions?
How much will this cost the tax payers (even in an optimistic scenario)?
How will this affect our international credit rating, especially in light of the deficits we are going to run in the coming years?
I suspect they’re trying to put a high floor on property prices to protect values at our expense, clearly not in the taxpayers interest, agree with Eamonn Moran above.
Overpayment for assets could constitute prohibited state aid falling foul of the Commission. The Commission are watching us like hawks. Accordingly, it is highly unlikely there will be any “wilful overpayment”.
@Lefournier : agreed, its a fairly bland article in parts but overall well balanced.
My take on your questions:
What will happen if the banks or the borrowers who have performing loans do not want their loans to be transferred?
tough.
Will Anglo be able to participate in this scheme?
yep
Will the Government need to put more capital into banks, and on what conditions?
yep, and under any conditions that leaves 1% or more free float on the market.
How much will this cost the tax payers (even in an optimistic scenario)?
Sunday Times this sunday some estimates, if they run with it.
How will this affect our international credit rating, especially in light of the deficits we are going to run in the coming years?
sure 60b bonds is a thing of nothing….:)
@Brian,
Many thanks for your answers – I only wish the Department of Finance could be so forthcoming!
I think the performing loans issue might be a real obstacle if the developers go to the courts and rely on their constitutional rights. The legislation will have to be carefully drawn because it will amount to confiscation of private property (even a debtor has rights!). It could tie NAMA up for a year at least and time is of the essence here.
I’ll break with principle and buy Rupert Murdoch’s rag on Sunday if they have figures!
@Lefournier
I think the problem will not be the assignation of a lien on performing assets but the reputational damage that “good” developers will sustain if they are lumped in with “bad” or “ugly” developers. Feel free to email me if you want hte underlying spreadsheet btw..
The developers get their AMC’s and the NAMA get their own. A war breaks out about who is right and who is wrong. Arguments abound about who’s AMC’s are the most highly qualified and “expert” to adduce the correct values of ever falling toxic and non toxic assets, in a credit market which is completely stagnant.
Tell me about all these toxic assets that nobody wants that are suddenly going to be transformed by NAMA into valuable commodities and jobs! The pension funds and investors on the side-lines waiting to “mop up” these toxic assets will only make sure that a second generation of capital remains buried in property assets which they again ‘hope” will appreciate in the future. In other words, a replay of the same strategy as got us into the mess we are in.
NAMA and AMC’s arguments will lead to high court actions, judicial review proceedings, Supreme Court appeals. Some of which may give rise to rulings from the supreme court itself for constitutional referenda.
Then there are the European courts. Mr. Somers referred to all of this as a “bonanza”. During the years of the legal and accounting bonanza who will supply credit to businesses? Nobody!
We need the establishment of a “good bank” system immediately to run in parallel with the contaminated ones we currently. Why is this not happening? In my view, it is because the government, for some reason, do not want it to happen! We need banks, that will lend money to SME’s, entrepreneurs and the viable businesses that employ tens of thousands of people up and down this country. If we wait for Lenihans NAMA back of the envelope, we paid Merill Lynch 5 million to tell us… and guess what they told us…. approach this country will not survive!
26 replies on “Alan Ahearne Makes the Case for NAMA”
Alan Ahearne: “Decisions about which development projects are viable and which are not should be made in the taxpayers’ interest, not in the interests of developers and bankers. After all, additional funds will be required to bring viable development projects to completion.”
Am I correct in thinking that this is a radical ideological statement?
This is a clear and useful article by Alan. He is exactly right that the media are focusing too much on legal issues and other distractions being raised by various interest groups. The fact is that AMCs have indeed been used as part of the resolution strategy in many banking crises around the world — some succcessfully, some not.
Alan articulates well the case for the benefits of an AMC — I’m sure the government would have far preferred Mr. Somers to have made these points the basis for his answers last week!
Still, an op-ed can only address so much. And Alan’s article does not address what are more important outstanding issues:
1. Pricing: How are the assets to be priced? And since this hasn’t been answered, why is the government so sure that the losses crystallized in this process will be small enough that the equity capital required from government will not result in nationalisation. The fact that most previous AMCs involved banks that had already been nationalised or liquidated makes this issue much more important here than in previous examples.
2. Economies of Scale: Alan’s right that some AMCs are too small. But is NAMA too big? It is unprecented in terms of the scale of the assets relative to total banking system assets. Somers’s proposal to deal with the assets in a decentralised manner within the banks seems to undermine Alan’s point about centralising specialist expertise.
Also, there are examples of resolutions that don’t involve AMCs. I compared the two approaches here
http://www.irisheconomy.ie/index.php/2009/05/10/do-we-really-need-a-nama/
Pretty average article by Alan A in my opinion. I wonder if he actually really thinks that this NAMA plan will work. I am not convinced.
