“Speaking to the Sunday Independent Deputy Lynch said such a collapse in rents had “real implications for the credibility of the Government’s Nama banking scheme”.”

http://www.independent.ie/business/commercial-property/retail-rental-market-now-close-to-collapse-1897898.html

Do you think that Lenihan’s Estate Agent knows how to value property?

“Are you are being deliberately provocative and disingenuous”

Not true. I’m in a position to know, you’re not, so we need say no more.

“Ask Alan you say. Do you honestly think that, even for one brief moment in time, that the same Alan would waver and actually give an answer which conflicted with his political pay masters?”

Why would the answers have to be in conflict with his “pay masters”. Do you know something the rest of us don’t or are you just jumping to conclusions. For the moment I’ll put it down to jumping.

“Every economist in the country has tried to drag facts from the government and it’s advisors. The answers given are invariably of the “to the best of our knowledge” and the “as far as we can ascertain” variety.”

I know of no questions asked directly that haven’t been answered directly, if you do, let’s have them.

“They have extrapolated their nama plan from examining a tiny percentage of the loan books not to mention their underlying false assumptions about property values, rents, and assumed near static interest rates A little knowledge but above all wishful thinking, will prove to be a disaster by the ex minister for children.”

I would suggest to you that you don’t know what they have examined or whether their assumptions on property values, rents or interest rates are false or not. You are looking into the future, making a guess and deciding your guess is the way to go.

Finally, your jibe at the “ex minister for children” doesn’t need any comment from me, it should be let stand only as testimony to how highly you value your own opinion.

Every economist in the country has tried to drag facts from the government and it’s advisors. The answers given are invariably of the “to the best of our knowledge” and the “as far as we can ascertain” variety.

They have extrapolated their nama plan from examining a tiny percentage of the loan books not to mention their underlying false assumptions about property values, rents, and assumed near static interest rates A little knowledge but above all wishful thinking, will prove to be a disaster by the ex minister for children.

You appear to be confusing the issue of whether I could, via informal “back channel” contacts attempt get some answers to some of these questions—-answers that could not at all be considered to represent the official viewpoint of the Minister and which I could not post on this blog as representing such—with the issue of whether the Minister for Finance has explained adequately to the Irish public a plan in which he plans to issue fifty something billion of debts in the name of Irish taxpayers.

I am pointing out a series of important aspects of the NAMA plan that the Minister, in a series of long and carefully considered statements, has not chosen to reveal to the Irish public.

Your attempt to personalise this issue as being about whether I could have called an adviser to the Minister seems to completely miss that there is a far bigger picture here relating to the information that the government has been willing to reveal to the public.

And, as a final thought, what exactly is wrong with using a blog to ask relevant questions about a key public policy issue?

All you had to do at any stage was ask Alan, if he had the information but refused to reveal it or he confirmed that those decisions had not been made yet, then at least you’d know where you stood.

You are a citizen, you are entitled to ask questions, I just wondered why, given that you are in a position to, you didn’t ask those questions directly rather than choose the sideways route of your blog.

I’m sorry if my posts upset you, as they seem to, but if you are going to put yourself & your views out in public as you do, I think you might expect some questions.

Brilliant. What could possibly go wrong with that plan?

And of course indeed, this point proves that I’m not “genuinely” looking for answers.

As always, keep up the good work.

If you are genuinely looking for answers why didn’t you just ask Alan Ahearne. You have his email address I’m sure.

It is instructive to look back at the banks that were in danger of collapse. AIB, BoI, Anglo, INBS. The common factor? C&D and Commercial. Why? Because they are largely non-recourse? Because the rise in default rates is likely to be higher than in residential? (even where house prices are falling, borrowers don’t/can’t walk away… whether this will change is another matter, but for the moment it is the case - the price of credit card repo’s in the US rose once credit card debt became recourse, default rates dropped sharply… they rose again recently to high levels as won’t pay has become can’t pay).

