The Economist Conditionally Likes NAMA Post author By Philip Lane Post date September 17, 2009 The article is here. Categories In Banking Crisis Tags NAMA 143 Comments on The Economist Conditionally Likes NAMA ← Ronan Lyons on Long-Term Economic Value → Migration is endogenous 143 replies on “The Economist Conditionally Likes NAMA” “Despite its flaws, the NAMA plan seems like an advance over those in some countries—at least it gets something done. America’s scheme to buy toxic assets never got off the ground, while Germany’s bad bank is so punitive that most banks would rather stop lending than turn to it for help. The Irish government has also introduced some innovative risk-sharing elements to its plan. About 5% of the bonds NAMA will issue will be subordinated debt that will erode in value if the agency loses money.” Does this opinion from a reasonably well-respected international (and objective) publication not suggest that some of the negative commentary about Brian Lenihan and NAMA on this site verges on the hysterical? Is there any sense to the theory that, minister Brian Lenehan didn’t provide enough basic stimulus late last year, into the Irish banking system to shore it up? That is, it was a half measure. Now we are paying the price by having to go back a second time. Whatever we do this time, I suggest, we should ensure it has the effect desired. I know the ‘blanket guarantee’ was instituted last year. But it did not have the deserved effect, did it? The opposition parties in the Dail are having a sense of ‘Deja Vu’ at the moment, and wondering how will they look, if they support minister Lenehan in another massively expensive and failed attempt to re-start the vital organs of Irish commercial life. In other words, if this fails to work, most of Labour and Fine Gael will get kicked out of office, along with Fianna Fail. So it isn’t a welcome sense of Deja Vu for the opposition. Concubhar@ “Does this opinion from a reasonably well-respected international (and objective) publication not suggest that some of the negative commentary about Brian Lenihan and NAMA on this site verges on the hysterical?” Not in the slightest. They also go on to say that Irish banks get off lightly, behaved like drunker teenagers without parents in charge, and show no signs of changing behaviour. In last weeks edition, the editorial made the case for states making every effort to let risky banks feel the pain for their behaviour. The Irish has done the opposite. Dont be surprised that they favour an option (NAMA) that favours shareholders over taxpayers (which they categorically state in the article). Given that the economist (an unapologetic neo-classical economic right wing commentary that celebrated the global expansion of unregulated finace-capital over the past 15 years) thinks Irish banks are getting off lightly means that Irish people are not being hysterical enough. et tu Philip? Do you also conditionally like NAMA? The article doesn’t comment on NAMA will operate as an entity, instead it only looks at how it will remove the toxic assets and part recapitalise the banks – the issues that matter to their international readership. I’d bet if a similar scale behmoth as NAMA was proposed by the Brown government in the UK, the Economist would not only hold back on praise for the project, but would be outraged at the potential impact of the project on the domestic property market. @All Well, thats damning with faint praise. “he plan, so simple in theory, has proved fiendishly difficult to implement, not least because the government is trying to achieve three incompatible goals. The first is to restore trust in banks by cleaning up their books, so that the government can lift its blanket guarantee on their debts. Its second goal is to avoid enriching bank shareholders at the expense of taxpayers. And lastly it wants to do everything it can to avoid taking banks into state ownership. The trouble is that the banks have run up such large losses that it will be lucky to achieve even two of its three objectives.” And the shareholders having won (go us…..) we can infer that the other two are the ones that the govt will be lucky to achieve…. yep….two paragraphs on “The unpalatable choice facing the government was deciding how much of the banking industry’s loss to inflict on bank shareholders and how much on taxpayers. The government seems to have erred on the side of favouring shareholders” Shareholders > Taxpayers we can now take as axiomatic. So Concubhar , if thinking that that is a bad thing, from moral, political, economic and social grounds, then color me hysterical. I have been called worse (today). “The adults want to be back in charge of the punchbowl when the next party starts.” Most of the adults will have long gone to the great sheltered housing scheme in the sky by the time we have another party. I read this on the RTE news webpage this evening: “The full extent of bank forbearance with large property borrowers was revealed for the first time when the Minister disclosed that the loans Nama will acquire include €9 billion in overdue interest payments.” Perhaps I am dumb, but when I look at a figure like €9 billion, I wonder how long has that been building up for. It suggests to me looking at that figure, than many of the loans were fixed rate, rather than floating. Would that be a fair assumption? Has anyone asked minister Lenehan at the Dail debates, what is the break down of the loans in terms of fixed, to non-fixed, or other type of arrangements. I remember it came up as an issue in the Zoe developments case. Sometimes, I think the loans become fixed after a couple of years, or something like that. Maybe NAMA will have to re-negotiate terms with developers, or ‘borrowers’ as they now prefer to be known, as NAMA will be the de-facto bank for these borrowers. It doesn’t appear to me, that much interest is being paid at all, if you can reach a figure like €9 billion. Brendan McDonagh claims that 50% of loans are generating some money. But cows grazing in a field, paying agricultural rents would ‘generate some money’. How much money, is another matter entirely. McDonagh had to make that statement at quite a late stage in the NAMA development process, which signals he didn’t know much at that stage. @Maurice “Most of the adults will have long gone to the great sheltered housing scheme in the sky by the time we have another party.” Dr Fitz was fierce pro nama today on newstalk…. I thought he was very much overall, but he seemed to soften when Richard Bruton came on. He admited he thinks we need a change of Government, but only after Nama is passed for some reason. One think I’m saddened by, is in the media which have a huge influence over the population imo, seem to be accpting that Nama is going to be passed, and are now accepting that and dpn’t have a problem with it. Brian I’m not suggesting that all criticism of NAMA or Brian Lenihan is illegitimate. I’m simply observing that some of the criticism posted here implies that Lenihan is manifestly insane or utterly incompetent. If the opinion of an objective observer like The Economist is that Lenihan has done a pretty decent job in incredibly difficult circumstances – and in fact has done a better job than the US or the UK – with their armies of economists and financial experts – then I think it makes that kind of criticism look intemperate. @Con Well, i dont think he is insane. I do think, as I said here http://www.rte.ie/news/morningireland/player.html?20090917,2611465,2611489,real,209 that its a strange day when we gasp in relief that any minister would only overpay by 15%. If you listen to that you will hear me very very angry and not a little scared. This is twice in my working life that FF have brought the state to the point of beggary. Twice, and I am only 45. The way its going we are due another just when I retire. So, as to the competence of a man gleefully paying more than he claims something is worth, a value that most every commentator says is itself a great exaggeration, ….it makes me sick and makes me mad. The thousands I will get from the uplift in my share values are scant comfort. NAMA was clearly designed from the outset to resuscitate the banks and anyone who has a vested interest will, of course, support that notion. And perhaps a majority of commentators in the game as well. The problem is ? are the Banks worth saving in their existing business- model mould. ( even after some retrenchment …and recovery from the Punchbowl Party) The alternative options of Nationalisation , Good Bank -Toxic Bank were to linked/owned by respective political party+ their philosophy. The Government is in the driving seat so it’s essentially their call. (+/-) “resuscitation ” Thus it was a politically polarised solution rather than a thought-out banking solution. NAMA is the only game in town now…it can be tweeked here and there. My point is that we ( the State) have to focus/agree on Fixing the Bank System, then re-jig NAMA (NAMA+…still nama) to be a linked part of the full picture with the Dept of Finance. ( guarantees + equity ) ( did somebody mention joining the dots ! ) My proposal ** Fix the Bank System , FixNama, and kick-start quickly the supply of “Affordable Credit ” to retail, commercial and enterprise creation customers. Depending how the Greens / Independents wobble there could be a real chance to to move to an all party solution under the NAMA umbrella ….saving face for the FF, FG, Lab, Greens, Indep, ?SF ? Check out my proposal http://www.fixnama.ie Comments welcome via e-mail email@example.com Brian I completely agree that we have been brought to the point of beggary by Fianna Fail – although I also think the demographic shock of the accession countries is also an underdiscussed factor in the entire debacle. However, I think it is slightly disingenuous to classify what NAMA proposes to do by way of payment of ‘long term economic value’ as simply ‘overpayment’. Most property purchases in any state require loans from a domestic bank. The Irish banks are broken. NAMA is intended to fix this. The current depressed market value of Irish property is basically a cash purchaser price because the Irish banks are broken. So I think it isn’t unreasonable to assume that once the banks are fixed, property prices will be restored to a more meaningful value since the Irish property market will then more closely resemble a ‘normal’ property market. Apologies – meant to refer to the ‘demographic shock of the arrival and sudden departure of workers from the accession countries’. “So I think it isn’t unreasonable to assume that once the banks are fixed, property prices will be restored to a more meaningful value since the Irish property market will then more closely resemble a ‘normal’ property market.” so, they will fall? Tommy, A breath of fresh air at the end of a “hot”day . One would think that the crisis in country is of “Tsunami” level and that everyone should be bending themselves everyway and anyway to help each other.The problem seems to be that Political Parties and Commentators of all strains look determined to keep digging the holes they are in and arent willing to bend in any direction but the way they are determined to go—scoring points against the other seems to be the main game they are playing. @Tadgh O Laighin its the 1980’s again…. I don’t understand why people are angry that NAMA will overpay for assets. Isn’t that the whole point? The banks could presumably get market value in the market. They’re not in trouble because the market is frozen, it’s because their valuations are daft. The moral superiority of paying true value would be cold comfort if the banks failed anyway and the investment was wasted. I don’t expect that values will rise enough for the scheme to break even. Irish people still haven’t accepted how inflated bubble prices were. NAMA will lose money and that money will be what we spent to bail out our banks. Serves us right for prostituting our regulatory system to draw in foreign business. There is an important point about NAMA, which is hidden from debates I have listened to here. It is as follows. The structure of capital within the developer community in Ireland was very poor by comparison with other countries. You often had individual people standing over loan portfolios in the order of billions. It would appear to me, the ECB look at those individuals associated with the loans. The ECB looks at the kind of relationship between those individuals and banks and says, no way. The Irish system has to be improved, before we can do business. Pat McArdle’s article in today’s Irish Times hinted at this. When Peter Bacon was originally given his brief to do a study, and came up with the basic NAMA concept, Bacon would have to take the ECB’s requirements on board. That is the point that McArdle raised in today’s Irish Times newspaper piece. If there is anything good to be suggested about NAMA . . . I am no great fan boy of