Lenihan: Current Share Prices Prove Banks Can’t Be Nationalised!
This post was written by Karl Whelan
Yesterday’s Oireachtas Committee meeting left me more certain than ever that the NAMA “stockbrocking scenario” of something like a 20% discount is going to happen and that long-term economic value will be adjusted to deliver it. The transcript provides the strongest evidence yet.
The following exchange between Richard Bruton and Minister Lenihan shows that the NAMA pricing process has effectively already been decided. First, Bruton makes a point that I have emphasised on this blog many many times (for instance, here and here) which is that the Minister has effectively set a lower limit on the average NAMA haircut with his public statements:
If NAMA decides a €50 billion write-down is to be applied to the loans that are being transferred, and the shareholders’ funds are, for example, €20 billion, while the subordinated bondholders hold another €10 billion, it seems that the write-down will wipe out the shareholders and the bondholders. The legislation which purports to allow NAMA be independent in setting its prices has not shown us what will happen if NAMA, acting independently, wipes out the shareholders and the bondholders and is then left further below the water. That is a crucial issue.
On the one hand the Minister is saying that NAMA will be independent and that whatever happens with the valuation the cards will fall where they will and the State may have to put in more money. However, at the same time he is saying the banks will remain in private hands. He cannot pretend these two positions are consistent. To be honest, one cannot pretend that those the Minister engages as valuers - who are supposedly independent - will be immune from the knowledge that the Minister is saying every day of the week that at the end of this process the bank shareholders must be left intact. That may not be a written directive but it is certainly directive in its implications to those who are setting values. People who set values are fairly flexible in the way they work.
Lenihan’s answer is priceless. Read the following carefully. Referring to AIB and BOI he says:
Why would I outline the fact that there may be a residual or substantial shareholder interest left in these institutions if valuations established that their entire shareholder value was wiped out? The reason is on the basis of the information that I have at my disposal. This is not information that only I have at my disposal because markets have assessed that information in the context of their current share prices and rating agencies have used it in their assessment of these institutions. Were these institutions in the condition which Deputy Bruton suggests they would not have these positive market ratings and they would not have the degree of shareholder value they do. That is why in my public statements I do not envisage a complete wipeout of all shareholder interests in those—
Deputy Richard Bruton: What valuation of the loan book transferred to NAMA underpins those views?
Deputy Brian Lenihan: Bear with me for a moment. With regard to those two institutions, the current market assessment is based on their entire balance sheets which include the assets to be transferred to NAMA. Even on that basis the current market analysis is that they are viable trading entities based on their share price and rating assessments. That is why I speak as I do. I have to maintain confidence in a system in which world markets have confidence. When one speaks of the total wipeout of shareholder value it is unlikely to materialise on the basis of the information I have to hand and that will be the basis of my Estimates in the middle of September.
Now sit back for a moment and take this in.
Lenihan is saying that he knows the assets have a high enough value that the underlying losses won’t wipe out shareholder value. And he says that he knows this because the stock market says the banks currently have positive value! When he says “Why would I outline the fact that there may be a residual or substantial shareholder interest left in these institutions if valuations established that their entire shareholder value was wiped out? The reason is on the basis of the information that I have at my disposal” —it certainly appears to me that he is saying that even if NAMA came back and told him that the their asset purchases would render the banks insolvent, he would over-rule them, based on current share price valuations.
But anybody who has every studied financial economics knows that the stock market is valuing these banks based not on what the assets are truly worth but based on what NAMA is expected to pay. Bruton’s interjection is an attempt to explain this to the Minister. However, the Minister ignores it, ploughs on and essentially repeats the same point.
So there we have it. NAMA is a self-fulfilling prophecy. The markets expect something like a 20 percent discount. That’s built into the current share price. And the Minister will use the current share price to decide the discount.
It would be funny if it was happening somewhere else. To actually be living through this is very depressing.
Tags: NAMA
September 1st, 2009 at 10:23 pm
Hi Karl,
I am flabbergasted as to why the simple logical facts re NAMA/nationalisation are not put across in a coherent way by the opposers of NAMA in its current form. Brian Lenihan has said that the government would have pay €4b based on current valuations to shareholders of AIB & BOI if they were nationalised. He is completely ignoring the fact that it is the Government guarantee and the likelihood that the banks will get rid of their toxic loans that is putting the current value on the banks. If these weren’t in place the banks would go under and therefore shareholders would be wiped. He also refers to how we have had to put €4b into Anglo since nationalisation as an example of why Nationalisation is last option, using Anglo as reference is a complete red herring, since they are a complete basket case and not a bank in the real sense, more a private club. The minister is not being properly challenged to explain his assertions. The opposition needs to focus in on the key issues in the debate and don’t
get distracted going off in all sorts of tangents. I sse the key isues as;-
- The tax payer is on the hook for all the downside risk, why are they not in for all/most of the upside. What additional downside is there if substantial nationalisation takes place?, the minister has never explained or been pushed enough on this to explain his position.
- if the banks manage to have all their bad loans removed from their books and not pay accordingly it is as clear as night follows day that the value of the banks is significantly more than current value even using conservative valuations. In this scenario the banks will have no problem raising new equity as they will have plenty of willing punters. AIB said in its latest results release that 88% of its book is repriceable, once NAMA is in place they have a huge opportunity to increase their margins and bottom line accordingly (for who’s benefit ?).
- as I understand it ( I may be wrong) the government have a future potential 25% stake in AIB & BOI, however this can be prevented being exericed by the banks if they manage to pay back the preference debt within a set timeline. Again, this is the likely scenario if the banks offload the toxic loans as they will raise fresh equity and pay the government back. Therefore, all the tax payer gets is approx a 3% premium on capital injection v the cost of borrowing for a short period and the longterm headache of sorting out the toxic loans mess.
- the suggestion that at the end of the NAMA process in 10, 15 20 year time (take your pick)the banks will have to make good any shortfall is just another attempt to deflect attention. It is so far into the future that it is not relevant to the debate.
- Fine Gael have muddied the water by bring up a proposal for NAMA in reverse, all this has done is allowed the Minister deflect attention on to this proposal which is not properly thought out, the good bank part of the idea is fine but they have not thought through what to do with the toxic loans in the banks.
Finally, I agree that the bad loans will have to be managed separately over a long period of time in a NAMA type arrngement. My main problem is why are the banks shareholders the only risk takers that are being bailed out and left intact for the inevitable upside to come. If the same help applied to other sectors sure most will come right at some stage in the future.
I think the debate needs to be kept to the core issues, I think it suits the Minister when other alternatives are put forward with different sets of figures as it allows him re-direct the debate and deflect attention.
Bart Gilmartin
September 1st, 2009 at 10:38 pm
Overiding valuations- allowing for underpayment appeal appears to be a failsafe should the NAMA due diligence process diverge from the “estimate”. No hostages to fortune here. 18,000 loans to value across 3000 borrowers = smokescreen behind which much can be hidden - red book or not. Statutory formula aside will the Minister divulge the economic assumptions underpinning LTEV valuations.
September 1st, 2009 at 11:17 pm
1. If the banks have provided the Minister with information which suggests that the banks are solvent then it is very difficult for the Minister to plunge feet first into a nationalisation as it will likely entail a large cost in shareholder equity if the banks are solvent.
2. If the banks say they are solvent then they are misleading the Minister then the Minister needs their assistance and cooperation to ascertain for certain the truth of their statements. The mechanism for this is NAMA. If the banks turn out to have been misleading the Minister (wittingly or unwittingly) then they should end up nationalised after NAMA. The ancillary benefits of going through the process is that the Minster has got the co-operation of the private institutions in valuing the debts on a voluntary basis without any legal avenue for shareholders to come back at him. He also has managed to clean up the books of the newly nationalised entity in a credible fashion with the result that it can be re-floated more quickly thereby minimising any period of uncertainty.
3. The Minister was at all stages at pains to say that he was operating on the information given to him. He clearly said that if the NAMA process showed the information to be true then the banks would not be nationalised 100% BUT if the information turned out to be wrong then the valuation process would ascertain that (as it would ascertain if 75% LTV at peak is not accurate) and the banks may be nationalised.
Other relevant statements from the Minister:
“….When one speaks of the total wipeout of shareholder value it is unlikely to materialise on the basis of the information I have to hand and that will be the basis of my Estimates in the middle of September. It should be remembered that to protect the taxpayer one must have a detailed statutory valuation of each loan for the purposes of this exercise. If there are matters which these institutions have concealed from the markets, rating agencies and the detailed stress testing in which PricewaterhouseCoopers, my Department and the NTMA have engaged over the past year, which successfully evaded capture from all this analysis and which emerge in the statutory valuation, then they would have an effect and an impact on the valuation of these banks.”
and later on
“Deputies O’Donnell and Burton both referred to the loan to value ratio. Deputy Burton is concerned that 75% is a very low level and that there were 100% arrangements. Clearly, if that emerges in the statutory valuations, it will be very serious for the institutions concerned. I am imparting to the committee the information I have amassed to date which suggests a 75% level. That information is provided in due diligence exercises and the PricewaterhousCoopers report. It is not new information established in the last few weeks. We must always guard against the over-optimism of financial institutions. That is why one must have a statutory process to undertake evaluations.”
