Funnily enough, we’re disussing this issue tonight here at
http://www.irisheconomy.ie/index.php/2009/09/23/publicly-owned-banks-and-the-ecb/

Bottom line: I don’t think you’re right on this one.

http://trueeconomics.blogspot.com/2009/09/economics-23092009-cost-of.html

Credit for a timely, indeed overdue set of arguments in favour of the current NAMA proposal, in contrast to the worryingly threadbare offerings from so many of its proponents to date.

In particular:

1) Your emphasis on the International context is especially welcome - we are after all a Nation crucially dependent on the ongoing goodwill of International lenders.

2) Your argument in favour of a NAMA mechanism:

“It is towards this funding and credit log-jam that the NAMA project now takes direct aim. In replacing illiquid and impaired loan assets with debt eligible for refinancing at the ECB, the creation of NAMA has two immediate benefits, in simultaneously assuaging both solvency and liquidity concerns surrounding the Irish banks. By cleansing bank balance sheets of “toxic” loan assets, NAMA will dramatically transform the shorter-term funding prospects for Irish banks in both the deposit (wholesale/retail) and debt capital markets, whilst paving the way for longer-term capital raising in the domestic equity market. Most importantly, the combination of loan asset transference and enhanced funding flows will sharply reduce loan/deposit ratios at the Irish banks towards the 100% zone, thus providing the wherewithal for the resumption of prudent lending to corporates and households alike.”

is, I think, the best summary of the necessity of such a mechanism that I’ve seen yet in this debate.

However, the necessity to remain ever-cognisant of our International lending audience, and the need to accrue the benefits of a NAMA mechanism (as convincingly argued by you), fails to clinch the argument for the current NAMA proposal.

Why can’t we assuage any concerns of International lenders, accrue all the benefits of a NAMA mechanism, and allow the taxpayer own a signiicantly larger share of the Banks (short of Nationalisation) than implied by the current proposal?

Public happy / Job Done.

However, I can offer DOM/KW a perspective which might help them understand the scepticism of the great unwashed.

We have had all these people in public office and at helm of industry tell us for years that prices would only ever go up, not to worry, to get on the ladder, there’d be a soft landing.

Then we find that “the crazies” and the “nutters” and “marxists” were actually right all along: this was a wild orgy of overexhuberance that will/did end in tears.

Now these same people unblushingly tell us that the fat cats, golden circles, ’senior bondholders’ (unnamed) etc absolutely must have thier private wagers repaid, as they made all these hare-brained bets and somehow the taxpayer has to now reimburse them, at the cost of losing our public health and education systems (hospital closures, cancelled school building, increasing class sizes..)

They themselves were responsible for due diligence, having a clue, and reading the f’ing newspaper once in a while.

The Irish National Casino : The House Always Loses. WTF?

The taxpayer owes these people nothing.

The argument for bailing them all out is because of the alternatives being “too awful to contemplate” and that “we need a functioning banking system” (for undefined values of ‘we’,'need’,'functioning’, and ‘banking’).

I would really love to know what would happen if the banks were, as private enterprises, simply let go. Deposit and current accounts could be transferred to credit unions; MBS could be sold on the open market; tickets to watch the investors wail and gnash teeth could be sold for €50/head 8-hour show (i’d go twice a week). Businesses needing cash flow could approach all those still solvent, who, lacking a 20%/year ROI property play, could get 5% easy for punting a car mechanic, hairdresser, or pizza delivey play. Win-win.

Risk is risk; Idiocy is not a defence; or if it is, I have a bridge to sell you. No; wait, somebody did that one already.

What I would like to see people like DOM do is to offer a forfeit in case thier expectations of return to growth do not materialise.

Given the oversupply of housing ;
the <a href=”http://www.finfacts.ie/irishfinancenews/International_4/article_1017945_printer.shtml” overindebtedness of consumers;
the prospect of falling wages;
the still-deflating bubble ;
the strong chance of interest rate rises;

— would DOM be willing to, for example, donate his entire net worth to charity (SVDP/Barnardos/..) if any of the above risks negatively affects the taxpayers “skin in the game”?

As is, if it all works out, he collects a big fee and retires on a fat pension.
If not, … … … he collects a big fee and retires on a fat pension.

