Ahearne on NAMA

Alan Ahearne has an article on NAMA in today’s Irish Times. Mostly, it’s stuff that’s hard to disagree with about the need to fix our banking system, something which those opposed to the government’s current strategy also wish to achieve.

40 thoughts on “Ahearne on NAMA”

  1. “Values for some properties might reasonably be expected to experience some uplift when the current extremely high cost of financing purchases of property eases.”

    Erm, I thought financing was super cheap these days? ECB rate @ 1%, EURIBOR rates are all way down. Only government bond rates are going up, does he expect the government to buy all these properties as their bond rate goes down?

  2. His arguments are as expected very good. However, it is still based on the assumption that property prices have bottomed out and will rise in 10-15 years.

    He is stating:
    -“Values for some properties might reasonably be expected to experience some uplift when the current extremely high cost of financing purchases of property eases.”

    Interest rates are low, I assume he might refer to high deposit required thus reducing the risk of negative equity. If the that is the case, then the banks themselves are execting further falls in property prices.

    I don’t think property prices have bottomed out. There is still an oversupply and the only way the prices could be upheld is if someone finances the cost of not allowing the markets to work. The banks are currently not calling in the loans and are thereby allowing developers/investors time to hope for prices to rise again.

    The banks are not doing this for free, they are getting interest. The banks, the developer/investor are doing this to protect their investment. If they had the possibility to finance this on their own the only argument against them would be that they are operating a cartel to the detriment of the consumer.

    The banks, developers/investors do not have the money to finance this. The state does. What is the benefit of distorting the market using NAMA for the State?

    Overpayment will keep the banks solvent. The state needs solvent working banks. Howver, it does not mean that overpayment is the only way to get solvent banks.

    The discussion isn’t whether or not NAMA can work, the discussion is whether or not it is the cheapest way to ensure working solvent banks.

    If the Swedish model is the best model that has been employed anywhere why is it now being modified?

  3. Alan’s article concludes with the observation that listed banks are required by stock exchange listing rules to furnish information, useful to potential providers of funds, additional to that required of unlisted entities.

    This is true, but not an argument against nationalisation, should that be necessary. The State-owned Anglo-Irish is now relieved of these reporting requirements and subject to less onerous (and less frequent) reporting as per the Companies Acts. But there is nothing to stop Anglo from continuing to report as if it were still listed, and if it keep lenders happy, it would be in the bank’s interest to do so. Similarly with any other bank that came off listing: the stock exchange listing rules about reporting could be cogged into the Act of nationalisation.

    There are arguments against nationalisation, but this is not a compelling one.

  4. If by “extremely high cost of financing purchases of property ” he means the initial deposit needed to buy a house then is he expecting banks to start supplying 100% mortgage again?

    Wreakless lending got us into this mess to wreakless lending will get us out of it?

  5. I disagee Mr. Whelan, I find many things to disagree with in the article. Most of it is assertions and assumptions. I don’t believe the assertions (about LTV and about otherwise viable businesses finding it hard to get credit, for example) and I don’t agree with the assumptions (that we have reached bottom in residential or commercial rents – the benchmark against which yield must be calculated).

    Furthermore, I think the idea that prices can increase in any way beyond the 2% average inflation the ECB will impose in the near/medium/long term is a positively dangerous assumption. If the problem we have is lack of competitiveness, banking on lack of competitiveness to get us out of it is surely not sensible?

