Subordinated NAMA Bonds = Equal Sharing of Risks?

So, as signalled on this website over the past week, the government’s nod towards protecting the taxpayer consists of NAMA paying for some of the assets it acquires via subordinated bonds whose payoffs will depend in some way on the performance of NAMA assets.

I’d make two points. First, it is generally understood that the payment of these subordinated bonds will only account for a small minority of the overall payment. As such, Eamon Ryan’s claims that this mechanism “will deliver an equal sharing of the risk between NAMA and the banks”—a characterisation directly taken up by RTE’s 9 O’Clock News last night—does not appear to be justified.

For example, suppose we pay €70 billion for NAMA assets, €5 billion of which is in subordinated NAMA bonds. If the assets turn out to be worth €50 billion, then the taxpayer loses €15 billion and the banks lose €5 billion. Perhaps Minister Ryan would characterise this as “equal risk sharing.”  If so, I think the taxpayer is shouldering “the bigger half” of the risk.

Second, the legislation does not make it at all clear what these subordinated bonds really are and, if the government’s track record is anything to go by, they won’t be explaining what the bonds are next week either. The legislation does not even actually say that the bonds will be linked to NAMA’s profits just that “to the extent” that they is linked to NAMA’s performance, the link will be to the totality of NAMA’s performance (e.g. there won’t be a special AIB sub debt issuance linked just to how AIB’s bad assets.)  And certainly there is nothing in the legislation linking the payments to the total cost of NAMA including interest payments.

Beyond the reasons I have already outlined as to why I think this approach is inferior in design to Patrick Honohan’s original plan (and will almost certainly be grossly inferior in terms of the scale of risk sharing) I find the lack of necessary detail disappointing. Relevant section below

47.—(1) NAMA or a NAMA group entity may, whenever and so often as it thinks fit, create and issue subordinated debt securities of such class or type as it specifies—

(a) bearing interest at such rate as it thinks fit, or no interest,

(b) for such cash or non-cash consideration or deferred consideration as it thinks fit, and

(c) subject to such terms and conditions as to repayment, sub-ordination, repurchase, cancellation or redemption or any other matter as it thinks fit.

(2) Subordinated debt securities issued under this section shall be used only for the purpose of providing part of the consideration for the acquisition of bank assets in accordance with section 89.

(3) To the extent that the terms and conditions of the subordinated debt securities (including the terms of subordination) are referenced to or based on a measure of financial performance, the
measure shall be the financial performance of NAMA in totality and not any part or parts of the acquired portfolio.

(4) Subordinated debt securities may be subject to different terms and conditions for different classes or types of those securities.

(5) The total amount of subordinated debt securities issued under this section shall not exceed a percentage of the aggregate total portfolio acquisition value specified by the Minister by order. Such securities will be issued to the participating institutions pro rata.

(6) Where the Minister proposes to make an order under subsection
(5)—

(a) he or she shall cause a draft of the proposed order to be laid before Dail Eireann, and

(b) he or she shall not make the order unless and until a resolution approving of the draft has been passed by Dail Eireann.

61 thoughts on “Subordinated NAMA Bonds = Equal Sharing of Risks?”

  1. @ Karl

    re the subordinated “pro rata-ing”. Isn’t this more than likely going to increase the risk sharing by the privately owned banks in favour of the taxpayer/State? ie on the basis that Anglo’s loans are assumed to be the worst, so AIB/BOI would have to take on subordinated debt, rather than pure senior debt, as a result of Anglo’s bad loans? Even if the opposite were true (AIB/BOI worse than Anglo, which seems less likely), nationalisation wouldn’t have helped out in this regard, ie State owned banks would be dragging down other state owned banks?

  2. Correct me if I’m wrong but this windfall tax, criminalising lobbying NAMA and the ‘sharing of risk’ stuff are just bolt-on red herrings designed a) to show that the Greens have some clout and b) to placate the opponents. Do I have that right?

