Noted that FG are suggesting that we can push losses onto the senior bondholders and have an effective banking system. I am not confident that this is realistic but I am not going to dismiss it out of hand until I have had time to examine it in more detail. I am finding it difficult to get a grip on the mechanics of the FG proposal so far.

@Joseph

It is to be welcomed that FG will comment on the NAMA legislation as per Richard Bruton’s radio comments yesterday which I referenced in the discussion on the Minister’s comments. If FG are playing politics then they are entitled to do so. It is not as if making proposals is risk free so one has to give them the benefit of the doubt as to bone fides. Opposing the NAMA legislation and stirring up discontent which might spill into Lisbon (through no fault of FG) is the one course of action that could lead to FG delivering the next budget.

I strongly suspect we may see some ‘realpolitiks’ in action over this. Better to oppose the legislation and lose than have to deliver the next budget yourself? Why not let FF stew in it a bit longer and really wipe them out, etc. ??

It’s pretty sad if politics takes precedence over what’s best for the country. But hey, nothing new there the world over then.

The question as to who pays is not disingenuous -it is central.

FG policy is unambiguous - shareholders and bondholders lose all their money before taxpayers pay out a red cent.

LP policy on nationalisation is ambiguous as they never say what compensation existing shareholders receive or what happens to bondholders. If the FF nationalisation of Anglo is anything to go by, the bondholders are bailed out.

FF policy is that the taxpayer pays for everything by makinga free gift of about 30 billion to the banks.

GP policy is to save the planet by changing light bulbs and cycle to work schemes while FF bankrupt the nation.

NAMA is not about recovery; its payback time.

http://www.irishtimes.com/newspaper/frontpage/2009/0822/1224253080717.html

Again he cites the IMF, although the ECB gets a stronger mention this time.

One wonders if he is relying on the best ‘international’ advice because the ‘national’ advice that is available to him is so disagreeable?

Does this mean FG will not propose amendments to NAMA but rather will oppose the legislation altogether? I hope not.

ok millions

In your example in scenario 2, there would be 20m cash? Also, lets consider the ownership of banks. Say scenario 1 results in 50% state ownership and 90% in scenario 2.

Then looking at what the government owns at end

Scenario 1: 40m recoveries (cash), 50m bank shares.

Scenario 2: 20m (net) recoveries (cash), 80m bank shares, 18m (”to shareholders in cash”).

Scenario 2 looks better. I think the recoveries in scenarios 3&4 trespass in to the fanciful. Once you get into high recovery rates, the greater the likelihood that the loan doesn’t default. If a loan performs to maturity, NAMA’s upside is capped at principal plus interest.

Shocking

http://www.irishtimes.com/newspaper/finance/2009/0821/1224253022935.html

“Anglo achieved that ratio on August 6th when it received €827.72 million from the Government, a payment that followed a €3 billion injection in June.

Anglo incurred a pretax loss of €4.1 billion in the six months to March as the value of land and development assets plummeted. While taking a €4.1 billion impairment charge, Anglo said that the level of “past due” and “impaired” loans had risen to €23.6 billion from €2.5 billion in six months.”

I went a bit poltical there myself! I guess it is hard not to.

You might look at my reply to Ahura Mazda. I wasn’t talking about billions. I was just using simplified models with abstract amounts to try and tease out how Honohan’s NAMA 2.0 would work as an alternative. I wanted to ask if I was missing something important.

Isn’t the question “who is going to pay?” a little disingenous at this stage. Across the globe, the citizenry of capitalist countries and of other countries are being told that they have to pay for the mess we are in because the alternative is ruin. We all know the answer.

The real question now is how do we minimise the cost to the country of this mess so that ordinary citizens’ suffer as little as possible. All the political parties have the same professed goal at this stage. The debate is about method rather than the desired end-result. In other countries more hawkish free marketeers might say slash welfare, burn the banks and let those who fail starve. Nobody is saying that here.

(With that said, it is clear that there are many supporters of opposition parties who have demonised FF in their own minds over a long period of being frustrated with their own electoral failures. Such people are capable of ascribing any base motive to any act by FF. I would not make this criticism of 90% of actual opposition politicians who are smarter and more serious than that.)

Instead of your scenarios, which frankly I find confusing, why not concentrate on the real problem. What are the losses and who wll bear them?

You have the state “investing” in banks, but while it is getting a shareholding, is it getting any value or just filling a hole?

Why would you pay 20 billion directly to shareholders whose equity at the moment is valued at 4 billion?

There is a role for financial engineering, but we need to decide the basics first.
Who is paying for the clean-up after the coke driven property party?

I agree that new statutory FDIC-type bank resolution powers are required by the FG plan, but I do not see this as being as a major impediment (we do only need them in place by September 2010 when the Guarantee expires).