As far as the state is concerned, a high loan to deposit ratio is desirable. Borrowing short is to be encouraged. It is unsecured, unguaranteed credit. Once the ECB stepped in to fill the liquidity gaps, borrowing short became safe again. One could argue that the failure of the BoE to provide liquidity to Northern Rock was a terrible mistake (although given their default rates, they were probably dead anyway). Anyway, now that this particular moral hazard has been introduced, a short-term liquidity shock is less likely to be a danger than a run on deposits (as in large corporate deposits)…

PTSB has probably a bit of a capital requirement, but what it really needs is a new funding model. If they boosted up their capital levels they’d probably be able to borrow more cheaply on the interbank market (bonds or depos), but this is also at the same time what they’re trying to move away from. Long term they probably need to either deleverage significantly, or else try and move more into the business banking world in order to gain more ‘customer’ deposits. This would be a shame in some ways, as at the moment they have a very simple product offering, which is in many ways a good thing given the currently messed up financial system. Hence the reason why we’re seeing the first moves on some serious consolidation with INBS and EBS (and maybe BOSI) set for a merger with a spun off PTSB. I think from the figures i’ve heard, PTSB has a loan:deposit ratio of 300%, but a merger with INBS and EBS would bring this down to 200% (assuming all customers remain, which is debateable in INBS’s case given that their depositors are to a large degree their owners as well - will they stay afterwards?)

I suppose what underpins my search for alternatives is that I would rather see a zombie banking sector than a zombie public sector. We had that in the ‘eighties and the country wasn’t a pretty place. Why is my preference this way round? Because I believe that the private sector will find ways to overcome a zombie banking system, but there is little that is going to overcome a zombie public sector (social net, health, mass education) without damaging the rest of the economy (i.e. pulling more money out of consumers’ pockets).

You make a very important point.

There were and still are a large number of choices, tailored to the individual circumstance of each institution, including cutting some of them loose post-guarantee, taking majority ownership in some via an a NAMA-style mechanism, breakup, nationalising, new good banks etc etc.

The assertion that “we had 3 choices” based on the concept of a “national banking system” that must be treated as a monolith is wholly bogus. Realistically there were hundreds of choices, not three.

To identify the best strategy mix, you need a clear idea of financial services requirements on a five year horizon. That includes foreign banks by the way. Trying to fix it so it can be like before is wrong. It won’t be like before, so why try.

NAMA has locked frightened policy-makers into an untenable position. That explains the face-saving mathematical absurdities taxpayers are constantly being invited to swallow.

Okay. we are as close to each other as we are going to get. Agree on INBS and EBS.

I also agree that the NAMA number has been reached by setting a target (how much do we need) rather than by setting a ‘worth’.

I disagree with you that 30 bn would leave the state owning 99.7% of the banks. A third of the loans are from Anglo, leaving 52 bn from INBS, EBS, AIB and BoI. INBS is hopelessly insolvent, so the 8 bn or so from there might as well just be nationalised. So we are down to 44 bn. There’s a billion from EBS which should probably be dealt with by a 500 mn recapitalisation (assume a 50% loss on it).

So NAMA Anglo and a nationalised INBS.

That leaves us with 43 bn from BoI and AIB. The writedown indicated by the preliminary valuation is 20%, so something about 9 bn of new money is required. Even assuming it is split evenly between the two would see the state taking less than 60% ownership of each of them.

But as I say, the discount of 20% is bogus. The recoverable value (whether long-term or liquidation) of the loans is way less than this, IMO. Which is why we have NAMA subsidising the banks at taxpayer’s expense.

We agree on your point 1. But my argument is that ECB+50bp medium term floaters would not command a market value of par.

I think you are missing my main point.

77Bn is being removed from the banks’ balance sheets, agreed?

This hole is made up by:

Already written downs, internal capital generation and existing capital, let’s say 17Bn in total.

Still 60Bn to find and presuming this comes from the State the only question is how much of it will be used to acquire equity. Note that this 60Bn total requirement is quite indepentent of MVs or LTEVs. What the LTEV mullarkey decides is how much of the 60Bn injection will not be entitled to equity. We are told that this figure will be 54Bn so that would mean that 6Bn will be used to acquire equity. Where will that leave State ownership? This is one of OP’s more relevant questions.

