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Banking Crisis

IMF Report on NAMA and Nationalisation

One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.

Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances …  The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”

Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released.  It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later.  Naturally, however, I was drawn to page 19 of the report:

25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus  preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.

26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.

What do people think? A ringing endorsement of the government’s approach?

41 replies on “IMF Report on NAMA and Nationalisation”

I was particularily impressed by this one
“20. Estimates of losses being faced by banks vary but are likely to be sizeable. On a gross basis, staff’s review of available estimates and methodologies suggests that the losses faced by banks through the end of 2010 could be about €35 billion, or about 20 percent of GDP. The authorities did not formally produce any estimate for aggregate bank losses”

So : Finance either dont have or wont (cant ) tell the costs.
and this one

“24. The authorities took note of these considerations for their further deliberations on setting up NAMA. They agreed that piecemeal efforts could keep banks dependent on official support and unable to resume normal functioning. The Japanese experience is
particularly cautionary.”

…but theyre going ahead anyhow to Japanify the banks…

To be fair, the Irish Independent’s description seems reasonably accurate. The report is politely critical in spots but generally positive toward the government’s recent main policy thrusts. At the more detailed level there are criticisms.

I wish the report could have said more about government information openness and accountability. The IMF provides more information about the state of our financial system than the national government!

In terms of the 35 Euro billion losses (mentioned above by Brian Lucey; I also noticed it in the report) — what amount of that loss is likely to accrue to the taxpayer and what amount (the remainder( can be absorbed by bank equity capital (not including government share) and ongoing earnings over the time period?

The report makes a good point about the positive role played by the ECB in sustaining Ireland’s financial security during this vulnerable period.

Obviously its a “wonder report” in that no matter what views you hold you can selectively choose and quote a page or paragraph to bolster ones arguments/reasoning. I would think Government took solace and encouragement from the Executive views/comments as distinct to those of their Staff.

The big mystery is just why the government is so keen to give taxpayer money to bank shareholders. Every stockbroker in the world from Davy to J P Morgan now has, effectively, ‘Buy’ notes out on the Irish banks because the penny has dropped that this transfer to equity holders is now official policy. The stated reasons – contained in the IMF document and repeated as doctrine by government at every opportunity – are risible. And everybody knows this. My own theory is that the authorities have a basic strategy: once a policy is announced, that’s it. And when things are made up as you go along, or by Peter Bacon, it is not always the case that the policy is correct. Somebody advised the government that nationalisation is a bad idea. Sounded plausible. And instantly became policy.

If Gregory Connor thinks the IMF is goingto be publicly rude about Ireland he doesn’t understand how Article IV consultations work. Decoded, this document is as scathing of NAMA and the forthcoming mis-pricing of the bad assets as it is possible for the IMF to be.

Anybody got any ideas about why they want to give shareholders a freebe?

We mustnt forget that this is a political document at fifth and last. And its one that has been batted back and forth tween the two parties.
I still find it stunning that finance havent a clue or wont tell us what they think the losses are on the banks. And they have the temerity to chide people here when we make attempts at semi-educated informed guesses. Its part of Greg’s issue on transparency, I think.

Speaking of transparency, let me ask again: why are we the only country in Europe that I can see whose government does not allow the Concluding Statement of these Article IV missions to be published?

Kevin : do you REALLY think that a DoF or CBFSRAI official (AKA IMF Alternate Director) would step off the reservation and say things outside the comfort zone of the mothership?

@CJ
Im confused ; you correctly note that the report is lukewarm in the extreme on NAMA but then you say “he stated reasons – contained in the IMF document and repeated as doctrine by government at every opportunity – are risible.”
As far as I can see the IMF are really close to saying “nationalise”.

@Brian Lucey
Sorry for the confusion: when I say ‘contained in the document’ I am referring to the following:

‘The authorities prefer that banks stay partly in private ownership to provide
continued market pricing of their underlying assets. They disagreed with the staff’s view
that pricing of bad assets would be any easier under nationalization. They were also
concerned that nationalization may generate negative sentiment with implications for the
operational integrity of the banks.’

The IMF report, accurately, the government’s reasons for not nationalising. They clearly hold these views in contempt. Apologies if I implied they were the views of the IMF.

And yes, in Article IV-speak, the IMF is saying, why haven’t you nationalised already?