the scheme myself . . . but if there is something good about NAMA, then it allows us to re-organise the structure of finance as it pertains to property development in this country. No longer are the developers in Ireland running amok dealing with one or other bank, to get the banks ‘competing’ with each other etc. The developers now have only one port of call. That new banking institution, NAMA, has every motivation to pursue developers for all of what they owe, not part. Look at the recent court case involving Zoe developments as an instance. One ‘small lender’ . . . calling €130 million small seems strange to me, as the total sum of venture capital invested in Ireland in 2006 was nothing like that much. In the Zoe case, one small lender could only work with part of what the total Zoe enterprise owes. It owes almost €3.0 billion between all companies. That €3.0 billion is tied back to a couple of individuals. The entire loan amount owed by Liam Carroll is bigger than the ‘risk’ the six Irish banking institutions are taking as part of their ‘risk sharing’ arrangement as proposed. But at least NAMA creates one single lending institution, which has the legislative power to tackle the entire Liam Carroll enterprise, and will be motivated to do so, on behalf of the Irish taxpayer. Now, there are some advantages there, to be sure. To be sure, the ECB is witness to those advantages also, and probably even encouraged a NAMA type approach, as suggested by McArdle in his article in the Times today. When a reputable paper like the Economist favours NAMA every word is parsed and disected to suggest it is wrong.It seems to me that we now have reached the stage on this issue that people want to score academic points but forget what is happening in the real world in Ireland for those who have already lost their employment and those of us now left in the Private Sector who face the real fear of losing our livelihood. I face each day as a person running our business serious challenges to maintain our business in existence.It is not an academic exercise for us but what we crave along with the rest of the business community is some stability and positive attitudes to this economy. What we have been getting from so called experts for endless months is plain negativity about everything not just NAMA. I am not a FF voter but I have to say that I think Lenihan is a decent man, trying to learn his trade fast and taking steps that he sees will lead us out of the multiple crises he has to deal with. The continuation of this mantra of negativity is eating away at the soul of Irish SME businesses. I would suggest that some of the Academic experts here might try their hand at running a business, employ some young educated Irish people from their Universities and try to create some wealth in an environment where there is a constant barrage of vitriol about Irish business and the economy. Fat chance of it happening I would suggest .We are not even now meant to read or hear some positive things from a reputable foreign newspaper. Faint praise indeed ………… @Ray yeah, its all the academics fault. I will post more on this in the morning….. WTF? I have just watched Wee Willie on prime Time – did I hear him say in response to Brutons assertion that the cost of the nama bonds would avearge approx 5.3% (3.8% + 1.5% i think Bruton said) “well thats less than inflation” I cant exactly recall what he said – need to see it again – but I nearly kicked the tv – we’re deflating here at about 5% pa – what planet is he on? Oh yeah Planet Bertie. The only chart I could find quickly on Japanese land prices only goes up to 2007 but after 20 years its still down 50% for residential and 2/3rds for commercial. http://tochi.mlit.go.jp/english/6-05.pdf The notion of only needing 1% to break even is a disgusting lie and the government should not be brainwashing the public. Its pretty clear to me that the 47bn is too high and I would be of the view in ten years we arent even going to see that never mind 54 bn. @Ray I am not an academic and i run my own business. we’re trying to survive on a daily basis too and i’ve had to let people go and no I havent slept well. However had we listened to people like Morgan Kelly and other “academics” we might not be in quite the mess we are in. There were lots of things we could have done eg we could have banned 100% mortgages, increased reserve requirements, stopped the building societies behaving like Lehman brothers etc etc. Just because nama is a plan doesnt mean its a good one. This site isnt negative for the sake of being negative but one of its purposes is, I believe, to try to bring a dose of reality to the situation and break down the myths – many of which are being purported by the govt. I agree we need a bit of positivity but when youve been screwed for 7 billion (at least) its hard to go to bed with a smile on your face. night night….. To conclude something in my point above – the concept of the single toxic asset management vehicle does possess the advantage of being a serious weapon, to wield in order to pursue developers who don’t want to be pursued and rely too much on the forebearance of Irish banks who roll up interest to the tune of €9.0 billion. But as the ‘academics’ have correctly pointed out, there is risk in this for the taxpayer, there is a transfer of wealth to shareholders, we now see on the share price index. When the government has to buy up ‘ordinary shares’ they will obviously pay the higher price. Worst of all, NAMA without nationalisation does not seem to offer us any guarantee of lending back into the system. That is especially worrisome, given the amount that NAMA will cost to institute. However, I would like to keep that key single advantage of a ‘central asset management vehicle’ in the forefront of peoples’ minds too. Perhaps there is some very of a plan, which retains the advantages of the said vehilce, but also addresses the risk to the taxpayer, the issue of the transfer of wealth to shareholders and the need to stimulate lending to the economy. Can it be done, while retaining a central asset management vehicle or not? @Ray “It is not an academic exercise for us but what we crave along with the rest of the business community is some stability and positive attitudes to this economy. What we have been getting from so called experts for endless months is plain negativity about everything not just NAMA.” Academic exercise? Is that what you say this is, so the academics should get back to their “Ivory Towers”. Shades of “Who will rid me of this troublesome priest”!!! Hopefully there will be no assassinations, except of the charachter type. So called experts? You doubt their bone fides? Philistine!!! No possibility at all that these academics are in fact the true heroes in all this, and that they have educated ordinary people like myself to appreciate the enormity of what is about to be perpetrated by the FF/Green Govt. Possibly you agree with Government spokespersons, and a previous Taoiseach, who argued that “Talking down the Economy” was a Capital Offence, for which “suicide” was the proper punishment? “Lenihan is a decent man, trying to learn his trade fast and taking steps that he sees will lead us out of the multiple crises he has to deal with.” No argument with the Minister’s decency. But, as a reputable and senior member of the SME community, which I have no doubt you are, how can you reconcile someone who is “trying to learn his trade” taking the biggest and most crucial financial decision this country, Ireland Inc. has ever made. “We are not even now meant to read or hear some positive things from a reputable foreign newspaper” And we, the ordinary Irish Taxpayers, are supposed to ignore the views and advice of our own Independent Academic Economists? While this site is an incredible resource and has served a hugely valuable function, the one criticism I would make of it at this stage is that a lot of people have entrenched positions. In my view, the fact that The Economist has taken a favourable position on NAMA should at least cause people to honestly reconsider their very negative views towards it. Instead, I get the sense (not very scientific I know) that many commentators are looking for ways to attack and/or dimiss the opinion expressed in the Economist because it is not consistent with the entrenched position they have reached on the subject. Given the dire position we find ourselves in, I don’t think this is very helpful. @ Concubhar O’Caolai I believe myself, given the dire position we find ourselves in, you are probably correct, on balance. I am a lot closer to all of the large property developers in Ireland, than anyone else here on this site. I am a long ways away from the bond markets, but very close to property. Perhaps what economists have still to grasp, is how much bigger than their boots these developers were allowed to become. I can only compare it to the reason Alcatraz was needed in the United States. NAMA is like Ireland’s version of Alcatraz. Yes it costs too much to run, it is a prison built for too few inmates, but one thing is certain, if built, the developers I know will hear the sound of that gate drawing across behind them. I doubt many will make it past their first night in the cell. On another level, I do compare NAMA to a weapon of mass destruction. The kind necessary to blow some of our large developers into oblivion while we still can. I as one taxpayer, would be more than willing to pay my €30,000.00 contribution towards the manufacture of this weapon. That is not an insignificant sum for someone like me at the moment. But I would willingly pay. I would also recommend the ‘children’ in Ireland pay it also, in order that they can look forward to a life in Ireland, without having the Irish property developer on their backs. I say that as someone involved in the Irish property development industry myself. I support broadly what both minister Gormley and minister Lenihan are doing. I have only recently changed my mind on this. I have a lot of issues with NAMA, with Gormley and with minister Lenihan. But again Concubhar O’Caolai, well said. “The unpalatable choice facing the government was deciding how much of the banking industry’s loss to inflict on bank shareholders and how much on taxpayers. The government seems to have erred on the side of favouring shareholders” The above is a quote from the article. Still we are hearing a ‘truism’ being generated that the Economist is supporting NAMA? Getting 25% back on the outcome of on an investment while carrying 95% of the risk can never be justified on economical reasons. ‘Ivory towers’? A person is asking for a spending of 54bn (+ up to another 5bn later) based on a model and the people questioning his model are being called living in ‘Ivory towers’? Modelbuilders are usually accused of living in ‘Ivory towers’, here the people quoting real life examples disputing the validity of the model are being dismissed as not living in the real world. NAMA is a political solution to an economical problem. Temporary nationalisation is the economical solution. If the €9bn of interest roll up applies to distressed debt and 40% of the loans transferring are good loans (Wee Willie – Primetime) then the balance of market value €68bn is bad ie 40.8bn. (BOI say it has €1bn in roll ups). Which means the int roll up is 22% of the bad bit – unless of course it also applies to the good bit as well ? The Economist is damning with faint praise Credit Default Swap rates dropping for Irish Banks. CMA state: “Irish banks tighter as Allied Irish sells £20bn of property loans to government”. AIB CDS rates down from 400 on July 16 to 170 now. Shareholders and investors in the two Irish banks are having a grand old time on our buck, with those corrupt aholes in Government spinning lies 24-7. Is there anything we can do other than post bile on message boards…? Ray Says: September 17th, 2009 at 9:48 pm “..but forget what is happening in the real world..” Ray, Apologies, if this is out of context. The “real world”, it appears to me at any rate, seems to occur as an argument for NAMA when all other argument is lost. I know you have a real world. I also have one. “I face each day as a person running our business serious challenges to maintain our business in existence.” Ray, If I may, this sounds like your business is suffering from a lack of credit. Some call it liquidity. What makes you think that NAMA will provide any credit to your business? It is my opinion, and you may disagree, that NAMA is nothing more or less than the State (Fianna Fail & the Green Party) borrowing €54Bn on your back to pay off the ubiquitous “bond market”. Once the appetite of the bond market is satisfied your business (not that I know what it is) won’t get a penny. NAMA is designed to transfer the last drop of blood from the Irish credit bubble stone to Wall Street & the City of London. You are being misled. “It is not an academic exercise for us