The next thing I say is going to sound a bit dramatic but I think it needs to be said. Your suggestion that the valuation is predetermined is a pretty serious allegation against the Minister and those people who have given evidence to the Committee on Finance and the Public Service to the contrary of what you are saying. I know you only say it because you are desperately concerned about the valuations as we all are.
However, what you are suggesting could be taken to suggest that
- the Minister and/or his agents have decided that they are going to skew the valuations to achieve the result of no nationalisation come what may, and
- that they are going to do this in contravention of EU Commission Guidelines, in contradiction to what they have said in public and in total contradiction to what they have said to the Dail Committee.
That is an allegation of huge bad faith towards the Oireachtas, towards tax-payers and towards the EU. To what end would they act in such bad faith? What motivates them? It can’t be politics because FF’s political future is possibly wholly dependent on being seen to have championed the public against the interests of banks and developers.
It really baffles me that such a suggestion can be made without serious evidence to back it up. It is all based on rumour and supposition and extended extrapolations from Ministerial statements.
Let’s say the banks are actually insolvent and the shareholders should be wiped out. If that were the case then there are plenty if third parties who have good reason to promote a rumour of bank solvency. If the banks are borderline insolvent then we all know that it is hugely in their interest and in their shareholders’ interests to try and let on that they are not insolvent (or to err on the side of optimism) and to hope NAMA will rescue them.
It is not beyond belief that the same “denial” they suffered form before is at work again. If that is the case then how is the Minister to know to second guess the banks prior to NAMA process begins and where is the benefit in second guessing them if it’s all going to come out in the wash anyway?
This is hugely serious and hugely political. I would email you this in private except I wonder would you think I was making some kind of subtle threats as I am clearly a politicised poster. As it is I am happy enough if this is not shown or is deleted as I believe that you Karl are acting in good faith and out of concern for your country.
I think that rather than focussing on evidence of a conspiracy we should be focussing on the mechanisms that can be put in the legislation to remove the possibility of a conspiracy. I think a bit of chillaxing until the valuation regulations and expected haircuts are announced is of the essence. Beyond that I am sure FG or Labour and the country would welcome your input as to how over-valuations can be avoided and how the definition of “long term economic value” and the oversight provisions might be tweaked if the Government is wedded to the concept.
Lastly, there may be a lot of power for the Minister in the Bill. However, the bookies tell us that, come the end of next year, it is as likely that Eamonn Gilmore will be exercising these functions as Brian Lenihan. I think that is something the public should bear in mind too.
September 1st, 2009 at 11:34 pm
I believe that the hyping of the difficulties about temporary nationalisation is because the minister’s goal is to save the shareholders and all the bond holders. “Yes I am paying over the market value for the assets. I am doing this, in contravention of best practice everywhere, based on highly optimistic forecasts regarding property prices. But if I didn’t it would lead to the worst possible of all outcomes - NATIONALISATION, against which the costs of overpayment are miniscule”. Someone should make him explain why saving the shareholders and bondholders is his priority. Although all this is depressing, Nama in it’s current form is by no means a done deal. Even if it goes through continued opposition has benefits. If nothing else it deprives this smooth talking Senior Counsel, and the rest of the government, of the excuse in future years that they had not been warned, repeatedly and bluntly, about the costs of what they were doing.
September 1st, 2009 at 11:47 pm
@Zhou
No problem with posting your comments at all. You are a welcome contributor to the debate here. I’ll leave it to others to decide if you are making subtle threats.
I have explained why I believe what I believe. The Minister is clearly stating that he can use the current stock prices — based on well-established public expectations of haircuts of a specific size — to reject recommended haircuts from NAMA that exceed this size by a large enough amount. That is how I interpret the section
“Why would I outline the fact that there may be a residual or substantial shareholder interest left in these institutions if valuations established that their entire shareholder value was wiped out? The reason is on the basis of the information that I have at my disposal. This is not information that only I have at my disposal because markets have assessed that information in the context of their current share prices and rating agencies have used it in their assessment of these institutions. Were these institutions in the condition which Deputy Bruton suggests they would not have these positive market ratings and they would not have the degree of shareholder value they do.”
Now maybe I’m wrong. But this is my direct interpretation of this section. I do not believe that I am engaging in “rumour and supposition and extended extrapolations”.
And with that, Zhou, I think it’s best if we leave our bilateral debate aside now until September 16.
If I’m wrong, I will be the first to admit it and will do so here in public. Remember that I’m the one here that’s out in public, while you pretend to be a dead Chinese ex-premier.
September 1st, 2009 at 11:50 pm
To hear Brian Lenihan quoting share price and rating agency assessments in support of his viewpoint is scary.The share price strength in recent months can only have been based on the belief that NAMA would be ’soft’ on the banks (investors cannot have believed the levy idea).While still with us,the rating agencies have been pretty well discredited at this stage.
September 2nd, 2009 at 12:57 am
@Zhou…..You can talk your way around it until your blue in the face and that goes for Linehan et al.The truth is Linehan has NO agreement from the ECB for His valuations and as such cannot state for sure whether the shareholders will be wiped out ir not.In summary He has no mandate from the ECB regarding any haircuts and if He went to the Country tommorrow He would get no mandate for NAMA or Fianna Fail.
September 2nd, 2009 at 5:48 am
S&P is explicitly saying as of 1 May that it was leaving its AIB rating at A neg with Nama providing 2 notches of support ie it would be BBB+ without Nama and the Government. S&P also takes cognisance of Government support and systemic importance of AIB in arriving at its ratings.
Quote:
….the planned transfer of assets to NAMA has been factored into our assessment of AIB’s stand-alone credit profile. We now factor two notches of support into the ratings on AIB, reflecting our view that the government will provide further support to AIB if required. We consider AIB to be of high systemic importance to the Irish banking sector.
From the details so far available, we consider that the NAMA plan
provides further demonstrable evidence of the government’s desire to support AIB and the other participating domestic banks.”
The report is on AIB’s website here: https://www.aib.ie/servlet/BlobServer/document.pdf?blobkey=id&blobwhere=1241515531338&blobcol=urlfile&blobtable=AIB_Download&blobheader=application/pdf&blobheadername1=Content-Disposition&blobheadervalue1=document.pdf
Moody’s meanwhile downgraded the covered banks including AIB and BOI on 7 July 2009 as a result of its downgrade of Ireland. No correlation there then! It should be noted that this applied to its long term corporate rating and not just Government guaranteed paper
September 2nd, 2009 at 6:35 am
I don’t know who wrote this analysis in today’s Indo as I’ve only access to the online version without an author name, but it’s the type of sports level punditry that has to be contended with, in this serious debate.
http://www.independent.ie/opinion/analysis/lenihans-pr-blitz-shows-cowen-how-its-really-done-1875093.html
“IT’S amazing how some people manage to score PR own goals from positions of strength. Take the past week. The much-hyped 46 anti-NAMA economists are now something of a toxic entity themselves.”
September 2nd, 2009 at 6:43 am
The share prices are not a very good indicator of what the ‘market’ thinks.
Why? (1) As alluded to above, government support for the asset side (Nama), Liabilities (Guarantee). Regarding equity, the state will make large injections diluting shares. (2) the short selling ban is still in operation in Ireland, which means that traders cannot easily take a contrary view on the residual value of equity. Banning short sales basically made no difference, and may have increased volatility in the Irish case.
These shares are behaving like options on certain outcomes, and the minister and his advisors should know better.
September 2nd, 2009 at 6:45 am
Could someone take Lenihan aside (AA?) and mention that even Greenspan (Jack Welsh for that matter) as I understand it have recanted the ’shareholder value’ philosoph that assumes the market knows all and the share price reflects that.
September 2nd, 2009 at 6:51 am
@Michael
Thanks for the Indo piece.
“After getting strips torn off them by former Taoiseach Garret FitzGerald for their irresponsible appreciation of figures, they have now gone to ground.”
Ah yes. Sure I haven’t responded to Garrett at all! And I’ve definitely gone to ground. Currently commenting from a cave in Afghanistan.
September 2nd, 2009 at 7:07 am
“The share prices are not a very good indicator of what the ‘market’ thinks.”
In the short term share prices are fairly meaningless in terms of valuing a company. Markets can get it very wrong. They are not always rational - in fact you could say in the short term they are rarely rational.
The bank shares are speculative shares. I know many people who bought in at under €1 because the potential upside far outstripped the downside. I have no idea what the banks might be worth if Nama went through and the banks got future market price for the loans but still had to raise x% equity. I doubt anyone does.
These shares could just as easily halve over the next week or so if the market gets nervous. I decided to follow Dermot Desmond and got out Monday. At least I got back some of my Anglo losses.
September 2nd, 2009 at 7:13 am
@Karl Whelan “And I’ve definitely gone to ground. Currently commenting from a cave in Afghanistan.”
