Will NAMA Get Credit Flowing?

I have spent a lot of time arguing that, among the set of options available to us to put the Irish banking system back on track, the current NAMA proposals represent an approach that is unacceptably costly to the taxpayer. The sense I get back from those who defend these proposals is that, yes this may be risky for the taxpayer but that the risk is worth it because NAMA is going to “get credit flowing in the economy again.”

Forgetting for a minute the questions of cost or fairness, I would argue that there is little reason to think that the current NAMA proposals will achieve this goal over the next few years.

Let’s take a step back and start with a potted history of the Irish banks.

In recent years, the Irish banks rapidly expanded their balance sheets, most notably to do a huge amount of property lending. This was funded, not out of deposits, but via borrowings from international money markets. Many of these property loans went bad with the losses threatening the solvency of the banks. With global financial markets in turmoil, wholesale markets have largely withdrawn their funds from the Irish banks despite the presence of a state guarantee, and the banks are now heavily reliant on collateralised borrowing from the ECB.

Implicit in the idea that NAMA is going to get credit flowing in the Irish economy are three assumptions, one that is probably correct but not explicitly stated by the government and two that are probably not correct.

The probably correct assumption is that the Irish banks are now constrained in their ability to extend new loans (should they want to) because they have reached the limits of their eligible collateral. I can’t recall any explicit statement by the government about this, perhaps on the grounds of “commercial sensitivities”, but it certainly seems to be an implicit assumption. According to this reasoning, the replacement of property loans (ineligible as collateral in ECB repo loans) with government bonds (which are eligible) frees up this constraint and allows the banks to make new loans again.

The next (probably incorrect) assumption is that this access to new liquidity will result in new lending to businesses and households. I think this is based on some dubious thinking. The money from NAMA plus whatever recapitalisation funds come from the state are replacing property loans, not loans for small businesses. To expect this money to then be channelled into small business lending is to expect a large increase in lending to these firms over the levels that prevailed prior to the crisis.

Now the fact that so many firms are in trouble might lead you to believe that this type of lending should go up in recessions. However, the opposite is generally the case. This is partly due to demand—firms shelve investment plans during recessions. But it is also due to tightening of credit conditions. See page 9 of this release of the Fed’s Senior Loan Officer Survey for evidence that banks have tightened credit in each of the three recessions since the survey was introduced.

Researchers will, of course, be familiar with this as an example of the so-called “financial accelerator” mechanism associated with the research of Fed Chairman Ben Bernanke—as the underlying financial conditions of businesses deteriorate, banks become reluctant to them supply funds out of fear they’ll go bankrupt.

The final probably incorrect assumption is that, after NAMA, banks will not be concerned about their capital levels. The government has promised to recapitalise the banks after the losses triggered by the NAMA loan purchases. However, they are also reluctant to stump up too much money, partly because they have a declared goal of keeping state ownership of the banks to a minimum. So, in line with the various stockbroker reports, I expect that after NAMA the main banks will have Tier 1 capital ratios of either the regulatory legal minimum of 4% or else slightly above it. This is likely to be below the level that international money markets will consider safe, so it seems likely that a guarantee will remain in place and also that the banks will want to get their capital levels back up.

What would this mean for lending? The concept of bank capital isn’t very well understood by most journalists, who regularly repeat a line about undercapitalised banks “hoarding capital” by not lending. But that’s not really the way it works. Bank capital standards are assessed according to capital ratios in which the denominator is a risk weighted measure of assets. When banks want to get their capital ratios up, they can do so by adding to their capital or by reducing their risk-weighted assets.

With further loan losses coming on mortgages and businesses, the banks are unlikely to make much in the way of profits over the next few years, so capital won’t be added via retained earnings. Rights issues are a possibility but they would probably be limited. So, it seems very possible that the banks will engage in a medium-term strategy of tight credit, thereby getting loans back down to pre-bubble levels and gradually selling off the NAMA bonds to pay off liabilities.

These arguments may worry those who express concerns that the NAMA legislation doesn’t directly relate to getting lending going. Many have expressed the view that there should be something in the legislation that compels the banks to meet some set of lending targets. I think this is a really bad idea. It would undermine the commercial nature of the banks and would impede them on their longer-run path to a viable loan-to-deposits ratio. Those who oppose nationalisation on the grounds of political interference in the banks should consider why clauses like this should be considered anything other than political interference of the crudest form.

I should emphasise here that much of this scenario could also come to pass after nationalisation and that this is not just me taking another swipe at the NAMA proposals. One difference may be that, if the objective of minimising state control is set aside, the nationalisation process may produce better capitalised banks than are likely to emerge from the current proposals.

One reason why it is important to discuss these issues is that most of the political appeals in favour of NAMA, such as Brian Cowen’s on Prime Time on Thursday, are now focusing somewhat emotionally on the idea of NAMA as a quick fix to get credit to troubled firms—This is about saving the Irish economy and so on. I would suggest that this simply isn’t the case and that a more sober discussion about how to get our banking system back to solvency and on the path to a sustainable funding situation would be more useful.

139 thoughts on “Will NAMA Get Credit Flowing?”

  1. The short answer is that “NO” NAMA will not get credit flowing. The long answer is, these banks are going to spend years repairing their balance sheets. The liquidity injection they receive from their NAMA bonds has to go to finance their own debts. After borrowing left, right and centre, they even sold off their own headquarters to pump money into property, they are going to be concerned about their own survival for years to come. They are going to be much smaller entities. Their operations will shrink their traditional methods of making money are destroyed. They will have to find new ways of making money. Also, they are operating in a country that is, to use McCarthys recent expression, “bust”. Hardly a good environment for a banks that are trying to survive. They will follow the money trail and the money trail is outside of Ireland for the next ten years minimum.

    The problem with NAMA is, that it was presented as an economic stimulus package, when, in fact, it is the opposite. It eliminates any possibility of the real economy getting stimulus now or any time soon. By choosing NAMA the government have made stimulus contingent on a broken banking sector with a defunct business model. The government believes that it will repair itself and making loans to businesses. It is not going to work. Alternatively, it will be so slow that it will be less than useless to stem the tide of business closures and unemployment.

    At the same time, NAMA will be competing with the real NTMA and the bond spread will widen. Our national debt will double in the space of three months. Interest rates will not remain at their historical lows all this borrowed money is set to become a mill stone etc.

    We need uncontaminated banks in the country to operate beside our broken banks. Our credit unions need to be revamped or they too will not have a cent to lend shortly. That is another discussion. I want to see Canadian banks or Chinese banks operating on the high street discussing peoples lending requirements and either lending or refusing credit on a case by case basis. How many times in my lifetime are we going to have to save the Irish banks? Is this solution to complicated?

  2. Well-reasoned article.

    I too, would expect credit lines to be a lot tighter for a few years to come.

    There has been so much emphasis on Nama and the € 90 billion of commercial loans, that a potentially bigger problem may be just around the corner…..an estimated €150 billion in home loans.

    Jobs continue to be lost. Incomes have, and will continue to be squeezed. There is the uncertainty re ECB benchmark rates, not to mention the speculation that when Nama is established, banks will increase mortgage rates.

    There is every danger that the number of mortgage defaults will rise.

    I recall Colm McCarthy commenting recently that loan loss provisions from AIB looked low.

    The idea of somehow legislating for setting lending targets is flawed.

    An aspirational target would offer the banks a greater degree of flexability.

    We need to keep in mind that a code of conduct for lending to SMEs was published by the Financial Regulator last February and took effect in March. SMEs are still protesting that banks continue to deny credit.

    I do not believe that we will see a similar situation in Ireland as in the U.S.

    I have seen estimates suggesting one in ten U.S. mortgages are in difficulty.

    However, any significant rise in defaults here would pose serious problems for the banks and further impinge on their ability, or inclination to lend.

    I am not sure how many of you are aware of this, but credit lines are already being withdrawn from other sources.

    BOI announced last week that American Express cards will no longer be valid from November 1st.

  3. From the DKM report from the previous thread.

    “In a recession, quality borrowers are hard to find and quality
    Irish borrowers may well be an endangered species.”

    As far as I am concerned this is the next Shoe to drop in the make it up as you go along policy being adapted by the Government.
    They seem to be ignoring The big elephant in the room, Private sector Debt.
    Do you think that a bank is going to extend credit to someone who has a €500,000 mortgage over a 40 year term?:neutral:

  4. One presumes we all hope that banks will apply more rigourous criteria to lending in the future. I audited a big bank (not big 4) many years ago and reviewed their loan books. The 2 main questions they’re supposed to ask are

    1. Ability to repay the loan – how is the business performing, future expectations etc. Ratios like interest cover (i.e profits/interest) come into it.
    2. Value and realisability of security but a bank should not lend based on security alone. Item 1 should be paramount.

    Now pretend you are a sensible banker and a struggling business comes in to look for credit to carry them over until the good times come again. They are not making a profit. You should say no to each and every one as repayment is based on a hoped for recovery (not unlike Zoe).

    Next security. Unfortunately many of these businesses already have borrowings backed by a now reduced value property or a personal guarantee which was backed by a now reduced value residential property.

    The current climate is going to limit the number of customers who will be able to fulfill sensible lending criteria. In the past we had An Foir Teo to lend to businesses that banks (quite rightly) wouldn’t. You get the impression just because the banks are getting big dollops of taxpayers money they should be forced to lend to anyone. Unless we want Nama 2 they shouldn’t.

  5. @KW

    The prime point there is that even with oodles of capital, bank lending would be much lower than the previous decade. This points towards the obvious: leaving aside their liabilities problems, Irish banks will have very low income over the next while and will need to seriously trim costs to avoid operating losses.

  6. Nope. Some customers are already in debt and may be finding it hard to repay. Some are saving more, hence will not need to borrow. Rest are sitting on their wallets waiting to see what the interest rates will rise to.

    I read a comment in the IT that suggested that all (or should this be, the majority?) of first-time buyers in 2006 got either 90% or 100% LTV mortages. If this IS correct, then they are all likely to be in neg equity by now. Negative equity mortgages will have higher default rates. So who is holding these mortgages? Is there any info about the LTVs of non first-time mortgages?

    Brian P

  7. Fianna Fail are a bit like the kid who breaks a window with a football, and then tries to over-compensate by being really ‘helpful’ and apologetic all of a suddent. I mean, look at minister Lenehan, he learned Economics in a couple of months.

  8. @Karl

    If my German is still any good, I read in the Frankfurter Allgemeine a couple of weeks ago that French giant Societe Generale was aiming for a Tier 1 ratio of 8% by the end of the year.

    Irish banks have a lot of catching up to do.

  9. “I expect that after NAMA the main banks will have core Tier 1 capital ratios of either the regulatory legal minimum of 4% or else slightly above it. This is likely to be below the level that international money markets will consider safe, so it seems likely that a guarantee will remain in place and also that the banks will want to get their capital levels back up.”

    Is this a “zombie” bank level of Tier 1 capital. Recent reports of 8+ Tier 1 capital in well capitalised banks would seem to indicate that at a level of 4 the banks would be regarded as marginal and would be unlikely to access funding on the wholesale market. The recent sale by BOI of their mortgage backed bonds saw them paying 190bp over swaps. This margin indicates increased risk even for a presumably prime mortgage book and is likely to be loss making.

    The various reports show that banks in the US, Uk and Germany have not increased lending despite huge infusions of capital. We are so far behind in our rescue efforts that we should benefit from the experience of others and not go down the same path. The German finance minister said recently that the banks had resorted to their old ways of gambling in securities.
    A Bloomberg report shows what outsiders think – ”

    Ireland’s Nama Bill ‘Not Good’ for Bond Holders, SocGen Says
    By David Clarke

    Sept. 11 (Bloomberg) — The publication of a bill to set up Ireland’s National Asset Management Agency is “not good” for holders of the country’s bonds, according to Societe Generale SA.

    “It raises the chances that NAMA will pass,” Ciaran O’Hagan, a fixed-income strategist in Paris at Societe Generale, wrote in a research note today. “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.”

