NAMA Critics Want Firesales?

I’ve been reading some funny stuff in the Sunday newspapers about how those who oppose the current NAMA plan are in favour of having a big fire sale of property assets. I’m not sure if anyone has ever proposed this as an alternative to NAMA (it would be interesting to know if any of the prominent NAMA critics have.) But since I’m generally associated with NAMA criticism, I thought I’d clarify that I certainly have never suggested this.

For instance, in the four point plan article I put forward in April, I proposed that after nationalisation of our two main banks the government could “set up a State asset management company to sell these assets over time to attempt to recoup as much as possible. “Over time” means over time, not an instant firesale. And an “attempt to recoup as much as possible” most likely would imply a careful sequencing of sales. But, of course, being in favour selling the assets over time in a careful sequencing is still consistent with starting to sell some of them soon.

Perhaps what’s going here is that there’s a (deliberate?) mixing up of the idea of transferring loans to NAMA at low prices with the idea of having a property firesale.  I guess there may be people who think that calls to wipe out the bank shareholders via the losses incurred with the NAMA purchases and then nationalise (not my preferred sequencing, mind you) rely somehow on writing down development loans at Carroll-liquidation levels.

This is not all the case, however. AIB, for instance, have €24 billion in development assets alone and €8 billion in core equity capital. So one doesn’t need to rely on Carroll-liquidation levels of discounts on loans to conclude that this bank is insolvent.

Indeed, the current debate about “the right price” to transfer the assets illustrates a highly unfortunate aspect of the government’s plan that had been flagged by critics all along, which is that the pricing on transfer was always going to be incredibly controversial.

A plan involving nationalisation, an asset management company and a stake for the bank shareholders in the AMC (as proposed by Patrick Honohan) would allow for the banking system to be quickly placed on a sound footing and shareholders to be treated fairly without having to rely on the wisdom of Solomon to decide the right price at which the assets should be transferred. But, of course, that is an alternative and as we know now, There Is No Alternative.

27 thoughts on “NAMA Critics Want Firesales?”

  1. Bryan Carey had an article in today’s Sunday Time’s on NAMA.
    It is not available online but this is a summary of what he had to say

    “NAMA is not a taxpayer bailout for the banks, or a Fianna Fail bailout for their builder buddies.

    NAMA is the European Central Bank’s carefully structured rescue of the Irish Economy.
    The difference between Iceland and Ireland are four letters N.A.M.A.
    This is Quantitative easing via the ECB.
    When NAMA takes over the €90 billion of dud property loans from the banks. It will deposit in
    return €60 billion of NAMA bonds with irish banks that can be exchanged in frankfurt for ECB funds. This is what bankers call liquidity. To us it is money injected into the economy.
    Who will be the ultimate arbiter’s of the pricing mechanism on the loans to be transferred to NAMA? Answer The ECB.”

    This seems to make sense to me or am I missing something?

  2. Karl,you and your colleagues analysis is logical and indisputable,why then are you coming under such a concerted attack?The possible answers are obvious and sinister,please do not waver we need you!

  3. @Karl Whelan
    Add the quote from Jane Suiter’s article “However, a spokesman for the Minister for Finance insists that the Government is determined to avoid nationalisation at all costs” and it is clear that the Dof are determined to implement their own strategy regardless of the cost to the State. The publicly reported determination to avoid nationalisation at all costs seems to be a peculiar strategy when the DoF are negotiating to buy toxic assets from insolvent banks. It demonstrates arrogance and incompetence.
    But the good news is that Dan Boyle is of the view that the draft legislation must be amended (as reported by Stephen Collins on IT website) and that Prof. Honohan’s view be given consideration (interview RTE1).
    So the TINA brigade may be forced to listen to the alternatives despite their apparent willingness to avoid nationalisation “at all costs”.

  4. “a spokesman for the Minister for Finance insists that the Government is determined to avoid nationalisation at all costs”

    If a bank’s officer made a statement on these lines and did the opposite two weeks later, it would be open to sanctions. Politicians (and their minions) can tell the truth or they can lie – there is no consequence except electoral. That is perhaps why people fear the government owning financial institutions?

  5. southofdub: here is what I believe is wrong with Brian Carey’s analysis.

