IT Article on NAMA

1 NAMA is not quantitative easing

2 NAMA is an addition to National Debt (Clever PR can’t get around this)

3 NAMA is not a stimulus package. It is a bank/bond bailout.

4 The State does not own 25% of AIB & BOI

5 Anglo Irish Bank will not be lending its share of NAMA money (€20Bn? +)

6 Irish Nationwide will not be lending its share of NAMA money (€4Bn? +)

7 AIB & BOI will not go on a lending splurge

8 The Minister’s yield analysis if hopelessly flawed

9 The Minister’s “estimate” of the current market value of CRE is grossly
optimistic.

10 Bond holders are more than likely covered by Credit Default Swaps (AIG?)

@KW Well done, well said.
Almost as an aside, there are several fascinating aspects about the conduct of this debate. Sorting out the banking system should be, mostly, a technical matter. The explanation for why you need a functioning banking system is easy and straightforward. How to rescue a system should be a simple matter of laying out the options, with their associated probable costs and benefits (admitting to the uncertainties around these) and making an informed choice. All rather technocratic one would think.
What follows, of course, is emotion and politics. Why? First, and foremost, there is the involvement of the ignorant and the stupid. Second, (with some overlap with the first) there is the involvement of the many vested interests, all of whom were/are desparate to get the game away from the technocratic field. The stockbroking community were predictable in this regard.
The sad thing about the NAMA debate is that the idiots were allowed to dictate the terms of the debate. The technocrats, some of them anyway, tended to allow themselves to be sucked into the idiots way of doing things rather than keeping the debate narrowly and properly focussed. Street fighting skills should be developed for the next round, should there be one.

@ Brian

12 They’re to busy chasing hares set running by the well known Fianna Fail Minister John Gormely.

@conchubar
“I think this a very poor and reflects badly on Karl as an academic.”
Quell Surprise.
Tell us, leaving aside Gold In Sacks (investment banker likes bank shareholder bailout….p2, Trees Made of Wood….p4) can you tell us ONE single independent analyst that likes NAMA. The economist dont – they sorta hold their nose and say “well, if you must”….
Just one name, of someone without skin in the game, who is at least at professorial rank or equivalent? One….

As I said in the IT feedback, one of the best articles I have read on this subject so far.

@Karl Whelan – would you be interested in doing a short piece to camera in early November (working title ‘3MN’ – Three Minute NAMA)? If you would, please drop me a line josephmorgan@dublin.com

@C.O’C.

I think that is unfair. I don’t agree with all of KW’s negative views on NAMA but one must welcome debate if one cares about the issue. The Minister of Finance has said he wants a proper discussion.

The level of debate has deteriorated seriously lately. This is popssibly largely due to anti-NAMA but pro-Lisbon people taking their foot off the gas for fear of skewing the referendum. As De Gaulle said, people have a habit of not answering the question you are asking them in a referendum.

We now need to refocus the debate on NAMA. The first step is to for information deficits to be addressed and for common misunderstandings to be banished. I think KW’s article does that to a degree. It also proposes the nationalisation of part only of the banking system which is a distinct proposal newly stated if not newly promoted.

I am worried about the decoupling of NAMA and nationalisation. The NAMA bill must provide a mechanism for participating institutions to be nationalised in certain circumstances. If the right to nationalise is not obtained when the banks sign up to NAMA then the risk of zombification is huge.

Apart form that, I would like to know what Karl Whelan and other economist think of the draft regulations on valuations as published.

On good and bad effects . I was at a debate on NAMA in Athlone last night with the government spokesperson (who moonlights as Global Analyst in Davy’s apparently) Donal O’Mahoney.

A point that was made from the floor and afterwards was this ; NAMA is self avowedly designed to put a floor under the property market. So in years to come when someone is trying to move factory or whatever they fear that they will find themselves in a market where there is an artificial ceiling. As one chap said to me “its bad enough that I cant compete with the health board as they are paying 50% more for staff with the same qualifications, now I have to compete with NAMA for property and leases”. Another said “how can the government square the circle of wanting lower costs and greater competitiveness and at the same time prop up a major cost element at an artificially high level”. The government stockbroker-spokesperson had no cogent answer to that other than to suggest that the questioner didnt see the full benefits of NAMA (questioner is a sme with 50 employees exporting to UK/France in the IT components industry, a far braver man than I or D O’M) to sme’s and to the banks.
Travelling to Athlone there was a sign for a set of houses somewhere near Kilbeggan, starting at 155k. Its a long time since we saw that. How affordable property can in the longterm be bad is not clear to me.

@Eoin
Alan “public interest director on the board of Anglo” Dukes is not independent.
Eunan is only recently retired from NCB . GF I may give you but i am ….not impressed..by his demeanour or actions recently. So one versus well everybody else.

@KW

Amen to that!

People are anti NAMA for a variety of reasons… some are pro nationalization… Im not; I want the losses to stay where they are in so far as possible…. and use that as the basis for settlement of debts, with the taxpayer doing as little as possible…. I dont buy the argument on getting credit flowing, and I recognize the importance of banks but want to see that if they are too big to fail, they get cut down to size so they can be let fail the next time….
I could just about tolerate a NAMA-Like vehicle if Seanie etc were reduced to living in rented flats in Balbriggan. It might not be right, it might be short sighted but screw it, I am being asked to pay and that is my price… Its vindictive but some creative destruction is needed…. the losers should lose and the next generation have a go..