    The agency is buying loans with a book value of about 90 billion euros ($131 billion) at a discount from banks. Finance Minister Brian Lenihan said he will announce the discount on Sept. 16, the same day lawmakers debate the legislation.

    The difference in yield, or spread, between Irish 10-year bonds and equivalent German debt was little changed at 163 basis points today, compared with 145 basis points a month ago”.

    With spreads widening again it is apparent that the markets are not sold on this NAMA thing.

    The Independent today states we will need to borrow 97billion over the next for years. With our existing 68billion sovereign debt and a further 60 billion of NAMA bonds our national debt is going off the Richter scale.
    The cost of servicing this lot over the next 4 years will ensure that there is no money available for anything. Colm McCarthy is right. We are bust.

  10. It’s a double whammy. The claim that NAMA’s objective is to get credit flowing again was always a red herring and nobody wants to take on new loans etc. anyway. As these banks shrivel, they will also charge their customers more and more.

  11. @Michael Harvey “a potentially bigger problem may be just around the corner…..an estimated €150 billion in home loans!”.

    Just this week I wrote an article (“Aftershock”) on the threat posed to society and the financial sector by unemployed people with mortgages. I estimate the potential problem next year to blow a hole about €35 billion wide in Ireland (and I’m only talking about problems with unemployed people not the struggling employed or ‘strategic defaults’).

    In it, I posed a question about whether the definition of what type of loans could be ‘imported’ into NAMA is vague enough (I suspect it is) to include these mortgages (ie the government may well be aware of this ticking bomb).

    ‘NAMA 2’ may not be quite what we thought it was going to be (as in 2 part payments). It may be a whole other ball game.

  12. @Karl
    If the multiplier is dependent on rwa capital – factor in Basle 11 – which remains the model in use and IRB – LGD must rise in recession as default risk increases – which means higher levels of capital should be required to support risky lending – but with oodles of fresh cash via the loan to bond to cash process the temptation will be to use it to fund safe less risky assets.

    Capital released from the bond for loan swop and injected by gov will not be used to unerpin new lending but rebuild and increase rwa capital.

    What isn’t clear right now is what is the new roce or rorac etc required – what’s the benchmark for viable banking propositions.

    Anecdotal evidence suggests that capital is so tight that unused overdraft limits (commitments) are being reduced with pressure on small business to take out hard core and finance it using longer term lending.

    Finally consider the human systems dimension as the internal banking pendelum swings from aggressive lending to risk management. Lenders burnt from bad loans run away from risk. Also cost reduction programmes as banks cut spare capacity impact on not only the people who will be left go but on those who stay – called survivor syndrome – it is a documented syndrome of industries that suffer major negative shocks.

    There are three boad issues at play:

    Business Model Realignment – deleveraging and derisking the balance sheet
    +
    Demand characteristics of a recessionary environment and rising default risks
    +
    Internal human systems effects

  13. @ bill hobbs
    The problem with Basle II is that while its core objective was and is to improve risk management culture there are grave question marks over its effectiveness. In particular, by allowing lenders with the most advanced risk management skills to to migrate “upwards” to an IRB approach. Who decides if the models are up to the mark? The complexity of these models you are talking about where values have to be ascertained for LGD, EAD as well as a value for M (maturity of exposure) often means that the models are shaky at best! The final values that get “plugged in” are often way off the mark. RWA is one of the reasons why NAMA will not work. Who are the experts that are going to decide the values? Is it the auctioneers or bankers who gave 80% LTV’s only to discover they were all horribly wrong. Someone said on this site recently that NAMA was going to be a FAS course for auctioneers, will it also be one for bankers, barristers and politicians?

    I for one, have observed teams of say 20 programers writing financial software for commercial banks. Individually they were experts but had no clue whatsoever about how the bits of the system fitted together i.e. the totality of the system. If these models were “good” we would not have the financial meltdown we have had. Again, as Larry McDonald said in his book on the Lehman collapse there was a “collosal failure of common sense” Lets us try and stick to common sense approaches.

  14. In, “Keenan on NAMA” 6th August Ted McCarthy says:

    “The State is likely to borrow approx. €25 billion in 2009 whereas, one bank alone will likely be borrowing/rolling over funding well in excess of €100 billion.”

    I don’t have numbers but, if (say) before the end of 2011 AIB, BOI, Anglo & Nationwide had to rollover €100Bn would that not account for a large chunk of the NAMA “cash”. That is, even if they could rollover half such a number and the international markets then decided they could get a better risk/reward outcome elsewhere are they not likely to take their chips of the table.

    If seems a possibility to me that much of the NAMA ECB Cash is headed directly to fill some upcoming funding gap. There is no guarantee that the markets will play ball once they have their money back.

    Irish banks could be on ECB life support for a decade while they squeeze margin out of what’s left of their book.

    As I say I don’t have any numbers so this could just be hogwash.

    🙄

  15. @robert brown
    Precisely my point – rwa is being reported based on nonsensical mathematics that cannot ever join the dots- nama is not only being constructed on ltev but the largely discredited IRB approach – it’s delusional- bank capital comes in may guises -which one will be used by BL? The dynamic interaction between deleveraging and derisking is at the heart of whether or not bank money will be created from NAMA’s intermediation. LTV is a smokesreen – what matters is how capital has been allocated based on optimistic LDG/EAD formulation etc Begs the question what is the right level of capital and how is it to be measured, reported and controlled from now on.

  16. I might also add that credit grading systems are based on certain assumptions that have never been tested in a crunch- I suspect bank credit risk managers are worried their internal rating engines which are crucial to feeding into capital allocation models are at best wonky

  17. Is there not a wee contradiction in the notion that banks can’t expand lending, but that there is no demand for lending because firms are shelving investment? Who, exactly, is the target for the credit the banks will be able to lend, and is this not the kind of thinking which has led to furrowed brows in the US as “stubborn” banks there are not shovelling money out as the politicians demand?

  18. Am I being to simplistic to suggest that Ihat Irish debt will become way more expensive on the back of the government increasing the national debt via NAMA ?

  19. Will NAMA get credit flowing again?

    Reasons why it may:
    1. NAMA will provide extra liquidity for banks.
    2. NAMA will provide extra solvency for banks (if NAMA overpays for assets).
    3. NAMA will probably be accompanied by legal and administrative pressure from government on the banks to lend out the extra funds they receive.

    Reasons why it may not:
    1. Banks may use extra liquidity / solvency to reduce dependence on external funding / improve solvency ratios rather than to increase lending. This has been a problem in the US and UK recently.
    2. We are deflating a debt-driven bubble … normally debts levels would reduce significantly under such circumstances.
    3. Very high real interest rates curb demand for debt. Taylor Rule indicates that our interest rates are v.v. high right now. The recent Mazars study into SME funding revealed that “the value of new applications for credit decreased by an average of 42%”.
    4. Nationalisation of bank rescues means a nationalisation of bank credit and a reduction of bank lending here by foreign banks. If the British govt bails out Bank of Scotland, why should BOS use such funds to boost lending in Ireland?
    5. There is little logic behind demands for wholesale extra bank lending. Companies that reduce their scale of activity typically have reduced credit needs, as net working capital is initially released by a reduction in activity. It would be surprising if there were a lot of companies seeking to expand today as the domestic economy continues to contract and our cost base is still high for exporters.

    Weighing it all up I would conclude as follows:
    a. the shortage of credit is not the real problem facing our economy. It is, in the main, an alibi for ignoring the main problem: a deflating credit bubble where most of us lost the run of ourselves.
    b. But banks are withdrawing credit and this is posing a real problem for some businesses. NAMA will significantly help restore the supply of credit. But banks will probably have to be forced to lend out the extra credit by goverment action.
    c. The big surprise will be the shrivelling up of demand for credit.

  20. All posters seem agreed.
    Good
    But these comments remind me of what I was reading in 1999 and 2000. The precipice was in sight and the various wagon trains that are the real economy had still not applied brakes and it would take miles for them to slow to a halt. So the USA invented a War on Terra. Some think it a pronunciation mistake of Bush, for Terror, but as it also includes global warming, not global climate change, and anthropogenic global warming, AGW, it is effectively war on every inhabitant.
    Things are bad. But all of a sudden the economy had started up again. Homes were worth more. So people were inveigled into borrowing against their new equity and the consumer miracle resumed.

    Now we have had a fall off the new much higher precipice, but there are green shoots and a new bubble is being inflated. Most of us think this will fail. But those who have too much skin in the game, not the cream of the crop!, are desperate and will continue to re inflate come what may and using whatever levers are to hand. Surely we remember this? It wasn’t too long ago?

    There are now more of us who see disaster ahead. We also see a greater longer depression caused by the waste of yet more, ever more scarce, capital.
    We also boast many of the economists, although it seems the US do not agree … but we can discount them.

    So what can we do? Liquidate? Join the inflators? Or just fulminate on this great blog?

  21. @Michael Harvey “Have you a link for your aftershock article?”

    Michael, it’s on http://josephmorgan.blogsome.com

    Please bear in mind when reading it that the intended audience are unemployed people (the link through to my blog is from the homepage of halfaloaf.ie) and may not be up to quite the ‘forensic analysis’ a professional economist is used to!
    It’s been difficult to find hard data on precisely how many unemployed people have mortgages, average size of mortgage, etc.

  22. There are some really good and reasoned comments and discussions on this blog, well done to Karl for instigating the discussion and to everyone else who chipped in.

    There is one issue that I would like to add to the debate, and yes there is some self interest here, because at V2020 we have a stated goal of saving 200,000 jobs in Ireland, so we want to be sure we are on the right track.

    Let’s assume that banks do start lending to SMEs, how can we be sure that they make the most appropriate use of the funds, given that their previous 3 trusted advisers, namely bankers, solicitors and accountants do not necessarily understand business.

    Having spoken with many people, we started to realise that small companies, do not have the professional advisers the corporates have and the consulting industry is fragmented. With over 65 industry specialists on board, if http://www.v2020.ie can get the banks on board, we have a framework to ensure we help SME’s or particularly MEs who employ the most people, make the best use of that credit.

    All we need is banks to realise that what they have done before needs to change if they are to de-risk their portfolios and start making profits at the same time as Ireland Inc starts to recover and eventually prosper.

  23. I 4 1 am consoled if our banx do not suddenli ‘lend’ out the nama cash should nama go through. We have to watch the banx like a hawk would its children now; we can’t depend on the market ecb ec or Basle standards of themselves to stop the banx misbehaving again. I wonder would there b the same level of ‘support’ 4 nama if it was explicit that the cash the ecb advances on the back of the nama bonds is simpli going to flow out of the countri to pai down this 100bn 12 month roll over cash call?

  24. @Michael Harvey

    p.s. are you the same Michael Harvey who wrote The Chicago Way? I noticed a reference you made to a writing teacher you once had in another posting.

  25. while not pefect NAMA is probably stage 1 of getting credit flowing again in an economy that is still overlevered by a decade of borrowing from external creditors. away from delevering by waking away from senior type debt (ala iceland, ) we need a process to allocate the adjustment over a long period thru our membership of the euro system. there is no quick or easy fix. lets not pretend to peolpe that there is some binary political decison to be made. many peolple on this website are guilty of promoting this idea.
    1)a large part of NAMA is really a clever way of using the ecb and our membership of the ”eurozone super liquidity zone”. irish banks (and many banking systems thru out europe) have arguably being bailed out since summer 07 thru the ecb repo system. guaranteed funding with low (+crucially v stable) haircuts was the only real source of significant funding for the banks once the wholesale markets closed. nama debt is another v efficient way of generating funding from the ecb system. dont be surprised to see v little nama debt move out of ecb repo. the banks dont need to sell it as it will attract low to zero capital charges on their balance sheets and they have the understanding that it can be converted into cash thru the ecb repo. they wont crowd out the market for irish soverign debt as a) i believe the banks will not want to be seen to sell b) they would be stupid to sell anyway as even if fully g’teed i would expect the market to attach a not insignificant discount to nama bonds. (for liquidty reasons plus for the tail risk perception that they would not be treated the same as pure soverign debt in extremis.)
    2) the irish state and ireland inc needs funding (a lot of it) over the next 2 years. the cheapest source of this funding is the private + public parts of the european system. for the right and often wrong reasons this money will be available in the cheapest form if we cleanse and warehouse the riskier element of the banking system. dithering over a fully nationalisied banking system for the next 2 years is probably not what the international bond markets want. remember – the NAMA workout process will be a 5-10year process. we wont be spinning out aib or boi anytime soon if the reason we nationalsied them in the first place was so didnt have to worry about nama transfer pricing.
    3) we also need private capital. aib + boi will be strong investment cases with post nama balance sheets. i’d buy into both. there is plenty of capital around for banks who can show long terms earnings prospects with short term huge (but mangeable) balance sheet + earnings problems. lets just get on with nama.

    in general i do feel that so much of the debate has being more political rather than economic. a brief look at the balance sheets of any of the banks 6 months ago show that there simply is not enough loss absorbing capacity outside of senior debt to make nationalisation effective in any circumstance. better to borrow money from europe, manage the adjustment over 10-15 years and move to protect an economy that could be worth 300bn by the time my kids leave school. will we care that taxpayers took the second loss risk on 60bn market value or loans (and with risk sharing,inflation and a return to normality i think the eventual losses will be remote to zero).