    Firstly, the bond is basically an IOU (a promise to pay at some point in the future), written by the Irish government. Instead of paying for the development loans with hard cash, the government is using this bond as a substitute. They call these IOU’s bonds and loans ‘paper’ in the financial industry. The ECB may indeed buy this paper from the bank for some amount of money. However, it is the State, not the bank, which has to pay back the IOU.

    The ECB also has an interesting arrangement for buying government bonds from Irish banks which routes money in their direction. This is certainly helping prop up the Irish banks. This is certainly costing the ECB money. However, I do not think this will be a very long-term arrangement. (German central bankers are conservative about handing out free money.) Cynics could well argue that this is an effort to support the Irish and other banks to ensure Lisbon II goes through, and that it will begin to be phased out next year. Cynics may well be on to something, although the ECB will never be so uncouth as to leave themselves open to a direct accusation of political manouvering.

    Secondly, the issues of capitalisation and liquidity are mixed up in the article. The Irish banks at this moment do not have an acute liquidity issue, certainly not in relation to lending to small and medium-sized businesses. The government guarantee means that they have ready access to short-term money to make loans, and funding from the European Investment Bank provides plenty of scope for lending to the SMB sector (or at least it should).

    (If the banks were to have a liquidity issue, then the whole system would freeze up overnight, and this is the situation that forced the government to guarantee the banks. This gave the banks back their liquidity, because the government guaranteed that any funds advanced to these banks would be returned, if there were a collapse. )

    What the banks have is a shortage of capital. So what is the difference between capital and liquidity? This is hard to understand if you don’t know something about accounting. Basically, the bank can have cash in its hand, but it doesn’t mean it is rich enough to give out loans. Granted, it could use the cash to hand out loans, but it will make your financial situation even worse.

    (This is exactly the same as if I followed you to the ATM and asked you for a loan of a thousand euros on pay-day – you have the cash in your account, or maybe even in your wallet, and you could lend it to me, but if it is the only money you have, you might not have enough to pay for your own groceries, your petrol and your own debt repayments on your house. If I fail to repay on time, you will be in really big trouble. Even if I come good, and you are able to struggle by, your spouse or significant other, acting in this case as a type of small-scale financial regulator, might be very angry with you, and might call a halt to further lending until capital adequacy is restored.)

    Banks are governed by regulations forbidding them from advancing loans if they are not in a strong enough financial position to survive if some of the loans fail. There are international norms for how much financial strength you have to have in order to make loans. Capital is (and this is a simplification) a measure of financial strength.

    So this is the banks’ problem. They have plenty of cash on hand, but they do not have the financial strength to make new loans. They can only get this financial strength by making a profit (or at the very least, reducing their losses, which is what will happen as a result of NAMA taking over the loans) or by getting new investment capital from outsiders, either the government or private investors.

  6. @Antoin O Lachtnain
    Thank’s for the response
    I am not an economist, I am just trying to get my head around this.
    I think that a simple explanation from the Economist’s here would be Helpful.
    The article was eloquently simple so some more simple explanations would be a good idea.

  7. As far as I know, all of the proposed NAMA solutions envisage debt.

    As both Willem Buiter and Nicholas Taleb have been pointing out no debt-based solution is possible to the Credit Crunch, and this can only mean a new approach to equity.

    NAMA will presumably be a corporate body. That does not mean it has to be a Company, although that is what everyone assumes it will be.

    In my annual lecture last November for FEASTA here

    http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-credit-crash-presentation

    I set out a way in which property could be financed – and in the case of NAMA, refinanced – with a new form of equity in an “Open Corporate” legal framework incorporating partnership principles.

    This “co-ownership” approach is set out on pages 8 and 9 here

    http://www.scotregen.co.uk/pdf.pl?file=surf/news/Scotregen_46_web.pdf

    In essence banks would receive income bearing Units of NAMA Equity instead of debt, and would be free to sell these at any time to investors prepared to buy them.

    This bypasses the valuation problem, since there need be no sale, merely a debt/equity swap. Moreover, it means that Banks receive a much better financial outcome to any solution which leaves a debt obligation intact.

    The necessary funds would come from long term investors interested in a long-term, probably index-linked, property based (and interestingly enough, Sharia’h compliant) investment.

