What Will the Banks Do with NAMA’s Bonds?

There were some entertaining media reports last week about the appearence of AIB and Bank of Ireland executives before the Oireachtas Committee on Finance and the Public Sector. I decided at the time not to comment on these reports because the full transcripts of these meetings eventually get put online and these are a better way to judge what was said.

The transcript is now online here. The most insightful aspects of the committee meeting were the exchanges relating to what the banks were going to do with the NAMA bonds given to them by the Irish government.

Anyone following the NAMA debate over the past few months will have regularly seen and heard members of the government explain how NAMA was going to get credit flowing: NAMA would take ownership of the banks’ property loan portfolios in return for government bonds, which the banks would then use as collateral to get repo loans from the ECB and then these funds would be loaned out to Irish firms and households.

The statements made at the committee meeting by CEOs Richie Boucher of BOI and Eugene Sheehy of AIB did not at all conform with this story. Indeed, the general tone of their statements was that there would be very little swapping of NAMA bonds for ECB loans. Instead, as illustrated by Sheehy’s already infamous “trickle-down” comment, the only benefit to getting credit going in Ireland would be a lower cost of market funding for Irish banks which might get passed on to customers.

I will pick out three passages from the transcript.

First, there was the following exchange involving Mr. Boucher:

Deputy Joan Burton: What does Bank of Ireland see itself doing with the NAMA bonds?

Mr. Richie Boucher: The NAMA bonds are a contribution to our funding. The proportion of the NAMA assets to the overall Bank of Ireland assets – whether €10 billion, €11billion, €12 billion, €13 billion or €7 billion – is a contribution to our wholesale funding. We mentioned earlier that as a board we took a decision that our colleague, Des Crowley, would have absolute access to funding. We provided funding into this market when we had much more straitened liquidity circumstances than today.

The Deputy mentioned the European Central Bank. Bank of Ireland took a deliberate decision, which has paid off but has been expensive for us, to have the minimal possible reliance on the ECB. It has cost us money to term out our funding and not rely on the ECB. At 30 September, we had net borrowings, not just from the ECB but from monetary authorities, of approximately €7 billion. For a balance sheet the size of ours, that approaches normal market operations, because there could be borrowings overnight and so on. That is a disclosed figure, but it should not be taken as reliance on monetary authorities. It approaches normal market operations for a bank of our size. It is not appropriate for a bank like ours, which we believe has a long-term future, to be reliant on monetary authorities for permanent funding. That is a broken business model. We have held to this discipline, although it has been a difficult discipline to adhere to over the past six to nine months.

The comments about NAMA, which is a swap of one type of asset for another, being “a contribution to our wholesale funding” seem a bit odd since NAMA bonds are held on the asset side of the balance sheet and wholesale funding is on the liability side. But certainly Mr. Boucher had the opportunity to state that the bonds would be used for repo loans from the ECB and instead went out of his way to talk about how he didn’t want to avail of further ECB borrowing.

Second, there is the following exchange involving Eugene Sheehy. Deputy Joan Burton asked the following question:

Deputy Joan Burton: It relates to the future of the bank. The bank is restructuring its lending side. The more important issue is whether it has a funding side to keep the lending going. What does AIB propose to do with the €16 billion or €17 billion in NAMA bonds? Will it hold on to them and use them at the ECB window or does it envisage selling them on the market? As Mr. O’Connor stated, the ECB is beginning to close the window. It seems that by January or February AIB will need a very large injection of further Government funding to square the circle which he was discussing.

Sheehy started on a long and rambling answer involving ATM fees and the international financial crisis and other matters. Eventually, he gets a bit closer to answering the question about the NAMA bonds:

Mr. Eugene Sheehy: In regard to whether the banks will offer more money to a customer who enters one of our branches the day after NAMA is established, that will not happen. Over time, we have a good prospect of reducing what we referred to in our paper as the funding premium. We deliberately identified this separately because we see it as a new lexicon which we and our customers have to understand. We left it as a cost so that customers can clearly see why it should be variable and demand that it be reduced as funding becomes cheaper.

Deputy Joan Burton: Is AIB proposing to hold or sell the NAMA bonds?

Mr. Eugene Sheehy: Our funding position, which is strong and diverse at present, will depend on the overall liquidity of the bank.

Deputy Joan Burton: Mr. Sheehy does not see a need for additional Government funding in the new year.

