Lenihan Not Anticipating Further Nationalisations

Minister Lenihan has returned from his holidays to talk about NAMA on RTE’s This Week. I’m not sure much new was revealed from this interview. On the key question of what will happen with the major banks, the Minister argues that only “some allowance” will be incorporated for long-term economic value while at the same time he says “we don’t anticipate nationalising any other institutions in their entirety”.

To see what this means in practice, consider AIB. This bank has property-related loans of €48 billion, half of this being development loans. It is widely reported that €30 billion of these loans will be transferred to NAMA. The bank has private core tier 1 capital of about €8 billion. So the minister is saying that he is not anticipating a discount for AIB as high as 27 percent (because 27 percent of €30 billion is €8 billion.) 

Given what we know about the current financial situation of Irish property developers, the haircuts envisaged by the Minister appear to rely on a very substantial recovery in property values. And yet the Minister also rules out purchasing assets at multiples of their current market value, so I don’t see how the various comments here hang together.

It would be interesting to know on what basis the Minister’s anticipations about NAMA transfer values have been formulated. And since the people doing the mysterious long-term economic value calculations all work for the Minister, it is reasonable to ask how likely it is that these people can back out the right answer as to what the average haircut needs to be to fit with the Minister’s anticipated outcome.

Of course, this could all be a bait and switch, and the main banks could end up being nationalised. However, the spin suggests otherwise. The Minister’s latest comments contained a series of misleading remarks about nationalisation.

For instance, Minister Lenihan blames the cost to the taxpayer of re-capitalising Anglo on the fact that the bank was nationalised, rather than on his decision to guarantee almost all of Anglo’s liabilities last September. In relation to AIB or BOI, the implication is that the cost of sorting them out would be higher if we don’t overpay for the assets to keep them in private ownership. There are arguments worth airing against nationalisation but this just isn’t one of them. As long as the guarantee is kept in place, these banks need to be recapitalised, most likely by the state. Doing so by overpaying for assets rather than by getting an equity share really doesn’t save money.

An unnamed foreign country that nationalised its banks, leading to disaster, was mentioned by the Minister. I’m guessing the country the Minister has in mind is Iceland. Minister Lenihan may think a decision to nationalise the banks was the cause of Iceland’s problems. I’d wonder though.

144 thoughts on “Lenihan Not Anticipating Further Nationalisations”

  1. Just on the Iceland thing. This article in the Telegraph was interesting:

    http://bit.ly/UrStT

    It mentions some of the bully that Iceland is getting from the likes of the UK and Netherlands to force the government to use public money to cover losses incurred in their countries. Could Ireland be on the receiving end of treatment such as this.

    Also it is not hard to see the similarities betwenn the Icelandic banks and Anglo in particular with huge loans to insiders and bank loans being given to purchase bank shares, e.g.

    “Several investigations into Kaupthing centre on share ramping, where the bank would allegedly give loans with no interest or security in order to buy shares in that same bank – boosting the share price.
    One particularly murky incident revolves around the acquisition of a 5pc stake in Kaupthing by a company called QFinance linked to Mohammed bin Khalifa Al-Thani, the Sheikh of Qatar. Several weeks before the banks collapsed, a press release stated that the transaction showed that “Kaupthing’s position is strong and we believe in the bank’s strategy and management.”
    Only after the bank collapsed several weeks later did it emerge that the Qatari investor “bought” the stake using a loan from Kaupthing itself and a holding company associated with one of its employees. The bank appears, in effect, to have been purchasing its own shares, which does not seem to be uncommon; ”

    Very similar to the Anglo Golden 10?

  2. Karl

    Another feature of the interview was the claim that any attempt to impose costs on bondholders would have far-reaching effects on the economy. As well as the potential international reputation consequences, he introduced the idea that some of the bondholders are things like pension funds and so on, with presumably the idea being that any strike at them would have further negative economic consequences. Karl, I am aware that you have dealt with various versions of this issue in previous posts (particularly the international reputation issue) but is it possible to address his point on this. I doubt I am the only one who is wondering why a government would prop up a group of private investors if it really was the case that no seriously negative consequences would ensue by letting them take a financial loss.

  3. “It would be interesting to know on what basis the Minister’s anticipations about NAMA transfer values have been formulated.”.

    That would be the basis given to him by the Wizard of Oz.

    Given the lack of anything that looks like quality coming from the opposition benches though, I’m afraid to say that these guys look like they are going to get away with a great heist.

  4. @Karl,

    Perhaps you could enlighten us as to what you think the right down should be? I know this is an inexact science but what would be an appropiate level of haircut to apply?

  5. Several issues seem to be working here. Im not sure I would be with Karl that BL is not anticipating further nationalisation – to me he seemed to keep the door open.
    There is a consistent and clear thread however going through the comentary – that private investors must, as much as possible, be spared the consequences of their investment failures. That drives whatever haircut will be applied
    We are as ever into the post hoc ergo propter hoc school of analysis – iceland nationalised its banks and its a basket case. Therefore, nationalising banks makes one a basket case. After 9 months its still my view that the minister is still confusing liquidity, risk and sovereign capital issues. Equating and conflating them is neither honest nor helpful. Depressing…

  6. @JL
    Not to speak for KW but personally I would pay 30c on the €, no more, for a portfolio of good bad and ugly loans.

  7. @ Brian

    I think we need to be careful here to distinguish between what people may think the loans are actually worth and what’s really a stake during the NAMA asset transfer. For instance, Brian may be willing to pay 30% of book value but once the discount goes above a certain level, there will be no equity left to wipe out. As we can see, with AIB, this is approximately a 27% discount.

    So we have to be careful here not to fall into one of the many debating traps that are being set up by pro-NAMA columnists. Advocating nationalisation is not the same thing as advocating “firesale” discounts.

    @ JL

    I have “enlightened” people here with my preferred approaches many times (some would say far too often). Most recently here

    http://www.irisheconomy.ie/index.php/2009/07/28/not-too-late-for-a-different-approach-to-the-banking-crisis/

    So I don’t have a preferred write-down because NAMA is not my preferred approach. I think the main banks should be nationalised. I am open to the idea of transferring the bad assets to an AMC and if the losses relative to book value turn out to be smaller than the final level of book equity (approx €8 billion in AIB’s case) then we can compensate the shareholders by paying back the difference. This is essentially what Patrick is proposing.

    Note, however, that it’s not quite the case that PH’s proposal incentivises the banks to manage the NAMA portfolios better. He proposes to give the NAMA shares to the bank shareholders, not to the banks themselves. The banks could be owned by different people altogether and some other form of incentivisation would have to be considered in that case.

    @Liam

    It helps to think about this issue by looking at the different classes of investors who are at risk.

    Shareholders gain all the upside when a bank is successful and should bear the full risk when things go badly. Using state money to prevent shareholders from losing all their money is morally reprehensible.

    Subordinated debt holders are guys who took their chances on the banks never running into any problems, accepting a position at the back of the bondholder queue in exchange for a higher return. The idea that these guys shouldn’t be cleaned out now that banks have indeed failed is also highly dubious. These bonds are now likely mainly owned by distressed debt investors who know that full cents on the dollar is unlikely to be obtained. If losses exceed shareholder equity, these guys should take a full hit.

    Then we have senior debt holders. On the one hand, you can say that this debt is not sovereign debt, so its not our responsibility. FG are willing to let senior bond holders take a hit while protecting depositors, but it’s my understanding that legally these two classes of claims are equivalent. Also, its my impression that in the post-Lehman world, pretty much every senior debt holder in distressed banks has been looked after (I’m happy to be corrected on this.)

    So, while attractive in theory, I would worry about the long-term reputational effects for the Irish financial system of the government letting senior bond holders take a hit. Having to finance the Irish banking system’s loan books out of domestic deposits alone would not be too pleasant.

  8. KW
    After equity there is sub debt. So there is room to wiggle. Also, afaik, if the banks dont take the full whack (which may well leave negative shareholder funds for a moment) then there is a requirement down the line to take more losses. Better not to have semi zombies but to take it all. If that requires “phantom” government equity to be created and destroyed for the purposes of absorbing the losses, thats what I would suggest. Then new equity to rebuild. So we have three classes of equity : exsting (wiped out), Govt Temp Equity (wiped out) , Govt Real Equity (recapitalisation).

  9. Is it possible that the minister is slicing and dicing the meaning of nationalisation? So perhaps he is attempting to drive a distinction between full nationalisation, as in Anglo’s case and majority state ownership, as in the case of some of the UK banks. In the case of AIB, for example, with a current market cap of 1.87 bn, the state could invest up to 80% ownership at a cost of 15ish bn for recapitalisation, but could ‘in’credibly claim it is not nationalisation (cf. AIG). This would leave the bank recapitalised, the taxpayer with an equity stake, the shareholders hurt, the bondholders intact, but the state not liable for all debts once the guarantee runs out.

    I vacillate between there being a very deep game being played and an incredibly shallow one! Which end of the swimming pool is Mr. Lenihan lying at the bottom of?

  10. Sometimes, when the truth is staring you in the face, it is hard to join the dots. As Yogi Berra would never had said.
    As Colm McCarthy has pointed out, whatever the bad debts on the property books, the ‘normal’, cyclical problem loans (credit cards, overdrafts, mortgages, SME lending) are likely to be unusually large in this cycle and are only just starting. The point here is that we can spend endless amounts of time debating the size of the NAMA haircut and fail to appreciate just how insolvent the banks actually are. I would guess that one or two people in the DoF have worked this out and have decided the only strategy is one that delays the day of reckoning for as long as possible, in the hope that pre-provision profits, the global economy and Santander bail us out. In that order.
    Similarly, the hole in the public finances requires tax cuts and/or spending cuts that are simply impossible to deliver. Hence the immediate ruling out by Lenihan of property taxes and other difficult stuff.
    The one insight that the Mandarins have not shared with us is the view that the only people with any real money in this country are future generations of taxpayers. They are the only ones with the cash necessary to solve all of this. Therefore, it is their problem. Nothing to do with us. Guv.

  11. It is depressing Brian. The Sunday Times Peter Carey is reporting the Goodbodys are anticipating haircuts of 1.4b and 1b. for AIB and BoI respectively. Enda is reported to have said that he knows what the haircut is. Could he share the information? As Goodbodys is owned by AIB their numbers are more likely to be accurate notwithstanding Chinese walls.

  12. @Podubhlain

    Brian Carey’s €1 bn and €1.4 bn figures refer to the additional capital that would be required after the NAMA purchases. Most likely this refers to the minimum amount that will be necessary to get the banks back to the “barely legal” core tier 1 ratio of 4% — technically they are above these limits now, so the amount of capital required for bare legality is less than the losses that will be registered. Of course, this scenario would still involve a pretty small discount. And at 4% core tier 1, these banks wouldn’t be let cross the streets without continued ongoing government aid in the form of the liability guarantee.

