IT Article on NAMA

With the Lisbon debate now over bar the voting and counting, I’m hoping that despite widespread exhaustion with the topic of NAMA, we can now have a debate about this issue that doesn’t involve misleading spin about IOUs, free money from the ECB, support from international organisations and the like. It’s with that in mind that I have written this article for today’s Irish Times.

Reading it now, the tone seems a bit more strident than my usual approach but I think it’s important that misleading spin be seen for what it is so that we can return the focus to the basic questions of correctly diagnosing the problems with our banking sector and designing fair and efficient ways to deal with them.

For that reason, I don’t plan to engage in a comment-fest here on the various distractions that have been been central elements of the government’s PR campaign on NAMA. If you don’t agree with me about free money, IOUs, ECB, international organisations, or frogs and locusts, fine, but I’ve said my piece on these and don’t see much benefit from repeating myself any more.

169 replies on “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?)

@Greg
11 None of the above matters if the GP dont grow up, learn some basic econ, grow gonads and do the right thing.

@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.

A good article. Did you worry whether it could affect the vote?

Wasn’t there a post on this blog before about the relationship of property values on an economy and the ill effects that a total collapse in property values codl have? I think it was in an american context? I may be thinking of an article from the FT site though.

@ Brian

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

I think this a very poor and reflects badly on Karl as an academic.

If Karl was a barrister whose job was to argue against the NAMA project as currently structured, then I think it would be an appropriate piece.

However his failure to even mention any of the positive international commentary on NAMA from the likes of The Economist or Goldman Sachs or positive developments in the bond markets makes the piece come across as entirely partisan.

Perhaps Karl feels that any mention of positives re NAMA would immediately be seized upon by NAMA supporters and would be reduced to a soundbite that Karl Whelan supports NAMA on much the same way that the IMF’s views
were distorted.

I still don’t think that excuses this shoddy piece.

@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….

@Zhou

I did in fact ask the Times to publish it after Lisbon, not so much because anything I say could affect the referendum vote (I voted yes and am not too worried about reading Sunday headlines — “Yes-voting UCD Econ Geek swings the Lisbon vote to No”) but more so that it wouldn’t get lost amid the Lisbon debate. I’m guessing with the debate over, the IT decided to publish it straight away — that’s newspapers for you.

On property values, there are bad effects (negative equity, potential wealth effects on consumption) and good effects (lower costs for business, cheaper houses for first-time buyers.) I have little doubt that high housing costs were a major contributor to the loss of competitiveness in the Irish economy in recent years and this positive side of falling property prices is being lost in the debate.

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

@ Concubhar

I will leave it to others to decide on my qualities as an academic, though I can assure you they won’t base much of their judgment on IT op-eds.

As a more general matter, I never cease to be amazed at people who get really annoyed at me because I have used the small amount of space available in a newspaper op ed to put my position forward rather than theirs.

@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.

@KW

Don’t under-estimate the power of the pen! Most people I know would be more influenced by a UCD Econ Geek than by a newspaper columnist.

I agree that property prices have had a huge direct negative affect on our competitiveness. I think it is particularly pronounced in this country where the promotion of home ownership has been promoted as a method of promoting long term wealth distribution.

@Zhou

I think the draft regulations on valuation (such as they are — “adjustments can be applied” is hardly very concrete) and the accompanying analysis based on prime commerical property yields are highly incomplete and misleading. I have no idea, for instance, how they will value the 60% of assets not yielding any income right now.

@ Brian

“Just one name, of someone without skin in the game”

Kinda unfair no? This essentially rules out anyone from the global banking sector, the Irish stockbroking sector, the EU or the ECB, and anyone even remotely related to the government or a bank or the property sector?

Anyway, regardless, Alan Dukes, Garreth Fitzgerald and Eunan King….

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.

@Zhou

Well in that case, I plead with anyone thinking of voting No because of my Irish Times piece: Don’t Do It, step away from the polling booth, give yourself a good talking to, summon up some images of Gerry Adams and Declan Ganley, then go and Vote Yes and let’s be done with this thing for god’s sake.

😆

@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.

@Greg
Apparently we have all missed the articles and impassioned defences of the taxpayer by Alan “sure we have to keep anglo afloat, chuck some more cash into it for gods sake to balance the list” Dukes.

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.

@ Brian,

I is confused.

“Public Interest Director”. Is there a legal definition?

How do the responsibilities of a “Public Interest” Director differ from a Director?

The only interests a Director serves are those of the shareholders.

@Brian

Ok, ok, I’ll play as well.

We can judge Garret’s level of advocacy for the current NAMA proposals based on this article:
http://www.irishtimes.com/newspaper/opinion/2009/0919/1224254861445.html

Some quotes:

“I added that, for this very reason, a Government defeat on Nama would not be to the advantage of the Opposition parties, who would be better placed if they came to power after both this issue and the December budget had been dealt with by the present Government. But, contrary to what has since been alleged, I refused to get involved in politically sensitive comparisons of the relative merits of different schemes, each of which may have its own merits.”