Mr. Eugene Sheehy: The fact is that we would not be able to repo the assets which are going into NAMA because of their quality and the uncertainty that surrounds them. The big advantage of NAMA is in its removal of uncertainty by replacing the assets with bonds. It thereby strengthens the perception and the reality of the bank’s funding position.

Deputy Kieran O’Donnell doesn’t seem to have been too happy with this response, so he continued with a similar line of questioning.

Deputy Kieran O’Donnell: The Minister has stated on numerous occasions that one of the main benefits of NAMA is that it allowed the banks to access the cheapest funding from the ECB. Is Mr. Sheehy telling me that AIB will not avail of that facility?

Mr. Eugene Sheehy: The system has already benefited hugely from NAMA.

Deputy Kieran O’Donnell: I asked a direct question. Will AIB take the NAMA bonds to the ECB to get funding at 1% or will the bonds sit on its balance sheets to earn 1.5% annual interest from the Government?

Mr. Eugene Sheehy: Currently we do not expect any shortage in our ability to meet the lending requirements of our customers.

Deputy Kieran O’Donnell: Mr. Sheehy told me that one of the reasons for higher rates is because the funding requirement for his bank has increased significantly.

Mr. Eugene Sheehy: It is a cost issue, not a volume one. We can get the funds but they cost more.

Deputy Kieran O’Donnell: Why not go to the ECB with the NAMA bonds to get the funds at a reduced cost? When we looked at it, one of the main ideas was to provide a flow of credit. One of the reasons credit is not flowing is the cost to banks and customers. Banks were to function in an environment and pass credit to small and medium-size enterprises, in particular, at a reduced cost. Will AIB not go to the ECB with the NAMA bonds to get funds at 1%?

Mr. Eugene Sheehy: We have adequate funding available to meet the demands of our customers. The NAMA bond will be part of the bank’s overall liquidity management position.

Deputy Kieran O’Donnell: It will not go to the ECB.

Deputy Joan Burton: What will the bank do with them? That is the question I asked as well.

Deputy Kieran O’Donnell: They are being taken on the balance sheet of the banks, with the interest from Government bonds from the taxpayer, but they will not be used with regard to one of the main issues, getting cheap credit flowing again.

Mr. Eugene Sheehy: We want the credit to be as cheap as possible.

Deputy Kieran O’Donnell: Why is the bank not going to the ECB?

Mr. Eugene Sheehy: The NAMA bond will be part of the bank’s overall liquidity position. It will help us get money.

Deputy Kieran O’Donnell: Mr. Sheehy is not answering the question.

Deputy Joan Burton: Will Mr. Sheehy explain that? I asked the similar question of what the bank proposes to do with the NAMA bonds. Will it hold, use or sell them?

Deputy Kieran O’Donnell: From Mr. Sheehy’s statement, the bank will effectively sit them on its balance sheet. He is not answering the question. Does AIB intend to go to the ECB with the NAMA bonds to access to funds at 1%? Have the banks discussed the matter with the Minister for Finance? I would love to know his views on what the banks are saying today. This is the bank which is providing over 40% of lending to small and medium-size enterprises in the Irish economy. There is disconnect.

Mr. Eugene Sheehy: I do not see the disconnect. We are exchanging assets with the State for the bond and that bond will improve the funding position of the bank. It will improve our ability to fund money more cheaply.

Deputy Kieran O’Donnell: Why will the bank not go to the ECB?

Mr. Eugene Sheehy: It is one of the options.

Deputy Kieran O’Donnell: Is the witness saying the bank will consider going to the ECB?

Mr. Eugene Sheehy: We will consider everything. The important factor is that removing the uncertainty around these assets improves the overall funding position of both the bank and the country.

Deputy Kieran O’Donnell: Nobody disagrees with that. We are making a very simple point.

Mr. Eugene Sheehy: I accept that point.

Deputy Kieran O’Donnell: Is Mr. Sheehy stating that AIB will look to access funds through the ECB by effectively repoing NAMA bonds?

Mr. Eugene Sheehy: We will use the NAMA bond to improve our overall funding position.

Deputy Kieran O’Donnell: What of the cost of funding implicit in that?

Mr. Eugene Sheehy: If our funding position is better, the cost of funding will be better.

Deputy Kieran O’Donnell: Okay.

It’s a pity we don’t have video of this exchange. Suffice to say, however, that Mr. Sheehy ended up being even clearer than Mr. Boucher about his lack of enthusiasm for using NAMA bonds for repo loans from ECB.

