NAMA Levy versus NAMA 2.0

Thanks to pro-NAMA commenter AL for a useful contribution in a comment thread below. I think we probably need some more pro-NAMA commenters here, at least to give Zhou some company! But seriously, AL raises some useful issues. One in particular is the question of whether we should be worried about the pricing. AL states:

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.

I think this is worth discussing more.  My worries here are (a) It’s an “understanding” rather than anything that will appear in legislation, so I have no faith that it will ever appear or, that if it does, it will be based on anything like the actual combined cost of NAMA to the taxpayer. (b) If it really becomes apparent that a levy will apply and then NAMA is running losses, this will cast a shadow over our banks for years, so that NAMA will have failed in its goal to draw a line under the problem.

Here’s a question I’d be interested in getting more discussion on. Why not have risk-sharing as suggested by Patrick Honohan’s NAMA 2.0 (pay a low price for the assets today—Patrick phrases it as “what we can confidently expected to obtain”) and then compensate shareholders (not the banks) with a share in NAMA’s potential profits, should they ever appear? This protects the taxpayer, achieves risk-sharing, and gives us cleaned up banks with no “legacy” problems.

34 replies on “NAMA Levy versus NAMA 2.0”

Didn’t somebody elsewhere on this site point out some time ago that the levy made no sense, since the banks could have no advantage by participating in Nama if they were afterwards levied for the difference (Government losses)
I can’t remember who or where on the site.

I have yet to hear any detailed argument / discussion as to why this “levy” is to be preferred to NAMA 2.0.

Maybe people feel NAMA 2.0 will necessarily imply nationalising the banks and feel that that outcome would be a disaster.

If we only pay “what we confidently expect to obtain” then the banks will be left thourougly insolvent – and we then have to either impose significant losses on bondholders / debt for equity swaps or inject a shed load of capital. NAMA 2.0 forces us to take our heads out of the sand abit.

I’m not saying NAMA is a perfect proposal. However, we need to do something to deal with impaired assets and progress has been made in getting it set up – so let get it done and work it in the fairest way possible. Suggestions that are workable and relatively quick to do within the framework that is in the process of being set up are better as it leads to less of a delay. NAMA 2.0 seems like a viable option in that context.

An opportunity for equityholders to reap back some of the recoveries from NAMA through an equity stake or an additional haircut is definitely an option. We just need to ensure that an equity stake won’t leave the banks unable to remove the risk associated with those loans for regulatory purposes as a result. If it was set up in a way where it benefited shareholders through ownership of a separate entity (as PH suggested in his Irish Times article) the risk would be taken off the bank balance sheets totally.

@southofdub
As far as I’m aware, NAMA is looking for a company to value derivatives attached/related to loans its looking to acquire from the banks.

I am indeed getting a bit weary!

One reason for preferring a levy might be that it provides a real incentive for the banks to work out the loans properly – the more the banks recover the more money they make. However, as you say NAMA will have failed to clean the books of the banks.

With NAMA 2.0 the money recovered goes to shareholders and NAMA – there is no penalty for the bankers not recovering the full amount. Seeing as pre-NAMA shareholders and post-NAMA are the same people one would hope the banks would work in their interests. However, shareholders have not had that much influence over bankers to date and in any event, legally speaking, the bank must act in its own interest. Funds repaid to shareholders don’t generate bonuses in the short or long term.

Another possibility is that NAMA might issue an amount of asset backed covered bonds (excuse my lack of familiarity with the terminology). These bonds may be eligible for ECB repo operations if the assets were acquired in a commercial transaction. This might keep off the national balance sheet. I am speculating here.

The Minister seemed to imply that because the bonds were paid over in a commercial transaction, i.e. an arms length deal with the banks, that the interest rate could be lower and NAMA could service that debt. Assuming KW is correct, and I reckon he is, then it makes no difference to the ECB what the bonds are paid for so the availability of repo operations is not the point. Speculating again, it may be legally difficult to set up an AMC and to apply its earnings against Government bond used to buy shares, i.e., not applied towards the purchase of assets owned by that AMC. Applying interest to service bonds used outside the AMC might also make it particularly difficult for that AMC to issue covered bonds. The potential to issue covered bonds can be issued at a low rate might be a major attraction of the NAMA scheme.

With all that said, I am generally in favour of NAMA 2.0 and think we need to be given a good reason if it is not to be implemented. I also think that a NAMA 2.0 mechanism might be absolutely crucial for assets other than property. If I were Minister I would have the draftsman working on a NAMA 2.0 option and variations thereof in preparation for the debate.

Let see if I understand NAMA2.0 correctly

Scenario A: NAMA buys assets at market and undertakes to give FailingBankofFail 50% of any gains. FBoF can then decide whether to distribute this to shareholders or to hang onto it to shore up its books/put against tax losses.

Scenario B (NAMA2.0): NAMA buys assets at market and undertakes to give FBoF shareholders 50% of any future gains.

Why is important that shareholders get the upside directly? They don’t own the asset, they own the bank that owns the asset, a bank that is now weaker because it took a haircut and got no upside. Also – shareholders at time of asset purchase or asset sale?

