Not too long ago, the Green Party announced with great fanfare that they were getting the NAMA plan amended to feature “equal risk sharing” between the government and the banks (though not between the government and bank shareholders as proposed by Patrick Honohan). Even as it was announced, there were strong rumours that this risk sharing element would represent a tiny change to the original plan. This has now been confirmed.
First, there is the issue of the interest rate on NAMA’s subordinated bonds. I had noted more than a month ago that no information on this had been released. Now, continuing in the drip-drip manner in which it is releasing information about how NAMA will actually operate, the Minister has told the Oireachtas Commitee meeting on the bill that the bonds will pay an interest between 5% and 7%. No information has been released to suggest that these payments depend on the perfomance of NAMA. If these are unconditional coupon payments at say, six percent over ten years, then this will mean that the banks will recover sixty percent of the €2.7 billion in subordinated bonds no matter how badly NAMA’s loans perform. So much for risk sharing.
Second, there is the question of why the payment of subordinated bonds is being capped at five percent of the total. Today’s Irish Times reported the Minister as saying that there was “an accounting issue” relating to going above 5 percent. The transcript records the Minister as later clarifying this issue as follows:
The general rule when valuing equity investments, for example a straight-forward ordinary share, is to value it on a mark to market basis. It is valued as it is in the market because the share is traded in the market. With an ordinary share, market valuation takes place on whatever it is quoted in the Stock Exchange. However, in the case of the six-month treasury bills which are the nature of the bonds which we will issue as consideration for the assets, it is not mark to market and carries the full-face value as an asset of the bank. In accountancy practice, if subordinated debt is well in excess of 5% of the total consideration it is mark to market and treated as an ordinary share. Therefore, its hazardous character means it can be traded on the market and marked to a substantially reduced price. That would mean it would not amount to compensation for the banks and one would still have to pay the additional money depending on the appropriate level of compensation for the assets that one acquires. There are powerful technical reasons that one cannot exceed this 5% limit in the case of subordinated debt and that is the clear accountancy advice which the Government received on this matter.
In other words, the Minister is worried that if the banks receive too many subordinated bonds, they will have to be marked to market and that their “hazardous nature” will see them sold at a large discount. I’m not a financial accountant so I don’t know what the rules are under which banks have to mark assets to market rather than record them on a “hold to maturity” basis but I’d be surprised if five percent of the bank’s sales to NAMA featured in these rules. Still, I’d be interested to hear from those who know more about this.
Of course, the hazardous nature of these bonds relates to the probability of NAMA breaking even. In stating that the market will sell these bonds at a discount, the Minister is effectively admitting that the financial markets do not believe that NAMA can break even.
Update: It’s possible that the Minister is referring to the International Financial Report Standards on “derecognition” of financial assets — link here. These guidelines suggest that assets can only be “derecognised” from the balance sheet as long as the bank has not “retained substantially all risk and rewards”. A five percent payment in the form of contingent bonds seems to fall a long way short of creating the problem of the banks being unable to derecognise the assets.
50 replies on “Risk Sharing and Accounting Issues”
It does look like the minister had to give the Greens some risk sharing but he didn’t want it to have any effect. So he created a kind of risk sharing that didn’t share any risk. This too clever by half approach is destroying his credibility.
@Karl…Well I’m no Financial Accountant either but my read on what you have outlined above is this. Linehan issues 2.7 billion in Sub Debt to the Banks for Assets of dubious quality. He then offers to pay up to 7% coupon on these Bonds over the “expected” lifetime of Nama or 10 years .In the absence of any inflation around these parts for the forseeable future. the word “urine” and the extraction of the afore mentioned come to mind.
“He said it was important to clarify the amount of that subordinated debt “as a matter of certainty in the markets. According to the accountancy advice available to the Government, there is an issue about going beyond 5 per cent.”
I couldn’t find any such advice. I think what Lenihan means is that it would have affected the banks capital and he would have had to take large stakes in them.
Truth or Fib? Fib. But he may feel it’s true because his accounting advice is if he goes beyond 5% risk sharing he will have to partially nationalise.