I see they make a point that has already been made on this website:

“Staff noted that losses are likely to extend beyond the property-development sector as the economy weakens and the design of NAMA should incorporate that possibility…Other asset classes could deteriorate as the economy continues to contract and unemployment rises. The sharp ongoing rise in troubled loans is a warning that this possibility needs to be seriously considered.”

For ‘likely’, read ‘almost certain’. It seems the authorities were receptive to the argument, which is interesting.

Regarding nationalisation : selective listening is the problem, not selective reading.
I suspect however that the banks may give back some of their recent bull run tomorrow….

Brian Lucey drew attention to para 20 from where this extract is taken;

..”On a gross basis, staff’s review of available estimates and methodologies suggests that the losses faced by banks through the end of 2010 could be about €35 billion, or about 20 percent of GDP.”

Is it known what were the sources of these estimates and what were the methodologies and were these compared with anything the government prepared for them ?.

The government doesn’t seen to have any estimate of the total losses in the banking sector. Either that or it doesn’t want to say what it is.

There were two major developments today in the fight to stave off nationalisation.

Firstly, the governments decision to extend the guarantee (long) beyond the original September 2010 deadline. The argument given was that the banks need to be able to access longer term money and this could only be achieved by extending the guarantee.

Secondly, the ECB released €442.2bn in a once-in-a-lifetime offer of unlimited one year funds. No figures available for the amount that ended up in Ireland, but I’m certain that our institutions didn’t pass on the chance for some extra liquidity.

But. The above moves are both aimed at solving a liquidity crisis, ie the crisis that existed last Autumn when the inter-bank markets shut down. The continuing crisis is a capitalisation one. Put simply, banks can raise capital by going to the markets to raise equity, or by retaining profits. Raising equity seems unlikely for the Irish Banks, and they need to make a profit to retain one.

So, the banks need to make a profit if they are to solve their capitalisation problems, but that seems far from likely in an economy that seems set for a 10% reduction this year.

Brain Lucey says Japanification.

Starting to seem like an understatement…

http://www.independent.ie/national-news/courts/pair-must-pay-8364165m-for-site-valued-at-836445m-1789143.html

Seems that some land must now be reduced to 30% of value at 2008 ……. if a buyer can be found. The current use is as agricultural land, say E 5,000 per acre, or less than 1% of what was adjudged. A 99% haircut is more than a trim!

The IMF are economically qualified but lack morality and clearly may be bought. Why should what they say and do not say be valued at all? We know who will be paying for policy like NaMa.

“thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.”

I would fear that a nationalised bank would take greater writedowns at a cost to the tax payer, if a bank is still privately owned they will try to get a certain price, if it is state owned they can sell at any level knowing that the state will then fill any void, real life case in point is Anglo.

If the state overpays temporarily then they can get that back by amortizing the cost, but if there is a debt due from a nationalised bank, even five years down the line it will not be privatized again because nobody will want to buy into that type of uncertainty, ‘what did the state pay for state owned assets’ (think back to a certain site that was going to have a prison situated on it), naturally we can have the typical state run IPO too (eircom). it’s early in the morning and i’m already depressed…

‘the period of price discovery longer’…. nice, so we have a drawn out affair too…. contrary to the idea of them being ‘temporarily placed in public ownership until private sector solutions can be developed’. in ireland that particular issue would be 10yrs in the making.

Just read the document… it is certainly not favourable to the government but because it’s written in IMF-speak most people will not be able to tell.

For instance, paragraph one opens/ends with:

1. “Ireland’s ongoing painful adjustment reflects the unwinding of critical internal imbalances…. Various commentators and the IMF in its Article IV consultations did warn that the seemingly-unstoppable growth masked serious imbalances, including the fragility of public finances.”

From the original IMF speak: “we told you so!”

The IMF has been tough on Ireland for almost 10 years now but it’s clear that their A/IV consultations have had absolutely little impact on the direction of policy whatsoever.

I am not in favour of nationalisation for administrative reasons (I don’t trust the banks to act fairly) and political reasons (I don’t trust the politicians to resist political pressure to stimulate lending; I don’t trust the public to believe the banks are acting fairly whether they actually do or not; I don’t trust the public to accept banks acting prudently).

