Just wondering what is known about the context of this French rescue scheme and whether the analogy is appropriate ?

Constantin’s recent blog entry suggests that the Irish SPV gives us the honour of owning the most leveraged SPV on earth
http://trueeconomics.blogspot.com/2009/10/economics-21102009-ireland-most.html

Lenihan is still fibbing about the impact of Nama, and how the EU regulates it, on our undynamic duo of AIB and BOI’s shareprices.

http://www.irishtimes.com/newspaper/breaking/2009/1029/breaking40.htm

AIB, the world’s least favourite, double crashed multiple scandaled bank is sounding a bit more modest on its astoundingly arrogant demand for an internal chief executive.

While this comment by the Irish Times business columnist Cantillon really deserves a thread on its own:

“Just because you are paranoid about Nama . . .

THE REVELATION that Nama will carry out its functions via a special purpose vehicle (SPV) has raised the prospect of property developers, banks and pretty much every other bogeyman emerging cuckoo-like in the Nama nest.

The source of this concern is the requirement that the SPV be majority owned by unspecified private investors in order for the Government to be able to avoid including Nama’s €55 billion worth of debts in the National debt. Indeed, the real issue in all this is arguably the logic of relying on off-balance sheet accounting at a national level to solve what in part was a problem caused in the main by faulty off-balance sheet financing by institutions.

Leaving that aside, the fact that the Government decided in its wisdom not to disclose the SPV arrangement up front only feeds the paranoia surrounding Nama. The fairly limited information disclosed subsequently about the checks and balances that will operate to protect the public interest has failed to put the issue to bed.

In the Government’s defence it should be borne in mind that the more watertight they make the Master SPV, the less independent it becomes and eventually it will fail the tests imposed by Eurostat, who are the ultimate arbitrators in this issue.

And what has been decided to date is reasonably comforting: a veto over decisions affecting the national interest combined with returns linked to 10-year bond yields would be expected to ensure that only institutional investors come on board. Further limits may be imposed on who can invest and what size stake they can hold at a later date.

But there is no escaping the fact that private capital is being invited into the heart of the Nama process, albeit under the Government’s terms.

It adds a further element of risk to what is already a spectacularly risky enterprise”.

Nama couldn’t be just a scheme to allow bankers & developers who are facing further probable losses of €17.5 Billion to transfer the bill to the ordinary public, could it? That is so horrible that it simply couldn’t be true.
Still, at least he/she is starting to contemplate it.

Shouldn’t the Nama board represent taxpayer interests only?
Isn’t that the least we deserve for putting up €54 Billion to overpay for property loans?
Why should anyone else, be they bankers, developers or institutions, decide on every issue except “decisions affecting the national interest”, over which they will still be able to have a majority voice at board level?

Board members matter.
A board chaired by Peter Mathews, with Bo Lundgren, Morgan Kelly, Joseph Stiglitz, those two Dutch guys from ACC and Peter Mathews would be very different from one chaired by Pat Farrell, with Eugene Sheehy, Tom Parlon, Sean Dunne, Frank Fahey and Patrick Hurley.

“I assume there has to be a market-based coupon or the banks would immediately have to write it down from par when it hits their books?”

that is exactly what I assumes would happen. Is the interest payable annually or at the end? I don’t like the sound of it.

From RTE: “He [Lenihan] said if the Government had issued up to half of the bonds in the form of subordinated debt, NAMA would be crippled with huge interest bills. ”

This suggests NAMA will pay a coupon annually on subordinated bonds. How could it be crippled if the interest would be paid out of NAMA profit? I am appalled if a coupon will be paid annually.

“Why do you assume there will be any coupon on subordinated debt???”

Lenihan indicated yesterday there would be a coupon of between ‘5-7%’, though he was somewhat vague and indicated that it might not be paid immediately (performance based?). I assume there has to be a market-based coupon or the banks would immediately have to write it down from par when it hits their books?

The fact that the SPV was not announced at the outset suggests that the SPV is not a mechanism which was seen as having key strategic benefits. Common sense dictates that if the primary aim of the SPV structure is to achieve an accounting treatment of debt then it is a bad strategically as it alters the control and operation of NAMA dramatically for reasons other than strategic benefit. Such an approach smacks of schemes devised by financiers and accountants rather than by experienced CEO’s who focus on strategy and the long term overall economic gain for the company.

The benefit of the SPV is the off balance sheet treatment of Govt liabilities. The risk of the SPV is the loss of control over the operation of NAMA (only has a majority of shareholders, has a veto but may not be able to disctate actions, introduces a legal construct where the aims and objects of the SPV will have primacy in dictating board behaviour). The degree of loss of control is therefore the crucial issue. If the NAMA board members can legally act and vote as a block in the interests of NAMA and/or the State rather than in the interest of the SPV then that may be sufficient.

There may ancillary be benefits of the SPV approach to be taken into account. For instance, it may act more commercially rather than acting politically.

Nonetheless, it appears that we are buying a pen-knife to do a tin-opener’s job because pen-knives are much much cheaper at the moment.