    The result is essentially the conversion of part of Ireland’s National Debt to a National Equity, which would be something of a “first”, and also opens up the new approach to sustainable development.

  8. A fire sale is a realization of the asset. It is done quickly. The value of these assets may well decrease over time as other sites are developed first. I have always tried to point out to readers that the order in which things happens is important! Who chooses that order?
    The perjorative “fire sale” is meant to imply that the properties will regain some value over time. Inquiring minds may wish to analyze the various assumptions in this! By allowing these assets to be sold at an under value, they will allow the purchaser to finish the project and rea;ize a profit. Yes! Profit is good! Then they can use that profit to do the same for another derelict site. One mans undervaluerd fire sale asset is the communities derelict eyesore that will not employ anyone untile it has recovered value. Talk about a deflation trap!
    Liquidate those atrocious loans and sell off the assets now!

  9. @ SouthofDub
    Mainstream media are for sale. They will print what ever they are paid to. If it comes from significant advertizers then they will do it verbatim. No investigative journalism. Read everything but believe only what rings true.

    Of course this is not the ECB that will repay these debts. You will. And to the extent that they attack the retired civil servant who lices abroad, I will.

    In infaltionary times banks make money. Literally they make credit. In deflationary times they lose money. They will be looking for more hand outs later on too. People pay back loans and banks lose the interest stream. People do not pay back loans and they lose both income and capital! People do not take out loans to buy something that will be worth 10% less next year. That means the cost of ownership is the interst rate and the rate of deflation for that asset. Even if interest rates were zero people do not borrow.

    Now do you understand why people think it will be a fire sale, but are wrong? When they realize that values will continue to decline, they will be very sorry they had not gotten out before it hits bottom. It still has a way to go. Liquidate now! These parcels of land are opportunituies to build and employ. They cost money if they are left undeveloped. Develop those that make sense. They will eventually provide more profit. Owning them is a toxic option! Sell them on. Ultimately the entire community pays a cost but politicians live from election to election, hence they have interests that can conflict weith communal good and with business sense. But they do influence the media. While they are in power. Look back at the 1930s and learn from history. This depression has been ongoing for a while but the media disguised it!

  10. @ SouthofDub

    To add to Antoin O’s explanation, the banks, with the connivance of the government regulators, lent too much money to one sector. The stress tests designed to prevent this were fudged. This greed on the part of the banks has been known since before the bulb bubble in the Netherlands. All the lenders knew what was going on, they helped one another cover the capital adequacy requirements instead of blowing the whistle. The banks have been too big to fail for a long time. If they are too big to fail, then the government will lie and the best way to do this is anonymously by way of the media!
    Not a pretty picture! Very few media commentators will agree with the article as they value their credit. After a while no one reads lies. That is why US media are failing. They did not tell their readers what the best economists knew. Instead they told them what made the “news”paper money from building advertizers. A grand con spiracy.
    Don’t forget to share your anger on yopur blog!

  11. Pat Donnelly assertion that “Mainstream media are for sale” is untrue, ill-informed and a response to Brian Carey, defamatory. As an editor (business, news, technology, property) with almost every major Irish newspaper, including the Sunday Times, I have never seen evidence of any any due influence by advertisers. On the contrary I’ve seen advertisers attempt to exact influence only to be told, in each and every case, where to go.
    Some papers do allow advertorial which are articles as advertisment but these are clearly separate from editorial and are not usually written by the same journalists.
    Outrageous generalisations of this sort are very easy to fling around but they are no substitute for debate.

  12. Pat Donnelly’s assertion that “Mainstream media are for sale” is untrue, ill-informed and as a response to Brian Carey, who has an impeccable reputation, defamatory. As an editor (business, news, technology, property) with almost every major Irish newspaper, including the Sunday Times, I have never seen evidence of any undue influence by advertisers. On the contrary I’ve seen advertisers attempt to exact influence only to be told, in each and every case, where to go.
    Some papers do allow advertorial, which is articles as advertisment, but these are clearly separate from editorial and are not usually written by the same journalists.
    Outrageous generalisations of this sort are very easy to fling around but they are no substitute for debate.

