Presentation to the Labour Party Post author By Karl Whelan Post date September 10, 2009 Here‘s a link to my presentation to Labour’s Parliamentary Party meeting yesterday. Categories In Banking Crisis Tags NAMA 36 Comments on Presentation to the Labour Party ← Subordinated NAMA Bonds = Equal Sharing of Risks? → The Lehman Anniversary 36 replies on “Presentation to the Labour Party” @Karl Clear, comprehensive and compelling in its logic – a timely summary with time running out. Leaves me feeling even more quesy about why very clever people remain wedded to the all but indefensible. @Karl Liked the presentation, have a suggestion on additional point as to what the government is attempting to do: (4) Absorption of the property overhang in the market through change of ownership and to that end giving the new owner (NAMA) an advantageous and protected position within the market One property developer called me today and told me that the new 80% CGT/Windfall tax was “wonderful” as it will bolster price of previously zoned land – which NAMA will soon be taking possession of Nationalisation is no problem eh except for the 25 -30,000 additional Civil Servants based in Ireland, UK, US, Poland etc etc. for a Government that your UCD colleague Colm McCarthy says is “Bust” Do you know that the AIB Pension Scheme has a deficit of €1.2 Billion as at 30 June 2009 ? B of I probably similar. It is expected that probably 10,000 people working in Irish Banks are no longer required (IBOA fears) so now the Taxpayer will be bankrolling their Redundancy. If Labour get into Government it will not be temporary Nationalisation but for the long haul as Tommy Broughan et al in the LP wouldl not privatise the Banks again in the next 50 years. Just in case someone suggests that I am a FF man I want to make it clear that I never cast one vote their way in my lifetime. There is merit in the Fine Gael Good Bank idea but we are too far down the road now to be changing horses. I think I voted for LP as a student . I cringe at the thoughts of it……. John “time” has run out – listen to Colm Mc Carthy. Revaluation Exercise TOP 10 LAND DEALS IN 2005 (Remember this is only the site values) Jury’s Hotel Site, Ballsbridge, Dublin 4 €270m Veterinary College, Ballsbridge, Dublin 4 €171m Allegro, Sandyford, Dublin 18 €165m Berkeley Court Hotel Site, Ballsbridge, Dublin 4 €135m Digihub, Thomas Street, Dublin 8 €100m Eircom Site, Heuston Station, Dublin 8 €79m Central Park Residential Site, Leopardstown, Dublin 18 €60m Kilternan, Co Dublin – 35 acres €55m Newbridge Industrial Site, Co Kildare €52m Waterford Retail Warehouse Site, Co Waterford €45m Total Value 2005 €1132 What are they worth now? What value can you put on these siates using long term historical data comparisons? Is this site now IrishAntiNama.ie rather than IrishEconomy.ie? Until about six weeks ago, virtually every piece of significant economic news triggered a thread. It might have been the latest manufacturing figures, trade figures, inflation figures, retail sales figures, exchequer returns, or whatever. Even the quarterly figures for number of births and fertility rates would get a thread. But, in the past six weeks, its just NAMA, NAMA, NAMA. Of course, I totally respect the right of the owners of the site to use it for whatever purposes they want. Its their site. They can use it to campaign for pink cheese or abolition of the offside rule if they like. So, if they wish to use the site mainly as a platform for an anti-NAMA campaign, they are perfectly entitled to. But, if that’s what they want, they should change the name to something other than IrishEconomy.ie, because that implies its for discussing all aspects of the economy. And the economy is more than just NAMA and its more than just property. Far be it from me to suggest that the recent dearth of threads on other aspects of the economy is related to the fact that virtually all economic statistics published in the past six weeks have shown very significant improvement. Manufacturing output has risen (figures out today show it at an all-time high), merchandise exports have risen, inflation is the lowest in the EU, the monthly increase in unemployment has fallen from 30,000 to 5,000, the monthly PMIs have risen from just over 30.0 to 44.0 (manufacturing) and 46.7 (services), the ISEQ has been going up faster than any other stock market index in the developed world (up 65% since March), government tax revenues have shown clear signs of stabilising, the gap betwee the yield on Irish and German Bonds has narrowed dramatically, and the number of births is the highest since 1896. These are all items of economic news published since 1st August. Prior to that, most of them would have triggered a thread for discussion. But, in the past six weeks, nothing. It is clear that some of the organisers of the site are extremely hostile to Fianna Fail. That is, of course, their right. I’m not attacking them for that. But, if they wish to