“If NAMA purchased the banks loans at a steep discount shareholder equity would be completely absorbed.
As karl w says they could be given some form of upside in NAMA
possibly in the form of shares.

The next stage of the bank restructuring would be to force the bank bondholder to exchange some debt for equity. This would would have two big advantages. Firstly it would go a long way to recapitalizing the banks. Secondly, and this is crucial to many such as karl d, it would mean the banks still have a significant private stake. ”

From what I have read this seems to be the most sensible solution, at the end of the day both NAMA and nationalisation result in the tax payer taking the full brunt of the bailouts, whereas with this solution both the bondholder and the tax payer get screwed!

Is it true that the bondholders can’t be touched until the guarantee scheme is up??

If only things were as simple as you make out. In a distressed market, the value of the assets will be less than the market with the result that the shareholders claim on the equity is wiped out. But if you as the government exercise your power to acquire these assets at a distressed or current market valuation, I will head to the High Court, armed with my discounted cash flow models to show try to establish that you are “stealing” my assets and infringing my constitutional right. If you subsequently dispose of these assets at a higher value than you bought them at, is not my case proven.

So if you nationalise the banks, wipe me out by paying a distressed price,I could hold you up in court for years and prevent you from restructuring the loan book on the basis that you can’t retructure what you don’t own.

I agree that the Courts must accept the constitutionality of the measures. However, I don’t think there is anything to fear from this the State is willing to compensate shareholders fairly (which may be not at all) and is willing to pay fair prices for the assets. The Courts can only decide between methods of valuations and will not decide the values themselves. The only cost risk I see would be possible entitlement of the shareholders to interest on the compensation at a high rate. Such a cost risk is miniscule to the risk which may be incurred by allowing the valuations to become a matter of debate and dispute now or at the time of transfer.

Any judicial compensation process and / or new legislation on this issue will still have to respect constitutional property rights.

I wish I could be as confident as you that conservative Irish judges, with a history of fiercely defending private property against the “common weal”, won’t side with shareholders against the taxpayer/Government on this issue. I think we can at least agree that there will remain a degree of uncertainty regarding the ultimate cost of nationalisation.

But to be fair to the arguments presented by yourselves and karl, any court-determined over-payment for nationalisation will at least be more obvious to the general public than subsidised recapitalisation by stealth under NAMA.

Andrew

“Does not the valuation of shares on nationalisation ultimately hinge on the value of assets, including the distressed assets (given that the liabilities of a bank are relatively clear)?”

Not necessarily. The value of shares may be wildly different to the valuation of the underlying assets. Shares are shares in a business. The valuation would most likely be ascertained after the banks were re-floated and taking account of the fact that the banks required recapitalisation. If recapitalisation (and consequent dilution of shareholders’ holdings) happens before nationalisation then it makes it all the simpler. My (very simplistic) view is that if (i) a bank were nationalised for €8bn and this gave the State 80% ownership and (ii) the bank was later nationalised and (iii) the bank was recapped by a further €10bn and (iii) the bank was later re-privatised for €5bn then the shareholders would be due 10% of that ((€8bn+€10bn):€2bn; 9:1) being €0.5bn. As you say, there are other options such as valuing the shares at pre nationlisation traded prices.

However, the valuation of assets gone to NAMA would not matter once the State had paid a defensible price for the assets. Personally, I think if it is proven that the banks were insolvent without the Guarantee and/or NAMA then the shareholders should get zilch. Any shareholder still hanging in is aware of the risks of nationalisation/collapse.

One must also remember that the banks (and not the shareholders) own the assets. The right to contest valuations resides with the banks. If the bank boards (nationalised or otherwise) are mandated to value the assets fairly then the shareholders will have no course of action against NAMA. It will be important that the banks co-operate and agree the valuations (or agree to the method of valuation by expert) as part of a commercial arrangement with NAMA/the State rather than as being subjected to a statutory mechanism. This will eliminate any scope for judicial review proceedings and will allow for the expert’s determination to be binding if accepted by the State.