  26. @Joseph

    It’s been difficult to find hard data on precisely how many unemployed people have mortgages, average size of mortgage, etc.

    Read your Aftershock article. I agree that any reliable data is very difficult to find.

    However, your hypothesis that the situation can only get worse in the short term is almost certainly correct.

    I have mentioned it on different threads on several occassions that Economists and Economic theory often fails because it can not take human behaviour into account.

    That said, there are trends in human behaviour that we can take into account.

    As an example, I was quite alarmed at some of the statistics revealed by the last census.

    Nationally, 22.4% of households are single occupancy.
    8.9% of households are lone mothers with children.

    That is an alarming number of households vulnerable to present economic conditions.

    Cuts in social welfare? Do they make any economic sense at the present time?

    Reckless lending by the banks got us to the position we are now faced with.

    We all recognise that. Politicians of all shades constantly remind us of it.

    Yet we now have them seriously considering forcing banks to lend!
    No bank could reconcile more lending with a deteriorating economy.

    Political Insanity.

    p.s.
    No Joseph, I am not that Michael Harvey.
    Great book though.
    Political corruption, the Mafia, and crooked police officers.

  27. @Thomas c
    “brief look at the balance sheets of any of the banks 6 months ago show that there simply is not enough loss absorbing capacity outside of senior debt to make nationalisation effective in any circumstance.”
    Im sorry, I dont understand this. Surely its the combintion of the issue you raise plus the losses to be absorbed that requires such large injections of capital as to make the N-word a real possibility?
    If you want to buy into AIB, so long as you pay me longterm economic value, you can have my shares. and my anglo shares. What am I bid?

  28. ramp up margins on lending, then operational costs will cover increased risk,

    “When banks want to get their capital ratios up, they can do so by adding to their capital or by reducing their risk-weighted assets.” … NAMA will do both, once its in the banks will make a move toward higher margins, they can’t do it in advance or it would derail NAMA. They could never do it with nationalised banks (politically).

  29. @ Peter Lawless

    Good point made here:

    “Let’s assume that banks do start lending to SMEs, how can we be sure that they make the most appropriate use of the funds, given that their previous 3 trusted advisers, namely bankers, solicitors and accountants do not necessarily understand business.”

    This comes across to me very much when I read the commission on taxation report articles in last weeks newspapers. Even by the highest up experts on the commission. To a degree, I don’t think that SME’s are consulted on things like the commission/taskforce on innovation either, which has been discussed on Iulia’s blog entries here at IE.

    It was also noticeable in Flynn constructions comments to the media this week too, to allow property developers become a part of the solution. I have not heard much in the way of intelligent comment coming from Tom Parlon of the CIF, but then again, he is not of the construction industry either. He sits on another commission of some kind, and performs necessary functions for the industry, but is not of the industry.

    I saw an article, I think it was in last weekends newspaper, about a business in Limerick which was helping to advise companies how to create a ‘Lean business’. That appeared to have some scope to my mind, to create something useful in Ireland.

    But I agree with the point you have made about bankers, solicitors and accountants. Between the three of those cultures, they ran the country more or less into the ground. The fact is, all three cultures are required in order to find a solution.

  30. u have 2 choices to a failed bank/banking system (insolvent,illquid or both). u liquidate the bank and push losses onto every provider of capital (either senior, sub or equity) (iceland, lehman brothers, wamu) or u restruture the asset and liability side. commercial banks are not built to market to market their entire balance sheet. neither should they be forced to sell at “market prices” unless u are liquidating them. the whole problem with a national banking crisis is that you cant clean up the bank using conventional market clearing processes. the crisis itself creates a sitution were is no market or funding for the assets you want to sell/purge. however we know that credit will artificially be rationed and private capital will keep away from banks until the assets of the bank are restructured. its better to place the with somebody who can fund,workout and account for the loans devoid of medium term concerns of maintaining capital adequcy or were they are going to fund. (one reason why many things it may be, it aint a developer bailout – a non bank holder of property loans with access to cheap funding (NAMA) is much more likley to put a loan into default and move to seize assets) if u want domestic credit creation u need a normally functioning banking system. nationalising banks or forcing them to move assets at banking crisis driven market prices is only a solution if are comfortable with forcing losses on every part of the liability side of the balance sheet (excluding domestic depositers). otherwise you end up with the same asset, 93% of the same liabilities but all under the control of the state.

  31. @brian lucey

    u have 2 choices to a failed bank/banking system (insolvent,illquid or both). u liquidate the bank and push losses onto every provider of capital (either senior, sub or equity) (iceland, lehman brothers, wamu) or u restruture the asset and liability side. commercial banks are not built to market to market their entire balance sheet. neither should they be forced to sell at “market prices” unless u are liquidating them. the whole problem with a national banking crisis is that you cant clean up the bank using conventional market clearing processes. the crisis itself creates a sitution were is no market or funding for the assets you want to sell/purge. however we know that credit will artificially be rationed and private capital will keep away from banks until the assets of the bank are restructured. its better to place the with somebody who can fund,workout and account for the loans devoid of medium term concerns of maintaining capital adequcy or were they are going to fund. (one reason why many things it may be, it aint a developer bailout – a non bank holder of property loans with access to cheap funding (NAMA) is much more likley to put a loan into default and move to seize assets) if u want domestic credit creation u need a normally functioning banking system. nationalising banks or forcing them to move assets at banking crisis driven market prices is only a solution if are comfortable with forcing losses on every part of the liability side of the balance sheet (excluding domestic depositers). otherwise you end up with the same asset, 93% of the same liabilities but all under the control of the state.

  32. We are now getting close to the economic equivalent of what came first…the chicken or the egg?

    A lot of small businesses are not even looking for loans….they are waiting for orders. In the meantime they are cutting costs to stay afloat.

    Orders will not pick up until consumers start spending again.

    Consumers will not start spending again until uncertaintly re job losses stabilises.

  33. @ michael harvey

    i have to agree. a bigger issue is the lack of confidence and a feeling of instability in the economy. dithering over the banking system is not what we want to do. the US is already exiting large parts of its banking system stabilisation (which when u add up bank pref’s, aig equity, aig loans, auto bailouts + money market and senior bond g’tees was a lot more aggressive and taxpayer risky than is actually realised). meanwhile while we have economists in a uniquely well paid and non-traded sector of the irish economy shooting down the a credible pragmatic plan while suggesting a series of conceptual non-plans.

  34. @Thomas C

    1. “a brief look at the balance sheets of any of the banks 6 months ago show that there simply is not enough loss absorbing capacity outside of senior debt to make nationalisation effective in any circumstance.”

    Like Brian, I didn’t understand this point. Is your point that the equity and remaining unguaranteed sub debt is small (relative to some metric) and so we might as well let them keep it?

    2. “dithering over a fully nationalisied banking system for the next 2 years is probably not what the international bond markets want.”

    Who’s recommending dithering for two years?

    3. “we wont be spinning out aib or boi anytime soon if the reason we nationalsied them in the first place was so didnt have to worry about nama transfer pricing.”

    I don’t understand this. What’s the connection between a time profile for selling off the banks and the argument about simplified NAMA pricing under nationalisation?

    4. “we also need private capital. aib + boi will be strong investment cases with post nama balance sheets.”

    Do you think that those advocating nationalisation are in favour of leaving the banks to sit around starved of capital? Certainly I’m not. I assume you’ve read the same research reports every one else has indicating that AIB will have a high state equity stake after NAMA? Well you’ve just said that you will be willing to invest under those circumstances? Why would investors be so averse to a similar arrangement just because the starting point was a short period of full state ownership.

    5. “lets just get on with nama.”

    Because it’s The Only Game In Town right?

  35. @ brian lucey

    re were i bid your aib stock – lend me money at L+100 (average irish govt spread) for 10years secured against aib stock (no margin calls allowed please) i’ll buy your shares 25% above market.

  36. 1) very small on nearly every metric . which capital do u suggest we attack and forces losses on immeditely? exact number pls karl. (as a reminder ireland inc needs funding over the next 2years of 100bn plus. the govt already has 7bn of equity (prefs) in the bank. boi has 4bn t2 capital left post buybacks etc. most of this lt2. can only wipe this out thru declaring bank insolvent before u nationalise it. would love to see that headline….
    2) have yet to see a credible fully worked out plan suggested by anybody else. this is a bit strange. clearly everybody has plenty of time considering the NAMA wordcount thru out summer on blogs,newspapers and “summer schools”. (except the labour party who suggest nationalising the banks as going concerns!!). as an example karl pls suggest in simple time lines and state action how u would nationalise AIB and BOI.
    3) by suggesing nationalising the banks as way of reducing the relevance of the prices paid u are therefore saying that 100% state ownership will remain until we work out the eventual recovery prices of the land involved. how long will this take? 2years? longer?
    4) private capital will be very slow to invest in a majority state owned bank that was stated owned as a result of govt action. thats investing 101.
    50%+ govt ownership is a binary signal for investors. especially foreign capital.
    5) see 2. again – show me a the outline of 90 day plan for nationalising aib and/or boi.

  37. @ karl whelan

    1) very small on nearly every metric . which capital do u suggest we attack and forces losses on immeditely? exact number pls karl. (as a reminder ireland inc needs funding over the next 2years of 100bn plus. the govt already has 7bn of equity (prefs) in the bank. boi has 4bn t2 capital left post buybacks etc. most of this lt2. can only wipe this out thru declaring bank insolvent before u nationalise it. would love to see that headline….
    2) have yet to see a credible fully worked out plan suggested by anybody else. this is a bit strange. clearly everybody has plenty of time considering the NAMA wordcount thru out summer on blogs,newspapers and “summer schools”. (except the labour party who suggest nationalising the banks as going concerns!!). as an example karl pls suggest in simple time lines and state action how u would nationalise AIB and BOI.
    3) by suggesing nationalising the banks as way of reducing the relevance of the prices paid u are therefore saying that 100% state ownership will remain until we work out the eventual recovery prices of the land involved. how long will this take? 2years? longer?
    4) private capital will be very slow to invest in a majority state owned bank that was stated owned as a result of govt action. thats investing 101.
    50%+ govt ownership is a binary signal for investors. especially foreign capital.
    5) see 2. again – show me a the outline of 90 day plan for nationalising aib and/or boi.

  38. @Thomas C

    1. Which capital? The equity, dude, the equity! Is it really so complicated? As for declaring them insolvent. Without NAMA, they probably are.

    2. How to nationalise AIB, BOI? Take Anglo bill. Use Find and Replace feature.

    3. No — not saying that. Definitely, positively not saying that. And you repeatedly saying that’s what I saying doesn’t make it so.

    4. Don’t agree with you on this, sorry. And I’ve taken finance up to PhD level at MIT. I didn’t see that part of “Investing 101”. Also, I guess you’re going to have to reconsider your investment strategy re AIB since they probably will be majority state owned after NAMA.