Why do you assume there will be any coupon on subordinated debt???

Perhaps Mr Lenihan could explain exactly what his vision of risk sharing is.

Thanks, I’ll have a look.

@zhou
Even if this investment was attractive it would still be worthwhile for a group of people, of a number more or less than ten, with an interest in how Nama operates to buy in. Perhaps the government accidentally forgot to tell us about this until now. Perhaps they view it as a meaningless concession to Eurostat. In that case the best way for Lenihan to get out of this dilemma is to give the shares to an independent trust representing the citizens of the country. Even a public auction would be no protection. I just hope he doesn’t spring on us another unpleasant surprise regarding who the private investors will be.

Cheers. I hadn’t realised he sold down some of his stake. Looking more closely a lot of other value investors have either sold out or are in the process of doing so.

I dont think Buffett would care that much about Moodys downgrade of Berkshire. Id say he had a good laugh. He’s such an independent thinker. Im sure some people saw the program on BBC2 the other night. Imagine getting away with doing a wife swop like that? I’m sure many people might like to do it, but by God they wouldn’t succeed!

You might get a 5% yield this year a 7% yield next year and an 8% yield the year after that.

There is also no mention of whether there will be fees and salaries to be earned. High variable interest rate + fees and salaries + 10% bonus payment. It could be tasty enough in the end!

“Isnt there one o too many in the last word but one?”

You could be right
Read somewhere that one of the ML team had advised on the acquisition of ABN AMRO - a deal that cooked a number of banks.

Unfortunately, McNamara pulled from his committments in that scheme.

I received a response earlier from Richard Tol in discussion about the carbon taxation.

Basically, Richard’s point is that when the government can free up cash inflow from somewhere, like the carbon tax, which doesn’t impinge too much on our next economic recovery, that inflow of taxation might free up the government and policy makers to focus on helping areas that need help - i.e. education, etc. Stuff that could lay a foundation for the economy longer term.

In other words, any little bit of movement and free-ing up of space within the system might get the economy to work again. I suppose at the moment we are in a gridlock situation as far as the economy goes. The classic case being in the construction industry - I can’t pay out, until I get paid. Hence, the only route to fruit is to begin sue-ing one another. But that is only something to pass the time, it doesn’t deal with the primary gridlock issue.

The grid lock issue stems from the fact that Irish property always had early innovators, and copy cats. There wasn’t a huge amount of initial innovation done up front to develop the model. There was a lot less major innovation done after, because followers copy-cat-ed the early movers.

What is happening now, is everyone is standing back waiting for someone to take the first leap. Richard Dawkins in his book, The Selfish Gene, gave the example of Penguins jumping into the water. They gang up together at the edge of the ice berg. Eventually the pressure of the crowd builds up, one penguin gets pushed in, is gobbled up by a seal and then the whole crowd plunges in.

This is what normally happens in Irish construction. At the moment, we are in the build up stages of this theatre before the first one gets pushed in and ka-nabbled to save the rest. The only difference in this situation, is likely or not the the first penguin in the water is going to be Brian Lenehan and then the rest will spot the mistake in the model, fix it, and it will be a big crowd, free-for-all in construction.

That is my theory anyway. What we do need, seriously, is one or two major schemes under construction somewhere in the country and completed. Even if they turn out to be less than successful. It will basically give some pointers to the rest of the group, and the industry will get some idea of how to move forward with a blueprint. But nobody wants to be that first penguin at the moment, so I suggest the minister for Finance takes one for the team.

I don’t know what that would entail. Possibly a completion of the building of Adamstown with subsidised rents or something to fill it with people. Another major scheme that springs to my mind and is already completed, though vacant at present is the Elm Park office development in Booterstown designed to the highly of environmentally-friendly standards. We need to make some incentive and get that occupied soon I believe. Even if we have to take a hit.

Another McNamara spear-headed project which will definitely take a hit is the Irish glass bottle site. But it is also an opportunity for Ireland to aim research and development at new innovative ways to reduce toxicity levels is the soils at that site, to enable the process of building to commence in the process of time. There is no point in allowing the site to sit there indefinitely. It will require government investment again. I would humbly suggest though, that if the Irish taxpayer is to sink more money into the Irish bottle factory site, that other stakeholders shares are transfers in part to the taxpayer under some new joint venture policy. But get the thing moving, make that first plunge.

“Thanks for that.
No looking clever for Irish banks then.”

Or people who bought shares in them recently. Down about 47% since Sep 18th if measured in USD. Wonder what Minister Lenihan thinks about the boards of these banks and their solvency.

Have you been told that the NAMA bonds will be short? I was presuming they would be floating interest but medium term.

@ Karl I repeat again the words of Eurostat. They distinclty said “the SPV will have a net present value of €4,800M provided Irish property prices only increase by 10%”. But now we know that the very highest NPV that could be accorded to this SPV is little over €100M.

It is good news of course that the SPV is not an exuse to line the pockets of some SPiVes but I’m with you, who on earth would want to invest in this?”