If the banks refuse to agree and NAMA has to resort to an arbitration or CPO type valuation then there will be trouble as each decision will be open to judicial review by the banks. One would expect that will not be an issue as the banks will be asked to sign up to the process at the beginning (as they signed up to the Guarantee and as the UK banks signed up to recapitalisation). Those who preach nationalisation say the banks would not seek advantage if nationalised and would be much easier to deal with.

The Shareholders may have an action against the bank or its board if the valuations are agreed wrongly. However, this should not hamstring NAMA or other financial institutions. Furthermore the shareholders would have a very difficult time proving loss or damage given the value of assets. Taking on such a case with all its evidentiary difficulties and public policy problems would be madness. In any event, if they are not already suing the boards for their actions over the last 10 years then I think we are pretty safe on that score!!

The key thing would be that the method of valuation as between the banks and NAMA would be defensible and that the board could be said to have acted in the interests of the nationalised institution. This should not be difficult as nobody has it in mind to screw the banks as that only damages their ability to lend.

“There will be a range of competing possibilities facing a court:

(1) the most recent share price;
(2) the most recent audited book value;
(3) some investment bank estimate of the share price that would have to be paid to acquire the whole company (somewhere between the book value and the most recent share price on the day of nationalisation)
(4) some economist’s estimate of the “true value” of the assets of the bank given reasonable economic projections
(5) some estimate of the share price of the bank were it not for the fact that the Government had been providing other forms of support (e.g. guarantee for liabilities)”

I think you have left out their future price as determined by the markets adjusted for CPI! The Government has the right to choose between the range of possibilities. The Government can enact legislation to stipulate how the shares are to be valued. Once that legilation passes muster when sent to the Supreme Court by the President then we should be ok (there is a presumption of constitutionality which gives the Govt the edge). This is a lot cleaner than simply “kicking it down the road a bit”.

Also, it is worth noting that the State has to address a similar problem for Anglo shareholders so the work involved has to be undertaken in any event.

’some estimate of the share price of the bank were it not for the fact that the Government had been providing other forms of support (e.g. guarantee for liabilities)’

It’s surely obvious that without the guarantee these banks would already be gone with shareholders having received nothing - it’s difficult to understand therefore, your continuing concern about what ‘compensation’ they should receive in the event of nationalisation - the answer is clear: 0!

Does not the valuation of shares on nationalisation ultimately hinge on the value of assets, including the distressed assets (given that the liabilities of a bank are relatively clear)? Are not the two issues closely linked in this way?

In other words, won’t a compensation process for shareholders ultimately get bogged down in the same challenges that NAMA will face - what value to attribute to distressed assets?

There will be a range of competing possibilities facing a court:

(1) the most recent share price;
(2) the most recent audited book value;
(3) some investment bank estimate of the share price that would have to be paid to acquire the whole company (somewhere between the book value and the most recent share price on the day of nationalisation)
(4) some economist’s estimate of the “true value” of the assets of the bank given reasonable economic projections
(5) some estimate of the share price of the bank were it not for the fact that the Government had been providing other forms of support (e.g. guarantee for liabilities)

I don’t want to labour it, but my key point is that we should not characterise nationalisation as magically overcoming the valuation problem for distressed assets. It only kicks the problem down the road a bit.

Andrew

Andrew

A few different things are being mixed up:

1. Valuation of shares on Nationalisation. This is the Northern Rock scenario. The valuation has not been arrived at and there is litigation threatened in that case.

2. Valuation of assets as between NAMA and the banks.

2.1 If you value at the market value or the economic value then compensation does not arise once the banks participate in the process. This should be the case whether the bank has been nationalised or not once the bank is acting prudently and the transactions are conducted at an arm’s length basis. It is in this process that some commentators have suggested nationalisation may assist as it may encourage bankers to act openly and not to try to obtain a gain/advantage or profit in the transfer of assets.

