NAMA and Subsequent Private Equity Investment

Today’s Irish Times lead story on potential interest from a Canadian bank in taking a stake in AIB raises some important issues.  These are being well covered already in some comments at the end of the Carroll thread just below but I think they’re also worth hoisting up to the front page.

Most likely this story will receive a lot of coverage which will report it as implying that NAMA is “a good policy.”  The Canadians will only be willing to invest once NAMA has taken AIB’s bad loans, so we’ll be told that this shows that NAMA is a good policy that is helping to get our banks back on a sound footing.

This is fine up to a point. However, what may got lost in this version of the story is that the potential Canadian interest doesn’t imply any specific endorsement of the NAMA as currently constructed. The presence of a huge amount of bad loans on AIB’s books, and a complex public debate about what to do about it, implies an enormous uncertainty about the future of the bank. And until that uncertainty is resolved, no private investor would be willing to acquire a large stake.

It should be remembered as well that the alternatives being proposed to the current NAMA legislation also involve dealing with these bad assets. For instance, the four-part plan that I proposed in April involved nationalising and then quickly transferring the bad assets to a government-owned asset management company.

In that article, I proposed that the government could fully re-capitalise the banks and then look to sell off equity stakes to the private sector. As with the current NAMA proposal, a key step in attracting the interest of private capital was the hiving off of the bad assets into an AMC. But of course, if this step was immediately successful in attracting interest from private investment, then there would be nothing to prevent the government negotiating with outside investors to have them jointly or fully recapitalise the banks.

I could also point to two advantages of the nationalise-and-NAMA approach in terms of getting private investment involved again. First, with nationalisation, the pricing process of transferring the assets would be far simpler than the excruciatingly complex process that NAMA has now set out on. Without doubt, the asset transfer would be achieved far faster than the schedule being outlined now for NAMA, with the top 50 developers having their loans transferred by the end of the year and the rest later, with the process rumbling on through next summer.

Second, the government is proposing that, at some point in the future, a levy related to NAMA’s losses may be imposed on the banks. This could act as a deterrent to some private investors (unless, of course, nods and winks are being used to indicate that the levy won’t be something to worry about.) In contrast, nationalisation-plus-NAMA would produce banks that do not have any future levy hanging over them. The idea of risk-sharing can be implemented via Patrick Honohan’s suggestion of giving the bank shareholders a stake in NAMA’s profits, should there be any.

I’m sure a contrary argument will be put, which is that private investors won’t want to purchase stakes in nationalised banks, perhaps because they won’t like the idea of having the Irish government as a business partner. However, if our Canadian friends are interested in buying the whole thing, then they could buy the whole nationalised bank also. And if they only want to buy a small stake, then it would seem likely that they’ve already signalled that they’re ok with having the Irish government as a partner for a while. Remember that the post-NAMA outlook being predicted by even those in favour of low haircuts is that AIB could still end up being 70 to 80 percent state-owned.

The other potential argument here is that the Canadians really want to keep the current shareholders involved in owning and managing the bank in the future. Personally, I couldn’t see why. In fact, it would probably be easier for the Canadians to avoid dealing with that crowd altogether.

To summarise, we need to be careful not to confuse correlation with causation. Involvement of private equity investment in our banks may be a good thing. But the fact that there may be a sequence of events in which first NAMA-with-overpayment happens first and private equity investment happens second, does not have to imply that NAMA-with-overpayment is the best policy available to us.

24 replies on “NAMA and Subsequent Private Equity Investment”

Am I correct in thinking that current AIB shareholders are set to gain a windfall, if this becomes reality? The state removes all the bad assets from AIB, the shareholders now have a clean, re-capitalised bank to sell to an outside investor, and all at the expense of the taxpayer.

Am I missing something here? At what point are the shareholders taking a hit?


If there is going to be a levy, AIB should build up a provision each year for expected clawbacks later but what prudent approach should it and its auditors take???

That aspect of the NAMA “plan” is a liitle opaque.

I would guess that the majority of holdings have been purchased since the crash.

So the answer on a killing is maybe or likely!

People leaking this type of information need to be careful. If the potential buyer’s shares take a hammering, they may need to clarify their position. If the approach was tentative, their clarification could be more harmful than a short lived gain from the leak.

@ Ahura

in fairness, RBC is worth around €45bio, and they could buy a 30% stake in AIB for €700mio or so, so i dont think they’re under too much threat from this story. But yes, agreed, there could well be a “look, NAMA is working!” rational for leaking this story, which, true or not, is probably not what RBC want to be involved with at the moment.

One thing that can always be said in favour of the Liberal government of Canada under Chretien (PM) and Martin (Finance) – they told banks “no” when they wanted mergers and other US-style liberalisations in the late 90s. The banks here aren’t bullet proof, but there are no lines to take money out of branches either.

However, this story is not proof that nationalisation is unnecessary – after all, the government could resell AIB just as easily as the existing board.

