Gift Horses and The Taxpayer’s Pocket

With only a couple of days to go before the key details are announced, it seems to me that confusion over the role of the ECB has now become a central feature of most journalistic discussions of NAMA (I’ll pass on speculating as to why this is the case). Take this paragraph from an op-ed on the Greens in today’s Irish Times by Deaglan de Breadun:

A key point was that the European Central Bank is prepared to provide €60 billion on favourable terms to assist the Nama process. Moreover, the more pragmatic element in the party is reluctant to look this particular gift-horse in the mouth, especially since it will not be coming from the taxpayer’s pocket.

Is the fact that NAMA is being paid for by the issuance of Irish government bonds really so hard to understand? Even the role that the ECB is playing in the process—which I discussed here—isn’t really so complicated.

Moreover, doesn’t anyone find it strange that the same people who worry night and day about the government budget deficit—the issuance of €400 million in IOUs per week—and tell us that large cuts are necessary because of it, then regularly tell us that we don’t need to worry about the costs of NAMA because it just involves printing IOUs?

One might as well say that deficit financing spending is a fantastic idea (a gift-horse from the bond market!) because it doesn’t come from the taxpayer’s pocket.

71 thoughts on “Gift Horses and The Taxpayer’s Pocket”

  1. A simple solution, put the HSE and Department of Social Welfare into NAMA 🙂

    On a different note, does it not look like the green leadership have been told by their party members that paying anything other than current market value is unacceptable…

  2. I too am perplexed by this and have made the point on a couple of boards. The “the difference between NAMA bonds and government debt is that the ECB are paying for NAMA bonds on favourable rates” thing is widespread and pervasive. So much so that it seems to amount to a campaign in itself.

    To be charitable, this is part of the “isn’t Europe great” spin campaign before Lisbon. But with NAMA following soon afterwards, the charitable explanation wears a little thin.

  3. There is either:

    A – No idea of how it is going to work

    or, I will speculate

    B -It is a deliberate attempt to disguise a pigs ear as a silk purse.

    I think the press get the impression that this is some form of magical stimulus.

  4. PS If you want some more crass, er, I mean class spin…
    http://www.youtube.com/watch?v=M4AgIdW9vBg
    “I’m very confident in the proposal in its capacity to deal in a comprehensive way with the issue of the loans and the assets which were primarily property based unlike the sub prime scenario elsewhere”
    (HT provost for typing it without retching).

    Our subprime loans are better than your subprime loans….

  5. Out of curiousity is the 1.5% interest rate that has been mentioned a fixed rate? Or can it rise to anything at the discretion of the ECB? But yeah in the media alot of the time, and really even some of the politicions are describing it as IOUs as it if isn’t really money that has to be paid back.

  6. The lack of clarity surrounding the NAMA bonds is very annoying.

    And the ECB is great as it is providing huge amounts of liquidity to our banks without any NAMA.

  7. Karl, you risk missing the key benefit of NAMA.

    Ireland’s broad money supply is shrinking at a rate of over 10% p.a. It has dropped 15% from its peak. This has dire implications for our immediate economic prospects. Read Milton Friedman’s article “Why Money Matters” to see why.

    http://economistsview.typepad.com/economistsview/2006/11/milton_friedman.html

    You are right to say that NAMA will fund its asset purchases by selling government bonds. But it is the willingness of the ECB to exchange cash for these bonds which means that the NAMA exercise should amount to a form of quantitative easing. That is a key reason to support NAMA. As NAMA may help stem the monetary / banking / credit crisis currently afflicting the Irish economy.

  8. @Cormac
    The government could just abolish tax for the next two years and borrow the difference in ten year bonds. There is no difference between NAMA bonds and other sovereign bonds. Sheesh!

  9. @Cormac Lucey

    quantitative easing?

    Money created ex nihilo (out of nothing). You can not claim that is the case here.

  10. Cormac has hit upon an increasingly common form of the confusion Karl describes: to brand the use of NAMA bonds as collateral for ECB funding as a clever form of localised “quantitative easing”. But the thing about “QE” is it really is basically money for nothing. The banks lending money from the ECB using freshly issued sovereign bonds is no such thing.

  11. Last sentence should have read: “The banks lending money from the ECB using freshly issued sovereign bonds AS COLLATERAL is no such thing.”

  12. @ James Conran

    Maybe I am confused. I am not an economist. But, if I am confused, maybe I’m not alpone …

    “A process that starts as a liquidity crisis could lead to a solvency crisis. Furthermore, problems at one bank could easily spread towards the rest of the financial system. If various banks would go bankrupt, the resulting decline in the money supply could lead to a serious recession. Deposit insurance and liquidity support by the central bank may prevent such a scenario from happening.”
    BRIEFING PAPER ON “THE CONDUCT OF MONETARY POLICY AND AN
    EVALUATION OF THE ECONOMIC SITUATION IN EUROPE – 2nd QUARTER
    2001” (MAY 2001) FOR THE EUROPEAN PARLIAMENT
    Should the European Central Bank Be Entrusted with Banking Supervision in Europe? By Prof. Dr. Sylvester C.W. Eijffinger (CentER, Tilburg University and CEPR)
    http://www.europarl.europa.eu/comparl/econ/pdf/emu/speeches/20010528/20010528_eijffinger.pdf