@Karl
“why is the government so sure that the losses crystallized in this process will be small enough that the equity capital required from government will not result in nationalisation”
a) they have that old chestnut we love, perfect foresight OR
b) they have crunched the numbers (or got, oh, PWC to do it….) and know OR
c) they have made a decision that, come hell or high water they will not nationalise/ take nationalisation level stakes in the banks.
I should note that in case c above this implies wilful overpayment will be required.
@Karl W & Brian L
you can’t over pay or the taxpayer loses out, you can’t underpay or the bank will not be willing to sell. The assets, quite simply have to be priced the same as any marketable object is priced, where the buyer and seller meet at some common ground, profit is not implied so getting what is ‘fair’ is not totally unlikely, expecting automatic haircuts or overpayments is.
The real downside thus far is time, it keeps moving whereas progress doesn’t, getting NAMA operational is vital if it is to work, in fact, any plan, no matter what is agreed upon needs to get up and running sooner rather than later if it is to have any positive effect.
@ Karl : the taxpayer loses out and the banks share/bond holders gain if you overpay. Its a political calculus.
I agree time is of the essence. Im sure that when NAMA falls flat, as I suspect it will, I and others who are probably the “huffing and puffing commentators” will be blamed.
However, the moral of the three little swineflu vectors is to do things right, first time. If anyboy thinks that NAMA has been carefully constructed, im all ears.
Whether NAMA is theoretically a good or bad idea is irrelevant, in my opinion. The very fact that it is the policy of Fianna Fail means that it is already doomed to failure.
Daithí,
Thats my concern. Not that a FF plan is inherently bad but that we are only shadow boxing until the general election is called june-july.
Unfortunately the timing of a bank/economy bailout is secondary to the need to ensure FF can retain as much of their voter base as possible.
We are therefore condemned to another two months or so of inaction
I find this quote from Alan Aherne’s piece puzzling:
“Decisions about which development projects are viable and which are not should be made in the taxpayers’ interest, not in the interests of developers and bankers. After all, additional funds will be required to bring viable development projects to completion. ”
Is Alan saying viability projects need to be completed prior to asset transfer? Will unviable loans be purchased at a discount to agri land? I guess he must as without this information the “but so long as the valuation of loans is roughly correct” can’t happen.
He correctly identifies the difference between the nature of German and Irish bank’s toxic assets. But I don’t agree with what he infers from this. It does not mean that nothing would happen for twenty years. If you were to adopt the German plan to Ireland, I’d suggest the creation of an NPL-type structure for each bank. Operating terms and trustees would be used to ensure appropriate functioning.
With regards to Japan, they didn’t have a NAMA. It’s not reasonable to deduce such a different outcome on something that didn’t happen. And, maybe, he should also consider that our bubble burst 2years ago.
In addition, I find that Alan Aherne waves away one of the most crucial elements of this proposal:
‘These bonds will add to the gross stock of public debt, but so long as the valuation of loans is roughly correct, there will be no change in net public debt. Nama’s assets and liabilities will roughly match.’
That is a major assumption to make, and one which is very doubtful to occur. If we find that the assets we have just purchased are overvalued, then we will find our balance sheet in even bigger trouble than it is already. Of course, it would help a great deal if someone would tell us just how we will be valuing these loans…
@Daithi
the only way that they can “roughly” match is if , at a very first approximation, the yield on NAMA assets is the same as the cost of borrowing for same. Im doing the figures right now and hope to have something for the weekend reader….
@ Brian
In preparing your piece it might be worth considering the underlying meaning of a sentence in Simon Carswell’s piece on page 20 of the IT today ” the ECB had set guidelines for valuing impaired assets on an “economic value” over time rather than at distressed prices and that this had guided the bank’s view”
Quick lclarification
The above statement was attributed to the head of a capital markets division so it may have nothing to do with NAMA but may relate to other assets (debt securities?)
@Joe
Mark to myth eh, mark to market having given us all such indigestion.
@Joe
And of course, like any good analyst I do have a nice spreadsheet with loads of excel colourdy cells for inputs, outputs and shakeitallaboutputs, so any scenario we like can be analysed.
If the banks were forced to sell the assets and current market values of the assets were paid then we would not need NAMA. NAMA is the tax payer paying more for the assets than they are currently worth.
People seem to be forgetting this.
Therefore Alan Aherns comment “Decisions about which development projects are viable and which are not should be made in the taxpayers’ interest, not in the interests of developers and bankers.” is complete emotive rubbish that will not have a hope in hell to standing up to what will actually happen (almost by definition).
