Presentation on NAMA to Greens

Here‘s a presentation on NAMA I gave on Saturday to the Green Party’s Economic and Social Policy Group. The other speaker was Constantin Gurdgiev, whose presentation can be found here.

27 thoughts on “Presentation on NAMA to Greens”

  1. Thanks Karl, great slides. I thought half way through you were like the Al Gore of Ireland’s banking crisis, I expected a cherry picker to be taken out to show our future debt levels!

  2. An excellent presentation. It is by far the most understandable explanation for the lay man that I have seen. It should definitely be the starting point for any debate between the Government parties.

    My question is can the State and the Minister address the concerns raised by Karl Whelan and Patrick Honohan by
    (i) valuing assets closer to market value or
    (ii) taking a NAMA 2.0 approach
    and then taking a majority shareholding in the banks without nationalisaing 100%?

    I am somewhat confused about when the amount of equity to be taken by the government will lead to “wholesale” (i.e., 100%) nationalisation as opposed to the state becoming the majority shareholder. I have always taken it from the Minister’s comments fromthe initial announcement of NAMA that the State may well take a majority shareholding without taking full ownership. His comment that it is “not inevitable” that the state will take a majority shareholding certainly holds it out as a possibility (whatever else one might read into that statement in terms of asset valuations).

    I ask because there is commentary that suggests that the valuation issue/problem might be solved by the state taking a majority or subsantial shareholding. Philip Lane previously linked a working paper by Dorothea Schäfer and Klaus F. Zimmermann “Bad Bank(s) and Recapitalization of the Banking Sector”
    http://www.irisheconomy.ie/index.php/2009/06/29/bad-banks-and-recapitalisation/
    http://ideas.repec.org/p/diw/diwwpp/dp897.html

    Quote from that paper:

    “Sweden’s bad banks, Securum and Retriva, managed to limit losses on non-performing assets. A successful resolution also appears to be on the horizon for Berliner Immobilien Holding. With the application of the principle that the stockholders should bear losses first, it was possible to secure relatively low prices for the acquired assets. This circumvented potential “lemon market” effects. At the same time, there were no incentives established for shareholders to rely on the expectation of government assistance in the future. The partners involved in negotiations for the restructuring of the troubled assets were clearly identifiable and accessible, ensuring that assets could be managed actively and effectively. In Sweden and Berlin, the government drew on the expertise of external consultants with distressed asset management experience. The allocation of sufficient funding prevented the premature sale of assets at prices below their future market value. As both the good and bad banks were partially or completely in government hands in each case, no conflict of interest developed between the government and private banks. For this reason, it can be assumed that the management had considerable autonomy over operative decisions.”

  3. An excellent presentation. It is by far the most understandable explanation for the lay man that I have seen. It should definitely be the starting point for any debate between the Government parties.

    My question is can the State and the Minister address the concerns raised by Karl Whelan and Patrick Honohan by
    (i) valuing assets closer to market value or
    (ii) taking a NAMA 2.0 approach
    and then taking a majority shareholding in the banks without nationalisaing 100%?

    I am somewhat confused about when the amount of equity to be taken by the government will lead to “wholesale” (i.e., 100%) nationalisation as opposed to the state becoming the majority shareholder. I have always taken it from the Minister’s comments fromthe initial announcement of NAMA that the State may well take a majority shareholding without taking full ownership. His comment that it is “not inevitable” that the state will take a majority shareholding certainly holds it out as a possibility (whatever else one might read into that statement in terms of asset valuations).

    I ask because there is commentary that suggests that the valuation issue/problem might be solved by the state taking a majority or subsantial shareholding. Philip Lane previously linked a working paper by Dorothea Schäfer and Klaus F. Zimmermann “Bad Bank(s) and Recapitalization of the Banking Sector”
    http://www.irisheconomy.ie/index.php/2009/06/29/bad-banks-and-recapitalisation/
    http://ideas.repec.org/p/diw/diwwpp/dp897.html

    Quote from that paper:

    “Sweden’s bad banks, Securum and Retriva, managed to limit losses on non-performing assets. A successful resolution also appears to be on the horizon for Berliner Immobilien Holding.25 With the application of the principle that the stockholders
    should bear losses first, it was possible to secure relatively low prices for the acquired assets. This circumvented potential “lemon market” effects. At the same time, there were no incentives established for shareholders to rely on the expectation of government assistance in the future. The partners involved in negotiations for the restructuring of the troubled assets were clearly identifiable and accessible, ensuring that assets could be managed actively and effectively. In Sweden and Berlin, the government drew on the expertise of external consultants with distressed asset management experience. The allocation of sufficient funding prevented the premature sale of assets at prices below their future market value. As both the good and bad banks were partially or completely in government hands in each case, no conflict of interest developed between the government and private banks. For this reason, it can be assumed that the management had considerable autonomy over operative decisions.”