For an illustration of what, in Lenihan’s fevered imagination, partial nationalisation will result in check out the following:
“But Mr Lenihan said that if half the bond issue was through subordinated debt, “the consequence would follow that Nama would be crippled with huge interest bills”.”
Truth or Fib? Fib. But he may feel it’s true because he insists on paying a high interest rate on the subordinated debt. Therefore, if he issued more Nama would have to pay a higher interest bill. “It’s circularly logical, Captain!”.
Mr Lenihan said euro-zone interest rates had been historically very low and he rejected the argument “that somehow future fluctuations and interest rates endanger Nama”. If rates rose it would mean the European economy had staged a substantial recovery.
Lenihan Fibometer explodes. He is not so young that he doesn’t remember high rates of inflation. Steep Eurozone inflation would be good if we could keep our prices down. But now Lenihan through Nama has found a way to turn even that against us.
I can only conclude that he believes the world really is ending on Dec 21, 2012. Now I know the reason for his mocking smile.
“None of you realise this is all pointless!”
Would you go as far as saying that the risk sharing has zero value in present value? It looks like the way it’s been engineered.
I have no idea what Lenihan’s “powerful technical reasons” are. I would expect nama bonds (being gov guaranteed) and subordinate bonds would be treated seperately. In general, there are times when you can group bonds with the same credit rating together. As is usual with lenihan on banking, I struggle to make any sense of it.
With “hold to maturity” you’re still required to assign expected losses to its value.
On second thoughts maybe Lenihan was advised about keeping it to 5%.
The more of these risk-sharing bonds he issues the less the consideration is worth. If the risks were shared 50 – 50 the effect would be dramatic. You really would have to reflect the market value of this in the banks accounts, wouldn’t you? The banks would be getting €54 Billion less half of €20 Billion of future losses giving them €44 Billion, when he wants to give them €51.3 Billion. The problem yet again is that he is overpaying and the markets will react accordingly if he really shared the risk of the overpayments. So in order to overpay he has to stymie any substantial risk-sharing. Although to save the Green Party’s honour he shouldn’t stymie the 5%. Now he has gone and destroyed their credibility too. The only solution is not to overpay but if he does that we are back to Dec 21, 2012. So he must create a risk-sharing but it must share as little risk as possible. It all makes sense when you start from the wrong place.
More “powerful technical reasons” and changed risk-sharing assumption being dripped out this morning.
The bank levy (agreed in principle in the new programme for Govt) it seems might be more likely provided for in the NAMA bill by a means to impose a corporation tax surcharge.
according to a comment from Goodbody this mechanism is seemingly preferred
“to avoid any complications that could arise for bank balance sheets or capital from the explicit legal contingency of the levy.”
So, no levy. Now a tax surcharge.
I think this must be applied as a rate across all “domestic” banks.
The “losses” are “pooled”.
Ulster Bank’s domestic operations will be subject to the surcharge. No?
It is my conclusion that the drip feed of information mirror’s closely the DoF’s progress in putting NAMA together.
It is blatantly obvious that their goals are ill defined, that their drafting and design process is ad hoc and unstructured.
I think it is also obvious that their internal expertise is limited, their access to external expertise is strongly influenced by banking experts and their ability to reconcile market imperatives, accounting rules, economic strategy and political imperatives is inadequate.
I think that the Minister should ask the EU Commission and the ECB to make specialists (particularly UK specialists) available to them on secondment to assist in the formulation of not only the NAMA legislation but also legislation for the orderly wind-up of banks and reformed bankruptcy legislation.
Question marks have been hanging over the DoF for some time now and the NAMA legislative process is confirming our worst fears. There is no point flogging the DoF further. It is not possible for them to “up-skill” in the required time frame. The price of failure is too big. We must swallow our pride and ask for extraordinary help from abroad.
The tyranny of the technical expert has long been extablished. Politicians must understand that the political act of clothing one’s actions with the opinions of experts is not sufficient. The expertise must be real and the experts’ opinions must be robust. That is not the case here. We appear to be in a nightmare regulatory capture/hostage situation.