  6. @jesper
    Spot on. AA, like Pat McCardle (surely a coincidence?) now argues with precision: assume the current level of the property market is the low, take as given the 75% LTV. Allow for the fact that not all lending was done at the peak. Assume peak-to-trough property fall of 50%. What they don’t say (but this is coming) is that gives a ~ 23% haircut on current loan prices and, via the implied hit to AIB equity, a ~48% government stake in that bank. And a smaller stake in BOI.
    Lots of assumptions, explicit and implict in all of this. But the conclusions are consistent with the assumptions; the arithmetic holds up. If a little conveniently, for us sceptics.
    The two key assumptions, for me, are the 50% peak-to-trough property fall and the assertion that this is the bottom. Maybe, maybe not.
    The point is, we don’t know. We can argue about it – for what it is worth I think the fall in property prices will turn out greater than 50% and, for Ireland, this most definitely is not the bottom. But what do I know?
    Risk sharing is the logical resposnse to this: if you don’t know, don’t load all the risk onto the taxpayer. Simple point and they clearly are nodding in the direction. But watch for token gestures toward risk sharing. Subordinated NAMA bonds anyone?

  7. Alan Ahearne makes it all look plausible -at first glance. His assumption that NAMA will pay its way ignores the fact that interest rates will rise and consequently more of the so called good developer loans will default.

    He states- “The solution is obvious. As in other countries where risky assets are clogging the banking system and restricting the flow of credit, the State must intervene to remove the risky loans from the balance sheets of the banks. This is exactly what Nama does. It is hard to see how our economy can recover otherwise.”

    According to reports from G20 today European Banks have only written down 25% of risky loans. Yet we have not seen other European countries rush headlong into inflicting toxic loans on their taxpayers. As another poster has pointed out our minister assures us our banks are solvent. So where is the problem? They merely require more money to lend.

  8. If the €90bn loans were backed by €120bn in property and this has fallen to €60bn. AA claims that we should pay €60bn for the loans.

    But shouldn’t the government insisted on a 75% exposure to value on monies paid for the loans.

    Therefore a fair price for the loans be €45bn using AA assumption of a 50% fall in property prices.

    And as other have said the eventual fall could be significantly higher meaning the loans would be worth less again.

  9. @ColmMcCarthy
    “There are arguments against nationalisation, but this is not a compelling one.”

    I agree. When the banks were publishing stock exchange mandated numbers over the last few years nobody could see that they were loading up on dodgy loans.

  10. Is it not the case that one-third of NAMA loans are for properties in the U. Kingdom? Apologies if this is wrong, but I read it on this site a few weeks ago. If so, it is extremely unlikely that these will fall by anything like 50 per cent. House prices in the U. Kingdom fell by approximately 20 per cent from their peak and are now rising again. They’ve been rising since May/June by about 1 per cent a month, so the trend seems fairly well established. Going by the amount of money, the British Government has pumped into the economy, rising inflation right across the economy, including property, seems a good bet over there.

    As for Ireland, the latest ESRI/TSB index shows prices down 23 per cent from their peak, and falling by about 1 per cent a month. So, an allowance of a 50 per cent fall doesn’t imply an assumption that the bottom has allready been reached. Rather, it implies an assumption that house prices will fall at their current rate for another 3 years before bottoming-out at a level which, by then, will be about one-third lower than in the U. Kingdom. That doesn’t sound like an overly-optimistic assumption to me.

  11. “The solution is obvious. As in other countries where risky assets are clogging the banking system and restricting the flow of credit, the State must intervene to remove the risky loans from the balance sheets of the banks. This is exactly what Nama does. It is hard to see how our economy can recover otherwise.”

    Can anyone enlighten me as to what Countries removed risky loans from their banks.

  12. @ Karl, You might find “it stuff that’s hard to disagree with about the need to fix our banking system”. Not quite.
    The paper makes several implied assumptions, that is typical of much of the debate in Ireland: One is that all of six “major” Irish banks must be saved. And all their activities must remain under Irish ownership and control. It is a sine qua non that their activities cannot be wound down, on fear of the supposed void that would leave.

    But let me fix instead on what might appear to be detail:
    “These bonds can be exchanged for cash on international markets and at the European Central Bank”, writes Alan Ahearne. This could be important. I have some difficulty figuring out what is meant here. If anybody could help on this score, that would be interesting. An Irish bank tries to sell an Irish government bond, that nobody else owns any of? As you may know, liquidity is a crucial element in the valuation of government bonds. I wonder how such an initiative will impact the demand for Irish sovereign bonds, and whether it could steepen the Irish sovereign credit curve or not. Feel like calculating the cost or benefit of Nama on this score?