Im sure people are pro NAMA for a variety of reasons also,

I acknowledge there is no perfect or even good solution……its a complex subject and most people are trying to see a way out of a very difficult situation.

But. Trying to be objective, NAMA as is, is a one way bet on Ireland recovering from recession far quicker than Germany/France.

I think given the IMF even believe commercial property here is overvalued and combined that with the sort term funding for long term debt, NAMA needs price rises plus low interest rates for a few years…..

And I think, this isnt investing this is doing a double or quits bet on Irish property….closer to the behaviour of an out of control rogue trader looking for a big win to cover up losses… not plotting a plan for national recovery, or even national solvency.

I’m not disputing that vigorous debate is neccessary.

I think the commentators on this site-Karl included- have done a great service to the State in forcing-with varying degrees of success- the Government to pull up it’s socks on every aspect of the NAMA process.

Given Fianna Fail’s appalling track record this is a vital function.

My criticism of Karl’s piece is that it is entirely one-sided and from an academic of his stature this is both inappropriate and unhelpful.

Given Ireland’s reliance on international markets in the coming years, I think it is ludicrous to disregard the views of those with ‘skin in the game’ particularly since perception is so important in this field.

@ Brian

sorry, so we’re ruling out anyone who at any point in their somewhat recent career history was employed or did work for a global bank, an Irish stockbroker, a property company, or a pension/investment fund with exposure to the Irish bank, property and government debt and equity markets? No really giving me much room for manouevre here are you?

@ Eoin

Isn’t that exactly the main problem of Ireland in recent years? Everyone seems to have been linked to property in one way or another. Not a healthy model to build an economy on, if for no other reason than that it stifles dissenting views.

@Sean Healy

How is the ECB deeply implicated in the plan?

@(father?) Sean Healy 🙂

Well, I work in a private institution (as confirmed in the 2000 act), so perhaps I may be even more independent than Dr W. Im assuming that I you have missed the entire argument that we actually dont need a bailout. We need to clean the banks, for sure. But there are alternatives to the bailout.

I take it that you have never worked in any central monetary institution – the first rule of central banking is to stfu. For everybody. no matter how junior, the words of central bankers are taken with weight. So, they are not independent. The ESRI are more so here, and I dont recall seeing Alan Barrett or John Fitz doing hoops of joy on the idea of stiffing the taxpayer.
On that point, perhaps your being a tad rude to Karl (and the rest of us). Of course we know what they are doing and why they are doing it. That however doesnt stop us analyzing and critiquing it. From political economic, economic, and moral grounds the idea of bailing out shareholders and bondholders is wrong, IMHO.

Reputation is important, but your implication is that I would row back. I wont. I may well be proven wrong, but thats a different thing. The key attribute of anyone who even tries to be a scientist (even a social one) is an adherence to some sort of falsification. Our reputations are not built on being right – they are built on being willing to see that we are wrong and to amend accordingly our models and views. Maybe thats too subtle but there it is.

I have more direct skin in the game than I want to remember – what is the LTEV of anglo shares? less than zero alas. And I want to wipe out my remaining pot in AIB. So, even with interests vested that doesnt stop me (but it seems to stop others) from trying to take a rounded cool look.
As for growing up – smackdown. Less of the patronising . The ECB could be writing this – the Ghost of JM Keynes could be doing it with input from Marshall and The MP for Portarlington, but guess what….that would not necessarily make it right.

NAMA ….. on which subject, I see Zoe are back in the courts today.

One is tempted to draw parallels between the idea of keep going back to court until you get the right decision and keep going back to the referendum mechanism until ……. but one won’t.

On NAMA: What does it say about the state of modern discourse (both in the print media and elsewhere) that we’re now expected to not only defend our own position but elaborate on the opposition’s as well? Is this “fair & balanced”? Or is this giving creedence to garbage proposals?

Karl is an academic and wrote an op-ed piece. He has no responsibility to explain the other side. That’s a reporter’s job.

On Lisbon: What does it say about European democracy that the same Constitution/Treaty is repeatedly presented until the EU gets the answer it wants?

Now go vote as you’re told and don’t MAKE them run a third referendum.

@ Brian – Athlone debate sounded interesting, did they mention if they would be publishing a video or transcript online?

@ Eoin

If they dont sell the bonds, i cant see how it stimulates anything?

@ Patrick the American

well if the opinions of the electorate have changed in the last 18mths, then i dont see how asking a similar (with small but potentially important differences) proposal is that bizarre an idea? Given that a lot of the No argument revolves around allegedly supporting democractic ideals, it seems strange that they have an issue with more direct democratic actions like this referendum.

Brian Lucey Says:
October 2nd, 2009 at 10:50 am

“Otherwise we would face an appalling vista. If the directors had to act in the interest of the shareholder (aka the minister) then they would have to, for instance, prop up the property market.”

Speaking of appalling vistas.

The State now has an unquantified liability to the (former) shareholders of Anglo. There shares were after all confiscated by the Minister under the Anglo Irish Bank Corporation Act 2009.

There were roughly 760 million shares in issue at the time of the confiscation. Section 22 of the Act provides;

22.—(1) The Minister shall, as soon as he or she considers it appropriate in the circumstances, appoint a person (referred to in this Act as the “Assessor”) to determine, in accordance with this Act, the fair and reasonable aggregate value of the transferred shares and the extinguished rights and the consequent amount of compensation, if any, payable to persons in respect of those shares and those rights.

Apparently the Minister does not consider it in the Public Interest to appoint the assessor at this time.

Let’s do some hard sums. At one euro per share that would be liability of €760 million. At five euro a share that would be €3.8Bn.