Maybe he should instead offer to fall on his sword if he turns out to have been overexhuberantly optimistic.

I can supply the sword, and assist with the ‘falling’.

Fav Obama Quote - (to bankers) : “My administration is the only thing between you and the pitchforks”. Maybe out fearless leaders could try that line. Or “our administration is the only thing between you and default/russification/sinofication/etc”.

Cheers to roubini, buiter, stetser, ilargi, mish.

Now. I’m off to Q for 2 hours to get my dole.

They are against overpaying the banks for loans and for taking on the bulk of the downside risk from bank shareholders and subordinated bondholders with very limited of the upside return.

You mention that the amount of subordinated bonds should be increased to cover the full overpayment for LTEV but why shouldn’t it go even further?
There is a real risk that property prices will fall further and not recover by 10% in the next 10 years. Why should the taxpayer accept all this risk from the shareholders of the banks?

That was indeed an interesting article, though I thought it was odd that it didn’t mention that the amount of Irish govt bonds bought by the Irish banks (€7bn) is also the amount pumped into BoI/AIB in preference shares, adding another bit of circularity to the whole transaction.

As to whether this is an argument against nationalisation…. Has not Anglo been heavily funded by the ECB post-nationalisation? (Could be wrong, genuine question.) Surely the collateral is the key thing for the ECB - the government could surely recapitalise nationalised banks with government bonds (which could in turn be used as collateral with the ECB) just as easily as with private banks?

I doubt anyone who counts is likely to be fooled into thinking our deficit isn’t being partially and indirectly funded by Frankfurt by the private status of the banks acting as intermediaries. In any case, could nationalised and recapitalised banks not be immediately reprivatised via either an IPO or some per capita handout to the citizenry?

re (ii) i’m pro NAMA, or as you correctly describe, pro-the-least-worst-option, and i dont see why the subordinated element of the offering wasn’t, or shouldn’t be, increased to encompass the full 7bn overpayment in lieu of LTEV. I suppose it would possibly reduce down the available liquidity to the banks (on the basis that it couldn’t be repo-ed at the same level as the full nama bonds), but i wouldn’t have thought that this extra 4.3bn would be the material difference in the maths.

On the off chance that you do read this, I think you deserve some credit for an erudite presentation on why NAMA is a least worst solution among all the proposals on the table. However there are some points many reaonsable people would take issue with.
i) on the subject of valuation, we have no disclosure from the MOF as to how he arrived at his calculation. So therefore we have preciousl little context for judging the extent to which the taxpayer is assuming downside risk. Without further input, we cannot know whether LTEV is reasonable or make believe and without the market valuation spreadsheet we cannot judge how accurate the minister’s claims are
ii)I would have liked some evidence from pro-NAMA ites on the degree of equity or first loss protection that the taxpayer has. the silence is deafening.
iii) you say that NAMA is operationally cash flow positive at the current low level of rates-clearly it probably is. Your assumption is that in a global economic recovery where rates rise, the cash flow on the performing loans would also increase. I am assuming that you are claiming tht these loans are floating rate loans. However, again we have no disclosure. In addition there is no stress test provided to show what would happen to cash flows if ECB policy rates rose and the Irish economy lagged.
iv) the purpose of NAMA as sold to the electorate is to bosst lending again, presuably by underpinning solvency and improving liquidity. Nowhere, is there a discussion of how giving about 50% of the ECB funding to institutions that are in run off is going to boost lending.
v) what is completely missing from the MOF is a term sheet outlining how much capital the banks need and who will provide it in a post NAMa world.

Did you mean that I was “witty”? If so, thanks. But if you meant to construct an adverbial form of “whit”, as in “a slight and insignificant fragment”, then I take my thanks back!

All of your questions are worth asking and deserve good answers. They do credit to your obvious professionalism in the field.

If the taxpayer had a way of hiring guys like you (the same way the other side does!) it would be possible to answer them in a way that un-muddied the waters. Unfortunately, the guys the taxpayer is paying for have already been regulatorily captured by the other side.

But the basic point, I think, is that there is a mess to clean up. Cleaning up that mess requires a financial commitment from the government and ultimately liquidity support for our financial backers in Frankfurt.

