Non-Anglo Haircut is What Matters for Taxpayer

I flagged this last night but, going by the discussion we’re having at the previous thread, I think it’s worth saying a bit louder. The only thing that matters for assessing the potential cost to the taxpayer of NAMA overpayment is the average haircut on non-Anglo loans. Anglo is a nationalised bank and this transaction is one arm of the state paying another arm of the state.

So we simply do not know right now the extent to which the taxpayer may be exposed. Nor should stock markets really know how to react to this information when valuing AIB and BOI, unless they have been supplied with information that we don’t have. However, the “cowboy factor” makes it likely that the discounts applied to Anglo (and perhaps EBS and INBS) will be greater than those for AIB and BOI. So I’d be pretty confident that the haircuts for these banks will be less than the 30% average.

We know that the markets were expecting something like “the stockbroker scenario” involving a discount of about one-quarter (the stockbrokers gradually increased their estimated haircut over the past few months as irresponsible, mischievous, destabilising and opinionated economists lead a public fuss about the price to be paid for the assets).

Can we be sure that the average haircut of 30% announced today implies a larger haircut for the two main banks than was anticipated? Well we know that AIB and BOI are transferring €40 billion in book value loans to NAMA. A discount of a quarter would imply payment of €30 billion. Since we are paying €54 billion for the loans, this would imply paying €24 billion for the remaining €37 billion in loans which would be an average haircut of 35%. That seems perfectly plausible to me.

So, as regards the future of our two main banks, I don’t think we know any more than we did this morning. And yes fellow NAMA anoraks, the failure to announce any details about the two types of bonds is incredibly annoying and, frankly, hard to justify on any grounds that I can think of.

Update: AIB telling media that the discount on their €24 billion of assets (€17 billion in land and development) will be less than the average discount of 30% and that they will only need to raise €2 billion. AIB shares up 26% in after-hours trading in New York. BOI up 16%.

26 replies on “Non-Anglo Haircut is What Matters for Taxpayer”

If AIB nad BOI are transferring “performing loans” they should be deducted from total before calculating the haircut applied.

@Karl

the failure to announce any details about the two types of bonds is incredibly annoying and, frankly, hard to justify on any grounds that I can think of.

This is FF, they can justify anything!

As the Zoe assets hit the auction block the mysteries surrounding property valuation will evaporate. The gov’t will lose valuable cover and force reality back into the deliberations.

@Mickey Hickey

FF have managed to maintain this game of make believe up to now. The collapse of Zoe group should not prove any obtacle to their unbridled imagination.

@Generally
The announcement of AIB only having to raise €2 billion of capital with no reliance on the government suggests that that the non-blended NAMA haircut actually turned out to be a beard trim.

“AIB telling media that the discount on their €24 billion of assets (€17 billion in land and development) will be less than the average discount of 30% and that they will only need to raise €2 billion….”

Frankly, I think we all would have been shocked if AIB and BoI were taking as much of a haircut as Anglo and INBS.

“And yes fellow NAMA anoraks, the failure to announce any details about the two types of bonds is incredibly annoying and, frankly, hard to justify on any grounds that I can think of.”

I totally agree.

The lack of detail is infuriating, especially considering that some snippets of information were leaked some time ago. The fact that the ECB is accepting bonds has been stupidly dragged into the Lisbon debate has compounded things.

I am very disappointed with the lack of detail today.

BTW – I don’t think that the amount NAMA pays is strictly a zero sum game where the State owns warrants for Shares in the Banks.

@zhou

The PR ground has shifted – (almost free) monetary stimulus compliments of the ECB, Lisbonisation of reasons why and the sugar coated social dividend will now be deployed with of course “the support” of the IMF, EU, ECB and President Obama etc.

Will the due diligence process be allowed to negatively diverges from the estimated “estimates”?

@ All

I am not sure how other comment posters and/or KW, BL & co feel, but I awoke this morning with a sickening feeling in my stomach.

I actually find it hard to believe that this is really happening.

Is the govt really going to get away with this?

@Graham Stull

ditto – having slept on it I’m sure this is a bad deal. Perhaps Karl will open a ‘having slept on it’ thread?

Nearly 1 year into the crisis and it is clear that the figures announced yesterday (with the exception of the value of loans to be transferred) are all back of the envelope estimates of the type produced by hysterical uninformed economists who populate this region of cyberspace.

Surely after all this time, and expense on expert advisers, they could have completed a bottom up valuation of a representative sample of loans and used those valuations to give us an estimate based on their direct access to individual loans.

Graham Stull Says:
September 17th, 2009 at 7:49 am

I woke up with a similar feeling.

The kindest word I can think of is revulsion.

I can think of many other words but I won’t use them here.

If, as Karl Whelan says, we should disregard the loans to Anglo on the grounds that the taxpayer owns it, should we not also divide by 2.0 (aproximately) the worst-case scenario taxpayer loss in relation to the other banks on the grounds that the taxpayer own 50 per cent (approximately) of the shares in those banks? Or is my logic flawed?

