Pro-NAMA Irish Times Article from Rory Gillen

The government are now caught between a rock and a hard place, largely of their own making.

They have been caught out making promises (on behalf of Irish taxpayers) to international financial markets to take on €90bn of some bad, some toxic and some fraudulent loans from Irish banks without causing them too much pain.

This government have been dancing to the tune of the “key audience” which is the “international financial markets” for years, not just for the last year. The FF/PD governments have worked hand in glove with these financiers in the Financialisation of the Irish economy. The creation of a large Financial Services Industry in Ireland is a good example of the hand in glove relationship between FF/PD governments for over up to 20 years. Now international financiers believe that this government owes them one. In the middle of the current financial turmoil these financiers know very well that “The only certain game in town in relation to capital is the State” as Frank O’Dwyer, Irish Association of Investment Managers stated recently.

Last September the government caved in to the demands of these financial markets and local banks to give them the Bank Guarantee Scheme – a good example of Naomi Klein’s “Shock Doctrine” in action. The Labour Party is to be praised for their opposition to this panic measure. They were only party to oppose the measure in the Dail. Joan Burton vigorously pursued the fishy goings-on in Anglo-Irish Bank at the time and since.

Since then the government have devised NAMA, a bailout of these bankers, financiers and developers, without even having the legal sanction of the Dail. Is this an abuse of their constitutional power? It certainly displays contempt for the role of the Dail.

But then people like Karl Whelan, Brian Lucey, Morgan O’Kelly and many others started to ask questions about this NAMA deal. The government and their advisers don’t like questions on NAMA.

The ordinary citizen, and some political parties, may have been fooled/bounced into granting an enormous Bank Guarantee Scheme to bankers and their financiers last September. This time around, thanks to the persistent questioning of people on this site and elsewhere, we the citizens are not going to be fooled again even if the NAMA legislation is bulldozed through the Dail.

On this issue the choice for the present government is simple. Are you going to govern in the interests of the few bankers, financiers and developers or in the interests of all the citizens of this state?

In his article he is actually making a very strong argument against NAMA:

“At today’s prices, the combined market value of Allied Irish Banks and Bank of Ireland is €4 billion, an amount that would make only a modest dent in the losses likely on the €90 billion of assets being transferred to Nama.”

He is saying losses are being transferred from the banks to the taxpayer & he is saying that the losses are bigger than 4 billion. I wonder what he estimates the losses to be?

I believe the value of the banks will increase by the amount of losses they can offload to the taxpayer.

Reduce the losses for the taxpayer by getting the gains for the owner. Nationalise, split the banks into the good and bad banks. Sell the good banks and manage the bad banks as well as can be done.

The stated aim of NAMA is to get credit flowing again in the real economy but one has to wonder if this objective can be achieved given the experience of the German finance minister as reported in the Telegraph today-

“The banks are not stepping up to their responsibility to provide credit,” he told the German paper Handelsblatt.

“Mr Steinbrück said markets are awash with liquidity again, but little is going into the real economy. “The banks evidently prefer to put their money into securities rather then granting new loans because they can get a higher return. After two years of financial crisis the gambler mentality is gaining the upper hand again.”

The solution, as reported, is for direct lending by the State Banks- “Mr Steinbrück has now backed away from talk of forcing banks to lend, recognising they have to rebuild their capital, and shifted the focus to direct lending by the state.”

Many commentators have expressed their frustration at the lack of credit in the real economy. Should we take notice of the German experience in any scheme devised to solve the banking crisis?

Karl you are incorrect in your criticism of Rory Gillen. There is a world of a difference between a bank independently deciding to default on its debt and a bank being forced by a government as part of the resolution of the banking crisis (and within an environment where there is an actual and assumed govt guarantee in place) to default on its debt. In the former scenario the markets would dump the defaulting bank, it would likely go out of business (or at least any business that required wholesale funding) for at least a period until confidence was restored. In the latter case the negativity would transfer onto government debt issuances – thus the Argentina comparison is very much valid.

As president Sarkozy has reminded us in a slightly different context, it is imprtant for particpants in financial markets to play ball with the authorities if they are to share in business generated by the French government. It is important to remember that there could well be lots of government controlled business for Dublin (and foreign) stockbrokers in the coming months with potential bank rights issues, mergers and other restructuring/issuance. NAMA itself could well generate lots of fee income for all sorts of people. Everything that emerges from the broking community needs to be sense checked against where the vested interests lie. And appraised accordingly. Independent analysis and comment is always possible, of course, even when it does upset a potentail paymaster. NAMA may also be a good idea.

On another note, all of this is predicated on the notion that creating a working bad bank in the right way is the solution. But what happens then? What if the problem is not (just)lack of credit supply but lack of credit(worthy) demand?

The banks aren’t forced by anyone to default on anything. They might be about to default as they seem to lack the necessary funds to honour their commitments.