Any lawyer with a brain cell will be able to use the very arguments put forward by the Minister to claim that Anglo had long term economic value. Why should shareholders in AIB and BOI get greater value from the bailout? Why should Anglo shareholders be discriminated against? After all this is a matter of “liquidity” not “solvency”.

If NAMA goes through and Anglo’s balance sheet is all nice and shiny, the entire value of the shiny new Anglo is the property of the original shareholders. The Assessor will have no choice but to say so.

Eoin Says:
October 2nd, 2009 at 11:50 am

“As such, if not QE, surely it counts as a massive (30% of GDP) stimulus package, even if you disagree as to where it is being focused?”

Eoin,

Firstly there is no “if” about it. NAMA is not QE.

Secondly, what makes you think the money will stay in Ireland? Aren’t there a lot of foreign bondholders queuing up to get paid?

@ Eoin

ye, i see what youre saying, they definetly won’t have any liquidity issue. Their whole balance sheet will be government bonds!

But, and im probably being stupid here, what happens after they repo them? they get a new liability – a loan from the ecb – and a new asset ie cash – now, what do they do with that cash? can they simply lend that cash.

I mean does their capital ratio not need to increase in order to allow them to lend me money – or will their “risk adjusted” capital ratio, or something like that, be much lower now that they have off loaded the junk.

“Any lawyer with a brain cell will be able to use the very arguments put forward by the Minister to claim that Anglo had long term economic value.”

im a lawyer – and i like to think i have a brain cell – and im sure a lawyer will put that argument forward – but it most certainly wont work

@Christy
“but it most certainly wont work”
Why?

well, besides any other considerations, even the cheekiest lawyer would find it hard to argue to a judge while keeping a straight face, let alone convince him, that there was any equity value left in Anglo!

@ christy

If the intention is to provide zero compensation why does the Act provide for an assessor?

Why did the Act not state clearly that the shares were valueless?

I’m not a lawyer. Could it be that the Act would have been challenged under the Constitution?

“The State accordingly guarantees to pass no law attempting to abolish the right of private ownership”

What about the law of unintended consequences?

@ Greg

im fairly sure you could mount a legal case on the basis of the MoF just deciding, without a due process or consideration, that the shares were worthless. As such, it would have been incredibly stupid to NOT appoint an assessor. Anglo shares will ultimately have a zero value.

@ Christy

yes, even despite a bump in capital reserves via the reduction in RWA, they still need to raise a good bit more capital (already flagged by AIB and BOI, though they seem to be understating the likely requirements so far) in order to be able to lend properly again.

The idea would be that the liquidity of the ECB, in combination with the fresh capital (either private or public), should be able to get them lending again. However, as noted here, they may just decide to pay off debt (private or ECB) with this cash. But thats a seperate issue, which is hopefully being taken care of via the government caveats that are gonna come with NAMA and the board representations.

@ greg

people make a lot of these constitutional “guarentees”- especially with respect to private property – the reality is that in alot of cases all they guarentee is fair procedures – I mean if you look at the private property article…

Article 43
1. 1° The State acknowledges that man, in virtue of his rational being, has the natural right, antecedent to positive law, to the private ownership of external goods.

2° The State accordingly guarantees to pass no law attempting to abolish the right of private ownership or the general right to transfer, bequeath, and inherit property.

2. 1° The State recognises, however, that the exercise of the rights mentioned in the foregoing provisions of this Article ought, in civil society, to be regulated by the principles of social justice.

2° The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good.”

So i mean, if the gov wants to steal your stuff, to an extent, all it has to do is argue it was for the common good!

@ Greg

well if i was an AIB sharehlder (which i aint) i’d be pointing to the expression of (vague) interest from CIBC and the newly issued non-guaranteed bonds as an indication that there is a non-zero value on my shares. To ensure a zero value to the shares, you’d have to prove the company to be insolvent, possibly via a liquidation process given the process above. Not entirely sure we want to go through that process with the banks that operate 70% off of most of the Irish banking system.

@Concubhar O’Caolai Says:

The US TARP scheme did not directly bail out shareholders. The Gov. took big equity stakes up front. The US method of dealing with insolvent banks is demonstrated by the recent report of the FDIC closing a bank last weekend. They had issued a “cease and desist” order because of various practices in the bank. One practice that caught my imagination was the failure to recognise losses in a timely manner. The FDIC closed the bank transferred the depositers to another bank and took a hit of 45% on the total assets of 2b.
Clean solution that has been repeated many times this year in the US.

@Eoin
So as not to disappoint you
The banks will repo then at the ECB and buy Gov. Bonds and make a 3% return without any risk that those pesky sme people will go bust.

christy Says:
October 2nd, 2009 at 12:46 pm

2° The State, accordingly, may as occasion requires delimit by law the exercise of the said rights with a view to reconciling their exercise with the exigencies of the common good.”

“So i mean, if the gov wants to steal your stuff, to an extent, all it has to do is argue it was for the common good!”

I don’t have a problem with your interpretation.

However, that State cannot claim that it is for the common good to confiscate the property of Anglo shareholders while at the same time providing the resources of the State to enrich the shareholders of AIB & BOI.

AIB & BOI shares are worthless without the guarantee and NAMA bailout.

@ Karl Whelan

V. good article – and the more STRIDENT the better …… anger is a useful tool when well used …….. debunk the myths and the spin ….. the sheer enormity/scale of this ‘bail-out’ has not yet filtered through to the general public ………… but the metaphor of 10,000 years of ministerial expenses will do more than any of those lovely econometric equations ……………. MORE PLEASE!