but what we crave along with the rest of the business community is some stability and positive attitudes to this economy.” Ray, “positive attitudes”. I’ve never really understood that, or negative ones for that matter. I don’t buy the glass half full / half empty meme. If someone tells me that a glass is half full I will point out that it is merely half a glass. If someone tells me that a glass is half empty I will point out that it is merely half a glass. The glass is neither half full nor half empty. It is half a glass. That is reality. “Positivism”, and by that I mean a “positive state of mind” is a major cause of why we find ourselves where I and you are. You are being encouraged by Fianna Fail & the Green Party to believe that NAMA is a “positive” thing. Have you considered that they might be lying to you, and using your “positivity” as a weapon against your real interest? “We are not even now meant to read or hear some positive things from a reputable foreign newspaper. Faint praise indeed …………” Ray, “not meant to read”. If that were true I have to agree with you. A most disturbing idea. However, the “reputation” of newspapers, and indeed “media” is surely suspect. Were they not the same that provided the “positive” meme that led us here? This has not been explored here I think and am not sure I am understanding it correctly? AIB said in April it needed another Eur1.5 billion capital and it would look at disposals etc to get that eg Poland, M&T etc. Then the market gets worse, the overpayment for LTEV is pared back and lo and behold – AIB now only needs Eur2 billion. So unless they are saying this Eur2 billion is in addition to the previously announced Eur1.5 billion (and it doesn’t look that way from their press release), NAMA has only resulted in the need for Eur500 million of additional capital over last April’s position. If so, for the first time in 2 years it feels good to be an AIB shareholder and I’d like to thank the Government. Brian O’ Hanlon You ask if you are dumb. I cannot answer that, but you seem very intelligent but economically confused. And no wonder. You are making the mistake of reading the mainstream media. Do not expect news or education from them. Banks do not require stimulus. They have a licence from the Central bank to lend out what is not theirs. It is a bare confidence trick. Read up on it! It is called fractional reserve banking. Try Mises.org for a clearer view. They create stimulus but as you should have gatyhered from others’ posts, especially mine, they have all gone insane for the last two decades and completely berserk for the last 7 years. Now they have lent so much that no one can want to borrow because the supply of borrowers has been tapped out. Assets are now declining and will for another decade. Too much lending and the banks are not the worst! Re-read that last sentence! Now look up shadow banking! And the we have derivatives. So no amount of “stimulus” can help us now and half the economists know this. But “they” are still calling for it, Brian! Greg Very smart post, that last one of yours! Too true, mate! Divisive comments are meant to distract us from the reality. No wonder the likes of Brian who, probably, “earned” three times my Rolls Royce salary, are confused about credit. Belief and whom to believe is essential. The Wizard of Oz was a political tract, made into a kids film. It discussed the impact of gold and cheap food on humans, making them enslaved munchkins. Some of the commentators on this site are still munchkins! Well said! Concubhar O’Caolai Hysterical? Yes! Because I and others can see what is happening and you cannot. I was also insane but it appears I am on the mend, unlike the economy in Ireland. Doesn’t mean that there is a need for panic. Yet. But you will find out over the next decades just how hysterical you should have been! Maurice O’Leary Sadly, the adults are still not able to get to the punchbowl. The stimuli world wide are just destroying what is left of scarce capital. It cannot succeed excepy at considerable cost and that will mean more debt. So the process continues as the kids do not understand that FRB, (fractional reserve banking) and overlending IS the problem! Tadgh O Laighin Yes. But this site http://www.irisheconomy.ie has missed a lot of punch as it has failed to highlight just how bad things are going to get and that the Minister has burned off too much capital already with Anglo-Irish. His stupid belief in borrowing, as ever available, will break him, politically and personally. Just what happens when the state can no longer borrow? Or do you all think this is hypothetical? I strongly urge you to reconsider the availablility of funds! John D You are right. But we had done very well out of that whoring. Allowing fiscal policy to relax when we entered the Euro zone was stupid! And foreseeably stupid. Just think what would have happened if they had been sensible? No influx of E Europeans? Fewer dislocations? Why were the politicains so stupid? I include FG as well! Simonos Welcome to the club! It will get much, much worse! Seriously worse. As in shutting down hospitals and schools worse. Crime “against” property up 100%. Welcome to the hellfire club. Taxes will rise but too late to avert calamities. The driving home of sense to the voters will be slow and painful. Rightly so. Drunk on promises from hack politicans who are decent skins. Just as in Iceland. Overriding civil servant advice for political success at the polls. Hiding the existence of that advice. Freedom of Information is the key to avoiding worse disasters. But all I see is learned economists in a state of “learned/acquired helplessness” bemoaning what is still happening. Just what do we have to show for the show trials? A bill of 1,000,000,000 euro? A realization of corruption? A massive bailout of the undeserving? Say, do you think it was in anyway corrupt? Ah, no, you’d never think that! Jesper The Economist is famous in contrarian circles. Contrarians are those who have spotted the Wizard of Oz at work and make money by trading as s/her does, n ot as s/he says! The economist is mainstream media. It usually tells people to pile in when at a top! It is called a contrarian indicator. If it is for anything, then you know what not to think! “The economist is mainstream media. It usually tells people to pile in when at a top! It is called a contrarian indicator. If it is for anything, then you know what not to think!” Pat I’m afraid you’ve made yourself sound quite hysterical here. The Economist was calling the Irish property market a grotesque bubble for years (along with the US and UK property markets). @ Concubar Pat is almost right. It’s only when you make the front cover of the Economist that you need to be worried. @ Concubhar I think you and I read very different articles. The Economist article I read stated that the Irish taxpayer was caught holding the bag for the losses incurred by the reckless and irresponsible banks and developers. The fact that they are not furious about it is just because they are not the taxpayers who will have to pay for Nama. The fact that they are happy to see irresponsible stakeholders walk away from a mess that was their own creation is only a reflection of the interest group they tend to represent. If positions on this site seem “entrenched” to you, I would suggest that is because taking €7 billion (or likely much more!) from one group and giving it to another group is always going to excite deep and contrary opinions. But really, to place more credence in this summary article by a foreign newspaper than in the informed opinions of our country’s best independent economic voices is either folly or mischief. @Ray: “It is not an academic exercise for us but what we crave along with the rest of the business community is some stability and positive attitudes to this economy.” Well, yes. What you want is a comforting fairy story. It doesn’t matter whether or not it’s true as long as it is comforting: all the details are worked out to provide a happy ending. The principal power of modern governments seems to lie in the creation and implementation of fairy-stories. Perhaps the most blatant exercise in recent years was the lying over the invasion of Iraq, in which some governments of powerful countries conspired to put forward entirely false stories to justify an action they had already decided to take. Although it was entirely clear that they were lying, their power to dominate the media was such that their story eventually prevailed. The same process seems to have been going on here. The Irish government decided, for reasons best known to itself, to set up NAMA. While it has invited help in tweaking its story (just as Bush and Blair tweaked the Iraq story), it has done its best to impose silence on anyone who challenges the basis line. It has never, as far as I know, undertaken a comparison of NAMA with alternatives; nor has it asked whether NAMA is the best use of billions of euro that the state will have to borrow (issue IOUs for). It has continued to recite the “nothing but NAMA” mantra even when its representatives (notably Little Willie) clearly don’t understand the details of the policy themselves. Now, as a decision-maker, you probably need to reduce the number of unknowns affecting your decisions, so you welcome a simple story, whether or not it’s true. The government likes simple stories because they fit on posters and in sound-bites. Even the journalists like simple stories because it’s easy to change a few words here and there as they paste the press releases or type out the briefings. Furthermore, the journalists are presented with a meta-story: they can pretend to be representing “the debate” by accepting that the story about the story is about FG -v- FF or about some minor details of NAMA. [Incidentally, I accept that some journos have done considerably better than that.] But this state has been run on the basis of comforting fairy-stories for far too long, from the Celtic Twilight through the holy Catholic state through the Young Europeans to the Celtic Tiger. Accepting those stories puts us in the hands of rogues and charlatans, self-seeking self-enriching fixers who manipulate the levers of the state while telling us it’s all for our own good. Challenging those stories, and the story-spinning power of their creators, is a difficult and time-consuming task. And it’s not the feeble challenge posed by the parliamentary opposition, offering their own soundbites to differentiate their brand from that of the government. It’s a search for some kind of truth, and it requires intelligence, expertise and, as we have consistently seen from the academic contributors here, considerable amounts of courage. Lay readers, like yourself and myself, may not have the training needed to subject the NAMA (or any other) proposal to proper scrutiny. But, thanks to the work of the economists here, we can read the comments of the better informed, whether they are for or against NAMA, and — with a bit of thinking, which I accept is hard work — we can make up our own minds whether it is a good or a bad thing. But the economists here have opened up for us the possibility of making that decision based on analysis rather than on prejudice, after a process of discussion rather than a period of story-spinning. If we could embed such a process into public policy-making, we might yet have a chance of making this a somewhat more civilised state than the one we have inherited from the myth-makers. “I would suggest that some of the Academic experts here might try their hand at running a business, employ some young educated Irish people from their Universities and try to create some wealth in an environment where there is a constant barrage of vitriol about Irish business and the economy. Fat chance of it happening I would suggest.” Well, indeed. The state employs academic experts to know and to think about their disciplines, not to run businesses. Their comments on economic policy are far more valuable than any marginal contribution they could make to Irish employment. Ne sutor ultra crepidam. bjg @conchubar NAMA stinks as a deal for the taxpayer. this view is based on numerical facts that are available, my own modelling in my own spreadsheet. there is easier alternative way to evaluate this deal. you cannot prove that NAMA will lose money, even though it starts in a hole at least 7Bn deep. you cannot prove that its will start to burn cash after 1y, although the current yield curve indicates that it will. what you CAN prove is that the taxpayer is being loaded up with every risk imaginable, while banks/investors are getting a free lunch – guaranateed cashflow and zero risk. NAMA takes huge risk and swaps negative expected return for a nebulous upside – “getting credit flowing”. incredibly, it doesn’t even give us equity in any banks. throughout history bankers have ripped off the innumerate. in this instance government is ripping