    Alan Ahearne sees “growing confidence in the Government’s policies”. If that were the case, Ireland then could expect no longer to be the cheapest sovereign credit in the eurozone at the longer end of the yield curve. Confidence in Nama will ensure that Ireland will no longer have the steepest (i.e. riskiest) credit curve, cheaper even than single-A Greece. Maybe after the 16 Sep, if not today? Don’t hold your breath.

    Alan Ahearne says “it is hard to see how our economy can recover otherwise”. But there are real alternatives, although the pro-NAMA crowd prefer to dismiss them out of hand. What would the impact of plans along the lines suggested by FG? That I am convinced would lead to an appreciation in the value of Irish sovereign debt. And a lower cost of borrowing for the State.

    Alan Ahearne, like most of the pro-Nama crowd, gives the impression that “other countries” are also running Nama type plans. That is most misleading. Germany’s plans have barely got off the ground, precisely as so problematic. A Nama-type scheme in the US was shelved as too costly, too uncertain. The Swedish experience of the 1990s was in a radically different context. And Finland, as Alan Ahearne noted in Sunday Independent, 16 Sep 2007 , involved some private sector default (and depreciation). Something which Ireland’s present government eschews at all cost.

    Ironic then to read Alan Ahearne comparing the rapid adjustment – that involved default and currency depreciation – in Finland, to the lost decade of Japan Sunday Independent, 16 Sep 2007 .
    Most economists agree (a most unusual feat) that the Japan’s lost decade teaches us that immediate pruning of the cancerous branches is the best medicine. That supposes the government has the public interest at heart, not just the interests of some investors.

    Alan Ahearne argues that “prices for most things could reasonably be expected to be higher in 10-15 years’ time due to normal inflationary forces”. I saw a house this week in the Netherlands, where it was sold 15 years later for half the value of a bid put on it in 1979. Avoidable disasters can still happen.

    Alan Ahearne put it well himself, “banks may not pass on these rate cuts to customers if spreads in the credit market don’t narrow. Moreover, it is hard to see how an economic downturn and associated increases in unemployment could be positive for the housing market.”
    Ireland has lost one year already in fixing its banking problems. Without radical root and branch surgery, some fear it could lose another ten, as it muddles through without an improvement in employment and credit prospects.

    For some, the discussion is whether or not NAMA will work. For Jesper above, it is whether or not it is the cheapest way to ensure working solvent banks. My primary concern is whether the luxury of such a rescue can be paid for, without putting undue pressure on the public, taxpayers or even the proper functioning of institutions. Ironic then to read in Alan Ahearne’s article today that “people appear to have lost sight of the fundamental problem”.

  13. @John
    i don’t know what those property indices measure, but it isn’t Irish property prices. A much better guide can be taken from the performance data of domestic property fund managers. A lot of these funds own properties that are very similar to the commercial property portfolios of the banks.
    The valuations on these funds for regulatory reasons are done externally. By experts. (MAMA valuation obsessives please note).

    They don’t typically do residential or development. So they are at the ‘better end of the market.

    I just looked up the published 3 year price perormance of one (the best performing actaully) of these funds. This is just money in irish offices and retail – not geared – plus a bit of UK. The 3 year number is -51%. And i talked to someone in that game and he reckons there is easily another 10% – 20% to go by the end of this year (no forecasts for 2010!)

    If, however, you want to argue that this is all nonsense, and the proper indices just show falls of ~20%, you need to realise that this is a major problem. Those indices feed into the data described on Kevin O’Rourke’s post today on the superb Dutch central bank web-site. Go take a look.

    Using published data it shows one bubble property market currently ~4% above real prices seen in 1990. Yes, that’s just 4%.

    It shows, using that official data, abother bubble market currently ~ 190% above prices seen in 1990.