    “But, in the short run, easing monetary conditions may be an entirely appropriate response by central banks concerned about financial fragility spilling over into system-wide problems, which in turn could disturb monetary stability. The LTCM example, when the Federal Reserve System eased monetary conditions to increase liquidity in the financial markets, is a case in point.”
    Central banks and financial stability – Remarks by T. Padoa-Schioppa, Member of the Executive Board EUROPEAN CENTRAL BANK, Jakarta, 7 July 2003
    http://209.85.229.132/search?q=cache:bDYnfMbLln8J:www.ecb.int/press/key/date/2003/html/sp030707.en.html+ecb+emergency+liquidity+assistance&cd=1&hl=en&ct=clnk&gl=ie

    “Central banks’ ability to contribute to the stability of the financial system is based on their unique capacity to create liquidity without constraints. Consequently, a central bank can make a substantial contribution to the resolution of a liquidity crisis through the provision of adequate amounts of liquidity.”
    ECB and Managing risk: The role of the central bank in a financial crisis
    Speech by José Manuel González-Páramo, Member of the Executive Board of the ECB, Frankfurt am Main, 4 June 2009
    http://www.asymptotix.eu/content/ecb-and-managing-risk-role-central-bank-financial-crisis

  13. I heard this Lenihan interview repeated over the weekend. I’d like to get feedback on (or an interpretation of) what he’s talking about from 10mins55secs to about 12mins20secs.

    http://newstalk.ie/newstalk/shows/recommendations/Finance%20Minister%20Brian%20Lenihan%20on%20Nama.mp3

    “the fact that the bonds are at 1.5% gives the banks a huge incentive incentive to make money on them and not to leave them in their balance sheets…” I can’t see the relevance of the coupon in this context. Is he suggesting a doubling of bets.

    His comment on the possible floating nature of the coupons seems evasive. At one stage I think he just about stops himself from saying “commersial sensitivity”

  14. @ Karl

    In the mindset of the government the interests of the Irish Banks and the Irish State are joined at the hip.

    This symbiotic relationship means that if a mechanism can be fashioned by the Irish State to enable the Irish Banks to effectively exchange their toxic assets in return for ECB-provided cash (sanctioned in Frankfurt in the broader interests of the Euro-Zone), this mechanism should be embraced with relieved and patriotic gusto regardless of other consequence.

    The mechanism is NAMA (which I described on a previous thread as the ECB sanctioned vaccination to innoculate the Euro from Irish toxicity), but is probably better understood as the Cute Hoor solution to the problem of the Cute Hoors!

  15. Dr Whelan, would you not think that the apparent confusion among Irish journalists is no more than a reflection of the appallingly low standards of journalism in Ireland and indeed the near troglodytes quality of media commentary to which the country as a whole has become accustomed. As a ‘4th Estate’ the Irish media have repeatedly failed to fulfil that proper role in society. From the beef Tribunal forward all the major scandals were exposed otherwise than by the Irish media which functioned as principal cheerleader for the madness they now choose to characterise as ‘The Boom’. Indeed the printed media in particular fed of that madness parasitically and had every reason to declaim against those honest economists who doubted that the fundamentals, were ever in fact, truly sound

  16. yoganmahew Says:
    September 14th, 2009 at 2:02 pm

    Just watch the link. Everything’s ok then. The diaspora are coming. Do we have a government any more?

    :-&

  17. Ahura Mazda Says:
    September 14th, 2009 at 3:33 pm

    “the fact that the bonds are at 1.5% gives the banks a huge incentive incentive to make money on them and not to leave them in their balance sheets…”

    I think he means that the banks should take the bonds at a funding cost of 1.5%.

    Then, pass them off to the ECB who will receive the coupon.

    Then, ECB lends 80% of the value of the NAMA bonds to the Irish banks at (say) 2%.

    Then, the banks make hay by lending to distressed SMEs (who will have no choice) at 10%.

    My two cents worth.

    Everyone gets screwed except the banks.

  18. @greg
    surely the ECB lends 100% of face value and as SME’s aren’t borrowing anyway or are poor credit risks, the banks play the bond markets

    Mention of some form of incentive to force banks to use their dosh to make loans hopefully means making good loans -watch out for how green lateral thinking may be applied to good loan lending criteria to finance its social dividend policy

  19. bill hobbs Says:
    September 14th, 2009 at 4:22 pm

    “…surely the ECB lends 100% of face value…”

    Wouldn’t be too sure about that.

    “ and as SME’s aren’t borrowing anyway or are poor credit risks, the banks play the bond markets”

    Yes, you may be right. It would certainly follow the behavior of the USA banks who deposited their bailout with the Fed. As some have mentioned they may even lend it back to NAMA (the €10Bn, now €5Bn… but could be more if not guaranteed by the Minister)

    “Mention of some form of incentive to force banks to use their dosh to make loans hopefully means making good loans -watch out for how green lateral thinking may be applied to good loan lending criteria to finance its social dividend policy”

    On this I think you are positively correct. The Greens will insist that loans to SMEs must be for “sustainable” projects.

    They will use taxpayer’s money to pursue their own agenda and will be available for every photo opportunity in front of a turning windmill or a rare snail.