turn the site simply into an anti-FF site, and therefore not a suitable place to publish positive economic news, they should say so. For what its worth, I’ll stick my neck out and say that Ireland is now out of recession. I should emphasise that I’m referring to Q3 rather than to Q2. I don’t claim to be infallible. Its just my opinion based on a reading of the latest manufacturing, trade, retail and other statistics. I could quite easily be wrong. But, if I’m right, I trust the news (figures won’t be published for Q3 until December) will trigger a thread here. The way things are at present, I doubt if even that momentous news would get a mention. @ john I think you are right on 1 issue, GDP growth in Ireland may be positive in Q3. This is not in consensus forecasts As regards your more substantive point about an anti FF bias in the site. This probably reflects the views of society as a whole. After all only about 17% of the population now support FF with only 11% support in Dublin. Only about 15% of the population think the govt. is doing a good job. A lot of people feel NAMA to be a scam whereby walth will be transferred from bank shareholders and taxpayers to insiders and FOFF when they default on their loans and buy back the property of NAMA at knock down prices. I suppose when you blow up the economy for the 2nd time in a generation, you are going to attract some negative comment. @ John I think the coverage of Nama on this website is representative of the coverage that Nama receives in the national media. Furthermore, this site has featured multiple posts on many other important stories in recent days and weeks, including the appointment of Prof. Honohan to the Central Bank, the Report of the Commission on Taxation, the economic implications of Lisbon, the debate about the “Smart Economy” and of course, an Bord Snip Nua. It just so happens that Nama is a very big deal (involving very large sums of money). When the history books look back on Ireland in 2009, they won’t be kind unless the Irish Govt. gets the banks lending again – but with the minimum burden to the Irish taxpayer. I think this is the terms of reference that most (non-partisan) economists are directing their enerdy towards when discussing Nama. @Aidan C Your figures are a little out: * Jurys hotel site was sold for €260 million on 1-Sep-05 according to Jones Lang LaSalle (and not €270m – actual price/acre was €53,958,086) * Exactly 2 months later the same agent sold the Berkeley Court site for €119 million (€59,453,817 per acre, not the €135m you quoted as both sites combined cost Sean Dunne €369m – your figures are €405m??) * Ray Grehan of Glenkerrin Homes paid €171.5m (nit-picking I know but its still half a million euros) for the former UCD Vet College on corner of Shelbourne/Pembroke Rd) – the AIB loan on this one was €110 million and the site has not been revalued, but market commentators suggested earlier this year that this was now a 100%LTV loan – probably more now) * Digihub site in Thomas St was sold for €118 million on 11-Dec-05 not the €100 million you listed (that was the Guide price given by Finnegan Menton) * You missed the 27.6Ha. Celbridge site sold by MacDonald Bros. Ltd on 13-May-05 for €77.6 million * The Newbridge Industrial site at Little Connell, Newbridge was sold for €53 million not €52 (every Million counts) – sold by my former employer * Eircom site at Westgate/St. John’s Road west D8 went for €79,263,000 * The Kilternan site (if it was the Enniskerry Road one) was sold for €35 million (Vs Lennox guide of €30m) on 30-Apr-05 and not €55m My figures concur with yours on the remainder sites Apologies if this appears a bit pedantic, its not meant to be, it is information sharing. What are they worth now? Well 2005 prices per acre were exactly double 2004 prices and D2 prices doubled again in 2006/7 (very few sites/acres) whilst D4 prices stayed flat averaging around €40m/acre. So working backwards, I would guesstimate that D4 are down 50% from what was paid, whereas D2 prices would be down more (rose more), say -60%. The D8 site was <€10m/acre and would still probably achieve €7m an acre even in today’s market – so down 30%. Dublin 18 sites back in 2005 were all sold between €3.5m to €6m an acre (went bananas in early-2006 when prices went from a min of €10/acre to €25m in Sandyford), so I’d haircut the 2005 prices by about 20%, no more. @John You’re right that there have been less threads on the basic economic news over the past few weeks. But this doesn’t mean that there has been less posts. In fact, I think the opposite is the case. So, yes NAMA has been the big policy issue of the past few weeks and I don’t think anyone contributing should apologise for it. As regards the slant that has been taken on this by contributors here, to interpret it as simply anti-FF is to show that you’re viewing things through a certain prism. Personally, I am not aligned to any political party and was writing pieces openly aimed at influencing the Minister not to adopt a NAMA approach even before we’d ever heard of the N-A-M-A. I had no idea which approach he would take but I can’t for the life of me see why I should change my mind when a Minister adopts a policy I believe is a bad one just because he’s an FF minister. Beyond that, take a step back here for a minute. Can you name a single independent academic in the country that is enthusiastically pro-NAMA? Is that because we are all involved in some anti-FF conspiracy? Or does it tell you something about the merit of the proposals? A couple of other points might be worth remembering. 