“Now, experience has shown that Ministers’ advisers tend to be very strongly committed to the proposals in the legislation that they have drafted. It will be especially important in this instance that the Minister demonstrates willingness to assert his independence of his advisers by accepting Opposition amendments, even where these are not merely technical but may involve a shift from his department’s approach to the problem.”

“The Bill as presented to the Dáil includes a watered-down version of Prof Patrick Honohan’s suggestion for part-deferment of Nama payments to the banks. It would be useful to hear during the committee-stage debate why the actual proposal made by the incoming governor of the Central Bank before his appointment was not adopted by the Government.”

“Only €2.7 billion of this will be by way of subordinated loans, from which the banks will benefit only if an estimated 15 per cent value increase actually takes place. That €2.7 billion subordinated loan figure appears small; and it would have been higher if Prof Honohan’s proposal had been accepted – a point that might be pressed in the committee-stage debate.”

@ Karl

I’m trying to imagine a bailout in which the taxpayer doesn’t overpay. That’s the definition of a bailout, right? You mention this as if it’s some silver bullet, but it’s been obvious from the start that the whole point of Nama is to overpay for assets. Unless the banks are going to get some premium, they might as well take their chances keeping the junk on their own books and working it off over time. But the Gov has taken the position that it’s better, on balance, for the whole economy for the banks to take the (mitigated) pain upfront and so Lenihan is willing to pay to effect the transfer. Are you pretending to not understand this?

Also, you mention – as if it’s an argument in itself – that many economist proponents of Nama are either vested interests or government employees, but that you are an ‘independent’ academic. I hate to break this to you, but you’re a government employee as far as most people are concerned. The Central Bank or ESRE are ostensibly as independent as UCD.

@ Brian

We all have skin in the game at this stage. You telling us your reputation – and what else does an academic have – wouldn’t suffer if you walked back on your pronouncements of the last six months?

@ Greg

Re: 1 and 3: Nama is as close to a Keynesian response as this particular Government can get. And grow up everybody: the ECB is deeply implicated in the whole plan.

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.

Garry Says:
October 2nd, 2009 at 10:32 am

“I could just about tolerate a NAMA-Like vehicle if Seanie etc were reduced to living in rented flats in Balbriggan.”

How about somewhere rent free with a nice view of the Royal Canal?

@ Sean Healy

I just did a search of the article. There is no mention of the word bailout, so I’m not sure exactly what you’re referring to. As for pretending not to understand, are you pretending not to understand that there are other ways to deal with banking system problems than overpayment for bad assets?

@Greg
Ah….you spotted the crucial flaw. No, Greg, there is no such beast in law. At least, not that I know of. But sure the Minister for Overpayment said that the appointed directors would be sure to act “in the public interest” so thats all right.
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.

@ 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
“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?”

thats it really. But there are lots and lots and lots of others.

@ 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 Says:
October 2nd, 2009 at 10:39 am

“Re: 1 and 3: Nama is as close to a Keynesian response as this particular Government can get. And grow up everybody: the ECB is deeply implicated in the whole plan.”

I’m not sure if you disagree with 1 and 3.

I would disagree that “Nama is as close to a Keynesian response as this particular Government can get.” I see it as a bailout of banks/bondholders. Much, if not the majority, of NAMA funds will leave the country. If I am right, and I could be wrong, NAMA is the very antithesis of Keynes.

I agree that the ECB is deeply implicated. They want their Anglo billions back and they don’t care how the Government goes about it.

But, to be clear. NAMA is not quantitative easing. It is impossible for a State to engage in quantitative easing where the control of the money supply is outside the State.

@(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.

“The International Monetary Fund says Irish bank loan losses will be about €35 billion and this implies that Nama should be used with nationalisation”

Sorry to draw the debate back a bit, but is the only benefit of nationalisation that the government gains control of the failing banks – ‘buying them time’ to sort them out? Or would it be the case that if the banks were nationalised, then the could stimulate lending, and in that way NAMA’s expenses would be beneficial to Ireland?

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.

It would be interesting to read a thread on the relationship between, NAMA on the one hand, and QE and other stimulas measures on the other.

As far as i get it, QE means increasing the quantiity of base money in an (largely unsuccesful) attempt to increase broader money aggregates. As such NAMA is not QE.

But could NAMA affect the “money multiplier” or some other type thing?

NAMA will surely fill the banks balance sheets with a lot of governemnt bonds – which would lead you to believe, in normal times, that they would want to sell some and search for a higher yield on more risky assets such as bank loans, (maybe to me, yipee)

Its probably a stupid question, but can the banks (and would/will they want to) sell these bonds as they see fit? What would be the consequences of uncontrolled flooding of debt markets with these weird/unknown type government bonds?