    Perhaps I’m going off topic here but I think that, on the matter of the Greens and the proposed carbon tax – deemed to be a sop to them – they are rather like Marie Antoinette and her playing the peasant whilst France falls into Revolution. I mean you have, say, a couple earning 80k between them – living in Cavan and commuting to unsafe private sector jobs in Dublin. They paid 400k for their house at the top of the market including a whooping stamp duty of 38k(?) – or there abouts. They have to drive to work each in their own car. Their house is now worth 200k and will possibly go down to 150k. They only bought out there because the dysfunctional planning system means that for a tiny sparsely populated country we have Tokyo commuting distances so that a small class of property owners, developers, professionals, intermediareis can get rich. Eamonn Ryan and co.s big contribution to government is to impose a carbon tax. This ought, in theory, to be a tax designed to change behaviour – i.e. people would be encouraged to take the bus instead. But in reality the tax is proposed as a revenue raiser – in the full knowledge that this couple has no choice. As a man from the ‘government think-tank’ said a couple of weeks ago on RTE Radio 1: it’s real purpose is to raise ‘much needed’ government revenue. So there you have it.

    I don’t think that the words ‘Vaporised’ adequately describe what is going to happen to the Greens at the next election. The only word I can think that describes this government is ‘decedant’ in the way that Gibbon described Rome in his Decline and Fall.

  3. I should have said ‘we have Tokyo commuting distances so that a small class of property owners, developers, professionals, intermediareis can get rich AND government can take its cut in fees and taxes..

  4. of course decadent describes the end state of an administration in decline but, in reality the people who perpetrated the 1980s never paid any price. Social Partnership was nothing more than a face saver for them and a soon-to-be opened ATM for the Unions in return for desisting from their habit in the 1980s of destroying the economy…

  5. If the proposed risk sharing is limited to a particular loan class or subset of loans, it makes the value of this scheme even more dubious and open to manipulation. It would make much more sense that risk sharing applies to all loans. In fact, subordinate generally means junior to the senior bonds ;). Failing that, the risk sharing would be more effective, from a taxpayer’s perspective, to apply to loans purchased at face or close to face value. If it were to apply to a category* that was set for an 80% discount, perhaps now a 70% discount will apply with the banks “risk sharing” the 10% which would have been written off.

    (*for example loans backed by green fields)

  6. @Eoin JUDGE REFUSES CARROLL PETITION FOR EXAMINER

    Where next then? The European court of human rights? Might as well give it a shot eh?

  7. It will be very interesting to see Mr Justice Frank Clarkes written Judgement tomorrow.

    But for now, I would like to solicit comments on the risk sharing aspect.

    In light of Justice Clarkes limited comments today, that he took a ‘very serious view’ of how the company presented its income figures, adding that there were ‘many inaccuracies in the material’, how can we have any confidence at all in any of the Banks involved in this case in assessing risk on the basis of the Zoe revised business plans. Bearing in mind that one actually supported it, and Anglo was even prepared to advance further sums of money.

    Where are the Banks expert accountants? Or do they now not look beyond the executive summary?

    Can we have any trust at all in those tasked with the valuation process?

    That Nama will have the ability to spend to bring projects to fruition, can we have any confidence in their ability to assess risk properly?

    Unless we can, it is pointless even debating the mechanisms of risk sharing.

  8. @Eoin

    I was going to suggest the Hague where I believe there’s a rather large international court but I expect Rabo/ACC have a branch there!

  9. Nama, will have the same rights as the banks when it takes over the loans.

    We should hope and pray that very few of the developers default, otherwise I fear for the future.

    A bonanza decade for Senior counsels on the Nama carousel in the courts.

  10. I was surprised that a Big 4 accounting firm like KPMG would put its reputation at risk post the bubble where good business will be harder to find.

    I used be an accountant and the €10m margin on about €1.3bn in loans in a 3-5 year period just seemed flaky. A marginal change in outlook would have presented a different scenario.

    The 7 companies and the inter-company balances with the other 44 and possibly unrealistic cash flow assumptions, must have resulted in a tangled web.

  11. @Michael Hennigan

    I just hope the Justice goes into the detail when he gives the written judgement tomorrow.

    Is it just poor accounting? If it is, then the country is in even bigger trouble than we imagine.

    At the first application there was a similar scenario, when a liability was actually presented as an asset.

  12. Does anyone else think that the delay on stating how much Nama / the public will pay for the bad loans being so long, was purposly planned that way?
    So that once it does come out, they could say as they are saying now, that it’s too late to change plans and Nama is the only thing that can go ahead at this stage?
    It kinda feels that they didn’t want to give out any information or details until people were worn down and the idea of starting all over again with another plan might not be welcomed even by the public.