    I’m not sure what Booker-winning Oz author Peter Carey thinks of NAMA. Another example of truth being stranger than fiction?

  13. Karl
    Thanks for your reply on this which is very helpful. I have been listening to the debate this weekend and the amount of people using the phrase “let the bondholders take the hit” without the subtleties that you introduce is worrying.

    “These bonds are now likely mainly owned by distressed debt investors who know that full cents on the dollar is unlikely to be obtained. If losses exceed shareholder equity, these guys should take a full hit.”

    I have to admit I am having trouble reconciling this in my head with the statements being made by the Minister and other people advocating the current NAMA approach. The clear implication is that they know something you don’t know about the subordinated debt-holders and that to make them take a full-hit would be economically irresponsible (even more irresponsible than buying loans that most people now believe are worth 30 billion less than what we are are going to pay for them). Either that, or our government is genuinely and consciously embarking on a policy of protecting investors who bought financial instruments specifically designed to expose them to some risk as the price of getting healthy upside returns, and that the government is going to sell the taxpayer down the river to finance this.

    Do you have any sense of how much the taxpayer would save if unsubordinated debt holders were allowed to take a full hit (leaving aside the issue of guarantees)? Do you give any credence to the Ministers strong assurances that to go down this road would violate tacit agreements in ways that would have strongly negative implications.

  14. @Brian/Karl
    Where do the National Pension fund preference shares rank compared to the normal shares, sub debt and senior debt? I presume that any losses would wipe out ordinary shares first but are peference shares next in line?

  15. @Tony

    Yep, I’m afraid that’s my understanding. Putting €7 billion of our money in front of sub debt holders in the queue to be wiped out doesn’t look so smart now, does it?

  16. Karl

    we have, to be fair, been somewhat ambiguous about forcing losses on senior bond holders. While it is true they are par passu with depositors in a bankruptcy, Governments traditionally have offered greater additional protection / insurance for retail depositors. Implicitly, therefore, it has been recognised that in a wind-up situation senior bond holders can expect to suffer losses that depositors are insured against. At the same time, the reputational issues that you cite are also a factor.

    The mechanism for forcing owners of subordinated to absorb losses above certain levels is, I hope, clear under the FG model. But what is the mechanism for forcing sub-debt owners to take losses under NAMA? Say the write-down on AIB’s loans is 40%, more than wiping out all equity. It is still not clear how in this scenario sub-debt owners can be forced to accept losses. The assumption seems to be that the taxpayer will fill whatever hole emerges between non-equity liabilities and post write-down assets.

    Andrew

  17. @Karl
    Sorry, I misread the piece. The original figures from Goodbodys were 20% and 17% for AIB and BoI respectively.

    On the nationalisation front RTE report “Mr Lenihan said he did not envisage fully nationalising another bank as it had to do in the case of Anglo Irish Bank.”

    How you part nationalise a bank is beyond me but presumably he means the State owning less than 75% of the equity.

    It should be possible to work the numbers on these assumptions.

  18. Thanks Karl, I suspected that might be the case alright….

    @Andrew

    What is likely to hapen to these preference shares under the FG scheme?

  19. Brian Lenihan’s performance today was classic smoke and mirrors stuff.

    Labour Party’s Joan Burton got the “Will you walk into my parlour?” said the Spider to the Fly, ‘Tis the prettiest little parlour that ever you did spy.” treatment. Her letter to him re NAMA was so “constructive”.

    Of course the FG alternative was “irresponsible”. Did they not realise that they were undermining him as he toured the centres of finance to assure them that Ireland was solvent?

    As for his NAMA proposal, it is of course based on “Best International Practice”. All those questioning NAMA are involved in “abstract economic arguments”. If only our professors and citizens could have a civilised and subservient debate based on the TINA (There Is No Alternative) principle.
    I think the two Brians would much prefer “complicitous silence” in this sensitive area of policy.
    “The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence. Three decades ago, Pierre Bourdieu, a French sociologist, observed that elites in a society typically maintain their power not simply by controlling the means of production (i.e. money), but by dominating the cultural discourse too (i.e. a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored. Or as he wrote: “The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence.” Gillian Tett Financial Times 20 August 2009 http://www.ft.com/cms/s/0/96810a0e-8d8f-11de-93df-00144feabdc0.html

    Could we have a little bit of silence in the name of NAMA?

  20. @ Liam
    “Either that, or our government is genuinely and consciously embarking on a policy of protecting investors who bought financial instruments specifically designed to expose them to some risk as the price of getting healthy upside returns, and that the government is going to sell the taxpayer down the river to finance this.”
    Well…..thats been the consistent approach they have suggested that they will take.

    @Others , KW
    as I note, the realistic losses to be absorbed will be greater , imho, than the existing equity can absorb, so the 7b will/would have been wiped anyhow. New equity will be also needed. There are no cheap ways out, just ones that leave teh taxpayer with more or less skin in the game.

  21. Brian – still doesn’t address my question (and I am not signing a petition without hearing some views on this issue). Yes, the Minister is consistently saying that he wants to protect these people. But he is not saying that he wants to protect them because he is an evil person who wants to sell short the taxpayer. He is saying he wants to protect them because to do otherwise would lead to worse repercussions. Unfortunately, neither he nor Alan Ahearne spell out clearly the mechanisms and channels whereby forcing bank bond holders to take a loss could lead to negative outcomes. Instead, when asked this question the Minister repeatedly adopts a grave tone of voice and assures us this would be deeply irresponsible. He does this convincingly enough for me as a non-banking expert to want to know what he is talking about.

  22. @Tony

    I’m afraid the preference shares in AIB and BofI and the equity capital put into Anglo (€11 billion) are already paid and rank ahead of all bondholders in loss absorption (much against FG’s advice).

    Andrew

  23. @ Karl,

    Very fair approach-however point 2 is the key issue. Due process demands that you have a transparent methodology for deeming a bank to be insovlent. Call it a proper stress test.
    After you have presented the banks with expected losses on a loan type basis, you deal with the rre-capitalisation consequences. You could have this done in 6 weeks, it was done in the US & UK. This opens up the way for a proper dialogue with all stakeholders as to how to share the burden.

    @andrew, you have to big careful about forcing losses on senior bond holders. With a loan to deposit ratio above 125%,we willstill need them after recap, unless we envisage shrinking loan volumes by 20% i.e further rationing credit. That said, we can use the market to tender for senior debt to effect some covert debt equity swaps. Its fair game to tender for a senior bond that is trading at 50c in the euro.

    You are correct regarding sub debt. The recent tender prices for Anglo and IN sub debt arguably constitiuted overpayment. Holders were reluctant to sell becuase they think they will get a better recovery rate post NAMA.

    @Brian
    When you say 30c in euro for portfolio. Do you mean 30c of loan value or 30c of asset value?

  24. @Liam
    I dont know why . Ask AA or BLenihan. As you so rightly say “neither he nor Alan Ahearne spell out clearly the mechanisms and channels whereby forcing bank bond holders to take a loss could lead to negative outcomes.” Now, recall that we are in political economy here. For whatever reason they dont want to do what you, me and many others think would be the rational thing to do. For some reason they dont have an answer other than to try scare tactics. For some reason, thats not good enough for me. I think I am reasonably smart so lay it out for us what would happen if say the subbies were to be written off.
    BTW – while you are indeed not a banking expert, dont think that there are hordes of same advising the minister, at least not hordes of independent minded banking experts. This is politics, not economics. And in politics scare tactics are acceptable actions. Its “stick with nurse for fear of worse”. Not good enough.

  25. @JL
    Theres a problem here, right enough. The working assumption has emerged that the average property loan had a 75% LTV with the investors putting up the 25% from their own equity. Im suggesting of course 30% of loaned money. I do not for one minute think that irish property investors injected €22.5b (25% of 90b) of savings and other non-loaned funds into their investments. Rather I suspect , with no evidence other than an increasing scepticisim, that this was borrowed from other places/under other headings. So 30% of the loans will probably emerge as 30b close enough, if we can track the loans through the system.
    Of course, I could be completely wrong. Has been known to happen.

  26. Brian – we are in political economy and I am still stuck as to why a government would embark on a course of action that will make itself deeply unpopular with the electorate and perhaps even brand some of its core players for the rest of history when they could do something at least slightly (and perhaps majorly) more popular by simply making some bondholders face up to the risks they have taken. Alan Ahearne’s email (which I am choosing not to treat as a secret given that about 300 people were on the list) cites the guarantee and accuses you of being misinformed. In particular, he accuses you of “a startling lack of understanding of the bondholders’ position” and goes on to say that given the guarantee is in place that any attempt to “cajole” these guys is equivalent to a sovereign default.

  27. @ Brian Lucey,
    what DOf will not tell you is that defaulting on senior debt while you have a guarantee in place on all liabilities will have negative consequences in terms of access to senior bank debt markets. It could also have negative repercussions in terms of access to corporate deposits. It is the kind of thing that investors worry about when delaing with a nationalised entity. The goal posts can suddenly move and you find your playing Gaelic football and not rugby. This will be one of the downsides of nationalisation…a funding bloodletting. Will it be any worse than the current one though.

  28. @brian lucey,

    again fair point. If all loans were written to a 75% LTV standard, then 30c in the Euro would be a complete underpayment. However, while the banks have hinted that all was rosy in the garden re underwriting, they have not yet produced the data to verify the data. All, we have is acouple of slide from Anglo and AIb saying “typical loan”.

    The mortgage gives you a good insigt into underwriting-100% loans (sometimea IO) were readily avalable at the peak of the cylcle when rental yields were 2-3%.

  29. @Liam
    so am I, stuck that is. So, why dont we stop trying to parse the imparsible.
    Trying to interpret the government approach from the outside reminds me of the way experts used to work out who was what in the Soviet government by seeing where they stood on the podium. Frankly, its depressing, and somewhat insulting to the population and to the taxpayers that the government has chosen a course of impenetrable secrecy but there we are. I amnt able to work out what is in BLenihans mind.

    As for Alans email, of course its not a secret (altho he didnt actually send it to me). Im not sure what that has to do with the price of eggs but the general consensus which I share more or less is that whatever about the senior bondholders there is a pretty compelling argument to treat the subbies as we treat the shareholders. Why that should not be so is unclear and will remain so for as long as the DoF and the minister/AA choose to keep the people in the dark. Im not sure its my role, or yours, or any of us here, to sort out which scenario (malign intent or benign idiocy) is driving the decision to bail out the remaining private risk investors.

    For whatever reason fate has made KW, myself and a few others public faces and voices on this issue. Rather than sending dismissive emails and uttering gnomic utterances perhaps AA and Blenihan should invite us in for a cuppa, lay out the reasons and say “lads, I know you have the best interests of the state at heart, so this information you have to keep to yourself”. Hell, both I and KW signed the Central Bank Act which is more stringent than the Official Secrets Act. So, we can keep secrets. Tell us, and by our silence (if persuaded) on this issue we will all know that there is something deeply darkly dangerous in asking capitalists to face losses.