“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.”

Al and others assume that once the bank balance sheets are sorted out that credit will start flowing into the Irish economy again. This is not guaranteed. It is not even likely in the present economic crisis. The banks are private business entities who will say “Thank you very much for taking all this rubbish into NAMA.” and then go back to doing what they are legally mandated to do – making profits.

At the end of the day (and probably very late in the day) the Irish state will have either directly (through direct state spending) and/or indirectly (through a state sponsored bank) to kick start the economy.

The good bank plan and a realistic and transparent sorting out of the banks problems is the best long term solution.

Even NAMA 2.0 is leading the citizens of Ireland up a cul-de-sac.

FF should not allow themselves to be pushed into a corner on this issue.

NAMA 2.0 could possibly (maybe easily) be sold as their original plan with an amendemnet suggested by one of their TD’s / or the green party. It would still be very different from FG’s plan.

The problem would come when they are forced to nationalise or effectively natianalise the banks. They could say they never wanted to do that – for good reasons – but the financial position of the banks left them with no alternative.

@ Aidan

So do you think we should nationalise a bank(s) and then run that bank(s), not along commercial lines, but as a viechle for pumping credit into the economy?

@Aiden C
You may see that I mentioned it as a first step. The second is to adequately capitalise the banks. In order to earn a return on this capital it makes sense to lend to creditworthy investors, particularly when the returns on lending begin to look more attractive. However, anyone thinking both of these would magically lead to a normalisation in lending would probably be overly optimistic. As we discussed earlier (on a previous conversation from which you took the quote) demand for lending it anaemic due to uncertainty of consumers and businesses over the economy, while the creditworthiness of some borrowers is still very weak.

Nationalisation, although possibly giving some people a sense of justice, won’t solve the problem either. So what is the alternative, other than allowing a Japanese style situation.

The levy punishes future *customers* not necessarily future equity holders – equity holders (many of whom will have snapped up shares post haircut) would only be punished if there was a way to stop banks from hiking already substantial interest and charges on its customers to maintain returns, forcing them to essentially make do with less.

Those with long memories (i.e. older people, i.e. voters) will remember the AIB Insurance “temporary” levy which got transformed into stamp duty when it became politicially impossible to continue blaming AIB/Insurance Corporation for it. Is it not enough that the future generations are paying for that and the debt incurred to get the government out of disaster without them funding NAMA into perpetuity too, albeit through usurious credit card rates and standing order charges rather than a state tax?

@AL
“Nationalisation, although possibly giving some people a sense of justice, won’t solve the problem either. So what is the alternative, other than allowing a Japanese style situation.”

Well apart from a sense of justice, the aim of nationalisation would be to minimise the cost to the exchequer – which could allow for, for example, a less deflationary fiscal policy then would otherwise be the case. I don’t think it is argued that nationalisation would solve the problem, but rather that it would be better step along the way to solving the problem then NAMA would be.

@ Mark

Ye, dusting down an old micro textbook – i remember something about the burden of a tax being shared between the producer and consumer of a good.

Also, would this levy be bank specific, and linked to a bank’s contribution to NAMA losses? Would it be worked out loan by loan and interest charged? What the hell is the story with this “levy”, and how the hell are TD’s supposed to vote on this proposal without knowing some of the basic facts about the plan?

@Al

Even you agree that the “getting credit flowing to the economy again ” argument/assumption for NAMA is weak. As you say it may even be difficult to get “creditworthy investors”. (Who decides which small business in Ireland is creditworthy – big corporations don’t need to talk to their local bank manager).

I would not agree with blanket nationalisation of the banks either. This would be like buying a gigantic pig-in-a-poke which include the €90bn mix of good?? , bad, toxic and fraudulent loans.

Even in the Labour plan for temporary nationalisation I believe it would be much safer for the state to have the loan books of the banks checked first (open up the poke) before taking on any responsibility for the reckless behaviour of the excessively well rewarded banking executives and their speculator backers. At the very least the state should not take on fraudulent loans.

I see several major disadvantages of a levy compared to NAMA2.0

1. The levy cannot be put into the legislation or it defeats the purpose of NAMA.

2. The government cannot even be specific about the levy as if it does the property tail risk stays on the banks balance sheet.

3. If the NAMA losses are very large it may be impossible to recover all the losses from the banks.

4. It will be passed on to bank customers. Essentially a tax administered by the banks.

5. Better risk sharing between the taxpayer and existing bank shareholders.

6. Gives NAMA a privately held stake possibly even stock exchange listed. This should improve transparency, corporate governance and will make it easier for the taxpayer to exit from NAMA in the future by selling shares onto the market.

What exactly are the advantages of the levy?

@AL

Do you think the Banks that arent lending to ‘existing’ customers will be extending credit to same customers after this transaction, in whatever format it ends up as, is concluded?

Al
(not AL, just Al!)