  13. @Michael Hennigan
    “I was surprised that a Big 4 accounting firm like KPMG would put its reputation at risk post the bubble where good business will be harder to find.”

    You must have heard of the joke about the economist, the lawyer and the accountant who were asked what 2+2 is?

    The economist said ceteris paribus 2+2 is 4
    The lawyer produced a 50 page document and a bill for €10k and said the answer is 4
    The accountant asked “What do you want the answer to be?”

    It seems to be the case now whether it’s accountants, lawyers or even economists they’re prepared to align their view with whoever pays the money.

  14. @Karl

    You seem to see every single development in this NAMA initiative as negative, or maybe I am misinterpreting you.

    1) Yes of couse this is not quite Nama 2.0 ala Patrich Honohan. Is that of itself negative?

    2) One difference is that the risk asset is being given to the banks rather than the shareholders. This could reduce the requirement of the taxpayer to inject capital. Is that a negative?

    3) Another difference is that it is subbies and not equity which is being granted. As Robbie Kelleher of Davy said on RTE Drivetime this is actually more favourable for the taxpayer as the banks get some of the downside of mispricing but none of the upside. Why do you think that is a bad development?

    4) You state that under the PH plan the banks get completely freed from their legacy past, whilst under current proposals they remain partially chained to it. But the government has consistently insisted that should NAMA failo a levy will be imposed. There was never any suggestion of a completely clean slate.

    One of the intersting developments is that the subbies stake in NAMA is an agggregate one and not bank specific. This is contrary to for example the DAVY expectation in their morning comment. I was surprised by this. It must dull the incentive of each bank to ensure its loans are successful.

  15. @Brian Woods

    Robbie Kellaher of Davy and his friends from Goodbodys and Bloxham are never asked on TV?Radio to declare the interests that their employers represent.

    They are far from being independent experts – fully paid up spokepeople for serious vested interests would be a faur description.

    Tom Parlon rightly gets a lot of abuse for fronting for the CIF.
    These good gentlemen represents interests that put Parlon in the halfpenny place.

    Who was it that said the only thing that ever really scared him was the bond market?

  16. @BW

    I am doing my best to interpret the proposals as best I understand how they will be implemented. There are very strong signals that the sub bond component will be small and this post states that and should be interpreted in that light. If I turn out to be wrong I will come back and admit it.

    “1) Yes of couse this is not quite Nama 2.0 ala Patrich Honohan. Is that of itself negative?”

    Well, it’s not quite Nama 2.0 in ways that I don’t like and I’ve explained why.

    “2) One difference is that the risk asset is being given to the banks rather than the shareholders. This could reduce the requirement of the taxpayer to inject capital. Is that a negative?”

    Let’s back up a bit and start at the start. The banks are ostensibly adequately capitalised now. The capital requirement post-NAMA will be related to the losses incurred in the transfer. Every euro in losses for the banks will be a euro saved for the taxpayer that can be used to recapitalise the banks. There is no “magic” way to reduce the capital requirement without in some way overpaying, so just looking at the required capital injection in isolation fails to capture what’s going on. I am in favour of the Honohan plan partly because I view the underlying assets as likely to have a low value and so I like the idea of paying a low value, with little lost from handing an equity stake in NAMA to the shareholders.

    “3) Another difference is that it is subbies and not equity which is being granted. As Robbie Kelleher of Davy said on RTE Drivetime this is actually more favourable for the taxpayer as the banks get some of the downside of mispricing but none of the upside. Why do you think that is a bad development?”

    I’m sure Robbie and all his colleagues at Davy’s think that an upside for NAMA is highly likely. Given the upfront non-contingent price likely to be paid, I don’t think so. But obviously I can offer a more informed opinion next week.

    “4) You state that under the PH plan the banks get completely freed from their legacy past, whilst under current proposals they remain partially chained to it. But the government has consistently insisted that should NAMA failo a levy will be imposed. There was never any suggestion of a completely clean slate.”

    So just because the right approach wasn’t being discussed by the government, that means I can’t put forward, as an independent economist, a case for the right approach. Why would I behave like that? That said, nobody ever took the levy idea too seriously.

