BaNama Republic

Well, the legislation is out though I’m not sure we’re really much the wiser.  Needless to say, my favourite bits have already been highlighted by commenters in our long-term valuation thread.

(a) a reference to the current market value of the property comprised in the security for a credit facility that is a bank asset is a reference to the estimated amount that would be paid between a willing buyer and a willing seller in an arm’s length transaction where both parties acted knowledgeably, prudently and without compulsion,

(c) a reference to the long-term economic value of the property comprised in the security for a credit facility that is a bank asset is a reference to the value that the property can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated and in which a future price or yield of the asset is consistent with reasonable expectations having regard to the long-term historical average.

I could rant on about the craziness of paying according to (c) rather than (a) but it pretty much speaks for itself and, in any case, you already know what I think.  What about the rest of you? What do make of paying according to (c) rather than (a) and is there much else in the legislation that you found interesting?

61 thoughts on “BaNama Republic”

  1. Karl I too could rant for Ireland,but I will confine My queries to the position of sub-contractors,suppliers etc. who have been waiting to get paid from these Developers.Most People appear to think that these Developments are in a sort of stasis at the moment awaiting valuation and fresh Capital via NAMA and then set out on their elusive path in search of some mythical “long term Economic value” along the yellow brick road.Sorry but meanwhile back in the real and immeadiate World subbies, suppliers etc. are going to the wall,families are being torn apart,Social Welfare cares little for former self-employed,without labouring the point ruination is commonplace.Its all very fine for paid proffesionals et al to discuss these things in a measured way and debate the long term etc. but I can give anyone who’s interested hundreds of Names of real people who have supplied goods and services and if they are not paid then the fallout will be horrendous…The key point here in My contribution is that these goods and services have a real tangible value and are not dependant on underlying land values or such like and who ever takes charge of these developments will have to pay these bills.There will be blue murder in this Country if these subbies and suppliers etc. are forced to take Cents in the Euro on their debts,while the Banks and Developers get the big bucks with their “long term Economic value”.The pain of seeing their Industry ruined for decades,the bleak prospect of trying to re-skill among various age groups etc. have proven to be a bitter pill but I feel that an unfair treatment of these People who are owed Money may well provide the final tipping point.Lets not go down that “REAL” road people.

  2. I’ve commented on the ‘Long-term values’ on that thread, but as you say, there are other issues.

    The first important one to my mind is the how the banks are going to be paid for the assets. Today’s publication has:

    “(2) Within 28 days after the service of the acquisition schedule—
    (a) the Minister shall issue to NAMA, or the NAMA group entity that acquired the bank assets concerned, debt securities, or
    (b) NAMA or a NAMA group entity may issue debt securities to the participating institution,”

    Two things. Firstly there is no reference to the coupon that the debt securities will pay (or even if there will be a coupon) and secondly it seems that NAMA will be able to issue its own debt. Perhaps a small point, but if NAMA is going to be allowed to double the national debt, surely giving them a carte blanche on their issuance is a dangerous precedent to set.

    Also, did I miss something, or is there no reference to bank re-capitalisation in the Bill? Or is that a fight for another day?

  3. @jim: this for me is the really puzzling question. What is in this for FF politically, assuming that they do go ahead and overpay?

    From the IT:

    # Assets will be priced at market value adjusted up to “longer-term economic value”
    # Long-term value will take account of demographics, supply and demand, and economic growth
    # Certain assets may be worth no more than current distressed market or agriculture value

    So: can we please be told what the assumptions are going to be regarding demography and economic growth? For example, one of the key lessons of Irish history is that, as regards population, what goes up can come down.

  4. Jim, Sorry to tell you this but NAMA isnt about suppliers or tradesmen, its about banksters and developers.

    Have a read of the document, I cant recall a single mention of those owed money, the taxpayer, or suppliers……its all about banks lending, and development land.

    If suppliers want to be paid, they need to get in peoples faces and start kicking up an almighty noise.

  5. Of course NAMA will ‘overpay’ in the short run (if by ‘overpay’ you mean pay more than the current depressed market conditions would dictate). That’s the whole point of the entire exercise.

    Ireland needs a banking system that has the ability to lend in order to stimulate the economy. If NAMA does not ‘overpay’ in the short run, but instead marks to current market, the banks will be in no better position to lend money than they are without NAMA.

    Why do economists and asset valuers keep missing this simple public policy point? The point is to ‘overpay’ now, incresaing the ability of the banks to lend (serving the laudable goal of stimulating the economy, jobs and all that stuff, eh?) and recoup the ‘overpayment’ later. This approach will considerably extend the amount of time the banks have to adjust their capital to compensate for past mistakes. Yes, yes, they made mistakes; but make them pay too swiftly for those mistakes, and the pain will be visited not just on the banks, but all of Ieland, and for much longer than necessary. Sorry, that is the reality, and that is why a NAMA that ‘overpays’ in the short run is beneficial to economic recovery.

    Thus, NAMA’s ‘overpaying’ will constitute, over the short to medium term, a form of state aid (subsidization), and therefore be subject to the European Commission’s guidelines on the subject. Why, by the way, do you think the Commission is supporting this approach? Because it makes sense. Yes, it’s an appoach than can be criticized from dawn ’til dusk, until one tries to come up with an alternative.