off the innumerate on behalf of bankers. that is the only real “innovation” in NAMA. Jesper Says: September 17th, 2009 at 11:28 pm “Getting 25% back on the outcome of on an investment while carrying 95% of the risk can never be justified on economical reasons.” Jesper, I obviously missed something. How are we “getting 25% back” Pat Donnelly Says: September 18th, 2009 at 5:55 am “The Wizard of Oz was a political tract, made into a kids film. It discussed the impact of gold and cheap food on humans, making them enslaved munchkins.” If there are any members of the Green Party reading this look away now. PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN. In the same edition of the Economist there is an article on global house prices noting that they are still out of kilter with incomes with steep declines in affordability in Ireland. Previous articles note that they still believe their much publicised view that Irish property remains overvalued. It seems strange that they would give a conditional backing to NAMA in particular the overpayment for bad property loans. @ Graham A couple of comments. To my mind, the biggest ‘call’ to be made on the Irish economy in the past few years was whether the Irish property market was destined for a soft or hard landing. Some of Ireland’s most prominent independent voices who post here publicly called a soft landing. The Economist called a hard landing, in very strident and definitive language-and years before the arrival of the global credit crunch. So I think that it should at least be considered a very credible publication. Secondly I think The Economist article is useful insofar as it displays an international perspective on NAMA-and since we are effectively beholden to global markets for the next few years, commentators on this site should be watching it closely. I don’t understand this focus on reinvigorating banks who have already ‘failed’ in the Irish market. To get credit flowing, why not instead simply offer incentives for international retail banks to set up shop in Ireland, and leave the failed banks to get their own houses in order? Irrespective of the merits of The Economist as a publication – or of its ideological stance – it has a wide international readership among decision-makers and opnion-formers. Its summary take will probably register with these players – or, at least, with the few who have any interest in, or pay attention to, Irish matters – but (see the comments following the piece) they are unlikely to be taken in by the Government’s attempt to separate NAMA bonds from sovereign bonds. This is the real tsunami that is building up out in the deep. Can I ask a question of the more technically gifted commentators on here: I note there has been a huge reduction in the cost to the Irish state of borrowing over the past few months. What is the rough annual saving to Ireland arising as a result of this based on our current borrowing levels? @ Pat Donnelly, thanks, I will certainly do the research you suggested. @ All, I listened to Bill Hobbs talking on a radio program. He had to correct the other people being interviewed a number of times, to remind them that asset management vehicles, only purpose is to save what can be saved of distressed banking institutions. That is there only purpose in life, everything else is secondary to that. In essence, an asset management vehicle is set up from the beginning to fail, except it serves to try and minimize the extent of the loss. When we have a community of 1,500 individuals in Ireland, or less if you focus on the really toxic players, who cannot pay their interest even. Who are well connected and embedded into our system, and refuse to move. When they can roll up €9 billion in a short space of time. Then the country has to do something about that problem. Those 1,500 individuals are behaving a bit like their own quasi-government. Alcatraz is designed to make some of those guys break down and sob like babies. After the really big guys see their ‘support’ falling away around them, they will tumble also. We require an institution capable of doing this job – the banks weren’t good on justic and law enforcement is seems. It is costing away too much to even tackle a grossly insolvent player such as LC. @ Brian J Goggin: Brilliant post “Perhaps the most blatant exercise in recent years was the lying over the invasion of Iraq, in which some governments of powerful countries conspired to put forward entirely false stories to justify an action they had already decided to take. Although it was entirely clear that they were lying, their power to dominate the media was such that their story eventually prevailed.” Of course, the invading powers in the Iraq War also perfected the control of the Media, remember the tame “embedded journalists”, which allowed them to sell the fiction of WMD, Colin Powell at the UN lying through his teeth, Donald Rumsfeld’s known unknowns, etc. etc. So, the invaders had learned their lessons from Vietnam, not to allow free media comment, which had informed public opinion in the US and throughout the world, and actually succeeded in helping to end that war through the force of Public Protest and an informed population. So, long live the independent economists and this forum, through which the public can get informed analysis, critique and comment . @ Concubhar obviously the fall in bond yields doesn’t affect the debt that is already in issue. We’ve agreed to pay a fixed rate on it regardless of how the outlook for the country changes. However, based on us requiring 20bn per year to fund the budget deficit (ie excluding NAMA and any bank recapitisation funds), and given that bond yields have fallen (from the worst point in March) by 200bps in 3yr, 175bps in 4yr, 155bps in 6yr, 150bps in 7yr and 120bps in 10yr, we can make a guess on what we might save on next years issuance (these changes also include interest rate swap changes, though these actually are at fiarly similar levels to March!). I’ll assume 20bn over the year, and equal tranches of 4bn in each of the periods above. As such, these issues would in totality be €1.792bn cheaper to issue/fund over the life of the debt than if they were all done at the worst point in March. Lots of assumptions in there, but at a basic level that’d be the figure. Obviously as the budget deficit changes, and the yields on Irish debt change over the course of next year change, so will this figure. @Brian Lucey. Dr. FitzG famously lives in his son’s basement when he honourably faced up to his own financial problems. Maybe its time he moved to the attic. @Brian Lenihan is a decent man etc. Brian Lenihan is his fathers son. He is very intelligent. He can talk the most wonderful nonsense, knowing that it is nonsense, and condone it to himself as a positive attitude based on his father’s “no problem” mantra. @Ivory Towered Economic Academics In political terms Richard Bruton is the man of the moment. While he is a rounded politician whose main interests are education and health, he is head and shoulders above anyone else in the Dail in relation to our catastrophic situation. But he is only one voice. Where else can we turn to for education/inspiration? Non-ivory towered economists are largely associated with the banks and stockbrokers. The media always gives them a free ride and never questions their role as representatives of the largest vested interests in the state. Those in the public sector outside of academia are naturally constrained in what they can say. So really, if you want independent opinion, where else would you turn to but an academic economist. Some of our prominent medical consultants hold teaching positions and are more than happy to be referred to as Professor. It says something about the anti-intellectualism that masquerades as populism, that academic economist can be made into an insult. @Thread The Economist article is essentially a news report with the observation that the taxpayer rather than the bank shareholder is carrying the can. But no doubt we will hear soup strainer O’Dea misquoting it this weekend when he does a nixer in the Sindo. Thanks Eoin. Is there a virtuous circle at work here ie as the interest we have to pay on borrowings falls, presumably this makes it easier for us to service the debt and hence makes us a less risky proposition, thereby reducing the spread further? Or is this hopelessly simplistic? @ Concubar somewhat yes and somewhat no. The saving is obviously important and makes it easier to service the debt. However, based on current yields, the debt assumptions i worked off above would still require interest payments of 4.63bn over the life of the debt. So instead of 6.43bn in total interest payments, its ‘only’ 4.63bn, or a 28% saving. So its a significant saving that should make it easier to pay the debt, but we’ve still gotta make a lot of debt repayments, so its not like it solves the problem for us! That said, for all those that say that Irish government debt is much more expensive to service than it used to be, due to the collapsing interest rate environment, its actually incredibly cheap by historical standards. It was a little bit cheaper last December, but it has hasn’t been materially cheaper since early 2006 due to the general level of interest rates. The most interesting paragraph in the article for me is this: “Tweaking the plan further so that banks recognised even bigger losses upfront might have been more sensible for taxpayers. But were NAMA to pay the market value for the banks’ bad assets, then Irish banks would probably have to find as much as €7 billion in additional capital. Since equity markets might not oblige, that could require the government to stump up even more of its own cash to recapitalise the banks directly” This suggests that overpayment for assets increases the banks’ capacity to recapitalise with private equity rather than State money. There is clearly a benefit for the state in not having to fund a recapitalisation of the banks. The way we have been looking at this to date is on the basis that whatever we don’t pay for assets will have to be paid to recapitalise the banks, i.e. that NAMA Bonds + Recap Bonds = Total Cost; and that Total Cost is constant. The Economist suggests that this is not the case because NAMA Bonds + Recap Bonds + Private Equity = Total Cost; and Private Equity is (indirectly) proportional to NAMA Bonds. Now, one could say that where Recap Bonds are used instead of Private Equity then there are share assets underpinning Recap Bonds so the net position is the same. However, Funding Costs of the National Debt are (indirectly) proportional to Recap Bonds. Also, the value of shares in banks is very uncertain and may count for nothing until they are sold, which would of course be difficult to do without affecting the share value! Leaving aside the question of warrants, it appears it is not quite the zero sum game we were thinking of. To deal with an expected criticism of my above post, I suggest that the NAMA bonds will affect our funding costs but not as much as Recap bonds because the NAMA bonds are backed by real assets on the NAMA balance sheet and generate a cashflow. I suggest that the Recap bonds would be viewed differently. @ Zhou im fairly sure i’ve tried to get this point across (regardless of wheather its correct or not!) in some of my posts. AIB’s share price rising is good for us, not bad. I’m also fairly sure one of the key points the pro-NAMA side tried to get across (regardless of wheather its correct or not!) was that a privately owned banking sector would find it easier to attract private capital than a nationalised one that had been declared insolvent. For the record, i don’t work for the Economist! From the Minister’s speech on Second Stage of the Nama Bill: “I wonder if those who argue that NAMA should ignore the fact that the market is currently distressed and pay the institutions current market value realise the cost implications of what they are proposing. The additional capital required by the institutions compared with what might be required under the NAMA approach would be in the region of €4 billion to €7 billion. This capital would have to be provided — and because the banks would be so weakened, the only possible provider would be the State. Some of this, clearly, would be offset by the effect of our ownership in the institutions concerned, but this money would have to be provided, with any payback coming later. More expensive still is the Labour Party’s reported proposal for blanket nationalisation and a straightforward 50 per cent discount on the loans. This would immediately require the State to borrow an additional €10 billion to €14 billion to recapitalise the banks. Even under the benign assumption that additional borrowing of this scale would not affect the interest rates on Government bonds, the interest costs of this additional capital would be between €600 million and €700 million each year. That is dead