    Some of us believe that the international evidence shows very little long run trends in real house prices. The first market, the 4% one, is consistent with this notion. It’s the US by the way.

    The second does not. It’s Ireland of course.

    So if you believe the official data, we are still 190% above where we were at the start of the 1990.s. I think you should think we have a very real problem on our hands

  14. “Now that the myth of ever-rising house prices has been shattered, it may be time to embrace another inconvenient truth: that prices can take decades to recover, at least when adjusted for inflation. A study in June by the Federal Housing Finance Agency, a regulator, pointed out that in parts of Texas house prices still languish some 30% below their 1982 peaks in real terms.”

    http://www.economist.com/businessfinance/displaystory.cfm?story_id=14258851

  15. And let’s not fall into trap laid for us and focus entirely on property prices. That way lies madness.
    The 75% LTV assertion warrants close examination. Where is the rolled up interest? Where did the devlopers get the 25%? Did they borrow? Is it going to emerge in some form on unsecured lending by one of the smaller institutions. From the earlier years of lending, when prices subsequently increased (for a while) was more lending done on those temporarlily higher prices? During the boom, were those values properly appraised? How could they have been? were all the incentives geared to maximise the ‘V’ so that the bank could shovel out as much ‘L’ as possible?

  16. @yoganmahew

    Not so. TARP shifted a bucketful of freshly printed money into the 19 important banks. They have that luxury.The asset purchase programme never really got off the ground.

  17. @simpleton
    “And let’s not fall into trap laid for us and focus entirely on property prices. That way lies madness”.
    Spot on.
    We (NAMA) are buying loans from banks. What is wrong with putting a portfolio of the good, the bad, and the ugly loans together, say 500m, and invite bids on the international debt market.
    A true value would be established.
    Maybe I am being simplistic – or maybe certain people don’t want the real value of the toxic loans to emerge.

  18. @ColmMcCarthy and pod

    I don’t think the stock market listing point at the end of the article is necessarily about the disclosures listed firms are required to provide (disclosures resulting from listing requirements are not that significant).

    Rather, I think AA’s point is that a stock market listing per se gives you a useful price signal regarding the performance of the listed firm (and management) since the market will aggregate information from many sources.

  19. @pod
    I was thinking of the Fed with its rather opaque asset purchase schemes. The quasi-nationalised, quasi-government entities FNM and FRE upping the value of the loans they guarantee, deferring interest payments from banks, paying prices above the performance of the underlying loans (the sale proceeds they get from the loans) and the Fed buying those loans back from the market…

  20. “These bonds can be exchanged for cash on international markets and at the European Central Bank” and the description of this as a form of quantitative easing is wrong in my view.

    I understand the ECB will exchange them for cash if nobody else will, but that this is essentially the ECB providing the Irish taxpayer a loan via NAMA. And if nobody else does the exchange, the ECB are lender of last resort to the Irish taxpayer… same as currently for national debt….

    This is very different to the printing of paper money to buy crap which is described as QE in the US/UK. There its not painless but its not transferring all the pain to the taxpayer either. it is to everyone who has some of the currency…

    In QE, the money is magicked into existence by the central bank which directly buys the assets… In our case, real money is loaned to us at commercial rates. And with all such loans, it should be considered to be part of the national debt, despite with former taoiseagh think. Because when NAMA money disappears due to corruption/cronyism or simply because property prices dont bubble again, we the taxpayer will have to pay it back to the ECB with interest via the banks.

    From the article, one could be forgiven for thinking bonds were actual solid gold ingots or something valuable that people would pay cash for and that would be the end of the transaction.

    Instead is it selling our collective futures to pay for the past adventures of banksters and developers. In the hope that eventually these adventures will all work out because property only ever goes up more than inflation in the long term.

    Which is absolutely stupid.

  21. @Ciarán O’Hagan
    On the bond issue BL has stated that the coupon will be 1.5%. This implies short term money- 3/6 months. AA says the international markets and ECB will be the buyers. I cannot see international markets buying anything of the 60billion of new low yield illiquid bonds. It looks like the only show in town is the ECB.
    Maybe some of the pro traders out there could give us an accurate assessment.