Osama bin Whelan? I’m sure you’re on a few wanted lists in FF HQ Karl, but don’t worry, we will stick up for you when they come to get you! I’ve no doubt there’s some vague clause in anti-terrorism bills they can nail you on!
I have to say, reading your piece, I just went ‘Oh my god’.
Keep up the good work that you and your colleagues are doing by putting some ‘forensic analysis’ around this whole debacle.
September 2nd, 2009 at 7:50 am
Karl - your piece is frightening - but the utterances of ff/financial establishment/supine and lazy media and all other vested interests ranged against the ‘great unwashed’ indicate you are quite accurate in your assessment - at least Sean Barrett in IT today seems to be supportive!
September 2nd, 2009 at 8:27 am
If NAMA is paying ‘long-term’ valuations, where is the discount factor? If we are talking about values in 10 years, the discount factor wipes at least another 30% off the price to be paid. That alone is bigger than some of the haircuts being discussed.
September 2nd, 2009 at 8:39 am
@Michael Hennigan
The Indo piece is by Fionnan Sheahan.
Who’s better half just happens to a former special adviser to a FF minister and also a failed FF local election candidate.
Maybe some of the pro-NAMA kool-aid was passed over the breakfast table at Chez Sheahan.
Funny how there seems to be even more enthusiastic support for NAMA among *failed* rather than successful FF candidates, cf. Noel Whelan’s fantasy piece in the Irish Times at the weekend.
Like a spurned lover, they seem to yearn acceptance back into the warm bosom of FF and will bend logic to any degree seeking to attract attention from the object of their unrequited affections.
September 2nd, 2009 at 8:59 am
Karl,
This kind of line-by-line dissection of the obvious inconsistencies in the Minister’s position remains essential, given the governments current policy of steamrolling past logic and reason with their thick FF shoulders and smokescreen economics.
Of course, opponents to the current plan could engage in spin too, if they wanted.
“Minister, your blanket refusal to consider nationalisation is dogmatic. Now is not the time for dogma.”
“Minister, how can you contemplate putting our children in hoc for billions in order to bail out private interests?”
“Minister, you say the market valuations are wrong and yet you claim you don’t want to privatise because you believe in the market? That just doesn’t square!”
“Minister, the Swedes nationalised before they bailed out their banks. The IMF says we should nationalise before running Nama. Every independent economic voice in this country says we need to consider some form of nationalisation. Explain why you stubbornly refuse to consider that option?”
I sometimes wish Richard Bruton would be a little less subtle in his attacks, and a little more like a Brian Cowen in a china shop.
September 2nd, 2009 at 9:06 am
Its amazing how many people have come out in favour of NAMA while at the same time failing, refusing or neglecting to offer even potential answers to qustions that are at this stage of the debate very basic.
For example, and in particular, I would like to see every pro NAMA advocate answer;
“Why do you prefer NAMA + levy over NAMA 2.0?”
I think that should be a mandatory question asked of pro NAMA advocates in interviews etc.
September 2nd, 2009 at 9:10 am
Groupthink occurs when a group makes faulty decisions because group pressures lead to a deterioration of “mental efficiency, reality testing and moral judgement”. Its symptoms include amongst others; Illusions of invulnerability - creating excessive optimism that encourages taking extreme risks; Collective rationalisation - where people discount warnings and do not consider assumptions; Belief in inherent morality – groups believing in the righteousness of their cause, ignore the ethical or moral consequences of their decisions; Pressure on dissenters - where people are under pressure not to express arguments against any of the group’s views ;Self-censorship - where doubts and deviations from the perceived consensus are not expressed. Self-appointed “mindguards” - where other people protect the group and the leader from information that is problematic or contradictory to their cohesiveness, views and decisions.
The Indo article may fit the last category.
September 2nd, 2009 at 9:21 am
Apparently on the pat kenny show now.
One can listen about the ‘moral force’ of NAMA!!!!!!!!!
Where is the nearest airport?
Al
September 2nd, 2009 at 9:28 am
@KW
I await your expert analysis of the draft regulations as much as everyone else.
I am disappointed you cannot judge for yourself that I’m not making “subtle threats” rather than leaving it up to others. (It wasn’t a brilliant phrase for me to use in the first place!). As Marlowe might say to me, “you want it to be one way, but it’s not, it’s the other”.
I note that you are putting your name out there. I would prefer not to feel constrained to post anonymously but I understand there is a huge difference in our positions.
Until the 16th (or 17th) of September so.
September 2nd, 2009 at 9:35 am
1. Mulcahy should resign immediately..
2. Bank shares should have been suspended 6months ago
September 2nd, 2009 at 9:57 am
It would help the anti-NAMA campaign win over undecideds like me if there was a clearer differentiation between the following two categories of people opposed to NAMA:
(a) Those who oppose NAMA because they think it will FAIL in its stated objective of reviving bank lending and hence restoring consumer demand, particularily for new houses and new cars.
(b) Those who oppose NAMA because they think it will SUCCEED in its stated objective of reviving bank lending and hence restoring consumer demand, particularily for new houses and new cars.
I’m sure the main opponents of NAMA on this site, such as Karl Whelan and Brian Lucey, belong to category (a), and I certainly wouldn’t challenge their integrity on this matter.
However, we are deluding ourselves if we think that everybody wants the Irish economy to succeed. You only have to read some of the posts on this site, but much more so on other sites like Property Pin, not to mention a well-known news site, whose editor frequently posts here, to realise that there are a very large number of people in Ireland who are absolutely longing for a complete economic collapse. I don’t fully understand their motives, but it appears to be something to do with a belief that a complete economic collapse will result in a political upheaval that will see the end of Fianna Fail (widely regarded by the cultural and academic elites in Ireland as the most evil organisation in the world).
Until a few months ago, such people might have hoped that the global recession would be sufficient to achieve this aim. It was widely believed that Irish manufacturing and exports would face meltdown in the global recession. However, this hasn’t happened. The global recession is now ending, and Irish manufacturing and exports have come through it with only very small declines compared with all other developed countries. This will probably result in the fall in GDP in 2009 being much less than predicted several months ago.
However, for GDP growth to resume at its pre-recession rate, we need, not just exports to do well, but bank lending to be restored, if not to its previous level, then certainly to well above its current levels. That is what, according to Lenihan, NAMA is designed to achieve. I (along with probably 99.9999% of the population) lack the technical expertise to know whether he is correct or not. Can those who oppose NAMA, but who genuinely want to see a resumption of bank lending and economic growth, explain why he is wrong and why their alternative proposals will succeed in restoring bank lending. I’m all ears.
September 2nd, 2009 at 10:04 am
I seem to recall that when NAMA was first announced Brian Lenihan pointed to falls in the bank shares as evidence that it was going to be tough on the banks. Clearly, rises in the banks’ shares proves the banks are in incredibly good shape even despite NAMA’s toughness!
And if the banks are solvent without any helping hand from NAMA, why not abandon both NAMA and nationalisation and let the banks just raise some capital on the market if they want to bolster their balance sheets even more?
September 2nd, 2009 at 10:09 am
@john
there is a third constituency who are sceptical on NAMA on the basis that they do not think that transferring the inevitable losses on the biggest property bubble in the history of the planet from the bank’s shareholders and (some) bondholders to the taxpayer is a smart idea. In that case, the economy will never recover, because we will be too burdened with taxation to service the resultant public debt.
I could accuse you of playing the old Haughey card that anybody who opposes FFs is in MI5 or 6…but I won’t.
September 2nd, 2009 at 10:10 am
It’s worth pointing out that the Minister has very little room for compromise in his haircut plans. Using MF Global, an independent broker’s estimates for Bank of Ireland, a 20% haircut leaves the equity with some residual value, a 23% haircut wipes it out completely. The margin is that tight.
September 2nd, 2009 at 10:17 am
@ John,
Excuse me while I get some snark out of the system: if you spent a bit less time psycho-analysing people who supposedly desire the collapse of the Irish economy and a bit more paying attention to the debate you might have noticed that the question of whether NAMA will boost lending is only one part of the issue. Ah, that feels better.
In fact I would say the NAMA debate is less about whether it will “work” than the distributive questions - the main argument against NAMA is that it entails an unjustified and unneccessary subsidy from the state to bank investors. Fixing the banks’ balance sheet (whether via NAMA overpayments or more transparent recapitalisation) will presumably increase lending, though possibly not dramatically given the state of the ecoomy. But the governement is currently throttling an already choking economy with tax increases and spending cuts designed to protect the state’s solvency - so it would seem reasonable to object to unnecessary donations to unworthy causes.