If, on the on the other hand, the banks need to hold them for a while (how long?) how will this help to “get credit flowing” again?

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.

I was under the impression- perhaps incorrectly- that the government bailouts in the likes of the US and the UK had resulted in exactly the kind of shareholder enrichment that has drawn so much attention in the NAMA debate.

I did notice in the Economist article the comment on Germany’s bad bank that it was ‘so punitive that most banks would rather stop lending than turn to it for help’.

Would a current-market-values approach here not suffer from the same defect?

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

@ Christy

the whole issue about the bonds, what they pay, how they are structured, can they be sold etc etc is the big unanswered question currently irritating minds across the country. However, i am now (!) believing that they will indeed be short term in nature and that there will be some sort of pledge from AIB/BOI to not sell them on the open market.

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?

“Would a current-market-values approach here not suffer from the same defect?”

I would have thought so. However, Honohan’s original NAMA 2.0 dealt with this by allowing the shareholders to participate in any upturn achieved by not having to deal with the assets as distressed assets.

@ 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.

@ Christy

fair point. But they can repo them with the ECB, gaining liquidity, and so hopefully stimulating the economy by enabling increased access to credit. Before all sorts of people start shrieking “oh no they wont!” panto-style at me, im just saying this is the basic theory behind it.

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 Says:
October 2nd, 2009 at 12:09 pm

“is that well played sarcasm, or just insane logic? If its the former cool, if the latter, eh…”

Take your pick Eoin. But remember this, the Minister didn’t buy the shares he confiscated them.

@ 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

@ Greg

if the govt cut taxes by 20%, it’d count as a massive stimulus package. But if i subsequently spent all my money up in Newry it wouldn’t really do much good. Same logic applies here.

As for our next contribution to irishgrammar.ie, the “if” was used as a negation rather than in the conditional sense.

@ christy

They have to be compensated. It’s just a question of how much.

The shares were confiscated at (I think) a market price of 22c.

That’s €167m.

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
“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!”
Lets rewrite that
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 realistic prospect of Zoe developments being able to turn itself around in three years”.
Yeah, could never happen

@ 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 Says:
October 2nd, 2009 at 12:31 pm

“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,

The Minister has continuously stated that the security underpinning the loan books of the “covered” banks have Long Term Economic Value.

As I say I’m not a lawyer.

Maybe you can tell me why the LTEV of the Anglo book/security differs in a legal way from that of AIB or BOI.

Why should shareholders in AIB or BOI receive different and more advantageous treatment than those of Anglo, from a legal point of view?

@ 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.

Eoin Says:
October 2nd, 2009 at 12:40 pm

“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.”

OK,

Then what is the value of AIB and BOI shares without the Government guarantee and NAMA?

The same as Anglo I think. Zero.

Why are Anglo shareholders being treated differently to those of AIB & BOI? Are the property rights of Anglo shareholders somehow less in law?

@ 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!

@Eoin

completely agree – IMO the way the gov would lose a constitutional challenge is by not following fair procedures when deciding to give anglo shareholders nothing

@ 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.

My uninformed opinion is that this government are playing for time and do not want anyone trawling through any part of Anglo.

And most certainly do not want a lot of different investigations going on at the same time…. who knows what would emerge if people with different skills met and discussed their different findings into different areas of that organization?

But the LTEV argument from Greg is interesting.. LTEV allows the keeping of 2 sets of books…2 values for an asset, a recipe for fraud and tax evasion.. and litigation…

LTEV didn’t exist when Anglo was nationalized. But it does after NAMA is setup… A lawyer could argue that the govt confiscated assets and then made up a whole new set of rules to revalue and trade in these assets..that only they can use.

I don’t for a second believe that is the intention. Or that it will happen as I believe NAMA will result in national bankruptcy as the full state of losses become apparent.

@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.

Karl,

The article is eloquent and hard-hitting.

As an aside, I think it is ridiculous for people to criticise you for taking a strong stance on this issue as an academic. Academic economists are being continuously ridiculed for not shouting loudly on public policy issues. But as soon as they do, they are told to hush up and climb back into their ivory towers.

Other points you no doubt did not have the column space to stuff into the article, but are worth mentioning for the benefit of those just tuning in to the debate:

– The appalling lack of detail in the Nama Bill, particularly concerning the crucial issues of the how the IOUs will be structured and – even more importantly – how the asset valuation was arrived at. I mean, why should we believe the €47bn figure?

– The fact that no one in the main banks is going to be sacked as a result of putting the country in hoc for billions of euros. Indeed, that nothing in the legislation will even limit the payment of the salaries or bonuses.

– The fact that Nama will be empowered, above and beyond the money it will use to buy toxic loans, to borrow and lend to developers to finish their failed investment projects.

– The fact that Irish property is still relatively overvalued, and is hampering a restoration of international competitiveness by driving up the domestic cost base.

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.