  30. @JL

    It is possible that the NAMA valuation process being undertaken is indeed a “stress test” that could result in nationalisation of some banks. But the Minister seems to be ruling this out.

  31. @JL
    fine, ok, leave the Senior Debt (but press very very very hard for D-E swaps and no reupping of the guarantee). Now whats the problem with the remnants of the subbies?

  32. Also Brian, to be honest I think it is at least partly up to you to make a convincing case that you have thought through the potential negative consequences of default and can stand up and dismiss them, before releasing the petition as it was worded when I last read it. I hope you get the spirit of my argument here. I am not making some version of a silly “are you 100 per cent sure, certain, positively??” argument. I am simply asking you whether you have given sufficient consideration to these points and I am suggesting that you should include some discussion of this in your petition, namely that you have considered these arguments and do not find them convincing.

  33. @Liam
    Well, thats asking me to do the work of the DoF, NTMA and probably the CBFSAI. Not fair…
    As for the oped, thats a different issue to what we are trying to work out here.

  34. @Liam

    A couple of points.

    1. Before any bond holders lose their money, private equity holders need to be wiped out. The Minister appears to be saying that even that is unthinkable. So, the de facto position of the government is now, and has been for some months, that it is unthinkable that shareholders — the providers of the ultimate form of risk capital — can lose all their money. If the Minister thinks that this occurring will lead us to be some class of financial pariah, he might remember that shareholders all around the world lose their money all the time. What’s so special about Irish banks?

    2. Don’t get too hung up over bondholders and “defaults”. Subordinated bondholders have already taken some cents-on-the-dollar deals from both AIB and BOI. This kind of thing happends all the time to debt of distressed companies.

    3. As regards the supposed “startling lack of understanding” of the position, of say, subordinated bondholders, I actually think that Brian’s letter didn’t go far enough in explaining why these bondholders should take a hit. We don’t have to just “cajole”. These bonds all fall due after September 2010 and we don’t have to renew the guarantee. So, while technically, a debt-for-equity swap offer may be considered a default, I sincerely doubt if its beyond the best legal minds available to frame a contract that allows bond holders to accept such a swap while, at the same time, waiving their rights to sue for par value. Again, restructuring of financial contracts of this type happens all the time.

    And in case you think it’s only irresponsible people like me and Brian that suggest that bond holders of nationalised banks should take a hit, I’d refer you to this post by Patrick Honohan in relation to Anglo’s bondholders
    http://www.irisheconomy.ie/index.php/2009/05/29/anglo-irish-bank-dealing-with-risk-investors/

    Patrick wrote:

    “It might be argued that losses incurred even by sub-debt holders of a bank could damage the credit of the Irish government. I disagree.

    First, it is really immaterial that the bank is Government-owned: eveyone knows that situation has only arisen as a result of the disastrous performance of the bank. No new subordinated debt has been issued since the nationalization. Besides, in his statement in the Dail on January 20, during the debate on the nationalization bill, the Minister removed any doubt about whether nationalization entailed an expansion of the guarantee.

    More generally, even though there might be an immediate knee-jerk reaction in market prices of debt, mature reflection by the financial markets would recognize that a country honouring its debts and guarantees to the letter–and not beyond–was more creditworthy than one which handed over money lightly to unguaranteed risk investors.”

  35. Karl

    Absolutely no suggestion on my behalf that you and Brian are acting irresponsibly. Very grateful for your continuing work on keeping an intelligent debate on this issue alive.

    I had, of course, read Patrick’s comments on this. I have not heard his views on whether this applies to AIB and BOI, which seem to me different prospects. Your comment above makes the clear case that the potential negative consequences of default are being hyped by the government. Do you have an indication of how much money this would save Irish taxpayers?

  36. @ all

    Under the current NAMA model, and ignoring senior bond holders, can anyone explain to me the mechanics of forcing even sub-debt holders to take a bath even if the write-offs are so large as to more that wipe out the shareholders’ equity, given that the intention is to keep the banks as going concerns and that sub-debt owners only have to absorb losses in a wind-up situation?

    Andrew

  37. @liam
    Every cent that the shareholders/subbies have to absorb is a cent saved for the taxpayer. Its not easy to see what the total market value of subbie debt is but its somewhere in the vicinity of 8-10b, I would venture. Not going to look it up now. The PRINCIPLE however is the same whether its €1 or €8,000,000,000 ; why should the state take the loss that this capital is designed to take? Which brings us back to your original question of course…..why not do this?

  38. Liam.

    It’s a bit hard to keep track of these numbers because there has been some swapping of non-guaranteed sub debt for guaranteed debt. For instance, I wrote a post about a recent AIB deal here

    http://www.irisheconomy.ie/index.php/2009/06/26/aib-debt-buyback/

    But I can tell you that as of 31 March 2009, BOI had €8 bn in sub debt. AIB had less and have traded much of it for other types of debt. I’d appreciate if anyone has an up to date figure on this stuff.

    But basically, it may be small potatoes in the context of the oveall losses, but it’s still a decent amount of money when you start looking at required budget cuts and tax increases.

  39. @Karl Whelan
    The chaos caused by the collapse of Lehman had very little to do with the default on senior bondholders. It was because Lehman had billions of $ of OTC, credit and other exposures with thousands of companies around the world.

    http://www.fdic.gov/bank/individual/failed/banklist.html
    I think they are plenty of banks of this list that didn’t pay 100% back to senior bondholders. Pretty sure from memory that Washington Mutual didn’t

    Why if these were considered “sovereign risk” investment did they pay a premium over government bonds?

    I would also take issue that the senior bonds should rank pari passu in the for any proposed government guarantee. Yes in the even of a wind it would but surely a government is free to design a investor protection scheme of its own likeing.

  40. @DE
    Im pretty sure KW doesnt think that the outcome of the collapse of Lehmans was made materially worse by their seniors being hosed. Now, what Mr Lehihan thinks is something else – post hoc ergo propter hoc – lehmans collapsed, they world economy siezed up, Lehmans had defaulted on their seniors THEREFORE it was the default that casued the siezure.

  41. @DE

    Good points. Unfortunately, finance ministers everywhere have learned the lesson that wholesale defaults on liabilities are very bad things and I’m not sure we’re in a position to be ballsier on senior debt than the rest of the world.

    Lurking in the background here are separate but important questions. To what extent have the post-Lehman policy actions around the world raised the moral hazard problem to a new level? And will enhanced regulatory action be able to keep one step ahead this time?

  42. So in the region of 13-15 billion. I’ll hold this as a provisional figure in my head until a better one emerges. In one version of this debate, this represents a straight payment from the taxpayer to the bondholder. I think I am going to have stop commenting now and think more about this.

  43. @Liam
    In every version its a straight payment from the taxpayer to the bondholder. The only issue is why that is so.

  44. i think it is a mistake to describe what various debt holders ‘are’ rather than what they would ‘do’ if you start to wipe them out.

    even if we only opt to protect depositors – that is still a direct transfer from the tax-payer, granted it might not get as much backlash, but if you nationalise one you had best be ready to nationalise them all, international confidence is not something you can easily reverse.

    if we nationalise banks why wouldn’t they just end up being replicas of anglo? the track record thus far is a joke

  45. Anglo was a joke long before nationalization Karl D. Nationalization had very little to do with it.

    I could live with a subsidy from the taxpayer to depositors but I think professional bond investors are big enough to fend for themselves.

    What do you think are triggers for the sudden additional loss of confidence if we nationalized all the banks?

    Everyone around the world knows all the Irish banks are technically insolvent under even the most optimistic of scenarios.
    Why would they be shocked if the banks were nationalized now?

  46. Good question Karl.

    Here’s my answer. Anglo was a cowboy outfit solely focused on the property sector lending. Their business model is dead and the bank needs to be wound down. The government is trying to do so in an orderly manner, which may require stretching the truth every so often by describing it as a going concern. In any case, having Anglo be a major player is not part of anyones recipe for the future of Irish banking so it’s no surprise they are not making loans.

    In contrast, BOI and AIB are functional retail banks that made bad mistakes in lending to property developers. But they are still the proverbial “life-blood” of the banking sector in the Irish economy. Once re-capitalised, they will be in a position to make loans to businesses and households. There is no reason to think that the business plan for a nationalised AIB and BOI will remotely resemble what has happened at Anglo. Also, there are good reasons to think that we may be able to quickly get private equity capital involved (e.g. CIBC).

    So, that’s how I see it. But I understand that you’d prefer to extrapolate from one, not very useful, data point.

  47. @Brian Lucey. “The only issue is why that is so.”

    Isn’t there lots of issues behind the issue?

    You could also ask why it is that the banks here became so reliant on bondholders for their funding. I know it neither changes nor helps the current situation to investigate why are banks are where they are, but it might be helpful to keep in mind when dealing with the bondholders.

  48. @ KW,
    I thought Lenihan left himeself some wiggle room today on the issue of nationalisation, particularly of AIB. It is almost as if the penny is dropping with the DOF.
    @BL,
    One way of pressing for debt equity swaps without being explicit about it is to look at what EBS has done in tenedering for its morgtage securitisation at 80cents. Ok its only a 20% hair cut but its a modest positive. If the bonds are trading at a discount to fair value go ahead and tender. DOF could be more agressisve on Anglo sub-debt. Paying 55 for tier 2 is overpaying but to go below that level probably requires acceptance that Anglo is not a going concern. We all know its not but they seem unprepared to accept.
    @Karl Deeter,
    I think you have hit the nail on the head here. nationalisation arguably should be the nuclear option not the first option. If you want a disfunctional banking system, with massive run on funding look at Anglo & repeat over the whole system. In my view nationalisation, risks resulting in a massive credit squeeze as international liquidity is withdrawn from the banking system by investors who do not have to be here. I am not exactly thrilled at eamonn Gilmore suggestion of a Banking Commission full of 2nd rate international experts & representatives of the social partners. Anyone fancy CORI running the lending deparment.
    @Andrew,
    the answer to your question is as follows-option 1.make the NAMA haircut 40%, AIB & BOI are insolvent, they are nationalised immediately, offer the sub debt holders a settlement 0-xx%. the banks are not going concerns until they are recapped on Day2.
    option 2 would be to announce a tender at low levels to the market, complete with a hawkish statement on the haircut. Again this would require a change in tone. Investors would draw their own conclusion and hit the bids.

  49. Good evening to all

    It strikes me (late on a Sunday night) as important to recognise the importance of the fact that this debate is going on intelligently, coherently; and is not being corrupted by politico’s attempting to spike the debate.

    If we were in the1980’s, I am sure that a few of the shining stars on this forum would be getting visits from political goons, goons with terrible suits, and ties, ties that would ward off Medusa!