1. People take holidays in August. 2. People only have so much time to contribute to unpaid blogging. If you’re spending time writing about NAMA, it is of course likely that you’ll end up spending less time on other things. 3. The site doesn’t really have “organisers”. Philip set it up. The rest of us have the right to post. Sometimes we do, sometimes we don’t. We certainly don’t have meetings where we decide to take a certain slant. 4. Nobody is paying any of us to be a “full-service” economic news outlet. People post on what they’re interested in. For instance, as well as NAMA, we’ve had plenty of discussion of the Commission on Taxation as well as our ongoing discussion of Innovation\R&D issues. Also, most of the contributing economists are not high frequency “number watchers”—most are highly research-oriented economists who focus a bit more on the big picture and policy issue. But of course some releases catch the eye and people post on them—the really precipitous decline in economic activity around the turn of the year in Ireland and elsewhere was undoubtedly particularly noticeable and so those releases provoked more attention. And John, remember that we might all take your consistently positively-skewed opinions on the economy a bit more seriously if you didn’t consistently come on here and engage in politically-oriented conspiracy theorising. @John, jl I track Consensus Growth forecasts and post them on my website. No one is forecasting any positive output growth before 2011 (except Dr. Dan McLaughlin has penned in 0% for 2010 as a whole). @jl I am interested that you agree with my view that GDP probably grew in Q3 and therefore Ireland is out of recession. You actually seem more confident than me. I only tilt to that view marginally, and I would put the chances no higher than 55/45 or 60/40 at most, although that would increase if the next couple of months’ manufacturing and trade figures are like the past couple of months’. Regarding the issue of bias, I am not referring to the opinions expressed in any particular thread. If a thread is opened, and 95 per cent of the responses are anti-Fianna Fail, it doesn’t worry me in the slightest. I have no party political allegiance. In fact, I don’t even come from the Republic and have never lived in the Republic. I’m from Northern Ireland, so I have little interest in the differences between FF and FG. In fact, to people from Northern Ireland, there is no difference between FF and FG, other than to do with partition, and even those differences have diminished in recent years. The bias I’m talking about is the selection of topics that are chosen for opening threads. As I pointed out, until recently there was a very wide range of topics. So, typically, when the manufacturing output figures were published, someone would open a thread and they’d be discussed. And when the exchequer figures were published, someone would open a thread and they’d be discussed. And, likewise with the merchandise trade figures, the inflation figures, and so on and so on. The point I’m making is that these have all dried up in recent weeks, and I’m speculating that this is related to the fact that they have nearly all shown very significant improvement in that time. Of course, I might be wrong. Maybe its just that those who were in the hablt of opening threads on these topics have been on holiday, and Karl Whelan and Brian Lucey are the only two who have been around. If that is the case, I look forward to threads being opened on these other topics in coming weeks. Regarding ‘blowing up the economy’, perhaps some academic economist (of whom there seem to be an amazing number in Ireland) could count the number of recession years that Ireland has experienced since 1922 and see under which party most of them occurred. Or maybe calculate average growth rates or average migration rates or average unemployment rates under each party. I’d do it myself if I had time, but unfortunately I don’t. @John I’d be interested in seeing how many posts there ever were on this site on manufacturing output or merchandise trade figures. Not many, I’d reckon. Again, you might want to think about why you place so much more weight on those figures than other people do. If the answer you come up with is that we’re all rabidly anti-FF, you’d be wrong. @Karl I take your point about holidays