KW: “Not sure I agree with your analysis via the Minister and the subbies. What he has said is that they “have taken” some losses. Past tense.”

Brian Lenihan @ Public finance committe on 31/8/09:
“Tackling subordinated debt is an ongoing process. It is not something one can compel. There are difficulties with it but the banks have made a very big start on it and I have no doubt they will continue to do it. All of this is being done in an international marketplace context. Ireland cannot suddenly jump out of line with regard to debt. That is the point I am trying to get across. This is not Argentina; this is Ireland. We do not have a record of jumping out of line with other countries with regard to what one honours and defers. If we start to get into that terrain, our credit worthiness as a state, as well as the credit worthiness of the banking system, will deteriorate and the speed of the recovery will be less.”

We are ad idem on the issue of a special resolution regime. I think it is the next step after NAMA and prior to the expiry of the guarantee. The guarantee does not ensure that undated subordinate bonds or subirdinate bonds maturing after the guarantee period won’t be wiped out. I am not an expert in bonds but I think your facts are incorrect on that point.

In any event, the guarantee has been given and has to be honoured. I took you to saying that NAMA will cost us €10 bn on top of the guarantee?

NAMA together with the government promise of recapitalisation is designed to ensure that the shareholders are not completely wiped out.
The government has made clear that it will subscribe for additional ordinary shares in any recapitalisation, so as a result the shareholders are not completely wiped out. This guarantee ensures that the subordinated bondholders don’t lose out. There is approx 10 billion in subordinated debt.

Everyone can quote EU guidelines to defend their position.
A special resolution regime applied to banks is also instanced as a policy option in the same document for which you rely on for EU approval.

….. and I’m sure FG are happy to play the waiting game. Apart from NAMA, would you want to deliver the next budget in December? I’m sure George Lee wouldn’t (if indeed my conspiracy theory about Enda Kenny being frightened of Richard Bruton is anywhere near correct ……..and that he has brought in George to replace Richard!).

I see that IT breaking news has Irish property prices down by 24% since 2007 (PTSB/ESRI index). Get real. The house in front of me that has been on the market since 2007 at 540k is now down to 350k……. and still no takers.

24% has a kind of nice ring to it though when we talk about NAMA haircuts. It’s not an obvious round number. It looks to the public like there might be some ’sums’ behind a figure like that. Surely the two aren’t connected?

I would also like to nominate the following words from the same report (and many very similar phrases pushed out by G20 countries in 2009) as one that is fast becoming cliche of the year……. “However, there is some evidence that the PACE OF DECLINE MAY BE EASING”.

It’s still going down no matter how much it may be ‘easing’. That G20 sure has some spin machine.

NAMA is not taking on losses. The idea is for NAMA to make the banks crystallise their losses by selling to NAMA at real economic value (as per EU Commission guidelines). Where are the €10bn in losses coming from?

You will note that Garret FitzGerald has no problem with FG bringing down the Govt in January. His issue is the timing.

@BL

If you are reading, I would very much appreciate if you could respond to my post on your article:
http://www.irisheconomy.ie/index.php/2009/08/26/irish-times-nama-piece-signed-by-46-economists/#comment-13202

I understand you are busy. I just wanted to point you to it in case you had missed it.

If you think that the losses to be borne are less than 10 billion, you should work as an estate agent.

Irreparable damage to our reputation is done by an at best incompetent, at worst corrupt, government fawning to vested interests. To suggest the fall of this government would do irreparable damage to the reputation of the country, is to subscribe to a level of hubris more appropriate to the Fuhrerbunker on April 30th 1945.

http://www.ft.com/cms/s/0/b83102fe-9590-11de-90e0-00144feabdc0.html
“Evidence that Ireland is addressing the crisis has been well received in financial markets. Irish bank shares have rallied and the risk premium on Ireland’s sovereign debt has reduced. Back in February, there appeared to be a real possibility that Ireland might default on its foreign debt.”

Not wanting to labour a point BL, but do you think there is no risk of irreparable damage if the international markets lose confidence in Ireland for the reasons referred to by Garret FizGerald?

(1) I had already read R. Bruton’s article. That is where I was coming from. He says that FG has made detailed submissions on how NAMa can be altered. I take it this is not the Good Bank plan but their view on NAMA if NAMA it is to be. I suggest that they publish those detailed submissions.

(2) You are making a huge assumption that NAMA will €10 bn. I don’t share that assumption.