    On the other hand, maybe NAMA should just mark to market (pay only what the current market dictates), place its banks in the position of scrambling for capital for a few years, depress lending, and visit the economic pain on both the banks and the economy for much longer than necessary. Sure, lots of folks will be without work much longer, but, hey, you can walk around with your tin cup bragging about how you didn’t ‘overpay’ those slippery bankers.

    I have concluded, after reading hundreds of news articles from the Irish press lately, that many critics simply don’t understand – or don’t want to accept (probably because it requires too much intellectual effort and/or doesn’t fit within a pre-existing belief sysytem) – the fundamental policy being served by the legislation.

    And, no, the fundamental policy served by the legislation is not bailing out the banks. That is incidental. The purpose is to help stimulate the flow of credit into the economy, which – by the way – is what generates jobs and the tax revenues needed to pay for social programs.

    Be careful not to cut off the Irish economy’s nose to spite the face of its bankers.

    Note: Someone commented on another post of mine that the evidence from the US and the UK indicates that lending actually decreased after the bailout, and then concluded that the assumption that a bailout would help stimulate lending is flawed. Wow. First, there is the obvious ‘post hoc ergo propter hoc’ problem if that comment was meant to suggest that the bailout somehow caused the decrease in lending. Second, and more important, that comment appears to me to involve statistics abuse. The issue is not whether lending in absolute terms decreased after the bailout, but rather whether the bailout mitigated the degree of that decrease, which was already well underway before the bailout. I strongly believe the answer to that to be “yes”.

  6. @Bill
    Well…what can one say. Maybe just to reread those hundreds of articles with an open mind the next time? Dozens of alternatives to NAMA have been floated.

  7. @Jim
    NAMA is just a variation of receivership. Instead of the banks winding up the various property developers, NAMA will. The difference is they will do it over a much longer period. In theory if the property values go back to near where they were then in theory there will be a surplus to be distributed to the ordinary creditors. In theory, one day, not soon.

    Also in theory the property will never get back to near where they were, the proceeds will not cover the debt and the ordinary creditors get nothing. That’s what happens in business, you take risks and hopefully you get the rewards.

    @Bill
    I think everybody agrees we need a working banking system. It’s the cost to the tax payer we worry about. Your summary seems to assume that it will only be a short term overpayment and that in the medium/long term they will have paid the right amount. The reality is if we seriously overpay, then the “state aid” will be very expensive which whether it is on or off balance sheet has to be funded and this will be done through higher taxation/lower public expenditure which in turn will restrict the economy’s ability to recover.

    As for long term valuation:
    Office rental yields seem to be around 5.5% now. They had dropped below 2% at the height of the boom and were to a blind man unsustainable. In simple terms if 5-6% is a sensible return and the yields were only 2%, the property was overvalued 2-3 times. Maybe someone who is more experienced in the property side can blow holes in my logic.

  8. ah Bill, the taxpayer should get the best possible deal for whatever assets it buys. The taxpayer should not abuse its position or allow their position to be abused.

    If banks need recapitalisation, then this should be done directly, and again subject to the same principals above…..not via side effects, because these side effects are never what you hope for.

    If you are putting money in one end of a complex system with many different players and agendas and hoping for money to come back out in the form of loans; you are hoping that the effect you want will happen but you are without leverage. The taxpayers very presence in the system alters things, suddenly the existing players spot the greater fool.

    If we keep this fundamental dishonesty as to motives and valuations at the heart of NAMA, we end up in precisely this situation.

    The CIA have a term for unexpected consequences for their operations where they went in to countries and did stuff which their analysis told them would result in X Y or Z. Blowback.

    We already saw blowback with the state guarantee, do you really need to see more?

  9. Bill,

    Your general point that the banks need to be refinanced is valid. That is not at issue. What is at issue are the terms on which that happens.

    Central Banks facilitate bank refinancing by generating a very steep yield curve, with short-term interest rates well below long-terms ones. That allows commerical banks borrow short-term money at very low rates (now 1%) while investing in longer-term assets (such as Irish 10-year government securities, now yielding 5%). This is one reason why Brian Lenihan is so grateful to the ECB. The other is that it provides a ready source of demand for Irish government debt.

    There are two broad options for refinancing the banks via NAMA. Suppose that the Irish banks need €80b in fresh finance.

    Option 1
    Pay a market rate (€25b?) for assets with a book value of €100b > trigger large losses for Irish banks > Irish banks insolvent > nationalise and inject balance of €55b. Consequences: value of original bank equity NIL, share of subsequent upside captured for taxpayer 100%.

    Option 2
    Pay a “through the cycle” / contrived rate (€80b?) for assets with a book value of €100b > trigger some additional losses for Irish banks > but Irish banks remain solvent. Consequence: value of original bank equity retained, share of subsequent upside captured for taxpayer is limited to current proportions.

    The issue is not NAMA: a coordinated work-out of distressed assets makes sense. The issue is the price which NAMA pays and the consequences of that for (a) the value of existing bank equity and (b) the proportion of subsequent upside which taxpayers enjoy. My point would be that we (pobal na hEireann) are bearing massive potential downside and we should get the full upside.