    Finally, you want to classify me as someone “who interprets every development as negative” but I’ve read enough of your comments now to see where you’re coming from so that doesn’t surprise me. All I can say is that I am politically independent and I’m simply commenting on and interpreting the proposals as they come forward. Incorporating some class of contingent payment into the proposals is a good thing. But in light of repeated claims that the government was “adopting Honohan’s plan” I find what’s happening now pretty disappointing.

  17. This is what Prof Honohan said in the Irish Times,

    “Thus, there would be a two-part payment. One part, representing the basic price that can confidently be expected to be attainable, should be paid in bonds. For the rest, the shareholders of the banks (and possibly other providers of risk capital to the banks) should be paid in the form of an equity stake in Nama’s future recoveries.”

    If I’m right this means that NAMA would pay a confidence value of (say) 80% of estimated LTEV to the banks and allow the current shareholders to participate in any upside of the NAMA process. So, if NAMA recovered anything over 80% of estimated LTEV the current shareholders would share the in the gain (say) 50/50 or 25/25/50 is subordinate debt holders were to participate.

    In other words there was potential upside for both current shareholders (which Prof Honohan distinguishes from the entities that are the banks) and the Citizen (through NAMA).

    What John Gormley and Eamon Ryan have achieved is nothing more than reserving judgement on part of the estimated LTEV while we hold our collective breath and “see how it works out”. As they say in Ireland “sure it’ll be grand”. But it won’t be grand.

    NAMA now beings to sound like a USA GSE (Govt Sponsored Entity). It had been assumed that the USA GSE’s did not have the “full faith & credit” of the USA.

    That changed when the creditors of the USA got a little concerned. So, what was not a debt of the USA became a debt of the USA.

    NAMA will find itself in the same position. It will have to honour its debts.

    How will the banks value their holding of NAMA subordinate debt? How will auditors be in a position to judge whether the opinion of the directors of the banks regarding the value of the NAMA subordinate debt is true & fair? By definition the subordinate debt can only pay out on a cash flow basis. And that’s after the expenses of running NAMA. The directors will have to mark it zero from day one, they don’t have a crystal ball. The auditors don’t have a crystal ball. The auditors will need considerable evidence to value the sub debt at anything above zero. It seems to me it has to be marked to zero for (say) three years by which time there may be some evidence of its value.

    To give them their due at least it took the USA 30 years to create the monsters that are Fannie Mae & Freddie Mac. John Gormley and Eamon Ryan have managed to create a similar monster for Ireland in two weeks.

    What Gormley & Ryan have created is so far removed from the Honohan proposal it is surprising that they can say the name Honohan without being struck by lightning.

    But there is another problem. What is LTEV? It is an unknown.

    If I put my cynical hat on for a moment. Fianna Fail & The Green Party have already decided what the banks “need” to make them solvent (and please don’t tell me that the banks are solvent).

    The number has been cooked.

    So what used to be estimated LTEV is now New estimated LTEV which is equal to Old estimated LTEV * (1 + whatever John & Eamon need to get this over the line at the party meeting).

    The banks will fit tooth & nail to increase estimated LTEV. If they get overpaid how does the State recover the overpayment?

    Who’s running this circus? Is it the Wizard of Oz?

    The membership of the Green Party need to be fully aware that the estimate of LTEV is entirely dependent on who pulls the levers and flicks the switches of the valuation process.

    If there are any members of the Green Party reading this look away now.

    PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN.

  18. @ Greg

    re Fannie Mae and Freddie Mac: “It had been assumed that the USA GSE’s did not have the “full faith & credit” of the USA.”

    Eh, where on earth do you get this assertion from? In fact the exact opposite was the case. Although technically speaking there was no “full faith and credit” type guarantee in place, everyone ASSUMED that there WAS implicitly just such a g’tee in place from the US government. This is what enabled the GSE’s to borrow so cheaply and grow so large in size. Indeed this is why so many people blame the US government itself for creating so much of the housing bubble there, by granting the GSE’s this implicit g’tee.

    Capitalist societies implicitly g’tee their largest financial enterprises and systems. This is why after the Irish govt g’tee was brought in to place, one of the most prevelant comments was that all the Irish govt was doing was “making explicit that which was always implicit”. Maybe this isn’t how it should be, but it’s generally how it is.

  19. Eoin Says:
    September 10th, 2009 at 9:34 pm

    “Eh, where on earth do you get this assertion from? In fact the exact opposite was the case.”