September 2nd, 2009 at 10:24 am
@John
As one of the gang of 46 my own objectives in opposing current NAMA policy does not fit into a or b. Transferring 10-20 billion of uncompensated shareholder wealth from Irish taxpayers (current and future) to international investors, Irish banks and developers might help to produce outcome a on your list, but it is not necessary. We can reach outcome a without any wealth transfer of this magnitude. The government needs to remove the risk overhang of the banks and inject equity capital, but it can do that through fair-value transactions rather than through a windfall gift. I think that is the main source of objections to NAMA as the banking crisis solution. I also note Sean Barret’s point (see another blogpost above) that the proposed solution will prop up Irish housing and commercial property prices when these are actually too high and distorting incentives and hurting competitivness. So an alternative to NAMA which “fails” to keep property prices high might be a good thing in the long run.
September 2nd, 2009 at 10:27 am
@ bill hobbs
Excellent point. However I don’t think that mindguards need protect the leader in this case.
The leader establishes the “think”. The mindguards are utilized to put “pressure on dissenters”.
It seems to me that Fionnan Sheahan is such a mindguard.
He should of course remember that his own paymaster is currently renegotiating its liabilities with bondholders.
September 2nd, 2009 at 10:28 am
The minister is clearly a financial genius. What are we worried about?
More to the point, what is he worried about? We clearly do not need NaMa.
September 2nd, 2009 at 10:35 am
@ John
There are a number of larger issues to address but NAMA is the most immediate. There is also a need for deleveraging in private sector debt. Ireland has to fund additional credit from abroad. At some point, other european states won’t appreciate the ECB providing this funding. Credit will become scarce. For a successful economy, we need to divert available credit to productive uses. Supporting asset values is an unproductive use. I would suggest that many see high house prices as a burden on competitiveness. Perhaps such people see low prices as a key element to a successful and sustainable economy.
I think it’s unfair to suggest they’re “absolutely longing for a complete economic collapse.”
September 2nd, 2009 at 10:35 am
“…not to mention a well-known news site, whose editor frequently posts here, to realise that there are a very large number of people in Ireland who are absolutely longing for a complete economic collapse.”
I’m not going to engage in ping-pong on this ignorant echo of others.
Suffice it to say that it’s quite a charge from behind the shield of anonymity, to say I wish that my income be cut further and hope for more misfortune on the population.
September 2nd, 2009 at 10:46 am
David McWilliams has an article in today’s Independent here:
http://www.independent.ie/opinion/columnists/david-mcwilliams/nama-money-pit-could-be-our-economic-stalingrad-1875206.html
In short he points out that those who predict disaster if NAMA is stopped simply do not understand how international finance works.
@ zhou_enlai
It’s hard to know where to begin with your post. It’s been pointed out that Lenihan’s citing of the ‘markets’ view’ justifies a putative valuation level ignores the fact that the information the markets are basing this view on is Lenihan’s own decision to promote NAMA. He is watching them and they are watching him. Now if you can’t understand the basic logical fallacy from Lenihan’s reasoning then there’s not much that can be done to reason with you. Hence I have to question who you are working for.
I take your comments and, where possible, convert them to plain English. Where I don’t understand them then I indicate that that is the case.
You say
[1. If the banks have provided the Minister with information which suggests that the banks are solvent then it is very difficult for the Minister to plunge feet first into a nationalisation as it will likely entail a large cost in shareholder equity if the banks are solvent.]
This means: Because management of banks have told the Minister they’re not broke then it makes it more likely that they’re solvent, yes? You don’t see a possible problem with this logic do you?
You say:
[2. If the banks say they are solvent then they are misleading the Minister then the Minister needs their assistance and cooperation to ascertain for certain the truth of their statements.]
What? IF the banks are lying to the Minister then (because they’re lying?) he will need their help in figuring out whether they are lying or not. That’s what you mean, right? You don’t see a possible problem with this logic do you?
You say:
[ The mechanism for this is NAMA. If the banks turn out to have been misleading the Minister (wittingly or unwittingly) then they should end up nationalised ..... valuing the debts on a voluntary basis without any legal avenue for shareholders to come back at him.]
OK so the real ‘value’ of the loans is best determined by a committee of NAMA/Banks/DoF….? I think maybe you should include Mary Robinson also. Your Chinese namesake had a better grasp of economics than this. The value of the debts is determined by what the underlying collatoral can fetch in the market plus the prospect of any stream of repayments on the loans…minus a likely profit for whoever buys them.
You continue:
[ He also has managed to clean up the books of the newly nationalised entity in a credible fashion with the result that it can be re-floated more quickly thereby minimising any period of uncertainty.]
OK so you’re saying all this NAMA process is just to help the sharholders and bondholders because nationalisation wil work anyways if he needs to go that route, yes? You don’t see a possible problem with this logic do you?
You say:
[3. The Minister was at all stages at pains to say that he was operating on the information given to him. He clearly said that if the NAMA process showed the information to be true then the banks would not be nationalised 100% BUT if the information turned out to be wrong then the valuation process would ascertain that (as it would ascertain if 75% LTV at peak is not accurate) and the banks may be nationalised.]
In plain English. The minister says the information he has from the banks is good and if it’s not then on a case-by-case (loan by loan) basis they will use discretion and decide to pay more or less. The scales have fallen from my eyes Zhou. The only question worth asking about is what could possibly go wrong?
You then quote the Minister:
[..... It should be remembered that to protect the taxpayer one must have a detailed statutory valuation of each loan for the purposes of this exercise. If there are matters which these institutions have concealed from the markets, rating agencies and the detailed stress testing in which PricewaterhouseCoopers, my Department and the NTMA have engaged over the past year, which successfully evaded capture from all this analysis and which emerge in the statutory valuation, then they would have an effect and an impact on the valuation of these banks.”]
So you’re saying that the PWC, the DoF, NTMA….NAMA….(Mary Robinson…?) will be able to figure out the real value of one of the largest loanbooks / property plays in the world in a dynamic market and ensure that the tax payers’ interest is protected – do I have that right? You don’t see a possible problem with this do you?
Then you the Minister further:
[“...I am imparting to the committee the information I have amassed to date which suggests a 75% level. That information is provided in due diligence exercises and the PricewaterhousCoopers report. It is not new information established in the last few weeks. We must always guard against the over-optimism of financial institutions. That is why one must have a statutory process to undertake evaluations.”]
He’s saying that we need to guard against over-optimism [in valuation] which is why we need a ‘statutory process’. You don’t think that he might be begging the question? You don’t see a possible problem with this logic do you?
Then you get – as you put it – a ‘bit dramatic’.
[‘ Your suggestion that the valuation is predetermined is a pretty serious allegation against the Minister and those people who have given evidence to the Committee on Finance and the Public Service to the contrary of what you are saying. I know you only say it because you are desperately concerned about the valuations as we all are.’]
In plain English: Karl, you have questioned the word of a Fianna Fail Minister and suggested that those who are giving him information may be self-intersted and unreliable. Clearly this is insane as such a thing has never happened in Ireland before. I know it’s because you are desperate but, for God’s sake man, pull yourself together.
You continue the good-cop / bad-cop attempt to intimidate Karl Whelan as follows:
[However, what you are suggesting could be taken to suggest that
- the Minister and/or his agents have decided that they are going to skew the valuations to achieve the result of no nationalisation come what may..]
Yes Zhou, that’s what is being suggested. It’s like The Matrix isn’t it? I mean Karl whelan and the rest of the 46 are mentally deranged.
[- that they are going to do this in contravention of EU Commission Guidelines, in contradiction to what they have said in public and in total contradiction to what they have said to the Dail Committee....That is an allegation of huge bad faith towards the Oireachtas, towards tax-payers and towards the EU. ]
Yes. To Question the good faith of the government on this matter is to insult taxpayers and, worse, to insult the EU. Clearly Karl you have lost your reason.
[To what end would they act in such bad faith? What motivates them? It can’t be politics because FF’s political future is possibly wholly dependent on being seen to have championed the public against the interests of banks and developers.....It really baffles me that such a suggestion can be made without serious evidence to back it up. It is all based on rumour and supposition and extended extrapolations from Ministerial statements. ]
This means: what’s in the interest of the public is in the interest of the Fianna Fail party and, therefore the Fianna Fail party simply cannot act against the interest the public. You don’t see a possible problem with this logic do you?
Then you continue
[Let’s say the banks are actually insolvent and the shareholders should be wiped out. If that were the case then there are plenty if third parties who have good reason to promote a rumour of bank solvency.]
But if they were ‘actually insolvent’ then ‘promoting rumours of bank insolvency’ can also be called dissimenating accurate information.
You continue…
[It is not beyond belief that the same “denial” they suffered form before is at work again. If that is the case then how is the Minister to know to second guess the banks prior to NAMA process begins and where is the benefit in second guessing them if it’s all going to come out in the wash anyway?
This is hugely serious and hugely political. I would email you this in private except I wonder would you think I was making some kind of subtle threats as I am clearly a politicised poster. As it is I am happy enough if this is not shown or is deleted as I believe that you Karl are acting in good faith and out of concern for your country. ]
Zhou – at this stage I’m losing the will to live. I have never in my life read such self-serving, circular-drivel. Your appeal to patriotism at the end of this crap confirms my worst fears. You are either very very naive or are simply part of a disinformation campaign run by the the state to write this rubbish – which is it? Who is paying you? Or are you living in a basement suffering from auto-induced Stockholm syndrome.