“The truth is, at the moment all of the incumbent property players in Ireland are sue-ing one another, and jostling around for positions and watching one another”

Brian, I wonder if the reason for the above is that those who are selected by NAMA or the SPV ( no one knows who will be pulling the NAMA LEVERS) will be the ones who survive and thrive building out the oversupply they or others began.

I wonder would I be allowed to invest in the SPV?

he reduced down a 20.31% stake to 16.6% over the summer. Going to be far more regulation and potential liability on the ratings agencies going forward. Buffett possibly didn’t like the fact that Moody’s downgraded Berkshire Hathaway earlier this year either!

The CSO documentations states:
“On winding up of the Master SPV, the equity investors will only be repaid their capital if the Master SPV has the resources.”

The meaning of “only being repaid their capital” is uncertain. But even if it means getting all your money back without a return after ten years(a return of zero) the general point remains. In the bad state of the world, you get no return. In the good state, the most you get is a paltry ten percent premium over government bonds over ten years. Given the decent probability of the bad state of the world materialising — even NAMA’s most vocal supporters concede that their are serious risks to the exercise — I find it hard to view this is anything other than a terrible investment prospect.

Yes, David Einhorn of Greenlight Capital is quite a clever and shrewd operator. He made a substantial amount of money shorting Lehmans.

I would agree with most of what he says about Moodys. They seem to have blown their ‘economic moat’. It will be interesting to see if Buffett has reduced his stake in the company in his next sec disclosures.

Indeed, I shouldn’t have been comparing one year and ten year returns. My bad! Math fixed and message basically the same. NAMA needs to have only a ninety three percent chance of losing money in this example for the investment to be as attractive as investing in a government bond.

Of course. it may the case that even if NAMA is performing badly, the investors will still get their performance-linked dividend, so the real world may be more complicated. But the example illustrates a general point. The tiny premium over government bonds offered to these investors would is completely out of kilter with the widely-acknowldeged risk of the project.

it might just be me but haven’t we seen this somewhere before? ( cdo’s, subprime….

truth is really stranger than fiction in this land of ours….

The property business in Ireland is at one of those phase shifts in my opinion. It doesn’t take much either, to create a phase shift in the property business. We have plenty of things available to us now, to upset the apple tart that traditionally worked. We might see in the coming years, an entirely new set of players in the property business in Ireland, who approach things very differently to players in the past. We have issues like carbon taxation, energy independence, sustainable family living environments, public transportation, smart-er economies, NAMA, a whole raft of things basically which seem to alter the fundamental rules.

Take only one of those things, sustainable family oriented living environments. In the past, we never got to a stage where high density apartment living offered this. But now the local authorities and government departments are expecting it in their development plans. The truth is, there is no blueprint for this, how it could work in Ireland. A blueprint which may work somewhere else, in a different society, may not work here. Implicit in the blueprint is the business model - we don’t know what the business model for sustainable family oriented living environments could be. We don’t know how capital intensive it may be from a developer point of view. We don’t know how long term an investment in might be. These are all unknowns. We roughly knew in the past, how the property game worked based on an older model, which didn’t need to perform to the same level, in a whole plethora of measurements. In fact, I would argue, in the older model the financial management capabilities of builders and lenders wasn’t sophisticated at all.

The truth is, at the moment all of the incumbent property players in Ireland are sue-ing one another, and jostling around for positions and watching one another. In other words, they are fairly flat footed and static. I would bet my right arm, that many of them will be left dead in the water. They are all waiting to see what the next model will look like. When Gerry McCaughey introduced Century Homes, he was copied several times over. When Liam Carroll introduced shoebox apartment complexes in inner city Dublin, likewise, he was driven out of his own domain by competition. In fact, when he had perfected his model to the n’th degree, that is when he was making the least profit from his operations.

I think rather than waiting around for a bus to hit them and flatten them outright, the property players in Ireland should group together - that is, do the very opposite thing to which their instinct tells them - and decide what the new model should be. They have difficulty understanding though, their opponents in the future will not be each other, but someone completely new, who never existed in the game before.

Thanks. B.

i’d assume so. Both actually very good assets with lots of potential buyers. No reason why they should have them in the medium-to-long term if they are short on capital and in receipt of government support, though obviously we don’t want them to flog them below fair value either.

BIAM and BOISS (custodial) are both worth a little bit for BOI, but not nearly as much.

“you forgot the other leg of the stool - borrowing short (in a low interest rate environment) hoping that the markets will stay liquid and cheap, and investing long.”

You’re absolutely right.

I find it hard to imagine that interest rates (short-term and long-term) won’t rise markedly over the next decade as a result of:
a. governments issuing unprecedented amounts of debt;
b. central banks printing unprecedented amounts of money; and
c. commercial banks eventually reversing their current use of crisis funding (by buying government bonds) and lending instead into the real economy, thereby contributing to rising bond yields.

The only reason I am still a bit uncertain about this scenario is that the developed world could conceivably be facing into a Japanese-type scenario where deep deflation caused interest rates to remain ultra-low despite very aggressive fiscal and monetary policies.