    My hat is off to you all!
    Al

  50. The cost of funding NAMA -vs- the cost of funding recapitalisation:

    It was interesting to hear the Minister say that Interest on NAMA’s funds (1.5%) is lower than interest on funds being borrowed by the Govt (approx. 4%). NAMA will be paying approx 1.5%. The NTMA say a sufficient income stream exists from the existing loans to service the interest on NAMA loans. One has to assume that the interest rates payable by borrowers on bank asset loans must be at a margin over Euribor. If the loans are bought at a discount of 30% and if, let’s say, one third of them (being having an aggregate nominal value to borrowers of approx 50% of the amount paid by NAMA for all loans) are functioning then that interest could service the interest bill on the entire NAMA debt.

    Does this mean that NAMA will place the least strain on the public purse? Also, can anyone tell me will this apply to the funds used for recapitalisation? I suspect it won’t because Minister Lenihan seemed to relate the availability of this low interest rate to the fact that the funds are being made available by the EU on foot of commercial loans backed by security. Am I correct in thinking that this would not be the position for funds used to recapitalise the banks?

    100% Nationalisation:

    @KW – can you please expand on how a given valuation can necessitate wiping out all existing shareholders. I would have thought that shares usually retain some value even in insolvent companies – for instance Anglo shares had a value at the time of nationalisation. Is it the legal position that wiping out capital? I have to say that my reading of the Minister’s comments is the same as Yoganmahew’s on this point. I also note that Constantin Gurdiev has said that NAMA allows for 99.9% nationalisation.

    Valuations to be based on trends in property values:

    Valuations will be based on trends since 1974 but excluding the recent bubble. Is this a long enough period? Is this an appropriate period? I have seen very little analysis of how that particular period will affect valuations. To my mind, the 26 odd years form 1974 to 2000 is a short period that could disclose a trend skewed by the particular economic history of that short period.

    Haircut 100:

    Estimates of valuations will be announced when introducing the NAMA legislation in the Dail in September. This will surely impact on the share prices of the banks hugely and will affect how much the taxpayer will get for it’s money in any early tranche of recapitalisation.

    The Opposition:

    I was happy to hear Richard Bruton say that FG will contribute to the NAMA debate. I was also particularly happy with the two points he picked out:
    1. The need for a mechanism for preventing over-payment by NAMA.
    2. The need for a mechanism to introduce risk sharing (NAMA 2.0?).

    I note that Richard Bruton says that the point of their proposal is to do an opposition’s job of presenting a real alternative. He said that this means that when an election comes around people will know they are not just choosing between people but choosing between real alternatives. To my mind the FG proposal is a political move, and a good one at that, on their part. Bruton did admit though that they had not consulted with Labour on it and any Government would have to take the best ideas from both parties. I am starting to think there is no chance of FG’s plan being implemented even if FG and Labour won an election in the morning. Am I being too dismissive?

  51. @BL

    The Minister’s statements seem to contrast with your statements that they won’t see shareholders and bondholders take a hit. He said the following:

    “…of course shareholder value will have to reflect the value of the institution and I don’t have a problem with that…”

    “…the subordinated bondholders have had to take a big hit and there has been a big reduction in the amount of money paid back to them, and that’s quite right and proper because they advanced their money on a risk basis…”

  52. There is a difference between terminal nationalistion (Anglo) as a soft wind up option and the temporary nationalisation & subsequent reprivatistion of an AIB or BOI. The problem may well be that DoF realises that temporary nationalisation is inevitable but cannot be satisfied of a timely reprivatisation. Just how insolvent the banks are no one knows for sure and even if the Nama haircut leans towards the banks, no one yet knows what the second wave of bad debts will be. Perhaps retaining bond investor confidence concerns relate to reprivatisation risks rather than nationalisation.
    Blenihan has not ruled out further capitalisation and maintains nationalisation is not an option (today).

  53. I will keep asking until Im blue in the face….What sort of estimate do people put on the value of bonds held by people who have outstanding property loans with the Banks.I know a friend of mine is in this position.If the bond is wiped out, He looses most of his pledged collateral.If this loss is added to the present write downs in property values He is Insolvent.What is the estimate of ,how many developers will be wiped out if their bonds are wiped out.Whatever people saw coming or not,nobody factored in the scenario of the Bank going bust and defaulting on its Bonds.

  54. In a depression, asset prices continue to deflate and often oveershoot to the downside. The long term value of the dubious real estate assets, backing the useless loans made to cronies, is likely therefore to be then lower, than the current market value.

    I am astonished to see practised economists assume the contrary.

    There is absolutely no basis established on this blog, by anyone, for assuming growth in these deflationary times. Still less, growth in assets which are so tainted that they were artificially inflated by crony capitalism.

  55. @ Jim
    In a depression we find out who was swimming naked, ie who was unsecured from the point of view of his creditors and investors. Basically, Jim all paper assets are woth just that, a piece of paper! The bank runs that would have occurred and thereby alerted even Bruian Cowen, have been stopped, but that does not mean that the baks are not wiped out. We now have some time to srot things out, but if all concerned can be persuaded to ignore reality, then yet more money can be taken off of suckers. My advice to your pal is to sell his paper for cash or useful metals. Once serious talk of the banks collapse begins to penetrate, and as you can see, even economists have difficulty in realizing all the consequences, there will be no further market in such assets!

    I strongly urge all reading this to understand just how serious this is. There is no known bottom for what were popular investments in times of rampant inflation. Many may be wotrthless, but the markets still do not appreciate this.

    If this government were as cute as they are supposed to be, they would have long ago crashed the market, in all forms of financing of all the banks, enabling the ownership of all their debt including shares, to have been purchased for a few cent on the euro. Funnily enough they or rather their mysterious intermediaries in the media, would merely have been correcting the market as the banks have been acknowledged explicitly in this blog to be bust.

    Where does this leave directors of all trading banks? They must by now know that these entities are insolvent. One of the consequences for this, is unlimited liability for directors for the debts incurred by the trading entity. Expect resignations!

  56. @ zhou_enlai
    All the companies concerned have a stock exchange quotation which to be retained requires some maintenance costs. They therefore ahve residual value but in a liquidation, the existing shareholders will lose their ownership rights as the right to a quotation will be sold off by the liquidator!

  57. I already hinted that the government might not be above the manipulation of the bond market, and if NaMa is suddenly dropped, with trebles all round, I suspect it means that those who had bought such bond debt had now parked it elsewhere, leaving them to write it off!

    NaMa is such transparent lunacy, that I still consider this the likliest motive.

    We are in a depression! Get used to it.

  58. I see that Green Party Senator Dan Boyle describes the FG proposals as “voodoo economics” in the IT this morning. Looks like the PR boys are scraping the bottom of the barrel to find new soundbites in the hope that nobody actually knows what they mean. Watch out KW, they’ll be dubbing you as some sort of evil high priest soon!

  59. It looks like the Greens are going to have a thorough debate on the efficacy of NAMA & then support it.

  60. @al
    “If we were in the1980’s, I am sure that a few of the shining stars on this forum would be getting visits from political goons, goons with terrible suits, and ties, ties that would ward off Medusa!”

    Well…things are more subtle now but the message can still be given!

  61. @zhou_enlai

    If the dates for valuing are 1974-2000 to avoid the increase in prices during the boom, I wonder will the models also exclude the massive increase in building completions? Although the price rises during the period may be irrelevant for the long term values, I don’t think this si the case for completions etc.

    A more general point is what exact data will be used? Is it just the average house price (and land) data? For land in particualr I am almost sure that there is no electronic copy of micro data available for the whole period!

    Basing the long-term value on a single national or perhaps at best a few regional averages over 26 years seems to me to be very unwise…

  62. I think the biggest new information to come out of the Minister’s radio appearance was the interest rate at which the ECB (not the EU as I said earlier!) will make funds available to NAMA.

    A difference in rates could mitigate severely against adopting a NAMA 2.0 approach as the additional monies which will be required for recapitalisation come at a significantly higher interest rate than if you paid for the full estimated value of the asset.

    @Tony

    Without checking, the legislation probably allows the amount of completions ot be taken into account but it is not apparent that we will ever know how much weight was given to each factor. This is good from a legal point of view as the valuation process is less open to question by the banks, but it is bad from a transparency point of view because it means there is no guarantee that we will ever know how much each factor counted for. In fact, there is no guarantee that we will get full details on any individual asset valuations!

  63. The simplistic 27% figure has no relevance. The total book of land and development loans at AIB was an original 20.9B. It has already been written down to 18B in the last 18 months. Its current book value is 18B with original collateral of 27.9B. Average LTV of 75% (remember all of these loans did not originate at the peak of the boom either).

    NAMA will be looking at the markdown in respect of the collateral., not the loans. It will be taking into account the long term economic value of the collateral, not the loans. So take a 50% haircut on the collateral and pay a price of 14B (remember not all these will transfer because of minimum loan size, but lets just take them all to illustrate point. This 50% haircut will not be on assets that were not all valued at peak property prices either.

    This leaves AIB with a 4B writedown on Core Tier 1 of 11.1B (including government prefs), but lets assume it without the prefs. Core tier 1 is 8.6B.

    Now… 8.6 + pre provision profit of H2 0.9B = 9.5B – writedown of 4B = 5.5B of core tier 1 capital.

    Risk weighted assets will have declined by a corresponding 18B from 131B to 113B so core tier one ratio will be 4.9% still after a 50% haircut.

    My suggestion is cleanse the banks by purging their balance sheets with Nama. Swap the prefs for equity and assume a larger minority stake in cleansed banks. Participate in the upswing of the share prices (a la Swiss stake in UBS) and profit on the stake to compensate for any loss on slow disposal of assets from Nama.

    This makes so much more sense than a swooping Nationalisation. No country during this crisis nationalised their banking system and I find it hard to believe that it is even being considered as a solution at this stage. International money markets and economies are functioning again and panic measures are certainly not required.

  64. Seldom has so much analysis been wasted on so little as the time & effort spent parsing Lenhian’s interviews.

    What he says will have zero influence on how NAMA will operate, its whats in legislation that matters.

    @zhou… all that analysis and you are back to where you started…. Your last sentence sums it up…. But the draft legislation is clear on this…. all you do know is the minister says is final, that NAMA’s agents are immune from prosecution, and NAMA doesn’t have to pay taxes, publish accounts, and NAMA’s agents are gagged from whistleblowing….

    NAMA as defined in the draft legislation is a framework for fraud…. It is that simple

  65. @Zhou

    I’m afraid you’re still not correct about the NAMA interest rate business. The rate mentioned by the Minister is not the rate at which the ECB will make funds available to NAMA. The ECB will not be making funds available to NAMA. The Irish taxpayer is making funds available to NAMA and the DoF has decided to make the bond it gives to the banks a low-interest rate floating bonds. This has nothing to do with the ECB at all.

    Where the ECB comes in is that the banks can take these bonds to the ECB and use the as collateral for loans. The main operation for this is called the Main Refinancing Operation and the rate at which the ECB lends in this operation is plastered on the front page of their website

    So, before this gets around, can we kill the idea that Mr. Lenihan’s annoucement relates to the ECB lending money to NAMA?