2.2 If you deliberately initially value at an undervalue and force the banks to accept such valuation then you will have to pay compensation to the banks (or possibly to their shareholders if the banks are fully nationalised). Generally you will only do this when it is almost impossible to value the asset. The compensation would likely be ascertained when the asset has been sold and a real value has been discovered.

I assure you that I’m very open to being persuaded that, in the context of NAMA and asset transfer, that nationalisation could be the superior option, particularly if the IMF’s prognosis about potential losses is credible.

And I agree that no proposal on the banking crisis has been fully thought through, including FG’s. But given that we’re now discussing nationalisation and NAMA, don’t be surprised if I ask some hard questions, and forgive me if they across as hostile!

If Northern Rock provides a good precedent about how nationalisation overcomes the problem of valuing a banks’ assets, including its distressed ones, I’d like to hear more about that process of determining shareholder compensation. Do you know of any references?

Also, what about the liquidity risk of nationalisation? Evidently the flight of market funding and deposits from Anglo Irish Bank has, if anything, accelerated since nationalisation. This seems somewhat counter-intuitive to me. given that one could have expected nationalisation to have reassured depositors and the markets. But for one reason or another it has not done so, perhaps because it signals to the markets that things are even worse that they already feared.

This has to be a huge risk of any proposal to nationalise either or both of the other two major banks.

Andrew

I would agree that nobody is immune, People from industry and academia have ideological biases (be they left or right wing) but I would stand by my opinion that on average it is likely that a financial opinion given by by an academic is less likely to be influanced by financial industry interests than that given by someone working for the financial industry.
I dont think that economic thining should have a unified front but I do think that more academics should be used in private media (ie not RTE)
Similarly people working for the department of finance are not likely to say they think Nationalisation is a good idea.
Privately owned media use a lot more industry experts as compared with academic experts, which is probobly why academics feel their opinions are not valued as much. Vincent Brownes show on tv3 is an exception.
BTW my are not supposed to be personal just general observations

What I would like to see is the private media using more academic opinions where possible but when there is an absence of this that industry experts give clearer accounts of their involvement in the financial industry and admit that they may have (dispite their best intentions) pecuniary biases.

I talk out about banks and my own industry too, as for my employer, if i am unhappy with practice there I hammer them too although i don’t need to do it in public because I can get the result internally (i work in operations).

and of all the industry economists -and there are a lot of them - they would surely speak out against each other right? I think an economist for Depfa (for instance) would happily give good opinion on INBS positive or negative if asked.

I don’t think people in industry can’t be independent, and furthermore, they are not even given the chance because their opinion is not sought, and given some of the answers here, it is clearly not valued either. written off before a response is possible.

Will that ever give economic thinking a unified front? I think not, not as long as one side sees itself as better than the other the divide and stagnancy will remain, you can dress that up however you like it but that is the underlying reality of the matter.

thinking public sector employees can be independent is equally as mythical, how many PS economists are calling for numbers to be cut in the public sector? philip lane is the only one i have heard actually say it in a clear cut manner thus far. Everybody in every sector has taboos and in as much as you’d say practitioners are not immune i’d equally wager nobody is.

I think you’re making the shareholder compensation thing more complicated than it is. There is plenty of legal precedent (NR and the legislation underlying the UK Special Resolution Regime) to deal with this issue effectively.

In relation to “I had thought the unreliability of the NAMA price setting process was the very basis of your objection to NAMA without nationalisation.” Pretty clearly, my objections to the NAMA pricing process are that the prices are likely to be too high. I will have no objection if the prices come in realistically low, though all the signs are that this will not happen (and the process seems unlikely to have mechanisms to prevent it.)

Finally, as for banking proposals that are not “fully thought through” the old adage about people in glasshouses comes to mind.

It just seems very obvious to me that public sector employees can be more independent.

Industry economists are used more on the media for corporate reasons.

As Joan Burton summed it up in her contribution to the Dail debate on the IMF on Friday last, government policy on the banking issue has only one objective:

“The purpose of public policy at his point in time is to offer a rescue package to the Fianna Fail Golden Circle.”