    We also get a “Peace Dividend” by taking on €5Bn of crap Northern Irish property.

    Happy days.

  20. One swallow doth a summer make? Driving to town today I was trying to spot an 09 reg plate – when I nearly crashed rubber necking one of the rarest of sights. Pure eye candy for the green shoots brigade! There amongst a forest of for sale signs was one that proudly declared SOLD ! I drove on slowly as you would after passing the scene of an accident

  21. Questions for the Greens:

    1. If the banks are willing to cash in their toxics at “market” rates, what does NAMA do for them? They can get a “market” rate from the, um, market (well – sort of – see Q2 below). Essentially the Green preferendum wants to believe the banks prefer a fire sale to the State over a fire sale to other people (so that Dan Boyle can plant flowers and organic veggies in the ruins of half-built conference centres).

    2. What does the presence of the State in the “market” for toxics (which it otherwise would not be, for the most part, excepting incidental CPOs etc.) do to the “market rate”?

  22. NAMA should amount to a form of quantitative easing.

    “Central banks’ ability to contribute to the stability of the financial system is based on their unique capacity to create liquidity without constraints. Consequently, a central bank can make a substantial contribution to the resolution of a liquidity crisis through the provision of adequate amounts of liquidity.”
    ECB and Managing risk: The role of the central bank in a financial crisis
    Speech by José Manuel González-Páramo, Member of the Executive Board of the ECB, Frankfurt am Main, 4 June 2009
    http://www.asymptotix.eu/content/ecb-and-managing-risk-role-central-bank-financial-crisis

  23. Cormac Lucey Says:
    September 14th, 2009 at 5:46 pm

    “NAMA should amount to a form of quantitative easing. “

    I could be wrong. But I thought quantitative easing was required were the central bank had become trapped at very low interest rates. That is, there was not further opportunity to “stimulate” the economy by dropping rates further.

    Result, print money and buy assets from the banking system.

    NAMA is not a money printing exercise. It is a transfer of private debt to the sovereign.

    Unless the ECB prints money and buys Irish private debt directly it is not quantitative easing.

    In the US, and I think in the UK, they printed fresh money, hoping that the multiplier would have a generalised effect on the economy. Unfortunately the multiplier in the US is below 1.

  24. @ Greg and Cormac

    the “is it QE?” debate is pointless until we have the exact structure of the funding of NAMA (all the way to the repo operations with the ECB). If the details of the repo operations indicated that they were being done at rates more beneficial to the Irish banks than existed elsewhere in the private marketplace, this could be argued to be QE, ie smaller haircut/higher bond valuation. Indeed, the ability to do 60bn in fresh soveriegn issuance in one go could be argued to be QE as there is no way you could issue that much debt in one go to private purchasers at the moment. Actually, the whole notion of lending both 1wk and 1yr at the same rate with no liquidity premium could be construed as QE being extended to the entire European banking sector.

  25. The ECB ,without nameing it as such, has used quantitative easing. Achieved by expanding the assets that banks can use as collateral. They can then be exchanged with the ECB in return for Euros.

    So in one sense Cormac, you are correct. A sort of QE

  26. Its my understabnding that QE involves the outright purchase of securities by the central bank from the financial system, typicall gov. bonds. These assets are purchased with newly created money.

    This increase in the quantity of (base) money should/could lead to an increase in the broader money supply through the standard money multiplier process, as well as lower interet rates.

    I dont see how NAMA is QE.

  27. NAMA/”Quantitive Easing” = Debt to be paid later, kicking the can down the road or the Cute Hoor solution to the problem of the Cute Hoors!

  28. Eoin Says:
    September 14th, 2009 at 6:11 pm

    @ Greg and Cormac

    “the “is it QE?” debate is pointless until we have the exact structure of the funding of NAMA (all the way to the repo operations with the ECB).”

    Consider a sovereign with its own central bank, say the UK or the US.

    If they print money and buy MBS they put additional money into the economy and hold the securities. They may decide to leave it there or, should inflation arise, sell the MBS back to the banks (hopefully without loss) and burn the money.

    Consider a sovereign with a foreign central bank, Ireland and the ECB.

    The sovereign (Ireland) “prints” bonds and (taking a short-cut) sells them to the ECB for freshly printed money. This could be considered quantitative easing within the Eurozone. But the implications for the sovereign are different.

    In this case the sovereign, Ireland, must honour the bonds with “recovered / real / earned” money when the Central Bank decides to sell them.

    Where the central bank is foreign owned the (NAMA) bonds represent real debt to the sovereign.

    It’s not just a question of printing fresh money, swapping it for assets and then reversing the process.

    The NAMA debt is REAL. Ireland does not control its own money supply.

    I don’t believe NAMA is QE. It can’t be when the sovereign does not “own” the Central Bank.

  29. @ bill hobbs re. sold signs

    Well Bill. I live a bit outside carrick on shannon. Many houses built in last couple of years. loads of ‘sold’ signs in estates of houses. thing is they aren’t really sold at all. i think the developer did it to panic people into buying early last year. some suckers (very very few) took the bait and the developer I’d say is afraid to take down the sold signs in case he gets sued or lynched.

    Another estate of houses was put on sale in summer 2007 – featured a sign saying – ‘only two units remain’ on opening day. developer netted one sucker. All other houses are empty.