    Two questions to you:
    (i) if bank bond-holders have already taken substantial write-offs on their holdings, how can there – in logic – be any value left in the bank equity?
    (ii) if your argument – that the point of the NAMA exercise is to overpay for bank assets – is valid, why does recapitalisation of our banks not feature as a purpose of the Act (at section 2) while the protection of “the interests of taxpayers” actually does?

  10. @ Bill

    There is no assurance that more proper lending practices will resume following NAMA’s acquisition of the loans.

    Remember the banks have to deal with both the smaller development loans and the horrors in the 100B mortgage book.

    While I agree that we need a functioning banking system, I have no confidence that NAMA will provide this.

    The opacity of the banks in relation to their exposures previously and my personal experience in seeng them speak out of both sides of their mouths over th past year as I tried to raise funds for clients makes me wary.

    At the end of the day, the bankers naturally put their own needs first. They will survive at whatever cost to the broader economy.

  11. @ Bill

    i agree with you for the most part. However, you seem to imply that all NAMA is really doing is providing liquidity to a market that either has no bids (or just insanely low ones) and a huge amount of sellers, many of whom are forced sellers. This would make perfect sense, and most commentors on this site wouldn’t have a problem with that – eg a site was originally valued at 500k, but is worth 250k in the bank/developers eyes right now, and the best bid in the market is 100k. So NAMA splits the difference and pays 200k or so. Perfect. The problem at the moment is that the banks/developers want NAMA to value the site at 350k, this being the price they think it’ll be worth in 5 years time.

    However the prices that NAMA is applying to the loans will be taking on a huge amount of assumptions over a 5-10-15 year period, many of which they will, naturally, not forecast correctly. Given that it appears loan values will be based off the best-case scenario rather than the worst-case one, there is likely to be a limited, if any at all, upside situation for the taxpayer. There is a far bigger chance of a loss at the end of NAMA, and a very real chance that that loss will be a huge one.

    As such, the real question is whether the boost to the economy from clearing the banks’ balance sheets and restoring the flow of credit will outweigh the nominal loss that may eventually come from NAMA. For many, this question has yet to be convincingly answered by the government.

  12. Maybe I am naive. Nama will control vast tracts of development land with the objective of maximising the return to the tax payer – that is realising its paid for value + costs at a minimum. It will exercise market power and dominance in the supply of land and property. It’s in its interests to obtain a price close to what it will pay which may not be in the public interest. The question is where is the wider dimension of land and property price “control” – could it be that Nama may inflate prices too far or trigger another bout of land and property speculation.
    Also consider the holders of subordinated debt and shares – are the not in the main Irish institutional investors who if some alternative nama propositions were implemented would lose their shirts and thus undermine the value of their customers funds – many of whom are private citizens and pension trustees? Apart from keeping the big two trading and providing a possibility for generation of fresh credit could it not be the case that government is also concious of protecting pension, credit union investments etc.

  13. @ Bill

    btw, completely and 100% agree with your last point about the use of lending statistics to somehow claim the bailouts have reduced lending by banks. Some people are probably claiming the g’tee here has led to reduced lending by the banks. Eh, i would think its reasonable to assume that 3 or 4 of the nations largest banks going bust would have had some material effect on lending into the economy, but of course some people like to ignore this sort of thing…

  14. Bill
    Im conscious that many smaller (1-5m euro) investors have taken on sub debt, possibly been missold to them. But…..this is capitalism. Sometimes your investments fail (iv got some atlantic resource share certs if your interested – divil the one bailed me out there). Do the math. 10b overpayment = 550m pa interest cost. Maybe, if were lucky, NAMA might get 200m on the assets taken over for that. So the 350m is for thee and me to pay. Now, is that a good use of taxpayer resources when we could burden share with the providers of risk capital?

  15. @Karl Whelan

    Sub-section 58(1)(c) which you have highlighted deals with the long term economic value of property rather than the long term economic value of bank assets.

    The long term economic value of the bank assets (58(1)(d))is the maximum we will pay; the draft legislation does not suggest we will pay the the long term economic value of property as defined in (c).

    One would expect that the long term value of the bank asset would always be less than the long term economic value of the property becasue the long term economic value of the property must stretch to cover the notional bank’s cost of funding, the notional bank’s profit, the notional bank’s administrative expenses and a reasonable development profit for the notional developer to keep him incentivised. (The “notional bank” I mention is that buyer of bank assets referred to in 58(1)(d))

    I think a concern that has not been highlighted is that the value of a bank asset has not been capped at the amount owed under that loan. It is not included in 58(6) or 59(2).

    The nexus between the long term economic value of property and the long term economic value of bank assets can be seen in the below sections (all credit to Acrobat Reader for its search facility):

    “58.—(1) In this section—
    ….
    (d) a reference to the long-term economic value of a bank asset is a reference to the value that it can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated.

    (2) Subject to subsection (4), the acquisition value of a bank asset is its long-term economic
    value as determined by NAMA.