September 2nd, 2009 at 10:53 am
When I read Comrade Chou post this morning, it reminds me of Lord Denning’s “appaling vista” judgement. For the Police to frame & beat up the Bermingham 6 would have been a crime. Police don’ commit crimes so it did not happen.
On another note, for all the proponents on nationalisation, look at the Anglo/Carroll transaction. Why is our bank lending our money to an insolvent builder to build a Taj Mahal to the bubble on the banks of the Liffey. Is this not a real state funded bail?
September 2nd, 2009 at 10:55 am
back on topic..
from the transcript “Mr Lenihan: …the protection of the taxpayer is paramount”
At the risk of being labelled an expert, if protection to the taxpayer is paramount, why not try to make a profit for the taxpayer? If Lenihan thinks he’s getting such a good deal, why not push home his advantage and at least maximise a large equity share in the banks (95%+). Why not maximise taxpayer returns?
September 2nd, 2009 at 11:00 am
Can I just put in a little 2 cents worth, and hope it does not derail the thread.
I was watching TV last night, and there was a re-run on E4 of the movie “Enron: The Smartest Guys in the Room”.
This brought to mind whole fantasy model of LTEV.
Mark-to-market or fair value accounting a la Enron:
http://en.wikipedia.org/wiki/Mark-to-market_accounting
“As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available or the asset value was derived from other traded commodities, such as crude oil futures), so assets were being ‘marked to model’ in a hypothetical or synthetic manner using estimated valuations derived from financial modeling, and sometimes marked in a manipulative way to achieve spurious valuations.”
I think it is instructive to look at the quote above, and apply it to Assets in the Irish Property Market, and the so-called LTEV model being proposed for NaMa.
One short section of the movie shows a skit video presentation involving Skilling, made by Enron itself, where Skilling mentions that they, Enron, are moving from Mark-to-Market Accounting to a new Hypothetical Future Value model which would boost Enrons profits into the Stratosphere.
The joke, of course, is that Enron’s mark-to-market method of accounting (which was approved by the once-trusted gatekeepers known as Arthur Andersen and the Securities and Exchange Commission) was actually just that: outlandish predictions about future profits on such business schemes as trading weather derivatives, booked as if they were current earnings.
http://www.commondreams.org/views05/0608-21.htm
Enron: The Smartest Guys in the Room
http://www.imdb.com/title/tt1016268/
Does anyone feel that we should learn lessons from Enron and the outcome with that company.
Does LTEV = HPV in the Irish Property MArket.
September 2nd, 2009 at 11:01 am
@John
(a) Those who oppose NAMA blah blah blah
(b) Those who oppose NAMA…
There are many reasons for opposing NAMA.
Mine is
(c) Those who oppose NAMA because it is organized fraud.
I do not believe it will succeed in restore lending to anything like even 2002/3 levels, let alone 2006… Fraud tends to only enrich a small minority at the expense of the majority
To borrow tens of billions and GIVE them to the banks in the hope the banks may lend us back a few hundred million is either stupid or corrupt, take your pick.
NAMA is a doomed attempt to have us end up with the highest property and land prices in Europe, with the highest amount of empty and partly built accommodation per capita, with almost the lowest population density in Europe, and now climbing towards the highest unemployment rate!!!….Classic FF gangsterism to look after their cronies who have been bribing them for years at the expense of the common good.
If you want to restore lending, then put a policy in place where money is handed over conditionally… it is that simple…. This talk of NAMA being designed to restore credit is bollocks; playing on the fears of ordinary business people in order to bail out banksters and developers.
September 2nd, 2009 at 11:02 am
One more point. @Zhou_Enlai. Zhou do you really think that the onus is on the critics of NAMA to prove with ‘evidence’ why the biggest financial gamble in the history of the state is worth taking whilst it’s ‘unpatriotic’ of its opponents to question the claims being made by its promoters. There is simply no reason for you to remain anonymous. I mean it’s not as if supporting NAMA is going to harm your career in this country now is it?
I call everyone’s attention to Constantin Gurdgiev’s post where he says of the claimed intention of NAMA:
‘Nama will aim to guard the interest of the Irish state. Now, the State does not have the existent allocated means for such an undertaking, so to pay for Nama, it has to use taxpayers’ money in an emergency draw on resources. Since the Irish State is not spending on Nama the money that belongs to it, why should the State interests be protected by Nama and not those of the payee, i.e the taxpayer? Of course, the only way that Nama legislation makes sense from the point of view of protecting our property rights and liberty is if State interest = Taxpayer interest. This is, alas, not so. Irish State under the current Government has been run as a thiefdom of public sector unions and vested interest groups. This, of course, is not and should not be of concern to the ECB. But it should be of concern to ourselves, the taxpayers, and to the opposition.’
Ergo the ECB and IMF ‘endorsements’ of government policy are endorsements by groups that have no (immediate) stake or interest in whether the government robs taxpayers or not. I don not know why Gurdgiev is not part of this group.
September 2nd, 2009 at 11:11 am
Sorry, final piece should have read:
Does LTEV = HFV in the Irish Property Market, as in the Enron “skit”
September 2nd, 2009 at 11:14 am
the really disappointing thing is the lack of a serious, logical alternative from fg/lab. since they will almost certainly inherit this mess they should be pushing to generate ideas of their own.instead they seem to be afraid of saying the wrong thing.
September 2nd, 2009 at 11:18 am
@PMcD
I don’t rate you as a paraphraser. I suggest that people read my original post without your interjections if they are interested in what I said. I won’t address the bulk of your comments which are reminiscent of another website to which I don’t intend returning.
The only substantive point you made was that the share price represents the markets watching the Minister. Colm McCarthy said the same thing on the radio yesterday. It is a view I am inclined to myself.
The Minister’s point about the market suggests to me that the markets judgement and their gamble on NAMA is makes it difficult to nationalise now and complicates any pre-emptive nationalisation greatly. In particular they complicate the post-nationalisation valuation of any bank assets and assessing what the long term values of bank shares would have been.
This constrains the Minister’s actions whatever he may suspect about balance sheets himself. Also, the Minister must be cognisant that any suspicions he may have are suspicions only and are not a sound basis for pre-emptive nationalisation.
However, the Minister is not letting the banks away with this based on their word.
If the Minister and the markets thought the banks were credible enough then the Minister could decide to ask the banks to write down their assets now themselves to the full extent in exchange for recapitalisation them. The banks would love that. However, neither the Minister or anyone else has that amount of faith in the banks. That is the reason for a bad bank solution.
Unfortunately, it is becoming apparent that the credibility problem of the banks which the bad bank is supposed to solve is now being projected as a credibility problem for Government and the bad bank process. This leaves us in an endless loop.
How do we get out of this endless loop? My answer is that we must adjust the legislation to satisfy the public that the concept of long term economic value will not be false or excessive. How does one do that? One must have a public debate and one must allow the opposition parties to have greater input to the Bill than would be normal. I think we are started on this process.
I think everybody is agreed that we need to avoid false overpayment. For my part, I have endorsed NAMA 2.0 from when the original article was published.
September 2nd, 2009 at 11:19 am
So what? We have know-nothings running the country. Tell us something new.
It should have been quickly pointed out to Mr Lenihan that just because something has a positive price, doesn’t mean it has a positive expected value - try lottery itckets as just one example.
Risk and uncertainty are at play in pricing and in this instance the fact that a range of potential positive outcomes for shareholders are being left wide open by NAMA, the liability guarantee etc. is buoying the price.
Sometimes known as “option value”
September 2nd, 2009 at 11:19 am
Bravo Paul MacDonnell.
September 2nd, 2009 at 11:29 am
@Zhou
Ok - you pose lots of questions, many provocative and thought provoking that move the debate along. Can I pose one back? What, based on your evident considerable knowledge and informed opinion of the irish banking system, do YOU consider should be the aggregate discount on the entirity of the portfolio of loans transferred? Say that face value is 85b…What would youpay? No prevarication, no hedging. What would you pay?
September 2nd, 2009 at 11:32 am
@ John
“That is what, according to Lenihan, NAMA is designed to achieve. I (along with probably 99.9999% of the population) lack the technical expertise to know whether he is correct or not.”
I think your 99.9999% is incorrect. If the population over the age of 14 is (say) 3,300,000 that only leaves three people who have the technical expertise. A freighting prospect I think you’ll agree and in itself good reason not to proceed.
September 2nd, 2009 at 11:40 am
@Zhou_Enlai . My post used about 95% of your post and I commented directly underneath your comments - which were cut and pasted. I have some difficulty with your logic. Perhaps English is not your first language so I am prepared to assume that you’re trying to be honest in your analysis. But, for example, you just wrote:
[The Minister’s point about the market suggests to me that the markets judgement and their gamble on NAMA is makes it difficult to nationalise now and complicates any pre-emptive nationalisation greatly. In particular they complicate the post-nationalisation valuation of any bank assets and assessing what the long term values of bank shares would have been.