  30. Quote from Roger Bootle
    “Quantitative easing (QE) refers to the monetary policy options available to a central bank when conventional monetary policy has run out of ammunition. Conventional monetary policy focuses on changing the interest rate, i.e. the price, at which the central bank will supply money to the system. With certain minor qualifications, official interest rates cannot go negative. Accordingly, once they have reached zero, there is no further that such price-focused easing can go. But the central bank can still vary the quantity of money it supplies to the system – hence the expression quantitative easing.”

    My Comment
    In practice, what this policy involves is the central bank buying assets in the markets. This is what NAMA is about. The sequence is as follows:

    1. NAMA buys property backed loans from banks and issues government securities in return.
    2. Banks go to Irish Central Bank and exchange government securities in return for cash +/- interest margin.
    3. Irish Central Bank borrows funds from ECB to finance purchase of government securities from banks.

    Our central bank will owe the ECB for the funds transferred so, in accounting terms, there is no gift. But this is QE for Ireland. We are being gifted liquidity. That’s what we’re so short of right now.

  31. Here are a few (surprising to some!) things about repo operations.
    1. these are reverse repos = in plain english, you have a loan secured against collateral.
    2. the value of the loan is less than the collateral, this is the haircut.
    3. At the end of the term, you PAY BACK the loan, with the interest. It cannot be a net injection if they take the money back.

    The ECB like other central banks has a list of criteria for assets that it will accept; it has nt changed those criteria that much in comparison to some other CBs. They always had a fairly large collateral list. Its all on their website on the interweb.
    On Nama bonds, given that they will be guaranteed by the Irish govt. is no special thing on their part. This is what they always have done.
    Like Eoin says, lets wait to see the structure of the bonds. I seriously doubt that there will be anything new.
    It is not quantitative easing a la bank of england, there is no outright purchase of corporate bonds. They have had a tiny purchase of bank covered bonds which are different to the barrel of monkeys that Nama bonds will be.
    Can we at least get the facts straight about this?

  32. Cormac Lucey Says:
    September 14th, 2009 at 7:01 pm

    Roger Bootle is correct. Of course he wasn’t considering a case where the sovereign did not control the central bank and the money supply.

    The NAMA debt is REAL sovereign debt. It is NEW. It must be paid back.

    We do not control monetary policy, never mind not having the luxury of printing money out of thin air.

    We have a central bank in name only.

    Yes Cormac, more money enters the Irish economy. I don’t dispute that.

    But it is not QE. It is based on issuing NEW sovereign debt.

  33. @ Greg

    Neither of us can know whether it is QE for the Eurozone. Whether it is depends on whether the ECB finances the monies it advances to our CB by (i) issuing debt securities or (ii) printing / electronically fresh money. The first approach would not qualify as QE. The second would.

    Regardless, it amounts to QE for Ireland. We badly need it.

  34. Cormac Lucey Says:
    September 14th, 2009 at 7:29 pm

    “Neither of us can know whether it is QE for the Eurozone. “

    Cormac,

    I didn’t say it was “QE for the Eurozone”.

    I said “This could be considered quantitative easing within the Eurozone.”

    I do not disagree that fresh money will be available to Ireland as a result of NAMA. But I will say again that that fresh money is based on new sovereign debt.

    This is not QE from Ireland’s perspective.

    We might as well sell the NAMA bonds to the Peoples Bank of China, which also would provide “new money” for the Irish economy.

    This is not QE.

    We are on the hook.

    If this is QE how will the Central Bank of Ireland sterilise the effect at some later date?

  35. @greg

    your posts are absolutely spot on, of course NAMA is not QE.

    some people believe that the ecb will offer special radically off-market terms on NAMA bond repos. this might amount to a limited form of back-door QE. However, not a single shred of evidence has been produced to support this rather strange assertion. None. Quite a few winks and nods though.

    very likely the QE stuff is part of a campaign by the irish financial community to throw sand in the faces of the public in advance of the NAMA vote.

    recall other strange claims such as “a nationalised bank cannot get funding” and “if an irish bank misses a subordinated bond payment, Ireland will be shut out of the bond market”.

    people with trading experience in european bond or derivative markets see through these claims immediately. but they are effective in keeping members of the public and the media in a state of perpetual confusion and fear.

  36. Looking at today’s developments from a purely political point of view, it involved two players standing on a tennis court. On one side minister John Gormley hitting nice ‘easy’ balls over the net to his ‘opponent’ minister Brian Lenehan, who was poised and ready to knock the ball back again, safely into minister Gormley’s court. I can only suppose that Richard Bruton was outside of the complex altogether, with the angry farmers, attempting to break in past security.

  37. bg Says:
    September 14th, 2009 at 8:02 pm

    “@greg
    your posts are absolutely spot on, of course NAMA is not QE.”

    Thanks for that bg.

    The simplest way to put it is that a sovereign that does not control the issue of its own currency is incapable of QE.

    QE is issuing (printing, electronically or otherwise) currency out of thin air.

    It is not a reverse repo.

    The prudent central banker will at some time in the future try to sterilize that issuance by “sucking” the money back out of the economy before inflation takes hold.

    Ireland is a sovereign with a foreign central bank.

    We can neither issue currency nor sterilize the effect at some later date.