The leaking of apparently two week old information that a Canadian bank may have an interest in an equity stake in AIB should be viewed in the context of a report by Bloomberg yesterday of the view of RBC Capital (Canadian Bank) that –

“Ireland’s banks are in a “vegetative state,” surviving on European Central Bank (ECB) “life support,” according to analysts at RBC Capital in London.
“In light of the recent business franchise impairment, likely atrophy going forward and deposit outflows, we question the going-concern endurance of the banks,” the analysts said.
“The ECB appears to be acting as the lender of last resort for the Irish banks as their funding models have collapsed.”

The IT carries a limited version of the RBC note buried in the news section of the paper with the leak having front page lead story status. Wonder what is going on.

Interestingly, the leak, if designed to counteract the bad news, only serves to reinforce the perception that the taxpayer is about to be fleeced as the Canadians are reportedly only interested if NAMA takes the toxic stuff at a favourable valuation.

Or could it be that someone is attempting to manipulate the market. Strange that the IT would be used this way.

Karl – you mentioned the nods and winks about the levy. Unfortunately I haven’t the expertise to comb the NAMA bill and decide, so like most taxpayers I’m depending on others (such as you!) to do the dirty work.

But on the face of it, the whole idea of the levy is crucial. First because if it is for real and means that any shortfalls will be recouped then it insulates the tax payer (at first glance), but second because what it means is that the banks, even after the bad assets are extracted, remain in commitments to take the hit over the bad loans – in which case, as others have pointed out – the banks are still severely weakened by the legacy of their bad loans and might need further state capital.

So if I’m right and the levy is crucial. How well is the whole mechanism for the levy tied down in the Bill? (Question to Karl or others who know)

And second, if the levy is very vague in the proposed legislation – leaving it open to the nods and winks you mention – doesn’t this mean the minister is basically taking the piss about the state being repaid by the banks in case of loans that become uncollectable?

Or third, if the levy mechanism is well tied down and the levy must be collected, doesn’t this mean the banks don’t really get much out of NAMA only a bit of structure and a kind of breathing space, for in the end they take the hit anyway?

Why all the negativity—with everyone looking at “ifs” and “maybes” to support their well publicised and marketed views (considering dropping Irish Times becuse it keeps publishing “reruns” rather than fresh News).
AIB for years was a jewel in World Banking circle and there were many suitors hovering in background regulary—- but price was high!. Now AIB created a mighty nightmare for itself in Ireland over the past few years and brought company right to the brink. I dont think however that 100 years of growing and learning all disappeared overnight. I would suspect that it is the track record over the past 100 years rather than just over the past 3 that is catching the Canadians eye —that plus the strategic arms in USA and Canada—and now the price is Right !i

@ Mark Dowling

Yeah, I had considered that, but how many of the majority stakeholders made their purchase between 04-07 (serious question)?

So, reportadly, a Canadian Bank has said that if the Irish taxpayer (who has already guaranteed the deposits) substantially over pays for severely impaired development loans then they may be interested in taking an unspecified stake in AIB. This results in a 9% increase of the AIB shares.

I am Shocked!

Who ever leaked that just made a killing.

In the words of Gordon Gekko
“If your not inside you are outside!”

The Empire Strikes Back. Guys, you need to be congratulated for getting the message across: the world at large now knows that it is overpay, or pay fairly and nationalise. But the dark side is fighting back. First, Frank O’Dwyer does a sol run and briefs that the world wants NAMA. Next, the leaking of the ‘Mounties are coming’ story – with the side-briefing that this ‘vindicates NAMA’. (Shame on you Ivan Yeats for parrotting the DoF line). Next, watch the weekend press for puff pieces from the administration’s house ‘experts’ on why we have all misunderstood the arguments.

@ Eoin,

I take your point. I forgot some numbers relating to Irish banks can be small :).

The NAMA bill is crucially silent on the levy, with the suggestion that it be dealt with in a Finance Act, which of course is conducive to the nod and a wink method of dealing with problems which has been such a frequently used panancea for all inconveniences.

Personally, I am having trouble understanding exactly why the transfer to BoI and AIB shareholders involved in a whole of cycle valuation transfer with [Fianna Fail] in charge of a levy is better than temporary nationalisation with a quick sell off by the State for its own benefit of chunks to the PE players who will no doubt pay for a cleaned up moderately decent banking franchise in a country which is 7th easiest to do business in in the world. Am I missing something crucial?

AIB Statement re Press Comment

Allied Irish Banks, p.l.c. (“AIB”) [NYSE: AIB] notes the recent press comment regarding interest from a third party taking a minority stake in the Group and confirms that it has received such interest.

However any discussions with regard to this matter are preliminary and are not expected to progress in the near term, at least until there is greater clarity on NAMA among other issues. There can be no certainty that these discussions will lead to a proposal to invest in the Group or a transaction being concluded.