  22. @yoganmahew
    Thanks.
    I guess some of this accounts for the trillions used to prop the system in the USA. Add AIG, car companies, insurance companies then the true extent of the meltdown becomes apparent. They are lucky to have Japs, Chinese and Arabs to willingly loan them money- we are stuck with one lender of last resort. AA cannot be comparing little old Ireland to the mighty USA

  23. The 75% LTV nonsense persists as if borrowers used cash equity – instead of equity in their other properties or other financiall assets such as share portfolios etc.

    The maximum point of property wealth leverage was reached in 2007 – new debt layered on old debt funded by external and not domestic private deposits with deals relying largely on “phantom equity”.

    The banking issue has two aspects – the supply of and demand for credit. NAMA may solve for supply, if banks make credit available, which is by no means certain but what will solve for demand ?

    Chewing on a lemon takes courage to call the bottom.

  24. @Ciarán O’Hagan

    A very good dissection of Alan Aherne’s implied assumptions and arguable assertions. I agree with your concern on ” whether the luxury of such a rescue (NAMA) can be paid for, without putting undue pressure on the public, taxpayers or even the proper functioning of institutions.

    I wish to comment on just one of Alan’s assertions. He writes in his article, “The simple fact is that every euro lent by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else.”

    As a social scientist he should know that the facts do not speak for themselves. They become meaningful only when interpreted, and any interpretation is always in the light of a theoretical or conceptual framework.

    In the case of the way money works its way through the economy there are indeed different theoretical frameworks which suggest different public policy approaches.

    Dr Aherne’s theoretical framework seems to be the the standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend.

    There is an alternative conceptual model called the endogenous money theory which suggests that rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend, banks extend credit, creating deposits in the process, and look for reserves later. Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found. Thus causation in money creation runs in the opposite direction to that of the money multiplier model, implied by Alan Aherne’s assertion.

    I know Dr Aherne’s article is aimed at a general audience. However the above example of the science of “simple facts” is likely to undermine any advice he may give to the government. If one accepts the endogenous money theory as a better explanation of the real world then one of the implications is that the macroeconomic process of households and businesses deleveraging will reduce real demand no matter what is done with the banks.

    The only source of effective demand in the economy may turn out to be government spending, particularly investment spending. This was Keynes conclusion in the face of the Depression in the 1930’s. What’s the point in pouring large quantities of borrowed money (quantitive easing) into banks if the indebted households and wary businesses do not borrow to invest at sufficient levels to kich start the Irish economy?

    Even economics isn’t simple.

  25. “First, the estimated average loan-to-value ratio of 75 per cent will have to be verified by examining each loan individually, as required by EU Commission guidelines.”

    Alan Ahearne represents the Dept of Finance in the article but it’s unclear how much he knows about the loan situation.
     
    There is anecdotal evidence that many residential mortgages were topped up with other loans.  
     
    It’s likely that the same applied with commercial lending.  
     
    It is assumed the the average loan-to-value ratio of 75% based on the original value of the deal but it may be based on a more recent value.  
     
    It’s hard to believe that 25% of the value of big deals in the period 2004-2007, was paid in cash – – in particular in respect of Anglo Irish deals.  
     
    Security is on both domestic and local property.  
     
    It is likely that many transactions involved complex tax shelters and other vehicles – – not a bog standard €75 million loan on a €100 million purchase deal.

    What does AA know about such deals?

    The DoF have had a 6-month lead time to check the facts.

    Given AA’s public statements, there should be more clarity on the loans in advance of the Dáil debate and vote i.e. before Sept 16th.

    AA should state that he is satisfied that the 75% average applies to most of the loans on the basis of the original purchase price/stamp duty basis price and includes top up loans.

    Simply, as a representative of the Minister for Finance, it’s his duty to provide clarity on this issue.
     