    Yes, we can borrow on the “full faith & credit” of the sovereign (the future revenue stream of Irish tax receipts), but we cannot issue our own currency (out of thin air).

  38. Richard Douthwaite of Feasta, suggested a method of quantitative easing might be to allow the property market to find that lower floor level, which FF and Greens seem intent on stopping. I mean, at least with the lower floor level, Ireland’s competitiveness

    An opposition to Douthwaite’s argument within the Feasta group seems to be, that if the ‘sale of the century’ did happen, all of the safe money, or international investment money, would flood into the country and buy up the lot. It would not be ordinary Irish people who would buy everything up. Did anyone read Patrick Cunneen’s article in the Sunday Tribune?

    http://www.tribune.ie/article/2009/sep/13/why-not-give-taxpayers-a-stake-in-the-future-of-ba/?q=cunneen

    Or course, Vincent Browne’s SBP article also feeds into this point.

    http://www.sbpost.ie/commentandanalysis/the-money-is-there–its-just-not-being-shared-44282.html

    Maybe this is what NAMA is intending to prevent – the sale of the century. In other words, the 1,500 or so ‘best connected individuals in the country’ – as FG’s Richard Bruton described it, get a second, third or even fourth bite at the cherry?

    http://www.rte.ie/news/2009/0914/carrolll.html

    On the other hand, the other purpose of NAMA is to ensure that existing shareholders of the banks are not diluted out of existence totally. That we can still at least ‘claim’ to have some kind of stock market listing for our banks.

    This I presume, is why a third banking force is required, because the smaller institutions would simply evaporate after next Wednesday, as they will more or less be state owned entities.

  39. So yet again stating I’m just a member of the public, so therefore don’t exactly know what bonds are and all that. But I’m wondering, if the ECB are willing to lend 30 billion or 60 billion or w/e it is to the government at 1.5%, why do the government pay 6% or w/e it is for borrowing the 20 bil + it needs to run the country this year?

    As to what exactly the nama bonds are. Is it they will basically print a document that says they will pay 30 bil or 60 bill or w/e over 10 yrs or w/e, plus 1.5%, give this to the irish banks in exchange for the 90 bil loans, then they(the irish banks) give that to the ecb for whatever the ecb will give them for it, or try sell it to the international money markets ect.?

  40. bg Says:
    September 14th, 2009 at 8:02 pm

    “very likely the QE stuff is part of a campaign by the irish financial community to throw sand in the faces of the public in advance of the NAMA vote.

    recall other strange claims such as “a nationalised bank cannot get funding” and “if an irish bank misses a subordinated bond payment, Ireland will be shut out of the bond market”.”

    I would go further. Fianna Fail and (now) the Green Party are engaged in Financial Terrorism.

    They are terrorising people with tales of imminent Armageddon.

    As I don’t get to vote on NAMA (I am a political atheist) the terrorism is directed at the grassroots of the Green Party.

    “Vote for this, with green/social clauses, or the sky will fall in.”

    I hope the grassroots of the Green Party wake up before they become the Astroturf on which John Gormley and Eamon Ryan wipe their politically ambitious feet.

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

    PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN.

    http://www.youtube.com/watch?v=YWyCCJ6B2WE

    :mrgreen:

  41. Noel Says:
    September 14th, 2009 at 8:48 pm

    “So yet again stating I’m just a member of the public, so therefore don’t exactly know what bonds are and all that. But I’m wondering, if the ECB are willing to lend 30 billion or 60 billion or w/e it is to the government at 1.5%, why do the government pay 6% or w/e it is for borrowing the 20 bil + it needs to run the country this year?”

    Noel,

    The ECB are playing a confidence trick on the Irish people.

    They want the Irish people to sign up to €60/€70Bn of debt to pay for the bucket of pigswill that Fianna Fail and the Progressive Democrats (remember them?) created.

    Now I can’t blame the ECB for wanting some security for their lending.

    I just think they, Fianna Fail and the Green Party (remember them?) could be more honest about it.

    We’re on the hook for this Noel. Make no mistake.

    Also, the coupon (rate if you like Noel) that the NAMA bonds carry/pay is not fixed. Could be wrong but I could swear I heard Lenihan say it would change every 12/18 months. He didn’t seem that certain.

    Noel,

    You are right. If the State currently pays 3% or w/e why in the name of god would the ECB lend money at less than that?

    Well here’s the thing. They print it out of thin air. It doesn’t cost them anything.

    And we get to pay it back over the next ten to twenty years.

  42. When Toronto-Dominion Bank and CIBC wanted to raise their Tier 1s above 10% (Canadian minimum is 7%) the bonds were placed at 9.5-10.25%. Sometimes it seems easier to fail than to succeed…

  43. So another question I’ve never heard a clear plain English answer to.

    The Banks are private companys, that are on the stock market, so 1000s of people own a tiny % of them.

    these are all individuals who took a gamble that the price would rise when they bought shares.

    Ok, so, the banks lent out loads of money to people hoping they’d pay back the loans at a % rate of the loans, and therefore they’d make money. It turns out, that the loans they gave out to people were stupid, and people can’t pay them back, and the guarantees they gave against the loans don’t cover them. So these private banks are gonna lose a huge amount of money due to their silly decisions.