money that should be used to fund vital public services. In the more likely event that the extra borrowing put upward pressure on the cost of borrowing money on international markets, the overall costs to the State of Labour’s proposal would be even larger. Of equal concern is the damage that would be done to any possibility of recovery of the financial system. This new capital injection would lead to effectively full nationalisation of the banking system. Full nationalisation is, of course, Labour Party policy but it carries with it a very real possibility that the people who provide our banks with the funds they need to continue their operations would reduce their level of funding. The simple fact is that it is easier for a commercially oriented banking system to attract the funding it needs to provide credit to the economy. A forced nationalisation of the system would involve significant risks of reduced funding opportunities for the banks. Against a backdrop of the global funding crisis, these are risks we cannot afford to take.” Is this analysis valid? Are the figures given for the cost of immediate nationalisation correct? @zhou I think the markets are slighly more sophisticated and are capable of “Joined-up thinking”. The income cashflows behind the assets remain the same no matter what mixture of NAMA and Recapitalisation bonds you opt for. You will have to do better to justify overpaying by least 7 billion. @Eoin I understand your point. It is good for our sovereign debt rating and international confidence in Ireland if the markets regain confidence in the Irish Banks and the Banks can recapitalise privately instead of being dependant on State funds. I don’t think that the Share Price can be fully relied on in this regard but it i a good indicator. On the other hand, it is not necessarily good for us if the banks which are going to dominate our banking sector more and more can fully extract themselves form the State’s grip and continue to bleed their customers for their past mistakes. The crisis they created has given BoI and AIB a duopoly. We cannot let them walk off into the sunset half recapitalised and licking their wounds. A businessman does not let his most important and best paid employee come to work with a hangover. A football manager does not let his most expensive player play or party while he is half crocked. The banks must not be let out from under State supervision until they are fighting fit. Like any patient they have the right to sign themselves out of hospital at any stage so we must ensure that they must sign up to all the treatment from the get go. @ Veronica “Full nationalisation is, of course, Labour Party policy but it carries with it a very real possibility that the people who provide our banks with the funds they need to continue their operations would reduce their level of funding.” We are in this mess because quite simply the banks borrowed to lend, and borrowed big to lend big. Loan to deposit ratios for the Irish banks are on average 180%. This wholesale funded banking model is bust. I do not know why the Government are risking €54bn of our money to keep this model alive. It is now obsolete. An election and a new government would have the legitimacy to do away with the guarantee over the banks liabilities. The insolvency of the banks would be exposed and they could then be wound down in an orderly manner with the government guaranteeing all deposits. The infrastructure of Allied Irish and Bank of Ireland could be used to create two new banks, one recapitalised by the govt, the other perhaps by fresh equity from abroad be it a Canadian bank or a French bank or whoever the govt can attract. The new banks can go back to banking basics and get lending. The property market would do what it is going to do anyway, find it’s natural economic level without government interference. All at a much reduced cost to the taxpayer. We need a new model anyway, this gets there. Ever so slightly off topic but maybe someone in the markets (Eoin?) in a separate thread?) might start elucidating us on which potential angles there might be on nama for debt resellers/market makers/investment banks, et al.,, weer it to come into force as is: eg. Could nama not start selling off, for example, rights to loans’ underlying security and projected income streams on those loans almost straight away? What else could happen? Doubtless whatever angles investment bankers have already identified on nama (which the genius’s in the dept of finance are either conniving with or ignorant of) will mean we the tax payer will lose out and we’ll be left holding the baby without ever getting to shag the mother (!!) (eg. could a ‘social dividend’ become impossible because nama will, for example, sell on the rights to realise loans’ security to third parties who will sell them on ad infinitum in a way analogous to securitisation chains where ultrimate beneficial owners of income streams are impossible for the servicers to identify or negotiate with). Maybe if we can work this out in advance we will know which changes to the legislation might forestall our being ripped off further. @Zhou The banks are certainly important, they may even be some of our best paid people but it is an enormous mistake to consider them to be the most important people in the country. In spite of the IFSC, our economy has not become financialised to the extent of London and S.E. England. They provide a money transmission service. They do an okay job in the retail banking sector. But they are not the engine of growth of a modern dynamic economy. They certainly didn’t finance the Celtic Tiger but they did finance the Ahern/McCreevy/Cowen bubble. And they won’t finance the recovery. @MOL “The income cashflows behind the assets remain the same no matter what mixture of NAMA and Recapitalisation bonds you opt for.” The income cashflow (loan repayments) and security (real property) backing NAMA bonds is entirely different to the income cashflow (dividends) and security (banks shares) backing recapitalisation. We are all trying to assess whether NAMA will probably wash its face. With that noted, one cannot then suggest to markets that its cashflow can be used to service bonds used for recapitalisation. That is how I interpret your statement “The income cashflows behind the assets remain the same”. I suggest that the money spent on recapitalisation is more at risk (the Recap Risk) than the money spent on NAMA assets (the Loans Risk). Obviously, at the margin between the two, call it the Rescue Discretion Zone, which is there the LTEV uplift and the potential drop in bank asset MV reside, the risk is increased and closer to the Recap Risk (as far as international markets will see it). The Rescue Discretion Zone risk is a drag on the State’s borrowing costs in the eyes of the market. I postulate that IF we include the Rescue Discretion Zone risk in the Recap Risk THEN Rescue Discretion Zone risk remains constant BUT the amount of State Recap increases thereby increasing the overall Recap Risk which will adversely affect our credit rating and our costs of borrowing. @all Please don’t jump down my throat. I am putting this up to be criticised because I think it reflects the logic of the paragraph from the Economist I quoted. Some of the pro-NAMA arguments are becoming even more daft. We’ve had “it’s quantitative easing! free lunch from the ecb!”. Now we are told “good news that AIB share price rockets after we handed them billions for nothing!”. By this logic further billions of overpayment would be an even better thing. @Zhou The assets transferred to NAMA and any associated income will be the same irrespective of whether we pay 47 billion (CMV), 54 billion (Lenihan LTEV) or 30-40 (sceptics LTEV). So if we have 0, 7 or 14-24 billion to re-invest in the banks, we still have all those lovely NAMA property and rents. So why fore-go the opportunity to get shares in the banks for the same total amount of money? Hint: who did Lenihan meet on the night before telling first his cabinet colleagues and then the rest of us mugs the figures? Second hint: the answer is in the Economist article. So after watching prime time last night. Given that something like 36% of the loans are backed by land, and the vast majority of land seems to have dropped in value by 90-95%, does that not concern people that the average discount is so low? Also I’d like to just ask people. Do they feel Nama is going to come in one way or another? If for instance the Lisbon Treaty was rejected, do you feel the Government would have to go, and therefore Nama would also go? @MOL “The banks are certainly important, they may even be some of our best paid people but it is an enormous mistake to consider them to be the most important people in the country. … They certainly didn’t finance the Celtic Tiger but they did finance the Ahern/McCreevy/Cowen bubble. And they won’t finance the recovery.” By that logic, should we not be too worried about ending up with a functioning but zombie banking system? Krugman has said that Japan’s stagnation while banks deleveraged doesn’t look so bad compared to other scenarios. Do you think a Zombist Japanification solution might be optimal? Or are you directing criticism at individual institutions and their corporate cultures? “So if we have 0, 7 or 14-24 billion to re-invest in the banks, we still have all those lovely NAMA property and rents. So why fore-go the opportunity to get shares in the banks for the same total amount of money?” The point is that we might not be able to get shares in the banks for the same total amount of money [where “total amount of money” = NAMA bonds] unless we spend more money in top of that to fully recap the banks. The suggestion in the economist is that the LTEV payment will help us source that additional money from private equity. @ bg if u read back more carefully on my far more nuanced post about AIB’s share rise yesterday, you’ll see i phrased it far more along the lines of this: Assuming the passing of NAMA-as-is (a fair assumption though not a certainty), we should be happier to see AIB’s share price rise rather than fall. This would be based on the reasoning that fresh buyers of the shares will be willing to invest fresh capital into the banking sector. As such, this will reduce the need for recapitalisation via the state. It would also signal at least some form of international optimism for the banking system, the economy and the State as a whole. I also linked this share price rise with the falling yields/cds of the Irish govt debt which also took place. So: NAMA-as-is. Share price rises. Fresh private capital. Stabilised banking system. Less need for government capital injections. Lower government funding costs in both relative and nominal terms. That’s the logical argument that i’m making. You can disagree with this sequence of events taking place, but i don’t see how its daft or illogical. Just for clarity, would you consider this a bad outcome? @ Zhou i understand your point, but i believe we can address much of your worries via the regulatory regime and via caveats surrounding State representation on the boards on the basis of our preference shares, the govt guarantee and the govt warrants on the banks. While i have always argued against nationalisation if at all possible, i have no issues with maintaining a firm grip on them via other methods. @ CM My question was, and remains, are the Minister’s figures and analysis ofn the costs of preemptive nationalisation correct? The minister is quoting 600-700 million of extra costs per year for interest if the banks were nationalised. Would it not be possible to offset the interest costs against the profits the banks will generate? The market seems to think the banks will be generating profits after NAMA. Any estimates on the amount from the analysts? The banks profits might well pay for the interest costs and even give a net profit. Profitable banks can then be sold to recover some of the inserted equity. As is, the warrants might lead to a 25% share of AIB & BOI. This leaves 75% of the banks assets and future profits with current shareholders at no cost to them. Nationalise and resell. It is more than a little ironic – and in some respects addresses key features of the foregoing discussion – that, in parallel to its take on NAMA, The Economist has also launched a business and management column named after Joseph A Schumpeter:http://www.economist.com/businessfinance/displayStory.cfm?story_id=14447179 Every aspect of NAMA is diametrically opposed to every one of Schumpeter’s insights that has stood the test of time. @ Veronica His costings on borrowing €10-€14bn are ballpark correct. I disagree that this would be the cost of preemptive nationalisation though. @ Zhou and MOL Regarding the income stream from the NAMA assets allowing NAMA to wash it’s face – how secure is the income stream from the 40% performing loans. Has the Minister calculated falling rents and departing tenants into his cashflow analysis (he clearly hasnt into his yield analysis on the attractiveness of Irish property) Did anyone else pick up Minister Lenihan’s statement on Morning Ireland yesterday (partly in response to Brian Lucey’s cogent criticisms) that a “business plan” for NAMA would be presented prior to the termination of the Second Stage in the Dail? @Eoin Maybe these issues can be addressed through the guarantee but I don’t think we can do much with the regulatory system, the warrants or with public interest directors. We will be told (correctly), as we were told with Aer Lingus, that the state cannot be seen to use its shareholding or directors to induce the abnk to act other than in a purely commercial manner. Either way, we need to see the full package at least before NAMA starts acquiring loans though not necessarily before the legislation is enacted. @CM That is a separate issue. I don’t want to confuse matters. Suffice to say that NAMA is to examine each property individually so many issues should be caught by the valuation process that are not caught by the estimates. @PH I mentioned it elsewhere on this site. Joan Burton called for exactly that on the 16th. One hopes the DoF had planned this already and that they are not simply reacting to Deputy Burton’s suggestion. @Zhou Assume that AIB needs 4 billion and BoI needs 2 billion – twice what they say they need. So how much of a free gift do you think we as taxpayers should give the banks for 6 billion in private equity. 