The core goal of rescuing the economy in the interests of the populace are at risk. We are headed for a situation where we achieve the bare minimum of refinancing emergency funding from the ECB without achieving the cleansing of the financial system that the emergency assistance was supposed to allow us to achieve.
I concur that the proposed risk-sharing has diminished now to nothing more than a token gesture. The Green Party leadership does not seem to understand and/or care that they have been deceived on this promise to them. The payment structure has very little connection to Honohan’s original proposal since the proportional risk-sharing is so small it is almost meaningless.
If it’s done as a tax on all banks, aren’t we headed the for the VHI/BUPA community rating fiasco all over again?
It is possible that the advice regarding the 5% relates to materiality considerations. If the subordinated portion of the bonds were no more than 5% (an accepted materiality threshold in accounting) of the total, then the banks’ auditors could conceivably accept an argument that they need not be impaired (marked down) on materiality grounds in the event of their market value declining.
The question for me is whether the aim is (a) to allow the Subordinated NAMA Bonds (SNBs) be shown at face value on the banks books or (b) to allow Ordinary NAMA Bonds (ONBs) be shown at face value.
If the aim is to allow SNBs to be marked at face value then it is clear that, notwithstanding that NAMA will value each loan individually, the NAMA process is predicated on a certain maximum haircut to the banks. If the keeping the haircut below a certain point for accounting purposes was not paramount then we could have greater risk sharing.
If on the other hand, an increase in SNBs will have the effect that ONBs will have to be marked to market then there is a better reason for limiting SNBs as it appears to be a sine qua non of the whole plan that ONBs can be used to recapitalise the banks at par value. In that case limiting the SNBs to 5% makes sense. One would of course like such advice to be published and exposed to public scrutiny.
You seem to be grasping at straws with this.
The reason the limit of 5% of SNB’s was put in place is because they are near worthless.
The only value they have is the coupons.
There is no knock effect for how the ONB’s will be treated. Goverment bonds would always be marked to market on a banks books.
The accounting constraint relates to de-recognition rules (IAS 39). For NAMA to work the banks have to sell their assets (de-recognise in accounting) to NAMA. Under International Financial Reporting Standards (IFRS) you can only de-recognize assets and get them off your balance sheet when you have transferred substantially all of the risk and rewards of ownership of these assets to the entity buying them.
If the banks are given a large chunk of subordinated debt by NAMA then they are still substantially exposed to the risks and rewards of ownership of the loan assets they just sold to NAMA. In effect they would not have done a clean sale of the assets, so they may not be able to book the asset sales to get them off their balance sheet.
The issue then is what is “substantially all.” This is usually interpreted in accounting to mean close to 100%. The accounting rules are subject to interpretation and in this context the accounting advisers to the Minster (probably a big 4 accounting firm since Ireland does not really have a securities regulator) obviously think that 5-percent is a reasonable limit that still allows you to argue that you have transferred “substantially all” of the risks of ownership of the underlying loan assets to NAMA.
There is an institutional constraint as to how loosely one can interpret “substantially all” here. AIB and BOI are both cross-listed in the US and as a result they come under SEC jurisdiction. This means the SEC reviews their accounting to check that they follow IFRS correctly.
I am not “grasping at straws”. I wished to point out the implications for the valuation process if it is predetermined that a minimum amount of succour must be provided. I caveated that I do not have the evidence to hand to state that such is the case. I am hardly cheer-leading for the Govt in these comments!
I have not managed to read the 119 pages of the transcript of the Committee debate due to other commitments. It is probable that these issues were expanded upon there.
“Goverment bonds would always be marked to market on a banks books.”
Not if they’re classified as being on a hold-to-maturity or not-for-sale basis. You could value them at par or aquisition cost on that basis regardless of market pricing.
As I understand the accounting rules contained in IAS 39, an entity may designate bond investments as “held-to-maturity” if it is in fact their intention at acquisition to hold them to term. This eliminates the need to mark the bonds to market unless there are clear indications that the book value is not entirely recoverable.
The non-subordinated bonds do not carry any material risk of non-payment to the banks so there would be no problem carrying those at face value – or amortised cost in IAS 39 terms.