  13. I liked Alan Ahearne’s opinion columns in the Sunday Indo. And I was happy when I heard he was an Advisor to the DoF. A lot of what he said made sense.

    For example

    “Only when the house price bubble has fully deflated will mortgage lending pick up. That means further price cuts. It is up to the construction industry to get houses moving again by slashing prices to market clearing levels.

    Builders and bankers have a responsibility to face the reality of revised housing valuations. The Government’s responsibility is to protect taxpayers.”

    http://www.nuigalway.ie/staff/alan_ahearne/documents/alan_ahearne_sindo_august_3.pdf

    Instead, he now appears to endorse this strange long-term economic value concept. I wonder what he’d offer me on some BOI shares I have?

    By overpaying for toxic assets, you potentially create a “there is no functioning market” for a long time to come. This could lower economy activity in other sectors and perhaps drive asset values even lower.

    They should keep the market moving.

  14. the constant references to ‘market values’ in much of the debate means that you actually ARE referring to current market prices, if not then you would factor in some kind of ongoing economic value, and frankly, the idea that we will never rebound doesn’t wash so why now take a stance that is contrary to what is implied?

    if you started to nationalise banks you would also have an increased risk of ‘incidental nationalisations’ as investors fearing it may spread remove funds/sell shares etc. and if it was something that spread it would get very expensive very fast and when lenihan goes to frankfurt cap in hand he’d need to ask for more and more.

    on the valuation front, liquidators not selling is not vastly different than banks not selling! Brendan Keenan pointed out that many London prices rebounded tenfold within 5yrs of the bottom of the UK property market crash, and that is why it is TIME that must be factored in to setting a model value rather than a market one.

    moving the loans over at market values would be the same as forcing them to realise their losses right here and now at a low point in a cycle, that is irrational. you’d get your much vaunted nationalisations, but you also might get a few nasty surprises with it, we would have an entire industry of which the sole present example of how it would be run is Anglo. no thanks.

  15. @Karl

    I don’t know whose opinion you’re disagreeing with here but it’s not mine. My preferred option is not a standalone NAMA paying “market” prices because my preferred option is not to have a standalone NAMA.

    Take a look at the look at the alternative plan I just put forward and see how well it corresponds to your caricaturing of my position. The alternative has 3 steps. Nationalise. Put bad assets into a NAMA. Give bank shareholders a stake in NAMA profits.

    As I was trying to say in the post, an important advantage of this approach is that it doesn’t rely on calculating today’s market price. If you are right that the market for development assets will bounce back, then you and the other bank shareholders will have nothing to fear. If you’re wrong, then the good news for me is that (for once) you guys won’t have stiffed the taxpayer.

    As for the idea that the we need to pay low “market values” to leave the banks insolvent and likely getting nationalised, I was trying to dispell that myth in the piece I just wrote, to no effect it appears. I really wonder sometimes whether you and some of the other people that write in the Sunday newspapers actually have any idea of the scale of the bad loan problems facing the banks. Even relatively small discounts on their huge property loan portfolios will wipe out the equity in the banks.

    It’s understandable to wish that the bad loan situation at the banks wasn’t so bad. But as for making policy on that basis. Well, to paraphrase a friend of mine, the stakes are far too high for that.

  16. @ karl,
    Assume for a few minutes Karl, that you have been appointed as Banking Overlord
    How do you nationalise the banks. Currently AIB & Bank have about 7-8bn of core equity each, the market value of the equity is about 2billion in each case. Are you proposing to pay a premium for control-paying 5billion to acquire both of them? I assume not

    Instead, are you going to adopt some metric for declaring them insolvent and taking them into custody? what would that metric be?..would it be the your assessment of the market price of the assets? Would it not be your assessment of market value because there is no price discovery?. Is what you are advocating not a form of fair value but using a different model from the DOF?

    Or are you just going to use the article in the constitution that permits declaring a state of emergency and declare the banks nationalised?

  17. You can value the shares easily enough by determining the capital required and then holding an auction to raise sufficient capital. Existing shareholders would have preemption rights, so their rights would be the same as for any other issue. The government would underwrite the issue and probably end up with all the shares.