Your observations regarding the factors affecting the INBS senior debt buy-back are helpful. Do you have suggestions for increasing the changes of success of future schemes?

Andrew

I was comparing Scenario 1 with Scenario 2.

In both I am leaving aside the repayment of the bonds so we can take it there is €100 outstanding in bonds in each case. (BTW, I wasn’t talking in billions! Just using notional values for each indivdual asset and the effect that asset’s price has on the recapitalisation required.)

In scenario 1, NAMA is left with a €40 in cash (representing a €10 shortfall) and the State is left with €50 in shares. This leave’s the State having a total exposure of €60 backed by bank shares acquired for €50. (Of course, this assumes that the €40 will be applied towards the State’s exposure to the bonds. Should this be copperfastened by the NAMA legislation?)

In scenario 2 NAMA is left with no cash and no loss but the State has paid out €80 for shares. This leaves the States position as a having a total exposure of €80 backed by bank shares for €80.

It occurred to me last night that once the shareholders rather than the banks are involved then individual shareholders’ personal property rights come into play. This could cause serious legal difficulties in the administration of NAMA down the line. That issue would need to be resolved for NAMA.

I agree about what the Banks may do post getting money from NAMA and if there was one clause the Government needs in it’s NAMA legislation is that 90% of the funds generated by NAMA must be relent within 1 Year or else they will be Nationalised. There is no liquidity in the Banking system at present and this is putting the economy into a further downward spiral so less taxes,employment etc. This point is being missed completely here by academic arguments about haircuts etc etc.

But I don’t believe NAMA will restore credit; though it may ease credit marginally.

Here goes my theory.

NAMA is giving the banks taxpayer’s money. The difference between the actual asset value and this long term bullshit is a gift from the taxpayer to the banks.

There are no strings attached with this gift or no comebacks.

So don’t be surprised when the banks take the money and use it to pay back their own debt to bondholders or simply invest it where they believe they will get better value… In my view probably shorting the taxpayers that rescued them. After all, they know just how fragile the whole system is and they are the boys with the cash.

Not what you want to hear.

Blowing you head off with a shotgun is one way to cure a headache.
Discuss……

I predict the formation of a new class of travellers, who search Europe for a job. Gis a job. I could do da. Dragging their kids with them. Fascinating. Who was Cromwell?

Capital is being destroyed people, tick tock! Tghe sooner this option of NaMa is put away the sooner we can concentrate on a VIABLE BANKING SYSTEM!

VBS not NaMa!

@Sarah Carey - a conference sure, but a public debate would be good too. Not Questions and Answers-type media-directed crap but a forum where people on both sides of NAMA could present an accessible precis of why NAMA is the better of the options available to the Irish government right now.

I bet any number of university debating societies in Dublin, Cork, Limerick or Galway would be delighted to host 3-5 credible people on each side and give them 7-10 uninterrupted minutes to put their case. If there was interest in that I doubt it would take more than a few days to ping the Societies in question.

Please consider the following simplified scenarios and set me straight if needs be:

Scenario 1:
NAMA pays €50 bonds/cash,
Govt Re-caps Bank for €50 bonds/cash,
NAMA sells for €40 cash
Result - net loss to NAMA of €10, Bank gets capital gift of €10

Scenario 2:
NAMA 2.0 pays €20 bonds/cash + €30 contingent claim,
Govt Recaps Bank for €80 bonds/cash,
NAMA sells for €40 cash
NAMA pays €20 to shareholders in cash (i.e., does not form part of bank capital)
Result - net loss to NAMA of €0, Bank gets capital gift of €0
- State now has €30 investment in bank shares instead of NAMA having €40 cash.

Scenario 3:
NAMA pays €50 bonds/cash,
Govt Re-caps Bank for €50 bonds/cash,
NAMA sells for €80 cash
Result - net gain for NAMA of €30, net free capital to bank of -€30

Scenario 4:
NAMA 2.0 pays €20 bonds/cash + €30 contingent claim,
Govt Recaps Bank for €80 bonds/cash,
NAMA sells for €80 cash
NAMA pays €30 to shareholders in cash (i.e., does not form part of bank capital)
Result - net gain to NAMA of €30, net free capital of -€60
- State now has €30 investment in bank shares and NAMA has €50 in cash instead of NAMA having €80 in cash.

Does this mean that the success of NAMA 2.0 is based on the assumption that bank shares will substantially retain their value after recapitalisation? Is that a valid assumption? How long would it take the state to convert shares into cash? Would this likely involve tha banks fleecing customers to buy the State’s shares back, i.e. would it exacerbate the lack of credit?

When I started doing my examples I expected the money paid back to shareholders to be money taken out of bank capital and therefore money wasted as far as the country is concerned. The examples didn’t bear this out though! How did I end up with the extra cash?? Am I missing the cost of a balance sheet deficiency somewhere??