This constrains the Minister’s actions whatever he may suspect about balance sheets himself.]
Now this is, quite simply, nonesense. I don’t mean ‘nonesense’ as in I disagree with it. I mean ‘nonesense’ in that is an attempt to present corrupt Potemkin scheme as if it’s real finanance. For example you refer to the ‘markets judgement and their gamble on Nama’….But the markets aren’t ‘gambling’ on Nama. Nama will convert the bank debt into government debt which will live in the ECB.’
You present all the other stuff…analysis, write downs…etc…etc…all process as if it’s based on anything. But it’s not. It’s all as real as Enron.
You say that we must find long-term economic value by ‘having a public debate’. I mean what is one supposed to say to such complete and utter nonesense.
September 2nd, 2009 at 11:45 am
@ Luke
Pay more attention!
Labour have argued for Nationalisation for months now. Similarly as far back as May (or earlier?) Fine Gael’s “good bank” plan was out in the open. The disappointment you describe is not due to a lack of alternatives from the opposition, but rather due to your own failure to pay attention.
September 2nd, 2009 at 11:46 am
@KW
I have to ask your indulgence, but the economics in this case can only be seen through the politics, and the politics are not the high-minded stuff found in The West Wing. The stakes are large and those with most to lose know how to fight. Beside smoke and mirrors, not to mention blood capsules , thay have the entire state apparatus under their control.
And surely an analysis of the motivation of the principal players is central to this aspect of economics.
@Zhou
Firstly, I am Maurice O’Leary and, as you know, I live in Drogheda.
You hit the nail on the head.
” Your suggestion that the valuation is predetermined is a pretty serious allegation against the Minister and those people who have given evidence to the Committee on Finance and the Public Service to the contrary of what you are saying. I know you only say it because you are desperately concerned about the valuations as we all are.
However, what you are suggesting could be taken to suggest that
- the Minister and/or his agents have decided that they are going to skew the valuations to achieve the result of no nationalisation come what may, and
- that they are going to do this in contravention of EU Commission Guidelines, in contradiction to what they have said in public and in total contradiction to what they have said to the Dail Committee.
That is an allegation of huge bad faith towards the Oireachtas, towards tax-payers and towards the EU. To what end would they act in such bad faith? What motivates them? It can’t be politics because FF’s political future is possibly wholly dependent on being seen to have championed the public against the interests of banks and developers. ”
The Minister is overriding economics for political reasons - it is the only rational explanation for a policy that needlessly transfers losses to the taxpayer.
Those reasons dictated to Dr. Bacon to avoid nationalisation at all costs.
Those reasons dictate the valuation formula - quite why the detail is kept secret to at least September 16th is beyond me.
Those reasons are why they will sign whatever cheque is necessary.
FF has been repeated re-elected despite been seen as the builder party.
They accept that they will lose the next general election but they have no doubt that they will win the following one.
Mr. Mulcahy could have told them from looking at his charts of election results going back 76 years that FF always return to office after one term in opposition. The party may do badly in a fire-sale general election in Novemeber 2009, but there is real long-term economic and electoral value to be had and the party will bounce back to power in less than 5 years.
So what are these political reasons - the self interest of those people who “advise” FF.
September 2nd, 2009 at 11:54 am
@ John
“However, for GDP growth to resume at its pre-recession rate, we need, not just exports to do well, but bank lending to be restored, if not to its previous level, then certainly to well above its current levels.”
What is the current level of bank lending relative to “previous levels” and what level would you suggest it should be to ensure no repeat of a credit fueled bubble economy? Also, why do you believe that NAMA is the only possible method of credit creation in the Irish economy?
September 2nd, 2009 at 12:18 pm
@zhou_enlai
“How do we get out of this endless loop? My answer is that we must adjust the legislation to satisfy the public that the concept of long term economic value will not be false or excessive. How does one do that? One must have a public debate and one must allow the opposition parties to have greater input to the Bill than would be normal. I think we are started on this process.”
A public debate would be useful if we are given all the information available to the Minister. There is no apparent reason why this information could not be provided.
September 2nd, 2009 at 12:23 pm
@ John
September 2nd, 2009 at 9:57 am,
I have posted on a previous thread that a vehicle of some sort is required.
I oppose NAMA not because it is a vehicle. You could call it Securum or Resolution Trust. It makes no difference.
I oppose NAMA because the vehicle is being used to transfer all of the risk to the citizen.
Can you see anything wrong with the State getting warrants for 40%/50%/60% of the equity of the failed credit institutions as part of the deal?
On additional section added to the bill would cover this.
If the failed credit institutions believe they can raise capital at a competitive rate elsewhere so be it.
September 2nd, 2009 at 1:00 pm
@zhou
“Unfortunately, it is becoming apparent that the credibility problem of the banks which the bad bank is supposed to solve is now being projected as a credibility problem for Government and the bad bank process. This leaves us in an endless loop.”
The credibility problem for the government is of their own making. By consistently making statements that they will not nationalise, the government appears to have prejudged the process.
Moreover, by inserting LTEV into the valuation process, we end up with a situation similar to the benchmarking process - in fact the NAMA process has alot in common with benchmarking. We all know that LTEV will not lead to paying less than market value!
The NAMA plan appears to have at least two underlying assumptions. First, property prices, particularly development land prices, are currently affected by liquidity/ crisis conditions and will recover/stabilse. Secondly, that nationalisation will have funding effects on the banks and/or state.
Are FF acting in bad faith? I think it is difficult to put a motivation, such as bad faith, on a group as large and diverse as FF. However, it might be the case that some people in FF think that nationalisation is a reckless risk and they think it is better to overpay for assets then risk a funding crisis. This is a difficult message to sell, so instead they just argue that they arent ovepaying.
September 2nd, 2009 at 1:06 pm
@Greg
Where did I say that ‘NAMA is the only possible method of credit creation in the Irish economy’?
I don’t think I said any such thing. I said that Brian Lenihan was claiming that NAMA was the best mechanism for restoring bank lending, but that I lacked the technical expertise to know whether or not he was correct, and I requested opponents of NAMA to say whether their alternative proposals would do the job better and, if so, to explain why. I’m a statistician, not an economist, and I freely admit to knowing very little about how NAMA works or whether it is the best mechanism for restoring bank lending.
Despite this, as of now, I’d vote for NAMA, for the following reason:
Prior to the announcement of NAMA, all the economic indicators were getting worse. Since the announcement of NAMA, most of the economic indicators are getting better. In particular:
(a) Since March, the ISEQ is up 60 per cent.
(b) All the PMIs are up from the range 30-35 in March to 40-45 now.
(c) The Eurobarometer Survey (out today) shows confidence in the economy increasing.
(d) The ESRI Consumer Confidence Index is well up since its low in March.
(e) Consumer spending has stabilised, albeit at low levels, but much better than the precipitate falls that were occurring up to around Easter this year.
(f) Economists’ forecasts for the fall in GDP in 2009 are being revised down almost weekly. Back in March, the consensus forecast was around 9.5 per cent. Now its in the range 7 to 7.5 per cent. BOI today forecast 7.0 per cent, the lowest yet. I’m sure in the next few weeks the consensus forecast will fall to around 6.5 per cent, and continue falling.
(g) Merchandise exports increased by 10 per cent in volume between 2008 Q4 and 2009 Q2.
(h) Manufacturing output hit a 15-month high in June.
(i) The number of monthly redundancies has fallen for 3 straight months, down from 8,010 in May to 5,914 in August
(j) NTMA bond sales have gone exceptionally well and confounded gloomy forecasts.
(k) The gap between yields on Irish bonds and German bonds has narrowed dramatically since March, just prior to the announcement of NAMA.
(l) Most important of all: the rate of increase in the number on the Live Register is slowing dramatically. The August figures (just out this morning) show the smallest monthly increase for nearly 2 years (a seasonally-adjusted increase of just 5,400 in August compared with 30,000 a month at the start of 2009). According to Ronnie O’Toole, who often posts here, the average number on the Live Register in 2009 will now be nearly 10 per cent lower than even the Government forecast in April.
http://www.rte.ie/business/2009/0902/jobless.html
It may be that you will say this is entirely co-incidental and nothing to do with NAMA. I don’t know enough about NAMA to say otherwise. But, if you bring down NAMA, can you be sure you won’t bring the situation back to what it was in March, just prior to the announcement of NAMA? Why take the risk?
September 2nd, 2009 at 1:07 pm
@zhou
“what you [KW] are suggesting could be taken to suggest that
- the Minister and/or his agents have decided that they are going to skew the valuations to achieve the result of no nationalisation come what may”.
B Lenihan: “the Government is determined to avoid nationalisation at all costs”
There’s an awful lot of intense, complex analysis going on - but, I’m afraid, it really is that simple.
September 2nd, 2009 at 1:27 pm
Minister Lenihan might learn something on bank shares from a report in the New York post today -
“First there was the dead-cat bounce — and now there’s the Dick Fuld bounce.