    On your second point, about a “difference” in interest rates somehow meaning NAMA saves us money (even if the starting point is overpayment.) I don’t agree. I’m afraid I spend more time here than even you and I’ve come up against this one before and tried to explain it.

    See for instance here:
    http://www.irisheconomy.ie/index.php/2009/08/06/%E2%80%9Coverpaying-saves-money%E2%80%9D-talking-point-gains-popularity/

    Bottom line: You seem to think that bonds given to banks in exchange for NAMA have to be completely different things to the instruments used to recapitalise the banks. I’m guessing you think this latter instrument has to be cash — it doesn’t. In fact, it could be the exact same instrument used to purchase the NAMA assets.

  66. “Valuations will be based on trends since 1974 but excluding the recent bubble. Is this a long enough period? Is this an appropriate period? I have seen very little analysis of how that particular period will affect valuations. To my mind, the 26 odd years form 1974 to 2000 is a short period that could disclose a trend skewed by the particular economic history of that short period.”

    Since this was the new thing i am surprised there was not more talk on it.

    The question I wanted Damien Tiernan to ask was,
    Are you Presuming that we are at the bottom of the bubble in this scenario?

    @ Karl, Brian, Liam etc.

    A lot of the posts on this thread seem to be a kind of head banging exersize where we cant understand why the government is so worried/ preoccupied with bondholders to the extent that they are willing to empovorish a generation.

    I would suggest that the only way that it makes sense is if you start believing some conspiracy theories.

    That there are private interests out there that are so powerful that they can interfere with our democracy and that they have thretened to do so.

    The “Global capital markets will react badly” arguement is not strong enough for me to explain their worries unless there have been contributions from these markets to the government.

    @BLucey
    For whatever reason fate has made KW, myself and a few others public faces and voices on this issue. Rather than sending dismissive emails and uttering gnomic utterances perhaps AA and Blenihan should invite us in for a cuppa, lay out the reasons and say “lads, I know you have the best interests of the state at heart, so this information you have to keep to yourself”.

    But if karl and yourself start going quiet the rest of us will smell a rat.
    What could they possibly say that would make you stop talking on this very important issue?

  67. @Padraig

    It is clear that there will be more than 21bn going into NAMA from AIB and that much of the non-development stuff will also have to go in at a discount.

    Also, to what extent has a couple of years of rolled-up interest undone the equity in the original 75% that you cite?

    For both these reasons (plus some of the collateral being worth less than 50% discount) I think a reasonable write-down for AIB will be higher than the 4bn that you cite.

    And remember that there’s plenty more losses coming down the line.

    The improvement in international financial market conditions that you cite is welcome but this may also make it easier to have private investors come in an recapitalise. It is another reason not to mollycoddle existing shareholders.

  68. @Eamonn

    “What could they possibly say that would make you stop talking on this very important issue?”

    I think we’re heading into unknown unknowns territory!

  69. @KW

    Thanks for your reply. I really am not clear on the points about interest rates at all and I wouldn’t like anyone to think I am speaking with authority.

    The way I understood it (and I am very open to correction) is this:
    1. Govt issues low coupon bonds to NAMA to purchase assets.
    2. NAMA pays those Govt bonds to the banks.
    3. The banks pledge the bonds to the ECB and get cash in return. The ECB will do this because the bonds are backed by the assets which NAMA holds (rather then being straight borrowing based on the taxpayers’ ability to repay interest and capital). Is this what allows the Govt to issue at a low coupon?

    You suggestion that the Govt may be able to issue similar bonds to acquire bank shares is of course the nub of the issue. Is there a definitive answer to this or are we speculating? Is there any precedent or guideline which says the ECB will accept those bonds as being backed by the bank shares which they were used to purchase?

    I agree that overpayment will cost us dearly no matter what the interest rate and I also agree that we should seek equity ahead of overpaying for assets. With that said, a 2.5% difference in interest rates is significant, especially if the banks assets might service the interest. It hasn’t changed my opinion on overpayment but it does give more context to the debate and allows us to see where opposition to underpayment may be coming from.

  70. @pat donnelly – based on your assumption of no growth in the future I’ll suppose that when we get a bit of rain you start building an ark and collecting animals.

    to expect no growth in the future is ridiculous, its not ‘different this time’ its just that this time its deeper and harder but we’ll come out of it eventually irrespective.

    @karl w: your response is, as always, practised and brilliant but it didn’t answer the question – rather than what banks ‘are’ what would investors and bondholders ‘do’ if you start to wipe them out? Will that increase international confidence in the small island economy we call home or reduce it? will our CDS (which have finally reigned in) increase or decrease?

    the extrapolation sin is on both sides, i might think BOI could be anglofied, but if you think private equity will run into a country that wipes out other investors I’d say you are equally off the mark. they are interested currently only because we HAVEN’T wiped out investors/bondholders etc. not due to the prospect of nationalisation.

  71. @Karl deeter
    Is it not probably fair to say our reputation is shot anyway and a lot of international investors will give Ireland Inc a wide berth for some time.

    As someone who buys stocks and shares I won’t be touching the Irish banks any time soon as a long term investment (they’re quite good for short term speculation) no matter what I’m told as
    1. The same muppets are in charge of both the banks and the country
    2. There is talk of going back to the banks if the haircut is not enough.

    The world of investment is one of choice, you weigh up the risks and rewards in each. There are plenty of choices out there and Ireland is a very very small part of that choice. If you’ve been burnt once by a country why go back for a second time.

    What I suspect will happen is the new investment will effectively be a takeover or prelim to a takeover by a foreign bank in which case their main worry will be no recourse on the toxic stuff.

  72. @ zhou_enlai
    You are correct, potential oversupply seems to be covered here:
    (7) The Minister may make regulations providing for the taking into account by NAMA, in determining the acquisition value of a bank asset, of any report of an expert (whether prepared before or after the commencement of this Act) concerning factors or matters relevant to the determination of the value of property or property of a particular type or in
    specific locations or with specific features or benefits, including—
    (a) zoning,
    (b) availability of utilities,
    (c) availability of similar property in similar locations,
    (d) historic value of property in particular locations, and
    (e) recent valuations of similar property in similar locations.
    [from http://www.finance.gov.ie/documents/pressreleases/2009/bl103drftleg.pdf%5D

    But it seems to be full of things which NAMA/the Minister MAY consider but short on what they SHOULD consider and as you say the weightings are not mentioned at all.

    Given the number of loans to be considered, I suspect that something overly simplistic will be applied, perhaps choosig each town/area, deciding on their prospects in a very ad hoc way and then other factros will take prominence, with the cover that these factors were “given due consideration”.

    Incidentallly “(e) recent valuations of similar property in similar locations.” is 2000 considered recent now?

  73. I was surprised to hear Mr Lenihan say that long term economic value would look at house prices since 1974. Such an exercise would almost certainly result in nationalisation. So when he still suggested his belief that banks would remain private (even INBS?), I can’t really figure it out*.

    (*unless you only apply such discounts to ‘non-performing’ loans and assume interest roll-up loans are ‘performing’. Even if loans are genuinely performing, I wouldn’t buy them at face value).

    There is a reasonable argument that real house prices should remain fairly static. The linked graph below shows Real US house prices since 1890 (and a moody’s projection at the end):
    http://www.economy.com/dismal/graphs/blog/cc_072309_1a.GIF

    Unless there’s a lack of green space in Ireland, it’s hard to see why Irish house prices should differ. On page 2 of the pdf below, Chart 2 shows Real Irish house prices:
    http://ec.europa.eu/economy_finance/publications/publication13187_en.pdf

  74. @stuart blytham – if that is the case then we are already relying on a decreased pool of faithful investors, so why go any further towards hurting those that remain?

  75. @Zhou

    “The way I understood it (and I am very open to correction) is this:
    1. Govt issues low coupon bonds to NAMA to purchase assets.
    2. NAMA pays those Govt bonds to the banks.
    3. The banks pledge the bonds to the ECB and get cash in return. The ECB will do this because the bonds are backed by the assets which NAMA holds (rather then being straight borrowing based on the taxpayers’ ability to repay interest and capital). Is this what allows the Govt to issue at a low coupon?”

    So you’re right about steps 1 and 2.

    Step 3, however, is not correct. The bonds are backed by the Irish taxpayer. The fact that we have purchased property assets with the issuance of these bonds is beside the point for the ECB. From its point of view, the banks are presenting it with bonds guaranteed by the Irish government. Whether the Irish government makes enough money off the property assets it acquired is of no relevance.

    As for the low coupon, it appears to be linked to Euribor, which is low now but won’t be as low in the future. We’ll have to see whether income on NAMA assets will be paying for the interest on the NAMA bonds over the next few years. But, of course, that says nothing about the losses associated with overpaying for the loans, i.e. the fact that we have to pay back the principal.

  76. @Karl D.

    I was under the impression that in the capitalist system, shareholders in failed businesses lost their money and that bondholders got their money back in order of the seniority of their claims.

    You seem to think that the outside world demands that Ireland should not follow these time-honoured rules. What can I say? I don’t agree. Let’s just agree to disagree.

  77. At the risk of politicising this great thread, the other point that the markets have picked up from the minister’s interview is this one:
    ‘I don’t want a divisive vote on the NAMA issue to interrupt the Lisbon debate’.
    Which seems to point to a NAMA vote after the Lisbon referendum II.

    The Lisbon vote is Oct 2nd, so this implies that we will have to wait at least another six weeks before a NAMA vote.

    Perhaps not a big issue, but the delays thus far have done very very little to help the banking system and the businesses that rely on it.

    In the Swedish case (which is still pointed to as the ‘how to do it’ manual) they guaranteed the bank liabilities in September, but had their ‘bad bank’ up and running by the following spring. The delays here mean that we have allowed our banking system to slow down to such an extent that getting them started again will be a longer process than could have been achieved through some decisive action earlier in the crisis.

    More procrastination is leading to more Japanification.

  78. Funding Nama: The perception is nama will use income from good loans to finance its costs: but can it? Surely in buying a good loan it must price in all cashflows including interest.

    What is Nama’s cost of funds? Is it not the case as the actual cost of funding is government cost of debt – the open market price paid for Irish Gov paper – discounted and passed through to Nama. Nama’s lowered cost of funds is form of state aid which carries a cost to the taxpayer.

  79. @bill hobbs (“The perception is nama will use income from good loans to finance its costs: but can it? “).

    And…… there must be a high risk of any good loans in the bundle going bad post NAMA? I wonder if anyone is factoring that in?

    If a good number out there have already stopped paying interest on their loans, there’s no reason that others currently making repayments won’t stop in the near future as things deteriorate further or that more businesses will go bust and office/shop rent stops being paid, etc.?

    It would be bad enough to overpay but to overpay and then see the ‘portfolio’ further eroded must be a nightmare scenario (amongst other nightmare scenarios probably)?