    How confident can he be regarding the risk that the same security was not used for multiple loans?

    Keep in mind, that many of the later deals were ego driven as the top developers competed for prime sites.

    If they were paying 25% of the site costs in cash, were the banks providing 100% of the development costs?

  26. AA Quote
    “Initial estimates suggest that half of the loans are paying interest at an average (variable) rate of 3.5 per cent. This would generate €1.6 billion in annual income for Nama. The €60 billion in bonds that Nama would issue in this illustration would require €0.9 billion in outlays at a (variable) interest rate of 1.5 per cent as indicated by the Minister for Finance. This means that Nama would generate a cash surplus of €700 million annually. Of course interest rates are expected to rise, but that will increase both Nama’s income and outlays.”

    Bit of a jump here as good loans will go bad, good loans will be repaid early or sold off. Also factor in a declining interest stream as outstandng capital is paid down. What’s the duration of the good loan book V the bad loan book?

  27. @Ciarán O’Hagan

    “These bonds can be exchanged for cash on international markets and at the European Central Bank”, writes Alan Ahearne.

    AA says that the bonds created through the NAMA process are intended to be accepted on normal interbank repo market. One can see why the ecb would want this. Otherwise NAMA banks would be controlled a single repo counterparty, the ecb. The ecb’s job is to drain/add liquidity via refi operations in the interest of europe as a whole, not just one patient on life-support.

    The interbank repo market will need to be able to establish a market price for NAMA bonds. This means that the bonds must be tradeable. Therefore NAMA banks will be massive sellers of NAMA bonds. This puts them in competition with NTMA as effective issuers of Irish Sovereign Debt.

    Will bond traders at AIB/BOI front-run NTMA bond auctions by dumping NAMA bonds in advance? Will Irish sovereign spreads widen whenever a NAMA bank is rumoured to be checking bid prices?

    All this sounds like a recipe for bond market chaos. CHAOS. It is not surprising that Irish spreads are so wide.

    The cost of a disorderly bond market will be paid by taxpayers. We will probably never know the real cost of this folly.

  28. @bg
    Thanks for the insight into the NAMA bonds. You have confirmed by worst fears as regards Irish plain vanilla soverign bonds.

  29. As ever smoke and mirrors are used to distract us from the real issue.

    NAMA is a perfect example of the power of politicians.

    It is perfectly correct that they can make the moral/societal decision as to how to allocate the loses from the property bubble of the century. This is not a pure technical economic question with an answer that can be calculated using various models. The economics can only take you so far before you come to the supremely political question.

    The question of course is why is it right to use taxpayer money to ensure shareholders and subordinated bondholders stay in the game.

    It is hardly a decision that they can explain.
    They say NAMA will work which is arguably true but is not the important question. They claim that NAMA can get lending going again but all parties know that that is next to impossible. We discuss valuation models here endlessly, but that is another technical distraction, except in so far as we debate how the valuation model was designed to produce a certain answer.

    NAMA is a economists response to a political decison as to who as going to bear the losses. Dr. Bacon was always awkward (before dropping out of the media spotlight) when trying to answer the big questions – great on economic details but totally at sea in relation to the political decisons that set the agenda to which he had to work.

    It is not as if the Bishops and Fr. Sean Healy of CORI have been preaching from the pulpits and the TV studios of the moral imperative to bail these people out (we of course are some of these people).
    No this is not even in the interests of the many decent people who vote for FF.
    This is a decision made by people who advise FF.
    The major stockbrokers, etc.
    Well informed people could supply us with a list – we mightn’t recognise many of the names, but these people will do anything to ensure that this NAMA decision is made in their interest.
    At a moral level, NAMA is legalised and probably fully constitutional grand theft on a mind boggling scale.

    Meanwhile we are told that the GP want a bonanza tax to be paid by developers. There will be no bonanza for developers because this country is so monumentally fkuced. Future development will be on a scale more like the ’80s than the noughties.

    So lets focus on the big question – how should the losses be divided.