  4. Karl, your first few slides suggest you felt unsure of the audience’s knowledge.

    If appropriate, could you add a little colour on how the presentation was received? Do they have a good understanding of the problem? Were they comfortable with/understand the level of risk being taken on? I guess the fact that the Greens are looking for such presentations is a positive sign.

  5. @Ahura

    My sense from the questions afterwards was that many of the Green Party members present were pretty worried about financial implications of NAMA for the taxpayer, though perhaps that wasn’t too suprising given the content of the preceding presentations. My understanding is that they had a session after lunch where they discussed the issues among themselves but I had to leave for the afternoon so I’m not sure how that went.

    I was told that, for balance, they would be getting a more pro-NAMA presentation on Tuesday from, I think, Alan Ahearne.

  6. Karl
    Of course, the cabinet will finalise the bill on Monday, so AA could say what he likes, his advice will be moot. So he should stay mute.

  7. The Govt has said that the govt itself is likely to table amendments to the NAMA Bill and that it will seriously consider any amendments tabled by the opposition.

  8. It would be frankly incredible, both substantively and still more politically, if the bill were to get any opposition support. FG already supported the guarentee, makes no sense for them to prove their patriotism again at the cost of being unable to kick the government on this.

    Anyone know if the bill is going to specify the amount of NAMA bonds to be issued, let alon the average discount on book value to be expected or is it to be one big blank cheque? Hard to know how anyone could vote for it if the latter, though no doubt the government deputies will do their duty…

  9. @James
    It wont specify. No such act would. It will set out the conditions to allow a banks to “apply” and then give some guidance on how the valuation will happen.

  10. A technical suggestion regarding NAMA losses….
    Is it not possible to devise a structure for a future “balancing transfer” that is dependant on the losses incurred by NAMA (including interest, management costs etc. as well as capital losses), but which could also allow for a reverse transfer in the event NAMA makes a profit? This, if an eventual liability, could be conditional on the banks making future profits. This would render it similar to future tax payments from an accounting point of view, ie not accounted for until the obligating event (recognised profits) crystallised the liability.

    This would, in my opinion, not adversely impact on the capital ratios of the banks, as it would not represent a call on its resources until such time as there were resources sufficient to meet it. It also has the appealing advantage of rendering irrelevant the actual transfer value, as long as the interest rate on the NAMA bonds is fair.

    Unfortunately, this would not help with the losses of Anglo if it ceases trading. This requires a separate solution.

    Comments?

  11. The idea is to clean up the banks’ balance sheets to provide certainty. Any uncertainty is largely incompatible with this unless it is only on the upside for the banks. Even then you are left with an uncertain picture.

    Hence KW’s concern about the coupons which are unlikely to ever be paid and Patrick Honohan’s suggestion of undervalue and recompense shareholders. Have a look at KW’s paper again.

  12. Uncertainty is only an issue if it creates a possibility of future insolvency. By making repayments conditional on future earnings, you make one uncertainty balance out another, thus reducing overall risk.

  13. Thanks Karl. I was reading a section of Nassim Taleb’s excellent Fooled by Randomness over the weekend. It related to Path Dependence (of Beliefs) and how it can prove very costly. He describes one of the best traders he ever encountered as having “the remarkable attribute of being completely free of any path dependence in his beliefs. He exhibits absolutely no embarrassment buying a given currency on a pure impulse, when only hours ago he might have voiced a strong opinion as to its future weakness.” Unfortunately many of our politicians foolishly fear changing policy is a sign of weakness/incompetence (even when new information/opinions become available). Hopefully the Greens are different.

    Re the presentation, I’d like to have seen the Japanese Land price graph to cover off the dangers of the “long term economic value” idea (http://www.imes.boj.or.jp/english/publication/edps/2003/03-E-15.pdf – figure 2 pg 20. As an aside, and although too simplistic to draw any conclusions, it is interesting to note stock prices as a lead variable and the relative size of decline).

  14. The problem, for me, with the wider public NAMA debate is that the core points are lost beneath an ever thickening smokescreen of petty detail.

    The core point remains that banks took unwarranted risks in order to make undeserved profits. They lost bigtime and now the taxpayer is being forced to pay for this.

    Tax money is being taken from ordinary citizens and given to a select group of people who have a stake in these institutions.

    The vested interests in question here (bank executives, bond- and shareholders) know that the public’s capacity to grasp abstract concepts is limited, so talk of bad banks, future bank levys, recapitalisation, clauses to protect the taxpayer etc. will quickly obfuscate the debate to the point of mass public uncertainty. Then the govt does what it likes.

    The core message that needs to be driven home, I think, is this: Either the banks are broke and need to be bailed out, in which case those who had a stake in them (execs, shareholders etc.) must lose everything before those who did not have a stake in them can be expected to pay OR they are not broke, in which case they can pay for themselves.

    Yet sadly, Karl and Constantin’s crystal clear arguments will just get lost under a few shovels of pro-bail-out spin.

