Keenan on NAMA

Brendan Keenan has an interesting article on NAMA in today’s Irish Independent: you can read it here.

19 replies on “Keenan on NAMA”

Mr. Keenan is gradually coming around to the flaws of Nama but at such a slow pace that it appears he’ll finally understand how bad it is some time in 2010 (and no doubt claim then he knew all along.)

Amid all the verbiage, let’s look at this for the summary of why we need to overpay:

“So the temptation for the Government is to pay a higher price, so that the banks can stay on the stock market and tap private capital, rather than borrowed state capital.”

Two points on this:

1. Once nationalised and re-capitalised, there is no reason why the government can’t work hard to get a significant amount of equity in these banks purchased by private investment. They should already be thinking about this, whether they anticipate having a majority stake or full ownership. Why is Mr. Keenan so sure that private capital will be happy to invest in a bank that is 70% nationalised but would have no interest in purchasing a 30% stake of nationalised bank?

2. Beyond wiping out private equity, Tier 1 debt-for-equity swaps are another way to get private capital involved.

The constant insistence that the only way to get any private capital involved is by keeping current shareholders intact stikes me as largely DoF spin.

Another thing I don’t get is this sentence:

The budget crisis makes Mr Lenihan reluctant to put capital into the banks. For that he needs real money, whereas he is buying the loans with a huge IOU, to be paid at some unknown date in the future.

How can this be? Surely anything NAMA can use to pay for bad loans (huge IOUs), the government can as easily use to pay for bank shares.

It seems to me that if the banks are to lend, they need sufficient capital, and this must come from somewhere. The only difference is who owns the recapitalised banks – the government, or current shareholders.

Good question Graham.

I just wrote this on another thread:

This is not the first time today that the idea has come up that re-capitalisation requires “cash” while overpaying requires only “bonds”. It’s not true. You can acquire an equity stake in exchange for government bonds. Why would anyone think that this couldn’t be done?

There is a need to contrast the cost of issuing the bonds, which would likely be at a floating rate close to the Euribor (1.5% at present) and the cost of injecting capital into the banks which would have to be done with real cash; i.e. raised by Government bonds (approx. 5% at present).

Also, I am amazed that the debate to date has failed to focus on the very different borrowing requirements between the State and banks. The State is likely to borrow approx. €25 billion in 2009 whereas, one bank alone will likely be borrowing/rolling over funding well in excess of €100 billion. The State borrowing to invest equity in banks is the easy element, the difficult part begins with the State seeking to raise the level of funds required to roll over their funding. No doubt many commentators will claim that they can borrow from where they always borrow from, however, many of these lenders have an aversion to lending to nationalised banks; see the level of Central Bank funding in Anglo Irish Bank.


I have to confess to not understanding the “real cash” argument. Why would banks happy to accept a particular bond from Nama in return for property loans not also be willing to accept the same bond in return for equity?

The Irish Times reports on one aspect of the AIB figures today which is astounding -“A quarter of the bank’s loans are now classed as distressed in one way or another. The figure was nearer one in 10 six months ago”.
Clearly a bigger crisis is looming and perhaps that is why the IMF suggested including other assets in the NANA bank bailout.


The existence of our banks is dependent on the government guarantee. Therefore accepting bonds as capital, whatever our sovereign rating is, shouldn’t be too big of an issue (i.e. if Ireland’s sovereign rating goes round the u-bend, the banks will follow).

If banks take nama bonds at 1.5% and the equivalent gov bonds have a 5% coupon, will banks have to mark the value of nama bonds down?

@Karl W.

As far as I can see a significant difference between throwing money at the banks via recapitalizion and NAMA is that the NAMA route can be treated as off-balance-sheet, the merits of which I am very dubious, but seems to convince most politicians that they can have a free lunch.

“The constant insistence that the only way to get any private capital involved is by keeping current shareholders intact stikes me as largely DoF spin.” I am convinced that this spin is entirely political and inspired by the stock broking/finance community. Remember how close a previous embattled MoF (one Bert Ahern) became to the then head of NCB during the last punt currency crisis.

Some of us were foolish to believe that the off-balance sheet ruse had died with Enron!

Davy economist Rossa White wrote on July 24: “Many people have assumed that NAMA will be on the Irish government’s balance sheet, but that may not be the case. Last week’s ruling by Eurostat (“The statistical recording of public interventions to support financial institutions and financial markets during the financial crisis”) suggests that NAMA may well stay off balance sheet. That means bonds worth up to 40% of GDP may not add to Irish gross government debt.

The Eurostat ruling is quite complex, but the crucial section from an Irish point of view is 8. Classification of certain new bodies. To sum up, it seems that autonomy of decision is the salient factor. The following sets out the position: ‘Where a new body is created . . . the identification of an institutional unit in the national accounts requires that the body has “autonomy of decision” in respect of its principle function and either keeps a complete set of accounts or it would be possible and meaningful, from both an economic and legal viewpoint to compile a set of accounts if they were required’. On that basis, NAMA – which will make its own decisions – could be classified outside the General Government sector.”

