I see it reported that Mr. Lenihan accepted that the 25% of ‘equity’ of the 75% ltV was tied up in cross-guarantees, collateralisations and pledges. Anyone know if he did in fact say this? So, that would be not quite 75% LTV then. How much not quite 75% is it?

My point is McInerney a well run property developer are seeing 50%. The more speculative developers are probably far worse.

I stand to be convinced that the long-term economic value of residential and commercial property is not BELOW current mark-to-market value.

You are right to highlight that FF will go down fighting as the stakes are enormous.

But you are wrong to paint a picture of Irish banks falling into foreign hands. Just exactly which political party policy would lead to that consequence, whether intended or otherwise.

Lets forget the nonsense that NAMA was the result of wide consultation. There were no hearing held by the Oireachtas committee in advance to hear reasoned argument. The political decision behind NAMA, the instructions given to Bacon by the government when he accepted the consultancy job, were to avoid nationalisation at all costs. So presumably the banks stay with their existing owners.

The LP espouses nationalisation - no foreign ownership there.

FG envisages a good bank/bad bank if either BoI or AIB cant come out of the protection of the state guarantee in 13 months from now. The state would provide the capital for the good bank.

So under what scenario would the banks fall into foreign ownership?

http://www.davy.ie/Generic?page=MorningNews2

“The sharp deterioration in the value of its land assets, particularly in Ireland, has led to the €156m write-down. €111m of the write-downs relate to land in Ireland, while a further €37m relate to the UK. To date, the group has written-down the value of its land-bank in Ireland and the UK by 52% and 41% respectively. In taking these write-downs, management has assumed no recovery in either of its primary building markets.”

Under normal accounting rules they are not allowed to assume any recovery in the future. They have been a well run company so most of their assets would have been the better quality ones and they would not all have been bought at the peak- still writing off 52%.

Gives some idea of what the people living in the real world are doing.

Paul Hunt
What an interesting scenario! I am sure the 46 are sorry now!

Colm
What excellently cut cloth! Are you a tailor? Well analyzed. Have you considered the possibility that the government guarantee should be the last of their interference? It may have been necessary at the time, but should they gice fair warning and wind it down soon?

PROPERTY GAL
Welcome! Why should the government interefere at all? Allow the banks to deal with their business as pessimistic as it may seem now? Take care in your reply that you do not concede that they are insolvent as that would have legal implications for their directors to continue to trade. And might damage international perceptions of their AAA status ….!

Simpleton
Half of my posts and those of Michael Henighan among others who are well able to speak for themselves, query the honesty of politicians and senior public servants. But there is no recognition from the economic heavyweights that a corrupt administration can destroy otherwise workable economic policies. It seems economics, despite its provenance and the title of many “chairs” referring to political economy relegates this to a n other. Frustrating. Elusive, even evasive.

General
The whole valuation debate demonstrates that there are too many unknowns for anyone to justify NaMa, in almost any form proposed so far. If they are being honest.

Could they afford to have so much capital tied away at the current very low interest rates? Or would they have gone for something more risky such as bank sub or senior bonds?

Not because their loans are that much worse but because it allows the other 2 to stay in the existing shareholders hands but allows the government to show a 40% discount.

I would be careful about drawing any conclusions from the Sunday Indo. It might be good for wrapping chips and for the GAA and racing coverage but it is not the go-to for heavy duty economics.

Our political system is not unique. Politicians first set out their stall, argue forcibly for the merits of the case and then begin to cede ground when it becomes untenable. Look at the eulogies to that great Irish-American pol Ted Kennedy.
What we are seeing at the moment from the goverment is a fighting retreat from its first concept to NAMA which was a bail out of the banks to another position which is not so clear.
Why they are doing this is open to question. Its possible i) FF don’t have the votes for old NAMA ii) THe EU has ordered the retreat and iii) they might just have worked out the original position was too generous to the Blueshirted Bankers. Personally my money is on ii)

The 46 economists for the most part are not in thsi camp. They have been foremost in moving NAMA from a bad outcome with a low haircut to the point where that is open to debate. For that they deserve praise.

