There is a carrot and stick in NAMA alright. I think I got confused thinking Al was suggesting that there be no NAMA and there be punitive laws against bank officials. Now I think I got the wrong end of the stick… which has left me in a sticky situation….

I’ll get my coat

On carrots and sticks: Please correct me if I’m getting this wrong, but I would have thought the establishment of Nama itself is the ‘carrot’ in that it’s designed to solve the banks’ related problems of (a) toxic assets, and (b) liquidity and get them back into a position where they can start trading profitably again, which is in their interests, as well as in the interests of all the rest of us, our economy and our society?

The ’stick’ arises in Section 7 of the published Bill, for an institution that supplies false or misleading information to Nama in its dealings with an asset or their valuation of €5k on summary conviction or up to €20m on indictment; and for individuals involved €5k or 12 months imprisonment or both or on indictment, €5m or up to 5 years imprisonment or both. Section 16 also applies prevention of corruption legislation etc.

By the way, I don’t think a cynical Faustian pact between Labour and the Government on the date for a GE at end January 2010 in return for Dail support on the Bill would do much for the electoral fortunes of any of the parties involved. Would probably ensure an overall majority for FG though!

If you want the banks to behave correctly you have to create an incentive. The carrot and the stick are usually used to the same end. You have suggested a stick to stop the bankers doing the wrong thing. What is the carrot to motivate them to do anything at all?

Sorry about that
Could have made it clearer
Nama etc creates a peverse incentive for banks to milk the public pursue beyond what is needed.
If one can milk a purse….
Al

I agree that transaprency is one of the biggest issues. The Govt and the banks have no right to ask the nation to “trust” them. The way to prove they are trustworthy is to provide for proper oversight in the legislation.

One benefits of the NAMA plan is that it does not preclude the Labour plan down the line. Indeed a lot of the preparation work for NAMA is the same as would be done for nationalisation.

For this reason I think Labour should offer to give it their support in the Dail if the Govt undertakes to call a general election by the end of January. The Govt would of course reject this offer but it would show the international community that our opposition parties are going to be pragmatic.

It is what I would advise!

i think the primary objective, and benefit, of ‘nationalisation’ of the financial system is that it will allow competent persons to be appointed to negotiate directly with the holders of irish debt, on behalf of those of us who will end up paying for it, the irish taxpayer.

i don’t however, happen to agree with the concept of ‘nationalisation’ which sees the department of finance, nor even worse, the minister for finance (already the second most powerful position in the fianna fail party), running the irish (any?) banking sector.

i’d presume that most of the subsequent refloatation would already be negotiated (debt-for-equity swaps, existing shareholder coupons, citizen share schemes;-) long before the audit process was even complete. besides which, refloatation would be a chance for a big party, to celebrate being ‘clean’!

@zhou

i think the problem is transparency.
i don’t trust the bankers, i don’t trust the government.
why, in the name of anything you care to believe in, would i trust either of them to solve this mess, in a smoke filled back room, where they make up the rules as they go along, and they don’t even have to tell us what the rules are!!!

barry.

In fairness to Joan Burton TD, Labour have commented on the legislation as published and have called on the Minister to provide additional specific information. She is entitled to see any amended draft legislation and draft statutory instruments before giving any further views.

“We cannot incentivise behaviour and not discipline it.”

Where is the incentive in your proposal?

There should be a serious consequence for misleading/ misdirecting or general incompetence when it comes to statements of account from bank officials!

Misleading/ Misdirecting etc should be a 10 year prison sentence.
I believe Mountjoy would be closest so that friends could visit.
Incompetence should be a ban, EU wide if possible, on directorships, etc, for financial institutions, etc.

We cannot incentivise behaviour and not discipline it.
And we can end all the BS normally involved: dail commitees, tribunals, investigations etc etc.

Al

Your anecdotal evidence may be more typical than is anticipated. That is precisely why the Govt is setting up a statutory process to examine each loan individually to ascrertain what the situation is.