If, as per BL, half of the 60Bn should be entitled to equity then in the first place, the shares would be practically worthless (with only 30Bn being used to purchase the 77Bn toxics) and so the State would finish up with 99.9% ownership - i.e. Nationalisation.

We are haggling about how much of that required 60Bn should be directed towards the State buying equity. It seems to me there must be an optimal level of State ownership to balance all interests. The LTEV is really a red herring, hopefully chosen to arrive at the optimal final balance.

So if the banks need 60 bn in assets to replace 77 bn, actually what they need is 17 bn. An equity recapitalisation of 17 bn across the banking system is not really that much. On the other hand, if the loans aren’t worth 54 bn, the banks really need more than 17 bn and the state is buying overvalued, overpriced assets.

There is an element of circularity in playing with these numbers. The market cap of the banks is a function of the 54Bn to be used in NAMA cleansing and the cost of subsequent recap is a function of market cap.

I don’t think we are a milllion miles apart. The banks need, say, a total of 60Bn to replace the 77Bn being taken off their balance sheets. The split of this 60Bn between “cleansing” and recap determines the ultimate state ownership (presuming no other source of funds). If the cleansing had been done at 30Bn (per BL) we would in effect have nationalisation. It is being done at 54Bn. I agree with OP that it would have been nice to know how the Government expects this to pan out in terms of ultimate state ownership after the required equity ratios have been reinstated through recap.

I do think you must be wrong about the government being able to purchase equity with these 1.5%ers. Surely there would have to be a market test that these 1.5%ers are worth their face value, otherwise why not issue equity for 0%ers? The key concession is that the ECB will allow the 1.5%ers to be repoed PROVIDED they were only used to buy NAMA assets.

Argument 1. raises legal contraints, but if it extremely unlikely that the holders of bank bond at the end of September last year are still holding them today. And there seems to be no reason why a reasonable settlement could not be achieved with these bond holders.

Argument 2. is in the realm of positive economics and, imo, those advocating rapid adjustment have won the argument. But Argument 1. is usually deployed to trump it.

Argument 3 is comprised of value judgments, sanguine, but blurred, visions of the future structure of the banking industry and the property market, wonderful notions of a social and planning dividend (bribing citizens with their own money) and some over-riding political considerations.

All these arguments have been combined to generate a post hoc justification of NAMA. And the numbers and analysis (such as it is) have been retro-fitted - and are being retro-fitted - to justify the policy decision. This has evaded and frustrated any attempt to apply the kind of forensic scrutiny required - this links back to Karl W’s initial post.

My sense is that the delay in presenting the data and information that would be necessary to answer Karl’s questions is occasioned by a couple of pressure points that have emerged. One may be the nature of future ECB support as it seeks to wind down its support of the Eurozone banking system. It may be balking at the size of the NAMA bond issue that will be coming its direction. In addition I would be surprised if the NTMA does not have major concerns.

The second could be the comprehensive nature of the resolution proposed.
For the Government is has to be all or nothing. Initiating a process of winding up Anglo and Nationwide (the most likely candidates) would reveal immediate market values for the properties behind all the loans being bought by NAMA. Similar to the bursting of all bubbles the prices would overshoot on the down side. But how bad a thing would this be.

In addition, instead of overpaying for all the loans, NAMA would end up paying much less to the three remaining banks. The Government would have to step in with some recap, but fewer cleaner banks - and a cleaner banking system - would allow them to offload these shares most likely at a profit. And the recap might need to cover some relief on the more recent mortgages taken out by housebuyers caught up in the irrational exuberance.

Anyone for a slimmed down NAMA?

The historical basis for a bad bank is bad. They always lose money. Sometimes they lose a lot of money (Securum in Sweden, for example, lost 60% in constant money terms. We in the eurozone live in a world of constant money).

AIB has a market cap of 2.86 bn as of COB on friday. An 80% recapitalisation would inject 11.4 bn in new fresh shiny capital. AIB would then be free to write down its loan book to levels that make it attractive for repo. If that’s not enough, a 90% recap would inject 25.74 bn.