The subordinated bonds would be carried at cost until such time as it became apparent to the directors of the bank that there was a material risk to the amount of eventual repayment. Depressed market value would be an indicator that the market believed there to be such risk, but market value would not be the only factor taken into account in determining appropriate carrying value. It would therefore be possible to carry the subordinated bonds at face value until such outcome became probable. This would possibly buy enough time for the banks to recapitalise themselves through profitability.
This is a neat way of sharing risk without damaging the banks’ capital from the outset. However I am still not sure why it is limited to 5% of the bonds issued. There is no provision in IAS 39 of which I am aware that explicitly makes 5% a threshold for any specific accounting treatment. The only suggestion I can make is that it is related to materiality in some way. If there are more bank-specific rules governing this that anyone is aware of please elucidate!
Meanwhile I would echo the calls of other posters for the advice received by the minister in this respect to be made available to the public.
@ Brendan Doyle
“As I understand the accounting rules contained in IAS 39, an entity may designate bond investments as “held-to-maturity” if it is in fact their intention at acquisition to hold them to term.”
What is ther term of the subordinates?
What is the term of the “guaranteed” NAMA bonds?
This gets worser and worser.
I’m fairly sure that the economics of the current NAMA plan is an exercising in back solving. It is quite clear that pumping capital in to a subset of the banks and involving existing bondholders would achieve a superior outcome. IMO to date, Lenihan’s actions have cost us billions with respect to Anglo. The 7bn injection to AIB and BOI was done incorrectly (existing bondholders should have been involved). And how on earth is INBS of system importance!
And that’s before we start looking at probable losses from NAMA. Happy Halloween 😉
I am getting sceptical about the minister’s continuing professions to be open to amendments. He has been saying this since before the summer but whenever they appear he strikes all the big ones down with his red light sabre. I suppose economic theory would denounce him issuing lending guidelines but we deserve something for our €20 Billion. Also, Irish banks can no longer be described as rational economic actors, so perhaps theory can be discarded completely.
“It is my conclusion that the drip feed of information mirror’s closely the DoF’s progress in putting NAMA together”.
I agree with this and your other criticisms of the DoF. It is hard to resist the impression that a future disaster – on top of the inevitable losses from overpaying – is being slowly but carelessly constructed.
“I think that the Minister should ask the EU Commission and the ECB to make specialists (particularly UK specialists) available to them on secondment to assist in the formulation of not only the NAMA legislation but also legislation for the orderly wind-up of banks and reformed bankruptcy legislation.”
I agree. But why not take the radical step of inviting continental Europeans like the Swedish bank rescue veterans to assist. Canadians, Asians and Americans too.
We also need to start treating our desperate economic difficulties as a challenge similar to a war. Our peacetime administrative apparatus is just not fit for current conditions. As well as all the Czars I want to create we need economic advisors right across the government, with a council to provide top level advice.
Finally, we need to have a top level body, a majority made up of international managers (and again that doesn’t mean one or two guys from Britain) to transform our peace time administration.
After the woeful performance of our administration during the Celtic Tiger years it would be immoral not to make fundamental reforms.
You are quite right. Even I keep on forgetting the finance minister has already cost us billions. Now, where can I buy a Lenihan mask.
Without wishing to put words in your mouth, your reasoned defence of Nama was, IMO, essentially framed around a view that no perfect solution existed and that reasonable men, particularly in the guise of the Minister for Finance, would not propose an overtly unreasonable solution. You achieved a decent level of objectivity and balance in your views and the courteous way you handled your sometimes emotional critics was to be commended.
Critics, of the reasonable kind, always came from one of two persepctives. First, we all agree that taxpayer money has to go into the banks but sharholders need to be wiped first. And then argue about other participants in the capital structure. Second, starting with the Guarantee, the actions (as opposed to the words) of the authorities were not consistent with people who were technically qualified; simply, the government and its advisers have not been up to the task.
Your points, above, suggest that you might now agree that the expertise does not exist within the corridors pf power to deal with this problem?
Moreover, recent behaviour/actions/deeds are now more akin to a Nick Leeson style trader who, on discovering that his position is now well under water, tries to trade out of trouble rather than fessing up.