Nearly a year after its spectacular collapse, trading activity in the now-defunct Lehman Brothers has begun spiking, with volume surging to 50 times its normal levels over the past few days.
On Monday, some 125 million shares in Lehman Holdings, as the bankrupt company is now called, changed hands, compared with a meager 2.5 million shares that traded last Thursday.
Meanwhile, the stock, which is traded on the over-the-counter market, has seen its price go as high as 32 cents. It bounced between 3 cents and 5 cents in the month leading up to the surge. It closed yesterday at 15.5 cents.
Traders speculate that the run-up is fueled by a belief that the bank, which still houses billions in soured mortgage assets and esoteric derivatives, may have enough juice left in it to return at least some money to shareholders”
September 2nd, 2009 at 1:50 pm
The issue Karl has raised again illustrates the limitations of Irish democracy.
Ministers use outlets where there is minimum scrutiny to make a case to the public.
The Dáil format is useless in forensically pinning down ministers who usually have the protection of the ceann comhairle.
Most of the members of the Oireachtas committee on Monday would be incapable of dealing with an issue that is outside their regular messenger role, while the small number who were competent, had limited time to probe the subject.
To ministers, RTÉ Television is their main media outlet but it’s rare or never that a minister is available for a long forensic interview. The politicians call the tune despite what RTÉ staff would like to believe.
Ministers are also aided by journalists who outside of the business/finance area, have no interest or knowledge in the detail of such issues as NAMA.
So it’s the theatrics rather than the detail the engages the likes of Fionnan Sheehan.
As regards, Garret FitzGerald and the fear of the IMF arriving, it would likely have been a good thing, if it had happened during his own administration - - while acknowledging that it was FF who had put the economy on the road to ruin, in human terms, having responsibility for destroying people’s lives.
September 2nd, 2009 at 2:32 pm
@Bart Gilmartin.
I fully agree. The arguments against NAMA are so strong that the only risk of NAMA actually happening is if those that oppose and are being heard cannot get the message across clearly. As is, the opposition is a bit on the defensive and distracted by calls from NAMA supporters to provide an alternative.
Agree on the arguments against and then it should be easier to see the alternatives. My personal preference is to nationalise. There is no need to make it more complicated by introducing NAMA 2.0 or the FG alternative.
As for the comments from the Minister, I hope that the Zoe case will give a clear answer as to exactly what the value is of the loans and consequently an indication of the value of the banks.
According to the Zoe defense team, Zoe can’t make their interest payments. From that it is possible to assume they can’t make capital repayments either. They state that the rents & dividends are expected to increase of the next couple of years. I’m a tenant in one of the concerned properties, my lease expires at the end of October. I’ve spoken with their representatives, almost 20% reduction in rent would be the result today (their initial guess last week). I’ll be asking for more than 20% when the discussions start. I believe other tenants and commercial lease holders will do the same. Maybe the decrease in yield can be compensated by increased volume but then the value of the property should decrease.
The interest rates might go up, down or stay the same. If there is a risk premium I expect the rates to go up for Zoe.
The banks might be about to crystallise losses because of the Zoe case. If Zoe loses then I believe massive revaluations of property might be necessary in Ireland. Some more developers might become insolvent. The banks may or may not be solvent if that were to happen. If the banks were to become insolvent, then someone willing to take over all their assets and liabilities should be able to do so on the cheap.
Proponents of NAMA says that the losses expected are to be larger than the banks current capitalisation. The losses might be unevenly spread leaving some banks still standing. Reject NAMA, then the true price of nationalisation (insertion of equity) will come to light.
September 2nd, 2009 at 2:50 pm
On Garret vx. KW today on Newstalk I would like to say that Garret always had, like most of Fine Gael have now, this fatal Bond-Villain flaw when it comes to attacking their political enemies. They devise fiendishly complicated, over elaborate and easily escapable ways for their opponent to die and then stand aghast as he breaks free. Such was Garret in the 1980s and such are FG’s proposals instead of NAMA now. But the good side of this disposition from the point of view of Garret is, now that the stakes for him couldn’t be lower, he gets to indulge his love of big government. And government doesn’t come any bigger than NAMA. It enables him to exude concern and intelligence to his core supporters and when obfuscation, false leads and empty syllogisms are called for by a political establishment under threat then he is great to have around. The fact that he’s sincere makes him indispensible.
Garret likes NAMA for no other reason than that it enhances the role of government which, in principle, he supports. Fine Gael oppose NAMA for no other reason than that it has been proposed by Fianna Fail. Their morality is opportunistic. Garret has zero faith in markets and would not understand the moral hazard argument. He suffers from the same confirmation-bias that afflicts all those who propose state solutions.
The commentariat in the papers and a few bloggers - even some here - stand by as slack-jawed yokels, too easily impressed with the fact that he sounds posh and is called ‘Dr’ Fitzgerald.
Just as the slack-jawed yokel in a Hollywood block-buster would say when their hero kills the villain / wins the court case / gets the girl something like ‘He has made us believe in ourselves’. So upon reading Garret’s articles on NAMA the slack-jawed pundits say ‘We are where we are. Garret is right’. It’s a statement you hear a lot of these days. It’s designed to simulate and convey informed realism, sober assessment with a touch of gritty optimism. What it really means is ‘I’m a member of my local golf club, can’t be bothered to read too much into the analysis of NAMA and, because I’m not an extremist, I don’t believe in confrontational politics.. but I want to fit in.’ For example. Look at the comments on the Irish Times site today in response to Sean Barret’s excellent article on NAMA.. Someone called Ned O’Keefe writes ‘…We are where we are and now well down the NAMA road. Sean Barrett should stick to teaching and leave governing to Government.’ I mean is that it? Aren’t NAMA supporters not embarrassed by such dodgy support? It’s a rehash of the old 1930s engineer / expert-led economy argument. And so the peasants all nod in agreement, tug their forelocks and get back to toiling in the fields whilst the expert from the Big House / University decides what’s best.
The approach of all those who support NAMA, as with Zhou_Enlai here, is to keep setting up strawmen, answering questions that only they and no one else cares to ask. It becomes easy - having thus set up such straw men to knock them down and ‘win’ the argument.
The Indo last Sunday was a disgrace in this regard and also today. The argument has been reduced to winning the argument and not the substance. It’s as if the 46 economists are engaging in a debate about - well - nothing. There is a nihilism at the heart of Irish public life and those who embrace it, turning a blind eye to the carnival of institutionalised corruption that NAMA represents, cast themselves as realists and patriots. Hence we get Zhou_Enlai’s comment ‘…in particular they [market's judgement] complicate the post-nationalisation valuation of any bank assets and assessing what the long term values of bank shares would have been.’ - pseudo observations of unreal things - subtle questions that seem designed to cast light on important detail that nobody else would ask. But the truth is no one else would ask because the questions have no relevant or even interesting answers outside the closed-system group-think that NAMA proponents live in. Their real purpose, as with much of the discourse on NAMA, is to provide corollaries to the invalid syllogism that lies at its heart thus they are the raw material out of which the a Potemkin Financial ‘debate’ is constructed and out of which the Potemkin financial system that is NAMA will be constructed - a system whose only real purpose is to defraud the citizens.
September 2nd, 2009 at 3:10 pm
Step out of the office and I come back and find you guys are on the rampage! Can we calm down a bit guys? Particularly on the Garrett and Zhou bashing.
@John
Your question about will NAMA work in getting lending going again is a good one and you’re right that it probably hasn’t been debated enough here. Indeed you’re right that I suspect it won’t. I don’t have time to get into this a bit more but my reasoning is still pretty much the same as this passage from the old 20 guys piece back in April (remember the 20 guys? Ahh, the good old days. Compared with the national traitors that are the 46 guys, the 20 guys were patriotic warriors.)
Quote below:
There is thus a fundamental internal contradiction in the Government’s current position. The Government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership.
These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if Nama purchases the bad loans at a discount – but still well above market value ….
With the Nama process charged with meeting the three mutually contradictory objectives above, it is also possible that objective (b), recapitalising, will not be fully met. In other words, a Government that needs to be seen to purchase the bad assets at a reasonable discount and that does not want to take too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, this process may continue to leave us with zombie banks that still require the State-sponsored life-support machine that is the liability guarantee.
September 2nd, 2009 at 3:27 pm
@John
I swear if I hear the phrase “the rate of increase/decrease (depending on the stat being quoted) has slowed,” again I am going to go and live in a cave. It has fast become the cliche of 2009. It is such a typical PR person’s phrase and way of pushing bad news to an easily fooled public.
Whatever the ‘it’ is, it is still increasing/decreasing.
Do you think the 5,914 made redundant last month care about the selected use of statistics and language?
Tell me about some of your other economic indicators as you seem happy to use them. Is government debt increasing at a slower rate? Are the number of jobs actually being created increasing? Are the number of longer term unemployed decreasing? Is the tax take increasing? Is the social welfare bill coming decreasing? And so on.
A Eurobarometer survey or the ESRI Consumer Sentiment Index are not hard data. They are not much more than opinions.