    (4) NAMA may, if it considers it appropriate after consultation with the Minister, and subject to any regulations made by the Minister under subsection (5), having regard to—
    …..
    determine that the acquisition value to be assigned to particular bank assets or class of bank assets shall be—
    (i) their current market value, or
    (ii) a greater value (not exceeding their long-term economic value) that NAMA considers appropriate in the circumstances.

    (6) In determining the acquisition value of a bank asset under subsection (2) or (4), NAMA shall have regard to the following:
    (a) any value that the participating institution concerned submits as being, in its opinion, the current market value of the property comprised in the security for the credit facility that is the bank asset;
    (b) the acquisition value already determined in accordance with the valuation methodology of another similar bank asset;
    (c) the credit worthiness of the debtor or obligor concerned;
    (d) the performance history of the debtor or obligor in respect of that asset;
    (e) any reports furnished to NAMA in relation to the matters specified in subsection (7) whether prepared before or after the commencement of this Act.

    59.—(1) The Minister may make regulations providing for the adjustment factors to be taken into account in determining the long-term economic value of a bank asset and the property comprised in the security for a credit facility that is a bank asset.

    (2) In making regulations under subsection (1), the Minister may have regard—
    ….
    (c) in relation to the determination of the long term economic value of bank assets,
    to—
    (i) the long-term economic value of the property comprised in the security for a credit facility that is a bank asset,
    (ii) the net present value of the anticipated income stream associated with the loan asset,
    (iii) in the case of rental property, current and projected vacancy rates,
    (iv) loan margins,
    (v) an appropriate discount rate to reflect NAMA’s cost of funds plus a margin that represents an adequate remuneration to the State that takes account of the risk in relation to the bank assets acquired by NAMA,
    (vi) the mark-to-market value of any derivative contracts associated with the bank asset,
    (vii) any ancillary security such as personal guarantees and corporate assets, and
    (viii) fees reflecting the costs of loan operation, maintenance and enforcement, and

    (d) any other matter that he or she considers relevant.”

  16. So the government solution is to try get the private sector borrowing like mad to support property prices. Now I think I might just spot a flaw.

  17. @Bill

    Thanks for stimulating a good debate here.

    A couple of comments.

    1. In relation to the idea that paying current market prices will “place its banks in the position of scrambling for capital for a few years, depress lending, and visit the economic pain on both the banks and the economy for much longer than necessary.”

    I genuinely don’t know anyone who is proposing this. Remember that if we pay €10 billion less for the assets then that frees up €10 blllion euros that can be used for re-capitalisation. Every serious piece that has opposed NAMA has suggested that this be done. (Indeed, because public outrage may limit how much the government can overpay and the government wants to limit its ownership stake, I have long been convinced that NAMA is more likely to produce an undercapitalised).

    So I’m guessing your real objection is to having any period of public ownership of any of our main banks. My position on this is to agree with the IMF that a temporary period of public ownership can be an effective restructuring tool. However, there are other ways to get private ownership involved after the banks have been declared insolvent, including debt-for-equity swaps and a quick placement deal with private equity or a foreign bank after the bank has been re-capitalised.

    2. On recouping the ‘overpayment’ later, I’m not sure if you have in mind property prices bouncing back or a levy. I’ll note that the legislation contains no mention of a levy and I would bet that none will ever materialise even if we lose a fortune. As for “recouping” through property prices increasing, there are no guarantees whatsoever for that and it’s one hell of a risk to be taking with €60 bn of our money.

    3. “Why, by the way, do you think the Commission is supporting this approach?” Very good question Bill and one worth spending more time on.

    I’m not sure however that “Because it makes sense” quite gets it. I think “Because it made political sense” for them is closer. For instance, a plan somewhat similar to this has been floating around Germany for some time. Do you think the Commission—already relegated to a side player in this as each government adopts its own approach to dealing with its own banks—was going to tell the German’s they couldn’t have a bad bank if that’s what they wanted.

  18. @Karl Whelan

    Apologies – I note the use of the words “according to” in the OP. My mistake.

  19. @ Bill

    actually, just on the subordinated and hybrid debt of the Irish banks – i’d say right now its mainly owned by hedge funds and investment banks, the vast vast majority of whom are not funded by Irish investors. The Irish pension funds who owned that stuff were forced to sell a long time ago when the credit ratings were cut and the prices collapsed. As far as im aware, only the Irish insurance companies would be likely to have any exposure to this class of asset.

  20. @Bill

    While I do not agree with the NAMA solution now that we have it I agree with what you say that in the short term NAMA will overpay the Banks for the property now but over a 10 – 15 year cycle while the property is offloaded in a more structured market they may expect to recover all or part of that overpayment as against Fire Sale prices now.

    My preference would be for 2 New Banks, one for business lending and one for personal lending,mortgages etc and funded from the resources now being put into the Banks. If that meant that good clients left the existing Banks well then they might appreciate them more than the manner in which they are treating them now in regard to facilities, margins, security, charges etc.

  21. I usually keep my mouth shut in public about NAMA and the Irish banking crisis. While I have opinions, they are not sufficiently well researched to press on anyone but friends and family. But the publication of the draft legislation has crystallized some thoughts.

    The long term value of the property portfolio from which NAMA will seek to recover the public’s money will depend critically on:
    – Future patterns of demographics and population;
    – Future settlement patterns; and
    – Future employment rates and labour productivity.