“Much of this spin has been blatant misrepresentation of how Nama will work.”

In fact, this article is itself a misrepresentation. Karl Whelan asserts that “Nama plans to pay €51.3 billion in guaranteed government bonds for assets that it admits are now worth only €47 billion”. This is simply incorrect. Nama is buying loans, not property. The collateral on the loans may be worth €47 billion, but this doesn’t equate to the value to be assigned to the loans, which could be more or less. Put it this way, many of us are living in houses worth less than our mortgages. But we are still paying and will continue to pay those mortgages, so the loan – as far as the bank and anyone else is concerned – is still worth 100% of its book value. The amount Nama will pay factors in, or will factor in following the assessment procedures, the current amount outstanding on the loan, the ability of the borrower to service the loan, the collateral associated with the loan, the likely future value of that collateral. It seems to me that the (commercial) banks will take a significant hit and that there are significant upside prospects for Nama.

The key issue, which the Minister for Finance regularly repeats, is whether the money borrowed by Nama (in the form of Government bonds) to purchase the banks’ distressed loans will cost less to service than the amount coming in in interest on the loans taken over by Nama. Given the beneficial interest rate differential enjoyed by the Government, this is quite likely to be the case, and hence it is in a sense ‘free money’ that is being used, with no net cost to the Exchequer.

christy Says:
October 2nd, 2009 at 12:46 pm

christy,

Why has the Minister not appointed the Assessor?

Surely the time to do it was, say, within a month of the nationalisation, before all of the LTEV arguments for NAMA.

I think he has made a tactical error which could cost dearly.

I didn’t like this article, not because it was strident, but because it read like something a politician would write. Instead of cold analysis, there was too much reference to what the ‘other side’ were saying – and I’m not keen on taking Karl’s word for, say, what Brian Lenihan says and thinks, any more than I’m willing to take Lenihan’s word for what Karl says and thinks. This is the first article by Karl that I believe fell down in this regard, hopefully it will be the only one.

@Ninap

@Ninap
“The collateral on the loans may be worth €47 billion, but this doesn’t equate to the value to be assigned to the loans, which could be more or less.”

It is not Karl Whelan’s fault that the Govt documentation is completely unclear as to whether the €47bn is the MV of properties or the MV of loans. It refers to the value of “underlying assets” but assets can be loans or property. If it has referred to the value of “underlying security” or “underlying collateral” we could confidently have said it was property.

However, it refers to assets. Furthermore the Govt documentation does not explicitly give the MV for loans. We are just left with this one figure for the MV of “underlying assets”. Why is that?? Is it possible that the MV of the loans is lower than the MV of the underlying security??

podubhlain Says:
October 2nd, 2009 at 1:22 pm

“If, as Garry suggests above, there are hidden problems lurking in Anglo then the State could argue the common good on the basis that Anglo imperilled the entire banking system requiring handling in a particular way.”

I think the Minister might have some difficulty arguing that. He declared Anglo to be solvent at the time of the confiscation.

“The Government has today decided, having consulted with the Board of Anglo Irish Bank Corporation plc (“Anglo”), to take steps that will enable the Bank to be taken into public ownership. This decision has been taken after consultation with the Central Bank and the Financial Regulator which has confirmed that Anglo Irish Bank remains solvent. Anglo Irish Bank is a major financial institution whose viability is of systemic importance to Ireland.”

My reading of this is that Anglo was nationalised while solvent. It was a matter of liquidity. The Minister’s opinion was that there were “funding” problems.

If Anglo was solvent it must have had a value above zero.

http://www.finance.gov.ie/viewdoc.asp?DocID=5627

@ Greg

“@ 70c (if the quote is Euro) that would be €532m.

As I say could be wrong.”

Its not an OTC market. Its the US listed ADR. Its in $ cents, so its equiv of around 48 euro cents. Morever, not only is the volume tiny, its also almost exclusively used by funds that were short Anglo before the nationalisation and are looking for a way to get out (they can’t technically crystalise their profits any other way). Essentially its a “tax” being charged by market makers to close out short Anglo positions.

@ Eoin,

Pull the guarantee. Pull NAMA.

What would happen the share prices of AIB & BOI?

My view is they would go to zero.

You have a different view.

vive la difference.

For Ireland’s sake I hope you’re right.

ADR’s are what they say on the tin. They are not shares but are receipts for shares that are deposited in escrow with the issuer of the reciept. So they are tradable amongst whomever as they are derivative securities on the underlying.

There is a reasonable body of work that suggests that ADR’s need to be fairly good at tracking the “underlying” shares. So prima facia there is a market expectation of something. Note that these are not for Anglo shares but for itir a bundle of 5 shares in this case. So divide by 5, convert to cents to get an implied anglo price. Note also that the adrs are not part of any additional capital as they are bundles of existing capital.

@ Greg

should we expect to see you outside the Stephens Green HQ with a placard supporting the Anglo shareholders property rights???

Ok, so lets say you’re a hedge fund who was short Anglo shares. Essentially you borrowed that share off someone, and then sold it in the market. At some stage you have to give it back to the person you borrowed it off. So you have to re-buy it on the market in order to do this. Your profit on the trade is obviously the difference between the price you sold at and the price you bought at. However, the person who gave you the share in the first place also charges you ‘interest’ basically for the use of that share. So the longer you go without closing it out, the more interest you rack up. This erodes your total profit.