As Vincent Brown repeatedly put to the Minister a good while ago: ‘you don’t know what your doing, do you?’
If there was a plan, it was to pursue a strategy that led to share prices rising to the point where private capital could be attracted to the banks. That too, it seems, has failed.
It is remarkable that since the Greens voted:
The SPV has appeared. Although Minister Gormley is unconcerned.
The bank levy has been dramatically amended. But Minister Ryan is unconcerned.
And of course we now see that the risk sharing is bogus.
I couldn’t be bothered seeing who is unconcerned about this (Dan Boyle?)
but I did find an article from some time back quoting Minister Ryan:
“The Minister also said that now this risk-sharing element had been agreed, the really important element of NAMA to get right is how the assets acquired by the new agency will be developed”.
I think if you ignore the first part of the sentence you get a truthful statement about what has been the Green main (only?) concern all along.
Lads, it’s a scam…you’re only arguing about which way you’d like to be screwed.
Two points to consider:
i) Occam’s Razor
Which is more likely?
A – NAMA is a scam by members of a political party with a proven history of corruption and with close ties to developers in order to protect their own members and associates.
B – NAMA is a real attempt to react to global economic crisis
ii) The constant drip-drip of different aspects and the language used to describe the aspects could be seen as a classic example of a Gish Gallop – http://rationalwiki.com/wiki/index.php?title=Gish_gallop – “an informal name for a rhetorical technique in debates that involves drowning the opponent in half-truths, lies, straw men, and bullsh*t to such a degree that the opponent cannot possibly answer every falsehood that has been raised.”
The allure of acronyms and theoretical hair-splitting is blinding most of you to the underlying scam that is going on here. Keep arguing about the exact position of the deckchairs lads, the ship is still going down.
I don’t know if this is the right place to post, or the right website even, or the right day, country or year. But here goes nothing.
I have to admire the perseverance of Joan Burton, but there is something needs to be said. I have being paying attention to the Dail debates in the Oireachtas coverage on the RTE website. It is the most I can do in my evenings. I am more or less NAMA-ed out. My diary is full of events to do with carbon neutral societies etc, and renewable energy engineering talks. Hard to do everything I guess.
The one thing that does piss me off lately when I watch the Oireachtas tv coverage, is this. I would blog it tonight, but it is too late. The title of the blog entry would be: Lisbon is for Girls, Nama is for Boys.
I don’t care what politicians are on the ballot card in the next election, whatever female candidate is on the ballot card is getting my vote. It is about time female stood up and did some work on behalf of the country from a political point of view. If there isn’t a female candidate on my ballot card, I will probably spoil my ballot card instead. But one thing is guaranteed, no male is getting my next vote, that I have decided.
Especially in something like NAMA. I know it is a committee, what I am looking at on TV at the moment, but it is way too male dominated. I heard lots of female politicians during the Lisbon debate, when it was mud flying in every direction, and now with the boring mathematics, they are no where to be seen.
It is a perfect reflection of the state of our education I think. Females give up the mathematical stuff too early, because it is too hard. Yet females are so successful and prominent in business and commerce. I don’t understand it. I would also like to hear at least one female economist show up on Prime Time or somewhere, once, just to counter balance somewhat, Colm McCarthy, George Lee, David McWilliams, Brian Lucey, Karl Whelan, Gurdgiev etc, etc.
I do know one lady in property business at the moment, who has a voice about economics and can use it. She is very good on the issue of the environment also. I don’t know – this is the most depressing part of the NAMA debate for me at the moment. I feel that men are being asked to carry too much of the stress and bother of NAMA on their backs. Put your feet up guys and why not take a rest for yourselves?
“I do know one lady in property business at the moment, who has a voice about economics and can use it. She is very good on the issue of the environment also.”
In other words, I know there is nothing to prevent women from really being no. 1 in terms of understanding and facility to think through problems of this nature. I have seen them do it, when they want to.
I feel that men folk have been given a raw deal in NAMA. At least half the brain power available to us in the state is not being used. It is the same in the banking institutions more or less. I am sick to my back teeth of seeing it. That is the ‘culture’ which needs to adopt some change.