    These will not be the only factors that influence property value in the long term, but they are near-certain to be among the most important. Any assertion that NAMA will eventually break even or make a profit implicitly claims that these will fall within some limits or other. I don’t know what those limits are, but I think it is important that they should be made explicit. Because, while (to my eyes anyway) estimations of property values 10 or 15 years out look like “finger in the air” stuff, it is possible to have a well grounded discussion about population, demographics, settlement patterns, employment rates and productivity.

    This is all the more important because mainstream assumptions of the recent past about population, demographics and settlement patterns, that property developers will have used to inform their investment decisions, look likely to be wrong.

    Mainstream assumptions about future population have mostly followed CSO scenarios that assumed substantial net inward migration, on top of a significant natural increase in population. QNHS data over the last year has shown population growth (aged 15+ anyway) slowing, and going into reverse (Q1 2009). My own scenario work shows very little prospect of population growth getting back on track. And if the people ain’t there, they ain’t gonna buy or rent homes, they ain’t gonna work in offices, and they ain’t gonna use retail space.

    I think it is almost inevitable that changing thinking and incentives around settlement patterns will drive patterns of new development different to those that property developers have assumed. Where there is development, it may not be on the lands that developers hold. Ideas about sustainable development that were aspirational in recent years are becoming more deeply embedded in policy. There is every prospect that peak oil will drive fuel prices so high that commuting will become less attractive. And, driving in the opposite direction though not necessarily in a way that benefits the value of existing development land, property taxes and a better broadband infrastructure have the potential to make housing outside the main population centres more attractive.

    So, let’s make the assumptions about population, demographics, settlement patterns, employment rates and productivity explicit, and get away from the “finger in the air” stuff.

  22. On a different note, Section 51 of the legislation relates to appearences of the NAMA CEO at Dail Committees:

    (2) The Chief Executive Officer and the Chairperson, in giving evidence under subsection
    (1), shall not—
    (a) question or express an opinion on the merits of any policy of the Government or a Minister of the Government or on the merits of the objectives of such a policy

    I think we can call this one the “Thou Shall Not Pull a Michael Somers” Clause.

  23. How about if you consider the 10bn overpayment a subsidy to save the Irish banking system?

    It is admittedly highly unpalatable but without overpayment would the banks take part in NAMA at all?

  24. @Mark H
    How about we take the 10b from the equity holders instead, then recapitalise? That would save the system also.
    Oh, and if they dont want to take part in NAMA, sayonara.

  25. @Con

    I think your point is important.

    The Govt are talking about long term trends in property values from the 1970s (when data was first collated) to now but excluding the boom. Is that really a long enough period to get an accurate trend from??

    More importantly, are previous long term trends likely to continue with globalisation and the rise of asia, food shortages, population saturation, and peak oil? I would like to know that this issue has been considered even if it is decided that no adjustments need to be made to predictions based on previous trends. Perhaps the long term economic value should be substantially les than the market value!

  26. @Mark Hutchinson

    That is a good point. NAMA has to be more attractive than liquidation and capitalisation thereafter. Key benefits for the State are a quicker resolution to the crisis with less administrative and legal difficulties.

  27. Brian L,

    With the guarantee, outside of NAMA surely it’d be possible for AIB and BoI to keep running as “zombie” banks a la Japan, trying to write off the losses out of earnings for years to come, with all of the consequent economic problems.

    At least with overpayment all the banks take part and we do clean up the system. Admittedly the €bill is going to be a big pill to swallow for the tax payer.

  28. @Zhou

    “Key benefits for the State are a quicker resolution to the crisis with less administrative and legal difficulties.”

    Are you sure about the quicker resolution and the lower administrative and legal difficulties? Seems like you’re going back to drinking the Kool-Aid again my old friend.

  29. I’m sorry, but what’s the problem with just foisting the problem onto the bond holders? Up side: we dont bankrupt the state, recapitalized banks. Down side: unhappy bond holders. Am I missing something important? Would this affect the price of Irish corporate debt in future? Even still, is that enough to warrant not using this approach?

  30. The divil will be in the detail and that will be a long drawn out process that will be difficult to analyise until we have already gone through a significant part of it. At which time it will be to late to object.

    As karl mentioned, the fact the share prices of BOI and AIB have gone up this morning would indicate that the markets liked the wording and that the taxpayer subsidy is likely to be large.
    However the information that Nama will pay market prices for some of the property contradicts this assumption.
    🙁 ?????
    It all seems diliberitely elusive

  31. “(2) The Chief Executive Officer and the Chairperson, in giving evidence under subsection
    (1), shall not—
    (a) question or express an opinion on the merits of any policy of the Government or a Minister of the Government or on the merits of the objectives of such a policy”

    The state bears the risk in NAMA for €90bn. The state is to be the employer of CEO and Chair of NAMA to manage that risk. The CEO and Chair are in the first instance accountable to the state.

    Fianna Fail is signalling here that its own political reasons will govern its administration of NAMA in respect of its developer friends.

    What’s even worse is the opposition’s pathetic failure to challenge this.