@ podubhlain

it’s not impossible, but it would be rather difficult – the oustanding stock of ‘real’ Irish govt debt is only around 70bn or so…

@ 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!

Eoin Says:
October 2nd, 2009 at 12:59 pm

“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.”

AIB would not have to defend an action. The Minister would.

The CIBC interest (vague as it is) is based on NAMA cleaning up the balance sheet of AIB.

By definition CIBC see no value whatsoever in AIB without NAMA.

It really wouldn’t take to much effort to prove that AIB is valueless without the guarantee & NAMA.

“the newly issued non-guaranteed bonds as an indication”

The Minister has stated that the guarantee will (may?) extended on a case by case basis.

I think the purchasers of the “non-guaranteed” bonds are relying on an implicit guarantee.

Moral hazard!

“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.

Eoin said:

“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?”

How much of this “stimulus package” will be going into Anglo +NIB:

As per Greg:

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? +)

So, 47% of this “stimulus” will go to the Twin Zombies, and will go straight back to the ECB?

What % of Ireland’s GDP is that?

Also, Greg you have now started that queasy feeling in the pit of my stomach regarding Anglo confiscated shareholdings, all I can say is

OH MY GOD!!!

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.

@Greg
“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.”

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 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.

Irish Pancake Says:
October 2nd, 2009 at 1:21 pm

“Also, Greg you have now started that queasy feeling in the pit of my stomach regarding Anglo confiscated shareholdings, all I can say is

OH MY GOD!!!”

Could be wrong but I think Anglo shares are trading at 70c in the OTC market. Small volume I’m sure.

Here’s a link,

http://seekingalpha.com/symbol/agiby.pk

http://www.google.com/finance?q=OTC:AGIBY

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

As I say could be wrong.

@Ninap
“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.”
So the loans are at present yielding euribor+200 while the NAMA loans will be at euribor+50. This we pretty much know to be the income model. Now, the argument runs that even if euribor rises (increasing the cost) the income will rise also. Tell me, how is the case that if interest rates rise (in what will probably be a still slumped economy) the ability of the developers or renters to service the increased rent/interest will rise pari passus?

@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??

@ Greg

“The CIBC interest (vague as it is) is based on NAMA cleaning up the balance sheet of AIB.

By definition CIBC see no value whatsoever in AIB without NAMA.”

Good thing your not a lawyer Greg. The most you could ‘define’ off this is that without NAMA the value of AIB is far from clear. Fairly sure this was covered under the “Purposes of NAMA Act: to stabilise the banking sector”.

Secondly, the new govt guarantee may be extended if the debt qualifies for the programme and the issuer wishes to have it covered. At this moment in time everything AIB has done has been to clarify as clear as is possible that the debt is of a non-guaranteed basis. I tell you what, if the guarantee is extended, and AIB seek to re-classify this debt as of a guaranteed basis, i’ll 100% apologise for claiming it would remain as is. However, if after a month or so of the guarantee’s extention the debt has not been re-classified, can i get a rather public apology from both you, and indeed anyone else who questioned otherwise, admitting that you called this particular element wrong?

To clarify further, as things stand i am 100% correct to state that this debt is of a non guaranteed nature. Any suggestion otherwise is purely speculative based.

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

Expanding on my last post…

WHEREAS no banks are lending with LTVs of >100%
THEREFORE loans can be acquired or redeemed for = MV Loan

I suggest that this is more pronounced in the case of commercial loans which, unlike residential mortgages, may be repayable on demand or after a short period.

Ninap says: “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”

How can this be true? How could the market value of the loan be greater than the market value of the underlying security?

@ 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.

Aghhhh… tried to say the following…

WHEREAS no banks are lending with LTVs of >100%
THEREFORE loans can be acquired or redeemed for <= MV of underlying security
THEREFORE MV Loan <= MV underlying security

@ 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.

Another point arises.

In some cases the LTV may be as little as say 50% if the property is not bought at peak prices. The loans will be sold for full value because they are fully secure. However, the MV of the the underlying asset will not be usable by NAMA for other borrowers bad loans.

Therefore, quoting a global figure for value of underlying security is very misleading.

For example, if I have a loan of €100m secured against property worth €300m then only €100m of the value of that property can be realised by the lending institution.

In NAMA terms, if you divided the NAMA loans in two parts and you found:
A. €10bn of loans were secured against €20bn of land (current MV), and
B. €67bn of loans were secured against €27bn of land (current MV),
then things look a lot more sticky.

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.

phew..

@Ninap

You wrote:

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.

End quote.

I’d respond with two points.

First, a loan that a bank has made is an asset for the bank. It is on the “Asset” side of the bank’s balance sheet, right? This is what I mean in the piece by NAMA buying assets. I am not now, nor have I ever been, under the impression that NAMA is buying property rather than loans. The claim that those who criticised the NAMA plan did not understand this distinction has never been more than a cheap talking point (one of many.)

