a lot of Dermot Desmond’s plan had striking similarities to the UK asset protection plan, and this was roundly noted by those who are supporting Desmond’s idea. However, as we’ve seen in the last few days, almost nobody has actually signed up in full to the UK asset protection plan yet, and both Lloyds and RBS are desperate to stay out of it, such is its structure. Now i’m not saying that this means it doesn’t have merits (the “whats bad for banks is good for society etc” debate), but its quite clearly been far less successful than some would have thought or indicated.

Furthermore, a cynic would argue that Desmond would prefer to be able to pick off some of these loans/property assets from desperate banks rather than trying to do the same against a long term and well funded NAMA vehicle (in any shape or form)…

Bearing this in mind, Mr Desmond seems to believe that banks can issue €60 billion of bonds (guaranteed by the taxpayer) without the underlying real estate being valued. It is, in his opinion, “a purely book-keeping exercise and could be done overnight”. I’m sorry but I don’t agree. Any investor who purchases these bonds will want to know what is the net value of the underlying asset and what cashflows these assets will generate and what risk is attached to those cashflows. Indeed apart from being a simple book keeping exercise property loans must have an up-to-date valuation in accordance with the RICS red book.

He goes on to say that the government can charge a “transparent fee” for this insurance. But it cannot be transparent if no sensible economic valuation is put on the properties. The way his proposal works is that the banks will buy insurance from the government to indemnify them (the banks) against any losses. Mr Desmond wants this insurance scheme to be fair to the taxpayer. But if it is to be fair to the taxpayer the insurance must be priced correctly to account for the risk the taxpayer takes on. This would involve a huge cash outflow from the banks thus delving the banks into further liquidity problems (which Mr Desmond rightly points out is the problem that banks face) and moving the end solution to nationalisation which Mr Desmond doesn’t want.

Furthermore, if NAMA is not involved in the valuation the banks will do the valuation themselves with the incentive to overvalue the properties to be included in the insurance scheme. This leaves the taxpayer picking the bill for the losses on the overvaluation.

Finally, while there is no ‘silver bullet’ solution to this mess, Mr Desmond’s insurance guarantee proposal is a case of “taking out insurance after you’ve crashed the car”.

“Is this not QE ECB style especially if the NAMA bonds are treated the same?”

um .. no, this is not quantitative easing by ecb.

it is a normal repo market transaction, consistent with normal ecb rules.

NAMA bonds will end up in the interbank repo market. will we then hear that Morgan Stanley or Soc Gen are helping out with QE also?

you are right about one thing though. NAMA is a positive carry trade for the banks. they will earn 50bp (about 250m) from carry. however this is coming from the taxpayer not from ecb, as the taxpayer is paying the 1.5% coupon.

sadly, the only “free-money” here is free money from the irish taxpayer gifted to financial institutions.

Karl whelan’s theoretical persepective is correct “because bond market participants aren’t stupid, long-term rates are determined with reference to this short-term rollover strategy, so there is no “free lunch” from issuing short-dated rather than longer-dated bonds.”

So long term rates will differ from short term rates because if an investor borrows long term they will fear the damage caused by increasing interest rates and this
outweighs any benefit they would get from falling rates. The liquidity preference theory states that lenders prefer
to lend short term and borrowers’ prefer to borrow long term. Borrowers pay a premium for long-term debt
because there is less exposure to the risk of having to repay the debt under adverse conditions. On the other hand
lenders demand a higher return on long-term debt because they are exposed to more interest rate risk. In other
words, lenders are assumed to have a liquidity preference for holding cash and therefore borrowers must offer
an interest rate high enough to induce lenders to abandon their preference for holding cash. Therefore because
lending long term means giving up more liquidity, long-term rates should be higher than short-term rates.

So is this1.5% “some blessing” or “conspiracy” by the ECB or is the ‘true cost’ of these bonds not made explicit?