  32. The borrower must be overpaid, else s/he will sue and a parallel valuation process will ensue overseen by the courts? The legal costs will be amazing! Another series of tribunals. Truly marvellous how there is value in this for everyone …….. except the taxpayer.

    Theft from the taxpayer is obviously no longer theft. Economic necessity to have banks that are rich. Because they were so rich before and that turned out well didn’t it! We are stoking them full, so that they can be raped again!

  33. @KW

    Yes I am sure.

    It is quicker because the Government is forcing the pace on write-downs and balance sheet clean up.
    It is administratively less of a burden because one can leverage the bank’s personnel in administering the assets acquired by NAMA.
    It is less legally fraught because it is a voluntary commercial process so questions of infringing the banks’ property rights do not occur.

    I really don’t understand your point.

    I note most of the same benefits would accrue from nationalisation save that the shareholders property rights would have to be vindicated. Is that what you are getting at?

  34. @Brian

    Give the opposition a chance! Even the Minister agreed on radio this morning that the oversight and transparency provisions are too weak as they are.

  35. @Zhou

    Indeed, I’m comparing Nama with, as its opponents like to call it, pre-emptive nationalisation, as indeed it appeared that you were.

    Let’s compare on the aspects you mentioned:

    1. Speed: Nationalisation happens overnight (could have happened over the long weekend if they’d been willing). Nama purchases drip on and on into next Summer at least and who knows when the banks are properly re-capitalised and working without a guarantee.

    2. Admin and Legal Difficulties: I’ve never stressed this as my main reason for opposition to Nama but, yes it is an admin and legal quagmire, surely you can see that by now? As for “leveraging the bank personnel” as an advantage of Nama remember that

    (a) An AMC can get whomever it wants to manage the assets, so even under nationalisation, an AMC could choose to employ the banks to do this.

    (b) It’s not really such a great idea anyway for lots of reasons that I’ve discussed before (lack of expertise, need to break existing relationships.)

    In relation to nationalisation, the shareholder property rights issue can be dealt with in lots of ways (the tough NR route, paying share value on some date, providing pieces of paper that pay off in case the assets turn out to be worth more) but it would be separate and away from the main issue of sorting out or banks. For example, I haven’t seen many stories about potential compensation of Anglo shareholders being a key problem preventing us from sorting out the banking crisis.

  36. @ Eamonn

    the gross value added to AIB/BOI this morning was €280mio give or take. If thats the cost of the overpaying on NAMA, then i dont think anyone here is going to complain too much.

  37. @ Eoin

    Cmon dude, play fair here. €280m would just be the incremental effect on the overpayment number gleaned from yesterday’s events.

    Tracing the potential transfer from the taxpayer to the shareholders back from early Feb (pre-Nama annoucement) to now, off the top of my head I think the estimated transfer is about €3 billion. And frankly, to limit state ownership to 80% of AIB and 50% of BOI (as the stockbrokers are hoping) it’s going to have to be quite a bit larger than that.

  38. @ Brian

    Indeed, the ministerial discretion embedded in this legislation is huge. Won’t it be fascinating to watch what happens when FF are out of power? My personal train-wreck fantasy involves a) Nama legislation passes in September b) the extremely aggravated people of Ireland vote NO on Lisbon c) Government collapses d) nuclear codes pass to Richard Bruton and George Lee.

  39. @KW

    We were at cross purposes so. I did not intend my comment as a comparison between NAMA and nationalisation. I was thinking of NAMA -vs- banks muddling along on their own to clean things up and eventually requiring recapitalisation. I note that the Lex Column in the FT today recommends the mother of all stress tests and then recapitalisation with no AMC and no nationalisation.

    I do not see those three issues as being advantages for NAMA over Nationalisation. The NAMA -v- Nationalisation debate is a different kettle of fish.

    I agree that shareholder compensation is not a major issue.

    I do not think re-nationalised banks would solve the problem overnight and there would still be a long drawn out process to write down loans. It is not clear just how much quicker nationalisation would be in that regard or how motivated staff would be.

    As for breaking relationships, the banks move personnel for this purpose already (for example, the guy in Ulster Bank who advised me to fix interest rates a year ago is nowhere to be seen!). NAMA can easily require the bank to break relationships on their behalf. Historically, bankers haven’t had any compunction about screwing delinquent borrowers to the wall in any event.

  40. As Karl rightly states the draft bill is detail-lite. I wasn’t really going to get drawn in to commenting on it’s detail. Though I wonder if these couple of lines outline the potential growth of the NAMA project:

    “(2) Without prejudice to the generality of subsection (1), NAMA may—
    (a) provide equity capital and credit facilities on such terms and conditions as NAMA thinks fit,
    (b) borrow or raise or secure the payment of money in any manner, including by issuing debentures, debenture stocks, bonds, obligations and debt securities of
    any kind, and charge and secure any instrument so issued by trust deed or
    otherwise—
    (i) on the undertaking of NAMA or on any particular property and rights,
    present or future, of NAMA, or
    (ii) in any other manner,”

    Does “provide equity capital and credit facilities on such terms and conditions as NAMA thinks fit” mean we’re looking at Anglo 2.0?
    Does this mean that NAMA might pay coupons with more bonds?
    How much more than the 90bn are we looking at?