However, there is a dangerous element peaking their heads are above the parapet and that is the “burn the bondholders” group. This needs careful consideration.
First of all some sub debt bonds are part of the capital structure-these should be made loss absorbing and in fairness the buybacks of sub debt and the suspension of coupons willl deal with the issue. Perhaps this is not aggressive enough but still it is being done.
Some sub debt may or may not be part of the capital structure-lower tier 2. Thus far, I do not think much has been done here.

The majority of bank debt is not loss absorbing & is not part of the capital structure. In our legislation (which is not the same as USA) they rank parri passu with depositors. Most investors went in on this understanding that they are not loss absorbing. They were in before the guarantee and are not in for a free ride.
Making them loss absorbing is therefore problematic and may have some negative consequences that one should at least think about before going down this route. Investors do not like ex post rule changes-it does not inspire confidence. As we will depend on this source of money post restructuring we better be careful.

There regional bank restructuring of senior bonds that you refer to in the US are possible because the law is different and also have not been implemented in a bank of systemic importance-bar perhaps Lehman. They have been confined to small regional banks. Arguably, you can burn the Anglo senior but think carefully about BOI & AIB. In the end we need two or three institutions with the ability to attract external funding or we will have to deleverage.

This brings us to you main objection to NAMA-the risk of overpayment. Here, I agree with you. the best approach is not to overpay and thus minimise the risk to the future tax payer. Here at least the government is moving (or being forced to )in the right direction by hinting at a bigger writedown & more substantial stakes in the banks. That said, all we have is hints not definitive data yet.

I did not want to give the impression of ad hominem attacks on anti NAMA constituency. On some issues, I am anti NAMA on some I see the good. NAMA 1.0 was a very dangeous animal for the taxpayer. Subsequent versions are far from perfect and need to be improved upon. The debate here may have contributed to that improvement.

http://www.tribune.ie/news/article/2009/aug/30/why-nama-is-the-least-worst-option-for-getting-ire/

“We won’t know the valuation Nama will put on the land that is the subject of the €90bn of loans until next month, but most of the speculation suggests the haircut will be around 30%, meaning Nama will pay around €60bn. But while the loans are for €90bn, the properties secured on those loans cost considerably more (we are not talking about 100% mortgages here). The actual amount paid by the developers is likely to have been around €120bn. So at €60bn, Nama would be factoring in a 50% – not 30% – cut in land values, which does not sound unreasonable.”

AA’s spin illuminates what an Irish fact is (Colm McCarthy reminded us Brendan Behan’s Irish fact) - something repeated in public three times.

The article goes onto to say “Previous property crashes in London, Paris and Stockholm suggest that, within 10 years, prices recover to 30% below the top of the bubble. So there is a reasonable expectation that Nama could more than recoup its investment within 10 years once the property sector begins to lift.”

“Then there is the impact on the country’s ability to borrow. Within five days of Anglo Irish being nationalised, the rate which Ireland is charged for borrowing money internationally had risen by one percentage point, due to concerns about the exchequer’s exposure. Imagine what would happen if AIB and Bank of Ireland were nationalised.”

The political economy is in full flight expounding the new consensus including its self-appointed gatekeepers which symptomatic of Groupthink is a worrying return to the status quo that once used the illusional metaphor of a “soft landing” to deal with dissenting opinion.

Thank you for providing a succinct synopsis of the argument in favor of nama.

I believe that the argument is flawed based on the following:

If a bank’s capital position dips below the regulatory threshold due to (a) loan impairments and (b) operating losses resulting from (1) a slowdown in new business and (2) a bloated cost structure, then, in order to remain in business, a balance sheet restructuring is required. This will necessitate the infusion of fresh capital and the write down of prior claims (equity, preference, sub debt, unsecured debt).

Separately, normal functioning banks, also need to rollover their wholesale funding as and when the respective note issuances mature or market conditions encourage a prepayment.

The point to note is that the constituency that the banks need to maintain credibility with are the prospective investors i.e. those that will be providing fresh capital in the event of a balance sheet restructuring and/or those that will be refinancing the existing wholesale funding as and when it matures or is prepaid.