With that said, Nationalisation must continue to be an option after NAMA is set up because (i) it may be necessary and (ii) the banks must fear it. For this reason, I am worried that the extension of the guarantees combined with an overly generous (i.e. small) haircut on bank assets could preclude the Government from pursuing Nationalisation down the line. If the Government has, as it claims, no ideological antipathy to Nationalisation then it should not tie its own hands into the future.

@Zhou
Why would a nationalised bank not “act fairly” ? In what regard?
Your other arguments seem to be “i dont like the cut of that jib”. But if it works….
Finally, if they have no opposition in principle to nationalisation they have a damned funny way of showing it.

Ireland is a small country. People have very close relationships with bank managers and politicians. I know somebody who canvassed for a former Minister but would never vote for them the Minister (at the time) would not attend a meeting with a friend’s bank manager to have loans restructured. We have a clientelist political system. TDs and Ministers would under huge pressure to be seen to pressurize banks which the state owns to lend. I have already heard this complaint in relation to Anglo from numerous people.

Secondly, even without politicians making representations, when there are very limited resources and your owner has unlimited wealth and your boss’s bonus and future career does not depend on it, there will be huge personal pressure on guys within the banks to lend.

Thirdly, the propensity of the entire Irish population to put every administrative decision down to cronyism or somebody having a contact on the inside would lead to an increase in the cynicism which already infects the national psyche like the corruption which begat it. We cannot afford social discord and unrest inthese difficult times. A national effort and sharing of the burden is required. Politicising the banks, where every worker blames the State for their owner not getting a loan, could be disastrous.

My understanding of Lenihan’s comments is that Nationalisation is not favoured on practical grounds. He has said that specifically in the Dail.

But Zhou : all of these issues are about ireland being a small country. Its nothing to do with the banks bein nationalise/namafied . If this was a problem Anglo would be flinging money out like snuff at a wake. As it is they are doing the exact opposite. So the limited empirical evidence is not supportive of your thesis either.

@Brian, I think you have highlighted one of the major problems with the decision making process re nationalisation/namafication of the banks. There is a serious lack of empirical evidence for most of what is being planned/suggested. Opinions and ideologies are the driving forces at work here and in this position it is he who shouts loudest or he who is best connected that is most likely to be listened to.

I fear that there is no one in government taking a longer term view on the effects of their actions. The law of unintended consequences will continue to work its magic, springing new crisis on the administration that will need new band-aid solutions that will lead to further unintended consequences.

In my opinion all government action is predicated on the idea that a recovery is coming, and when it does, everything will be alright. This is a very serious gamble to be taking. When you are gambling, surely it is better to reduce the uncontrolled elements of the risk as much as possible?

The best way to control the risks is to own the risks. ie, nationalise the banks, who are the risk (or at least the front line of the risk at the moment).

Yes, as zhou points out, there will be accusations of cronyism, but surely that is better than accusations of gross incompetence if the gamble they are currently taking doesn’t work out?

the IMF document doesn’t point to necessary nationalisation, and in fact it is largely in praise of the government action take so far.

What it does say again and again is that the public sector must be cut down to size and addressed, so perhaps that is the real elephant in the room.

@Brian Lucey the only banks lending at the moment are those that were helped by the taxpayer but left privatised so the taxpayer is benefiting from that course of action. Nationalised banks -as per your example – are actually NOT lending, which you accept. Would you like to see that across the board?

The foreign owned banks are charging margins of 300bips above the domestic banks and are only open for deposit business.

The point missed thus far is this: tax payer saved banks are in turn saving the tax payer, because if they were to cease extending credit (as have nationalised/foreign banks) we’d be in an even bigger mess.

@ Karl
I think, no, know, that your deliberatly misreading my point. My point on Anglo was in refutation to Zhou’s argument that you may have missed, ie that nationalised banks would lend politically.
As for the taxpayer benefiting ; thats a counterfactual. We will never know.
Finally – from December to April (latest figures) non-clearing foreign banks credit to irish resident non MFI non govt fell by 11%, while domestic non clearing was essentially unchanged and domestic clearing was up a fraction. So clearly they aint lending and they are not nationalised (well, some are….)

@brian lucey anglo can’t lend either politically or otherwise, they are skint.

Taxpayer benefit being counterfactual would imply there is factual evidence pointing to the contrary, what I can tell you based on the hard figures we have as a company, and also anecdotally, is that the only banks doing non-deposit business at a meaningful level are those that the taxpayer helped. If you have info to the contrary then let me know.