I assume what some of the funds are waiting for is an eventual assessment that the shares are worth zero, cancelling them legally at that. However, until that point, the real price is somewhat up in the air, so you will have to buy a share on the open markets, at whatever price a seller in the market is willing to sell at, in order to buy that share, give back to the original owner, and cancel your position. So the people buying right now are the hedge funds, and the people selling are the big investment banks who have the shares on their books. They’re screwing over the hedge fnds somewhat cos they have no place else to go. (something similar happened with Volkswagon this year, except on the other side of the coin). The reason the shares have to be traded on the Us listing is because the irish shares are frozen, but the Us ones are essentially derivatives of the Irish ones and so can still trade.

@ Brian,

Thanks for that. You learn something new every day.

Even at 10c assessed value the State would have a liability of €76m.

I think the assessment will be challenged.

The Minister should have buried this within a couple of weeks of the nationalisation.

Too much water under the bridge now to claim Anglo shares were valueless.

@Eoin & Greg
Are you sure this isn’t a grey market operated by the investment banks rather than the ADR?

Also as far as I know short sellers did not need to close out the short positions they held on nationalization.

Eoin
Quite agree. Put not thy faith in the accuracy of thin speculative markets.

@ DE

its definitely an ADR – have the bloomberg data here. And it says its 1:1, fwiwi.

Will grant you one thing though – its possible that short sellers of the main domesticly listed share may have been able to close out (at zero or 22). However the short sellers of the ADR could only close out on the real open market (they are short ANGL ADR’s, not normal ANGL), and like i say, thats where the games of bluff come in.

@ Greg

what about turning up at an Irish rugby match with an “Anglo 3:16” banner? Someone needs to fight the good fight on the shareholders behalf.

But yes, essentially derivatives, but a very legally tight one that is actually sponsored by the underlying company itself. Not sure how voting rights work though, probably not included. The ADR’s are often used to get around foreign ownership issues.

@ Karl

You state “I am not now, nor have I ever been, under the impression that NAMA is buying property rather than loans.” I don’t doubt it, but nevertheless, that is the impression that you are content to convey to the general public, viz, in your original article: “Apparently, issuing €54 billion in IOUs in return for Property Assets of dubious value should not be a source for concern…” (my emphasis)

My original point, as highlighted by the article on Owen O’Callaghan elsewhere in today’s Irish Times, is that in addition to distressed loans, Nama may well take on fully performing loans that the banks nevertheless want rid of (perhaps due to the attitude of the markets towards developer loans in general). In my view, the discount being applied to the totality of loans is sufficient to deal with the overall risk of default. (In regard to the latter, surely it is hyperbole to suggest the possibility “that essentially all of the NAMA loans will go into default”?)

By the way, despite quoting Minister Lenihan, I’m not an acolyte of his, just a disinterested citizen. I recognise the fact that his references to assets and loans can also be unclear.

@Ninap
“In my view, the discount being applied to the totality of loans is sufficient to deal with the overall risk of default.”

Any particular reason for this? In my view, there’s a complete lack of information. What discount is being applied to performing loans?

What sort of discount is being applied to the 9bn of rolled-up interest? 🙂

@Karl,

Good article.

@all,

Why wasn’t a ban on banks’ dividends for ordinary shares(until potential losses on NAMA are recouped) included in the legislation? The obvious answer is that this would make raising capital through new equity issues more difficult. However, if this is the reason, you could always raise capital through Pref shares.

@podubhlain

Re: “If you look to the US it is clear that private investors will not touch the toxic stuff even with heavily subsidised loans (free money). If even vulture funds will not participate in cleansing bank balance sheets then we should be wary of this strategy of 40% supporting 60%.”

I could be mistaken but I thought the main reason that the US vulture funds were turning down “free money” was that they were scared that taking it would mean that they could become subject to government-imposed executive pay restrictions.

@ Concubhar

exactly, and im surprised that podubhlain would suggest this again given that i took him up on this before!!

However, it appears the plan is actually about to properly come on line! This should also be noteworthy because it is in fact doing what the TARP was supposed to – namely to directly purchase the bad assets sitting on the bank balance sheets. So, although Karl Whelan was right that the TARP didnt end up doing it, it appears another plan backed hugely by the US govt ultimately will.

http://online.wsj.com/article/BT-CO-20090930-713543.html

http://www.reuters.com/article/marketsNews/idUSN3023559420090930

podubhlain Says:
October 2nd, 2009 at 6:09 pm

“If you look to the US it is clear that private investors will not touch the toxic stuff even with heavily subsidised loans (free money).”

Private investors know a pig in a poke when they see one.

Rhetorical question, but what exactly is a performing loan.

It is surely one that conforms to contract.

Without knowing the nature of the contract one would need to be very suspicious of whether the loan if “performing” in an economic sense.

Some of these “performing” loans may well have had interest roll-up as part of the contract.

Indeed it would make some sense that interest was rolled-up, after all, a development is cash flow negative until the project is finished.

€9Bn in rolled-up interest?

€5Bn for “finishing out”? or is that €5Bn for more rolled-up interest under performing contract while waiting for the tooth fairy to arrive?

The US Public-Private Investment Program for Legacy Assets was pretty much dead on arrival.

I think Obama, Geithner, Bernanke are running out of bullets.

But hey, at least they were using bullets and not the Fianna Fail Green Party guaranteed blunderbuss.

Eoin Says:
October 2nd, 2009 at 7:47 pm

Would this be the plan that “is actually about to properly come on line!”