7 billion? 14-24 billion? And does that free gift not cost us something? Like 7 billion or 14-24 billion. As regards the banks, I don’t argue for zombification. My point is that we needn’t expect them to be at the cutting edge of financing the recovery. But at least we wont have asset based lending crowding out the productive sector. @Paul Hunt yes – I noticed it as well. It really says every that we wont even have a business plan until then. Surely the good non-ivory tower economists Dr. Bacon and Alan Ahearne would have done a draft one first. It could have been published with the draft legislation. Think Dragons Den for a moment. Visualise Minister Lenihan coming in with his NAMA plan to become the biggest property company in the world. He is asking the dragons for 54 billion. And he doesn’t have a business plan. We are told that the DoF were labouring night and day. Whoever was setting priotities doesn’t have the slightest notion of what needs to be done. @Veronica “Is this analysis valid? Are the figures given for the cost of immediate nationalisation correct?” No, No. Constantin G and I have done some analyses – max 9b we reckoned. Im sure that the minister will show us his spreadsheets…. Jesper Says: September 18th, 2009 at 11:43 am “As is, the warrants might lead to a 25% share of AIB & BOI.” Do you have a view on the probability of the warrants leading to a 25% share of AIB & BOI? I have heard on the radio, sorry no link, that we already have a 25% stake in these banks. Is this true? @Greg “I have heard on the radio, sorry no link, that we already have a 25% stake in these banks. Is this true?” It is true that you hear it on the radio. It is NOT true that we already have a stake of that magnitude. We have preference shares that give 25% of the aggregate voting rights. Most government spokespersons seem to be confused on this issue. @BL Do we not have the option to convert the preference shares to ordinary equity @ approx €0.60 per share??? Zhou we do. But that doesnt give us anything now. And this is only exercisable if the prefs arent paid off. Brian Lucey Says: September 18th, 2009 at 1:01 pm “Most government spokespersons seem to be confused on this issue.” Mightily confused I’d say, along with most RTE commentators. More disinformation. The reason I asked the question, having followed the debate, was that I thought I was loosing my mind. It has been said now so many times that the average Joe Citizen probably thinks we do own 25% of AIB & BOI. Brian Lucey Says: September 18th, 2009 at 1:10 pm “And this is only exercisable if the prefs arent paid off.” And the warrants cannot be exercised before the fifth anniversary of the issue of the prefs. So that would be, four and a half years from now? I’d say they are close to worthless. @MOL That €2bn & €4bn is on top of the LTEV payment (your “gift”). You cannot take from the €7bn and use that money for the €3/6bn. If there were no €7bn then the €3/6bn would become €10/13bn. The figures the banks are giving are based on the estimates. The banks might trust the estimates but the State doesn’t. The State is going to go through the banks loan by loan. What if it turns out they need another €x bn each on top of the €3/6bn? Won’t we be better off having brought in private equity earlier? Won’t we have a better chance of bringing in more private equity down the line? What if we want to recapitalise them above minimum/zombie levels and reserve the right to do so? Isn’t that easier if they have attracted more private equity in the meantime? Lastly, what if the real AIB figures, after the NAMA process has sorted them out, would have meant 100% nationalisation but enough private equity is attracted in to the banks in the meantime to prevent it? Is that not a benefit? Does the fact that our borrowing costs have fallen so sharply since their peak earlier this year, is it fair to say that international bond market participants generally ‘like’ NAMA? If they shared the negative views of many commentators here, would our borrowing costs not have increased? Concubhar O’Caolai Says: September 18th, 2009 at 1:18 pm “Does the fact that our borrowing costs have fallen so sharply since their peak earlier this year, is it fair to say that international bond market participants generally ‘like’ NAMA?” I’d say they like the fact that the ECB has become the lender of last resort for both the banks and Ireland. Greg Is that consistent with the timeframe in which the improvement occurred? When did the ECB step into this role? Concubhar O’Caolai Says: September 18th, 2009 at 1:32 pm “Is that consistent with the timeframe in which the improvement occurred? When did the ECB step into this role?” The ECB stepped into that role when we joined the Euro. I dare say they didn’t think they would be providing €30Bn in funding to Anglo Irish Bank (sorry no link). Unfortunately I don’t have access to a Bloomberg screen (or the like), but I would be interested to know the behaviour of Greek, Italian, & Spanish spreads over the last month. Anybody have access? Range on 10yr bonds (Aug1-Sep18) Spain 3.72-4.00% Italy 4.02-4.21% Greece 4.42-4.69 Ireland 4.74-5.02% So basically identical moves. Eoin Says: September 18th, 2009 at 1:53 pm “So basically identical moves.” Thanks for that Eoin. That being the case, is the NAMA effect not being overstated? @Zhou Everything you mention is a benefit. To the shareholders. Five years gives plenty of time to AIB and BoI to escape from 25% state shareholding. Bank Of Irealnd are already looking at getting enough money together to pay off the state preference shares. Bye bye to Lucky Lenny’s 25% warrants. Another benefit of NAMA. To the shareholders. Maurice O’Leary Says: September 18th, 2009 at 2:03 pm Exactly. The warrants are close to worthless. That was the plan all along. Why would you take out warrants on condition that they could not be exercised for five years? The whole point has to be that the banks “recover” sufficiently to be in a position to raise new Tier 1. When they raise it is irrelevant as long as it is raised before the fifth anniversary. Even after that if the State has not called the warrants the banks can repay the prefs at any time in the following five years. After that the warrants become extinct. Greg-there’s an article about credit spreads since March in todays FT. Ireland’s has halved in the period but it looks like that for Spain, Greece etc has halved too. So maybe NAMA effect is overstated, although given our particularly dire circumstances, maybe we should be impressed that our spread has performed this well in absolute terms. What do people think will happen to credit spreads if the Greens say no and the Government collapses? Concubhar O’Caolai Says: September 18th, 2009 at 2:16 pm “Greg-there’s an article about credit spreads since March in todays FT. ” Thanks Concubhar. Will look it up. Maybe you have a link? @Greg You are the first person I have heard say the warrants are close to useless. Do you have some expertise in the area? @ Greg well NAMA was announced in the first few months of the year, and we’ve had a drip drip drip of information on it since then. So its difficult to get a starting point from when you measure the ‘NAMA effect’ from. What is quite clear is that the overall stabilisation measures that have taken place in Ireland (nationalisation of Anglo, recapitalisation of banks, NAMA, tax hikes, spending cuts, proposals from commission on taxation and McCarthy report etc) over the course of the year have helped to reduce the funding costs to the state. As a comparison – 4yr (actually january 2014 – only way i could get exact comparisons going back to March!) yields at the worst of the crisis (end Jan, start of March) this year and at the moment: Ireland: 5.16%, 3.28% Greece: 5.80%, 3.07% Spain: 3.84%, 2.56% Italy: 3.99%, 2.75% Austria: 3.50%, 2.54% Belgium: 3.80%, 2.50% Whats clear is that Greece and Ireland have been the two huge outperformers of the European bond market this year. At least some of that effect is surely down to stabilisation effects NAMA. Greg if you put “ft eurozone shows its strength in a crisis” into Google you’ll find it. Concubhar O’Caolai Says: September 18th, 2009 at 2:16 pm Is this the article? http://www.ft.com/cms/s/0/0cf1c0ee-a3b5-11de-9fed-00144feabdc0.html?nclick_check=1 Interesting. And I think indicates that NAMA has little to do with the narrowing of spreads over Bunds. It may have had some minor effect. I just don’t understand why Fianna Fail & the Green Party are implying that we have reached nirvana in terms of funding costs for the State because of NAMA. From the article; “In spite of losing its prized triple-A credit status from both Moody’s and Standard & Poor’s this year, Ireland has had no problems in raising debt, although it does have to pay investors a higher premium to borrow. It has already raised its €25bn annual target in government bonds. Greece, the other government that was considered most likely to struggle to find investors for its debt, has raised about €50bn this year.” “However, the ECB stresses it alone is not the reason why confidence has been restored in the euro. In its bulletin this month, the ECB says the rise in spreads this year was mainly down to liquidity fears – rather than a heightened anxiety over the eurozone breaking up. This was because investors were so fearful of a financial collapse that they were only prepared to buy the most liquid assets, which for many meant only German government bonds.” I think most informed opinion recognises that NAMA lets the banks off the hook big time, for that is what it is designed to do, unfortunately…anyway, I wonder among all the comment on the Irish banks, if people have been watching the situation in the US where more and more commentators are saying that the US system now risks an even bigger blow-up than the last crash…as they think they’ll be bailed out at all costs…free one-way bet and all that… perhaps this should be discussed as well. http://robertreich.blogspot.com/2009/09/continuing-disaster-of-wall-street-one.html http://www.ft.com/cms/s/0/b24477de-a226-11de-9caa-00144feabdc0.html Given the chronic damage to the Irish economy,, at least we don’t have to worry about a second blow-up, more a false floor being being put on real estate prices I guess? Eoin Says: September 18th, 2009 at 2:26 pm “Whats clear is that Greece and Ireland have been the two huge outperformers of the European bond market this year. At least some of that effect is surely down to stabilisation effects NAMA.” I wouldn’t disagree that NAMA had some effect. I just think Fianna Fail & the Green Party are over-egging the pudding. Also, it is possible that the “markets” are pleased that an asset management vehicle is being put in place. The nuances of NAMA and how risk/reward is shared may not be particularly relevant to the market participants. Of course I could be wrong, I am not a bond trader. The might simply view it as “something” is being done. @Noel: “If for instance the Lisbon Treaty was rejected, do you feel the Government would have to go, and therefore Nama would also go?” Don’t even go there! zhou_enlai Says: September 18th, 2009 at 2:19 pm “You are the first person I have heard say the warrants are close to useless. Do you have some expertise in the area?” No I don’t have expertise in the area. It is simply my reading of the Warrant Terms. It seems clear to me that the banks would go through hell