Nearly Halloween! Zombies used to be a metaphor for the mindless masses. Now they’re a metaphor for our mindless banks and leaders who can only do the same thing over and over again. Here’s the Lenihan mask – or is that a Cowen mask? Now that’s efficiency. I’d like a Gormley one myself.
Your point is well made.
However I think you are being unfair to blog hosts and most of the commentators.
The blog hosts have done a great service to the Nation in their contribution to the NAMA debate.
They cannot be blamed if the political “opposition” failed to mobilise the public antipathy to NAMA.
And even if it is Gish Gallop, should Citizens suspend critical analysis? That is a recipe for tyranny.
The developers cannot possibly deliver that which is expected of them by Minister Lenihan via NAMA.
They cannot turn €35bn into €79bn in ten years.
The covered institutions will need to raise close to €20bn in Tier 1 capital just to tread water in terms of solvency margin. Of that €20bn, the State will have to ante up (say) €10bn to keep Anglo & Irish Nationwide afloat.
Of the (say) €20bn of NAMA funds that goes to Anglo & Irish Nationwide not one cent will find it way into the “real” economy.
AIB & BofI will not lend into the “real” economy. They already have their riding instructions. “Shrink your balance sheets”.
NAMA will lose between €15bn and €30bn depending on economic growth, inflation etc.
There is not bank levy, just a promise of a corporation tax surcharge. That would penalise Ulster Bank, ACC Bank and National Irish Bank who are not covered by the guarantee and are not participants in NAMA.
There is a gigantic residential mortgage problem on the horizon.
Probably left something out but I’m glad to get that off my chest.
Sounds about right.
Vis-a-vis the gigantic residential mortgage problem on the horizon…. I am currently making a radio programme about that very subject. Should be complete by Christmas and broadcast February by the looks of it. The problem might be a bit more visible by then so I hope it is not too late!
[…] be transferred to NAMA, so banks will have to share the risks". Dick Roche has been lied to. The Irish Economy Blog Archive Risk Sharing and Accounting Issues How will he […]
Could it be the risk-sharing will end up having negative value?
Let’s say that the interest rate is 7%. 7% compound over 10 years is how much?
“It is my conclusion that the drip feed of information mirror’s closely the DoF’s progress in putting NAMA together.”
I agree with you entirely. There is not so much as a fag packet in sight. This is being made up on the hoof with the minister getting a briefing on how it will work as he walks into the press conference. He does a good job of selling it, but it is mostly rubbish invented by idiots.
Anyway, I’m not entirely convinced that the NAMA bonds will now be passed to the banks. The SPV structure could indicate that the SPV will be repo’ing the bonds and passing cash to the banks in return for the assets. The result being that the government gives ‘authorisation’ to the SPV, the SPV owes the government 54 bn. The SPV swaps the bonds for cash on a six-monthly basis. The banks get cash and hand over their trash. The state holds all the risk. Am I being paranoid? Please tell me I am.
Couldn’t disagree with your analysis more… the upper bound for losses is €35 billion according to me (backed up by Morgan Kelly!).
Apart from that, pretty spot on. In particular, it is interesting that the corporate tax surcharge will affect the foreign operating banks. Profits are an interesting thing – post-bonus… post-dividend (no?) whereas a levy would be an operating cost so would reduce profits by the same amount, but would also, presumably, reduce bonuses…
The DOF are so out of their depth, it’s not true.
Just wondering if we should be consolidating our financial institutions with a new supermutual as mentioned in Cantillon in The Irish Times today.
Other experts are suggesting the opposite.
Also on the bank levy. Looking at things I have written previously is it correct to say:
1. That Brian Lenihan originally proposed it to reassure us about Nama losses.
2. That he then withdrew it because of the effect on the banks.
3. That the Greens then claimed to have won the levy back. They trumpeted this to get the backing of their convention for Nama.
4. That the magical levy has now disappeared again, because of its effect on the bank shares (it effects bank shares but Nama doesn’t according to the minister…but the levy is for Nama losses).
5. The Greens are completely unperturbed by the disappearance as I stated above.
So we have the comic opera of the magical levy.