@ Karl

“Can we be sure that the average haircut of 30% announced today implies a larger haircut for the two main banks than was anticipated?”

The haircut is only 30% if you ignore the fact that NAMA will borrow €5Bn guaranteed by the state.

If you include the €5Bn, which you should, the haircut is only 23%.

My read of the market consensus: the hedge funds that have built up 2.999% stakes (no need to dosclose at that level) are very happy. Delighted with the transfer from the taxpayer to the shareholder, as forecast. Insiders believe that they have delievered a solution equal or superior to the British solution so they have won the intellectual debate. On current market mood, the Banks will get away some rights issues. The main unknown is what happens when the analysts get back to thinking about the operating environment for the banks. The insiders believe that this small open economy is catching a tail-wind from the global recovery so time is going to add to the bail-out.
Lonely dissenting voices point out that the macro environment in Ireland vs UK & US is an astonishing contrast. Fiscal tightening vs ease; rising real interest rates/quantitative extraction (to date anyway); rising exchange rate vs $ & £ collapse.
When we get back to thinking about loan growth, net interest margins, costs and consumer impairments (think mortgages, credit cards & overdrafts) what will our analysis show? NAMA may, just, do something about supply of credit but what about demand? Where are the credit-worthy borrowers?
As a shareholder I say a heartfelt thank you. As a taxpayer I look at the share prices and notice that my pocket has just been picked.

@Eoin

I don’t know. I certainly wouldn’t know a fraction of what you and others here know about NAMA. So, I rarely comment on NAMA here. I’m only trying to establish accurate figures in my own mind before deciding whether I’m for or against NAMA. I thought I read ‘50%’ on this site recently. Maybe I got that wrong. If you say its ‘25%’, then I totally accept that.

But, would the general principle not still apply? Namely, would the figures for worst-case scenario taxpayer losses in relation to non-Anglo banks not have to be reduced by whatever percentage (say 25%) it is of those banks that the taxpayer owns?

@ John

no worries. I’m pretty sure as things stand we have a right to take ownership of up to 25% of either or both of AIB and BoI at a very low purchase price (well below €1). We don’t ‘own’ the shares yet, but it’s accurate to say that the taxpayer gains from any uplift in the share price, and also from any excess overpayment (to the tune of 25% there of) to these banks.

So yes your general principle holds that you have to take into account the state ownership in the banks when accessing the worst case scenario. On this basis, only 75% of the worst case scenario should be the ‘real’ worst case scenario for the State. Still bad, just not as bad.

Great performance by KW on TV3 last night.

KW mentioned that the overpayment for NAMA assets is a zero sum game.

I don’t think this is quite true because of the following:

1. The Warrants for 25% equity at €0.60 per share.
2. The preservation of some wealth in pension funds. This will keep money in the real economy and will be subject to income tax on dividends.
3. The preservation of some wealth for private shareholders.
4. The desirability of avoiding 100% nationalisation.
5. The greater potential to entice private equity in to recapitalise.

Against that it is to be noted that the more the Govt pays for the assets the less equity the Govt will get when it recapitalises.

@Zhou

Thanks.

Agreed the warrants make the zero sum game analogy less than perfect. But sometimes on live events you end up grasping for the clearest analogy. I’m pretty sure if I’d started to talk about warrants VB would have rolled his eyes and moved on to someone else!

That’s one of the reasons I far prefer to express my views in this format where there one can be as precise as possible.

That said, points 2 and 3 don’t overturn zero-sum logic while 4 and 5 are opinion more than fact.

By Post Author

@KW

I agree VB would have cut you off. I was disappointed that he interrupted you when you were about to get into the QE point with Simon Carswell.

Apart from the warrants, is there not some benefit to the real economy in preserving private wealth in the economy, particularly for retirees living in ireland and particularly when we are facing into a pensions time bomb?

I know it would be political suicide to say we are going to subsidise shareholders remaining 10% of share value but as a side effect doesn’t it provide some benefit for the real economy?

The discussion about preserving the wealth of pensionfunds could implicate that all companies where pensionfunds have invested should be bailed out.

Is it possible to get a list of the holdings of the pensionfunds? There might be those who’d like to take advantage of their high yield no-risk investments. Investing in any other company with high yield and the usual consequence of high risk would by comparison seem like a bad idea 😉

@Zhou

There are lots of ways to spend money which then generates indirect positive effects (remember 1 + c + c^2 + c^3 ……)

This isn’t necessarily the best way right now in light of resource constraints.

By Post Author

@Zhou; KW

“I agree VB would have cut you off. I was disappointed that he interrupted you when you were about to get into the QE point with Simon Carswell.”

I so agree with Zhou here, it was frustrating to see you cut off just when you were about to take issue with SC about the QE.

No criticism of VB at all, he is playing a blinder in relation to this issue and others, that lady beside you was absolutely brilliant. Just a rock of common sense. Not afraid of the Banker either 🙂

Do you want to expand on the QE point, or is this a subject for a different thread?

@Irish Pancake

The article on the cost of bonds being revealed this morning firmly puts the kibosh on talk of QE.

@KW

I take your point.

Comments are closed.