Perhaps the Kelly and King research (www.KingResearch.ie) give us the answer? Here everybody is a winner: banks, government and taxpayers.
Because ECB cannot buy gov bonds directly it can do so indirectly via the banks borrowing short term, buying gove bonds and then refinancing at 1%. Is this not QE ECB style especially if the NAMA bonds are treated the same?

“I have seen nothing from the ECB to suggest that “said bonds could then be exchanged for cash and subsequently rolled over on an indefinite basis at the ECB”.

Expecting an explicit statment along these lines from the ECB is unarguably pointless.

Equally, the lack of such a statement in no way suggests that the practical operation of the NAMA mechanism won’t be effectively along such lines.

In the current information vacuum we are left grappling to make reasoned conclusions - only time will tell on this one, and maybe we can agree to disagree on it for now?

Might be worth pondering however why Simon Carswell in the paper of record today (P.15) is so categoric in stating:

“the NAMA plan, under which the government is borrowing Euro 54 billion at a very favourable rate of about 1.5 per cent under the blessing of the European Central Bank (ECB)” … “NAMA is a complex plan to repair the banks, secure cheap European money from ECB headquarters..”

Where is he getting such ideas?

A few questions spring to mind.
- What is the “ECB’s average rate of interest”
- Why haven’t we been told about this fantastic arrangement with the ECB?
- Why is the Min for Defence announcing huge changes to NAMA that the Min for Finance doesn’t appear to be aware of?

Or is Min O’Dea completely confused about the operation of NAMA because he has heard that NAMA’s raising 6 month money “about 2% cheaper” than the NTMA is raising longer dated money.

Amazingly Bruton didn’t pick up on this obvious gaff/misrepresentation and allowed Min O’Dea to dodge the interest rate risk issue entirely.

agree-sloppy drafting. I meant that the banks have more capital than the might have had if Lenihan had not overpaid so much. You are quite right as well. Share prices have risen due to overpayment resulting in less of a stake for our money-if any at all.

I was giving the govt the benefit of the doubt in assuming a pragmatic outcome where they would overpay a little and take an appropriate stake (short of nationalisation) at an attractive valuation in the banks.

Unlike some here, I am uncomfortable with nationalisation on many fronts, ranging from i) politicised lending-the Anglo HQ ii) the plain inability to fund-deposit flight & iii) the inability to attract talent to run them iv) taint on the sovereign-wait til market consolidates AIB balnace sheet on to ours

The banks got what they wanted which was to minimise govt involvement but I am not sure what the govt has got. It has overpaid, got no commitments on lending, got no risk sharing, got no upside. Still as long as we have that rock solid commitment of ECB funding at 2% below market rates that Willie promised us. He must have slipped out of Cabinet at that point.

I have all along suggested that the objective was to avoid nationalisation/massive dilution at almost all costs. And lo….So how can achieving your aims be an error? The banks and the govt have what they wanted. Game over.

This presents a far better investable proposition for private capital to flow in. Consequently, we are likely to see rights issues of more limited size at higher prices than two or three months ago. In short less dilution for existing shareholders. If the govt underwrites them, it may end up not getting much of a share.

Consequently, we will probably emerge as taxpayers with all the downside risk abut none of the upside potential. The banks are already going down this route, in talking down their capital requirements.

It will be too costly to nationalise them at that stage !

ok, i see where you’re coming from, but i still find it unlikely they’d deliberately under-capitalise themselves. As i said, it makes sense that as more private capital pushes the share price higher, it should be far easier to convince private capital to inject fresh new capital into the bank itself. There’s nothing in a zombie bank for private shareholders to gain from.

However, please note that if they were to deliberately do this i will be leading the pack to nationalise them straight away.

My understanding is as follows:
- A fully recapitalised detoxified bank will have a total share value of €x in, say, two years’ time.
- €x does not vary according to when capital is injected.
- The amount the state can recover for its investment is y% of €x, where y = the state’s percentage shareholding in the bank
- y is inversely proportionate to the bank share price [should this be share capital?] at the time of recapitalisation.
Therefore, the greater the bank’s share price the less bang the state will get for its buck in a recapitalisation.