    It had been assumed by the “markets” that Fannie & Freddie would never go bankrupt. Which is what they are now.

    Nowhere in any of the loan documentation of Fannie & Freddie was the “full faith & credit” of the USA offered as a backstop in the case of bankruptcy.

    I’ll try and find some links.

    If Fannie & Freddie did have full faith & credit why was their debt not added to the USA national debt and why did such debt not have to go through Congress to be approved.

    The people who bought that debt got a premium over treasuries. Therefore it carried additional risk over treasuries. The people who bought that debt were “sophisticated” investors, they weren’t widows & orphans. Are you suggesting that they received additional risk premium for nothing?

  20. Eoin Says:
    September 10th, 2009 at 9:34 pm

    “Capitalist societies implicitly g’tee their largest financial enterprises and systems.”

    You and I seem to have differing views on what capitalism means for a democratic society.

    Too big to fail comes to mind. Though I prefer too big to bail.

    When I go to a pooling booth I don’t think I am voting for the Bank of Ireland or AIB or Anglo Irish.

    Maybe I need to go to a re-education camp. I don’t have a degree in economics.

  21. @Karl

    Thanks for the comprehensive reply. As a retired executive of a bank owned life assurance company, I myself am coming from nowhere on this. I am genuinely trying to assess the situation.

    The current proposal is not Nama 2.0 ala PH but is IMHO somewhat better.

    I take your point that we shouldn’t take this levy thing too seriously.

    Personally, I see this debate focussing in on the key issue “how much of the banks should the state own after this bail out?” 100% to me indicates a state of emergency and will loom large over our economic psyche for a long time.

    80% is just about right. A perception that things are continuing as normal without too much wealth transfer from the taxpayer to the bank shareholders.

    50% is wrong and would see bank share prices soar thanks to the taxpayer generosity.

    All will be revealed on N-day.

  22. Quick question- will these new sub-ordinated bonds create difficulty for the banks in raising cash in the markets or at the ECB? [Presuming the Subbie Bond figure is something worth talking about]… Seeing as they will now be borrowing on the performance of NAMA assets rather than on the performance of the Irish economy (through the regular Government bonds)

  23. Eoin Says:
    September 10th, 2009 at 9:34 pm

    “Capitalist societies implicitly g’tee their largest financial enterprises and systems.”

    So you would have a democratic republic embed moral hazard as part of its essence.

    Can you provide me with some suggestions on what I might read to come to that conclusion?

  24. @ Greg

    from Nobel Laureate Vernon L Smith in the WSJ in 2007 (via Wiki):

    “…it set the stage for housing bubbles by creating those implicitly taxpayer-backed agencies, Fannie Mae and Freddie Mac, as housing lenders of last resort.”

    You’ll never find this in the loan documentation simply because the g’tee was implicit rather than explicit. As such, it could never be formally stated. The premium that GSE debt carried over Treasuries was always minimal, but existed for this reason, and the GSE debt should have yielded far far higher if they were truly stand-alone and independent. However many people bought the GSE debt, sold the Treasuries and pocketed the difference in what they considered to be ‘risk free arbitrage’. The Congressional Budget Office estimated that this provided an annual subsidy to the GSE’s of as much as $6.5bn as long ago as 1996. Also they were allowed hold lower capital reserves than privately owned institutions of a similar nature, they were presented with housing mandate goals from the government, and they had direct lines of credit to the US Treasury.

    RE societies implicitly g’tee-ing their financial systems: look what happened when Iceland didn’t. Your textbook version of capitalism will never mention it, but then we don’t live in a textbook capitalist society.

    And when Irish society continually voted for economic policies which rewarded the taking out of loans and the purchasing of housing assets via the banks (tax reliefs on mortgages, room rentals, investor loans etc), then in many ways people were indeed voting for the likes of AIB, BoI and Anglo. Until we realise that we can’t just blame politicians, developers and bankers for this nations problems, instead of accepting much of it ourselves, then we will be bound to repeat the same mistakes again at a later date.

  25. Eoin Says:
    September 10th, 2009 at 10:17 pm

    from Nobel Laureate Vernon L Smith in the WSJ in 2007 (via Wiki):

    “…it set the stage for housing bubbles by creating those implicitly taxpayer-backed agencies, Fannie Mae and Freddie Mac, as housing lenders of last resort.”