    So, what would be the consquences of letting these private companys do their own thing, if they go bust they go bust. (after the goverment guarantee expires obviously)

    If the current Irish banks go bust, I’d imagine new Irish perhaps, and for sure international banks would come in to fill the void that is their for Irish people that need banking services.

    No cost to the Irish public?

  44. @ Noel

    slightly wishful thinking there.

    first of all please note what happened when Lehman Brothers went bust to see what might happen if we let a major Irish bank just go under. When you’re done with that please refer to Iceland. Neither of those particular stories had happy endings.

    secondly, where exactly are the new entrants to the market gonna come from? Most of the international banks currently trading in ireland are withdrawing their exposure to Ireland for two reasons: they dont want to lose any more money here, and more importantly most governments across Europe have supported their banking systems to at least some degree and probably wouldn’t be too happy at the prospect of their taxpayers money being used to recapitalise the Irish banking sector. In terms of using Irish based capital to set up a new bank, well the complexities involved in this process would make it extremely difficult at best to do this in any time frame sub 2 years in terms of an entity operating in any even somewhat workable fashion.

    Irish bank shareholders have lost around 85% of their money as things stand. Subordinated shareholders taken out via the tender operations have taken baths of around 50-60% on average. Even senior debt holders are looking at paper losses of 10% or so on bonds outside of the g’tee. It’s seriously incorrect to characterise the Irish banking investors as having gotten away without significant losses.

    As i’ve argued before, there is always some level of societal backing for the financial system of every nation in the developed world. It’s implicit to be sure, but it fosters a confidence in the financial system well beyond the sum of the capital invested in it. This is generally to the mutual benefit of both investors (implicit support or guarantees at some level) and to customers (cheaper and easier lending practices). Should this be the way banking systems operate? Highly questionable. Is it the way banking systems operate? Absolutely.

  45. This is an article that first appeared in Punch magazine in 1957… it appears nothing’s changed!

    Q: What are banks for?
    A: To make money.
    Q: For the customers?
    A: For the banks.
    Q: Why doesn’t bank advertising mention this?
    A: It would not be in good taste. But it is mentioned by implication in references to reserves of £249,000,000,000 or thereabouts. That is the money they have made.
    Q: Out of the customers?
    A: I suppose so.
    Q: They also mention Assets of £500,000,000,000 or thereabouts. Have they made that too?
    A: Not exactly. That is the money they use to make money.
    Q: I see. And they keep it in a safe somewhere?
    A: Not at all. They lend it to customers.
    Q: Then they haven’t got it?
    A: No.
    Q: Then how is it Assets?
    A: They maintain that it would be if they got it back.
    Q: But they must have some money in a safe somewhere?
    A: Yes, usually £500,000,000,000 or thereabouts. This is called Liabilities.
    Q: But if they’ve got it, how can they be liable for it?
    A: Because it isn’t theirs.
    Q: Then why do they have it?
    A: It has been lent to them by customers.
    Q: You mean customers lend banks money?
    A: In effect. They put money into their accounts, so it is really lent to the banks.
    Q: And what do the banks do with it?
    A: Lend it to other customers.
    Q: But you said that money they lent to other people was Assets?
    A: Yes.
    Q: Then Assets and Liabilities must be the same thing?
    A: You can’t really say that.
    Q: But you’ve just said it! If I put £100 into my account the bank is liable to have to pay it back, so it’s Liabilities. But they go and lend it to someone else and he is liable to have to pay it back, so it’s Assets. It’s the same £100 isn’t it?
    A: Yes, but…
    Q: Then it cancels out. It means, doesn’t it, that banks haven’t really any money at all?
    A: Theoretically…
    Q: Never mind theoretically! And if they haven’t any money, where do they get their Reserves of £249,000,000,000 or thereabouts??
    A: I told you. That is the money they have made.
    Q: How?
    A: Well, when they lend your £100 to someone they charge him interest.
    Q: How much?
    A: It depends on the Bank Rate. Say five and a-half percent. That’s their profit.
    Q: Why isn’t it my profit? Isn’t it my money?
    A: It’s the theory of banking practice that…
    Q: When I lend them my £100 why don’t I charge them interest?
    A: You do.
    Q: You don’t say. How much?
    A: It depends on the Bank Rate. Say a half percent.
    Q: Grasping of me, rather?
    A: But that’s only if you’re not going to draw the money out again.
    Q: But of course I’m going to draw the money out again! If I hadn’t wanted to draw it out again I could have buried it in the garden!
    A: They wouldn’t like you to draw it out again.
    Q: Why not? If I keep it there you say it’s a Liability. Wouldn’t they be glad if I reduced their Liabilities by removing it?
    A: No. Because if you remove it they can’t lend it to anyone else.
    Q: But if I wanted to remove it they’d have to let me?
    A: Certainly.
    Q: But suppose they’ve already lent it to another customer?
    A: Then they’ll let you have some other customers money.
    Q: But suppose he wants his too….and they’ve already let me have it?
    A: You’re being purposely obtuse.
    Q: I think I’m being acute. What if everyone wanted their money all at once?
    A: It’s the theory of banking practice that they never would.
    Q: So what banks bank on, is not having to meet their commitments?
    A. YOU GOT IT!