93 thoughts on “What Will the Banks Do with NAMA’s Bonds?”

  1. @ Karl

    Lending to an economy already over borrowed was never going to happen.

    We knew that, they knew that, you told the public that, the economists on this site told them that and now the Banks have told them that, but still they proceed.

    Obvious now as it was along that it was the bailout we all knew it was.

  2. I think we need to ask the question as to whether the model of repo-ing bonds with the ECB became defunct once the SPV format was taken on board and further by the announcement that unlimited repo operations are likely to be withdrawn. The legal basis for NAMA bonds and what they will be secured upon, if anything, is totally unclear. It is quite possible that they will not be eligible for the limited repo operations that will remain. We have mentioned this before:
    http://www.irisheconomy.ie/index.php/2009/11/05/ft-nama-spvs-and-other-irish-magic/#comment-23625

    I think we should also differentiate between (i) straight borrowing from the ECB by taking ECB deposits as has happened at annglo, and (ii) availaing of ECB repo operations by using eligible assets as collateral for ECB repo operations. The bankers do not explain the difference in the extracts quoted above though it appears Boucher may be talking in terms of that difference.

    Beyond that, I think we are playing dumb for rhetorical effect if we pretend we ever thought the plan was that the banks were going to lend out all the money they got from repo-ing NAMA bonds. The Govt never said this was the plan. We all know nice and soothing things were said about NAMA improving the banks’ ability to lend by stabilising the banking system, but time and again anybody who understood the matter clearly pointed out that NAMA funds would not be used directly for lending.

    Nobody who has understood the NAMA plan (whether they object to it or not) will be surprised by what the banks are saying. The opposition engaged in spin by asking would NAMA provide for new lending when they knew it couldn’t and the Govt spinners spun right back at them because it was valid to say that NAMA is part of the solution that will lead to more lending. That is the nature of the dirty game of politics for you. Nobody who understands the real issues will be distracted by this.

  3. @Karl:
    “Anyone following the NAMA debate over the past few months will have regularly seen and heard members of the government explain how NAMA was going to get credit flowing: […]”

    Your description applies only to the members of the government who were able to read their briefs. There were also members of the government who either misunderstood how NAMA was supposed to work or found it easier to tell porkies instead.

    A moustachioed figure comes to mind.

    bjg

  4. “Nobody who understands the real issues will be distracted by this.”

    That doesn’t read correctly. I don’t mean to minimise the importance of new lending or that people should understand by what is going on. I am simply saying that we should let a spin-fest distract us from the reality of the issues. Discussing the banks lending or not lending is important. Discussing the spin isn’t.

    The longer this banking crisis goes on and the angrier people get, the easier it is to appreciate the political difficulties and dangers of running nationalised banks in Ireland.

  5. @ Nhou_enlai

    Yes we do have a real problem, no doubt about that. We have a government who got us into the mess. We have banks who got themselves into a mess. We have a government who thought that the every bank in Ireland was systemic. We have a government that has already put 11bn into banks and which is being primed for more tax payers funds post NAMA and maybe even before. These banks without the government and tax payer are insolvent their share values nil. Their current share value is little nothing more than a future hope value.

    In all probability they will still need to be be nationalised next year when the level of defaults and bad debts in the pipeline keep rising and feed into their non performing loan categories. For instance buy to let mortgages and loans given out to businesses heading for bankruptcy car loans credit card loans etc.

    I bow to your wisdom but can you just tell me why it is possible for other countries to nationalise banks while the government here recoils in horror at the prospect. I know they have problems running things. I knew the banks were never going to be in a position post nama to lend because they have to discharge their own debt obligations and their profit making model is dead in the water.

    Is it to do with the government forming a tag team with our rescued domestic banks to extract money from the German tax payer?

  6. @zhou
    “Beyond that, I think we are playing dumb for rhetorical effect if we pretend we ever thought the plan was that the banks were going to lend out all the money they got from repo-ing NAMA bonds. The Govt never said this was the plan.”

    Dulcet toned David Murphy told us repeatedly that the purpose of NAMA, “was to get credit flowing again”. Who was telling him this? Presumably he now feels deeply betrayed?

    No, I didn’t think it would lend out everything but many NAMA supporters on here compared it to quantitative easing. Instead we are getting quantitative trickling. Presumably they now feel deeply betrayed?