  18. @ Antoin,
    My question is specific, what is the basis on which the Irish banks are determined to be insolvent and therefore in need of recapitalisation by the state. The most commonly advanced thesis is that the assets are marked to market, then liabilities exceed assets & the banks are insolvent or at least have insufficient capital to operate.
    However, if markets are not functioning and if there is no price discovery, how do you mark assets to market?
    Karl Whelan et al state that the banks are insolvent. But is this contention not based on a model and not the result of a series of market based observations.
    Those of us in the real world are thus faced with the claims of two competing model based conclusions. Which one do we believe?

  19. @JL

    I’m on holidays (albeit unfortunately with an internet connection) so I’m reluctant to engage in this stuff. Still, let me quickly give you an answer.

    I’m afraid JL that you are engaging in what is known as Irish Exceptionalism. Look around the world, for instance at the US. The FDIC takes banks like AIB that are clearly on the verge of technically meeting capital requirements but are most likely going to fall below them and become insolvent—and they intervene to deal with these guys, whether via purchase and asssumption or nationalisation.

    This happens in the “real world” all the time and it would be happening to the Irish banks if they operated in the US. As regards the market value of our main banks, a quick statement that the government has no intention of paying well over the odds for their bad assets would result in a collapse in the equity values of those banks, as expectations of a windfall from the taxpayer disappear.

    My observations are in no way related to a “a model”—show me a single statement I have made on this issue that relies on “a model”.

    Clearly the new talking point that the TINA brigade have adopted is that the banks are only insolvent if you “mark to market” and that I am the guy proposing marking to market. This is complete rubbish and I’ve explained why a few times already in this thread and won’t do so again.

    Wake up and smell the coffee. Try looking at the numbers instead of railing against reality.

    Last point: I know that some of you who only know this site for the whole NAMA debate might think I’m some sort of extremist. In fact, I’m a really boring centrist economist. Ask yourself—why would I (and other people who signed the infamous letter) and people like Patrick Honohan and the IMF (who suggested twinning NAMA with nationalisation) and Mr. Lundberg from Sweden (who said government buying assets from private banks was a bad idea)—do we all have it wrong? Are we part of a big conspiracy?

  20. What makes the banks insolvent is that they don’t have or will soon not have enough capital to cover their delinquent loans and to have sufficient provision to cover future delinquent loans, which is essential in order to protect depositors.

    There is nothing else involved in determining whether the banks are solvent. This is an accounting issue, not an economic one. It is hard to see how this is open to debate. No one I know of seriously believes that the banks do not need more capital.

    The only reason the banks are still open is because they are on ‘life support’. – a two-year guarantee and the promise of new government capital.

  21. @karl w: you use market prices in much of your rationale for why we are overpaying (or going to) on developer assets, so I go on the assumption that what you have written in the press is current to your stance on the matter.

    one of the advantages in your proposal is that of being fair to the taxpayer, I feel that the bigger issue in terms of tax fairness is that of addressing our public spending which is basically a perpetual cost but we’ll leave that aside!

    other than that, you don’t seem to see any downside and that (at least for me) is an issue, i would go as far as saying an oversight. while you might achieve fairness on one hand you will be putting state control over our banking sector which can have unforeseen consequences, the only example thus far is anglo, is it a good idea to extrapolate their performance over 70% of our banking sector and see anything other than disaster? will potential lack of market confidence play any role in your plan?

  22. I think there is a difference between those who outright oppose the NAMA plan and those who are calling for its modification (e.g. Honohan’s NAMA 2.0).

    There are many who are opposing any asset management vehicle funded by the state. They may not be serious commentators but they exist in abundance with people talking about having “Stop NAMA” campaigns and lobbying the Green Party.

    A suggestion that all serious critics of NAMA are advocating firesales is a straw man if such a suggestion has been made. Why bother knocking such straw men when the Minister has published the draft legislation far in advance in order to stimulate a real debate?

    BTW – given the ubiquity of wifi it’s just not a holiday if you bring a laptop!

  23. @Zhou

    Long time no hear my old Chinese friend! Good to see the gap hasn’t damaged your touching faith that Father Knows Best.

    Why bother at all addressing the claim that NAMA critics are advocating firesales? Why bother indeed?