Don’t forget that the core reason we are having a bad bank solution is because the credibility of our banks’ balance sheets is in question. If we take over the loans without examining them carefully then the nation’s balance sheet will be in question. That is the case with nationalisation too.

Transferring assets to an AMC/NAMA/Asset Recovery Trust is not risk free if the amount we get back for the refloated banks does not reflect the riak we have taken on. It could possibly be as bad as overpayment if we recap too high and refloat but then find we are left with a toxic sludge which nobody is sure of and which nobody will trust us to self certify.

Doing it the NAMA way with two self interested parties on either side (viz, (a) the State and (b) the Banks) enhances the credibility of both parties. It also gives us more time as the period which it will take to do a thorough NAMA acquisition process is much longer than the temporary period of nationalisation which others recommend. The longer the period of nationalisation, the greater the risks and the harder it becomes to manage the organisations.

From RTE site “This means, in the case of a small proportion of the loans, the banks will not get all the money immediately.”

Are the Greens buying an eviscerated NAMA2 and selling it as the Prof. Honohan solution.

I posted this on another thread. Perhaps Deputy Burton could comment.

Many thanks, once again, for your response. It doesn’t quite answer my question, but I can understand your reticence and I have no entitlement to push this any further.

Let us hope that the Minister will provide more evidence that will help to quantify the risks involved in NAMA. I am also hoping that some one of the contributors to this site finds the time to do some quantitative analysis to estimate the additional economic costs of NAMA, of its variants and of other proposals when compared to Labour’s proposal which, imo, with some fleshing out appears to be emerging as the most efficient solution.

The PWC report has not been published and is not public knowledge

I personally know of developers who borrowed 90% on amounts in excess of €80 million on sites in N.Dublin, who then “re-geared” up their loans as construction began and house prices were rising. They took their equity back out (and more sometimes).

The PWC 75% is an aggregate level over an extended period of time, assuming rising values (the V in L-T-V). LTVs change daily/weekly etc.

I don’t doubt the aggregate figure, but accounts take a snapshot view based on information provided to them, need mention Ernst & Young and Anglo Irish bank (how much did Seanie owe on the day the auditors were in?).

Furthermore, high profile court cases have shown that loan amounts have grown in the absence of debt servicing, plus developers (e.g. Mick Wallace on Prime Time end-March ‘09) have admitted to not making loan repayments.

A Director of one company told me in May’07 that the development bank loan was €165 million, and then at a social gathering in July’08 a staffer from the developers head office admitted that the same loan to the same bank was now €183 million. Two other sources confirmed these figures to me. What is the loan amount today? Given that the development has many unsold units according to a leading Sunday newspaper.

What is clear is that the €90 bn of loans (both performing and non-performing) includes “rolled-up” interest.

Irish banks were never in the business of providing 0% loans.

My point is that the €90bn figure relates to “Original” loan amounts that were ’smaller’.

The NAMA discount should be haircut further to account for this.

Minister Lenihan speaking to the Committee on Finance and the Public Service:

“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 Minister has made it clear time and time again that the purpose of the statutory process is to examine each loan to see if the banks have telling us the truth. There is no “ruse”.

One aspect of the NAMA debate that has gone unnoticed is the fact that many of these impaired bank loans are in fact what is known as “negative amortisation” loans e.g. developer borrows €160 million off BkIR for a development say hypothetically on N11 in South County Dublin. No interest or capital repayments have been made since 2006 and the loan amount is now closer to €200 million.

NAMA will purchase the ‘loans’ at a discount. Please ignore the discount for a moment. Alan Ahearne et al have written in the newspapers recently that the average developer LTV was 75% (an assumption) and then they’ve grossed-up these existing non-performing bank loans to suggest that the €90 bn was lent on asssets that originally cost €120 bn (assumed) and that if NAMA today pays only €60 bn that they are paying half-price!

This is the ruse being utilised by proponents of NAMA.