@Al
Banks aren’t lending to exisiting customer or others for the reasons that we need NAMA/NAMA 2.0/some vehicle to deal with impaired assets and recapitalisation. If returns are good enough (i.e. bank lending margins better than those of the last few years) banks will lend where there isn’t a risk of losing it all to a customer that’s unlikely to be able to repay.

Lenihans Levy is a promise to maybe do something in the future.
Bust Bank sells its loans to NAMA and at some time in the future is acquired by Foreign Bank. Is it possible to levy NAMA losses on Foreign Bank? Or is the intention to apply a general levy on Irish banks both domestic and foreign owned? Whilst done post ICI is it possible under EU rules to use an ICI type levy today?

As far as I can gather AMC’s typically lose money – given it’s likely that Nama will lose money then the objective should be to limit losses up front which means using the NAMA 2.0 structure & price concept and all it entails.

The banks haven’t hit the bottom of the canyon they fell into yet and other loan losses (SME etc) have yet to impact. NAMA’s remit may have to be extended.

@BL
You hit the nail on the head when you describe all talk of a levy as pure soundbite.

A here today gone tomorrow (well, in 3 months time) Minister promises that a government in 10 or 20 years time will introduce a levy.

When NAMA losses add up to 30 billion, how big a levy would we need?
Maybe 3 billion a year.
Is there ever a chance of a levy raising 1 billion a year?

@Mark Dowling
I am not a lawyer but in my opinion, FBoF would need court approval to distribute the funds to shareholders. Given the foreseeable state of bank balance sheets, that is even more unlikely that some of the other long term scenarios emanating from Merrion St.

A potential levy is not exactly going to attract new investors into the banks down the road.

It will be a massive unquantifiable contingent liability and would be a drag on the banks value increasing risk.

There is a saying “You can’t pour new wine into old sacks”. What chances a new privately owned (rather than state owned) bank with no baggage? I for one would be prepared to buy a few shares.

A lot of people are jumping to conclusions as to what the levy will be.

For example, we might say that banks will have to share in 5% of any downside and also will be intitled to share in 5% of any upside. This might address the incentivisation issue without corrupting the banks balance sheets. We will need some degree of uncertainty if we are going to incentivise banks to recover loans to the max.

On the other hand, a small levy will not be effective to reduce risk fully. This is why it might be combined with a NAMA 2.0 style approach. It is interesting that Alan Ahearne is amenable to NAMA 2.0 being explored says he likes the idea at first glance.

@Stuart

The gains need to be socialised too. If the state can get a particularly good deal then it shouldn’t sell out the opportunity to the wealthy when it has been underwritten by the whole population.

A private company could come in now and buy the assets without the state’s assistance and good luck to them if they did!

A specific levy targeted at the bailed-out banks would turn the bail-out into a loan, and as such would not improve the balance sheet position for the banks. This would mean that the bail-out would not work.

A general levy on profits across all banks would simply discourage banks from remaining in Ireland (banking will be a very different game, with a bigger international and European dimension by 2020) and would be passed on to customers more or less directly.

A specific levy on turnover (as is the case in the insurance market since the great PMPA bailout) would effectively be a direct tax on borrowing money. This would be a highly unusual step. Governments generally give tax breaks when you borrow money, not tax penalties, because borrowing is critical to growth and development.

Taxation is levied upon a business. But the burden falls on the customers of the business, as they will have to pay more. VAT is an example of this, it is a tax on consumption and creqates so much paper that it is easy to police.

The levy will be passed onto the customers of the banks, in order to pay off the tax payer. Think about that for a second. ……… OK? It will be a Peter to Paul operation as the consumers of bank services are also taxpayers! The levt is a way of hiding the reality that there is an irrecoverable transfer to the developers, and a temporary one to the banks. The banks will not survive without yety more subsidy so the temporary transfer is in fact a waste. As the transfer to the developers as none will still be inbusiness when this depression is truly over.

Levy? Ledgerdemain!

By the way: over borrowing is critical to a depression! You don’t get one without the other!

@zhou
I’m talking about a brand new bank from scratch. If they bought assets of the existing banks then they would cherry pick the best e.g. some of Anglo’s performing loans. Otherwise they would be starting from scratch as a regular bank attracting regular customers.

I was listening on the radio to an interview with a guy in the UK who is starting a bank in Cambridge called the Boring Bank.
They will attract customers deposits and lend out based on this whilst maintaining capital ratios. They won’t be burdened by the last decade and in theory would become the next AIB or BOI in time.

We seem obsessed with saving all our existing banks when maybe that is not the way to go.

@AL
“If returns are good enough (i.e. bank lending margins better than those of the last few years) banks will lend where there isn’t a risk of losing it all to a customer that’s unlikely to be able to repay.”

Have to agree with what you are saying,..,
But, do you not think that expectation that the banks ‘reset’ and return to normal lending etc, will incentivise the banks to play wounded or deserving of special treatment so that the Govt can play paternalistic?

Hence the unlikelyhood of there ever being a levy.

Al

Did my beady ears deceive me or did Mr. Lenihan say on The Last Word that the levy would be incorporated in the legislation?

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