    NAMA – the nightmare asset management apocalypse! (copyright Joseph!!)

  80. @KW, Karl Deeter,

    Does not the law rank senior debt parri passu with depositors. So if you subordinate senior debt to depositors you break the rules of capitalism. You can of course change the law but applying it retrospectively will have consequences.
    Therein lies a problem if you wish to continue in the game.
    Sub debt is a horse of a different colour.

  81. @Brian Lucey

    On Newstalk today you said that the FG plan would have been the best option if we were starting again ,i.e. pre-September 2008 and pre-Bank Guarantee Scheme.

    You said that the FG Good Bank proposal is not possible now. Why not?

    Even if it is not possible now why not wait until the Bank Guarantee Scheme runs out in September 2010 and then put the Good Bank proposal in place?

    We are already one year into the Guarantee Scheme and even if the legislation is passed before the end of the year it will be well into next year before any toxic loans are removed from AIB or BOI. Furthermore the immoral debts that NAMA will lumber the citizens of Ireland will weigh us down for a generation – not just for one year.

    No matter how many ways you cut NAMA it is a bailout for reckless and probably fraudulent financial chicanery. As Gary said in a previous comment, “NAMA as defined in the draft legislation is a framework for fraud…. It is that simple”. It’s hard to disagree.

  82. @jl
    Bonds may have ranked parri passu with deposits on the event of a windup but as far as I am aware there would be no requirement for any government to guarantee any or all investments at the same level.

  83. In WaMu the senior debt was split – the secured senior debt and was taken on by JP Morgan while the unsecured wasnt, thus “deranking” it below the deposits

  84. @Aidan
    For the reasons I gave in the irish times on 18 May (?) not sure that the FG plan is workable now.

  85. @BL

    Under our proposal, the split between the “going concern” (good) and asset management (“bad”) parts of banks that fail to adequately recapitalise adequately during the remainder of the Guarantee period (in large part by negotiating down their liabilities to bondholders of various classes) only happens after the Guarantee expires, at which point there will still be up to €40 billion in “locked in” risk capital and long-term bond funding that cannot “escape”. Financial stability could be secured by selectively extending the Guarantee only to deposits, new sources of funding and roll-over of s/t debt. So why is it not workable?

    Andrew

    Andrew

  86. @ DREADED,
    Please explain how Pari passu is not parri passu. Do you mean that there is some wiggle room if not wound up. I suppose deposit protection at a certain level does create a difference. Could you get away with a blanket guarantee on depos and senior debt.

    @ BL
    As far as I am aware, in US law is not quite the same. We follow UKconvention or so I am told.
    I think you are right about unworkability of FG plan. There would probably be a run on the legacy banks within 30 seconds and they would be nationalised by close of business.

  87. @ Andrew Mc Dowell
    If you can explain why Brian Lenihan brought in the indefinite extension legistlation unless he intended to use it if required then The FG plan may have some legs but as far as I can see it is a major spanner in the FG Plan.

    Why did he bring in legistlation giving him the right to do this?

    I think he did it beacause it was a very clever thing to do.

    If he asked the dail to pass legistlation extending the guarantee indefinitely it may have been blocked by the greens or back benchers.
    Also he is not yet positive the extension is required.

    So he passed legistlation to give him permission. He has an ace up his sleeve.

    Now given that we know from his interview yesterday that BLenihan is not going to allow bond holders to take a hit dont you think that if the government was in danger of falling he would use the power to extend the guarantee ensuring that a) he gets what he wants and b) immediately scuppers FG’s plan to save the Taxpayer.

  88. “Stop worrying, our bank deposits are safe. Boomtime profits have ensured Irish banks are well equipped to deal with the slump” , says Alan Ahearne” Sunday Independent. September 21 2008

    No, it couldn’t be the same Alan Aherne.

  89. @ jl and bl

    i think the issue with WaMu was that there was essentially two legal entities involved, with one company holding the cash deposits and another holding a lot of the debt (ie WaMu Inc and WaMu Bank Inc, one a subsidiary of the other, but can’t remember the exact details). In fact, i think the set up was so confusing that an awful lot of the hedge funds/investment banks were actually backing the wrong pony right up until the end, owning bonds on the structure that didn’t have the cash deposits etc. Heard there was a couple of larges losses and some frantic bond trading in the final days of WaMu as a result.

  90. @JL

    You say there could be a “run” on our legacy banks. I assume you mean the “bad” parts of the banks with the toxic loans owned by the private investors (the other “going concern” part of the bank would ne nationalised and remain under Guarantee to maintain depositor and market confidence).

    I’m not sure what you mean by a “run” by investors owning shares or perpetual notes or long-dated bonds. If a scheduled debt payment cannot be made, then normal bankruptcy proceedings would ensure and bond-holders would take control. Who cares? IT has not been separated from those other deposit-taking and lending functions vital to the normal functioning of our economy.

    FG’s policy can sometimes be mis-understood, but it is entirely workable and will reduce costs for the taxpayer.

    Andrew

  91. I wish there was an edit function – the last sentence in the middle paragraph of my last post should read “It has NOW been separated from those other deposit-taking and lending functions vital to the normal functioning of our economy.”

    Andrew

  92. Re: Long-term economic value –
    I am surprised that no one has mentioned the work of Piet Eichholtz et al on 355 years of evidence on the trend (or lack of it) in Amsterdam house real prices!
    see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1439735

    If you look at his chart of inflation-adjusted house prices you will appreciate his point that reversion to “long-run economic values” can take a very long time.
    see http://www.nrc.nl/achtergrond/article1853451.ece/Hoogste_huizenprijzen_in_bijna_300_jaar

    So perhaps going back to the 1970s is nowhere near long enough.

    None the less, it is sobering to work out what the (inflation adjusted) prices of Irish houses were in the 1970s, bearing in mind that the overall price level has risen only about 16-fold since 1968.

  93. @karl w: actually we do agree if you say you feel capitalism would be the best solution, but this is ireland and we have a state that intervened in the natural flow of business in more ways than just its treatment of banks.

    what we are left with now is not close to capitalism, to describe it as that is an affront to capitalism, it is statism dealing with an unforgiving market which was allowed to be unforgiving due (largely) to structures put in place by the state in an effort to avoid the kind of crash that would have naturally occurred otherwise.

    sadly, your solution seems to be more of the same, nationalisation and state answers, when it is largely the state that created the difficulties in dealing with this mess (with blanket guarantees etc.).

  94. KW: “The fact that we have purchased property assets with the issuance of these bonds is beside the point for the ECB. From its point of view, the banks are presenting it with bonds guaranteed by the Irish government. Whether the Irish government makes enough money off the property assets it acquired is of no relevance.”

    Noting KW’s point repeated above, can anyone direct me to an ECB guideline which deals with the rates which attach to eligible bonds which it will accept?

    Also, is it absolutely certain that NAMA will pay for assets with Government bonds rather than with asset backed covered bonds?

  95. @andrew,

    correct, I was referring to the bad bank. I am not sure though that the bad loans would not exceed the available long term funding. For example if you took all the property stuff, added the buy to let stuff and the SME book that was causing you concern…ie the true bad assets. Would you have enough capital and senior debt funding on liability side to balance off. If you did not you would be dependent on some form of deposit or wholesale funding. The devil is as ever in the detail.

  96. @ Zhou

    at the moment the ECB is conducting all of their repo tender operations at a fixed rate, that being the current ECB base rate, or more technically the ‘main refinancing operation minimum bid rate’, ie 1%. However, historically this rate has not been fixed and would be dependent on a competitive tender process from all the banks seeking to take part in any particular tender operation. Due to the credit crisis and the uncertainty surrounding the likely demand (in terms of how agressively some banks would be forced to pay for the funding) for these tenders, the ECB is currently conducting them at a fixed rate for all elligible collateral (different haircuts applying to differently rated collateral).

    On the longest term operation (12 mths) the ECB has reserved the rate to add on an additional premium on top of the fixed rate (so that they wouldnt have to raise the base rate in order to raise the tender fixed rate), and they will probably revert to variable rate tenders at some point next year as well when the uncertainty surrounding them has abated.

    http://www.ecb.int/mopo/implement/omo/html/index.en.html

    the ‘ad hoc communications’ section has all the necessary details i think.

  97. @ Brian Lucey
    Thanks for your reply.

    In your opinion piece in the Irish Times (18th May 2009) “Nama plan just delaying the inevitable”, you wrote that the, “…Fine Gael’s plan for the banking system is to be cautiously welcomed. It represents an attempt by that party to engage with the complexity of the banking crisis, and although in my view potentially flawed, is superior in almost every way to Nama.” Your criticism’s of the plan includes a fear of the zombification of the banks in the short run, the difficulty of the long lead-in time to sort out the banks, the fear of the politicisation of credit provision and doubts that the plan will in fact get credit moving. All good points.

    As far as I can understand the situation the main Irish banks have effectively been in the care of the Irish state since last September. Without state backing many, if not all, would now be bankrupt. Some of them probably should have been let go. Their survival was a political decision. The FG plan envisages a different political outcome to the survival of some banks. And why not?

    I can understand your view that there is a “loss of trust in the banking system but in the political system as well.” The so called competitive market in banking has always been open to the influence of vested interests. In recent years the biggest problem has not been the “Politicisation of credit decisions” put the capture of the government and public administrative/regulatory system in Ireland by the financial sector. Surely it is better to improve the political and administrative/regulatory system rather than look for a perfect non-politicised market driven financial system.

    The bankers who lived by the rule of the “market” in good times now want the taxpayer/citizen to hand them over €60 to €70bn to bail them out- Privatise the gains and Socialise the losses.

    Like you, I am strongly against the NAMA proposal. I am trying to figure out what is the best option. As the decisions on banking in Ireland are ultimately going to be political we need to hear FG, Labour and other parties explain and argue their different plans for the resolution of the banking crisis to the people.

    I don’t trust the present government to protect the interests of the citizens of Ireland in either the details of their plan or the manner in which they are selling the idea to us, as citizens. It’s time to consult the people.

  98. @ KW, Zhou
    On the earlier point of the bonds to be issued – s.68(2) allows for Gov. Bonds or NAMA bonds to be issued to the value of the total of the acquisition value for the bank assets acquired. This may explain the rate quoted by B|L yesterday. It looks like the NAMA bonds option is to avoid them being counted as part of the national debt.

