I don’t think it’s a good idea that an assets price is determined/dependent by credit available. This isn’t limited to house buyers. Developers competed with each other, outbidding each other with credit.

You correctly point out that first time buyers are unlikely to require credit. I think the key is that that it doesn’t cause asset price inflation. Given very low population density, real house prices should be pretty static. In 2007, they were at 3 times what they should be.

The whole proposal is based on the idea that the NAMA bonds can be repo’d (either at the ECB or on the interbank markets). This lets the banks swap them for cash at a low interest rate, less than the coupon on the NAMA bonds is paying. The result is the banks make some money on the trade and they now have cash to loan on rock-solid assets with - houses, offices, development lands, breakfast rolls, you name it, those whizz-kids will loan you money for it. They’re financial genii.

Can somebody tell me why we want to give our bozo banks money again? At least now they’re broke they can’t screw up.

All asset prices are somewhat dependent on credit. How are factories financed?

I had a quick look through the paper (skipped their model). I couldn’t help but feel that I’d rather be in the buyer’s position. If there are potential buyers, there is a market, yes? A key difference with this report is that many Irish sellers are leveraged and can’t afford the loss. I think it’s even reasonable to consider banks as being leveraged on their core capital. It’s where sellers can’t afford to hold, that activity will pick up. In this case the market price can be established through foreclosures, executor sales etc.

@JL

“credit will be restored and buyers can pay more for a given asset”
Why should credit be diverted to such unproductive uses? Is it healthy that asset prices are dependent on credit?

At the same time average industrial wage was €18k in 1987 while it was about €38k in 2007.

The house had increased about 11 times while wages just over doubled.

Why?
1. Population increase? But the population is probably no more than 10% higher than it was 20 years ago. Even if you argue migration Dublin population can’t have gone up more than 50%
2. Lower interest rates? When we borrowed interest rates were around 11%. The question is do lower interest rates effectively get balanced out by higher house prices. People can afford to borrow more and bid higher so they do.

What is the real fundamental value of my house? And if it is nearer €700k than €65k why is this when none of the other fundamentals (population, income) have shifted the same way.

I will try to explain. Property has always depended on credit for part of the purchase proceeds in the ratio of 1 euro of equity for 3 euros of credit. Remove the credit, as is the case at the moment. this leaves the most that any buyer can pay as 1 euro of equity. This is where we are at the moment.

this is the so called firesale level. therefore, if NAMA can unclog the credit spigot, credit will be restored and buyers can pay more for a given asset.

Therefore, is NAMA justified being prepared to pay more than firesale bids, since they are clearly too low to clear the market.

Put another way, you have bids that are too low and offers to high to clear so you have a Mexican standoff, therefore does NAM not by definition not have to pay up to set a clearing level.

I am not sure, I buy this point in toto. I am just interested in exploring it,

However, we need to remember that there is no fire-sale of Irish property assets going on right now. Quite the opposite. There is very little activity. The low prices that people are willing to offer today for hotels in Kilternan, to give a concrete example, reflect what people perceive as a low fundamental value. We are not at a stage where the asset values are low because there are large numbers of similar properties for sale in the market with a limited buying capacity.

So I don’t think arguments about firesale prices justify the NAMA strategy of overpayment relative to its own definition of prices that would take place between two “knowledgeable and prudent” agents. But once NAMA is up and running, I agree they should sequence the sale of properties carefully.

Does not the first part of the abstract lend some support to Lenny’s decision to “overpay” above market prices. “we argue….illiquidity makes bid and ask prices unsuitable for ….establishing fair value”
Historically, property from a field to a house has relied on credit to close the transaction. We used put up one quarter with the banks putting up three quarters of the proceeds. now with banks unwilling to lend prices will fall to the equity component…ie 25%. In other words house prices will fall by 75% in this example. But if Lenny can argue that this is not normal, credit will come back eventually. Therefore he can afford to pay over the odds. Does he have a point?

Market clearing is a more accurate term as the disposal would occur over a couple of years. I’ll use that in future. There’s a real risk that if nama overpays for assets, politicians may not wish to realise losses. This has the potential to cause greater problems.

I don’t think you are correct in your assertion There are some people out there sceptical of both nationalisation & NAMA. More to the point really sceptical of a policy that rules options out with out debate and even more scared of an approach without transparancy.

Yes shrinkage until all problem loans go away & banks recapped to satisfactory level. Irrespective of how you do it. The issue is how the bill is divided up between state, eurozone, bondholders, equity holders, employees & customers. Did I leave anyone out?

I don’t get the point of para 2.

A thought that has bugging me on nationalisation is the complete absence of any state body that I could think of that runs itself correctly. Apart from Horse Racing Ireland but that is probably run by Mr. Magnier

I would say the evidence is provided by the depo outflows from the major Irish banks post guarantee. The money that has gone is largely the large corporate & money market funds & has been replaced by ECB funding. No counterparty is going to admit this is the case but nationalised banks with high dependence on wholesale funds will struggle to raise wholesale funding.

As regards the 1990s experience in Sweden, I would say it is of little relevance to now. Was the Swedish banking system in the early 1990s net long of deposits. My hazy memory from the time was that they were not as dependent on international funding as the Irish banks are now.

Also, I think you are probably correct that interbank funding is less of an issue for nationalised banks. They are all in same boat and wll continue to deal with each other. The problem is with their lines to big money market funds, custodians, asset managers, supranationals, large corporates etc. these have been an important source of funds for the Irish system. These tend to have a very low risk tolerance.

“US wholesale money market do not like nationalised entities. They get crossed off the list. ”

Can you provide some support for this assertion? At what level of government shareholding does the crossing off occur? 50%? 90%?

If the statement is that nationalised entities get shut out of the inter-bank markets for deposits, repos, fras, interest rate swaps etc then it is not correct. For example, it was not the case for swedish bank Nordbanken in the 1990s.

Arguably with the blanket guarantee on most of the interest paying liabilities (including gawdbeless us..part of the sub debt) they are effectively nationalised. Hence the run. US wholesale money market do not like nationalised entities. They get crossed off the list.

Here the rock and hard place we face. No capital means no funding means no lending. But state capital means less funding means no lending. With a loan to deposit ratio in excess of 100% (is AIB 150%?), you need wholesale funding. That raises another issue. Are you wise to burn the senior bond holders in the systemically important banks (AIB & BOI) given that you will need them?
That is why the catch cry of “nationalise and burn the witches (sorry bondholders) brings as many problems as solutions. I am very dubious about debt equity swaps for the big 2. Most of the bonds are held by dedicated bond funds & banks who do not invest in equity.

Deposits by banks have risen from €25bn (15% of funding) at end of December to €45bn (27% of funding) today. (see page 20 of http://www.rns-pdf.londonstockexchange.com/rns/8370W_-2009-8-4.pdf )

It would be great to know who these banks are, and if any of them have ‘Central Bank’ in their title..

No US bank has been nationalised. AIG comes closest to nationalised - and it is not even a bank - and it reported a $2 billion (fake) profit.