Karl, I disagree with your interpretation of the IMF report and bank nationalisation. My interpretation is that the IMF says setting up a single entity to manage toxic debt is a sound approach. This is only a small part of the solution. The important piece is how this debt is funded. And this is where the IMF disagrees with the government’s approach.

Your deduction that because Anglo has stopped lending, nationalised banks won’t lend is not valid. Would Anglo have made a loan if they had remained private? If anything, I would fear that nationalised banks would lend too much.

That the protected Irish banks haven’t increased their margins is more a measure of how bunched they are. If, as you advocate, the Irish taxpayer pays to make these banks strong, expect to see their margins increase. Temporary nationalisation removes this risk.

The reasons against nationalisation are the possible behavious of bank and people once nationalised. It is a bit hard to ask for people to provide empirical vidence of the outcomes. As Aristotle said we must not expect exactness where the subject does not allow it; rather we should expect the level of precision afforded by the evidence.

The law of unintended consequences appears to apply more to Nationlisation than to keeping the banks private imho. Another outcome (albeit contradictory) might be that bankers will be less likely to take moderate risks if nationalised on the basis that bad debts will not be tolerated whereas a private bank might reward prudent risk taking. A further factor might be the fact that bank employees at all levels hold bank shares and so will be more motivated to get the bank back on an even keel while the banks remain privately owned.

I don’t profess to know whether Nationalisation or NAMA only is the best approach. In fact, I suggest that it is simply unknowable. (On the other hand, I think FG’s good bank solution is unworkable.)

In any event, my original point was that there was the potential that if the valuations are too high and the guarantee is extended too much then the banks might become too healthy to nationalise. Whilst I may not be inclined towards nationalisation I accept that it may be necessary. From a motivational point of view, nationalisation must remain an option. I am worried that the bankers are slowly inching their “crown jewels” out from under the guillotine. I would prefer to keep them under the blade.

@Ahura Mazda:

Anglo don’t lend because they are broke, and by right they were so illiquid and insolvent that it should have been wound down (sensibly). I am in agreement with the idea of the NAMA.

Temporary nationalisation won’t remove margin risk, on that i feel you are factually wrong, foreign saved banks (BOS/UB/Halifax) are charging the most extraordinary rates – new BOS variable is 5.9%! With a privately held but non-nationalised bank you can apply pressure if margins get out of hand [and you could do this with a nationalised bank too, but the risk of keeping margins artificially low and causing future insolvency is perhaps greater if a bank is state owned].

I’m in favour of higher margins, but not ECB+5% etc. and i feel that temporary nationalisation would be a mess, a different section of the IMF report stated that a key area for the irish economy is a ‘safe exit from the government guarantee’… so tell me, how do you not have an ongoing government guarantee in a nationalised bank?

@Karl D

I think you’re running a few things together here and making some dodgy causal inferences. Yes BOSI are part of a banking group that was bailed out by Her Majesty’s Government (though not fully nationalised) and yes they are now charging very high standard variable rates to their Irish customers. However, that doesn’t mean that one of these developments caused the other.

My interpretation of this had been that BOSI (like other foreign banks) just want to get out of the Irish market now that the crash has arrived. Part of the plan to do this is to keep variable rates high to induce their customers to leave them by switching their mortgage to something else.

@Karl Deeter:

” Anglo don’t lend because they are broke ” good, something we agree on. No inference can be made from this that other banks, if nationalised, won’t lend.

” Temporary nationalisation won’t remove margin risk, on that i feel you are factually wrong ” No. The more control the government has over banks, the more they can dictate margins (not that this is a good thing). Because the Irish government has no control over foreign owned banks, these banks have been able to increase their margins. You seem to contradict yourself later in that paragraph.

I would agree with you regarding margins being to low.

HBOS certainly don’t give the impression that they want to their mortgage customers to remain loyal.