  15. Thank you, Karl, for talking to them.

    @ Brendan
    I think that this argument should be used in the debate on the NaMa Bill. I still think the whole idea is to socialize the losses and gain privately. Abuse of office. Pickings will be slim for some years to come and those currently sucking us dry will not be sanguine about their political careers.

  16. Karl Whelan’s presentation highlights the dangers of over-valuation.

    Karl Whelan notes that various analysts at Davy Stockbrokers and elsewhere are predicting a benign haircut based on the Ministers statements against nationalisation.

    As I see it Davy’s logic goes as follows:

    (a) aversion to wholesale/100% nationalisation = aversion to state acquiring a majority shareholding
    (b) “not inevitable” that the state will acquire majority shareholding = the state will seek to avoid acquiring a majority shareholding
    (c) Therefore, the State will manipulate the valuation of bank assets to ensure that the State will not end up with a majority shareholding.

    I consider this logic to be tenuous. The valuation process will be governed by the legislation. The valuations themselves will also be governed by EU Commission guidance notes and will need to be approved by our “Sugar Daddy” the ECB.

    I do not see how the valuation process can be designed to be subjective rather than objective and to achieve an overall goal when individual assets will be under consideration. (Maybe this is why there is talk of “bands”!). I also think that any agreement with the banks to limit the level of consequent recapitalisation requirements would fall foul of the Commission.

    Now, whilst I think the logic is tenuous and the goal is difficult to achieve, it may be possible to do if the banks have a true picture of the value of their assets and can tell the Government now to what percentage the valuation process needs to be skewed. This is nod and a wink stuff and depends on the EU Commission approving the Govt’s method of ascertaining real economic value, i.e., the methodology of skewing the valuations.

    In summary, in my opinion:
    1. The analysts logic upon which they predict a small haircut is tenuous, and
    2. Such a result would be very difficult to achieve even if the Govt set its mind to it, and
    3. The economic and political benefits for the Govt in pursuing such a path are minimal if they exist at all, and
    4. The government has made no firm statement that it is averse to taking a majority stake in the banks. Rather it has only opposed “wholesale” or 100% nationalisation.

    However, a very important point about sequencing arises. If I follow my own logic and the Minister is willing to take a majority shareholding in the banks then shouldn’t the Minister do that prior to the valuation and transfer of the assets? One would certainly think so given that part state ownership is seen internationally as crucial in obtaining assets at a proper valuation. Therefore, if it looks like you are going to have to take a majority shareholding then you should take it now. This makes the Minister’s “not inevitable” statement a bit more interesting. That statement could be the first step in defending himself against charges of bungling when it later becomes apparent that the State will be taking a majority stake. The defence may be: “I couldn’t take the majority stake earlier because I could not pre-empt the valuation process.” All very circular!

    Does the Minister for some reason want to avoid having to take a majority share in the banks now? If so why?

    There may well be serious legal complications with minority shareholders’ rights and property rights in the event of the state taking a majority share of the bank and then selling assets to itself at a discount. However, one would have thought most of those problems could be overcome in legslation and that the shareholders would have a very difficult time proving their case. One hopes that the Minister isn’t depending on a nod and a wink form the Banks that they will be straight up about asset values!

    @Graham

    Colm McCarty has suggested (Sunday Business Post 26/07/09) that there should be a Dail Committee inquiry into the failures of bankers and bank regulation. There would then be no hiding from what is the cause of the need for the bail-out. One could be satisfied that the people were not being hoodwinked on that point even if one opposes NAMA.

  17. In writing the previous post I started to get a little ill feeling in my stomach. A number of factors could be thought of as hinting towards substantial over-valuation:

    1. Limiting it to certain developers allows the banks to prepare themselves. If they can skew tha valuations for those developers then they may be ok. A different valuation method can beused thereafter.

    2. Talk of bands for property valuations will alow the banks to set a methodology based on the holdings of the big developers which they have problems with.

    3. The “not inevitable” statement allows the State to avoid taking a majority shareholding now and looking over the shoulders of the bank execs.

    4. The Stockborkers, pension funds, bankers, bondholders and shareholders are all in favour of a low haircut. This is an alliance of some of the most influential and wealthy people in the state.

    Another interesting item will be how the valuation of “good loans” are treated. I suspect you will see the banks seek to value such loans relative to the value of the security rather than the value of the debt! This will be justified on the basis that NAMA can recover the value of the security as they can use it for cross-collateralisation. Keep your eyes peeled!!

  18. From a politics-watchers perspective it’s interesting that it was two right-of-centre economists chosen to speak…

  19. @Mark

    I find it hard to reconcile presenters who use phrases like ‘deeply immoral’ with being right-of-centre.

  20. Mark – Left right or center the facts remain. Im centerist (and wasnt asked to speak….) but would have been harder than KW or CG on the system.

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