    Well perhaps we could start with the fact that this claim is being made by a leading government adviser in the Sunday Business Post — an article I know you have read because you discussed it in one of your classic long comments yesterday. And this claim about NAMA critics is not just a straw man. It’s just simply not true.

    So why is this worth pointing out? Well you suggest that we should be having a real debate. I agree. I have attempted to contribute to that debate, though I know you don’t like what I have to say. However, if the SBP piece is anything to go by, then it is the government (the one you have so much faith in) that is not only failing to give us a good debate but actively misleading the public.

  24. @KW

    I went on hols without a laptop! “classic long comments” – what exactly are you trying to say about my writing style?? 🙂

    I did not read that article to say that critics of higher valuations are calling for firesales but rather that marking to firesale prices is as bad as having firesales. That’s a different kettle of fish and is why I did not link that article to your opening post.

    In any event, I never understood it to be your position that assets should be valued at the price they would fetch if a fire sale were commenced today. To that extent, if Alan Ahearne were saying that were your position then I would agree that it as a mis-characterisation. However, it is not clear who he is referring to there and his comments may well refer to others. One has to assume an inaccuracy to put you in the firing line which I didn’t initially do though I can see your point.

    Lastly, just because I don’t agree with everything you say doesn’t mean I don’t like what you have to say. On the contrary, I do like what you have to say. I also don’t see your position as being a million miles away from the Government.

    I see the differences in my view to be (i) that I do not share your optimism about the efficacy of immediate temporary wholesale nationalisation and (ii) that I don’t share your deep mistrust of the Government. It is not a case that I think “Father knows best”; more that I don’t think father is a venal moron.

  25. @Zhou

    The lines that caught me eye were

    “The ‘let’s bring on the fire sales and see what happens’ attitude among some commentators cannot form the basis of sensible policy making. The stakes are far too high for that.”

    Of course, I have absolutely no idea who these “commentators” are but I wanted to clarify that they certainly didn’t include me and also (perhaps more importantly) to illustrate a further decline in the standard of argumentation being put forward on the government side.

    Apologies for appearing cranky in my last comment. “Classic long comments” wasn’t actually meant as a dig. Sure I write lots of long comments myself. And perhaps I should also adopt your policy in relation to laptops and holidays. 🙂

  26. @ Karl Deeter,
    I think you have a fair point. Nationalising the banks opens the way to some pretty nasty unintended consequences. We currently have a blanket guarantee or close to it. Arguably this is a unique form of nationalisation where the risk of the banking system lies with the taxpayer.

    What has happened. Deposits have deserted Anglo, AIB & BOI and been replaced with 15% of the total ECB allocation to the Eurowide system. No doubt this will increase by 60bn-70billion post NAMA. Add to that, the potential for access to the senior debt markets to be curtailed if as some advocated debt/equity swaps come on to the agenda.

    Private sector liquidity will flee continue to flee system. and you will have a banking system balance sheet increasingly financed from public sector sources-govt equity, NAMA bonds, ECB injections and govt guaranteed senior debt. With a loan to deposit ratio above 100% and deposits fleeing there will be inexorable pressure to ration credit & deleverage.

    Who is first in the queue? Potentially it will not be the private sector or the homebuyer. Credit could be extended to the government to fund a burgeoning fiscal deficit & private sector credit could get crowded out. Will you then have a disfunctional banking system, borrowing from the ECB on repo to buy Irish govt debt?

    Why does liquidity flee a small nationalised banking system- its not fair but I guess its because the owners of the money do not like dealing directly with the government where contracts are routinely broken. on a political whim. Look how quick the US banks were to pay back the TARP. Having the govt in the boardroom is like carrying the mark of Cain. Moreover, once in the banks it might be difficult to get out. Part of the critique against CIBC potential deal with AIB was that the govt was letting capitalists get some of the cheap stock the government should own.

    That said the current status quo cannot continue either. The banks are capital constrained…at best …and are embarking on a vicious cycle of deleveraging. Ovepraying a lot is a vicious tax on future generations & recapping the banks to zombie minimum capital levels will not work either.

    It could be a case of damned either way.

  27. @KW – no offence taken. Even I find my posts hard to follow! I see your point on Ahearne’s article. Misrepresenting critics is a tried and tested way of avoiding valid criticism.

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