    5. Doesn’t take 90 days. Do it over a weekend.

  39. @ Karl

    i think there’s a difference between us all thinking/’knowing’ that AIB and BoI are/might be insolvent, and the government declaring legally and in factual financial terms that they are insolvent (which you’d have to do during the Nationalisation process if you want to limit/zero-ise what the shareholders/subbies will get). For all the talk of international financial markets being ‘rational’, sometimes scary headlines along the lines of “Irish Banking Sector Insolvent” tend to scare the money-men away for a while (ie a couple of years potentially)…and that can lead us into IMF territory…

    As an example, even after complete nationalisation of the banking sector, and even after a huge IMF-funded bailout, when do you think any serious affordable private capital is going to start flowing back into Iceland?

  40. 1) i still think u are missing the point. the banks have virtually no loss absorbing equity left (aside from the 7bn of govt pref’s in aib + boi). nationalise now on grounds of insolvency and u have 2 failed banks, the govt pref’s are worth zero and u destroy whats left of intangible asset value attached to aib + boi.
    2) really? that involved the govt sticking in 3bn of equity immediately + forced no losses on bond holders. it also triggered immediate repayment of 2bn of wholesale funding on a change of control clause. anglo is still a zombie bank and will be for the next 5 years.
    3) so what are u saying. correct me if i’m wrong but ur theory is as we dont know how much the loans are worth now, we should nationalise the banks and therfore we dont care what price we move out bad loans to the state?as some stage we retrurn some or all of the bank to private hands and give away the future upside. when does this happen?
    4) phd at MIT? any thesis/phd i read on quantitaive finance was blown out of the water by what happened over the last 12mths. capital asset pricing and that black scholes thing should go in the bin. the highly qualified F9 monkeys at merril, lehman etc are proof of that. look at the expense barclays went to in raising expensive capital from the middle east rather than cheap capital from the uk govt ala lloyds. compare share price performance. i would imagine aib will be below 50% govt ownership by the end of 2010 and crucially govt ownership wont be on foot on govt declaring a bank insolvent/failed.
    5) so thats the plan?

  41. @ karl whelan

    1) i still think u are missing the point. the banks have virtually no loss absorbing equity left (aside from the 7bn of govt pref’s in aib + boi). nationalise now on grounds of insolvency and u have 2 failed banks, the govt pref’s are worth zero and u destroy whats left of intangible asset value attached to aib + boi.
    2) really? that involved the govt sticking in 3bn of equity immediately + forced no losses on bond holders. it also triggered immediate repayment of 2bn of wholesale funding on a change of control clause. anglo is still a zombie bank and will be for the next 5 years.
    3) so what are u saying. correct me if i’m wrong but ur theory is as we dont know how much the loans are worth now, we should nationalise the banks and therfore we dont care what price we move out bad loans to the state?as some stage we retrurn some or all of the bank to private hands and give away the future upside. when does this happen?
    4) phd at MIT? any thesis/phd i read on quantitaive finance was blown out of the water by what happened over the last 12mths. capital asset pricing and that black scholes thing should go in the bin. the highly qualified F9 monkeys at merril, lehman etc are proof of that. look at the expense barclays went to in raising expensive capital from the middle east rather than cheap capital from the uk govt ala lloyds. compare share price performance. i would imagine aib will be below 50% govt ownership by the end of 2010 and crucially govt ownership wont be on foot on govt declaring a bank insolvent/failed.
    5) so thats the plan?

  42. @ EOIN

    very well laid out eoin. u’d basically have a minister for finance declaring a system that he maintained for 9mths was illquid but solvent as being totally insolvent. lets not kid ourselves – the huge amounts of soverign debt this country needs to roll and issue over the next 36mths in a cost effective manner is an issue of national solvency and will be based on a belief that the country has a credible and consistent policy to sorting out the banking system. nama is far from perfect but it beats nationalsing the banks ”over the weekend” and declaring them insolvent….

  43. @Thomas C

    I don’t think we’re getting anywhere with 1,2,3,4,5 and I’ve better things to do on a sunny afternoon than chew the fat with rattle-throwing banking sector vested interests.

    What I take from the above exchange, however, is the extent to which Judge Denning’s reasoning now dominates the pro-NAMA arguments. To admit that the main banks are insolvent would be such an appalling vista that we can’t admit it.

  44. @Eoin

    I understand the “don’t scare the horses” argument but I think all plans on offer, including NAMA’s overpayment approach, have horse-scaring risks.

    You’re clearly an informed guy, so I just wanted to check that you’re not endorsing the Cowen-Lenihan talking point that Iceland’s problems stemmed from nationalising banks.

  45. @thomas C

    First, speaking personally I find it very hard to read blocs of text without paragraphs, capitalisation and in txtspk. Even when you repost the same thing twice or three times its still hard. Thats just me I know….

    “the crisis itself creates a situation were is no market or funding for the assets you want to sell/purge”
    Well, you see I dispute that. There is a market, its just that the prices the vendors want are too high still. There is also a worrying tendency creeping into the debate of keeping the foreigners out- im not saying you are part of that tendency, but to suggest that there is no market for distressed assets is true if one seeks only to sell and finance within Ireland. Frankly, i don’t care if Greeks buy the empty stripmall cum apartment bloc that lives outside the estate where Iive, or danes the brownfield site in the village. Good luck to them.

    “while we have economists in a uniquely well paid and non-traded sector of the irish economy”. Not so my friend. Both Karl W and my good self run masters programmes which have to trade internationally to be credible and to survive. Constantin G is an adjunct, the embodiment of a traded service. I have no idea what you do, but odds are that the percentage of cashflow that comes from non-domestic and indeed non-eu for the services I run are a good deal higher than wherever you are. So, lets put that one to rest – note that I don’t even go into the market for intellectual capital.

    “buy your shares 25% above market.” Nah. The LTEV is much higher.

  46. @Brian Lucey

    “First, speaking personally I find it very hard to read blocs of text without paragraphs, capitalisation and in txtspk. Even when you repost the same thing twice or three times its still hard. Thats just me I know….”

    It’s not just you. After the first, I decided that struggling with Mr C’s contributions was too much trouble.

    bjg

  47. @various

    we are “DITHERING” big time – hitting 400 days now and the state heading towards borrowing a 100 million a day …….. serious lack of urgency at the political top …….. and no sign yet of a reasonably well thought out strategy ……..

  48. Oops!
    didn’t get to finish that – gardening does that to digits at times ….

    @various

    we are “DITHERING” big time – hitting 400 days now and the state heading towards borrowing a 100 million a day …….. serious lack of urgency at the political top …….. and no sign yet of a reasonably well thought out strategy ……..

    Serious lack of informationn – we do not know what is hidden in BOI and AIB etc ………. I

  49. i’ll dumb it down.
    1) there is no credible alternative plan to nama as if there was one, we would have seen it. no? “nationalisaton” on its own is not a plan.
    2) the nama bluster blurs the real debate on how we right size the public sector for a post bubble economy. this is and will be the key process that any govt needs to face over the next 3 budgets. will be a tough space to blog. no easy choices and no easy targets to attack. lets not go into that process with the public soundbite that nama “”spent” 60bn bailing out “bankers and developers”.
    3) in reference to running third level programmes that need to “compete internationally”. give me a break. u are not even ranked. how many of your students are non captive/domestic students? what real risk of loss do you have in your job and crucially your pension? tcd dont even try and benchmark their MBA programme internationally. and i’d love to see your salary benchmarked against similar ranking academics in spain,france,germay etc.
    http://rankings.ft.com/businessschoolrankings/european-business-school-rankings

  50. “The concept of bank capital isn’t very well understood by most journalists, who regularly repeat a line about undercapitalised banks “hoarding capital” by not lending.”

    I don’t think is so much a lack of understanding as it is a lack of common sense and, to some extent, unhelpful populism. The Fintan O’Tooles and Gene Kerrigans of our media aren’t awfully concerned with solutions: they’ve tapped into a vein of popular anger and see no particular contradiction in admonishing banks for the irresponsible lending that fuelled this crisis while simultaneously admonishing the same banks for, er, not issuing enough unsustainable loans. We could wish for a better pop media, but we probably won’t get one.

  51. @ brian lucey

    and sorry point 4 on no market for the assets.

    i’m not saying there is no market for distressed property loans. i’m just saying that the commercial banking system is not built to have balance sheets that need to be sold into the market at the worse possible time. u could argue that the entire global banking system was insolvent many times over last autumn if u used this pricing methodology. yet u maintain that anything other than current market prices is simply the “wrong price” in any neccassary restructuring of the banking system. there is no “right price” but i think there can a “right” process that is the worst of a number of unsavory options.

  52. @ brian goggin.

    start of contribution
    ”It’s not just you. After the first, I decided that struggling with Mr C’s contributions was too much trouble”
    end of contribution

    if you dont actually have a relevant “contribution” to make than save your magic turn of phrase for the bebo and facebooks of this world. this is an economic blog after all.

  53. @thomas
    And stick to the thread – will NAMA get credit flowing again? And if you believe it will then justify …but keep it short for heavens sake

  54. I am no great fan, but, if my memory has not been fuzzed by trying to follow Thomas Cs posts, Keynes put it this way:

    “Those who are not creditworthy cannot secure a loan, and those who are creditworthy do not want a loan.”

    The credit bubble and excessive lending now needs counter balancing.

    On each side of the equation we have lenders and borrowers in a u-turn from the risk taking of the past.

    Logic dictates they have to, in order to remain solvent.

    As is the case now, repeated globally millions of times, credit slows to a trickle, dead stop or can even contract.

    I would be interested to hear the views of others, but as far as I am aware, the only question that remains unanswered from the Great Depression and the Japan crisis, is whether intervention by Central Banks and Politicians, Nama like, alters the cycle for better or worse.

    Bernanke is reported to be a scholar when it comes to the Great Depression. But my reading of that episode, the Japanese and the current credit crisis- all of which had colossal sums of monetary intervention- have failed to provide evidence that such interventions can prevent or reverse a credit slowdown or contraction.

    I would qualify that by adding – in a closed system.

    There is the arguement that Capital injections from outside the system can free up a credit block.

    The large Capital flows from Europe to the US that began in 1940 is often given as evidence of this.

    But with virtually every major economy in the world struggling, where could we expect such a massive capital injection to come from.

    Sovereign Investment Funds have become very cautious, and I would not put any money on China either. They even intend to issue their own bonds later this month.

    Before jumping in with a populist proposal to force banks to lend, we need to think hard about this unresolved dilemma.

  55. It looks like we will be issuing 60billion of bonds to the banks if the |Business Post article today is accurate.
    Will they lend the repo proceeds? Not likely, as they have to pay down 100 to 120 billion they borrowed to fund the toxic stuff in the first place. Apart from this fact, the likelyhood of interest rates increases, further provisions for losses on consumer debt and an uncertain property markets will result in retrenchment at the banks.
    We need a complete revamping at our banks. These are the people that backed the business plan at Zoe which our Judges have found to be totally unrealistic, Mr Justice Clarke stating that the plan depended on the “virtual impossibility” of a benign climate in relation to interest rates, property values and property lettings.
    So why would we rely on the judgement of these people to lead us out of the economic mire or to resume lending to our businesses?

  56. @Michael Harvey

    On Sovereign funds here is something I picked up-“Listen to what Chinese officials are saying. The best line in recent days came from Lou Jiwei, chairman of the sovereign wealth fund, China Investment Corp., talking about why he expects to have a good year: “Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

    Wonder what school of economics he attended.

  57. “Nama’s primary aim is to get banks lending again -t o business and consumers -with the least possible cost to the taxpayer. Nama will facilitate the removal/sale of property loans from the banks’ balance sheets. It will also aid the banks in getting around €55 billion in cash from the ECB for the bonds they receive from Nama.

    But there are no guarantees that this money will be used to lend. It may well be used by banks to repair their balance sheets. In the boom years, they became too dependent on wholesale funding rather than Irish customer deposits to fund their lending. The money that arrives on their balance sheets may well be used to wean themselves off their reliance on overseas funding.

    Foreign liabilities could be repaid using the Nama proceeds, which would result in more stable and conservative balance sheets at the banks, but no increase in lending.