Equally assuming that LTVs were closer to 90%, and taking account of “Negative Amortisation”, the €90 bn of bank developer loans could actually relate to a similar OR smaller original loan amount given that devlopers paid interest rates based on 5-year bank-swap rates + a spread of between 0.75% to +1.25% resulting in developer loan rates that were around 4.5% to 5% during 2006/7.

So 10% of these developer loans could easily be “deferred capital interest”

I agree that NAMA is the central debate now. I believe that the value of the loans also depends on what is going to be done with the loans and when it is done. What I’d like to highlight is that NAMA could theoretically possibly be justified by extending the timeframe indefinitely. Hope springs eternal and the LTEV combined with NAMA is hoping for a recovery in the property market.

Zoe claims to be solvent in 3 years time (I don’t believe that but that is another matter) but also claim they are not solvent if wound up today. If they are to be believed then the value of their loans depends on the timeframe.

I believe that NAMA is probably the worst possible publicly presentable solution to the current banking crisis. The proponents of NAMA is asking for numbers, if timeframe affects price I’d like to know their timeframe.

“My view is that, given their performance, the existing boards and senior managements do not deserve to be allowed to run a whelk stall. Is Labour prepared to take that position up-front?”

Labour has consistently called for sweeping changes at board and senior management level at Irish banks. I would draw your attention, in particular, to a document we published back in February of this year:
http://www.labour.ie/download/pdf/a_clean_break_from_business_as_usual.pdf

Irish banks are insolvent and everyone knows it. Why would they still need a government guarantee a year after the Lehman crisis and when things like the TED spread and Libor are back to pre-crisis levels. There is no shortage of liquidity in the market now. So the only reason why they need the guarantee is that they are still insolvent. Find me one bank that is willing to give up the guarantee tomorrow if they are still solvent.

If 75% works, 95% would also work, no? The listing would be maintained a la AIG and Fannie and Freddie.

Excellent, as usual, but, imo, a bit light on the exit strategy.

You are right, this is an important issue. But it shouldn’t be debated now, because disposal of impaired loans will have to happen with or without nationalisation.

In other words, while its important, its not important in terms of the current Nama debate, which is all about the allocation of losses resulting from the cleanup process(i.e. who owns the clean banks onces the toxic loans are off their books.)

And given the public’s very limited ability to focus on the core issues, the less red herrings are swimming about, the better.

What is the timeframe for the disposal of the assets that might end up being seized?

The argument for a long period is that it might be possible to recover more money. The cost of capital compared to the asset appreciation/depreciation. The current value is difficult to know, the asset appreciation/depreciation is even more difficult to guess.

There are suggestions to not have a deadline for winding up the asset management vehicle. My opinion on that is that it is the worst possible alternative. If there is a deadline, the employees of the vehicle know they have to do their best before the deadline. If there is no deadline, then the only certain thing is that no-one, employee or politician, will have any urgency of exiting the market.

The worst that could happen with a deadline for the winding up of the asset management vehicle is that an auction might need to be held when the deadline is up. The bidders might collude to get low prices, but I find that unlikely.

The shorter the time that the vehicle can operate, the more likely it is that more losses will be realised. Some might say that some of the losses might be realised unnecessarily. The benefit of the short time would be that capital will be allocated quicker to more useful economic gains. The benefit of the longer timeframe would be smaller recognised losses but capital tied up for longer.

I see the resale of the banks as the easy part, dealing with their impaired loans is more difficult and the most difficult part about how to deal with the impaired loans is how long time it can be allowed to take.

Are there any economic models for estimating what might be the best timeframe?

Will the timeframe for dealing with the impaired loans be debated next week? (NAMA or some other vehicle?)