I need some help . The more property falls in value the bigger the bad debts that will be passed on to NAMA . From what I can gather through the media the ‘ haircut ‘ for the banks with Nama will be about 20 % . So Nama takes on these debts which is really bad property debts . So if they fall by say up to 80 % that leaves the taxpayer with 60 % loss on its dealings with NAMA and the banks . The banks walk away happy , the developers skip away delighted and the taxpayer has to cut childrens health care for the next 20 years .
How is this not very very expensive for us ? And will it not keep us in recession with the IMF hanging over us for years ?
Its not like we have tons of cash in government coffers .
Also are we not just pumping billions into Anglo because we have taken on 60 to 70 billion in deposits which I figure Anglo does not have sitting in its safe ? ( does Anglo even have a safe ? )
In short will we not be pumping billions into bad property debts and Anglo for years to come ? And why does everybody think that property will rebound in an upturn ? Is it not just finding its true value after a very big crash ?

I’m surprised that Media, Government and experts/commentators of all kinds are very light handed on their treatment of Property Developers. After all they were unsatiable in taking the rich cream during the boom (which they drove relentlessly). It may sound cruel , but I think there should be no hiding place for them or their debts—no “three cards tricks” like walking away through liquidating individual companies; there must be ongoing INDIVIDUAL accountability.

@Sean O’
I suspect that the IMF are using the results of previous busts to come up with a costing. See here http://www.bankofengland.co.uk/publications/fsr/2003/fsr15art6.pdf for more detail on what models and costs existed in past crises.

But I suspect that figures are on the low end of their medium estimate for the costs. Part of the horse-trading, I’m sure, is that the worst case estimate is not being published (like with the IMF having to withdraw their estimate for UK losses). My belief based on strictly Swedish figures for each loan category is that there will be 50 bn in unrecoverable losses. Unlike in Sweden, we are not going to be cushioned by a currency deflation (so reducing the nominal loss) or rising appetite for assets (since our bust is happening at the same time as everyone elses, not in isolation).

We were a day late having our salutary bubble, we will be a dollar short as a result.

@karl w

“BOSI are part of a banking group that was bailed out by Her Majesty’s Government (though not fully nationalised) and yes they are now charging very high standard variable rates to their Irish customers. However, that doesn’t mean that one of these developments caused the other”

timeline: RBOS saved by HM Treasury, margins start to rise in RBOS’s non-domestic markets (such as ireland). UK taxpayers would rightfully be frustrated with banks they are saving lending freely elsewhere during a credit contraction, credit has scarcity value and for that reason margins should rise on their own, I accept that.

“My interpretation of this had been that BOSI (like other foreign banks) just want to get out of the Irish market now that the crash has arrived. Part of the plan to do this is to keep variable rates high to induce their customers to leave them by switching their mortgage to something else.”

if this were the case they would want out of ALL markets, not just the Irish one, the UK crash is no model of bliss! And they would charge new customers in the UK c. 600 bip spreads, which they are not doing. So I am still convinced that the two incidents are linked, specifically along national lines

Karl, the provision of credit is not unlinked to the markets it is to be used in. BOSI is probably trying to source funding on its own regard (as opposed to funding through its parent). The Irish market is riskier and more illiquid than the UK market. This may explain the difference in spreads.

NAMA

I can hardly wait until we begin to read of the “anomalies” built in to NAMA legislation, or so interpreted.

Here’s are examples of several in the US TARP legislation.

Despite Diageo receiving benefits everywhere, I don’t see prices decreasing.

+++++++++++=

What an absurd side effect of rushed TARP legislation:

“In June 2008, U.S. Virgin Islands Governor John deJongh Jr. agreed to give London-based Diageo Plc billions of dollars in tax incentives to move its production of Captain Morgan rum from one U.S. island — Puerto Rico — to another, namely St. Croix.

DeJongh says he had no idea his deal would help make the world’s largest liquor distiller the most unlikely beneficiary of the emergency Troubled Asset Relief Program approved by Congress just four months later.

Today, as two 56-foot-high (17-meter-high) tanks for holding fermenting molasses will soon rise from the ground on the Caribbean island of St. Croix, the extent to which dozens of nonbank companies benefited from last October’s emergency financial rescue plan is just beginning to come to light.

The hurried legislation adopted by a Congress voting under the threat of sudden global economic collapse led to hidden tax breaks for firms in dozens of industries. They included builders of Nascar auto-racing tracks, restaurant chains such as Burger King Holdings Inc., movie and television producers — and London’s Diageo.

“It’s kind of like the magician’s sleight of hand,” says former House Ways and Means Committee Chairman William Thomas, a California Republican who ran the committee from 2001 to 2007 and oversaw all tax legislation. “They snuck these things in a bill that was focused on other things.”

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