    This Bill seems to seek a blank cheque.

  41. @ Karl

    fair enough. My point is really that the share price movements of AIB/BOI are still somewhat meaningless in the grander scheme of things. Its still pittence compared to just how big NAMA is going to be. Some fairly moderate changes to the underlying assumptions over the €60bio value of NAMA could easily wipe out the €3.5bio equity value of the combined banks. There’s a lot more relevance in the value of the outstanding bonds and how they are reacting.

  42. @Sean,

    As regards foisting the issue of recapping the sytem on the senior bond holders. My understaing is that this is currently against the law as depositors rand equal with senior debt holders. You can change the law or can you?
    Secondly, when the loan book exceeds the core deposit book and you want to keep lending growing, you are going to need bond holders in the brave new world. will they turn around & lend you money if you default.
    Clue, try missing a payment on your car loan and then look fora mortgage.

  43. The fly in the ointment or our salvation depending on how you look at it is the bond market. Euro 90 Billion worth of bonds being issued by a country with no end to deficits in sight will command a higher interest rate and it remains to be seen whether there is any appetite for the risk entailed.

  44. Some thoughts on NAMA

    1) There doesn’t seem to be any comments that paying current market
    prices for NAMA assets would be an overpayment in itself. Do people
    really believe that even the limited transactions that take place
    currently are reflective of the bottom of the market? The Japanese
    property bubble resulted in an 80% decline peak to trough and lasted
    over 15 years. I wish the government were debating discounts vs
    current market prices rather than the current market vs overpayment
    debate. (Scrapping the government guarantee lest we bankrupt the
    nation of course).

    2) NAMA may pay administration fees to the banks for administering the
    loans on their behalf? Are you kidding me?

    3) @ Bill. Unfortunately we have to deleverage our economy so
    stimulating the flow of credit is unworkable. Credit growth is falling as
    demand for credit falls as deleveraging occurs but also as asset
    purchases and business plans are uneconomic in a deflationary
    economy like ours. The “vicious self-fulfilling cycle” theory of
    decreasing credit availability misses the point that it is a return to
    normal conditions. A painful return no doubt but an inevitable one.

  45. I hope Karl and others keep ranting about the madness of overpaying for the toxic stuff. A six week window should be enough to convince the powers that be that overpaying to the extent floated is a form of political suicide.
    As regards the price rise today a quick check shows that London volume is 300% of Dublin – gambling.

  46. @ CM – The Japanese property bubble resulted in an 80% decline peak to trough and lasted over 15 years.
    Good point. But will we learn from this or continue to ignore precedent.
    The stated objective of NAMA – resumption of credit – is unlikely to succeed
    for the reasons you point out and as evidenced by the Uk and US experience. Another factor that will impact on credit decisions will be the understandable reluctance of decision making loan specialists to take any risk.
    Now that the biggest developer may be liquidated will also impact on values.
    Grim

  47. On valuations, I think it is unsatisfactory that the State or NAMA cannot object to paying the current market value determined by the valuations process.

    As CM points out there is every chance that the market still has some way to fall and the real economic value may be less than market value.

    The suggestion that NAMA could not make a lower offer than current market value is based on confused logic. If this is a voluntary proces then we do not need to protect the banks’ property rights and should be able to acquire at less than market value (subject perhaps to the relevant bank’s consent in that case). This facility would be an important element to facilitate effective oversight.

  48. @CM
    An opinion(ated) piece supposed to be in the times Sat 1 Aug by me touches on that very issue

  49. Most of those supporting the idea of a bad bank rely on the Swedish experience and their own academic knowledge of recessions. This is a depression. It started in 2000. There was a desperate attempt to stave it off after 2001 and that led to massive easy credit and bubbles everywhere, even in the tech sector eventually.

    A bad bank is a deferral of consequences and a juggling of who will pay for the disaster.

    This is so bad that the bad news will still be coming in in 3 three years time! There is no way that any ANY capital should be wasted on malinvestments like this in view of what is going to happen. When you are in a lifeboat and the food has run out and the lots have been cast, you just get on with it. You do not have a funeral service and you do not throw the food overboard, people!

    This tantamount to exempting, from the lot, the biggest of the passengers, on some principle. As a result, more must die before the boat is eventually found.

    Yes it is really unthinkably bad. Deckchairs, Titanic. Academic economists. In the real world, survival is for those who have power and use it. NaMa is making choices that will be regarded as highly wasteful and you all know it. Shame.

  50. @Pat D
    not sure what the thrust of your argument is. Id like to think that if it is “Deckchairs, Titanic. Academic economists.” time that I an others are going “for f*cks sake, LASH THE DECKCHAIRS TOGETHER IN A RAFT, dont argue over the pattern on the cushions”. However, I agree, “In the real world, survival is for those who have power and use it.” so DoF and senior govt officials willcontinue to think “oh, great more ice, my g&t was getting warm” and when the waves lap alongside will pull the cord on the outboard and speed off.
    So, while I may share your despair, better to light one candle etc etc

  51. Good article Brian. We need more press to counteract the NAMA propaganda machine. Dr Bacon was out defending on RTE Radio this morning.