    The Irish economy will not improve overnight -and as long as the challenges facing the economy remain, so will the risks associated with lending in a downturn.”

    http://www.sbpost.ie/newsfeatures/treading-on-very-dangerous-ground-44322.html

  58. @ Karl

    of course the bank nationalisation didn’t cause Iceland’s problems, not even remotely going near that ridiculous talking point. However it sure has hell hasn’t helped out in any meaningful way yet, and the ability to say “whats the difference between Ireland and Iceland? Well not a lot, its all happening along the same lines…” would be too easy to make for a lot of people both inside and outside of Ireland. Certainly the idea of Iceland nationalising its entire banking sector brought home to everyone just how dire the situation there had gotten.

    Banking and finance rely massively on confidence. I believe that international markets, in all their rationality (or not!), would take significantly more confidence from a privately owned banking sector backed by government supports than from a wholly nationalised banking sector.

    On the more substantive point of whether NAMA is gonna get credit flowing again, i think a sanitised and recapitalised banking sector will, eventually, start to allocate capital back into the productive parts of the economy in a rational and profitable manner. I don’t think any of the various NAMA, NAMA 2.0, Anything-But-NAMA plans have any more or less chance of attaining this goal, and i definitely don’t think that a soon-to-be heavily indebted nation should have credit-creation as major government policy goal! However, given that we all see at least some need to get the banks lending again, I think any failure to pass NAMA would ultimately see the government fall, and this would only delay significantly further the stabilisation of the banking sector, and thus stimy the new credit creation process even further. Given that its taken almost exactly a year to get from Lehmans/the govt g’tee to simplyl publish the NAMA legislation, then i’d fear how much longer it’d take to get any concensus going on an alternative plan. While YOU (karl and brian) might be agreed on what you think we should do, quite clearly a politically viable alternative plan is some distance from being enactable in the Dail. As such, i see this as being one of the major flaws of the anti-NAMA debate, and one which has not been addressed adequately by that side of the aisle. NAMA may be blunt and imperfect, and potentially even expensive, but at least it seems to address the major issues of the day, and its now only a fortnight away from coming into reality.

    @ bill hobbs and brian j goggin

    unless “will NAMA get blog contribution synthax flowing again” is one of the themes of this thread, then i’m not entirely sure how useful your contributions are today.

  59. @ eoin and karl. we’re not an iceland but the lessons of iceland’s bank nationalisation has some relevance to the current debate. the icelandic state effectively put the banks into administration and defaulted on all bank senior debt by immediately setting up new good bank banks and pushing losses of upto 100% on external senior bank debt. in one move the icelandic public and private sector debt went from 8 times gdp to 1.25 times. this didnt stop icelandic state debt collapsing in value. even now, the only source of external funding for iceland is the imf and even that money is contingent on iceland working out an agreement with their banks bondholders. even the UK is holding a gun to the icelandic economy’s head unless they agree to make whole deposit holders in the icelandic UK subsidiarys. the lesson from this is that nobody views regulated national banking systems as 100% arms length commerical systems. there are numerous negative feedback loops from a failed banking system.

  60. @p.odubhlain

    On Lou Jiwei, chairman of the sovereign wealth fund, China Investment Corp., Wonder what school of economics he attended.

    Easy enough to answer…..The same one that most of the economists in Irish Banks and stockbrokers went to.

  61. Whatever the pros and cons of NAMA it is at least a reasonably defined process in one area – the state will take a majority shareholding if required as part of the process. What’s less clear is what happens if a majority shareholding isn’t enough – and what of second wave bad debt losses from the wider economy. The mortgage book at e110bn includes e 40bn in upside down houses. Most residential investment lending occurred at peak prices etc banks were as agressive in lending across other sectors – most of which is secured by property assets.

    I am sceptical that private investors will be attracted to invest in a cleansed BoI or AIB as they will be wary of loan losses yet to be incurred across all domestic lending sectors.

    Also what are the new performance benchmarks – capital adequacy, loans/deposits, liquidity/funding profile required of banks?

    It seems to me that talk of investors being attracted is framed within a pre-crisis context and not the post-crisis one which is now evolving.

  62. “i’d fear how much longer it’d take to get any concensus going on an alternative plan. While YOU (karl and brian) might be agreed on what you think we should do, quite clearly a politically viable alternative plan is some distance from being enactable in the Dail.”

    I’d say it raises the far more pertinent question of why Fine Gael has failed to draw up any draft legislation for its “good bank” plan. It’s been whispering its “alternative” almost as long as the government has been proposing NAMA, yet in the same time they’ve not managed to manufacture anything concrete.

  63. Dave “I’d say it raises the far more pertinent question of why Fine Gael has failed to draw up any draft legislation for its “good bank” plan. It’s been whispering its “alternative” almost as long as the government has been proposing NAMA, yet in the same time they’ve not managed to manufacture anything concrete.”.

    I pointed this out on 24th August in a blog (http://josephmorgan.blogsome.com/2009/08/24/anama-alternative-national-asset-management-agency/)
    and said time was running out back then!
    Now there’s only 2 days to go until the debate.
    In terms of getting credit flowing again, I thought FG’s ideas had promise…. but as they say in America: “where’s the beef?”

  64. Taxpayers’ risk cut by €10bn

    In the independent today it is reported that:
    development loans of €5m or less will not be transferred to the agency.

    It is understood that smaller loans of €5m or less would have been seen as an ‘administrative hassle’ for NAMA which is to take over about 18,000 loans owed by 1,500 borrowers in a bid to cleanse the banks of high-risk debt on their balance sheets.

    Back to square one on the calculations.

    Only on the first coffee, but two things spring to mind already.

    Do we know if the majority of these loans are performing or not?

    Any idea of the vagueness of using NAMA in a mortgage crisis can be forgotten.
    The language used as well indicates this…..development loans

  65. @ Michael
    “development loans of €5m or less will not be transferred to the agency. ”

    I wonder if the 18000 figure included any of these or not originally. If not there are probably a lot more than 18000 of these if the usual statistical spread takes place.

    Going back to Bill’s point I can’t see any foreign investors touching the Irish banks unless the value is very attractive but even then there is such a big risk. As a small investor I wouldn’t touch them with a barge pole unless they drop back to 30c again and it becomes a pure speculative punt. There are plenty of safer very attractive options out there if we are genuinely in recovery mode.

  66. @ Thomas C,

    In terms of defining a plan for the Irish banking sector, the good that Nama can hope to do (i.e. clean up toxic loans so banks can access foreign capital) can be done just as well – nay better – after nationalisation.

    The real debate is then how to distribute the losses implied in this exercise. Do the taxpayers have to pay for all of the losses, or can a portion of the losses be paid by those who took the risks and would have taken all the profits had things gone the other way?

    Fundamentally, there is nothing that can be achieved under Nama without nationalisation that cannot be achieved under Nama post-nationalisation.

    But Nama will always work better after nationalisation, because state ownership removes the natural conflict of interests between the banks and the taxpayer that otherwise exists. This will allow Nama to focus on re-engineering the banks, and the transparency and market impulse which a new flotation will give will provide the necessary platform to ensure the new banks get full, clean access to international credit.

    Oh, and did I mention it will allow us the sack the clowns who ran the banks into the ground? Your boss, Thomas?

  67. @thomas c
    “in reference to running third level programmes that need to “compete internationally”. give me a break. u are not even ranked. how many of your students are non captive/domestic students? what real risk of loss do you have in your job and crucially your pension? tcd dont even try and benchmark their MBA programme internationally. and i’d love to see your salary benchmarked against similar ranking academics in spain,france,germay etc.”

    Ok, while answering this may be strictu sensu off topic here, it plays into the “academics don’t know jack and are sheltered” meme, that latent and dangerous mutant son of anti-public sector prejudice out of anti-intellectualism.

    “u are not even ranked”
    Well, who u? I am ranked (see for example http://www.irisheconomy.ie/index.php/2009/03/26/brian-lucey-honoured/ ; see also my rankings on SSRN-FEN. But, I suspect from your comments that this isn’t about ME per se but about TCD.

    “tcd dont even try and benchmark their MBA programme internationally.”
    Actually, we do try, and it is ranked in places other than the FT rankings. and the MBA, despite what some people within and without the academy, is not the NAMA of courses, the only game in town. Here’s the thing – The FT rankings you mention require a minimum number of students fulltime in the class over a rolling three year period, whom they then survey. That number is 35. MBA intake in the 2006-7-8 classes alas dropped below that figure, consequentially dropping off the FT radar. UCD squeaked in by one or two, good for them, but in the face of huge dropoffs in FT numbers also.
    More parochially, the MSc Finance is one of only two in the country that is a Programme Partner with the CFA institute, one of only 80 worldwide, and one of only 5 in Europe that is in a school where the undergraduate finance programme is also a programme partner.

    “how many of your students are non captive/domestic students?”
    Of the incoming MSc Finance class, 37% are non-Irish residents. Of the 11 phd students in finance in the School of Business we have students from China (3) , Argentina, Italy and even Howth…On the MSc International Management numbers are 25% non-Irish, while the MBA this year is on for a 40% non-irish. Im not sure what you mean by captive?

    “what real risk of loss do you have in your job and crucially your pension?”
    Very little. The point of this well known public sector goldplating being what exactly in the discussion we are having on NAMA?

    “and i’d love to see your salary benchmarked against similar ranking academics in spain,france,germay”
    Well, the last time I was headhunted for a chair in the UK (9m ago) I was offered £78k. That’s about €89k. My present salary scales are a matter of public record – see http://www.tcd.ie/Staff_Office/scales/scalem1.pdf, and note that that offer overlaps the bottom of the scale on which I am at present. And it was not at a university of TCDs rank and stature…

    Now, Iv shown you mine….show me yours. Its very easy to snip from the sidelines from a position of anonymity. Its even easier to murmer ad hominem remarks to deflect the argument. Openess and transparency would assist us all if you can bear the scrutiny.

  68. Failing to preserve the banking system or creating a zombie banking system will hurt this country hugely in terms of jobs, recovery and social stability. The issue is having a functioning banking system for when circumstances improve enough for lending to re-start. This could be soon enough for exporters. If we don’t fix the banking system then we will not be able to benefit from any upturn. The issues is not making loads of credit available immediately but rather making credit available again as soon as is humanly possible.

    Nobody (other then Richard Bruton) expects NAMA, Nationalisation or a National Recovery Bank to lead to credit on tap. The whole debate about getting credit moving again is something of a straw man. It is a short term impossibility. However, at every Dail Committee meeting Kieran O’Donnell TD and others harp on about it as if the Govt can click its fingers and make the bold bankers lend money to all struggling employers. O’Donnell and others do that because it is a political imperative.

    Pushing the burning wheel up the hill is the Minister’s job. It is no wonder that the Govt, faced with being accused of not doing enough to achieve the impossible, retorts that it is doing everything in its power to achieve the impossible. In fairness to the govt, getting credit moving again is a goal even if economic reality will dictate how quickly this can be achieved. The doctrine of “do no harm” is important in this context as over-ambitious plans could back-fire disastrously.

    With all that said will there really be no short term benefits of getting the banks back on an even keel? If credit supply remains static but credit demand declines then strong expanding businesses should be able to access credit. This is different to businesses who are hoping to keep their head above water in a trough. There may well be such businesses that banks want to lend to but can’t at the moment. The guy who is having problems getting people to pay will not be saved. At the moment the banks only want to lend to the guy with loads of assets and little debt.

  69. @zhou_enlai

    Your last sentence:
    At the moment the banks only want to lend to the guy with loads of assets and little debt.

    And he probably does not want to borrow!

  70. @ zhou

    As usual, you are the one putting up the straw men.

    Opponents to Nama are not the ones expecting insta-credit. This argument is coming from the pro-Nama camp as a sort of magical panacea to the economy’s woes.

    the real point is that paying for Nama (in its current incarnation) will add a huge tax burden to this country’s future earners. This burden will act as a millstone around the necks of Irish businesses for years to come, by dampening consumer demand.

    It’s not the lack of credit that is the problem in the Irish economy right now, it’s the lack of international competitiveness.