I fail to see why that cannot be achieved under nationalisation, if it can be achieved without nationalisation.

The only difference, it seems to me, is the distribution of the losses and the control of the hiring and firing of the current managers.

vague and whitty. But again with no details.

Are senior bondholders hit? How are the subordinated bondholders hit? What would the likely effect on the external credit lines of the banks be? How much can be gleaned from this process vs current options available? Declare AIB/BOI insolvent (court proceedings?), re-capitalise and re-fund - what is the timeline for this? When Anglo was nationalised it was the other Irish banks that helped keep it funded - who will step in to fill this gap when AIB/BOI are nationalised? What would be the effect on EBS, INBS and ILP in terms of their funding? How would this effect the already anaemic credit growth in the country? How would people’s existing credit facilities be affected, ie are overdrafts still open and available for use, could people still use their credit and ATM cards abroad, could they still deal in FX and MM prodcts? How would trade finance facilities be affected? Would insurance claims be delayed? Where will this cadre of professional managers come from to manage a multi-billion Euro banking industry employing over 40k people? Would the government be on the hook for the pension liabilities of these employees?

There’s lots more questions i could add to that, but you see my point - Anglo was a far simpler business model to nationalise, with far less employees, branches and business scale and scope to deal with. It also had the rest of the Irish banking sector there to at least attempt to fill the gap. It didn’t provide even a fraction of the banking services that AIB and BoI do. Nationalisation of the banking industry should be the last step we take when all else has failed, given the uncertainties that would arrive alongside it. And if we are going to do it, i’d really really like to see some sort of detailed plan that can answer all of my questions above and show that its worthwhile.

“Given that NAMA-as-is appears to be accepted by the markets…”

Just have to stop you right there: Nama-as-is created its own market for bank shares. You cannot allow markets to dictate policy choices.

You don’t need a plan to see how nationalisation will work, you just need to do to AIB, BoI et al what was done to Anglo Irish. The deposits remain protected by the same deposit guarantee. The nationalised zombies will not be lending, but they are not lending now anyway, so no change.

Then, you fire the clowns running the banks. Then run Nama as planned, with every memo, every dossier published on the website (hire a small secretarial scanning team and charge them with the task of PDFing every piece of paper in the office). Pay market values for bad loans. Keep paying until you restore any target liquidity ratio which the regulator sees fit.

Hire in a cadre of provisional managers who sign in blood to respect a new code of ethics in lending. These new managers are given the cleaned banks, which are chartered under a new financial regulatory regime which is designed to minimise systemic risk and report every loan book to the government on a weekly basis, under criminal penalties of fraud if they do not comply fully.

Then float the shares of the new banks on the stock market, to great fanfare and with little glittery hats on. Hope investors buy.

If Bank of Maple Syrup buys a controlling share of new Bank of Ireland, so be it, ay. If Bank of Gouda Cheese buys a controlling share of new AIB, I say “groot stuff!”

Meanwhile, flog off the loans as quickly as possible for market values, by way of regular Nama-auctions to get rid of the land bank. Read Ronan Lyons excellent reports as the Irish property market in Roscommon sinks another 40, 60, 75 per cent….all the way down to whatever makes us internationally competitive.

And then we all live happily ever after.

So €7bn would appear to be the key figure rather than any estimated recovery of asset value in the long run. How else explain why the LTEV premium would go from less than 15% (7bn/47bn) to 17.5% (7bn/40bn)?

Hope for you, yet!

Free lunch at the ECB for bankers.

@BG
“In fact risks for taxpayers are heavily skewed to the downside - e.g. NAMA starts in a 7Bn+ hole, we are at bottom of interest rate cycle, depth and duration of property collapse etc.The taxpayer is being told to ignore a lot of nasty real-world tail risk.
How ironic that the financial industry blew itself up doing precisely that.”