    Thanks for that, obviously I have some reading to do.

    By the way, what was the “it” that set the stage?

  26. @ Eoin:

    Jeez Louise, Eoin.

    You mean NAMA is not the GSE. It was AIB, BofI, Anglo …. all along.

    “And when Irish society continually voted for economic…..”

    No being picky here but “society” doesn’t vote. Citizens over the age of 18 vote.

    Are they responsible for their vote? Yes, of course they are. But, you seem to be placing greed at the forefront of each vote. I think that is a dismal view of the world, and indeed of Ireland. Is it not possible that they were conned by Ponzi Scheme salesmen?

  27. Eoin Says:
    September 10th, 2009 at 10:17 pm

    “RE societies implicitly g’tee-ing their financial systems: look what happened when Iceland didn’t. Your textbook version of capitalism will never mention it, but then we don’t live in a textbook capitalist society.”

    I glad there are no textbooks that say

    “Capitalist societies implicitly g’tee their largest financial enterprises and systems.”

    You have saved me some useless reading.

  28. @ Greg

    Clinton cutting massively (to $500k i think) in 1997 the threshold on capital gains tax on real estate gains, which many point to as instigating the 1997-2007 property market bubble (there was lots of other factors too, but it was undoubtedly a contributory factor).

    I wasn’t trying to be snappy with my posts above. I’m simply trying to point that, like it or not, nations almost always bail out their financial systems when they get into trouble. We demand cheaper and easier access to credit, we demand that policies are enacted to enable us to buy more and bigger houses, and we demand tax breaks to help us reach our goals. We then act surprised when a property bubble forms and the banks get into trouble, and whats our response? Make the banks keep granting cheaper and easier access to credit! We reap what we sow.

  29. @ Greg

    greed is the pre-eminent human condition. We’ve always wanted more food, more wives, a bigger cave, whatever. Always have and always will. I’m not saying this is a ‘bad’ thing, its helped us evolve to where we are, but at least i’m being honest about what we are! If believing that evil Ponzi salesmen were the sole cause of the housing bubble helps you sleep better, than thats your choice.

  30. Eoin Says:
    September 10th, 2009 at 10:17 pm

    Yes Iceland is interesting. A couple of basis points here, a couple of basis points there, and soon your nation is bankrupt.

    Or I’m I missing something about the global ponzi scheme that is excess savings from a mercantilist China and the petro dollar states flooding the western world and undermining the idea of saving and investing?

    Of course it’s possible that everyone in Iceland knew what was happening but decided to vote for greed nevertheless.

  31. Eoin Says:
    September 10th, 2009 at 10:38 pm

    Eoin,

    I do hope you do not think me snappy either. We do however seem to disagree. This for instance….

    “We demand cheaper and easier access to credit, we demand that policies are enacted to enable us to buy more and bigger houses, and we demand tax breaks to help us reach our goals.”

    You say potatoes I say potatos.

    You say demand I say supply.

    I and I dare say you did not “demand” credit.

    I, and you may disagree with me, say that credit was supplied as a means of recirculation dollars made necessary by the Communist Party of the Peoples Republic of China keeping the Yuan pegged to the Dollar.

    Eoin, we were all conned.

  32. @ Greg

    you should read the piece about Iceland by Michael Lewis in Vanity Fair, its excellent

    http://www.vanityfair.com/politics/features/2009/04/iceland200904

    Iceland spent 100’s of years (1000’s even) becoming master fishermen, they have universities, degrees in it etc, made it the lifeblood of the economy. Then in the space of a few years they thought they could do an equal job at corporate finance and banking, cos it seemed sexier and more interesting.

    Switch agriculture for fishing, and property buying for banking, and what do you end up with….?

  33. Eoin Says:
    September 10th, 2009 at 10:44 pm

    @ Greg

    “greed is the pre-eminent human condition. We’ve always wanted more food, more wives, a bigger cave, whatever…”

    Eoin,

    I will grant you that greed is an element of the human condition. I must disagree with you that t it is “the pre-eminent” condition. In fact I have proof.

    http://www.youtube.com/watch?v=o0FiCxZKuv8

    I don’t think he worked for Lehman Brothers.

  34. @ Greg

    i went in to the bank and said i wanted a mortgage. They didn’t doorstep me. Nor did they force or ask most other people if they wanted one.