  99. On the issue of how to deal with sub holders
    First – defer coupons on non tendered bonds that contain this type of coupon stopper (Tier1/Upper Tier2) for any bank receiving state assistance.NRock did something similar last week. It is possible to do this, without triggering default, depending on the prospectus language.
    These bonds not tendered for are priced this was anyway, ie., assuming coupon deferrals. Pre-buy back Irish bank sub bonds were rated around the C notch= junk.
    Second, copy and paste a resolution framework based on the
    uk (once more again, with feeling). Do this in parallel with an AMC with Nama 2.0 risk sharing. Detail the treatment of sub debt/senior debt holders in a clear statement from the Ministry in this framework. Make it clear that banks that do not have a future will be put down. If done well, this will reduce the perceived and actual liabilities for the Irish tax payer- the no more money into anglo argument.
    Third, do not guarantee any sub-debt/hybrid capital in an extended gtee. If banks want to issue this in future, say no. It may be tax efficient capital, but it is not loss absorbing.
    It is time to leave the piecemeal approaches aside. It is time for joined up thinking. Why?
    This will provide certainty to investors, and perhaps the people the minister keeps mentioning. More importantly, it addresses the point made earlier by Karl, and Ken Rogff in the FT a few days ago. As the banks are living based on the taxpayer, let’s make their passing a lot easier so that we do not find ourselves here again. Banks putting a gun to the head of the taxpayer is no longer acceptable.

    On senior debt, while I understand the sentiment expressed by some of the posters here, going nuclear on senior debt holders is not a realistic option. Why? Look at their balance sheets. The funding gap or structural liquidity deficit of Irish banks will only be made up by private funding and not the ECB. We can all get angry about it, the best thing we can do is reduce our the extent of our liability and increase the survival chances of viable banks.
    As noted by Eoin, the 12month LTROs are exceptional not the rule.Ditto for the fixed rate at which this op is currently tendered. At best, they provide temporary breathing space. Once the euro area economy recovers sufficiently, these operations will be wound back. Maybe they will come up with a new type of arrangement, in which case we become an addicted to Frankfurt funding. Not the sign of a viable banking system.

  100. If the NAMA bonds could be sold without a government guarantee then NAMA is a good idea, but since nobody wants to buy the assets that NAMA is going to be using as security then I believe it is safe to assume that nobody would want to buy the NAMA bonds either.

    Therefore I believe the NAMA bonds have to be sold with a government guarantee.

    NAMA might be a covered from audits but the fact of the matter is still that unless NAMA is profitable and self-financing without any guarantee from the Irish government then the national debt will increase by the amount of overpayment to the banks. It might not be seen until the day NAMA is wound up (if that day ever happens) but it will still be there.

    The biggest problem isn’t the risk of politicised new lending, the biggest problem is how impaired loans are dealt with. If the government can be trusted to run NAMA, they can be trusted to run a nationalised bank.

    NAMA is the costliest option. Nationalise and split into good and bad banks. Sell the good banks, use the bad banks to take the impaired loans through the courts (they are impartial and not elected).

  101. If senior debt rates pari parrsu with deposits, can the government step in and blanket guarentee deposits and then subsequently force losses on senior debt?

    That seems harsh because investors in senior debt could claim a legitamte expectation (or maybe a contactual right?) that any losses they suffered would be shared/diluted across that entire tier/level of risk capital, instead of concentrated on them.

    Would the government not have to impose losses on depositers AND senior debt holders on a pro rata basis and then reimburse depositors their share of the losses?

  102. I’m sorry folks i didn’t get a chance to ask all the questions i had written out or that came to mind in the course of the interview with the Minister yesterday…time was limited…and there were a few non-NAMA issues which had to be touched on…

  103. @christy – depositors pay for the insurance that they get. Bondholders get to buy CDS instead…

    Back to the original topic. It does seem rather myopic to say this given that INBS has stated that it would be dead if it was not for the guarantee. So is NAMA really going to bail out Finger’s little empire? What would even a 30% haircut on the ten billion of commercial that INBS has mean? I believe it only has 1.6 bn in cash available?

  104. @ yoganmahew

    re INBS: does anyone even know what the situation would be when a mutual gets recapitalised by the government? I mean, can it just issue shares or are we talking some sort of major legal restructuring being required etc?

  105. @Karl Whelan

    When the draft legislation first came out, there were some comments about how opaque post-implementation governance and oversight would be, ‘deals done behind closed doors’, etc. Would it be possible for you to start a seperate thread to focus on this aspect? How clear will it be (or not) about how well or badly it is going?

  106. @Eoin + Podubhlain
    Thanks for the replies.

    @Damien Tiernan
    That was a good interview – well done.

  107. very good website, by the way, essential for researching in preparation for interviews!

    one of the topics which really needs to be teased out is the 10 BN or so earmarked for “completing” unfinished building projects, whether they are here or abroad…does this mean that the taxpayer will be working with developers in the coming years to finish those half build office blocks or housing estates? I believe this is going to be a very tricky one for the government as perception will mean a lot in terms of who makes the decision to proceed or knock. Will there be a percentage cut to the developer? I predict this issue could become more important in the September debates. It will also have a bearing on the valuations that are going to be made on how much the government buys the bad loans back from the banks because if a decision is made to not complete a building site or office block, it follows that the project will be “flattened” and the valuation price will be put at “agricultural” or certainly non-developmental. So this debate may come in the back door and have a major bearing on the main issues surrounding NAMA.

  108. @ JI

    Yes, there may well be a mismatch between toxic assets and the long-term liabilities that are left in the “bad bank”. We have said that any shortfall would be made up by taxpayer funding. But the key point is that taxpayers would only suffer losses after the others have been wiped out.

    Recall that in AIB and Bank of ireland alone there is a minimum of €50 billion “locked in” risk capital and senior debt by the end of the Guarantee period.

    Andrew

  109. All the banks are insolvent. Just when will we stop recapitalizing them? How many times will opm buy them out of insolvency? Seriously, how much money wasted in this way is too much? 100Bn? 200Bn?

    One way to lose our sovereignty is to end up owing money to the ECB. How much will they lend us? How much do we need?

    Liquidate now! Set up good banks and stop being so greedy, and regulate building land. There will never be a better time!

  110. As said already, trying not to politicise a great thread – but – Am I being excessively naive in suggesting that the whole NAMA thing is orchestrated by ECB?
    It is a consistent line in the govt output, ‘international advice’, reputational effect, etc. Imho the ECB is driven by the potential negative effects of a € member going bust (typically, the Iceland refs…, I was there last week and the word on the street is that the UK/NL payoff is pressure from ECB in return for ‘allowing’ Iceland in; ‘disaster’ references too are ECB terminology)
    If we accept an ECB influence then a lot becomes clear, ideologically, bond holders. shareholders ad sundry others are the people ECB need to keep on side.

  111. @ Damien,

    I’ve heard this phrase “working with developers” a number of times. I don’t see much to gain from this. What particular skills do developers have? Their project managers and other key personel are the ones to work with.

    I agree that the use for the 10bn isn’t clear. How is it funded (strange that they can find 10bn for this, but 10bn towards bank recap is more difficult to come by)? Can we be sure that it won’t be used to pay bond coupons? Is it a float of 10bn (i.e. as projects complete, will part of the 10bn be rolled on to the next project)? If they make losses on this 10bn, how are they treated? Will the loans be non-recourse 🙂

  112. One would expect NAMA to ensure that the €10bn or whatever is used towards development would not go to developers but would go to contractors, professionals and other employers to be spent for the benefit of NAMA so that NAMA can recoup a greater amount of the loan.

    The €10bn (or whatever the figure is) will be money spent by NAMA for the benefit of NAMA and will feed directly into the real economy. Calling it money being given to developers and politicising it is wrong imho.

  113. Thanks Michael
    Very intresting article.
    http://finfacts.ie/irishfinancenews/article_1012464.shtml

    Did Fintan O Toole call you at the weekend looking for a topic to write about? 🙂

    So I guess the big questions are;
    Even if a political party was willing to take this on (which I doubt) How much would it devalue current property? Could the banks afford the write down?

    I am fairly sure the answers are a lot and no.

    So is it that you are suggesting since we are up a creek anyway we might as well try to fix all the underlying problems because they would never be fixed in normal economic conditions?

  114. @Zhou

    NAMA is entirely the result of a purely political decision.
    If the decision were based on economics, we could all go home.

    Paying builders 10 billion to finish projects at a time of chronic over-supply will play well in Parlon country – begob they might even be able to afford to bring the tent back at next years Galway Races if NAMA would sponsor them.

  115. INBS yesterday raised 500m at 3.5% for one year with Gov guarantee, 160bp over the going rate. Can anyone explain how BL is going to achieve his stated rate of 1.5 on the bonds to be issued to the banks.

  116. @MOL

    It is not money being paid to developers. As is normal money would be drawn down on foot of invoices from engineers, contractors, sub-contractors, architects certificates etc. That is how development finance works. You don’t give the money to the developer and tell him to spend it as he sees fit. Maybe it would be better to bulldoze the country and deprive professionals and contractors of funds for viable projects? That way we could cleanse the country of the 50% of architects who have not lost their jobs and those tradesmen who cheekily did not go out and get degrees.

  117. It seems we’ve got caught in the nitty gritty and have lost sight of our situation and what needs to be done. We need to deal with impaired assets on bank balance sheets as a first step in getting credit flowing to the economy again (as encouraged by the G8, IMF, etc) in order to avoid a Japanese type situation. NAMA may or may not be the perfect way, but it is (relatively) straightforward (the UK APS is still not off the ground having been announced before NAMA, is much more complex and is less transparent) and has been done before in other countries. If we get the pricing wrong on the way in – there is the understanding that a levy will be imposed on the banking system (affecting equityholders in the future) to recoup any shortfall on the wind up of NAMA. What’s important is that we get the banks lending quickly as the sooner they do the sooner we can move toward some sense of recovery – so lets just get NAMA done.

    The next step is ensuring that the banks are sufficiently capitalised to be able to deal with loans losses on the rest of their books resulting from the recessionary environment, while still having ample capital to lend to creditworthy borrowers. This may or may not entail a government shareholding in the banks, depending on the takeup of exisiting shareholders and other private investors in any equity issuance. It is worth noting here that Irish individuals and pension funds represent a large proportion of the equityholders in the banks, and not some Gordon Gekko character, and they have suffered significant losses already, impacting the wealth in the economy further.

    Nationalisation does not eliminate the need for NAMA, as any nationalised bank would still need to be adequately capitalised as it requires access to international funding in the same way as a private bank does. While on funding – I would be slow to draw much from the markets reaction to the hit taken by unsecured senior debtors in WaMu – it was already a very volatile time – but more importantly, the readthrough from that for the US sovereign creditworthiness could be very different in the situation where an Irish bank defaulted on its senior unsecured debt obligations. Is that a risk worth taking?

    NAMA is not a bailout for banks, their shareholders and developers – its way out for the Irish economy, by getting money flowing again. The reaction of sovereign debt markets to its announcement and developments is evidence of how the markets perceive its benefit for the longer term outlook of our economy. Despite the increase in gross debt due to NAMA, spreads vs German bunds have come in.

    People need to shift their focus from retribution and get towards positive action. The longer we wait before taking action or defer (by not voting NAMA through), the more we prolong our economic recession and below-trend growth. We’ll have plenty of time to see what went wrong pre-crisis and allocate blame if that’s what people want – we need to focus on getting to recovery first.