  30. @ bg
    I do hope you are not on the right track… for the sake of the taxpayer.

    Several scenarios for the coupon and the bonds are possible. Any further ideas are welcome.

  31. @Ciaran
    Mr. Bacon was specific in not wanting zero-coupon bonds to be used by NAMA to purchase the loans.

    When a bad bank was announced as being under consideration, but before the details emerged, I posited the idea that zero-coupon bonds could be used with the banks then using them to pay the coupon on the preference shares and buy out recapitalisation equity at current market price. They could also use these to buy back consolidated assets from NAMA – NAMA acting as a giant clearing house and receiver.

    I realise that this would result in zombie banks – the banks would use all their available capital to pay back the state and would be reliant on ECB repo for liquidity with these bonds – but is that not the best we can hope for? An orderly deleveraging of the banks balance sheets?

    If the government is intent on increasing lending to specific sections of society, then surely a senior bond investment in particular banks targeting that type of lending would be a more efficient mechanism?

  32. One very interesting line in AA article caught my attention

    “First, the estimated average loan-to-value ratio of 75 per cent will have to be verified by examining each loan individually, as required by EU Commission guidelines.”

    As Simpleton posted, the rationale for the 20-25% haircut and the resultant <50% stake in the two major banks is predicated on an average LTV of 75%. The above quote implies that this is an assumption and not a fact.

    Moreover, various posters have pointed to the quality of the 25% equity. Will the banks mezzanine loans to property developers be going to NAMA as well and at what haircut. If they do go at a haircut of 25%, NAMA is massively overpaying and is actually bailing out the equity holders in projects, if they don’t go, banks’ losses on its residual loan portfolio will be far higher than currently anticipated.

  33. @JL
    “Moreover, various posters have pointed to the quality of the 25% equity. Will the banks mezzanine loans to property developers be going to NAMA as well and at what haircut. If they do go at a haircut of 25%, NAMA is massively overpaying and is actually bailing out the equity holders in projects, if they don’t go, banks’ losses on its residual loan portfolio will be far higher than currently anticipated.”

    One would therefore imagine that the mezz loans will go.

  34. Rather than valuing the loans one by one, it would make more sense to aggregate them by borrower or groups of borrowers. You can’t value a loan in isolation from the person borrowing, and without considering how much other debt they are carrying.

    If the coupon on the bond is 1.5 percent, then surely the value of the bond will be lower than this face value, so as to give a satisfactory yield? Will the banks get bonds with face value equal to the LTEV, or will they get bonds with market value equal to the LTEV?

  35. On the issue of the UK-based NAMA-bound loans (which John argued were a reason to be cheerful since the UK property market is already rebounding after a smaller fall than here) – we would also want to consider the sharp depreciation of sterling vs the euro since the loans were made. Who knows how well hedged the banks were on this.

    On the issue of a stock exchange listing for a nationalised bank – I wonder should nationalisation advocates be promoting a quick process of nationalisation, recapitalisation and immediate reprivatisation in the form of an equal ordinary shareholding for every resident Irish citizen.

    This would presumably be popular (an important point given that we all recognise that we are in the realm of political economy) but it would also avoid the dangers of politicized banking under nationalisation (as well as addressing Alan Ahearne’s transparency point).

    Giving shares to the public instead of selling them to investors would obviously mean a big hit to the public finances, but it would also improve the balance sheets of the households that are going to be hit by tax increases and spending cuts.

  36. “On the issue of a stock exchange listing for a nationalised bank – I wonder should nationalisation advocates be promoting a quick process of nationalisation, recapitalisation and immediate reprivatisation in the form of an equal ordinary shareholding for every resident Irish citizen.”

    AKA Constantin G’s NAMA 3.0 plan…..

  37. A voucher privatization. It might sound like a good idea, but really, I don’t think it is. Bank financials are just so complicated for the average punter. But there is certainly plenty of scope for being imaginative and coming up with a scheme that would work well.

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