    As for the Chinese reserves and the Arab petrol Dollars, well i view it as the US consumer demanding cheap credit AND cheap goods, and everybody else complying with them. We’re all too scared (economically speaking) to say no. You’re right in that this fundamentally undermines our long term economic interests in having a stable and sustinable economy, but then this comes back around to my greed theory where we’re too greedy to look at the long term.

  35. @ Greg

    if MLK could’ve patented peace and love he’d have been a billionaire. But he cant. As such its up to the other aggressive innovators in our world to come up with the new ideas for tomorrow to make the world a better place. MLK no doubt would have disproved of the atomic bomb. But the research from that will one day lead us on to totally clean, cheap and renewable energy. MLK could never have done that, but a ‘greedy’ corporation or scientist no doubt one day will. Without greed there is little or no risk taking (what’d be the point?) or innovation. Without these there is no progress.

  36. Eoin Says:
    September 10th, 2009 at 11:31 pm

    “if MLK could’ve patented peace and love he’d have been a billionaire.”

    Eoin,

    Martin Luther King Jr. did not want to be a billionaire. He did not want to patent love.

    He knew that love was love.

    He also knew that greed and the desire for power over others is part of the human.

    Eoin,

    The people who invented the nuclear bomb, by innovation, could yet destroy the entire human race.

    Greed is one of the seven deadly sins. And it has nothing whatsoever to do with enterprise.

    Progress is a double edged sword. Greed is always bad. It just takes people time to work that out.
    And because we are not immortals we have to work it out at each generation. Greed and lying are joined at the hip.

    And now, the Green Party is joined at the hip with Fianna Fail.

    It’s a good job all the economists are asleep at the moment. Otherwise they might have moderated Political Economy to mere Economy. 

  37. The membership of the Green Party need to be fully aware that the estimate of LTEV is entirely dependent on who pulls the levers and flicks the switches of the valuation process.

    If there are any members of the Green Party reading this look away now.

    PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN.

  38. @ Greg

    “Greed is one of the seven deadly sins. And it has nothing whatsoever to do with enterprise. Progress is a double edged sword. Greed is always bad. It just takes people time to work that out.”

    Greg, from an economic point of view this is, in my view, utter tosh. If this was http://www.irishmorality.ie you’d probably have a point, but its not.

  39. Eoin Says:
    September 11th, 2009 at 7:05 am

    Eoin,

    Followed the link. Seems to be some sort of a search engine. Maybe that is appropriate to “Irish Morality”.

    However, the economists are probably awake now.

    What you seem to believe in is some sort of radical Libertarianism close to anarchy.

    I’ll leave the last word to you.

  40. The two aspects I like about the proposal are (i) it caps the gain for the banks if asset prices recover meaning gains are socialised as well as losses, and (ii) it provides a strong incentive to those in the banks performing outsourced NAMA functions to recover the maximum possible.

    Unfortunately, those are the only positives I can take based on what we have heard so far.

    Fundamentally, nobody in the public or in the markets trusts the banks. The suggestion is that NAMA will resurrect that trust by clearing up their balance sheets by removing all the toxic debt. This will work whether or not the banks hoodwink the state. The state is taking the risk of bank mala fides, not the market.

    If we leave the banks holding the most toxic part of their toxic loan book after a write down to LTEV only then who in the market is going to trust them?? We could well have to recapitalise them again a couple of months later. And, if they did hoodwinked us in the NAMA process and they knew it then they would take all the stringent measures to improve their capital position which we want to avoid.

    If we gave the assets to the shareholders and some bondholders then we would be giving an incentive to those shareholders and bondholders to invest further in the cleaned up banks to incentivise them to recover asset values. This benefit is also lost.

    It is regrettable that the risk sharing mechanism has been announced by cabinet members but no clear technical description of how it will work has been published. This is not conducive to proper debate which the Government has promised us.

    It more regrettable how this has been “stage managed” with the Greens being seen to force changes for politically expedient reasons. Either we have a clear banking sector recuperation strategy or we don’t. Mixing and matching with politcally popular but vague amendments is the very opposite of a clear strategy to rescue banks. Hard cases make bad law and political expediency makes for flawed strategies.

  41. Edit of above post – para 3 is how NAMA 1.0 or Honohan NAMA 2.0 would work. It does not reflect NAMA 2.GN as has been announced.