I think your take on things is a little ‘rose tinted’ at best.
September 2nd, 2009 at 3:29 pm
@ Karl I think that NAMA is Ireland’s Enron. I don’t say this to be alarmist but to point up remarkable psychological similarities in the group-think surrpounding both enterprises. First you have the notion that an ‘inner-core’ of experts, financial wizards, have it all figured out. Then you have people with a stake in the firm - whose pensions are tied up and whose financial futures rely on it surrounding them. And then you have its importance to community wherein its based. John’s post above is an excellent example of this. He’s like the guy at the back with torch saying ‘I don’t know if he’s guity or innocent but I say let’s not take a chance. Let’s go to the old mill and find out’.
Now let’s be honest. NAMA will not fail. Simply because it will be a government enterprise. So a good question to ask is whether we can construct a Popperian falsifiabiilty test for it. Let’s ask all those in favour of NAMA what, in their view, are the criteria for failure - perhaps any or all of the following:
1) Irish goverment debt gets more expensive?
2) Irish banks don’t lend to medium-sized enterprises?
3) Ireland’s economic performance remains below EU trend for 2-5 years?
4) 20% of under 30s emigrate in next 2-5 years.
5) 60% of university graduates emigrate in next 2-5 years.
6) Property values do not recover in NAMA-defined timeframe?
September 2nd, 2009 at 3:40 pm
I apologise for the fact that my long post has gone in a number of times. I posted it and, when it hadn’t appeared 10 minutes later, I posted it again. Then, a third time 10 minutes later when it still wasn’t there. Maybe, I should have been more patient. I thought all posts went in instantly. Maybe long posts take longer and have to be moderated by somone?
September 2nd, 2009 at 3:47 pm
One of the signs that we have group think in NAMA is the appeals to ‘confidence’ and ‘patriotism’. Also there’s the motivational / threatening / intimidating turn of phrase. The argument:
1) We are in the deepest crisis in the history of the state.
2) The ‘only game in town’ to solve this is NAMA.
3) If you oppose NAMA then you are guilty of treason.
It’s very hard to win against that kind of argument and whether they admit it or not 1, 2 and 3 are the steel core at the heart of the Pro-NAMA argument. Take them out and all you have are vested interests helping themselves to taxpayers’ money and avoiding the consequences.
It’s like when the young rich kid tries too hard to kiss Marge Simpson - breaking the strap on her dress - and he says ‘Please don’t tell anyone about this. Not for my sake you understand but for the sake of the reputation of the town’.
This, basically, is the logic of the pro-NAMA argument.
September 2nd, 2009 at 3:58 pm
@ marcus
i said a serious attempt to solve this mess. enda kenny couldn’t even be bothered to understand fg’s plan.
September 2nd, 2009 at 3:59 pm
It’s already been pretty well establshed that the NAMA numbers don’t add up. Hence we should examine why those who support NAMA against all reasonable evidence choose to do so. I suspect it’s because being an outsider in Ireland right now is very frightening. It’s better to be seen to be part of the communal effort to ‘reconstruct the economy’. As I say above this also requires a faith in ‘financial experts’ and hunting down all opposition. An example of the latter is Fionnan Sheahan in today’s Independent. ‘The much-hyped 46 anti-NAMA economists are now something of a toxic entity themselves. After getting strips torn off them by former Taoiseach Garret FitzGerald for their irresponsible appreciation of figures, they have now gone to ground.’ This is classic propaganda. Sheahan has designed this sentence to assure anyone who is in any doubt about NAMA that its critics have no ‘expertise’ and that this has been exposed by Garret Fitzgerald. You can be sure that Sheahan has no grasp of the details of NAMA in particular or of finance in general.
September 2nd, 2009 at 6:21 pm
“Compared with the national traitors that are the 46 guys, the 20 guys were patriotic warriors.”
As Leonard Cohen sang “Ah you loved me as a loser, but now you’re worried that I just might win”
September 2nd, 2009 at 6:24 pm
@ Brian, Karl
As advocates of temporary nationalisation, do you get worried when you see a state bank throw 68m euros at an insovent property deveolper to build a Hq for that bank, presuambly at bubble building costs. Is this not a developers bail out.
September 2nd, 2009 at 6:53 pm
@ John
September 2nd, 2009 at 1:06 pm
“Where did I say that ‘NAMA is the only possible method of credit creation in the Irish economy’?
I don’t think I said any such thing. I said that Brian Lenihan was claiming that NAMA was the best mechanism for restoring bank lending,…”
My apologies John.
Given that you stated you did not have the technical expertise I should have phrased that as “Do you not think that there might be other ways of getting bank lending on the move again?” Or some such.
John, I’m not an economist or a statistician. But I think there are other ways. I think NAMA is a pig. And putting the lipstick of elaborate valuation methodologies on it won’t change its nature. It is still be a pig.
The reason I believe it is a pig is that it transfers ALL of the risk to the Citizen with none of the reward.
By definition, if implemented in current form, the equity value (and share prices of those publicly quoted) of the failed credit institutions will increase. I would expect the share prices of AIB & BofI to rapidly rise to a range of €7/€10. The reason they will increase is that the risk has passed from their balance sheets. I’m not at all convinced by talk of levies. In ten years from now the banks will be able to make the case that the introduction of levies would damage credit formation and therefore is not in the public interest.
The Citezen, through the State, should share in this upside.
Why? Because if it doesn’t work generations of Citizens will pay.
I’ll get back to you of the stats.
In the meantime and again,
“Can you see anything wrong with the State getting warrants for 40%/50%/60% of the equity of the failed credit institutions as part of the deal?
On additional section added to the bill would cover this.
If the failed credit institutions believe they can raise capital at a competitive rate elsewhere so be it.”
September 2nd, 2009 at 7:01 pm
@JL
“do you get worried when you see a state bank throw 68m euros at an insovent property deveolper to build a Hq for that bank, presuambly at bubble building costs. Is this not a developers bail out.”
Hell yes. Id get worrried if it was a private bank also. BUT saying that Ango bad- anglo nationalised - nationalised bad is not correct. Nationalisation on a temporary basis, fire a boatload of people, hire in some canucks or dutch or ozzies, the nationalisation bill to have severe jailtime for any politician “directing” …..
September 2nd, 2009 at 8:07 pm
I have had meny experiences in this life but I never ever thought that an economist could make me laugh . Karl’s ‘ chinese ex-premier remark to Zhou was very funny . What next , daredevil accountants ? A humble banker ?
September 2nd, 2009 at 8:30 pm
@ BL
Give matches to a pyromanic and what happens? Give a bank specialising in lending to the property sector to a party dependant for support to that sector & what happens? give them 2 systemically important banks….like giving a warehouse full of matches and petrol to the pyromaic? Maybe we are better off with semi insolvent Zombie banks who serve no useful purpose.
I suppose Zhou will be along soon to defend the reputation of the current administration.
September 2nd, 2009 at 8:32 pm
@ JL
@ Brian
Sorry to State the obvious but Anglo is now State owned and has a “Public Interest” Director. I’m not sure that there is a definition of “Public Interest” in the companies legistlation.
However, what directors of Anglo have done is sanction €68m of a loan to a failed developer in order to influence the Judiciary in its decision, thereby attempting to stop the “market” determining value in plain sight.
Of course the directors of Anglo have done nothing wrong under company law. After all it is in the interest of Anglo that NAMA go through.
It won’t be a wet day in Ireland before Anglo dump that €68m on NAMA, along with the rest of Carroll’s garbage.
September 2nd, 2009 at 8:55 pm
Anybody any comments on the fact that a nationalised bank (Anglo) wishes to fund the development of its HQ without following public procurement guidelines. I’m sure there are other builders (nay even developers) who could 1) do it more cheaply and 2) would welcome the opportunity to tender for this work 3) Could do with a loan of €68M
Also interested to know whether Anglo would be in a position to obtain a tax clearance certificate in order to undertake these works.
Really looking forward to seeing the tender on e-tenders.gov.ie!
September 2nd, 2009 at 9:06 pm
Correction: previous post should have read Zoe obtaining tax clearance!
September 2nd, 2009 at 9:10 pm
@ Dave Ftiz
September 3rd, 2009 at 12:52 pm
@Greg
I will be debating NAMA with the Anglo Public Interest Director later this month in an open forum. Nice points to put to him. More please….:)
September 3rd, 2009 at 1:13 pm
@BL
Question#1-why are you extending the money to complete a building that will never be used?
#2 Can a director continue to sign off on loans when he knows the institution is insolvent
September 4th, 2009 at 6:10 pm
@ Brian Lucey
September 3rd, 2009 at 12:52 pm
I will get back to you by email.
Is this an appropriate email address.
brian.lucey@tcd.ie
September 4th, 2009 at 6:53 pm
Greg
Blucey@tcd.ie or the one you have there.
September 6th, 2009 at 8:41 am
[...] up on this post from a few days ago, I have written an article for the Sunday Independent discussing the Minister [...]