“The Public-Private Investment Program, or PPIP, has been dramatically scaled back as banks have proven that they can raise capital in the private markets without first unloading troubled assets, many of which are tied to bad mortgages.

When the plan was announced in March, the government hoped the funds could take up to $1 trillion of toxic assets off bank balance sheets but that target is now $40 billion, comprising private and public investments plus debt financing.”

From $1 trillion to $40 billion is a plan?

@ Greg

correct. And the reason?

“The Public-Private Investment Program, or PPIP, has been dramatically scaled back as banks have proven that they can raise capital in the private markets without first unloading troubled assets”

So the banks who hold the bad assets are raising capital (probably from some of the funds initially targetted by the Treasury), and some funds are getting directly involved and using the PPP to buy some of these assets. As such, doesnt it again seem the case that the PPP didnt reach its initial target because funds didnt want to have the government involved in their affairs???

@ Eoin,

Come on, please.

“The funds will have an opportunity to receive up to $30 billion in total Treasury equity and debt investment, bringing the total funding firepower of the program to $40 billion.”

This is nothing more or less than Bernanke & Geithner saving face.

For God’s sake there putting in $30Bn of the $40Bn.

“The Public-Private Investment Program, or PPIP, has been dramatically scaled back as banks have proven that they can raise capital in the private markets without first unloading troubled assets”

Do you really believe that?

@ Greg

“Do you really believe that?”

well are they raising the capital or not? Sorry Greg, but you having a hunch over this probably isnt going to be enough to convince me to disregard the facts. If you have something solid actually backing your assertion up, that’d be great.

Again, does anyone have anything to comment about the massively lopsided risk sharing scheme in favour of private capital that was the PPP, v-a-v claims of NAMA being unfair to the taxpayer in this regard, even though its far more balanced than PPP is?

@ Greg

1. Bridgewater appear to be uninterested due to the complexities and lack of leverage involved in the structure, and also due to the dangers of political interference or criticism that may arise from it (wouldnt this fit in very much with what i have said on a few occasions?). They didn’t seem to have too much issue with the underlying assets, other than saying they weren’t very interested in illiquid loans.

2. Bridgewater are huge fans of NAMA…

http://www.independent.ie/business/irish/investment-giant-says-nama-plan-a-roadmap-for-europe-1894912.html

@ Greg

“By “cheap” they mean you”

Excuse me?

Getting back to the point:

Bridgewater dont approve of PPIP. PPIP is a bad plan.
Bridgewater do approve of NAMA. NAMA is a bad plan.

Makes lots of sense….

Eoin Says:
October 2nd, 2009 at 10:38 pm

““By “cheap” they mean you”

Excuse me?”

Apologies Eoin, I find myself in continual apology to you.

I should have made myself clear.

When I said cheap it was not you as an individual or as a person. It was you, and I, as a cheap taxable source of a free lunch.

No personal offence was intended.

I am glad that you and Bridgewater agree that both PPIP and NAMA are bad plans. Even if Bridgewater know a free lunch when they see it.

@ Eoin

“apology for the miscommunication accepted.”

I don’t know where your head is, or for that matter your heart or soul.

Can you not accept a simple explanation without making my apology a matter of slight to my person?

I did not give you “miscommunication”.

@ Brian O’Hanlon – “You find the strangest of characters handing out help after a disaster.”.

…..or trying to move everything into their own hands.

@ Greg

“I should have made myself clear” = mis-communication = “failure to communicate clearly” (per Websters). No insult intended. Not entirely sure how the whereabouts of my head, heart and soul helps matters either.

@ Eoin,

I think you are about right. It is a subsidisation of the financial sector. You are right, everything is in a bleak state right now. It wasn’t only the buildings that were blown apart by 1945. It was the transport systems, the sewage and public utility systems. The whole kit and kaboddle was busted. I guess, it gives one the opportunity to look at new designs also and go about a re-building.

I don’t know, have any of the economists here looked at Ireland in the context of other post-war conundrums? I know that Morgan Kelly for instance has looked at the Japanese land price bust and the agricultural one in Ireland of the 70s. But perhaps these analogies of directly comparing this current situation with previous land boom/busts isn’t enough. Perhaps, as I suggest the war torn landscape metaphor could prove more robust, from an economics study point of view.

I am talking about Marshall plans and things like that of course. Then I would ask, having followed the EU and ECB bank route down the single currency direction, and the pro-capitalist route. What is the EU going to do, in terms of helping out a place such as Ireland, which took the full force of the nuclear blast?

That ‘duck-and-cover’ approach didn’t quite work out.

@ podubhlain

i think the nominal amount is ok, given that its well below the original estimates of 60-70bn. However, i would actually be very much in favour of increasing the risksharing element of NAMA by increasing the subordinated element to say 15%, ie 7.5bn or so. Even 20% would be acceptable. This would possibly reduce down the liquidity available to the banks, but not by a significant amount in terms of the whole scheme.

Now, seeing as i brought up risk sharing, do either of you have any comments to make on the rather skewed risk sharing attributes of PPIP, v-a-v a more balanced NAMA?

@ podubhlain

well, my first issue re the workability of your plan is who buys the bonds? At the moment the people selling us the assets are being forced to buy the bonds. Essentially, aren’t we forcing the bond/equity holders of the banks to exchange private sector risk for sovereign risk, crstyalising large losses, but also receiving a large government subsidy. However, the subsidy is essentially being funded by the banks themselves, and at a likely fairly low rate, so its simple for the government to ‘create’ this subsidy without affecting general debt issuance needed for the deficit. Yes, it adds to the overall credit obligations of the country, but we need to remember that credit is no longer anywhere near as easy or cheap to access as before.