  118. I’m as confused as everyone else (apart from those who are certain it will!) about whether NAMA will cripple the public finances. I think FG’s proposal for a ‘good bank’ is very politically astute but not sure how it can be done under EU competition law or with incumbent banks already in place dealing with the same business customers as the ‘good bank’. Are these customers supposed to borrow money off the ‘good bank’ to repay their debts to the ‘bad banks’? (probably a micro NAMA!) Or are they supposed to go bankrupt and kick off again with a new stream of credit? The bank bondholders and equity holders would certainly get a kicking but not sure Nellie Kroes would let this happen

  119. @Al
    “The next step is ensuring that the banks are sufficiently capitalised to be able to deal with loans losses on the rest of their books resulting from the recessionary environment, while still having ample capital to lend to creditworthy borrowers”

    Does anyone know what the non Nama loan losses are (inc the banks). The size of these will decide if they have ample capital to lend. I somehow doubt they will have ample capital and there will be a second bite of the cherry either by
    1. Nama mark II for personal debt
    2. New capital into the banks probably from abroad

    But I do agree that
    A) The delay in our response will have serious repercussions down the road – think rising interest rates while we’re still playing politics
    B) Nationalisation is no panacea either. Anglo is not a shining example so far.

  120. @AL – “We need to deal with impaired assets on bank balance sheets as a first step in getting credit flowing to the economy again”.

    That’s always been my understanding as to what this is all supposed to be about.

    But the $63 million* question is “Will it? Or will banks continue to sit on their hands post-NAMA and just build those balance sheets back up (maybe because of what they fear is coming next on the mortgages and unsecured loans/credit cards side)?”.

    Are there sufficient ‘mechanisms’ built in to the legislation (I don’t think so) to force this if necessary or are we just taking their word that they will get credit flowing again?

    Another question is “Is there actually any appetite out there to take up that credit if it were available?”. A straw poll I did the other day saw lots of individuals and small businesses not keen to take on any further credit/overdrafts/etc. and more keen to pay off what they have now.

    * adjusted from $64 million due to deflation

  121. @Joseph
    There are things that need to ironed out – be they lending targets, etc, while its true you can’t force people who don’t want to borrow to do so. There is significant amount of deleveraging that has to happen in the private sector, but any improvement in access to credit, be it even for working capital purposes, will be an incremental benefit. To get firmer demand for credit (for business investment, etc.) consumers and businesses need to have more confidence in our economic outlook. This is where it become quite circular (everything seems to be in this crisis) – we need to take steps to improve confidence and action to improve availablity to credit and evidence that something is being done rather than sitting around bickering will be a move in the right direction.

  122. @AL
    While cleaning up the banks balance sheets is very important to get the economy moving again how we do it has equal if not more importance.

    Most people accept NAMA is a solution to this but we could get the same results but using a fraction of taxpayers money.
    So while NAMA does this the clean up but it is also a significant subsidy to shareholders and bondholders.

    The moves in the Irish debt markets are reflective of a greater risk appetite for all assets worldwide rather than improved prospects for Ireland.
    A few months ago ourselves and Greece were both considered equally risky but now we are way out there on our own as the most risky country in the EU.

  123. @AL

    I agree with much of what you say even if it means I will be labelled a TINA member. With that said, I think the fact that the three main parties are espousing three different solutions is helping us have a proper debate.

    We should note that once NAMA has been up and running for a period it is possible that private equity will consider taking part in a recapitalisation of the banks along with the Government. This could further reduce the strain on the public finances.

    As for providing funds for future development, I think the principle is that any AMC should work out loans properly and in accordance with best practice. If this means completing a development so more money can be recouped then so be it.

  124. @Dreaded_Estate
    By no means do I think that bondholders or equityholders should be bailed out. However, I do think we need to tread very carefully with senior unsecured bondholders, as these are often the same investors that buy sovereign debt. However, I think there is too much focus on equity and sub-debt holders being bailed out, to the detrement of a focus on getting NAMA right or coming up with a suitable alternative (quickly). I don’t see FG’s recovery bank as an alternative as it is outcome is much less uncertain than that of NAMA – uncertain as that is.

    While I agree that we will have got some benefit on bond spreads from increased investor risk appetite, I don’t want to see their reaction if NAMA (in some form or another) were not to go through, at least without a workable alternative that can be put in place fast to replace it.

  125. I’ve been told & I believe that the bigger the investment the more important it is to do due diligence. The only exception to this rule would be for someone investing someone elses money without showing appropriate duty of care.

    90bn worth of spending. The government does not own this money, they are managing this money on the behalf of the Irish taxpayer.

    Should the Irish taxpayers as a responsible owners make sure that the Irish government is spending their money wisely?

    The blame game is as irrelevant as it is simple:
    Banks took risks on the behalf of their owners (the shareholders). The owners were either supporting their hired managers on their risk-taking and then they should be liable for the loss of their investment. Or, alternatively, the managers took risks against the owners wishes and then unfortunately the owners are still liable for the loss of their investment as they should have used their ability to control or replace the banks managers.

    NAMA is a bailout of the banks owners:
    They would get something now & the cost for them would be to repay some unspecified amount some time in the unspecified future. If the amount equals the cost for the taxpayers, then the banks might not be able to afford it so therefore the discussion is to let the banks pay something less. Get money now, pay back something less in the future. How can this be anything but a transfer of taxpayer money to shareholders?

    Buying something for more than market price is a gift from the buyer to the seller. If the owner of a limited company were to sell something to his limited company at higher than market price the owner would be liable to pay tax on the difference between sold price and market price as it would be seen as a form of dividend. For those who doubt, check with Irish Revenue.

    We do have to deal with the impaired assets on the banks balance sheets. Barring simply giving money to the banks for nothing, NAMA is the most expensive way of repairing the banks balance sheets.

    Buying an equity share & inserting more equity capital will do the same as NAMA but at less cost. Without NAMA the price of buying the banks is probably next to nothing so why spend more than necessary?

    AIB has someone interesting to buy it post clean up of balance sheet, the period of temporary nationalisation would be very short. Stop NAMA, prepare for the nationalisation, split and resale of banks.

  126. @ yoganmahew

    “Depositors pay for the insurance that they get”

    It is difficult to see how depositors “paid” for their insurance in circunstances where the upper limit of that insurance was unilaterally increased by the government during the crisis

    My point was that imposing losees on senior debt holders without imposing losses on depositers looks like treating two classes of creditors in different ways even though they are pari passu in the capital stucture of the bank.

    i mean it is one thing to guarentee depositors, its another to push them above all other senior debt holders in the capital structure, so that losses that should be shared across that creditor tier are concentrated on bond holders

  127. Putting loads of equity capital into the banks, as opposed to NAMA, is an option and could well be workable – but the more problematic loans would still need to be put into a separate unit so that they do not continue to divert bank officials attention away from lending. However, if its that easy – how come the Swedish govt set up separate bad banks for impaired loans in the bank’s they nationalised.

    Just a point of note the Canadian bank (presumed to be CIBC) is potentially (not definitely) interested in taking a minority stake – not in buying AIB.

  128. @ Al

    “If we get the pricing wrong on the way in – there is the understanding that a levy will be imposed on the banking system (affecting equityholders in the future) to recoup any shortfall on the wind up of NAMA.”

    but why not use PH’s idea on the way in instead of a levy?

  129. The owners can split the bank into a good and bad bank if they want to. The current owners are unwilling/unable to put up the equitycapital to do so. I’m guessing that the losses are too large for them to be able to do so.

    The Swedish government invested in equity, in some cases it meant they became the sole owner. The resulting owners then decided to split banks into good and bad banks.

    To answer the question why the Swedish government split up the banks in to good and bad: They owned equity shares in both and got the upside in the good banks and dealt with the bad banks as well as could be done.

    NAMA is getting the bad bank while leaving all the upside with shareholders of the good bank. I don’t see anything else in NAMA resembling what was done in Sweden. NAMA is a gift. Investing in equity is an investment. It is that easy.

  130. @AL

    “It is worth noting here that Irish individuals and pension funds represent a large proportion of the equityholders in the banks, and not some Gordon Gekko character, and they have suffered significant losses already, impacting the wealth in the economy further”

    I really don’t see why I should subsidise people who made poor investments and didn’t demand proper oversight. Let them sue the pension fund managers, sue the bankers or sue whoever they want. It’s not my fault they got screwed. They can have my sypathy but not my money.

    Let NAMA pay the right price for the asset and then recapitalise and dilute existing shareholdings to whatever degree is necessary. I am willing to pay to have a functioning banking system and a functioning economy again. I am not willing to pay for a pension for members of the generation that had it better than any other generation before them and likely better than any other generation to come.

  131. I should have pointed out that much of the money paid into pension funds benefited from tax relief at 40%.

  132. @Zhou

    Please read what I wrote – I didn’t mention developers.
    I said “paying builders”.
    And yes, I actually have some idea how development finance really works.
    Give a thought for the legion os mall sub-contractors who have not been paid.

    But the key point is how can you say that any of these projects are viable.

    Anglo Irish Bank aren’t going to need their new HQ – just a secure warehouse to deposit records after it is wound up.
    Why build any more apartments when even the better parts of Dublin are oversupplied?
    I notice that the Cosgrave group are starting to develop their D/L Golf Club site but that is an exceptional location.

    There is a surplus of office development.
    And we certainly dont need any more shopping centres.

    Do you really trust FF to be uninvolved in deciding which projects to finish?
    NAMA plans to spend 10 billion – the boyos will be licking their lips.
    It wont do the developers much good but the builders will have a field-day.
    And who will pay?

  133. Hi guys,

    On holidays so reluctant to get involved. But at 137 comments, we may be losing readership here — slipping down the front page.

    Thanks to AL for a useful contribution. I’ve written a short post on the issue of the levy—perhaps you guys might move over there.

    KW

  134. Ye – it would be good to read afew more pro NAMA contributors – even zhou seems a very half hearted and reluctant supporter

  135. @ KW
    Count me in the following group, as near neighbours of Zhou:
    Nama 2.0 Plus (AMC with risk sharing features) plus Bank Resolution Framework.

  136. @MOL

    I think if the principle of proper debt workout is applied then in theory the issue as to what projects are completed is done on a commercial basis. for example, if tenants sign up in advance or somebody agrees to buy it when built then it is viable. If the project is 70% completed and can be sold at a discount then it may be viable. It is indeed the sobcontractors I have the most sympathy for. As for political interference, it is hard to know what would satisfy you that it could be avoided. Hopefully the opposition and the government will both propose additional proper oversight provisions.

  137. The matter of how to get to grips properly with the sub bondholders is critically impaired by the NPRF money having gone in lower down the capital structure.The bondholders cannot be ‘wiped out’ as long as the preference shares have any value(in a wind-up or nationalisation).The withholding of coupons on the Tier 1 bonds will effectively devalue them over time – the tenders so far have demonstrated that the holders of most of this paper are delighted to be taken out at a significant discount to par.

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