An Emerging Consensus on NAMA Overpayment?

One of the interesting aspects of the evolving public discussion about NAMA is that economists from the stockbroking community have become increasingly explicit about the fact that NAMA will overpay for its assets.  The latest example was the column in today’s Sunday Tribune by Oliver Gilvarry of Dolmen Stockbrokers.  He suggests that NAMA’s approach to pricing will be as follows:

The haircuts will be determined by what the banks can take without requiring large injections of capital.

Similar predictions have been made in other recent reports by Davys, JP Morgan and others.

In a way, it’s a relief for me to see the emergence of this widespread agreement that NAMA will most likely overpay (and perhaps substantially) for its assets. Throughout this process, I have noted that government statements about the post-NAMA ownership structure clearly pointed to a substantial overpayment for assets.  While this point has been contradicted on a number of occasions by various government spokesmen, it is good to see pro-NAMA economists such as Gilvarry be honest about this aspect of the plan.

What is less encouraging is the position of Gilvarry and other stockbroking economists that this overpayment is a good thing for the taxpayer.  Normally, paying too much for something will make you worse off.  In my opinion, the same reasoning still applies here.

Not surprisingly, Gilvarry’s arguments for why we are better off to overpay revolve around the evils of nationalisation.  Here I’d make two points.

First, if one accepts that some amount of private ownership is required for the banks, why does this private ownership have to take the form of the current providers of equity capital?  Equity is the principal form of risk capital and when losses are made, the providers of this capital should be the first stakeholders to take the hit. 

How about the following for a process that leaves us with some private ownership of the banks? Set up a Special Resolution Regime following the UK model, announce steep but fair discounts for NAMA purchases, those banks that are then insolvent are put into administration under SRR rules, then the holders of subordinated debt can be offered a debt for equity swap.  This maintains a private equity element in ownership but avoids the state overpaying for assets.

Second, Gilvarry’s arguments against nationalisation are different from, but not much better than, Peter Bacon’s series of arguments.  He argues told that bond investors:

Would take a negative view of the nationalisation of the banking system and taking on all of the liabilities onto the state’s balance sheet. Defaulting on any of the debt covered under the guarantee  would be seen by investors as a government default and they would shun issuances by the state.

I’m pretty sure, however, that most opponents of nationalisation would view a default on any of the debt covered under the guarantee to be a disaster even if the banks weren’t nationalised.  Since those in favour of NAMA want to see the banks able to pay off all these liabilities and have a substantial capital buffer, the NAMA overpayment will have to be sufficient to make assets cover all the banks debts and more.  So, even though it would be indirect, the overpayment-via-NAMA would still see taxpayer funds being provided to ensure repayment of these liabilities.  But NAMA will also involve providing additional funds handed over to the current equity holders.

The bottom line here is that the public should be very wary of arguments that the taxpayer will ultimately benefit from overpaying for underperforming bank loans.

13 thoughts on “An Emerging Consensus on NAMA Overpayment?”

  1. I find it entirely predictable that economists employed by the main stockbroking firms what NAMA to overpay for assets i.e. want the taxpayer to bail out the banks and their shareholders. After all. who sold those bank shares to small investors as “money in the bank”?

    Will we ever learn the full story of Goodbody’s dealings in AIB shares?
    http://www.rte.ie/business/2009/0521/aib.html

  2. What is appalling is the disconnect between apparent economic consensus, as on this site, and the attitude of the government, having bought all of the services of Mr Bacon, they seem to think they can plough ahead, wasting public money for some poorly explained, but probably still secret, purpose.

    Where is the accountability?
    I note Mr Bruton’s article of today,rebuking the government’s plan and the tireless work of Brian Lucey, in another article today, explaining why it appears a scandal that we pay with our childrens’ future for faulty commercial decisions by well connected bankers.

    We are socialising the losses of the rich while not taxing their profits. There will be an inevitable backlash. I await that day.

  3. After NAMA was announced, Brian Lenihan said that the Government is not opposed to Nationalisation on grounds of principle and that he has demonstrated this by announcing that the Govt will take ordinary shares when injecting equity and that existing preference shares may be converted to ordinary shares. I hope he sticks to his guns on this.

    Overpaying for the assets is a direct subsidy to the banking classes. It pumps more money into the banks for employee remunaration and for shareholder dividends. At least if we own the shares the taxpayer can get the value ofthose shares back rather than it going to board members, stock brokers and shareholders.

    Ultimately, I think the Government will be guided by international best practice as it evolves and by the EU Commission and ECB. As has already been pointed out on this site, the asset valuation debate is an international debate rather than a national debate. As long as our credibility and credit-worthiness hangs in the balance, the Department of Finance will be determined to stay away from the bleeding edge of banking innovation insofar as possible. Commentators from Goodbodys and elsewhere should find outthat they have less influence than they hoped for.

  4. Economic consesus as reported in the media is corporate economic consensus. Independent economic consensus is something completely different.
    As Lefournier puts little more PC than myself ‘What do you expect from a donkey, only a kick’

  5. Just off Newtalk, talking on Anglo, with Oliver G also on the line. Interestingly, Oliver and I are ad idem that Anglo needs to be wound down, disagreeing only on timing and the consequent need for a capital injection

  6. ECB may provide sufficient constructive ambiguity in addressing the asset valuation issue – Nama will probably overpay hiding an implicit subsidy that won’t dampen a sovereign credit rating. By the time the dust has settled we shall be living in another time and place with differing issues. When the final bill is estimated, old heads, wiser, greyer and balder will recall jousts in the media and rue the cost.

  7. Machholz Comment
    This is exactly the type of tripe I was talking about on a previous article .These people are engaged in the hard sell of the concept of NAMA remember !

    There is a lot riding on this new state run Toxic Bank.
    A lot of people are hoping to make big bucks out of this entity.
    It is going to make all the previous tribunals the state has ever had look like a picnic
    All of the new directors will be appointed by the state so jobs for the boys at a massive scale
    I suspect that NAMA will need 4000 to 5000 staff and they won’t be paid peanuts neither!
    We are going to end up having so called financial experts come from all over the place and these are the self same Gob***** that probably have being thrown out of their last jobs as a result of their incompetence
    The Irish financial institutions will be looking after their own no need to worry about that!
    We the people are going to get screwed and that is a fact!
    Help stop this monstrous betrayal and take action get organized now.

  8. Surely the taxpayer is going to get screwed either way. If the banks are nationalized via NAMA ( government equity stakes over 50% in the banks) this requires government cash put into the banks – supported by taxpayer. If things go well the taxpayer may get their money back on the share price rise and payments over time. If things go badly , they lose.

    If the NAMA route does not lead to bank ownership in equity percentage, i.e a smaller haircut, then less money goes to the banks and more risk covering the toxic loans.

    If NAMA is dumped and nationalization as per Anglo goes ahead, taxpayer is hit with the bank debts, then we have trouble funding sovereign debt, IMF may grab us by the balls, drops in ratings etc..

    So do you want to be screwed by the devil you know or the devil you know or the devil you don’t.

  9. The Irish economy needs to be reflated, but the politicians will say that they do not have the euros to do this because the Irish government has been so extravagant and retrenchment is needed. Ireland under these circumstances will have to ditch the euro and return to its own currency. Any devaluation will have to be regarded as achieving balance of trade equilibrium.

Comments are closed.