These people are paid to price risk correctly. Granted, there may be some commonality between those who would suffer a haircut and those who would provide capital going forward. Nevertheless, their calculus on prospective funding will be based to a large degree on the risks going forward and to a lesser degree on their prior experience with Irish banks.

If the Irish banks follow normal commercial practice and restructure their liabilities to match the value of their loan book, then prospective investors will view the prospect of financing a cleaned up bank favorably.

If I understand the pro-nama case, the contention is that the fixed income community will, in the event of a balance sheet restructuring, collectively “walk”.

This is not convincing. Fixed income investors are not members of a trade union - they are individual insurance companies, other banks, pension funds, sovereign wealth funds, hedge funds, etc. They are paid to park their funds where the yield offered is commensurate with the perceived risk. Again, while there would no doubt be some disappointed bondholders among the ranks of the fixed income investors, they would be the first to acknowledge that their decision to purchase the old bonds was incorrect and move on. If they purchased on the assumption that the State would step in to keep them whole, then they miscalculated.

Nonetheless, I am open to being convinced. The tone set by many of the pro-nama contributors leads me to conclude that they have direct experience. It would be helpful if they could cite examples of bond holder strikes. The debate could then move on to the comparability of the instances cited to Ireland’s case.

In the US, the Federal Deposit Insurance Corp has shut down or merged 81 banks this year. The bondholders at these institutions will receive what remains of the liquidation value of the loan book after depositors have been paid. In many cases, the bondholders recovery is in the single digits. At the same time the cost of funds for the banking industry is declining as fixed interest investors pile back into the sector now that the perceived threat of collapse has passed. So, in the US at least, the bond holders have yet to institute a three day week.

I am prepared to accept that the pro-nama argument is well intentioned and is not being driven by self interested concerns. Accepting that the primary concern appears to be that the risk of a bond-holder strike is non-negligible, and further, that the ramifications of such a strike would have dire consequences for our citizens’ livelihoods and the stability of the state, my suggestion is that the risk be mitigated. I believe that the Fine Gael proposal mitigates the risk by putting in place a 20 billion line of credit with the ECB.

A separate issue concerns the probable consequences of implementing the nama project:
My main concern is that nama will overpay and that servicing nama’s debt will act as a drain on the exchequer for decades. Funds that could otherwise have been deployed into health, education, social welfare and infrastructure will instead be used to mop up the mistakes of few.

Ireland faces a turning point. A state with 2 million taxpayers simply cannot afford to finance a project of this magnitude. We need to ask ourselves the question: if we channel such a significant portion of our future national income into nama, are we likely to converge or diverge economically from the knowledge societies of Scandanavia, Germany, France, Denmark, the Benelux, Canada, the US and Japan over the next thirty years?

Are we instead more likely to end up with a club med economy that remains reliant on the subcontracting of certain supply chain functions from the advanced economies? If so, then that field is already crowded by Eastern European countries, soon to be joined by those of the Maghreb.

Servicing the nama debt will necessitate additional taxation. This will impose additional demands on the productive sector either through increased corporate tax or higher wage demands from overtaxed employees. The question we have to consider is whether in the face of these demands, the productive sector is likely to increase business investment, exports and employment?

In summary, I feel that it is necessary to bifurcate the debate into 2 separate questions - first, whether the proposed mechanism is in line with best international practice. If not, then go back to the drawing board.

Only if yes should we as a nation consider the second question, whether it is a price we can collectively afford.

On a separate matter, pg does the pro-nama case a disservice by labeling the anti-nama commentators as zealots. A neutral observer might well question why the pro-nama side is not content to argue its case on the merits but instead resorts to a collective ad-hominem attack on the opposing side.

I would say we have no clue about LTVs until we see data. As regars some of points. So what if stockbrokers clients & in the case of the IGB site (we the taxpayers ) put up the equity. It has served its purpose as loss absorber and is gone now. Kudos to the developer for getting some sucker to take the equity risk.
secondly, some developer land is going down by 100% and probably more if remediation costs are going to be included. However, nearly a third of the NAMA stuff is in the UK & US where asset values are stabilising. We have no disclosure about what is in the Balkans.