The black humour of the pretence that bank share prices reflect anything other than the Nama overpayment and therefore the higher they are the better for the country.
But now the deep sarcasm of a levy on bank profits that Lenihan is claiming (mass groan) will in ten years time affect their profits.
Whatever valiant efforts the bionic economist may be making it is clear that our politicians/top administrators are not up to the task.
It is really time that top independent business and economic people were recruited en masse into our government & administration.
The tale told below is another giant, depressing reinforcement of this.
Paranoid? I don’t think so. I think that is how it was planned all along.
The Master SPV becomes a conduit laundering the toxic loans. You can add €10bn to the €54. The Minister has already declared that he will breach the €5bn agreed with the Green Party (and no levy.) God, they really are living up to their name.
The banks never touch the NAMA bonds. They package the loans and deliver to the Master SPV. The SPV gets bonds from NAMA then repo, and the entire risk of the bonds remains with the SPV.
As the book unwinds and the losses crystallise the SPV becomes a real liability for the State. Eurostat are prepared to fudge for now. The ECB will over-ride that in the future. That is, the Sate will be forced to replace bad NAMA bonds with Irish Government Bonds.
The covered banks on the other hand will have received hard cash.
The SPV copper-fastens the losses on the books of the State.
No future government can change this by making the banks write down the value of the NAMA bonds held on their balance sheets…because there not there.
I wonder how this will work out for the subordinate debt? The same? Literally no risk sharing?
I don’t agree that was the plan all along. This is being made up on the hoof.
I had another bad thought. NAMA will be ‘buying’ assets from the SPV, presumably in return for the debt that is owed to it. This is the function of the purchase panel. The purchases of horses, artwork, property, land will make the SPV whole so it makes a profit, while each purchase will be at a loss. Expect the NPRF to be stuffed with so much useless tat in the next few years in lieu of genuine cash.
Didn’t explain that very well.
I didn’t mean the use of the SPV was the plan all along.
I mean’t that the plan was that the banks would get away scot free.
It seems like that’s the case now.
If they could shovel another €20bn in they would.
“We have this very strange situation today in America where we have given banks hundreds of billions of dollars and the president has to beg the banks to lend and they refuse,” Stiglitz said. “What we did was the wrong thing. It has weakened the economy and has increased our deficit, making it more difficult for the future.”
“Could it be the risk-sharing will end up having negative value?”
A very simple answer is yes. If you believe the DoF’s business plan, no losses are assigned to these sub. bonds but a good deal of interest is paid. I bring this up as it’s another example of the plan’s madness.
If you want to be a little more realistic…
Subject to caveats like I don’t know when losses get assigned to sub bonds etc…
Assuming no loss is assigned until a ‘call’ date 10/11 yrs from now, to get to a negative value you have to look at the interest being paid and the timing of these payments. If NAMA didn’t pay any coupon, then in year 1 you have 190m (2.7bn * 7%) and 10 years to invest the 190m (and so on). If you could get returns on investments (bond coupons) in excess of 7%, then the risk sharing would have a negative value.
@ Donal Byard,
Thanks. If there is a true sale of assets from the banks to NAMA, I don’t see how the 5% rule would apply. I can see how this rule would apply for synthetic risk transfer where a bank might create a spv in order to do a securitisation. I don’t think this is what is being proposed with NAMA.
The way I understand it, NAMA will acquire the banks’ assets (true sale) and in return the banks receive two types of bond – a government guaranteed bond and subordinate bonds. I don’t see why a 5% rule would apply.
Whatever you say about David McWilliams he is undoubtedly genuinely patriotic. His meeting with Brian Lenihan was an attempt to assist an isolated, floundering minister in a time of national crisis. But look at the reward he has gotten. Brian Lenihan had the political skills to brush off any embarassment of the leaking of his comments about the top civil servants (one of the rare things he has gotten right). He could also have brushed off suggestions that McWilliams was a key influence on the guarantee (even if he probably was). But McWilliams is opposed to NAMA and embarassed the minister with the claim of teaching him economics. Apparently the minister has considerable intellectual vanity but he is a lawyer by training and had no economic experience when he started in May 08, as he has been happy to tell journalists. However for someone else to lampoon this is gross lese majeste and the Nama dissidence meant the ministerial boot had to be put in. McWilliams got the full ministerial slime treatment.