If we were to go the TARP route of direct equity infusion, we’d have the problem of a huge debt general debt issuance to raise the necessary funds (10-15bn?) in the open market, and its debateable how we’d actually go about doing this. But in theory i’m not against such a plan, provided we figured out a way to raise the necessary funding in a stable manner. I suppose we could raid the NPRF, but there’s big downsides to this as well obviously.

As i’ve previously commented, i feel the best way to restore the stability, solvency and liquidity of both the banking sector and the soveriegn state itself is to maintain a material level of private sector involvement in the financial system while we work out the neccessary adjustments required in our economy, and this is best done by (a) not wiping out whats left of the existing private capital therein and (b) encouraging new inflows of private funding and capital. I feel that NAMA works to this end, but i’d be willing to look at any other workable and realistic plans that achieve the same ends. I’ll note that one of the major issues i have with most of the alternative plans is that “(a)” above is not part of them.

@zhou
“Therefore, where in the estimates we are given a global value for the MV of the underlying security, we should insist that any excess of the value property over the amount of the loan which is secured against it should be discounted, i.e. if a property is worth €300m and the loan is for €100m then only €100m should be attributed to the value of the property in coming up with the global figure.”
Absolutely.

We can either talk about loans or underlying liquidation values. We can only talk about underlying liquidation values as a proportion of the collateral that the loan holds. So if we talk about a 10% rise in prices, we are talking about a 10% rise in the the underlying liquidation values. If we were at the trough, it would be a mad understatement of likely uplift. But the key point is that loans don’t increase in value over time, indeed with performing borrowers, loans should decrease in value over time. So the minister is clearly talking about liquidation values and when he (or the DoF more precisely) talk about assets, they are talking about the underlying properties, but giving no indication as to the proportion of those underlying properties that they own.

@yoganmahew

Great posts!

That is precisely what the government should be trying to do. NAMA really needs private capital to give it any chance of working.

And the more you consider Patrick Hohnhan’s original plan the more you realise how clever it was and the complete pointlessness of €2.7bn in subordinated bonds.

The Norwegians insist that no investment is made in Norway for their sovereign fund. It avoids inflation and keeps competitiveness. The alternative would be what the Spanish experienced with all of their plundered gold.

But Ireland is different. We can inflate asset values, it is different this time.
Anyone see the problem?

Those who read my rants may recall that I have, alone it seems, prophesied (what a lonely profession it is too!) that other land development would further lower the attraction of all those putrid plots about to be dumped into Nama?

http://www.tribune.ie/news/article/2009/oct/04/four-years-worth-of-planning-files-missing-in-fing/

This suggests that a mere 4,000,000,000 euro development is planned for Dublin airport. Now like many, I doubt, ahem, it will ever get off the ground, but it does suggest a mismatch between government policy on Nama pricing and public developments?

I wonder how many other job creation and stimulus packages will refuse to use Nama sites? Once they are safely in the hands of cronies, they may then get a green light? Oh what a lovely Republic?!

Yoganmahew
You are optimistic, as am I. But you consider that there is going to be growth, that will result in increased prices. Are you aware that most growth in human history has resulted in falling prices?
You appear to have been captured by the “inflation is good” conditioning that we have been exposed to over the last three decades. Growth occurs through efficiency, technology and population increase. Yet relative growth depends upon the ratios involved. We will be returning to slow growth and asset prices falling. Soon. Asset prices only increase when there is a bubble in lending. Maintaining prices by Nama is doomed to fail. New sites will be cheaper. People will be selling up. Moving somewhere sunnier and cheaper. Like Australia! Even Panama. Avoiding taxes is going to be more popular as they rise.

podubhlain,

One problem with TARP (as implemented) in the Irish situation is that Anglo will never fully repay its allocation.

It seems to me that NAMA (amended for upside) / Resolution Trust or Securum is fine for AIB or BOI.

But Anglo & Nationwide (getting more than half of the €47Bn) are guaranteed to make a loss.

For the €2.7Bn “risk shared” 😆 , how is that to be split between AIB/BOI and Anglo/Nationwide. It seems to me that Anglo itself could eat the whole lot.

NAMA (as it stands) is not about using LTEV as a means of getting over a liquidity crisis in the banks. It is primarily about bailing out the creditors of Anglo & Nationwide.

NAMA (as it stands) is an abomination and adding windmills to it would just make it worse. More misallocation of capital.

If the Green Party membership approve it they may as well approve a change of name while they’re at it. Maybe “Fianna Green”.

Some interesting stuff stirring in GP circles, i.e. the formation of the GAN lobby group, (Greens against NAMA) to try influence delegates to next Sats crucial meeting.

They have issued a press release, shown here:

http://www.politics.ie/2163598-post31.html

Also, spokesperson has been on RTE 1 News at One today.

So, this is what it comes down to.

The GP are in an immensely powerful position.

We were always going to have a Political solution to an Economic problem.

Of course, this is in response to the Voodoo Economics, Smoke and Mirrors of Brian Lenihan and Co, which is an Irish Political Solution to an Economic problem.

The Green Party National Executive Committee are now trying to rig the outcome of the member vote on NAMA.

From the interview with Pat Fitzpatrick on RTE’s News At One.

Q…Are you not satisfied that there may be some amendments that will cater for your concerns?”

PF “dissenting groups put forward motion B….”