  46. Noel Says:
    September 14th, 2009 at 10:05 pm

    “The Banks are private companys, that are on the stock market, so 1000s of people own a tiny % of them.”

    Sorry Noel, you’re incorrect. The banks are “owned” by life assurance, pension, hedge and sovereign wealth funds.

    There are some individuals (1000s of people perhaps) who own shares in the banks but they have no control. Those who have control, your pension fund for example, choose not to exercise it. They also hold the majority of the debt (and some but not all of the deposits) of the banks.

    “these are all individuals who took a gamble that the price would rise when they bought shares.”

    Yes, these (life assurance, pension, hedge and sovereign wealth funds) are the holders of equity and debt. However they do not believe that they gambled. They believe they are smart people. They lost and now they want you to pay. You have to admit Noel, that’s smart. They have convinced you to take on their losses.

    “So, what would be the consquences of letting these private companys do their own thing, if they go bust they go bust. (after the goverment guarantee expires obviously)”

    Some would say Noel that we need banks. And they would be correct. However we do not need the current shareholders. We do not need the current debt holders. We do need to make a deal. But on terms acceptable to you Noel, not the terms of Fianna Fail and the Green Party.

    Still, what do they care Noel? You’re going to pay. They bought the politicians Noel. Welcome to the sustainable economy. And remember; don’t step on the endangered snail. The Green Party wouldn’t like it.

    “If the current Irish banks go bust, I’d imagine new Irish perhaps, and for sure international banks would come in to fill the void that is their for Irish people that need banking services.”

    Exactly Noel. Let’s just remove the guarantee. Let the share price of AIB & BOI hit the floor. Introduce emergency legislation. Take ownership. And sell AIB to the Peoples Bank Of China.

    “No cost to the Irish public?”

    As you say Noel. No cost to the Irish public.

    The ECB and the EU won’t like it. But then, if they’re going to screw you, do you really care?

  47. Eoin Says:
    September 14th, 2009 at 10:24 pm

    “@ Noel
    slightly wishful thinking there.
    first of all please note what happened when Lehman Brothers went bust to see what might happen if we let a major Irish bank just go under. When you’re done with that please refer to Iceland. Neither of those particular stories had happy endings.”

    Eoin,

    Are you still peddling this? More “real world actualities”?

    As I asked on a previous thread…..

    “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”

    You can exclude the “slightly wishful thinking”.

    Thanks

  48. bill hobbs Says:
    September 14th, 2009 at 10:53 pm

    🙂

    You’ve probably seen this before but it doesn’t lose anything at second glance.

  49. @ Greg

    you’re spouting simplistic nonsense im afraid. Wipe out the debtholders and wait for the Chinese to come to the rescue, p1ssing off the EU and ECB off in the process? There’s political atheism, and then there’s just anarchist irrationality. Total investor wipeout occurred in Lehmans and Iceland, and we’ve seen the ramifications of those decisions.

  50. @ Greg

    maybe if you read more thoroughly on the other thread you refer to then you’ll see that i answered your request at rather great length. Given that i’ve read through just whatever it is you’re supposed to be peddling, could you read through mine first before whining about a lack of reply? You can also exclude “real world actualities” in any of your responses, cos you’ve used it six times now to my original once. Cheers.

  51. Eoin Says:
    September 14th, 2009 at 11:35 pm

    “@ Greg
    you’re spouting simplistic nonsense”

    It is you Eoin that talks nonsense.

    If you want to pay for the stupidity of AIB, BOI, Anglo etc then form an orderly queue (of one or more) outside the Department of Finance and offer them your salary for the next year.

    I don’t think you’ll have much company.

  52. Eoin Says:
    September 14th, 2009 at 11:46 pm

    “@ Greg
    maybe if you read more thoroughly on the other thread you refer to then you’ll see that i answered your request at rather great length.”

    But Eoin,

    I did read it.

    All 827 words of it.

    So can I have it in bullet points?

    Again, just give me your top five.

    Surely “real world actuality” can be condensed into statements of twenty words or less per actuality.

    You see Eoin, I’m not an economist, it’s a bit like quantitative easing. Maybe I don’t understand.

    Oh, when you choose your twenty words or less, be gentle with me.

    Thanks

    :mrgreen:

  53. Oh Eoin,

    Almost forgot.

    I don’t need your permission to include or exclude “real world actualities”.

    This blog is moderated.

    If the moderator has a problem with the language I use I have no doubt it will be deleted.

    Thanks for your suggestion.

    :mrgreen:

  54. @ Greg

    i asked you to exclude ‘real-world-actualities’ from your responses only after you asked me to exclude ‘slightly wishful thinking’ from mine. I thought it was a fair deal. Obviously that was slightly wishful thinking…

    My response is what it is Greg, if its too long for your taste then that’s hardly my problem. Unfortunately not all of our problems can be brought down to bullet point presentations.

  55. ProNama: It is Quantative Easing, so it’s free money from the ECB!
    AntiNama: Hold on, Irish Govt issues IOUs, which have to be paid back. No free lunch there!
    ProNama: Well, that depends on the way things are structured, which we don’t know yet…let’s just wait and see.
    (Fast Forward Dec 2009)
    AntiNama: There, you see. The ECB wants payment on Nama Bonds. I told you it wasn’t free money!
    ProNama: Look, but we are where we are. No point looking for scapegoats. Ireland has to just move on!