Are we to ignore the signal/warning from Jurgen Stark -

“From a fiscal policy point of view, it should be noted that although the exit from monetary measures will be uniform across the euro area, it is likely to have asymmetric fiscal impacts given the current substantial heterogeneity of fiscal positions. A potential increase in market interest rates will have a much stronger impact on highly indebted countries, in particular those with outstanding government bonds with short maturities”

There’s 9 bn of rolled up interest and 60% of the loans are non-performing.
77 bn loans.
60% non-performing.
9 bn rolled-up interest.
From the Zoe case, it appears that the liquidation value of non-performing loans is 25%.
77-9=68 - ‘real’ loan value
68 - (68*0.6) = 27.2 - value of performing loans
(68*0.6) = 40.8 * 0.25 = 10.2 - liquidation value of non-performing loans

Assuming none of the performing loans go bad, can be liquidated at 100%, and are at market price, total asset value = 37.4 bn

Loss of 25+ bn coming up…

“…keeping most of the banks as stock market entities enables the ECB to fund part of the Irish Government’s deficit…”

See http://www.irishtimes.com/newspaper/finance/2009/0919/1224254861619.html

My biggest problem is with his conclusion - “NAMA is a bail out of a banking system.” The Irish banking system is history. The wholesale funded banking model is obsolete. NAMA does not address this. The capital required to get the loan to deposit ratios of the Irish banks back to 100% is just too big. NAMAs €54bn gamble only gets them to 130%, that’s zombie bank levels, leaving them still to deleverage. We need a new system not a continuation of an obsolete one. We need to start again.

i haven’t asked for a 200-pager on the nationalisation/insolvency/debt wipeout/re-capitalisation/re-launch/re-privitisation process. I’ve simply asked for something longer than a few lines, with some solid expectations of how much can be gained from this, and what underlying assumptions and tools will be used in order to (a) make it a success and (b) be used if runs into difficulties. Given that NAMA-as-is appears to be accepted by the markets and appear to be workable, i think its important any alternative plan is able to check these boxes as well.

This sentence struck me, among many in this vested-interest piece, as emblematic of the almost lyrical nature which the Nama debate has assumed.

“But revive it will” has almost a spiritual ring to it. It is a hope-filled exclamation, a battle-cry to rally troops around a cause.

What it is not is a reasoned argument in favour of reconstituting the Irish banking sector through the current approach.

Donal and others who seek to mask their real motivations behind economicsy verse like this are simply not able to provide the solid reassurances that this plan will work, because they do not have them.

Otherwise, the diatribe against the opponents of Nama contains nothing new - baseless character assassinations of ant-Nama economists in the form of accusations that they do not understand the difference between loans and securities of loans; the much abused Only Game in Town line dressed up in the specious “Look, we have a Ministry that can write 200 pages of pro-Nama legislation. Where are your 200 pages of pro-Nationalisation stuff? Ha! You haven’t got it! Ha!”

I give up.

“To be sure, the Irish property market may have further to fall, but signs of stabilisation are already apparent in UK commercial property, and current indicative yield levels suggest that Irish commercial property may not be too far from its trough. The recent Hilfiger deal on Grafton St reminds that the restoration of “positive carry” in any property downturn sows the seeds of incipient stabilisation/ recovery in asset valuations. ”

Ireland’s property market can boast the following shocking vacancy rates; 20%+ in retail; 20%+ in commercial and perhaps 15%+ in residential. Add to this a falling population and mix in at least two contractionary budgets and I cannot for the life of me see anything but further downside for all types of property prices in Ireland.

Moreover, NAMA is more likely than not too add to our oversupply of property. A fequent poster on the propertypin (yoganmahew) has highlighted this fact on numerous occasions. Essentially, NAMA might allow insolvent developers to finish projects for which there is no demand, and as I have already pointed out we have enough property of all types as it is. If the opposite occurs and all these half-finished developments dotting Ireland are scrapped then the taxpayer will be stuck with the losses on these projects as well. Heads I loose and tails you win.

By the way, if I recall correctly, Anglo Irish was on Davy’s stock ‘focus’ list until the bitter end (as were AIB & BOI). Forgive me for taking the forecasts of any Irish stockbroker with a wee pinch of salt.

i’m fairly sure KW et al were arguing for complete (though ‘temporary’) Nationalisation of all the banks (possibly ex Irish L&P) per the IMF reasoning, on the basis that paying the ‘real’ MV on the loans would result in all capital being wiped out?