    The only thing policymakers can do to restore this is get costs down as quickly as possible.

    Land prices, anyone?

  71. @ Graham

    i think what we have here is a debate where one side is going with a theory-based textbook argument that we should nationalise the banking system in order to enforce losses as far up the banking sector debt and equity ladder as is possible. The other side sees this as unrealistic, and indeed dangerous, in the context of the Irish state and banking sectors requiring enourmous funding levels as well as fresh permanent capital injections in the coming few years.

    Any wholesale nationalisation of the Irish banking system would be a de facto admission that the Irish financial system has failed in near totality, and indeed that the Minister for Finance had been complicit in denying and concealing this fact for the last year. Failed financial systems do not get granted credit from private sector sources. Struggling financial systems with strong levels of government support do, and this is pretty much what all the credit ratings agencies have indicated in all of their recent reports.

  72. Eoin,

    I interpret the core arguement there as being the must discussed “Don’t scare the horses” argument, a la Garrett Fitzgerald.

    I don’t agree. Nor do I accept the “consensus” from the credit rating agencies. However you dress it up, the Nama bailout is crony capitalism, and this is basically what the IMF cleans up when it tries to get a failed economy clean enough for international capital.

    Wholesale nationalisation may be a de facto admission that the Minister and the system have failed, but Eoin, this is the fact.

    The truth will set us free and eventually our economy will be the better for it!

  73. @Eoin

    “Any wholesale nationalisation of the Irish banking system would be a de facto admission that the Irish financial system has failed in near totality, and indeed that the Minister for Finance had been complicit in denying and concealing this fact for the last year.”

    Is NAMA not the converse? Is it not trying to hid the fact that the banking is in fact bankrupt and can only survive if it is bailed out at enormous expense

  74. @Eoin

    “Any wholesale nationalisation of the Irish banking system would be a de facto admission that the Irish financial system has failed in near totality, and indeed that the Minister for Finance had been complicit in denying and concealing this fact for the last year.”

    Is NAMA not the converse? Is it not trying to hid the fact that the banking is in fact bankrupt and can only survive if it is bailed out at enormous expense

  75. @Eoin

    “Any wholesale nationalisation of the Irish banking system would be a de facto admission that the Irish financial system has failed in near totality, and indeed that the Minister for Finance had been complicit in denying and concealing this fact for the last year.”

    Is NAMA not the converse? Is it not trying to hid the fact that the banking is in fact bankrupt and can only survive if it is bailed out at enormous expense to the Irish citizens into the future?

  76. @MH

    You said it!

    @GS

    Where is the straw man?

    We are back to the same debates about NAMA. You say it is too expensive. Others say Nationalisation is too expensive. Others again say FG plan is too risky. The evaluation process between alternatives is difficult but important.

    Whichever approach can be implemented effectively and with credibility and without crippling the tax payer will get credit lowing again fastest. I think this is the NAMA approach. You disagree. However, I think we all agree that a solution is required and no solution will turn on a magic credit-tap.

  77. @Zhou,

    Okay, perhaps I was a little trigger happy in that last post. My zeal to defend the Irish taxpayer from the evils of crony capitalism got the better of me.

    There are worse sins, though, n’est-ce pas?

  78. @GS

    There is no objective “truth” about the state of the banks’ balance sheets and there can be no objective “truth” until we have a process (either parallel to nationalisation or not) that allows people from outside the abnks to go through their loan book loan by loan. That is what NAMA does. That is what any AMC as part of a nationalisation would have to do.

    In the meantime, don’t let the lack of facts stop you stating as a fact that you know the “truth” and that any approach to fix the problem must be based on your “truth”.

    At least NAMA will work for the banks’ “truth” of them being solvent and for the sceptic public’s “truth” of them being insolvent.

  79. @ Graham

    i see it this way – NAMA appears to be working, vis-a-vis the Irish state being able to fund itself adequately and the Irish banks able to fund themselves under the current guarantee (and outside of the g’tee for the covered bonds). Maybe it’ll turn out to be an expensive program for the Irish taxpayer, but at least we’ll have 10 years or so to figure that out and adjust to that reality. Like i said, it works.

    A nationalisation of the banking sector throws up all sorts of new questions and dynamics, from changing investor perceptions of the Irish state, the Irish banks & the Irish financial system, to how much interference politics will have upon our banking sector and how this will affect the rational apportionment of capital into the economy. As such, NAMA-with-nationalisation may not work, and there’s no one on here who can guarantee me that it will. Note that the Irish sovereign CDS reached its peak at exactly the same time as the Irish banking sector reached its low point and nationalisation was considered a real possibility (there were obviously many different dynamics in play at the time, but the two were hardly coincidental either).

    No one can go anywhere near to ruling out what’d happen to capital and funding flows in the event of the de facto legal insolvency of the Irish banking sector. Moreover, we will have lost the real-world workability of NAMA-as-is for a questionable upside (the argument that there is very little loss absorbing capital left in the banks), and many of us will be left with the feeling that nationalisation will have been more a tool of punishment than repair.

  80. @ Aidan C

    well my point is that there’s a difference between a legal insolvency/bankruptcy and a technical one.

    NAMA-with-nationalisation creates it legally in the present tense, while NAMA-as-is may (and i stress may) suggest it in a technical sense, but more importantly in the past tense. Bond and equity investors (including potential future ones) are obviously going to be more put off by the former rather than the latter.

  81. @ Thomas C
    “i’m just saying that the commercial banking system is not built to have balance sheets that need to be sold into the market at the worse possible time.”

    What are you saying? That banks are taking risks they know they can’t survive?

    On a plus side, you reminded me of this quote…

    AIG Vice Chairman Jacob Frenkel: “The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine.”

  82. A bit off topic:

    It continues to concern me that we are applying LTEV twice in the NAMA process. I would have thought that it would be enough to apply it once to the loan value based on current market value of securities. Surely the LTEV of the loan based on MV of the assets is enough of a premium to offer the banks as the LTEV of the loan wil take into account the LTEV of the security? Once LTEV loan > MV loan, then a sufficient premium has been paid.

    I think we need to ascertain the LTEV of the security as if it is the same or less than the MV of the security the LTEV of the loan must be revised downwards. However, I do not think a higher LTEV of property should necessarily increase the LTEV of loans. I am worried that the way the legislation is drafted could apply a double premium.

    One must be careful because once there is a legislative formula it must be followed notwithstanding the result seems not to make sense. For that reason I think there should also be an over-riding descretion on the part of the valuations board to reduce LTEV of loans if they think they are too high (unreasonably high / commercially unlikely in non-crisis conditions).

  83. EDIT:

    Replace
    “Surely the LTEV of the loan based on MV of the assets is enough of a premium to offer the banks as the LTEV of the loan wil take into account the LTEV of the security”

    With
    “Surely the LTEV of the loan based on MV of the assets is enough of a premium to offer the banks as the LTEV of the loan will take into account the borrowers likely ability to repay the loan rather than a fire sale price.”

  84. @Ahura Mazda “The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine.”

    If it wasn’t so sad, it would be funny!

    I was (sadly) at a funeral on Saturday and got talking to a French cousin of mine I haven’t seen in a while because he runs a sizeable business over there and has been at work all hours every day since it all went belly up.

    If it’s any consolation, he was telling me that credit flow in France is chronic too. He also added that his business is currently running at 70-80% capacity and he is really not looking forward to Q4 when he expects it to drop to nearer 50%. He claims that any talk of recovery in France is just ‘smoke and mirrors’. So much for France being out of recession.

    I was filling him in on NAMA and he told me that the joke currently doing the rounds about Ireland over there in France is:

    Q: How do you buy a small bank in Ireland?

    A: Buy a big one and wait!

  85. This from Goodbody this morning:

    So, on Wednesday, probably after the market close, the Minister for Finance will finally set out the broad parameters around NAMA that we have all been waiting for.
    It appears that an overall haircut will be announced, rather than by institution, with the figure net of any provisions taken to date. From what we understand, there will be little in relation to capital levels in the banks, but there will be information in broad terms about what the future is for each institution involved.
    We are also assuming that the government is willing to accept a core equity ratio of 4% at the bottom of the cycle, although we note press comments that the Government and the Central Bank were meeting over the weekend to decide how much capital the banks will need to hold post NAMA.

    So getting back to the thread…will nama get credit flowing?
    Core equity ratio of 4%
    It might trickle, but it will not flow for 2 maybe 3 years

  86. @Dave and Joseph.

    From /www.citizensinformation.ie
    “In practice, the Government opposes all Private Members’ Bills so it is very rare that a Bill will survive to become legislation.

    Sometimes, Private Members’ Bills are initiated by members of Parliament (the Oireachtas) simply to draw attention to an issue or to focus public debate on a gap in the law.

    For example, in 1979, Fine Gael (a political party in Ireland) initiated a Private Member’s Ombudsman Bill. This Bill was defeated but the debate that surrounded the issue prompted the Government to introduce similar legislation.”

    FG have set out the principles behind their policy since before NAMA was announced.
    Under the Irish system, there is no point in preparing draft legislation.
    If FG get into office before NAMA is passed, there is sufficient work done
    for the AG’s office to work on immediately.

    @Everyone
    Off-topic
    Anyway I can convert 282,000 Anglo shares into ADRs and flog them in the US ?
    Will take current market price of 70 cents a share?

  87. @Eoin,

    “Maybe it’ll turn out to be an expensive program for the Irish taxpayer, but at least we’ll have 10 years or so to figure that out and adjust to that reality. Like i said, it works.”

    and

    “many of us will be left with the feeling that nationalisation will have been more a tool of punishment than repair.”

    Probably inadvertently, you may have put your finger on why NAMA provokes so much unease and opposition. It is difficult to deny that NAMA is designed to shield the banks and the developers (and the Government) from the full implications of their folly. But, equally, it is not difficult to understand a popular feeling that runs along the following lines: “You gambled recklessly, you lost. Tough. If I gambled like that I would go bankrupt and you would repossess my house. Why should I help to bail you out?”

    And there seems to be little recognition that probably the principal reason for the Government’s determined opposition to nationalisation is the desire to retain some measure of Irish control (at least some directors and senior management) of the cleansed banks. I have great difficulty accepting the contention that the international banking and capital markets would turn against Ireland if a rapid nationalisation and cleansing were followed by the sale of clean banks. I find it hard to believe that well capitalised, well-managed international banks would not snap them up or that the international bond market would take a dim view of Ireland if the future burden on taxpayers were reduced. But would the public accept foreign-controlled banks?

    Ten years paying for the mentality, if not the personnel, that created this mess does not seem like a good deal, but I think people should be made aware of the real alternative.

    Maybe they would be happy to pay more tax to sustain the culture, ethos and mentality that created this mess, but this is the question they should be asked.

  88. Andrew posed a good question earlier on, which seems to have slipped under the radar –

    “Am I being to simplistic to suggest that Ihat Irish debt will become way more expensive on the back of the government increasing the national debt via NAMA ?”

    This seems credible to me, but I would be interested to gain other people’s views on it.

    Also, as a student, I’m only getting to grips with some economic terminology. Would anyone care to explain in layman’s terms the concept of ‘Tier 1’? Basic I’m sure, but I’d rather fully understand what I am in fact reading about.

  89. @Paul Hunt

    In your last post:

    NAMA provokes so much unease and opposition

    In opinion polls and on blogs like this….yes

    On a miserable day in October last year, 15000 people protested against medical cards being removed.

    Nama march last weekend….several hundred turned out.

    We have effectively beed cowed as a people.

    @Howard

    It would take up to much time and space.
    Have a look at
    http://en.wikipedia.org/wiki/Tier_1_capital
    Take it from there.

  90. @PH

    Paul Hunt said: “It is difficult to deny that NAMA is designed to shield the banks and the developers (and the Government) from the full implications of their folly.”

    It is not difficult to deny. Borrowers will be much more exposed when all their loans are held by one institution which is not afraid to realise assets and which can use different institutions securities as cross colateralisation. No credible critic of NAMA has said that it is a bailout for developers that I am aware of.