In her view, all the government’s proposals simply reflect: “the efforts of a politically well connected golden circle to push our government to take their losses on board. That is what the ill-fated September 30th guarantee was all about. That is the heart of the NAMA policy.”

When NAMA was first announced Ruairi Quinn welcomed the announcement in a TV interview. But in good democratic centralist tradition he has since recanted.

“Initially, the concept of NAMA had some attractions, “Quinn stated during the debate on Labour’s Dail motion on the banks on 12 May. “I supported it because we must get the toxic debt out of the way and return to normal banking operations. However, upon examination of the small detail, it seems the difficulty is that NAMA is supposed to take the book value of toxic debt, which is of the order of €90 billion, off the books of the banks such that the credit of the banks can be restored in the international markets, which is critical. The problem the Labour Party has with the NAMA proposal is in the detail rather than the concept…”

In the same debate Burton made it clear that there is no room for such equivocation:

“Crony capitalism may not be as overt as before but it has not gone away, it is still very much with us. Its influence can be seen in the set of attitudes that run through the National Asset Management Agency plan. What is good for the failed banks and the failed developers is deemed to be good for Ireland or so, at least, the Government appears to believe. The Minister said it bluntly himself when he described the NAMA as a bailout of the Irish economy. In other words he identifies the interests of the bankers and the developers with those of the State. The Minister for Finance faces a brutal public backlash if he proceeds with the NAMA in the manner he and Dr. Bacon have proposed. There is a huge loathing at the prospect of yet another bailout for the golden circle of Fianna Fáil’s developers and the bankers.”

In his summary of how Labour’s nationalisation proposal would work, Eamon Gilmore stated:

“This avoids the requirement to value the bad loans in this highly uncertain environment. The State would take ownership of the loans and the banks. The process of writing down the bad loans would be vigorously pursued and the normal lending would be resumed. I would envisage that units would be established within the banks to deal with the bad loans. That would be sensible business practice. As many of the loans are likely to be syndicated, a clearing house mechanism may also be required to deal with them and to minimise the legal costs involved in dealing with them. If a developer owes money to a number of institutions, all owned by the State, it makes sense that they be dealt with on an integrated basis. Ultimately, there could be a transfer of outstanding loans to a clearing house, or transfer of loans between State-owned banks. This would be a transfer from one State-owned institution to another, removing the risk to the State of having to value the bad loans. Once the banks’ balance sheets had been cleaned up, the State would return the banks to the market. The return to the State from the resale of the banks would significantly offset the cost of bad loans that the State is required to pick up.”

When I first read this, it brought to mind that old Scrap Saturday sketch about Daisy the Cow, whose eartags and name changed depending on whether she was being transported to one side of the border with Northern Ireland or returned to the Republic teh following day. I guess it would be the something the same with developers’ loans. But since there’s obviously no cost to the taxpayer in moving the toxic debt about in this way through some sort of mobile ‘clearing house’, then it will be all OK.

However, a week later, Gilmore revealed in the Dail that he didn’t really understand the NAMA proposal, which was a bit worrying.

All joking aside, you are correct in your assumption that I personally have no problem with nationalisation per se. I have understood your proposal and there is a logic and substance to it. But I’ve also read FG’s proposal and can see some attractions in it also. I’ve come to the conclusion - and read some arguments on this site that support that conclusion - that the government would go the route you suggest in a shot, if there weren’t some compelling arguments of which it is aware which has persuaded it that it should not take that approach. So NAM first, nationalisation (possibly) later.

What I can’t do is buy into the Labour spokesperson’s gigantic conspiracy theory and that every action proposed by the government to resolve the banking situation is part of some ingenious plan cooked up between the banks, the developers and the two Brians that’s being rolled out since 29th September last. To be honest, I don’t think any of those people are smart enough to think up a criminal conspiracy of such magnitude. Cock up I can believe in…

@Peter Maguire,

I take your point that the mad, bad and dangerous may appear exciting, but inevitably they turn out to be really boring - because they’re like a stuck record. Everything they say becomes predictable in the end. They don’t allow for any opinion other than their own. And they never, ever change their minds. They’re always right. They bore me rigid with their certainty and one other thing I’ve always noticed - they’re really not ever interested in anyone other than themselves, so any conversation ends up being a trifle one-sided. Not the sort you want to get stuck with at a party!