and high water to repay the preference shares before the fifth anniversary. It’s just a non-expert opinion zhou. http://www.finance.gov.ie/viewdoc.asp?DocID=5669 “Warrants Form: On purchase of the New Preference Shares, the State will receive an option (the “Warrants”) to purchase 25% of the existing ordinary shares in each bank (calculated on a post-dilution basis). The State may exercise this option from the fifth to the tenth anniversary of the purchase of the New Preference Shares. Early redemption: If the bank redeems up to €1.5bn in New Preference Shares from privately sourced Core Tier 1 capital prior to 31 December 2009, then the Warrants will be reduced pro rata to that redemption to an amount representing not less than 15% (the “Core Tranche”) of the existing ordinary shares of the bank. Strike Price: The strike price of the Core Tranche of the Warrants shall be €0.975 for Allied Irish Banks and €0.52 for Bank of Ireland. The strike price of the balance of the Warrants granted to the State shall be €0.375 for Allied Irish Banks and €0.20 for Bank of Ireland. Anti-dilution: Market standard anti-dilution protection will apply. Voting: The State will vote no more than 50% of the votes associated with the ordinary shares which it receives through exercise of the Warrants. If the State transfers the ordinary shares to a non-State third party, full voting rights will be restored to these shares.” @ Greg well they only cancel the warrants provided they pay us our prefs back. I don’t think we should be complaining too much in this situation. Eoin Says: September 18th, 2009 at 3:13 pm “well they only cancel the warrants provided they pay us our prefs back. I don’t think we should be complaining too much in this situation.” You seem to almost agree with me Eoin. The warrants are close to worthless. Not exactly what Warren Buffet got in his deal with Goldman Sachs? “While Mr. Buffett’s investment is unquestionably a vote of confidence in Goldman, it is structured to protect him from losses. The dividends from the preferred shares will remain steady even if Goldman’s stock falls. And if it does, Mr. Buffett won’t spend the $5 billion to exercise the warrants to buy common. Including Goldman’s after-hours stock jump, Berkshire has a nearly $700 million paper profit on the deal already.” http://online.wsj.com/article/SB122220798359168765.html The way I read the article linked Buffet did a two part deal. Goldman can buy back the preferred at any time for a premium of 10%. But Buffet retains the warrants. Buffet’s warrants don’t seem to have any five year “lock out” period wherein they cannot be exercised. I think the Irish warrants are a smokescreen which has now morphed, in the public mind, to actual ownership of 25% of AIB & BOI. Lets look at the ten year bond yield as a percentage of germany Portugal Ireland Greece Spain Italy Jan 1.07 1.05 1.09 1.03 1.09 Feb 1.08 1.06 1.10 1.05 1.10 March 1.15 1.10 1.16 1.10 1.15 April 1.11 1.11 1.12 1.07 1.12 May 1.09 1.09 1.13 1.06 1.10 June 1.09 1.09 1.14 1.06 1.12 July 1.10 1.10 1.14 1.07 1.13 Aug 1.11 1.11 1.16 1.08 1.14 Sept 1.13 1.13 1.19 1.11 1.17 October 1.17 1.21 1.26 1.15 1.22 November 1.21 1.30 1.41 1.16 1.29 December 1.30 1.47 1.64 1.26 1.43 Jan 1.39 1.69 1.81 1.33 1.47 Feb 1.43 1.79 1.80 1.36 1.44 March 1.52 1.88 1.88 1.34 1.45 April 1.42 1.67 1.73 1.28 1.37 May 1.24 1.52 1.53 1.20 1.27 June 1.26 1.59 1.50 1.22 1.30 July 1.26 1.60 1.45 1.20 1.30 Aug 1.18 1.47 1.36 1.15 1.24 Note that in the middle of this year something interesting happened – we moved to the worst position of the PIGS. we so need an edit function…. as I was saying if we look at the relative bond yield (ten year benchmark monthly average yield as percent of germany) we now are worst of all the PIIGS. In other words while there may have been an improvement in bond yields, we are now relativly speaking RISKIER than the other PIIGS. The same has happened more or less in the CDS markets. We are drifting off. Much of this is probably down to uncertainty and drift but not all of it – to the extent that NAMA resolves this uncertainty we can see some improvement likely but to the extent that it reveals the hollowness in policy making, bank and personal balance sheets, and to the extent that it may weaken further the government, we will see that improvement eroded. @Eoin, @ zhou It’s worse than I thought. There is an incentive to pay off the preferred before the fifth anniversary. An incentive of €1,750,000,000. “Repurchase: Repurchase at option of bank at par in the first five years and at 125% of par thereafter. Repurchase may be made from profits available for distribution or from replacement capital which qualifies as Core Tier 1, in each case subject to the approval of the Financial Regulator.” If I hear anyone from Fianna Fail or the Green Party claim that the State has 25% of AIB or BOI or if I hear them say we have a warrant for 25% of AIB or BOI, I will have to conclude that they are deliberately lying. If I hear it from RTE I will have to conclude that they are failing utterly in their duty as a public broadcaster. Brian Lucey Says: September 18th, 2009 at 4:09 pm Is there any link available for bond yields and CDS rates for a mere citizen? I’m fed up being misled by our dear leaders on a daily basis. @Greg dunno.. i get em from Reuters. Not easily got in a neat packaged form. but feel free to keep asking. Does the info above assist you? @Brian Lucey I’m not sure how much of the drift is down to uncertainty. I would not be surprised if the market has cottoned on to the fact that the Government is planning to pay twice for the bonds it will sell to the banks out of the NAMA bonds repo’ed at the ECB; the first payment is the coupon on the NAMA bonds and the second is the (presumably) full coupon on the bonds sold to the banks. This signals a fear of the market that is the same as leaking blood in the water in the vicinity of sharks. Paul Well, the drift started in the early summer so that would be very prescient. Maybe. The key point is that contrary to the spin we are NOT that great, bond wise. Brian Lucey Says: September 18th, 2009 at 5:33 pm “Does the info above assist you?” Yes. Thanks for that. It really does seem that the market reaction is not nearly as positive as we are led to believe. @Brian, I agree. My limited understanding is that, in the context of such a major bank resolution challenge, the bond market would wish to see clarity, finality and some assurance of a long term debt service capability. In addition to politcial survival, the objectives of this woe-begotten exercise are to keep the main banks and the developers’ Irish activities (such as they are) out of foreign control. Irish taxpayers will pay a huge, economy-damaging premium to achieve these objectives. Maybe they would be content with that, but the size of the premium isn’t being spelled out so they have no basis on which to make a decision – apart from a well-founded suspicion that they are being gulled. The spread to bunds (or % of theBund yield as Brian has presented it) is certainly the most appropriate way to track the Sovereign debt performane in recent months. Single-name CDS (such as the CDS on Sovereign or Corporate names) is widely discredited in the financial markets at the moment as the price movements are driven by mininal trading volume. In recent times the credit risk on the US Treasury, as indicated by its CDS price, has frequently been rated highed than many Corporate issuers (the pricing in the US Treasury market would contradict this entirely). Originally seen as “default insurance” the prices only truly reflect the speculative view of a small number of hedge-funds. The yield on real bonds trading in the market represents a much more realistic view of the risk premium the Irish Government is required to pay. Looking for guidance from the experts again re relative spread to bunds of Greece, Spain etc. Is is not the case that some of these countries’ economies have unexpectedly started to grow again? I gather for example that Greece’s economy has returned to growth in the second or third quarter of 2009. Accordingly, since Ireland’s spread position has improved in tandem with these countries despite no such unexpected return to growth here, isn’t it possible/likely that bond market’s happiness with NAMA is what’s allowing us to keep up with these countries? @Brian O’Hanlon Sorry, that’s twice I’ve @’ed you this morning. Not picking on you ! “Perhaps I am dumb, but when I look at a figure like €9 billion, I wonder how long has that been building up ” – 2 years?? I thought your most interesting question was “Has anyone asked minister Lenehan at the Dail debates…..”. I have to say, I was looking for incisive questions to be asked by the opposition but not seen much so far. Do they not get any training in asking really flipping awkward questions? What I still don’t know is the breakdown of that big chunk of the 77bn being ‘associated loans’. I presume this unpaid interest is part of that. Is the rest of it loans from other banks to make up their (the developer) supposed 25% equity in the deal i.e. they just borrowed the money from another bank instead of putting it up themselves so what ‘associated loans’ means is a load of cross-dependencies bank to bank that looks a bit like a deck of cards? Maybe the answer to that is somewhere here on irisheconomy.ie but I haven’t got sufficient time today to read all the posts since the debate started. Good morning and welcome to Wall Street Executive Air http://www.youtube.com/watch?v=1d536PKwRAg&feature=channel 🙂 :conchubar “Accordingly, since Ireland’s spread position has improved in tandem with these countries despite no such unexpected return to growth here, ” Err…except it hasnt. See above and for a more graphical version see http://trueeconomics.blogspot.com/2009/09/economics-18092009-illustration-to.html Far from “improving in tandem” we have diverged from (Especially) greece in the summer. While I admire your optimisim, sometimes what look like green shoots are just bits of mould. Joseph Says: September 19th, 2009 at 7:07 am Joseph, You are already aware of these numbers but I put them here to emphasise your point. These are the only mentions of “Associated Loans” in the entire document (unless Ctrl+F deceives me). “This €77 billion, estimated by the institutions, is made up of approximately €49 billion land and development and approximately €28 billion associated loans.” Total Associated loans Ireland 67% NI 5% UK 20% USA 2% Europe 6% Total 100% Loan book category Total Land 36% Development 28% Sub Total L&D 64% Associated loans 36% Total 100% Brian Lenihan (and others) have stated that 40% of the loans to be transferred are performing. Could this mean completed developments? That is, no longer under development. If that is the case it seems sloppy that no definition of Associated Loans was not given. Maybe there are some NAMA gremlins in here. Do Associated Loans include loans to developers for the purposes of buying shares on the ISE, a la Liam O’Carroll? Dangerous if this is the case. Specifically do Associated Loans include loans given for the purpose of investing in Anglo Irish Bank? It is unfortunate that we have to guess. Do Associated Loans include the likes of……. http://www.irishtimes.com/newspaper/breaking/2009/0919/breaking7.htm That is, are we talking here not only of “development” but of every bad commercial real estate loan advance in the last five years. The Government is playing a very dangerous game in allowing the Oireachtas scrutiny of the NAMA legislation to continue beyond the Lisbon II Referendum on 2 October. It may have been forced into this by the timetabling of Oireachtas business and the Greens’ delayed grassroots’ deliberations, but it may have the insiduous effect of muzzling the kind of dissent expressed on this site about NAMA – and by contributors to this site in the wider media. We have seen the Government spin-machine in operation and it requires little imagination from the spin-doctors to link criticism of NAMA to fomenting wider public disaffection that could lead to a No vote on Lisbon II. The division has always been there, but there will now be more pressure to crystallise a “loyal opposition” – those who will have been forced to accept NAMA as a done deal and who seek to improve its implementation in the public interest – and a band of principled anti-NAMAites – who are determined to advance a more efficient and effective alternative. The objective is to marginalise the latter to the greatest extent possible. For me, it has always been clear that any consideration of an appropriate alternative to NAMA would require a change of government – and, even then, there was no certainty that there would be a rational consideration of alternatives. It is, in my opinion, entirely inappropriate to pursue that line on this site. However, I believe there are issues in relation to the development and application of economics that are worthy of consideration( e.g., the thread on the Stiglitz Commission for Pres. Sarkozy) and which may have been overwhelmed by consideration of NAMA. @ Greg i always assumed the associated loans to be to a large degree commerical real estate investment? While stuff like the O’Dwyers loans may be in trouble, other stuff could include Liam Carrolls renting of the Google HQ down by the Grand Canal Docks which is not doubt fully performing and likely to remain so. The problem is, like you say, we get big headline figures of “Associated loans of 28bn” and zero detail beyond that. As per Dr Fitz’s article in the IT today, FG and Labour need to push for amendments that give much more detail beyond this (at this point i expect lots of people to say “but NAMA hasn’t passed yet!! Arrgghhh!!”