The problem with the NAMA debate is that there is a shortage of hard info on which to base conclusions. As a result, people are trading in assumptions that are not all fact based.

“Any rational wholesale provider of money would walk.” If the banks can only raise money during a time window covered by the govt guarantee, as at present, then if the banks are nationalised whats the difference? Could an Irish bank raise 10 year money now - no chance. The govt could - and in fact has raised some 8bn out to 2018 - so I dont understand your point. Please explain. thx

AA has said that the exact price cannot be determined until individual loans are assessed. Thus 120/60 LTV is political spin as no one but the risk management divisions in the banks has a handle on what the LTV range actually is.

100% exposures were quite common - a mix of developer and private equity funding. Also LTV leverage was applied through cross collateralisation of loans etc.

Here’s a typical example:
2007:
Developer raises €100m to buy land at €120m. The balance €20m financed by private equity. (funded by bank lending to private investors)
Developers LTV =83% before additional collateral of equity in a commercial building Loan €40m Value €60m is taken. Result:
Developer Loans €140m - property value = 180m LTV 77%

Fast foward to today:
2009
Land 120m : value e€50m Loan €100m Bad LTV 200%
Commercial building: €60m value e€30m Loan €40m Good LTV 133%
Combined Loans of €140m V property €80m = LTV 175%
Private Equity investors first to absorb losses of €20m (wiped out)

Mix of a bad loan and good loan where collateral is underwater.

How will NAMA price the good loan? Is not the price a factor of both face value and future cash flows? In which case should it not pay for cash flows suitably discounted. In this example the commercial building is part rented to a blue chip tenant and part vacant. Rents just cover loan costs.

Here’s another typical rural/provincial structure
Builder John borrows €6m to build 20 holiday homes selling just two. Loan stands at €6m secured by 18 unsold holiday homes in the middle of no where (views are nice though). The two houses sold were bought by his accountant for €450k each in 2007. The unsold homes are on the market for €330k for the past years with no bidders. The value hard to determine as demand is non-existent and other use is not feasible given location. Pencil in €250k value €4.5m.

John has also built a small scheme of 10 detached houses (unsold) valued today at €400k/€4m (2007 €600k) with outstanding loans of €5.5m. He owns four residential letting units (houses) generating rents of €800pm - one is vacant. His borrowings on them are €1m. They are valued at €280k each - based on recent local sales. He is also in partnership with a pal where they borrowed €4m buying 12 acres of zoned land (no planning permission). John who is a part time farmer pledged his farm as collateral - 120 acres of mixed land value e€1.2m on which he has €200k farm related loans. He also has two properties in Spain financed by his main bank. Bought for €600k they are now worth €400k on which he owes €600k.

He banks with two banks - one of the big two - the other a non-covered bank.

As regards LTV, its fanciful to think that the consortium which for example bought the ex-Irish Glass Bottle site for €412m, were asked to come up with cash of €100m.

Ditto for many other big value deals.

What likely happened was that separate loans were advanced to make LTV in the 90 to 90% range.

New worth statements kept accountants busy during the boom to cover advances but they weren’t very “reliable” to put it mildly, as they didn’t have the standing of an auditor’s report.

The net worth statement was also common for buy-to-let investors who were able to get 5-year interest only loans.

I asked the Central Bank in 2007, if the banks had to provide data on interest-only loans. The answer was no - - which showed how interested the people there were in what was going on.

@Fergus

The overseas ownership for AIB fell to 60% in 2008 for AIB from almost 65% in 2007.

Most of the current overseas owners are likely recent ones and regard their stakes as high risk.

Courage is when you go ahead even when it may not be politic.