    On a lighter note- googled NAMA and got
    Nama (folklore), a hero in Altaic folklore who built an ark to save his family from a flood
    Nama (crater), a crater on Callisto, one of the many moons of Jupiter

    Take your pick – the crater seems appropriate for the toxic trash

  52. Hi, this is a very interesting thread, and I thought Garry’s comment about the likelihood of established banking players spotting the rookie taxpayer for a fool was thought-provoking.

    As a complete layperson in economic matters, may I please ask the opinion of others what may seem a naive question. Following the success of the SSIA savings incentivising scheme – would the government not be able to directly incentivise lending AND long-term bank recapitalisation (in the form of future interest repayments) by setting up a scheme to pay, say, 25% of the repayments on loans to small companies and sole traders for a period of, say, five years, to be reviewed in light of the state of the economy at that time? This might not add up to the total support the banks need, but it would certainly provide a stimulus to economic players with a potential to maintain employment and keep taxes flowing into state coffers…

  53. Manna from Heaven?

    And after the Seventh Month the mandarins rested… briefly.
    It seemed they had managed to manacle paddy past, present, and future (Paddy) to stump-up the spondulicks to bail out everyone and everything. Hans however, was beginning to smell a rat. The Bonanza would work like so; the ‘Statesmen’ would write the ‘Paper’ and give it to the Banks (via NAMA) in exchange for the Bank’s/developers bad debts, the Bank would then take the ‘Paper’ to the ECB and exchange it for cash. Paddy would be in hock to Hans for 60B (Billion), that is if the write down was a ‘fair’ economic value (30% max.) on the bad loans.

    The ‘sell’ mantra for the bonamza has clicked into gear.
    · It’s good for the banks because it would take bad loans off their books at a good future economic value which means they could make out to be a bank and lend again.
    · It’s good for the statesmen because they are in control of NAMA (and the banks because of the Sept ’08 bailout*) and the stink could be stuck to the developers and the Banks bad loans in the first place.
    · It was good for paddy because it would get the banks lending him cash in the present and future, and.
    · It was good for Hans because it prevented Eire going (officially) broke and upsetting the Euro (the ECB was also giving the Statesmen enough rope to economically hang Paddy).
    · Obviously, it was bad for the developers.

    The NAMA controlled loans could then be developed or disposed of (repackaged and sold on) and in due course everything would be OK. The PiNA MAlada’s would flow again.

    Hold on a Nano-nama-second, sell on property debt and everything would be OK, paddy and Hans were getting a sense of deja-vu about this, wasn’t this what kicked off the global financial meltdown shuffle in the first place, were the Statesmen and mandarins seriously suggesting this? Yes, but it’s not Hans Mannequin and Paddy Nammaquin’s job, to not see the Emperors repackaged Clothes.

    What if the Banks bad debt could be purchased at a much lower level by NAMA, surely that would help?
    No, the Statesmen had backed the banks loans in Sept ’08*, so if NAMA didn’t appear to be paying, the Statesmen would directly to the banks. No, a lower price would probably (officially) bust the Banks and would present the Statesmen with the problem of how to route extra ‘paper’ to the ECB without appearing to. 30% write down on 90B meant routing approx. 60B via NAMA/Banks to the ECB, if the write down was 60% then the routing of paper via NAMA/Banks would be approx. 30B. How would the Statesmen get their hands on the difference of 30B in order to keep the Banks from going (officially) bust, something else would be required to take the hit, NTMA.

    Hold on a Nano-nama-second, NTMA issues Government (Statesmen) bonds (paper) in order to assist in financing the country (Statesman). To date (end of July ’09) NTMA has issued circa 22.7B in Bonds this year with Irish Banks accounting for the purchase of at least one third of this amount, say a minimum of 7.5B (up from 520m or .52B since Oct ’08). The Banks have been using these bonds as collateral in the ECB to get cash. 7B in 9 months, just how could they get away with a potential extra 30B via this route, best to use NAMA (who work under the auspices of NTMA). Did the Statesmen really want to more then double Eire’s NTMA ’09 Debt to help out the Banks/Developers – regardless, Paddy will be in hock to Hans for 60B.
    The Statesmen won’t want to tarnish NTMA, they are the official Bus and will be conducted accordingly down the road, NAMA has the Bad Loans and greedy Developers associated with it (as well as only being around in the short to medium term) in the public mind, line them up for the hit. However, NAMA could not/must not purchased the Banks original bad development loans for less the 70% i.e. a 30% shave.

    Hold on a Nano-nama-second, in a recent (July) high court case taken by AIB the valuation on a development property 2.5 years ago was 3.9m, today (according to two separate surveyors) is was in the region of 620k to 650k, this represents approximately an 83% shave. Not the 30% shave the Statesmen have in mind with NAMA.

    Think of the whole sordid non-Statesmanlike exercise as an adverse rather than a reverse debt takeover done in our name by our Statesmen; the amplitude of our borrowings/debt is spiralling in the blink of a nano-second. This happened in Sept ’08 and is currently being repackaged and brazenly sold on, the Statesmen are quickly utilising the Bankers old tricks. Eire go (officially) broke , not quite… yet. Eire go “Banama Republic”, you bet.

    *The Government has decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II)

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