Where there is no explicit guarantee from the Irish government, the Irish government can choose to give the banks money to make them able to honour all their commitments, in the same situation the Irish government can also choose not to give them the money.

I meant to add that even if they achieve the objective, I remain to be convinced that there is much demand for credit out there anyway. Most people I know (individuals and SME’s) seem most intent on staying away from banks and paying back loans/saving rather than thinking about taking any new debt on at the moment – and I don’t see that changing in the forseeable future.

There might be some business in moving a loan from one place to another to try and get better terms but that’s just moving the deckchairs on the Titanic.

A few points about the posts so far:
BANK SUB DEBT AND DEFAULTS
Let’s have a bit of clarity on this discussion.
The commission recommended deferring coupons on sub debt. Roughly speaking, bank debt is made up of three layers: Tier 1, Upper Tier 2, Lower Tier 2, Senior. The first three categories are part of bank capital, the last (senior) is part of a banks funding.
Bank sub debt coupons for tier 1 and upper tier 2 debt are deferrable in most situations; you really have to look at the fine print in the prospectus. This is NOT a default. In the case of perpetual debt, this means that the investor gets no income. For lower tier 2 bank debt, generally deferring a coupon or refusing to pay back the principal IS a default. Ditto for senior debt.

CREDIT TO THE REAL ECONOMY
Let’s have a bit of honesty. Ireland= financial + household sectors are extremely leveraged. Government leverage will increase too because of this.
1. Banks do not have the capital to lend. no matter what is said in public.
2. For the banks, this means that to deleverage, what they need is more equity capital, and less loans on their balance sheet. Given that they cannot raise equity, they choose to shrink their balance sheets.
3. Nama will help with the latter, ultimately the government or private equity will be doing the former.
4. Politicians want to restore credit fulled consumption and keep voters happy without addressing the problem of over leverage in the financial system and in the household sector.
I am waiting for at least one politician to stand up and say we need to reduce leverage in a measured way. This is either a lack of comprehension or denial, or both.
5. Banks objectives now are return to profitabiltiy by whatever way possible. In Europe, it is the ECB LTRO funded carry trade, borrow at 1% invest in govies or whatever is your poison.
6. In short, if equity does not go up, and balance sheets do not contract, banks will still remain inert at the same level of leverage.
This will not help banks, governments or the consumer as ultimately we, the taxpayer, will be supporting them for much longer than anyone wants.

When a hopelessly incurable patient is taken off artificial life support, most sensible people don’t look upon the withdrawal of life support as the cause of death. No, they look to the underlying illness or event that placed the patient in the precarious and irrecoverable position in the first place.

With Irish banks though, certain parties have a strange approach to basic principles of causation.

In particular, we have a Minister for Finance who should be emphasising with authority how the banks owe their continuing existence to his support. Instead, he paints himself as the man who would be forever to blame if the guarantee was withdrawn (or, presumably, allowed to expire) and banks then collapse – as if they were previously fit and healthy institutions until the evil Minister shot them in the head.

Why is this? Why does our government not only reflexively agree with the interests of bank capital, but also apes and echoes its nonsensical rhetoric about withdrawal of the guarantee constituting some sort of cruel summary execution, rather than a withdrawal of life support from an ungrateful, undeserving, irrecoverable patient?

@Mark
Too true the new DGS legilsation does not provide any FDIC type powers. We operate a differing financial safety net and regulatory system – deposit insurance is relegated to the backwoods. The Irish DGS with its guarantee of 100k is what will be left after the bank guarantee is recinded. It was designed to fit with a Central Bankers mandate and not a stand alone deposit insurance system. Recall the nonsense of last September when Blenihan first said he did not plan to increase the deposit guarantee from €20k including co-insurance. Joe Duff got it in the ear and within two days he announced an increase to €100k the highest in Europe – without co-insurance. This was a full year after the Run on Rock during which time it seems little if any thought was given to increasing the DGS limits.

@Adrem
‘…World of a difference between a bank independently deciding to default on its debt and a bank being forced by a government as part of the resolution of the banking crisis (and within an environment where there is an actual and assumed govt guarantee in place) to default on its debt.’ Sadli 4 ur argument Adrem there is little difference. We need 2 adopt an historical view in order 2 assess the honesti and plausibilit of finance industri sourced arguments about what brokers would or would not do in the event our government tells bank debt (bonds) owners to sing 4 their monei. I’m not asking for u et al 2 revert to Irish consciousness 50 iears ago just pre-September 30th 2008. Before 8 hours into that dai it would have been absurd 4 ani1 2 expect a govt 2 honour ‘private’ sector and/or bank debt.

@Kevin Rian
Brilliant analogi. Exactli the kind of historical perspective we need to assess and draw conclusions about de absurdit of the ‘ski will fall in if banks renege on THEIR debts’ brigade; membership of which brigade I suspect Adrem Lenihan stock brokers (and that Treasuri holdings chap quoted in 2dais IT) et al. are either hapless or selfinterested holders.