Second, by any reasonable interpretation the government is saying that the assets that it is purchasing (yes I’m still talking about the NAMA loans) are worth €47 billion, i.e. the value of the underlying collateral. I don’t see any other way to interpet the Minister’s statement in his NAMA speech:

“NAMA will have to achieve less than a ten percent uplift over the current market values on its assets over ten years to break even”

Here, he is referring to assets (the NAMA loans) worth €47 billion increasing about ten percent in value to pay off the €51.3 billion in non-sub bonds.

I am aware that this implies that the Minister is equating the value of the loans with the value of the underlying collateral and, in this sense, he could be accused of committing the sin of confusion that you and the Minister’s acolytes have regularly, and unjustifiably, thrown in my direction. But I don’t see any other way to understand this and other government comments.

An interesting consequence of the government’s equating of the value of loans with the value of the underlying assets is that this could be effectively understood as a concession that essentially all of the NAMA loans will go into default. One wonders what this means for claims that the income-generating loans will allow NAMA to break even on a flow basis.

And, by the way, kudos to Zhou for being the only person to repeatedly ask for more clarity on the interpretation of the €47 billion.

Eoin Says:
October 2nd, 2009 at 1:49 pm

“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.”

Thanks for the information. Not sure I understand how that works. Who’s buying and who’s selling?

I remain unconvinced that the property rights of Anglo shareholders have been protected.

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.

@ Eoin,

“Good thing your not a lawyer Greg. The most you could ‘define’ off this is that without NAMA the value of AIB is far from clear. Fairly sure this was covered under the “Purposes of NAMA Act: to stabilise the banking sector”.”

Was that not also the purpose of nationalising Anglo?

“An Act to provide, in the public interest, for maintaining the stability of the financial system in the state, and for the purpose of….”

It was not that Anglo was insolvent; it was that the “financial system of the State” was unstable.

So the value of Anglo is equally “far from clear”, yet the property rights of the shareholders of Anglo have been treated differently (confiscated) to those of AIB & BOI (bailed out).

I look forward to the appointment of the Assessor.

Quite a poisoned chalice.

@ 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.

@Graham Stull “The fact that Nama will be empowered, above and beyond the money it will use to buy toxic loans, to borrow and lend to developers to finish their failed investment projects.”.

I guess that’s a contingency fund to help out later on in case any friends of those putting all this in place missed the first lifeboat….. but then again, I’m a cynic so perhaps I’m wrong.

@ 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.

@ Brian

but the ADR’s of a nationalised entity, with a frozen primary stock listing, and a decent amount of short holdings, is somewhat different to how ADR’s work 99.9% of the time.

At the moment there’s only one way to cash out a short position – buy the shares. And there’s only one way to buy the shares – via the ADR. And there’s only so many holders of the ADR, and most of them are probably large banks. So you have a hedge fund that is reasonably anxious to close their position. And you have an investment bank that knows this. Ergo we have a price well above inherent value. Exact same thing happened with VW – shares reached €1000 even though no one ever really valued them much above €300 in any scenario.

@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.

….. as for Zoe’s lawyers keeping ‘a straight face’, I suspect they are laughing all the way to the bank.

@ 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.

Eoin Says:
October 2nd, 2009 at 2:23 pm

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

No.

OK. So they are buying and selling derivatives.

I would have thought that short interest in Anglo was greater that the volume would suggest.

Thanks for the info.

I remain unconvinced that the property rights of Anglo shareholders have been protected.

@ 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

The Minister has not made unclear references to assets and loans. Every reference to ‘assets’ has been a reference to loans. Property has generally not been referred to as “assets”.

The DoF produced a document which appears to conflate property values and loan values. We know this because assets are values at €47bn and we are told that the estimates assumes that property with a peak value of €88bn has declined by 47%.

Ergo the DoF says that the market value of the loans equals the market values of property so the value of what NAMA is paying for is in effect the property (or the ‘value of the property’ if that is more acceptable to you).

Your suggestion that “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)” is somewhat behind the curve. NAMA will definitely be taking in all fully performing property development loans which come within its remit. The Minister has made numerous statements explaining why performing loans are being taken in – there is not need for “perhaps” on that score!

@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.

@Ahura Mazda Says:

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

The idea that 40% performing loans supporting the 60% non-performing appears to be a highly speculative strategy that even high risk hedge funds would not contemplate. The evidence is that the next wave of defaults relate to commercial real estate worldwide. The 40% may be performing in a technical sense but may be in default on loan covenants i.e. loan to value ratios. This is the reason the banks want to dump them as they expect them not to be capable or perhaps willing to service them in a deteriorating market. In the US numerous commercial developments have been handed over voluntarily to the banks.
The 40% allegedly performing loans could be sold now for cash thereby reducing the massive exposure of the taxpayer.

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%.