in August. In fact, I mentioned it in my own second post (which I typed up and sent before seeing your’s). So, I trust we’ll see a resumption of threads on a wider range of topics in coming weeks. Re NAMA. As I have no expertise in that area, I have no strong opinion on it, and I’m not necessarily opposed to your view on the matter. I’m neither for it or against it. Quite frankly, I’m a ‘dont know’ on NAMA. And I don’t think I’ve ever commented on NAMA, other than once last week when I said that I was influenced by the fact that I thought the leading lights broadly in favour of it (Alan Ahearne, Garret Fitzgerald, Gerry Robinson, Alan Dukes, Patrick Honohan) had more stature than those opposing it. That wasn’t meant to be offensive. I have zero stature myself. Nearly all my posts are on topics other than NAMA. None of my posts are especially pro-Fianna Fail. The only common theme in my posts is that they are nearly all attacks on scaremongering, whether it be Morgan Kelly saying that house prices will fall 80%, Joan Burton saying half a million people will emigrate in the next year, or whatever. @ John I don’t want to stray too far from the central point of this thread. But for the sake of anyone reading the final paragraph of your post, and considering totting up the figures… it is important to be aware of the “political business cycle” and “lagged variables”. It would be too naive to look at average growth rates under each Govt. and leave it at that… @Non-Partisan Economist I totally agree. Of course, these things would have to be considered. As would, “occurrence and depth of global recessions”. Anyway, getting back to the point of the thread, I recommend looking through Karl’s presentation to see some clear and impartial economic logic. He builds up to the complexities of Nama from an accessible foundation of how banks actually work. There’s a lot in the presentation of note, but some of the points that stood out for me are: (i) Money spent on overpaying shareholders can instead be used to produce well-capitalised state banks that are fully owned by the state. The state can get a return on this investment by selling off the banks at a later date. (ii) The government has promised that if it loses money because of NAMA, it will introduce a levy on the banks. However, the levy is not included in the legislation. (iii) The proposals floated in the media are not at all similar to Prof. Honohan’s plan. Prof. Honohan’s risk-sharing proposal would also make it likely that the banks would need to be temporarily nationalised. (iv) NAMA wasn’t done in Sweden; and it is not backed by the ECB and IMF. @TRP “Nationalisation is no problem eh except for the 25 -30,000 additional Civil Servants based in Ireland, UK, US, Poland etc etc. for a Government that your UCD colleague Colm McCarthy says is “Bust” Do you know that the AIB Pension Scheme has a deficit of €1.2 Billion as at 30 June 2009 ? B of I probably similar.” Employees of nationalised industries (state-sponsored bodies) are not civil servants though they may be public servants. The pensions of employees of nationalised banks need not concern the taxpayer: consider Irish Shipping. bjg I’d like to state again I’m just a regular member of the public. But I find this article interesting http://www.shane-ross.ie/archives/582/puffers-paradise-named-nama/#more-582 Particularly “An optimistic report from Goodbody Stockbroker’s economist Dermot O’Leary was offered by Carroll’s counsel as a reliable forecast that the general recession would bottom out in 2010, followed by a recovery in 2011. Goodbody is owned by AIB. Presumably this was declared in court? AIB is not opposing Carroll’s court bid to keep the receiver at bay. Like the other banks, it wants to see Carroll’s loans bought at inflated Nama prices. All Zoe’s other creditor banks except one — the foreign owned ACCBank — are taking the Nama line. The entire Irish establishment is backing Carroll’s bid for an honoured place in the world of fantasy valuations.” Any suggestion that Karl Whelan is politically motivated is fatally undermined by his decision to include a ‘but isn’t nationalisation a bad thing’ in his presentation to the Parliamentary Labour Party. Great. @Non Partisan I am not sure point iv) is correct. Arguably the ECB acceptance of the NAMA bonds constitutes tacit approval at the very least. Also is not NAMA consistent with point 2.4.6 of the ECB’s opinion on NAMA-which seems to state a preferance for private ownership (subject to not over paying..I guess) @Brian J Goggin “The pensions of employees of nationalised banks need not concern the taxpayer: consider Irish Shipping.” The fall in BOI share was a blessing in disguise for me Brian. I purchased 400 BOI shares in 2004 @10.66. On 5 march I purchased 607,142 BOI shares at 14 cent because I knew that Brian Lenihan wouldnt nationalise your bank. I now have 1,487,497.90 worth of BOI shares. As they say Brian, every cloud has a silver lining. @ jl correct. To say that the ECB does not approve of the NAMA plan is blind insanity. I would imagine that they’ve been central to all of the decisions made about NAMA given that they’ll be allowing NAMA-related securities access to their repo operations. Maybe it’s not their totally preferred structure for NAMA, but they’re clearly approving of it, and could make their voices heard very easily and clearly if anything was otherwise the case. @Derek Brawn Thanks for the interesting details on the site prices. I picked up the prices from an article in the Irish Independent on 18th January 2006. As some/many of these sites will end up in NAMA (If passed by the Oireachtas) it would be interesting to see how the NAMA valuation compares with your informed guesstimate. This information should be made public but I suspect it will be classified as “commercially sensitive” and hidden from scrutiny. Not good enough. @ Eoin I suspect that the rumoured modifications to NAMA in terms of a larger haircut, majority stakes in the banks and burning of the sub debt owe more to ECB intervention than any internal opposition in Cabinet or anything posted on this site. The final form of NAMA is probably going to be signed off in Frankfurt and not in Dublin. Desperately sorry for being completely off thread, and further apologies for the slightly confused ramblings on this, but, given that I am in fact slightly confused, it’s probably an appropriate tone. The term ‘market value’ is being bandied about. This can be defined in various ways – the value a bank might be paid for a given loan by a private investor is superficially attractive, but problematic. The realisable value of the loans managed collectively by an entity with sufficient liquidity and a long-term horizon is significantly greater than by a single entity taking a single loan. This much has been well highlighted in the Zoe proceedings. The reality in dealing with sums of this size is that there simply isn’t a meaningful market of competiting gigantic firms for any sort of efficient valuation. So for arguments sake turn it around. If NAMA was a pure (unguaranteed) SPV, what would it be worth? In other words, if all the loans in question were taken over by the entity, and tranched appropriately to maximise suitability to investors, what is the total it could be sold for on open market? There are clearly complications here (who holds highest risk tranches etc., but leave this to one side for the moment). This addresses (somewhat) the ‘too big for a meaningful market’ problem. Next problem is that the long-term realisable value of the loans is a function of how much is paid for them. So NAMA doesn’t have an intrinsic value separate to how much it pays to the banks. How much the development loans are worth is dependent on what state the Irish banking system is in to provide credit for the punters buying the houses on the other side. Underpay for the loans and the banks haven’t got the capital to support future lending, therefore the development loans themselves will underperform. The more you pay for the loans, the better the situation the bank is in and the more the assets purchased will realise over time. Underpayment has a more severe immediate impact – real money needs to go into the banks immediately. But overpayment depends on it creating consumer confidence. So is the challenge to pay the highest credible amount, which becomes a self-fulfilling prophesy? Is what is required just an accounting exercise? I suppose in short that all I’m getting at is the concept of market value seems fairly meaningless, and the debate might be better without it. The realisable value depends on the impact the process has, both on the banks and the economy as a whole. The value to the taxpayer is both the assets NAMA receives and the economic dividend of fixing the banks. Ultimately, political decisions for the next N years will determine the value, and it is reasonably sensible to apportion the risk on those making those decisions. The banks will have limited / no control over the management of the assets, but will have an economic interest in their performance. Final question is how the use of subdebt will affect the banks’ position, given one of the points for the levy style recovery was that it wouldn’t have to be accounted for now. Presumably the subdebt also isn’t usable for ECB QEesque indefinite liquidity purposes. Returning to Karl’s slides – and IMHO to the key point of NAMA and any alternatives – I think the most important point he raises is on the next-to-last slide: how can lending to the “real” economy be restored? Or as he puts it “Even after NAMA, we may still be in a credit crunch”. Experience in the US and UK has shown their rescued banks to be more interested in building up their balance sheets, profits and share price (and no doubt thus their bonus pool!). It seems that the main mechanism they have used is large-scale speculation in commodities and financial