  42. @ Greg

    we’re ridiculously off topic at this stage, but possibly i can bring it back around somewhat.

    I’m by no means a radical libertarian, but i don’t see why their concept of individual responsibility shouldn’t be more widely adhered to. In a progressive tax economy with generous social wealth transfers, people are ‘bailed out’ everyday, so i don’t see why this shouldn’t eventually naturally lead onto to one involving the banking sector. Society scultped a financial system which supplied cheap credit to be used for the never ending demand for consumer products and investment assets. I don’t see it as being bizarre to suggest that society should therefore be involved in the bailout of it when it gets into trouble (we can argue about the levels that this bailout should require from society). Ergo NAMA.

  43. @Zhou
    “Mixing and matching with politcally popular but vague amendments is the very opposite of a clear strategy to rescue banks. Hard cases make bad law and political expediency makes for flawed strategies”.

    I agree with the sentiment expressed. Interesting to see the view of a trader a bit removed from the local scene-” “The publication of a bill to set up the National Asset Management Agency (NAMA) is “not good” for holders of Ireland’s bonds, according to Societe Generale SA….That is good for investors in Irish banks. That is not so good at all, both for the taxpayer and holders of Irish sovereign debt.”

  44. @Zhou,

    “(i) it caps the gain for the banks if asset prices recover meaning gains are socialised as well as losses”

    It’s important to remember that the assets are loans. Unless NAMA forecloses and takes possession of the property, the ‘upside’ is limited to the principal and interest owed. If the loan is purchased below par then there would be a gain getting the principal back. I’m a little wary that some folk (not you) may think that if property prices shoot up, that NAMA will strike gold.

  45. @Ahura

    It is not inconceivable that the loans on some of the properties might be sold on at a profit in the future. Also, it is not inconceivable that a performing loan might recover more than if it were foreclosed and might exceed its designated LTEV at the moment.

    I don’t think NAMA might stike gold but if you have the strength to buy at the bottom of the market you should have a good chance of making money. For that reason I think gains should be socialised as well as losses.

    Also, if Prof. Honohan’s original formula were to be used the banks/shareholders would only get a share of the uplift from fire sale to LTEV and NAMA would get a share too. That of course is a better socialisation of gains.

  46. @KW

    Do you have any evidence to support your first assertion that: “it is generally understood that the payment of these subordinated bonds will only account for a small minority of the overall payment”. Generally understands by who? It is certainly not my understanding. I know economists are fond of assumptions, but really?

    Your second criticism is also pure conjecture – you consider it unlikely that a NAMA bond would not be paid out. This demonstrates an unwillingness to accept to bona fides of those trying to work the NAMA proposal out, justified in the case of FF I’ll admit.

  47. @JC
    Both KW and I have heard this “small percentage ” a number of times from what are credible, cross party, highlevel contacts. No, cant tell you whom.

    As for whether they would pay or not, given that the state are unwilling to ask private entities to default or restucure on junior debt, what chance that they will so do themselves?

  48. @BL
    I have heard different from decision makers at at the highest level. Are your sources in the DoF and FF by any chance?!
    On the question of paying, I think that this is a unique situation where it will be clearly set out from the beginning that payment is dependent on the performance of NAMA.
    I think it’s time to acknowledge that if what we are hearing from senior cabinet figures is correct, the NAMA bill is taking into account expert criticism and moving in the right direction. More work to be done perhaps but is it time for another letter to the IT acknowledging progress and identifying areas for further attention? I think that this would be in the interests of the country. It’s not time to become intrenched in extreme positions.

  49. @JC

    By generally understood, I mean that a number of the media outlets have repeated the “small percentage” report and, yes, I have spoken with various people who would generally be reliable. So I don’t really know what you mean by “what we are hearing from senior cabinet figures” unless you are using the Royal We.

    But look rather than play the your sources versus mine game or waste lots of time and effort on new mass signature letters, how about we wait until Wednesday and see what happens?

  50. @JC
    I dont think that wanting the capitalist system to work, the state to be available an willing to support the banks, and the tapayer to be protected are extreme positions.
    As KW says, lets see. Mind you I suspect that the level of spin, fluff, misdirection and obfustucation we will see on wednesday will not necesarily help us to see clearly. But, hey, could be wrong…

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