@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 O’Caolai

Sure that element impacted on the failure of the asset purchase scheme but if the vulture funds thought that they could turn a decent profit then they would have found a way of circumventing government regulation on pay.
I can only surmise that the biggest risk takers in the world refusing to participate in purchasing tainted assets with virtually free money is clear proof that the scheme is fatally flawed – much like nama.

@ 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

….its also an interesting look into how other nations are conducting risk-sharing exercises as well don’t ya think?

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.

The above looks like a really interesting debate and I only wish I could devote a little more time to engagement this evening.

I notice, listening to Morning Ireland this morning, the reporters are still calling ACC bank’s loan amount ‘small’. What has come very much to my attention in recent times, is that ACC feriously pursued the Carroll group in order to do business with them. The best analogy that I have come up with to date is the Vietnam or Afganistan wars. Whereby a small, non-strategy piece of ground was simply used by the powers that be on either side as a place to hammer the living daylights out of each other.

Using this analogy of the war on foreign soil, how does ACC’s agressive pursuit of the Carroll group for business, and subsequent pursuit of them in the courts fit into all of this?

On another matter – and purely as a thought off the top of my head – I have a neighbour who purchased his home back in the 1970s some time. Not so long ago. But using my very simplistic model of people and dwellings, I can observe the following about my neighbour and his 1970s purchased home. He had a rough working life of 30 years. He worked in his own speciality and supported a wife/kids. He used the facility of a roof over his head to stay healthy and strong for that duration of 30 years. During that time he also paid his debt to society, who will now support him in his older years as he applies more burden to health care system etc. Now what is wrong with that model?

It is a simple question to those of you who are economists. When the ‘resources’ of the working population in Ireland became diverted towards doing more than the above – when the resources of the younger working population became diverted towards the pursuit of oppulence in the form of over-priced property, where did that take us? Look back at the 1970s model for a minute. Surely you might suggest, that the working man or woman of the 1970s applied more of their talents and resource-ful-ness towards contributing towards society. Would that be a fair assumption to make?

On the other hand, did the pursuit of oppulence during the Celtic Tiger divert resources of human capital away from society’s goals and towards something wasteful? I don’t know. I was chatting to my neighbour today and this strange thought flashed across my brain. I thought I might share it with you. It seems in our debating of NAMA, there is still a sense that a large portion of the human capital resources available to Ireland, is tied up in something other than the future progress of society and it’s goals. Maybe I am wrong there, I don’t know.

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?

I may not have clarified sufficiently above. What I mean is that Irish banks and foreign banks, used the excuse of a property development company in order to have a right old get-together-and-hammer-each-other.

When you look at NAMA then, you realise what minister Brian Lenehan is proposing to ‘take over’ is a war thorn, country in shreds, blown back into the stone age, post-holocaust, Mad Max nightmare that no one else wants anything to do with.

The banks having ‘had their fun’ on this turf are more than happy to leave the clean-up job to someone else. Already the banks are in pursuit of their next turf to war upon.

I put this question to Brian Lucey specifically. Maybe it is not because the loans are worth nothing, or the land underpinning the assets is worth nothing, that no one is interested except the Irish government. After all, the Benelux countries after both wars were not simply ignored by the authorities and peoples of those regions in Europe.

Maybe these loans are ‘un-touchable’ now, for the same reasons that war zones are often un-touchable also. No one except the aid workers have the remit to go in and handle the devastation.

I noticed an article the other day, where Brad Pitt of all people is helping out to design kinds of dwellings for hurricane katrina devastated coastal Florida. You find the strangest of characters handing out help after a disaster.

@ 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???

Apologises, I will finish off my point here.

In other words, if Brian Lucey was standing on top of some rubble after the Germans, the Russians, the Americans and everyone else had come and gone – what would he say?

Oh! This land, it is not worth a fraction of its 1939 value. Its toxic, worthless, hopeless.

I know that isn’t what Lucey is saying. But it is kind of funny to imagine ourselves in the situation. 1945, and nothing around except rubble from armies and destruction. People living in the wreckage. Money had to be pumped into that situation – the Americans and the Russians both knew that.

I will use a very simple analogy. You leave your home in wintertime and go on holidays. You return and the house is really freeze-ing. In other words, you have to light a couple of fires to heat up the thermal mass of the walls, floor etc. Much more than you would normally need to do, when things are ticking over nicely, in normal daily routine.

I think this is where the over-payment comes from.

@ 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?

@ Brian

wow, that was rambling, via lots of wartime history, of the highest order. But i get your basic point (i hope) – everything is so f***ed up that there’s a danger no private capital will want to touch us for quite a long time to come. As such, the govt has to encourage them to keep/get some skin in the game. Hence overpayment.

I have described this approach as a subsidisation of the financial sector in order to maintain material levels of private ownership, capital and funding in the sector.

@ 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

@ Eoin

Is there something you are missing about Bridgewater?

They’re looking for a free lunch.