By not including industry economists (and there are plenty in the IFSC who don’t care whether or not irish banks are nationalised and indeed many might support the move) you are basically setting out a stall whereby you decided who’s commentary is and isn’t believable, at the same time academia suffers because they often feel nobody listens to them, it is the exclusion of practitioner experience that is partly to blame for this.

I harp on a bit about the difference between academics and practitioners, and my feelings are that they need to come together a bit more.

lastly - on one hand I’m told there are ‘no independent practitioners’ and on another that there is no need for ‘disparity between the two sides’…

clearly not in practice there isn’t folks.

http://www.irisheconomy.ie/index.php/2009/04/25/ahearne-on-bank-nationalisation/

‘not sure there are two sides’? … there seems to be when it comes to petitions!

BTW, the fact that no independent commentator has gone against the “Golden 20″ should not be taken as gospel that the G20 are right. Presumably there were 20 medieval astonomers who toled Copernicus that he was wrong.

Correct, almost by definition.
If you recieve part of your salary from any company within the financial industry you are not an independent finanacial analyist. How could one be?
It would take a level of benevolence that only the gods can aspire.
Going against the grain is different. No two financial entities interests are exactly the same so of course each ones experts disagree.
Also independent financial advisors that recieve varying levels of commissions/perks/etc. from different institutions are not independent.

With respect, I think the question of how much compensation to pay to shareholders under nationalisation could be just as complicated, if not more so, than pricing distressed assets.

After all, any uncertainties regarding the true value of the entire bank primarily reflect the uncertainties regarding the value of the distressed assets.

It’s like saying that any uncertainty regarding the individual values of a pharma company’s key patents can be resolved by buying the whole company.

You suggest that this valuation challenge can be safely kicked to touch with nationalisation, as time will reveal the true value of the bank under some extended judicial compensation process. But on what legal basis can the State deny compensation to shareholders while it waits to find out how much it gets back from assets appropriated from them? Can they not argue that they would have recovered more if the loans had been left in the hands of hard-nosed private bankers rather than well meaning but less effectual public servants? This is simply not well thought through.

As an alternative, you then appear to concede the validity of the price discovery process to be operated by NAMA by saying that “if the NAMA were to reveal that a large discount was to be applied, the share prices may fall so much that the government can make an offer based on market price without it costing too much and this may be the best option”. But I had thought the unreliability of the NAMA price setting process was the very basis of your objection to NAMA without nationalisation.

Unfortunately, if we’re going the NAMA route, this administrative valuation problem for distressed assets has to be resolved at some stage, with or without nationalisation.

Just to clarify, I wasn’t in any way claiming that the Taoiseach was “attacking” the 20 economists (though obviously other government representatives have done so on a number of occasions).

I’m a little unsure as to what you’re asking but I think you’re referring to the question of compensating shareholders after the banks have been nationalised. On this, I’d offer the following thoughts:

1. If Northern Rock is the relevant precedent (shareholders get nothing up front with compensation getting kicked out to an independent valuer) then this process would be a slow one. Most likely, it would become clear by the time the valuer as made a decision that the losses were sufficient to wipe out the book value of equity. At this point, the exact valuation would no longer be relevant for shareholder compensation.

2. Northern Rock doesn’t have to be the precedent. If the NAMA process were to reveal that a large discount was to be applied, the share prices may fall so much that the government can make an offer based on market price without it costing too much and this may be the best option (a valuer could still be appointed afterwards.) Alternatively, the government could adopt Patrick Honohan’s proposal to deliberately underpay but give the shareholders some stake in any profits made by NAMA.

So, yes this is a complicating issue but not nearly as complicated as the upcoming process of NAMA buying assets from privately-owned banks.