  91. @ Howard

    following on from MH’s link, Tier 1 debt is a less secure form of debt (relative to deposits, senior debt, and tier 2 debt) and would therefore be less likely to be repaid in the event of a liquidation of a bank (the other debt would have to be repaid in full first). However it would still be repaid before the shareholders of the bank received anything. It should therefore be worth less than more senior debt, and should yield more.

  92. If NAMA passes then the banks will suddenly have a large amount of cash (or near cash) assets. The government will have to fund the budget deficit by borrowing somewhere. Assuming that the Irish banks would like to lend to the Irish state then maybe a big part of the NAMA payments will be soaked up by the state.

    Anyway, NAMA seems to pass the Dail & when it does it will do what it is designed to do in regards to the banks. What is it designed to do?

    -Address solvency issues
    -Increase liquidity
    -Deal with impaired loans

    Solvency issues can be addressed two different ways:
    1. Insert equity
    or
    2. Use a transaction to increase the profits
    NAMA does not insert equity so therefore it must be increasing the profits of the banks. Hence the term gift by overpaying.

    Increased liquidity in the market:
    Banks make money by allocating money where they get the best return of investment. Banks will after NAMA have more money but unless the return of investment is good enough in Ireland the money will flow out. I suppose that with the amount of money/liquidity used and applying the rule of diminishing returns it will sooner or later increase the liquidity in the private sector in Ireland.

    Deal with impaired loans:
    No deadline mean that the people running NAMA can choose between:
    1. Call in the loans and the possibly seize the underlying securities
    or
    2. Do nothing except 4 times per year say that doing something will cost the taxpayer money. A cynical person could see working for NAMA as a lifetime job of doing nothing where nobody wants you to do anything while forbidding you to tell anyone about it. Probably with a good salary until retirement.

    The assumption that nationalised banks can’t access capital or be sold in the short term is an interesting one. To me it is on the same level as claiming that the taste of a drink depends on the colour of the straw used for drinking. The one guaranteeing the debt is the same, the conduit is different.

    Shareholders are saying they are being punished. Do they also feel the world is punishing them when(if) they are not winning the lottery? They made an investment which turned out to be bad, nothing more and nothing less

    I’m amazed that setting a price floor for property can be mentioned by the same people who claim that they’d like to make Ireland more competitive. Do they really believe that property related costs are not included when calculating the costs of doing business?

  93. Zhou,

    Who are you defining as a “credible” critic of Nama? Are you self-defining as a credible proponent? If so, I would think the use of your real name would be a minimum criterion for credibility, non?

    An an “incredible” critic of Nama, may I just point out that the Nama Bill authorises the agency to lend money to developers. In other words, after bailing out the banks and overpaying for the crappy toxic loans, Nama will give more money to the very people whose greed and shortsightedness got us into this mess.

    @ Eoin,

    You seek guarantees that a post-nationalised clean banking sector will work – this is of course an impossible condition to fulfill and has the character of a straw-man argument.

    The issue has to be whether nationalisation is more or less feasible than the current Nama bailout plan.

    In both cases, it is the Irish goverment who does the borrowing to clean up the banks. The only differences are whether we 1) wipe out equity and sub bondholder debt 2) take control of the management, in order to be able to remove those responsible from power and 3) ensure any potential overpayment for assets is recouped in the flotation of the new clean banks.

    In terms of the concern for how the markets will treat our new banks, I see no logical reason to assume international capital will shun our new banks in the future. Remember, these new banks will be clean and operating under new regulatory rules, with new management.

    But if we do not take these steps, I can see every motive among the crony capitalists driving the Nama project to do it all again in the next cycle.

    They literally have nothing to lose.

  94. @Zhou

    If NAMA is not in the developers interest, why have Liam Carroll and Zoe done everything to seek the protection of examinership until NAMA is passed?

  95. @Zhou

    I give up. The original post was about getting credit flowing. I never once mentioned “bailout”. It is inevitable that profitable opportunities to extend credit in Ireland will be limited in the near future. But the opportunities to do so are more likely to be evaluated more objectively by well-capitalised, well managed international banks that have taken over the cleaned up Irish banks than by NAMAised Irish banks.

    That is the key point I am making. But it is purely hypothetical as any consideration of the most efficient and objective options have no political traction and, if they are explored fully, are unlikely to have popular support.

  96. @Graham Stull

    Perhaps if you suggested a critic who said it was a bailout for developers I could tell you if or why I thought they were credible or not. I don’t know anything about you are so I wasn’t suggesting you were credible or not. I obviously was not referencing my own comments.

    I do not see why NAMA having the sensible facility of being able to lend to developers so loans can be worked out as economically advantageously as possible to NAMA is a bail out. Should NAMA not be allowed to provide funds to borrowers so the tax payer can suffer worse losses but be happy that it has punished the evil developer???

    If lending the money only reduces the amount of bad debts suffered by NAMA then the builder will still ultimately go bust once NAMA has them out of their hair.

    I think that calling NAMA a bail out for builders is inaccurate and unhelpful in the context of this important debate.

  97. @ Graham

    my contention is that the NAMA-with-nationalisation comes with huge execution risks that are based on real-world actualities rather than theory-based best practise. Your line of thinking, in short hand, essentially adds up to “insolvency declaration = new investment”. Excuse me if I’m skeptical in the extreme at this equation holding up. I know of only one nation that tried this logic, and Iceland is still awaiting the torrent of private capital to arrive.

  98. @PH

    I read “shield the …. developers” as equal to “bailout”. I may have missed the nuance.

    “But the opportunities to do so are more likely to be evaluated more objectively by well-capitalised, well managed international banks that have taken over the cleaned up Irish banks than by NAMAised Irish banks.”

    I would have thought that NAMAised Irish banks will hopefully be well-capitalised and possibly largely foreign owned.

    I many foreign banks, as opposed to investors, who might normally buy into Irish banks are in receipt of Government assistance from other states and so probably won’t invest in Ireland.

    @MOL

    I think Zoe’s Counsel’s statements to the Court about how NAMA will work were overly optimistic and that Zoe would have done anything to stay afloat.

    I also think that NAMA will have to deal with third party banks one way or another and this will have to be dealt with in the acquisition process. The Zoe decision may not change things hugely as NAMA/the State cannot afford to be blackmailed by the first third party bank they have to deal with.

  99. Eoin Says:
    September 14th, 2009 at 12:38 pm

    “@ Graham
    my contention is that the NAMA-with-nationalisation comes with huge execution risks that are based on real-world actualities rather than theory-based best practise.”

    I’m trying to appreciate your position but am at a loss when it comes to “real world actualities”.

    I don’t know how many “real world actualities” there are but perhaps you could put in bullet points your pick of the top five.

    Thanks

  100. @ Zhou

    fair enough for FG not publishing the legislation, but i’ve barely heard about their Good Bank plan at all in the last 3 or 4 months. Given that this is at a time when the Irish papers have essentially donated 25%+ of their opinion pages to the NAMA debate, it seems that they have either lost faith in the plan themselves, or they don’t see it as being a serious runner in terms of how the electorate have responded to it.

  101. Again, returning to the thread, When Karl posed the question, he was leaving the, is it fair or not arguement to one side.

    Will the banks start lending again?

    We still do not know the final figures. At the moment the general consensus seems to be that after Nama the banks will have Tier 1 capital ratios of around 4%.

    More to the point, using the last set of accounts, the loan/deposit ratio at BOI was 161%
    AIB was 156%

    They will almost certainly be looking to scale back to at least pre-crisis levels. I think they were around 137% in 2007.

    That will take time. As I said earlier, perhaps 2 to 3 years to get credit flowing. After Nama, they will have to be seen to increase lending but it will be marginal.

  102. @ Eoin,

    I do not wish to insult you by insinuating that your false dichotomy between text-book wishful thinking and real-world, Only Show In Town, Nama pragmatism is a cheap rhetorical device, but what you are saying does not gel with common sense.

    Look, the banking system is broken. Investors know this, economists know this and sooner or later even the Irish public will get to know this.

    This, if you like, is the “real world actuality”.

    Investors who lend to the Irish govt do so because they know there are two million skilled taxpayers in Ireland who will sweat and bleed in order to pay them back – more or less regardless of what ever happens.

    This is the sovereign guarantee and it is another “real world actuality”.

    Yet another real world actuality is that if we create a good financial regulatory regime and float a couple of clean banks with solid deposits and performing loan assets on the balance sheets, investors (probably other banks) will snap them up at a market price.

    This isn’t a text book observation, Eoin, rather it is an observation on the financial marketplace as it really functions. A clean banking sector is worth something, and the proof is that banks get bought and sold all the time.

    But the thing about your false dichotomy that really jars is the way you insidiously use the current Nama plan as a reference point, from which to question nationalisation as a dangerous departure from the norm.

    Let’s be clear: the Nama Bill is the dangerous departure from the norm. It will not work and you have no evidence that it ever could.

    So, as a proponent of this radical plan, show us your proof that we, the taxpayers, should spend millions on this extraordinary measure?

  103. @various

    Apologies – I wasn’t trying to say FG (or any other opposition party for that matter) should have published draft legislation. Bad choice of words on my part.

    I meant eg a document that dealt with/spelled out their alternative plan in some similar level of detail so that we really could start comparing apples with apples.

    Given that we have heard little real detail about their Good Bank plan (in the public domain anyway), I have to say I think that’s pretty poor opposition when the opportunity was there to bring some fine minds to bear on it, in a co-ordinated way, so that we did have a credible, clearly better, opposition and public supported alternative to (or significant improvements on) NAMA that they could have used to wipe the floor with the NAMA brigade on Wednesday.

    I think they have missed a great opportunity (though I doubt Dr Fitzgerald would agree with me!) and I have to say that I am disappointed they haven’t done a better job in discrediting NAMA as it stands and coming up with a great alternative. In fact, the only good debate seems to have been here on this BB but when people stand up to be counted (eg the 46) it seems to be met with PR and personal attacks rather than intelligent counter-argument.

    What I would be interested to know is do the opposition parties also think that the objective is to get credit flowing again (and it’s been pretty clear to me, regardless of what other agendas may be around, that’s what Mr Lenihan is actually stating the objective of NAMA is)? I presume they do? If they do, and if they think NAMA (as is) isn’t the way to do it………… then I still say the same thing….. “where’s the beef?”

    Maybe I’m wrong. Maybe they will suddenly produce a rabbit out of the hat at the 11th hour. Maybe messrs Bruton and Burton will get up and do an incredible, unified double act. Maybe ‘there is no alternative’ (nah, I can’t believe that!).

    Maybe I won’t hold my breath.

    I despair. I am seriously thinking of leaving the country. NAMA cannot be ‘fair’ or ‘right’ and I really don’t see why my children (or yours) should pay for it.

  104. @MH

    I note that KW reckons nationalisation will possibly leave the banks better capitalised:

    “I should emphasise here that much of this scenario could also come to pass after nationalisation and that this is not just me taking another swipe at the NAMA proposals. One difference may be that, if the objective of minimising state control is set aside, the nationalisation process may produce better capitalised banks than are likely to emerge from the current proposals.”

    Is this correct? Surely the state can recapitalise as much as it wants once NAMA has established the base position?

  105. @Wfg

    Thanks for that. It was about time we had a bit of pro-NAMA moral outrage for a bit of balance! 🙄

    “Thus far, the NAMA debate domestically has tended to gloss-over the
    burning issue of bank funding risks in preference for a cacophonous
    outcry over the likely “haircuts” being applied to loan values at the
    asset transfer stage. Here, the commentariat have been at their most
    misguided, nay mischievous, casually interchanging loan assets with
    property assets as though they were one and the same, and thereby
    confusing public perceptions regarding NAMA “overpayment”. ”

    Come on Donal. Who out there is misleading the public about loans versus properties? Name names. The quotation marks around overpayment are great, aren’t they?

    I also really liked this:
    “A profit is not recognised in its own land betimes, but it is never too late to make amends.”

    Funny guy. 😆

  106. Will there be more lending after NAMA? There will be at least 1 € of more lending, so the answer is yes.

    How much more lending will there be? The government needs quite a substantial amount and most banks are risk averse so a lot of the possible lending will probably be to the government. It is anyones guess how much will go to the Irish private sector.