@ 01:49

PF “That motion has now been taken off the table by the NEC the National Executive Committee”

PF “…being given NAMA as it is….”

PF “….cannot get away from the fact that the flip side of the renegotiated PFG is NAMA”

PF “….by voting for the PFG we’re voting for NAMA”

Gormley, Ryan and Boyle are now holding a gun to the membership saying vote for NAMA.

NAMA is now not just disastrous for the country it has corrupted the Green Party to its core.

If there are any members of the Green Party reading this look away now.

PAY NO ATTENTION TO THE MAN BEHIND THE CURTAIN.

@Greg
“It seems to me that NAMA (amended for upside) / Resolution Trust or Securum is fine for AIB or BOI.
But Anglo & Nationwide (getting more than half of the €47Bn) are guaranteed to make a loss.”
Agreed.
As I understand it the premise of Nama (as is)is that the 40% will carry the 60% non-performing. We are told that a 2% margin is sufficient to achieve this.
This is a highly speculative assumption that even the biggest risk takers would be loath to take. The potential downsides are enormous, with no discernible upside.
If the State has to clean up the mess then it should do so with the least exposure as possible.
Even Anglo has some good stuff – I seen Green Property trying to buy some of their assets at knock down prices. Same probably applies with INBS.
I noted some forecast the weekend that debt to gdp would reach 200% by 2020.
We should focus on reducing NAMA as is if the Greens don’t blow it out of the water.

@ everyone

If NAMA really was the only alternative, and you were in a position to amend it, what would you change?

Genuine question. Please help.

My view: the reality is that we really can’t know whether NAMA will work or not, just like the eminent economists on this thread who bought Anglo shares didn’t foresee the bank’s collapse. I don’t mean this as a dig, it’s just a reality.

NAMA seems to me to have a reasonable chance of success.

@jc

I would change the oversight and transparency for the valuation process. The actual valuations will trump the estimates. However, I would ensure that the Minister remains politically responsible and keep it away from quangos.

I would demand that NAMA only offers new loans provided the borrower agrees that generic information can be made public, e.g. Developer A etc. I think this is not possible at the moment.

I would get rid of the stupid proposal for 80% windfall tax on zoned land as if will mitigate the cross collateralisation.

I would resist the decoupling of NAMA and Nationalisation at all costs. I would ensure that the State has a right to recapitalise any bank that signs up to NAMA if it so wishes in the future, i.e., an option on ordinary equity. I would want a process for future Nationalisation which caps the liability of the taxpayer to that which it would have been if there no NAMA.

I would ask for greater risk sharing a la NAMA 2.0 if at all possible. I believe less than the market value (e.g. -15%) of the loans should be paid for in interest bearing government guaranteed bonds and subordinated bonds up to a maximum value of the LTEV should be issued to an SPE owned by existing shareholders. If this is not do-able (and I accept it may not be do-able) then I would want a satisfactory explanation why such is the case.

****************************************

Other brainwaves:

I would demand that detailed criteria of institution specific information be reported quarterly.

I would demand that the NAMA process values loans as of the date of transfer and the Minister can halt any transfer at any time. If a loan is particularly risky or uncertain then I suggest that a limited NAMA 2.0 approach should be taken in relation to such loans, i.e. pay less than MV fo those loans and put subbie bonds into an SPV for shareholders.

I would require that the Minister agree to bring in legislation for the orderly winding up of banks within 6 months of NAMA coming in.

I would require that none of a borrower’s loans are transferred until all of a borrower’s loans are transferred.

++++++++++++++++++++++++++

I would cap bonuses.

I would cap bankers borrowings from their own institutions. I would ask for delarations of interest re borrowings from other institutions.

I would require that all bank promotions and appointments be assessed by an independent board of international financial experts and that this be paid for by the banks at a set cost or a set percentage of any dividend, whichever is the higher. I would require that the assessment should be public so that there is full transparency for shareholders.

I would require that the Minister agree to bring in legislation for improved bankruptcy legislation within 6 months of NAMA coming in.

I would require that the Minister have the option to terminate the NAMA arrangement at any time.

@greg & others

Increasing the risk sharing element is the simplest solution for the really toxic stuff. This is a must do for the Greens – at the very least. However, having watched the straw poll on Pat Kenny last night i am afraid that these guys want to cling onto power at all costs. Some good suggestions there Zhou.

podubhlain Says:
October 6th, 2009 at 8:21 pm

“This is a must do for the Greens – at the very least. However, having watched the straw poll on Pat Kenny last night i am afraid that these guys want to cling onto power at all costs.”

I’ve done my good deed for the day podubhlain. I have to say what I really think.

“Honest” Greens are being hoodwinked by their leadership.

If the Green Party were not in Government the leadership would be screaming from the rooftops about how bad NAMA really is. And they would be right.

My comment on the Pat Fitzpatrick (October 5th, 2009 at 2:12 pm) interview makes it clear that the leadership are manipulating the outcome of the meeting in a most cynical fashion.

The only ethical thing for any Green Party member to do is to vote against the New PFG.

Gormley, Ryan et al will insist that they get cart blanch on amendments to NAMA. Then they will do next to nothing.

To be clear I am not a member of any political party and am what might be called a floating voter. But I generally don’t float in the direction of Fianna Fail.

When will the Greens next hold the balance of power? If the Greens want Green policies implemented then now is their chance. Personally, I think that the electoral system needs to be reformed to mitigate against clientelism and this is the best chance we will have for a long time to do that. The fact that it would require a referendum is an added benefit.