Many thanks for your response. I raised the query for two reasons. Firstly, I recall meeting Minister Ryan at a conference in April 2007 and, partly in jest, quoted David Steel’s exhoratation to the Liberal-SDP Alliance in 1982 “Go back to your constituencies and prepare for government”. Secondly, I realise that is politic for you and Labour to hedge your bets, but, when it comes to temporary nationalisation, the exit strategy is probably as important as, if not more important than, the entry strategy. The possibility of allowing the existing vested interests to have any hope of a return to “business-as-usual” runs the risk of scuppering the entire exercise, as they will plot and plan to turn this hope into a reality. Flotations will be expensive and time-consuming and will only make sense if there is a through cleaning out of the stables. Trade sales are much less costly and may be effected quickly, but they, almost certainly will result in external control of the remaining Irish banks.

My view is that, given their performance, the existing boards and senior managements do not deserve to be allowed to run a whelk stall. Is Labour prepared to take that position up-front?

declaring for certain that the irish banking system is insolvent is a very dangerous assertion to make, and this is exactly what would happen if the shareholders got zero. Not subjectively speaking, but factually and legally thats what we’d be saying to the rest of the world. I do not think this is a good idea. Nations with insolvent banking systems tend to get a knock on the door from the IMF.

Rights issues would dilute the governments holdings if the government didn’t take up their rights and either existing or new external shareholders did instead. On the share buybacks you’re probably right in that i don’t think it’s legal to focus a share buy back on particular shares, i imagine there has to be a ‘blind’ purchase element to it. My bad.

By having a 75% holding, and still a public listing, disposing of the shares could be done in the space of a few days (i’m not suggesting that they’d necessarily have to do it all at once). Re-listing, trade sale etc would be far more cumbersome to do (possibly not massively so, but the principal still holds).

I guess my basic position is that recapitalising AFTER the haircut is putting the cart before the horse, because it always provides the banks with a huge incentive to flog the loans off too cheaply (every € they squeeze out of Nama is a € less in current shareholder value dilution).

Thus, saying: Run Nama in its current incarnation and hope the valuers do their job and we end up owning 75% via ex post recap, is just not the way to spend our grandchildren’s tax money. It might work, but it probably won’t.

Instead, nationalise and then buy up the bad loans in peace and quiet.

As for refloating the banks after the clean-up, I don’t see a problem in doing this. Irish financial IPOs are small fish in a big sea of eurozone capital. Plus, nothing says we have to float NewAIB and NewBoI etc at the same time. We can float one after the other, to avoid ‘river log congestion’.

As for the legality of getting at the subordinated bondholder debt, I cannot pretend to be an expert in how these markets work. It seems to me they are just another party that has a claim on a company which is worth nothing - so their claim should be worth nothing.

The fact that we threw some bad money into the banks already is not a reason to throw more bad money into them.

It’s not the anonymous nature of it, it’s the content and tone. My 2-year-old daughter can adopt a more professional demeanour.

As for my name, I’m just too lazy to type everything. Nothing to hide here.

Joseph Morgan

Why would 75% “increase the chances of the government being able to quickly dispose of their holding when the market had stabilised”?

Share buybacks do not dilute holding but do the opposite. Rights issues also do not dilute in general.

And what is wrong with “having to wipe out” all existing ordinary shareholders? The banks are insolvent. So existing ordinary shareholders deserve zero.

The preferred do make wiping our subordinated a difficult issue. But if the banks are nationalised it does not matter. The preferred goes back to the government. By aggressively ruling out nationalising, the government is simply weakening its hand and driving up subordinated debt prices which makes any eventual purchase of these more expensive.

I don’t know how smart your kids are, but population projections are way beyond any 4-year-old I know…sorry, couldn’t resist.

Half a mil seems like a high number to me, but then again, if back in 2006 you confronted anyone with 2009 data, they would accuse you of scaremongering too.

But the real point is that it is off-topic. Joan Burton’s main point about the “numbers” is that we don’t know, because it is being kept under wraps. And she is right in saying this. The real point about numbers is you have to have them. We don’t cause the banks are hiding them, whilst begging for billions of tax payers money for free (!)

Then, you have to have a structure in place which allows you to crunch those numbers without the kind of intense lobbying and axe-over-head-hanging that private interests are always going to engage in.

Nationalisation provides that kind of space for the govt to work in. Nama does not.