I don’t see any block in the EU guidelines to the government swapping treasuries for equity.

It is simple, it will work, and it immediately solves the problem. It provides unlimited upside for the state.

There are more than two choices. Some of the choices are much simpler than NAMA.

IMHO this last is the least risky choice. It still leaves a big call on the optimal mix of cleansing and recap. I agree that it would be extremely coincidental if LTEV happened to provide that optimal mix and I am assuming that all this MV/LTEV pallaver is just a fig leaf to justify getting to the optimal solution. It does make it rather easy for the likes of OP to poke fun at the calculus. It’s rather as if the Gardai justified forcible intervention in an armed robbery by saying that they had weighed up scientifically the probabilities of civilian injuries. That would leave them an easy target for critics to demand to see the sums.

So it is with NAMA. The LTEV/MV figures don’t really matter. The argument is should we have let the banks go bust, nationalised them or chosen a better mix of cleansing/recap.

There’s also a pile of questions around transparancy and reporting. I’ll leave that aside for the moment.

Here’s a 2 year old post on an English personal-finance site called “an investment property should ‘wash its face’ “, where he writes:

“However, renting out a property you own becomes very risky if the property doesn’t ‘wash its face’, which is to say that the rental income should cover the costs. And for a lot of people who’ve bought recently, it doesn’t.”

http://plonkee.com/2007/10/31/an-investment-property-should-wash-its-face/

Some believe it to originate in the North of England or Scotland.

For future reference this is an interesing etymological website, though I didn’t find this particular phrase here:

http://www.etymonline.com

On Oct. 2, 2008, the Irish government guaranteed all deposits and borrowings at six of its biggest banks to assure customers they could withdraw their money and avoid a bank run. The decision rattled other European governments because it encouraged depositors to move their holdings to Ireland.

Irish Finance Minister Brian Lenihan told the BBC that there was no other choice because of the risk of panic.

“We were anxious to avoid that at all costs,” Lenihan was quoted as saying. “The policy options available to us were to immediately nationalize an institution. If we immediately nationalized that institution the risk was that it could lead to a systemic collapse of all the other institutions.”

French Finance Minister Christine Lagarde said the decision was “a bit of a shock,” the BBC said. Darling told the program that “the lesson that you draw here is you can’t do these things on your own.”
————————

So much for international support for the Irish move.

What about equity stakes? (recapitalisation). What about bond replacement (investment rather than bailout)? What about providing repo through the NPRF commercial program? Bung the 54 bn in the NPRF and repo it out to the banks?

Don’t like any of those?

What about splitting up the banks, separating their life and pensions businesses and floating them as separate companies for capital raising purposes? What about doing the same with their wealth management business? Selling off non-core assets? Do all that and then see where they are.

What about firing the existing senior management and boards instead of promoting them and retiring them?

What about selling the distressed assets off and recapitalising the banks through equity stakes? Much simpler, no admin charges. Just the cost of the NAMA bonds that will surely be recouped with dividends…

What about an SLS like in the UK where the banks can park their assets and get bonds in return? But they retain ownership of them, they have to work them out, they have to take the losses on them and they pay for using the scheme?

Can anyone tell me the historical origin of the face washing metaphor? Is this actually a term used in financial markets or was it made up by some Irish governmental wag?

Hmmm, your ideas are intriguing to me and i wish to subscribe to your newsletter…

1) Let the banking system collapse and with it the economy

2) Nationalise the whole banking system in a unique (for the Western World) declaration of economic emergency

3) NAMA as presented

(3) is the lessor (or is it lessest) of evils. All this whinging about where did the figures come from is irrelevant. Even if the MV was 30Bn (most pessimistic as per BL) (3) would still be the least worst option.

As to points 9 & 10 of OP, we are told that NAMA will “wash its face” so far as cash flow goes.

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. 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 the wrecks from less competent people”

… but reward financial industry vested interests with billions and billions of miserable taxpayers cash ..

really we are deep in George Orwell territory with NAMA at this stage ..