(3) Surely if we were unable to maintain the buffer then we would need to call in the IMF? By the way, the IMF doesn’t have much cash these days so it is unclear what help would be available or how quickly it would materialise.

@BL

I refer you to Garret FitzGerald’s article. Do you think there is no risk of irreparable damage if the international markets lose confidence in Ireland?

(1) Please look at last Fridays IT for a detailed submission by RB on the FG position.

(2) Irreparable damage to the state will be done by NAMA through taxpayers taking on in excess of 10 billion in losses that should be borne by shareholders and subordinated bondholders. If Minister Hanafin can boast about saving 300,000 in cracking down on benefit tourism, we can surely agree that 10 billion is an enormous sum.

(3) Garret FitzG has fallen for outrageous spin in relation to calling in the IMF if we have a general election before NAMA and the budget are passed. Even if there were any substance in the suggestion, the NTMA holds large cash balances and could go many months without raising any more money.

Garret the Good is as blue as Barney Rock’s underpants. He just sees that if FG manage to defeat NAMA and bring down the Government they will not only do irreperable harm to the State but they also risk scoring the greatest political own-goal of the 21st century.

I think FG are making a mistake in not publishing their submission on the draft legislation. That should be their first step in their retreat from the precipice.

Though he is well known for vilyfying Haughey for his flawed pedigree, Garret FitzG is a far less partisan person than most politicians.
In his youth he thought long and hard about joining FF.

Maybe he has come full cycle!

Rob

I’ll have to double check the Ministers comments again as I had always taken it that NAMA did not extend the guarantee. Personally, I am hopeful that we will have structured bank wind-up legislation on the books prior to both (i) full recapitalisation and (ii) the expiry of the guarantee.

In the meantime, can you explain the mechanics of how NAMA transfers could “wipe out the equity of any of the banks”? I note you posted that before and I honestly don’t fully understand it.

I would have thought that if NAMA left the banks with a hole of €x billion in their accounts then and the Govt recapitalises to the tune of €x bn then the shareholder equity will still exist (in diluted form) notwithstanding that the company was for technically insolvent, i.e. the only way to wipe out shareholders is to nationalise 100% or to wind up the bank. Am I wrong in this? Is there a scenario where the NAMA transfers could cause such a loss that the shareholders would technically lose their equity? If so, can you explain it if you have the time?

Not sure I agree with your analysis via the Minister and the subbies. What he has said is that they “have taken” some losses. Past tense.

Prices for sub debt have steadily risen from the annoucement of NAMA particularly as confidence in overpayment grew. The Minister’s assurance that he doesn’t expect the NAMA transfers to wipe out the equity of any of the banks is music to the ears of the subbies. They can’t be dealt with until the equity is wiped out. Fear of nationalisation is what has depressed the price of the subdebt and allowed swaps. The Minister has generally adopted a strategy of reducing these fears, so his actions have not helped with getting the subdebt holders to share the cost. Quite the opposite in fact.

They don’t earn “investment” returns. They earn closer to deposit returns. FF, FG, Karl Whelan, Brian Lucey and G. FitzGerald are all in agreement that they should be protected.

The mechanisms by which subordinated bondholders will be forced to take losses and when this will occur is unclear. It is quite possible that these guys will be invited to come to the table at the time of the post NAMA recapitalisation. However, I would also like some clarity.

I can understand why the Minister isn’t announcing plans to make subbies take losses far in advance. We are playing the good soldier in international markets. We want to be seen to deal with subbies on a commercial basis rather than on a political basis. With that said, the Minister has been clear that they will have to share the pain.

Great to see that the Seanad can continue its fierce tradition of unbiased, independent analysis….

We wont run out of cash in the time it takes to have a general election, put a new government in place and get ABNAMA (anything but NAMA) in place.

NTMA runs large cash balances, so while it has a rolling program of raising money, we can afford to sit on our hands in the short term.

Of course his whole argument is deeply flawed.
This is surely a time where the wider international financial community, though they operate to the mantra that past performance is no guarantee of future performance, must at stage however believe that past ineptitude is a guarantee of future ineptitude. A new relatively inexperienced but competent government is less of a risk than the present government.

And given that the difference in cost between NAMA and FG policy is at least 10 billion (by wiping out subies and shareholders), I think we must be absolutely barking mad to continue with NAMA.

The current amount is about 10 billion, which even in this calamity is not small beer. None of the subie debt is due to be repaid during the guarantee period. Some is undated (perpetual).

Sean Fitzpatrick was(is?) a noted holder of Anglo Irish Bank subordinated bonds.