instruments (e.g. http://topics.nytimes.com/topics/reference/timestopics/people/h/andrew_j_hall/index.html) rather than the sort of lending that might be of benefit to the local economy, and that the Government promotes as the motivation for NAMA. @Alan Sloane “Experience in the US and UK has shown their rescued banks to be more interested in building up their balance sheets, profits and share price “. It’s hard to disagree with that. Rebuilding balance sheets and cost cutting is what I would be betting on. My question though: “Is there even any appetite out there to take up any new lending should the ability to do it post-NAMA actually translate into the banks making it available?” I conducted a straw poll recently amongst some people I know (friends and SME’s in Ireland, so not overly scientific granted) and the vast majority aren’t interesting in doing anything but repaying any debt they have and getting themselves in a position where they are far less reliant on credit/borrowing/overdrafts from banks (ever) again. Doing that will obviously have an impact on their spending too. That might be jolly healthy for the individuals concerned but less so for the banks (and retailers) and no doubt they would need to find their pound of flesh elsewhere (eg higher interest rates on mortgages, lower ones to deposits, shedding jobs, etc.) …. which would have consequences. @BJG Call people working in Nationalised Banks what you like – Civil or Public Servants – if the Nationalised Banks are insolvent then the Government carries the can for them if they are Nationalised in regard to Redundancy,Pensions etc etc. The estimate of Civil/Public Servants on the payroll at the 31st December 2008 was 332,000 up 30% from 1998 so there is no problem in increasing the numbers by 25,000 ??? The Irish Shipping Ltd liquidation was in 1984 where a few Mariners were sacrificed by the State and does not compare to 2009. @ Joseph speaking as someone in the industry, i can tell you that banks are more than happy to have customers repaying their loans at the moment. There’s very little focus on profits right now, almost everything is focused on credit control, cost cutting and deleveraging. Profit focus (ex the already assumed increase in mortgage rates next year, which is as much about decreasing losses than increasing profits) won’t return til 2011. @Joseph “My question though: “Is there even any appetite out there to take up any new lending should the ability to do it post-NAMA actually translate into the banks making it available?” I suspect the banks will continue to borrow 1% money (ECB) and invest in bonds where the are guaranteed a healthy return. Building up the domestic deposit base appears low down on their priorities with recent reductions in deposit rates. With about 60 billion of new money post NAMA they will have to find a home for it somewhere. I doubt there will be any great demand in the domestic market for a considerable time. A recent report shows that US consumers paid down debt at a record rate this year. Our consumers have been equally shocked by the meltdown and will avoid debt for a considerable period. @Eoin “Profit focus (ex the already assumed increase in mortgage rates next year, which is as much about decreasing losses than increasing profits) won’t return til 2011”. Is it the case that the reported placing of mortgage bonds by BOI yesterday at 190bp over swap would actually generate a loss or at best breakeven. It was interesting to note that HYPO was able to get them away at 63bp. @ podubhlain well their current 5yr fixed rate offering to existing customers is 4.25%, thats around 147bps over swaps, so on the face of it its crystalising a loss for them. There’s possibly some balance sheet benefits from this as well (i aint no expert on that side of it), but doubt it bridges too much of the 43bps gap. A couple of years ago they were getting these covered bonds away at +10bps over swaps. The benefit of the funding far outweighs the downside of the loss, and the hope would be that the successful sale of this tranche provides confidence for better priced future tranches. @ podubhlain also, this shows that the banks are justified, from a p/l basis, in increasing their margins to customers, despite all the hoo haa that resulted from Perm TSB increasing their mortgage rates. Thanks Eoin So its a dash for cash. Bit late in the day. Mullally at Ford was criticised when he hocked Ford for cash before the meltdown. Pity our bankers did’nt have that foresight. @ podubhlain whats ironic is that Fingleton came within about a week or so of flogging Irish Nationwide to the Icelandics in 2007 right at the top of the cycle. He would have gotten it away for some decent dough and we’d probably be describing his as a genius now. Funny how life works… […] round of “call the bottom of the recession” given that John the Optimist’s plucky call of a bottoming out last summer doesn’t seem to have worked […] Comments are closed.