Off-balance sheet can also be off the radar in many ways.

Former Clinton administration Treasury Secretary Robert Rubin, who joined Citi after leaving Washington, earned $17 million in 2008, but was not aware of the detail of $55 billion of collateralized debt obligations (CDOs) and other subprime-related securities on the group’s balance sheet. “The answer is very simple,” he told Fortune Magazine. “It didn’t go on under my nose.”

The New York Times reported in November 2008 that in September 2007, Citi’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43 billion in mortgage-related assets!

So I suppose, why should we have expected part-time chairmen at Ireland’s two biggest banks to know much about what was going on under their noses also?

We seem to be going around in circles on the difference between NAMA IOUs and Government bonds. At this stage I think it would be useful to have an “ex cathedra” pronouncement from one of this blog’s “Contributors” to enlighten those of us who are less knowledgeable. My understanding is that NAMA bonds will have to have a coupon similar to that of Government bonds, say 6%, or else (ref. Ahura Mazda’s query), if they have a coupon at, say 1.5%, they will have a value of one-quarter of the issued amount.

There seems to be a view that NAMA will be able to acquire the bad loans on the cheap (and, perish the thought, off-balance sheet) and that this makes the under- or over-payment issue much less important.

In my view this is entirely separate from the Government’s recapitalisation of the banks in the event of a severe “haircut”. But what it has in common is that the cost of funds for the Government and for a government agency are very close.

Enlightenment, please.

do we care if its off, on, beside, or in another dimension to the “balance sheet” of the state.
FACT: if these loans could support repayment they wouldnt be given to NAMA to manage. So they cant
THEREFORE ; we, the taxpayer, will ultimately be liable for the coupon and retirement of the bonds.
THUS; you, me and Rossa White will be in the frame to pay.


Fully agree with what you have set out, but the question relates to the coupon. Will NAMA IOUs have a coupon less than the coupon on Government bonds?

@Paul H
Welll..rumours are that it would be 1.5% based on it being shortterm paper. But that would mean that the govt had no confidence in the toxic loans repaying whatever. In any case, the transfer of wealth (from taxpayer to reduce the losses of share/bondholders) would still be transferred.


We don’t really know what the Nama bonds are going to pay. The accompanying Q&A for the press says it will be a variable rate of interest. I suspect it will pay Euribor.

The lower rate of interest does not mean that the assets are worth one-quarter the value of a bond paying 6% because a lot of the value is in the principal and also Euribor won’t always be as low as it is today. But yes, a low-yielding asset will sell on the open market for less than a high-yielding one.

This could cause problems in terms of re-capitalising the banks if these assets are marked (down) to market soon after being acquired. However (and here we’re running up against the limits of my sketchy understanding of financial accounting) I think the bonds can be treated for accountancy purposes on a “hold to maturity” basis in which only the face value is counted as an asset. Interest income then accrues throught the profit and loss statement. This would just mean that these bonds may end up providing a pretty meagre interest income and this would make it more likely that further recapitalisation will be required.

Any other financial accounting experts out there care to provide some insights on this?

Variable coupons? That’s risky. The cost of hedging this risk should be substantial as there’s a bit of a risk multiplier here. If rates go to 5%, the likely disposal values of properties backing nama assets would diminish as people doing the purchasing will also require credit. This would push property prices lower (using the deeply flawed affordability methodology favoured by Irish lenders). You also need to factor in such credit will probably carry a higher spread in the future.

This is part of a turd polishing exercise by Nama designers. Designed to make it look that the assets moreorless pay the funding costs. It is purely short term cosmetics. It’s easy to hide losses for a couple of years and pray for a miracle. It’s a problem when your government thinks this is a good ploy. Especially if these tricks cause greater losses in the long run.

Brain L, Karl, Ahura Mazda,

Thanks to all. From the beginning I have seen NAMA as a politically driven exercise to shunt insolvency-threatening liabilities as a far as possible into the future, to minimise the short to medium term cost of this liability-shunting, to return to the status quo ex ante as quickly as possible and to rely on a rebound in land and property prices (and inflation) to minimise any eventual write-down.

Many years ago a collleague advised me “Never underestimate the slipperiness of an Irish civil servant”. I’m sure the finest minds in the DoF have made every effort to craft the path to this desired outcome for their politcial masters. To what extent they will succeed is debatable, given the avalanche of household insolvencies and small business bankruptcies that is building up, but a deal – or sequence of deals – will be thrashed out between the Government and banks behind closed doors and we’ll know nothing until the deal (or deals) is done.

The Government and the banks are locked in a symbiotic relationship – like a competitor in a three-legged race. Unfortunately there is no three-legged event in the global olympics in which we have to compete.

The current system of democratic governance doesn’t provide a sufficiently strong power hose to clean out these stables and I foresee a continuation of muddle and a slow and painful sinking into the economic mire.

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