…but anyway…), whether through closed door sessions for their front bench, or, even better, a publicly released report with the confidential details redacted. I dont see why a two paragraph piece on each of the top 100 loans can’t be produced along the lines of “Developer A, total NAMA exposure 500mio, owns prime Dublin office block asset, initial value 50m, MV 35m, 80% occupied to long term tennant (IT sector) and yielding X% off current MV. Full occupation of asset would yield Y% off current rental rates”. I don’t see why this couldn’t be done over the next month. “I dont see why a two paragraph piece on each of the top 100 loans can’t be produced along the lines of “Developer A, total NAMA exposure 500mio, owns prime Dublin office block asset, initial value 50m, MV 35m, 80% occupied to long term tennant (IT sector) and yielding X% off current MV. Full occupation of asset would yield Y% off current rental rates”. I don’t see why this couldn’t be done over the next month.” commercial sensitivity combined with political sensitivity. The reality would be lot of ” developer b, total exposure 400m, owns a 2000 acre landbank in the midlands and the upper yorksire moors, 10 acres within sight of habitation, currently occupied by 20000 rabbits, a curlew and a very mad old lady with cats, yielding ….” The truth shall make you fret as Terry Pratchett is wont to opine… Eoin Says: September 19th, 2009 at 1:49 pm Eoin, The reason that I (Joseph, and I have no doubt many others) would be concerned about the lack of information on this is, if you are correct and it is indeed “performing” commercial real estate, that that €28Bn will corrupt the market for the next decade. Prices will be artificially maintained. Nobody will enter the market until the overhang has been used up. The Government (NAMA) could destroy investment with the stroke of a pen, and would have every incentive to do so. Apart from the €5Bn+ of finishing out (creating yet more of an overhang) there will be no development for maybe twenty years. The perverse effect of this will be to make the Irish economy less not more competitive for a decade if not more. There must be a mass liquidation of a significant portion of CRE. If there is not, the businesses that are currently paying over “Global”/”European” odds for rent will suffer and die. NAMA’s entire LTEV argument rests on current rental yields. These yields are a fiction imposed on the market by law. If rents cannot be negotiated downward we will end up with the worst of all worlds, business will fold rather than cut costs and struggle on. The perverse economic incentives of NAMA aside I really would like to know what, if any, share portfolios were given as security for the €28Bn. If that figure is in any way significant the stock market will also have been corrupted. I will now go and read the Fitz article. @ Greg I’m confused about what your suggesting. I don’t think the purpose of NAMA should be to enforce liquidation on performing loans. Thats seems likely illegal/unconstitutional, and would amount to a temporary nationalisation of private contracts/property, in order to force down their value. While this would of course improve competitivesness, i think this sort of government intervention in the economy would scare all but the furthest left on the political spectrum. Or am i reading what you’re saying wrong? @ Brian as we all know, demographics for rabbits are ridiculously positive, and there will soon be 400k rabbits occupying that site. Problem solved. Eoin Says: September 19th, 2009 at 7:43 pm Misallocating Capital. @Brian Lucey “The truth shall make you fret as Terry Pratchett is wont to opine…”. This response would be more suitable in the post about the Dell workers but…….. I met (Sir) Terry Pratchett once. Did you know he used to work in the nuclear power industry? By a remarkable coincidence, his boss from those days was a friend of mine. He knew Terry wasn’t happy and cooked up such a good redundancy deal for him that he was able to take time out to write. The rest is history. Lovely man. @ Greg I’m not claiming that “misallocation of capital” isn’t a problem. I just have issues with your solution along the lines of “There must be a mass liquidation of a significant portion of CRE.”. Again, explain? As the shares are quoted, expect manipulation based upon access to information. Information is the key. Have a good time guessing where the prices go! Anyone know anyone who knows about what NaMa will do? Cosy up and earn money. Oh yes, it isn’t earned, it’s crony capitalism. Will the Bill even be passed?? Hello BlogMaster ! could you kindly put a link to my website … http://www.fixnama.ie on the links section of home page ( see contribution above ” Citizen Ruane ” ) Fix the Banking Model -> FixNama ( all party support ? )–> get a * Stable* and *AFFORDABLE* supply of credit into the Irish Economy ( creditworthies etc )….otherwise the clearing/commercial banks will be the cash cow to support Corporate activities…..manage the Corporate Black-Hole in a less hurried and more trustworthy fashion. The State is the White Knight….and should set the terms and outcome…not a deal done ala the “City”. …which got us into this swamp in the first place. Eoin Says: September 20th, 2009 at 12:14 pm “I’m not claiming that “misallocation of capital” isn’t a problem. I just have issues with your solution along the lines of “There must be a mass liquidation of a significant portion of CRE.”. Again, explain?” Eoin, I am glad we agrees that the misallocation of capital is a problem. I take the view that the bigger the misallocation the bigger the problem. Maybe I should have said that NAMA will be a de facto monopolistic provider of CRE and development land. This is economic perversion. With (I think I’m right) €28Bn going to Anglo and €6Bn going to Nationwide the bulk of the bailout is going to banks that are patently insolvent. I don’t think anyone would seriously suggest that Anglo, with five branches in the State, will be lending to newsagents in Roscommon, fish & chips shops in Donegal or car mechanics in County Clare. The €28BN given to Anglo is a massive misallocation of capital. Probably the same for Nationwide. They should be thrown to the dogs along with their bondholders. I don’t buy the argument that Ireland “Sovereign” would be barred from debt markets as a result, though Government action to date has placed the Sovereign in an awkward position. Let the liquidation begin. Let the market decide what value is. Rents for commercial space would plummet and allow indigenous (or foreign) enterprise a competitive edge in a Global/European market place. This competitive edge might assuage the negative effects of uncompetitive labour costs. “Thats seems likely illegal/unconstitutional, and would amount to a temporary nationalisation of private contracts/property, in order to force down their value.” NAMA itself is likely “illegal/unconstitutional”. What of the property of the citizen/taxpayer that is being appropriated to the cause of NAMA? Do the property rights of citizens count for nought? Eoin, Forget NAMA. Think about supply and demand. Think about price discovery. Think about a country where the state controls all land and property. Ignore the, very real, prospect of political interference in the allocation of that land and property. Think about the wider world. Nobody would invest in such a country. Their interests could be undermined by the state at any time. Back to NAMA. NAMA provides the state with the most perverse of reasons to manipulate prices. That is, to corrupt the process of price discovery. That perverse reason if the political futures of those who propose NAMA. NAMA (in its current form) is an economic albatross around the neck of enterprise for at least a decade. In short, in terms of economic recovery, price discovery (the essence of a free market), and fairness to citizens, NAMA is about as useful as tits on a bull. NAMA is not Quantitative Easing. NAMA will not provide credit to enterprise. The warrants on equity of AIB & BOI are close to valueless. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.” Andrew Mellon’s infamous advice to Herbert Hoover, 1929. You’re following in illustrious footsteps Greg! Concubhar O’Caolai Says: September 21st, 2009 at 7:15 am 😆 The more I think about NAMA the more it feels like a Japanese solution to an Irish problem Concubhar O’Caolai Says: September 21st, 2009 at 7:15 am This doesn’t look good. UK commercial property in negative equity until 2017. Our nearest neighbour. http://www.ft.com/cms/s/0/a29bce72-a60e-11de-8c92-00144feabdc0.html?nclick_check=1 “A report from the UK industry group that met with the Bank highlighted that the UK commercial property sector could be in negative equity until 2017 and undercapitalised by up to £120bn ($195bn) based on current conservative banking refinancing terms.” “The amount of outstanding CMBS that need to be refinanced poses an absolutely huge problem, which is waiting to hit the market,” said Edmund O’Kelly, head of real estate restructuring at KPMG. “A lot of the technology for creating the structures was imported from the US, but they have never been tested in Europe. Restructuring CMBS is unchartered territory.” It is difficult to call the next move in the UK property market – both commercial and residential. There is a sense of breaths being held waiting to see which shoe will drop next. Obviously it will have an impact on the portion of the NAMA portfolio in the UK, but the bigger picture may be more interesting. John McManus in today’s IT presents some interesting on the role of the ECB: http://www.irishtimes.com/newspaper/finance/2009/0921/1224254908745.html Not surprisingly it contains quite an amount of speculation, but some things are beginning to become more clear. The ECB may be holding its nose at the extent of the transfer from ordinary citizens to bank shareholders that NAMA involves (and at the time and space being awarded to developers to unwind their positions), but its overall stance on Ireland (and the other limping Eurozone members) should be pretty clear. On a temporary basis it seems prepared to use massive injections of short-term liquidity to part-finance fiscal deficits. But this requires a quid pro quo since these liquidity advances will have to be repaid as the ECB pursues it exit strategy from support of the Eurozone banking system and of the public finances of the weaker Eurozone members. In practice, I suspect, similar to the view expressed by John McManus, that the ECB will begin to operate very much in IMF mode. (It appears that the ECB has been content to allow the IMF to intervene to support non-Eurozone EU members, but is jealously guarding its Eurozone turf.) The pressure will come on to wind down the NAMA portfolio to release the cash to redeem the ECB’s liquidity advances and to reduce the fiscal deficit (so as to minimise indirect ECB financing). It is unlikely that this pressure will be applied too quickly or forcefully – the ECB is unlikely to want to be seen as forcing a major collapse in the Irish property market or putting overt pressure on the Government to reduce the fiscal deficit – but I would be surprised if its objectives had not been communicated very clearly to the Government. This, of course, severely restricts the ability of the Government to finance any sort of Keynesian-style investment stimulus. As a result, it also appears that the European Commission (and the Council) is keen to use other instruments to provide some fiscal support (e.g., the Globalisation Adjustment Fund mentioned in another post) and the European Energy Programme for Recovery (EEPR) – from which the East-West electricity interconnector will receive some support (and possibly some renewable energy projects). The latter is a significant development, but the total amount (approx. €4.3 billion) is being spread very thinly. The peripheral member-states will have to do much more themselves to finance upgrades in infrastructure and utilities. In Ireland’s case this brings the case for the privatisation of, at least, some of the semi-states to the fore. Comments are closed.