  56. RE- the QE debate.

    Trichet announced the ECB would buy bonds at the May meeting.

    More than a dozen journalists asked him if the ECB was going down the QE route.

    He sidestep the question throughout.

    Eventually, as the press conference was finishing up, he said it was CREDIT EASING.

    One to add to the handbook of Economic terms.

  57. @ Michael Harvey

    Trichet said the covered bond purchases would be sterilised through the sale of other assets. Given the realtively small scale of the covered bond purchases so far, its more or less impossible to say (a) if they have sold other assets or (b) what those assets were. Even if there were no assets ultimately sold to enact the sterlisation, i think the covered bond purchases were designed to increase liquidity in that particular market rather than to create actual QE conditions.

  58. REPO VALUE of NAMA BONDS

    Could someone clear up a point that is causing me, and others, considerable confusion.
    Hypothetically: NAMA will issue say €60bn, 10 yr, floating rate bonds – initial coupon 1.5%, to the participating banks. The market value of these, giben the yield to maturity on Irish Sov Debt, would be in the region of 60% of par or €36bn.
    The banks uses these bonds in a repurchase agreement with the ECB. Does the ECB repo the bonds at market value or at par value. Repo’ing at par value exposes them to massive credit risk should a borrowing bank fold but repoing at market value means that the banks will remain crippling short of liquidity and NAMA will have been all for nought?

    roundabout

  59. Well it looks like there is still an appetite for Irish Government Bonds…..
    results in…………………..

    The National Treasury Management Agency (NTMA) held an auction of Irish Government bonds on Tuesday 15 September.

    Two bonds were offered in the auction, the 4.0% Treasury Bond 2014 and the 4.5% Treasury Bond 2020.

    The overall total amount of the two bonds offered in the auction was in the range of €750 million to €1 billion.

    Total bids were received for €2,760 billion and it was decided to issue a total of €1 billion.

    An amount of €300 million of the 4.0% Treasury Bond 2014 was issued where the total bids received were 4.0 times the amount allocated, while €700 million of the 4.5% Treasury Bond 2020 was also issued where the total bids received were 2.3 times the amount allocated.

    The 2014 bond was sold at an average yield of 3.312% while the 2020 bond was sold at an average yield of 4.913%.

    http://archives.tcm.ie/businesspost/2009/05/17/story41750.asp

  60. I should have added see also Banks by government bonds and going stariaght to ECB for cash….the the link

  61. @ roundabout

    in answer to all your questions, the answer is, unfortunately: No, no one can answer those questions! There’s a huge amount of vagueness surrounding the funding process of NAMA.

    Some think the NAMA bonds will be short term (6mth) rollover (B Lucey)

    Some think they will be medium-to-long term with floating rates.

    Of this, some think the rates will be low (L+50) but repo-ed at par (me, and hence the QE debate)

    While some others think they will be repo-ed at fair value (ie 60 cents, BG, and so zero QE).

    Some others have suggested that the rates (and the bonds?) will be short-to-medium term (12-18mths) with rollovers and changing rates (Noel).

    (Apologies if i have anyone’s opinions wrong on this, trying to get them all together in one comment!)

    In conclusion, no one seems to be very sure of what these bonds will issue in terms of a coupon, what their rollover/maturity period will be, how they’ll repo with the ECB, whether they’ll realistically be tradeable on the secondary market, how they’re going to be accounted for (hold to maturity at 100 cents?) etc etc

  62. @Eoin
    My own feeling is that in order for NAMA to work, without the Govt issuing c. €100bn in bonds (which negates the Govt’s “cheap ECB loan” argument) – the ECB will have to repo at par. This means the bonds can never trade on the open market in direct contravention of several ministerial statements.

    It will be interesting also to see the accounting treatment of these.
    Could the banks auditors sign off on valuing these at par on the banks balance sheets? – if they mark them to market/model presumably the banks will remain insolvent post NAMA.

    roundabout

  63. @ roundabout

    i completely agree with how you see this playing out. It just doesn’t work otherwise (in my view). I see them keeping them on their balance sheet at par on a hold-to-maturity basis. This is at least feasible and has banking sector precedent.

  64. @Eoin @roundabout

    If you check the link I posted above, you will see that the Banks here bought about a third of government bonds.

    The article does not give the yield on the Treasury Bonds, but for examples sake let us assume 4% on a 5 year bond.

    The suspicion is that the Banks go directly to the ECB, re-discount, and use the bonds as collateral for raising cash.

    What the discount was, we will never know. No matter how you look at it they are still leveraging to raise liquidity levels

  65. I wonder if somebody could answer a question for me.

    If there is a €5 million floor, under which loans don’t go into NAMA, could banks simply let unpaid interest roll up on loans until they do go over the €5 million figure and then pass them over to NAMA?

  66. @greg from earlier reply. Banks will swap toxic loans for nama bonds. Unless the banks can sell their bonds, they will remain as assets on their balance sheets. The total banks assets will decrease by the amount they write off when selling the toxic loans to nama (though this will hit their capital).

    If the banks access the ecb repo facility using nama bonds, it effectively gives the banks funding for these assets. This would reduce overall funding pressures but it doesn’t give the banks 50/60bn to lend.

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