“Power concedes nothing without a demand. It never did and it never will.”
Frederick Douglass

As regards, your second point, comparing Fianna Fail (& Minister Lenihan) to Milwall supporters is insulting, small minded, inaccurate and should be withdrawn. Your analysis of the political sytem in Ireland is also wrong.
*Minister Lenihan never pitched the haircut at 15%-that is a stockbrokers wet dream.
*MinisterLenihan never ruled out nationalising banks
*Minister Lenihan never stated he would “overpay” for assets. What he did promise was a “mark to model” approach. He has no alternative to do so since the only place there is a market for property is in the imagination of some. How can you pay more than a market price when there is no market? He has stated on numerous occasions that in some cases “fair value” would be close to zero.
*Minister Lenihan has stated on numerous occasions that the NAMA process would be conducted in consultation with EU due process-which by the way forbids over payment.

The current government has consulted widely on NAMA, has listened to all sides of the argument, including this blog. In the end of the day, it has to make up its own mind. Now is the time to stick the economists in a windolwless office at the end of a corridor and send a porter for the report.

My information is that the “Irish Banks” are *already* owned as to 80%+ by overseas shareholders. Am I wrong ?

With regard to the reference to “trahison”, this perception (not your own, I hope) is baffling as well as disgraceful. The mauvais foi is not to be found on the side of the academics on this issue.

As it happens, I think this is only a partial explanation. Visceral and/or tribal responses to NAMA critics were the order of the day precisiely because our policical system is set up that way: once you adopt a position you fight the good fight for as long you can. Never admit your opponents have a point, never show weakness of resolve or purpose. It’s a bit like the way Milwall supporters support their team. The constitutional weakness is that nobody is charged with fighting the good fight on behalf of the country: we are all about vested interests.

Problems have arisen because the original NAMA argument is so obviously flawed. Overpaying is a tough position to defend. MAMAphiles had then to disengage (a bit) the left (tribal) brain and switch on part of the right (intellectual) brain. They then discovered that ‘don’t upset the bondholders’ and ‘we are afraid of another run on deposits’ carries an air of intellectual plausibility.

Partially nationalised banks in the US and UK are still, it seems to me, getting funded. The market knows who effectively owns the irish banks today. I think Lenihan will be surpirsed when the market yawns on the day of nationalisation.

This blog has had a good debate over the merits of appeasing, or not, different parts of the capital structure - to the point where I think an honourable compromise on bondholders is apparent to all reasonable people.

Also looks like they may well be looking at NAMA 2.0, if AA’s radio comments are anything to go by.

So, could we be approaching a workable proposition? If the commentators on this blog could act in the national interest just one more time they would figure out how Lenihan could take all this and make it sound as if it was his idea.

FF is facing electoral annihilation - an annihilation that might keep them out of power for a generation, but they are not going increase the probability of such an annihilation by allowing all Irish-based banks to end up under significant, if not total, external control. And this is the most likely result of any alternative to NAMA that is being considered which seeks to place a rational present value on the portion of these loans that may be recovered.

No government anywhere would be prepared to contemplate the ownership and control of the banking system passing into foreign hands. FF is prepared to mortgage the future of the country to avoid this outcome - and to minimise the electoral damage it will experience.

This is the simple choice that no one seems preared to spell out and confront: NAMA as it is currently devised and the Irish-based banks remain in Irish ownership and control; any significant revision to, or deviation from, NAMA and there is a high probability that there will be significant, if not total, external ownership and control of the banks.

Economic theory and practice, carefully marshalled evidence and rational debate are next to useless when the political stakes are so high. In the best of times our system of governance isn’t capable of dealing with it. Anmd these are not the best of times.

Assuming NAMA is enacted (which looks extremely likely) and Lisbon II is passed (again very likely) I wouldn’t be surprised if the December budget were to give third level institutions the Hobson’s choice of cutting funding of the social sciences and the humanities to protect the funding of the physical sciences and technology.

The courage of the “forty six” is magnificent, but it isn’t politic or sensible.

There’s a continuum of possible outcomes here. Obviously I’ll be happier with a discount of one-third than with the fifteen to twenty percent scenario beloved of our stockbrokers. I suspect I’ll still be grumbling in a few months but I believe that keeping up the pressure can push us closer to a better outcome.