    Btw, amazing how the money flows:
    Government borrows from ECB.
    Government buys toxic assets from banks using money borrowed from ECB.
    Government borrows from the now cashrich banks the money it paid for toxic assets to cover budget deficit.

  107. @ Greg & Graham

    first off NAMA works in terms of the markets accepting it. This is hugely important. Spreads on Irish banks (even beyond the g’tee) and the Irish state have come in hugely since the March nadir, and the NTMA should have our entire 2009 funding requirements taken care of by the end of this week (ie with 3 and a half months to spare). The ECB seems to accept it, or else they wouldn’t be letting us massively rely on their repo operations to fund it. Im not saying NAMA is “the norm”, but it IS the assumed financial rescue plan in place. Like it or not, i’d suggest that there is just as much onus on you to displace it as on me to propose it.

    secondly, Iceland nationalised and declared insolvent its entire banking sector, and has still yet to see a penny in fresh private equity, and isn’t likely to see any anytime soon. Nationalisation didn’t cause their crisis, but it doesn’t appear to have solved any of its problems either, and it turned whatever reputation it might have had into toast. Indeed even the IMF is still withholding their rescue package until some of the issues that were created by the insolvency+nationalisation process are cleared up.

    thirdly, there isn’t a stream of private banks waiting to enter the Irish market. Indeed the flow of capital is currently going the other way via ACC, HBOS etc. As Zhou noted, private banks in receipt of government support in their domestic base nation will not be easily allowed to extend large amounts of capital into a country on the peripherary of Europe that just declared its banking sector insolvent.

    fourthly, there is next to no loss absorbing capital left in the banks to ‘wipe out’. Liquidating 80% of the irish banking market, and our own €7bn in government preference shares, in order to maybe get at a few billion in capital seems like an inefficient suggestion to me. It sounds all well and grand that “those who made the gambles should take the loss”, but i don’t see how this is realistic in any meaningful and material manner. If someone could detail how much can be saved here, and the process we would go through to do this, in at least a somewhat full and detailed manner (i’ve heard the vague two line version), i’d appreciate it. If we could then net that off against the combined reputational and financial damage done from the insolvency process that’d be great. Anyone know what the external debt liabilities of the Irish sovereign and banking balance sheets are? Can anyone work out what the additional annual funding costs of this would be on even a 25bps general increase in the cost of this (caused by investor flight from a nationalised and insolvent Ireland banking sector)?

    fifthly, and this is as much a question as an answer, when was the last banking sector IPO in a developed Western economy? Almost all activity in the sector has been trade-sale based. I don’t even know how much demand there is for a newly capitalised bank with brand new management, financial structures and regulatory oversight and operating in a still struggling economic outlook. To say that there’s some hidden short term cash cow that we’re giving away is highly debateable. Given that per point no. 3 above very few foreign banks are going to be able to approach us anytime soon, what is the percieved timeline for re-privatizing the banking sector? 6mths, 2yrs, or 5yrs? Far easier for the government to take a 70% stake, keep it as a going concern, change management and regulatory structures over the next couple of years, and then look for options along the lines of a rights issue, private equity or trade sale.

    You can consider it insidious, or a cheap rhetorical device, or a part of a false dichotomy, or whatever other turn of phrase you want to use, but ill boil it down to simple terms: NAMA works, NAMA creates the breathing space the nation needs to get our financial system back working again and our indebtedness back to sustainable levels, NAMA doesn’t seem (or seek) to p1ss off or scare away all the people around Europe who are going to be lending us 100bn in the next couple of years, and NAMA doesn’t declare insolvent a sector of the economy which previously represented more than 40% of the ISEQ.

    The dangers of overpayment (which would only be after the subordinated bonds were taken out) need to be measured against the dangers that the alternative plans (none of which have been spelt out in a politically viable process) do not work. As per Donal O’Mahony’s suggestion this morning (though i would never accuse Karl and Brian of being mischievous!), i think the funding risks for the Irish financial system of NAMA not being enacted have been massively understated, and the workability of NAMA-as-is massively under appreciated.

  108. Since the debate about NAMA started the acceptable government share of the ownership seems to have increased quite substantially 🙂

    The reputational damage is done already. The people who were responsible might want to try to sidestep their responsibility and pass the responsibility over to factors beyond their control. “Regulators didn’t stop them from taking too big risks”…..

    Too big to fail means that no matter what is done there is no risk, this will lead to further risk-taking and sooner or later a bailout will be needed again.

    Does anyone think that the current owners could be trusted to monitor their own investment after failing as badly as they’ve done now? Maybe the owners want the state to monitor their managers, if so it can be arranged: Nationalisation.

    The debate about NAMA isn’t scaring away investors from Ireland. High property prices and the expectation of higher taxes to fund a big budget deficit is doing that already.

  109. @Maurice O’Leary

    “FG have set out the principles behind their policy since before NAMA was announced.

    Under the Irish system, there is no point in preparing draft legislation.

    If FG get into office before NAMA is passed, there is sufficient work done
    for the AG’s office to work on immediately.”

    Well I acknowledged they’ve set out their principles since NAMA-time (wasn’t sure of the exact timeline) – my point was that they’ve had months to develop their alternative plan concurrently and, still, all we have to go on is their assurance that work is being done behind the scenes.

    What exactly is the problem with proposing draft legislation? Nobody was suggesting that it would pass, or would even be intended to pass. It’s a bizarre attitude that just because a bill won’t pass that there’s no utility in even drawing it up. Part of having a credible plan is, well, demonstrating that you have a credible plan.

    The government hasn’t done a brilliant job vis-a-vis NAMA, which makes Fine Gael’s failure to at least halt it in its tracks all the more bewildering.

  110. @Jesper
    Too big to fail means that no matter what is done there is no risk,

    I agree entirely on this point. I have mentiones it a few times in my posts.

    @Karl, Brian and Philip.
    Would this make a good topic for a thread.

    Too big to fail or Too big has failed.

    The talk of creating a third force in Irish Banking by forceing a merger of the smaller institutions seems crazy. We need more competition not less.
    Talk of creating a third force also suggests they have given up hope on Anglo Irish. If that is the case, why are they contemplating taken Anglos toxic assets?

  111. Jesper said: “The people who were responsible might want to try to sidestep their responsibility and pass the responsibility over to factors beyond their control. “Regulators didn’t stop them from taking too big risks”…..

    Too big to fail means that no matter what is done there is no risk, this will lead to further risk-taking and sooner or later a bailout will be needed again.

    Does anyone think that the current owners could be trusted to monitor their own investment after failing as badly as they’ve done now?”

    None of the above issues are peculiar to Ireland and so have not caused the kind of reputational damage that full banking sector insolvency would cause.

  112. @zhou
    “Regulated by the financial regulator. Moral hazard underwritten by the Irish state and taxpayers”

    What other advanced banking system has been faced with the moral hazard dilemma of the Irish state (bar Iceland)? Could it be the international view of Irish banking system (a) dosen’t distinguish between Irish banks and (b) regards sectoral solvency a problem for the state to resolve and (c) knows of how a unique Irish regulatory/political/banking captive relationship amplified moral hazard risks.

  113. @bill hobbs

    What western state, other than perhaps Canada and Australia, has not had to support its banks in any way and has not had questions raised about regulation? Does Spain qualify? Is it the only one?

  114. @ graham stull + co

    ”An an “incredible” critic of Nama, may I just point out that the Nama Bill authorises the agency to lend money to developers. In other words, after bailing out the banks and overpaying for the crappy toxic loans, Nama will give more money to the very people whose greed and short-sightedness got us into this mess.”

    ”In both cases, it is the Irish goverment who does the borrowing to clean up the banks. The only differences are whether we 1) wipe out equity and sub bondholder debt 2) take control of the management, in order to be able to remove those responsible from power and 3) ensure any potential overpayment for assets is recouped in the flotation of the new clean banks.”

    may I point out that anglo irish was nationalised 6 months ago. since then:
    1) the only significant new lending I believe they are doing is actually lending to existing large developers***
    2) there is very little change in anglo ”management” (other than at board/senior director level).
    3) anglo will be participating in NAMA using the same pricing metric as all the other non-nationalised banks
    4) they are still current on LT2 sub debt (they actually paid 55c in the euro to buy some back)
    5) they paid over E500mm to holders of hybrid/tier1 capital to buy them back at a significant discount to par
    6) the irish state sunk E3bn of pure equity into anglo at the point of nationalisation to maintain its solvency (even when u nationalise, to remain as a bank, u need to be solvent)

    anglo is now a zombie bank in long term run off.

    now I’m not saying aib + boi are potential anglo’s but the anglo case shows u that nationalisation is not a perfect solution. I’ll agree there are plenty of imperfections in nama for the purists taste but there is too many grey areas in the irish current banking and economic mix to overlay textbook principals of free capital markets.

    remove the global nature of the current credit crisis and the specific debt/budgetary+funding dynamics of ireland inc and I’d be the first guy to apply the full fury of the market place to every element of the banking system balance sheet upto but excluding small depositors. but we are not in normal times and Ireland is not facing a normal economic problem.

    ***may seem like a stupid thing to do but it is often a very rational way of preserving value as a senior lender. developer uses the cash to pay of unsecured trade creditors/sub contractors at v significant discounts and also gets them to finish the property/development at often below marginal cost. its a workout that smart banks use all over the world – although clearly the headline of “lending money to bankrupt developers” does not fit well with our super smart media set.

  115. @ahura mazda

    “…commercial banking system is not built to have balance sheets that need to be sold into the market at the worse possible time.”

    “”What are you saying? That banks are taking risks they know they can’t survive”

    commercial banks convert short term deposits (liabilities) into longer term assets (loans) and maintain a 6-9% capital buffer. this capital buffer is there to aborb real losses and provisions for estimated real losses. its not there to absorb all losses from selling all your assets at market clearing prices at any time.

    “AIG Vice Chairman Jacob Frenkel: “The left side of the balance sheet has nothing right and the right side of the balance sheet has nothing left. But they are equal to each other. So accounting-wise we are fine.””

    aig financial products was not a bank. i’m not actually sure what it was. a hedge fund with huge credit lines mabye that faced the mother of all margin calls. not a commercial bank.

  116. @zhou

    Any bailout, and this is in my opinion a bailout, will be reflecting badly on the entity being bailed out.

    Would I trust the owner of a bailed out bank to not need further bailouts? My answer is no.

    Let the banks owners be concerned about the welfare of their business or you’ll have to do the worrying since the banks owners will know they do not need to.

    My argument regarding reputation is that if the government will bail out the banks owners now, then there will be expectations of future similar events and therefore a prudent lender should have concerns about Irelands ability to repay.

    When a lender is concerned about the borrowers ability to repay the interest will be higher. That is to me reputational damage to the Irish state. I believe NAMA will cause more reputational damage to the Irish state than nationalisation ever would.

  117. @Jesper

    That is all very true but the horses have bolted out of every stable in the globe some time ago.

    It is a well made point that bail outs now create moral hazard down the line. For that reason the top stratum in the banks must go and the shareholders must be left with a big loss as must the sub-debt holders. People seem to ignore that all those things re happening to one degree or another. Moral hazard relates to times gone by, not to the near future. Anybody who thinks otherwise has no comprehansion of the amount of wealth (genuine wealth earned through work and invested in “safe” banks) that has been wiped out.

    To quote from the preface to the 1975 Edn of Galbraith’s “The Great Crash 1929”:

    “In the wake of the 1929 crash, and with a view to preventing another runaway boom and the associated abuse, the Congress passed some tolerably astringent legislation including the Securities Exchange Act of 1934. It was not, at the time, especially necessary. Markets and financial adventure were then and for a long while after restrained not by S.E.C. but by the memory of what happened to so many in 1929”

    Moral hazard is real and reform is necessary but we are not going to create moral hazard by taking whatever measures are necessary to resuscitate the financial system now. Neither are we going to avoid moral hazard in the future by not taking these measures. More substantial reforms will be required down the line.

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