“US investment giant Bridgewater Associates, which also runs the world’s largest hedge fund, has described the NAMA project as “clever” and says it may provide a roadmap for the pumping of cheap funding into other struggling European economies.”

They wouldn’t do PPIP but they would happily (if not cleverly) eat NAMA for breakfast.

There’s a hint in these words “roadmap for the pumping of cheap funding into other struggling European economies”.

Eoin,

By “cheap” they mean you.

@ 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….

No Eoin. Bridgewater approve of NAMA because it is a worse plan from the perspective of the taxpayer hence a better plan from the perspective of Bridgewater. At this point the windows of your mind are so closed that you don’t seem to allow any information that deviates from the party line get in.

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.

@ Garo

we’re 129 comments into this thing, and THATS your contribution?

So, personal attacks aside (arent we supposed to be against that type of thing?), its claimed PPP failed because private investors still wont touch toxic loans. However, i claim this is false as the reason they won’t use PPIP is because of the political interference in the plan (more or less confirmed by Gregs link), and also because the banks can now raise their own capital so they dont even need to use these schemes to get rid of their bad assets anymore. However i do note that PPIP was (on a huge scale) and is (on a lesser scale) designed to directly purchase bad assets from the bank balance sheets (like NAMA) and involves a far more beneficial risk sharing agreement to the private investor than NAMA does.

Does anyone refute these actual assertions, and if so, on what basis?

@ Greg

apology for the miscommunication accepted.

@ 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”.

Eoin Says:
October 2nd, 2009 at 11:26 pm

“@ Garo

we’re 129 comments into this thing, and THATS your contribution?”

I thought Garo’s contribution was apposite.

“Bridgewater approve of NAMA because it is a worse plan from the perspective of the taxpayer hence a better plan from the perspective of Bridgewater.”

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

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

David O’Donnell
I like what you say and the way you say it!

Karl Whelan
I though this one of your better more energetic pieces, not that I know many. Well done and thanks again!

Banks are riddled with irregular practices. Shocking I know, but!

Nama meanwhile rests in the tender embrace of the GP. And does anyone know President McAleese? What does she think of dissolving the Dail if Nama is about to be passed? Any old squeezes out there willing to do their duty for the Republic?

@ 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.

@Eoin, Greg

“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.”
Eoin, you cannot be serious. Greg has really addressed the issues.Suffice to say that 1trillion to 40 billion says it all.
Now if we could reduce the nama plan by the same proportion we would achieve something. If nama is to go ahead then every million of taxpayer exposure avoided would be beneficial. Suggestions to reduce the exposure anyone?

@ 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?

@Eoin
Your suggested increase in the risk element to say 20% would make a lot of sense for nama as is.
I was thinking of something more radical.Forget about nama as is. Go the TARP route. Leave the performing loans in the banks and set up a Resolution Trust to work out the toxic stuff over time. If we can issue funny bonds for nama we can issue these for a recap of the banks. I know its a bit simplistic but there is enough brain power in here to fashion something that would dramatically reduce the exposure to taxpayers together with getting the banks functioning.
As you said previously TARP (as implemented) worked.

@ 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.

@Eoin
If we only buy toxic 60% that works out about 32.4b. the ECB repo these for cash. The coupon could be lowered as it seems the ECB are on board. Yes we raid the pension fund. better we invest in our own banks than widget makers in japan. leave the equity holders as is – they will be diluted. we improve GDP/debt ratio going forward.less exposure for taxpayer.

@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.

@Eoin
On the PPIP, I thought this article from last March interesting:
http://www.rgemonitor.com/economonitor-monitor/256162/the_public-private_partnership_investment_program_ppip__will_it_work
“The theoretical foundations of Geithner’s plan are provided by Lucian Bebchuk from Harvard University among others. He explains that “if the underlying market failure is at least partly one of liquidity, an effective plan for a public-private partnership in buying troubled assets can be designed. The key is to have competition at two levels. First, at the level of buying troubled assets, the government’s program should focus on establishing many competing funds that are privately managed and partly funded with private capital–and not creating one, large “aggregator bank”– funded with public and private capital and engaging in purchasing troubled assets. Second, several potential fund managers should compete for government capital under a market mechanism resulting in maximum participation of private capital and minimum costs to taxpayers.””

I would much rather see the government putting funding into several semi-private institutions to bid for assets from the banks rather than the government set the price that suits the banks…

@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?

Pat Donnelly Says:
October 4th, 2009 at 9:07 am

“At the moment the debt is owed by poor countries to banks, and if the poor countries had to, they could default on that. The bank debt is going to be replaced by debt that’s owed to the IMF, which for very good strategic reasons the poor countries will always service. . . . The rich countries have made this $500 billion available to stimulate their own banks, and the IMF is a wonderful party to put in between the countries and the debtors and the banks.”

Or as you imply,

At the moment the debt formerly owed by the banks (domestic to foreign) is now owed by Ireland, having given the guarantee, and is about to be owed to the ECB following NAMA.