RBC now saying, via ‘sources’, that they are not in talks with AIB. That could be a very legalistic point of reference (ie not in active talks), but certainly seems like they’re trying to distance themselves now. Could be another Canadian bank, or could be that the initial contact may have been very very fleeting and brief.

Reuters are carrying the story with added cheerleading from the local NAMA pushers
“analysts said foreign suitors could be betting on an eventual recovery in the Irish economy from 2010 or 2011, which would greatly boost profitability at Allied Irish Banks and Bank of Ireland.

“I wouldn’t be surprised if we heard other instances over the next few months of foreign banks expressing an interest in Irish banks as loans go into NAMA,” analyst Anna Lalor at brokerage Goodbody said.

Emer Lang at brokerage Davy also said further suitors could be found, with the banks’ valuation dependent on the discount on loans transferred to NAMA, which will have a book value of up to 90 billion euros.

“The recent publication of the draft NAMA legislation and the relative ‘cheapness’ of the Irish banks … has put the Irish banks firmly back on investors’ radar screens,” Lang said. (Additional reporting by Steve Slater and Kate Holton in London and Andrea Hopkins in Toronto; Editing by Hans Peters and David Holmes)

relative ‘cheapness’ – now what does that mean. Relative to the amount the taxpayer will pay to prop up the banks through buying grossly overvalued toxic property loans or relative to the current insolvency of the banks.


I think it is worth thinking about why the “mounties” are coming. The government is seriously short of cash and AIB will need recapitalising post NAMA irrespective of the price at which loans are transferred.
CIBC like any good capitalist has its eyes on the main chanceis and would want to buy into AIB at less than the prevailing valuations in the European banking sector. The only way that it can get in at these bargain basement valuations is if the recap needs in AIB are modest post NAMA i.e. low single figure billions. The only way there could be such a modest amount is if the transfer to NAMA could take place at an artificially high level.

If for example, AIB was to transfer 30billion to NAMA at a 15% haircut rather than a more realistic 40% haircut that is a 7.5bn euro potential subsidy from the taxpayer to the the shareholders of AIB. That is quite some dowry to offer AIBs new suitor.
One should then speculate as to why the Merrion Street Mandarins are so anxious to get rid of this unwanted child. “What do they know that we don’t know or are not telling us?” They are going to have to wheel out their brightest & best to justify this-we await Alan Aherne’s comments from the Dark Side.

If that is the rationale it amounts to transferring the recap burden onto future generations of irsh taxpayers. I can see why they might want to do this but I still think that the whelan critique still holds: whoever takes the the burden should also share in the upside.
My fear is that we are arguing rationally within this closed group but the outside world has gone tribal. We asume the Dark Side must have a rationale and conduct this blog trying to figure out what it is. That the dark Side have not/will not/cannot communicate with us does, I think, speak volumes about the strength of their case.
I fear that the case for NAMA has echoes of the run up to the Iraq war. What was blindingly obvious to the opponents of that war mattered not one whit: it was a debate that Bush and blair had decided to win, for reasons that we still can’t figure out. NAMA may not have quite the calamitous consequences of Iraq but the parallels are obvious: a ruling elite who have simply made their minds up in the face of a mountain of evidence pointing in the opposite direction. Such is modern politics.

NAMA is scam to bail out the reckless private sector gambling of an assorted group of developers and bankers (including their bondholders) who were facilitated by 10 years of FF/PD governments who also managed to screw up the public finances for the next 5-10 years.

FF and the PD’s have been captured by finance and developers for quite some time. Some economists , particularly those in the employ of the financial sector, have been complicit in the capture of these parties. They have provided the doctrines to justify the massive build up of private debt, the tax breaks, the light touch regulation, the superiority of the “market”, the privatisation of many public services, etc. The FF/PD governments in turn have captured/bought off the public service trade unions, the farmers, etc through S

Continuation of Aidan C at 6:36

The FF/PD governments in turn have captured/bought off the public service trade unions, the farmers, etc through Social Partnership. Of course Social Partnership had many beneficial aspects in its early years. Benchmarking was an another bright idea in theory which ended up paying over the odds without getting any significant changes in the way public services are delivered.

Where does the Green Party fit into all of this? They were cleverly seduced by FF into the present government at very little cost to the way FF do business for their backers. I suspect that many of the grassroots in the Greens are aware of their foolish decision in 2007.

NAMA is such a scandalous use of political power by the present FF led government to bail out its cronies that you would expect the Greens and Michael Lowry to have pause for thought. It is good to see that the grassroot Green are looking for a conference on the matter. Michael Lowry should also consider which side he is on – the speculators or the plain and many heavily indebted people of Ireland.

I still hold out some hope that enough TD’s and Senators will refuse to support this scam.

@jl “What do they know that we don’t know or are not telling us?”

Therein lies the question.

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