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.