The foreign banks get paid in full and the (Irish) State transfers the debt to its citizens.

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?!

Eoin
I know that you are worried that I am burning the midnight oil, the name of a local band here, but I am just up, to 24 degrees in a lovely Queensland day, wondering if the pool will be warm enough?
Thanks for your concern!

love and kisses
Pat

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.

@Pat Donnelly
Sorry, I am assuming that growth will lead to a return of some form of inflation. I expect house prices, once they have worked out the bubbe excesses to rise at slightly above inflation over the longer term (their historical move). Not enough to make them a more worthwhile investment than anything else that moves at just above inflation (buy and hold treasuries, for example).

I agree with you that we will be in a slow growth environment. I don’t believe we are at the trough (the bubble workout has some way to go). And I agree that net emigration will become a factor until the economy has started to grow. With the powers that wannabe now looking at seven or more years to reduce the deficit to growth-conducive levels, I can’t see any of this happening soon in Ireland. I am hopeful it will happen elsewhere…

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”.

I suggest that it should be stipulated as part of the NAMA deal that if banks have to be nationalised post NAMA, then the shares should be valued according to their likely value if there had been no previous investment in warrants and/or no NAMA. This is a minor contingency but I think the principle is important and shareholders should be asked to vote on it as part of the NAMA deal so it can have as much legal effect as possible. It might not be binding on shareholders but its approval would surely have an influence on any future assessment of share values.

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.

zhou_enlai Says:
October 5th, 2009 at 1:29 pm

“It might not be binding on shareholders but its approval would surely have an influence on any future assessment of share values.”

Well argued zhou. Obviously I am totally against NAMA (as it stands).

On the shareholder point. It can be put to a vote of shareholders. If they accept it fine. It not then no NAMA funds for you.

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.

From the GAN press release.

“We know that all the ‘goodies’ promised in the renegotiated programme for government will never make NAMA acceptable. We know that all the promises will never materialise because NAMA will rob us of our ability to implement them. Brian Cowen knows that too. But it will not matter to the leader of popular politics. He deals in opinion polls and spin. The Greens should not join him in this deception. We should return to principle led decision making. The members can make that decision on the 10th and our electorate will thank us for it.”

We know that all the promises will never materialise because NAMA will rob us of our ability to implement them.

Well at least somebody gets it.

@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.

podubhlain Says:
October 5th, 2009 at 3:32 pm

“If the State has to clean up the mess then it should do so with the least exposure as possible.”

I would add also, with an upside reward for the exposure taken.

“I noted some forecast the weekend that debt to gdp would reach 200% by 2020.”

We won’t be allowed to get that far.

“We should focus on reducing NAMA as is if the Greens don’t blow it out of the water.”

Got to admire your tenacity, podubhlain, but the way I read the Green NEC action it has become a binary decision. The new PFG & NAMA or nothing.

If the Green membership go for the new PFG then NAMA will go through with very little amendment. I have no faith in Dail process to achieve changes. Fianna Fail & the Green leadership have already made it clear that they intend putting it through as is. A little lipstick here or there (some talking points for the media & blogosphere to be forgotten in days) but nothing fundamental.

@ 03:40 Endeavour to persevere….

@ 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 turn it into a SLS (Special Liquidity Scheme) where the banks could swap their assets for short-term zero coupon bonds at par and pay a price to do so. It would effectively be a giant repo machine on a don’t ask/don’t tell basis. It would be net positive cash flow for the exchequer and it would allow the banks to work out their losses themselves.

This is the sort of scheme the Bank Of England are putting in place.

If you must keep the toxic loan purchase, then dramatically increase the risk-sharing. Pay market value (47 bn) with 23 bn in subordinate bonds.

@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.

@ yoganmahew

I agree that increasing the risk sharing seems obvious and most simple. Was surprised it was such small proportion in first place. Lenihan has posited all sorts of esoteric reasons why risk sharing can’t be increased. Cn you think of any legit ones?

@Zhou

I need to think about your comments a bit more. Some really good stuff in there.

Really appreciated folks – just trying to myself for Saturday:)

@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.

jc Says:
October 5th, 2009 at 9:49 pm

jc,

Probably repeating what others have said but here’s five bullet points you might consider.

1 Seek the Honohan recommendation on risk sharing. It is actually risk/reward sharing.

2 Pay only the market value of the security for the loans. Any other NAMA payments form part of the “sharing”.

3 Limit the sharing element to 15% of the market value of the security.

4 Any additional monies required is provided in the form of Convertible Preference Shares carrying an interest rate of ECB base rate + 3%.

5 Seek a change in the existing Warrants attached to the Preference Shares issued by AIB & BOI. The Warrants should be exercisable at any time and would have a lifespan of three years following the repayment of the repurchase of the Preference Share by AIB & BOI.

I’m not an economist.

Hope that helps.

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.

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