Now, it is always open to the state to make a low-ball offer for recapitalisation BUT the banks can call the state’s bluff by recapitalising to a smaller degree privately and then proceeding as zombies.

By decoupling NAMA from recapitalisation and by announcing the estimates first we are eroding our future negotiating position with the banks. If NAMA and nationalisation (partial or otherise) are the two sides of the one coin then they should be linked, i.e. the banks should not be allowed to sign up to NAMA unless they sign up to a formula to govern any future recapitalisation as part of the same deal.

i was under the impression that they would be transferred piecemeal, and BoI stated that this is what they believed to be the case today as well (they said they’ll take each writeoff in the financial period that they are transferred). However, that said, they also seemed to suggest that the biggest loans will go at the start, so quite likely in one big chunk or very close together.

I have seen nothing from the ECB to suggest that “said bonds could then be exchanged for cash and subsequently rolled over on an indefinite basis at the ECB”. They may well stop infinite liquidity operations before NAMA is done. Most likely will considering NAMA is going to last 10 odd years.

I have heard euribor + 0.5%, refi + 0.5%, six month maturity, six month rollover, six month reset. I am none the wiser as to what these bonds are and what the risks are as a result (although I am aware of the risks of each of them).

I am beginning to suspect that even with the current level of overpayment the numbers don’t add up for the banks or the government -
long duration = lower repo (higher haircut),
short duration = rollover risks;
refi + 0.5% = risk of severe haircut when ECB liquidity window closes;
euribor + 0.5% = reset risks.

There have been two severe credit crunches in the last ten years, the current one and the 9/11 one (that I am aware of). In the ten years before that, there was the Asian debt crisis and the Russian default. What chance of going another ten years without one?

@Derek
While it would make sense to have varying start dates to not have a single big rollover/reset event, how likely do you see that as being? The loans can hardly be transferred to NAMA piecemeal, so they will probably be transferred in a single chunk from each bank…

“The ECB on the whole would be in favour of responsible policies”

There can be no argument with the above statement.

But, do you really believe that a Euro-Zone State could issue new Bonds to its own Banks to the tune of almost its entire existing stock of outstanding debt; that said bonds could then be exchanged for cash and subsequently rolled over on an indefinete basis at the ECB, and that such a mechanism could be reasonably described (in spirit if not in letter) as the ECB “sticking with their existing operational procedures.”?

No.
The ECB on the whole would be in favour of responsible policies, as outlined in most detail by the IMF. The European Commission has made clear it wants an open playing field between banks across Europe.
And as KW says,
the ECB have not made a “decision” to “support the NAMA plan” by accepting the NAMA bonds as eligible collateral. Rather they are sticking with their existing operational procedures.

i read that, didnt really understand the logic? I can understand it from a control issue, ie €1bn only gets u 30% now as opposed to 50% last month, but thats the same for any investor who owns some shares but wants to own more. It also didnt seem to look at the idea that it would decrease our required capital injection. I say this on the basis that the likelihood of AIB attracting private capital increases in line with their share price. If AIB still cant raise private capital at say €4/share, it doesn’t mean that thats where we have to pay for it.

“btw, fwiw, having spoken with a few guys who work in banks in london on various sides of the markets, Lenihan was considered very impressive and on top of the issues yesterday. Cowen gets good marks, Kenny is considered weak, and Bruton is generally considered good but seemed slightly below par yesterday.”

Huh? Nobody who matters in the bond market or any market gives a hoot about how anybody performs in the Dail.

spreads came in because its 54Bn not 60Bn or higher. that’s all.

There is a downside for the taxpayer if the share price goes up because we will get less equity for our money when we go to recapitalise. FT Lex column mentions this today.