Dave Mc williams says property values need to halve from current levels.
Roubini sees a very real danger of a second US economic dip in 2010 due to several factors, so any overpaying over market value seems to just put the tax payer grossly overpaying current prices in a falling property market.
All the talk of making long term gains for the tax payer seems very long term or far fetched.
All the talk of making sure we dont pay to much for the assets is disingenious.
This is quite simply socialism for rich powerful elites and generational poverty (as earnest and young predicted today) for the rest of us
add
The only way out of this mess I see is by using our Kerry cute hoorism.
Set up one national lender through an post or Anglo to keep domestic businesses ticking over and Let the banks zombify till the day after the gurantee is over and then let the private institutions fail and allow international credit institutions take the hit instead of us, then we live with the consiquences.
It’s disappointing that, rather than addressing specific criticisms of the Government’s proposals, Alan Ahearne confined himself to defending the concept of an toxic asset management solution, which everyone accepts has worked elsewhere but in different circumstances.
He does not throw any further light on the fundamental question: the level of discount that will be applied to the loans. But here are some other questions which are raised in a Department of Finance FAQ: I have summarised the very vague FAQ answers in my blog. Alan Ahearn does not advance our understanding. For example, he doesn’t explain:
What will happen if the banks or the borrowers who have performing loans do not want their loans to be transferred?
Will Anglo be able to participate in this scheme?
Will the Government need to put more capital into banks, and on what conditions?
How much will this cost the tax payers (even in an optimistic scenario)?
How will this affect our international credit rating, especially in light of the deficits we are going to run in the coming years?
I suspect they’re trying to put a high floor on property prices to protect values at our expense, clearly not in the taxpayers interest, agree with Eamonn Moran above.
Overpayment for assets could constitute prohibited state aid falling foul of the Commission. The Commission are watching us like hawks. Accordingly, it is highly unlikely there will be any “wilful overpayment”.
@Lefournier : agreed, its a fairly bland article in parts but overall well balanced.
My take on your questions:
What will happen if the banks or the borrowers who have performing loans do not want their loans to be transferred?
tough.
Will Anglo be able to participate in this scheme?
yep
Will the Government need to put more capital into banks, and on what conditions?
yep, and under any conditions that leaves 1% or more free float on the market.
How much will this cost the tax payers (even in an optimistic scenario)?
Sunday Times this sunday some estimates, if they run with it.
How will this affect our international credit rating, especially in light of the deficits we are going to run in the coming years?
sure 60b bonds is a thing of nothing….:)
@Brian,
Many thanks for your answers – I only wish the Department of Finance could be so forthcoming!
I think the performing loans issue might be a real obstacle if the developers go to the courts and rely on their constitutional rights. The legislation will have to be carefully drawn because it will amount to confiscation of private property (even a debtor has rights!). It could tie NAMA up for a year at least and time is of the essence here.
I’ll break with principle and buy Rupert Murdoch’s rag on Sunday if they have figures!
@Lefournier
I think the problem will not be the assignation of a lien on performing assets but the reputational damage that “good” developers will sustain if they are lumped in with “bad” or “ugly” developers. Feel free to email me if you want hte underlying spreadsheet btw..
The developers get their AMC’s and the NAMA get their own. A war breaks out about who is right and who is wrong. Arguments abound about who’s AMC’s are the most highly qualified and “expert” to adduce the correct values of ever falling toxic and non toxic assets, in a credit market which is completely stagnant.
Tell me about all these toxic assets that nobody wants that are suddenly going to be transformed by NAMA into valuable commodities and jobs! The pension funds and investors on the side-lines waiting to “mop up” these toxic assets will only make sure that a second generation of capital remains buried in property assets which they again ‘hope” will appreciate in the future. In other words, a replay of the same strategy as got us into the mess we are in.
NAMA and AMC’s arguments will lead to high court actions, judicial review proceedings, Supreme Court appeals. Some of which may give rise to rulings from the supreme court itself for constitutional referenda.
Then there are the European courts. Mr. Somers referred to all of this as a “bonanza”. During the years of the legal and accounting bonanza who will supply credit to businesses? Nobody!
We need the establishment of a “good bank” system immediately to run in parallel with the contaminated ones we currently. Why is this not happening? In my view, it is because the government, for some reason, do not want it to happen! We need banks, that will lend money to SME’s, entrepreneurs and the viable businesses that employ tens of thousands of people up and down this country. If we wait for Lenihans NAMA back of the envelope, we paid Merill Lynch 5 million to tell us… and guess what they told us…. approach this country will not survive!
imf seem to think ‘something like nama’ is the answer
http://www.independent.ie/business/irish/let-banks-recoup-some-losses-imf-top-expert-tells-nama-1749766.html