I would just warn other advisors about publicly breaking with Lenihan. The knife will go in up to the hilt.
Lenihan is now too suave to be Nixon. I am afraid he is now the Irish Francis Urquhart.
“Is David McWilliams a lunatic? You might very well think that. I couldn’t possibly comment.”
The viciousness and immorality of our elite as they defend their interests with the €20 Billion Nama robbery makes this country more and more resemble the Britain of the Urquhart novels.
Given the EU’s insistence on ING and RBS being broken up, is it likely that what will be left of the two main banks is just ‘bad’ banks? The good bits will all be sold off, the remaining bad bits retained. In this case, the lumpen banks will never make a profit… (a levy, one presumes, would have to have some retained value on the books, so any asset sales would have to go to funding the levy before sharholders got a payoff).
AIB & BofI are going to get crushed by the ECB.
NAMA takes the toxic development sshhtt of their balance sheets onto the Citizen.
They are forced to sell “non-core” assets by the ECB as part of the bailout.
They are left with balance sheets that are completely impaired and with unrecognised residential mortgage delinquency to follow.
They can’t raise any capital on the “market”.
The ECB places sever restrictions on an Irish Government recapitalisation.
German & French banks come in (24 mths?) and buy for cents on the euro.
The ECB declares that the imposition of a surcharge of corporation tax is “non-competitive.”
Pan European banking takes another little step.
Now I’ll take my tinfoil hat off.
“The cheapest bailout in the world”
But hey, as long as the bondholders are made whole.
The Guardian today reported that the European Commission will require RBS to sell off its insurance operations, hundreds of branch offices, and (notably) its US operation “Citizens Bank”, as conditions for approving state aid from the UK government. http://www.guardian.co.uk/business/2009/nov/02/rbs-admits-eu-sale-plan
A similar approach to AIB and BofI would indeed seem to leave them in the “sshhtt” that Greg outlines above.
I think the maintenance of an Irish bank is seen as important per Alan Ahearne. It is as likely that AIB, BOI, Anglo & Nationwide will all survive as that they will all disappear. I would be surprised if BOI in particular does not survive. And if BOI survives then AIB will claim they are suffering a gross injustice if they are sold off. It sounds like there may be a supermutual. But at this stage who knows?
Even if we end up owning them all 100% who is to say that apart from a merger or two there will be any change. Given what happened I expect remarkably little change. But we don’t know.
They can keep the names. Ownership can and will change.
But as you say “we don’t know”. And that is the most worrying and insidious thing.
One way or the other we’re getting screwed.
Warning to whomsoever may give economic advice to Brian Lenihan:
Whatever you do, never ever disagree with him in public. Whelan, Lucey, McWilliams, the number of people whose public life he has tried to end will soon be in double figures. McWilliams was trying to help him but he was shown no mercy. Ireland’s Francis Urquhart is I am sure personally very charming. The worst ones always are. He will tell you that he was always opposed to the government’s budgetary policies.
He has been a TD since 1996, Minister of State since 2002 and at the cabinet table since 2005! He never said a word!
Be careful, your public life is in danger.
Stay cool E76.
You give this man too much credit.
He is no Lemass. He’s just being bullied by those who want your children’s income. He has no vision for Ireland. He is a complete failure.
He is just a frightened crying little bullied boy.
He’ll be gone soon.
Then the people will have to come to terms with reality.
What is the price of fish where you live?
I wish the females in Ireland would stop trying to seduce Irish economists and try to become economists themselves. I noted the fact above, that not enough females are involved in Prime Time debates on economic issues. I was wrong of course. Miriam has been in the thick of it all, having to deal with even the most eccentric economists.
But seriously, we do need more females on the air waves and on telly, who aren’t arriving from a journalistic/political angle. It would send out the right message that Ireland is a modern country with modern values. A bit like the ‘Eurovision’ did so much for Ireland’s image abroad in the past.
Interesting speech by Dan Boyle on NAMA. All my fears have just melted away.