    Do you agree with the minister that NAMA will break even without even breaking into a sweat? If this is not true will you feel deeply betrayed?

    “The opposition engaged in spin by asking would NAMA provide for new lending when they knew it couldn’t …”

    That alas sounds like spin to me. The country was repeatedly told that NAMA would result in very substantial lending:

    “Finance Minister Brian Lenihan says the primary purpose of the National Assets Management Agency (Nama) is to free up Irish banks to resume normal lending to the business sector.”

    Read more: http://www.breakingnews.ie/archives/2009/1021/ireland/sfa-nama-not-enough-to-get-credit-flowing-428157.html#ixzz0YaVb95SJ

    “The Minister also pointed to the establishment of NAMA as the next big step in the process of restoring the banks to health so that they can provide additional credit to the economy.”

    http://www.finance.gov.ie/viewdoc.asp?DocID=5857

    “Speaking after the publication of the Bill, Mr Lenihan said it was necessary to address the health and stability of the Irish banking system, to get credit flowing and ensure that people’s savings were protected.”

    http://www.irishtimes.com/newspaper/frontpage/2009/0731/1224251764850.html

    Trying to argue that we were not promised very substantial extra credit is reminiscent of this:
    http://en.wikipedia.org/wiki/Mental_reservation

  7. @ E43Bn & no extra lending
    Living on a “mental reservation” I think I have been trying to handle that and the rest of the FF mumbo jumbo for quite some time. However, it is the prospect of having to live on an actual reservation called nama, created by one Brian Lenihan that bothers me.

  8. The Government has hoist itself on its own spin petard. It’s one thing to argue that cleaning out banks’ bad assets is needed for the banks to be in a position to resume providing credit on a “normal” (i.e not bubble-promoting) basis (which has been the broad guiding principle of bank restructurings round the world and as such is hard to quibble with). But instead the government’s spokespeople wanted to tell an overblown story that the whole business was brilliant because the ECB couldn’t wait to help with easy funding (as if this was a special favour to Ireland rather than part of a general policy of exceptional monetary easing). This story has now fallen apart, but for this particular debacle I’d put more blame on the government than on the banks. (For what it’s worth I have never worked for either.)

    Call me old-fashioned but once upon a time banks made loans funded by deposits. The loans earned interest and it wasn’t seen as a disaster if they couldn’t be sold to another bank or repo’d at the central bank. Would there be something to be said for a return to this business model?

  9. @Zhou
    We need to be careful to distinguish between gross and net lending, good and bad lending. In the round, you are right: NAMA was never going to get ‘lending going again’. Only the passing of time is going to heal enough wounds for that to happen. But NAMA is supposed to make sure that that passage of time is not longer than it needs to be. And a subtle critique of NAMA is that it won’t even do that.
    Additionally, while we don’t want or need a sudden turning on of a credit tap in an over leveraged economy, the financial system should be restored to the point where those (few?) credit-worthy borrowers who are out there are not credit-constrained. NAMA doesn’t pass that test either.

  10. @Robert

    Is there a country other than Iceland that has nationalised its entire banking system? (not a rhetorical question by the way).

    If there are none, I would hazard a guess that this is why the government might be wary of nationalisation.

  11. @ Robert Browne
    You are probably correct, but the banks would be putting off the final reckoning by lending into this economy. The point is that everyone knew this but the shills said otherwise. They were trying to sell a cohernet story to the sheep who vote and who do not vote. Given the lack of response, they may feel themselves successful.
    No reckless lending. Tyhe wisest course now is to ensure that only the most secure and productive lending is made. The problem is that all those who failed in the last twenty years in the eyes of the banks, to lend enough were let go as unsuitable to earn profits for the bank. These very people are now the required skillbase. The present set of zombies know their limitations.
    There will be no lending. Good. It is the only sensible response until we know what industries will eat up what is left of our precious capital. Many industries are viable no more. Finance, Insurance Real Estate are the most obvious.

    NAMA has put capital into non-productive land and planning permissions. What a mess.

    http://www.japanfocus.org/-R_Taggart-Murphy/3265
    This develops point made in my previous postings. Japan style policies will cause Japan style results but only for a time.

    Debt continues to grow!!!!!

    In a time of manifest deflation!!!!

  12. @ Concubhar

    Is there a country other than Iceland or Ireland with a banking sector in quite this predicament? (This is a rhetorical question)

    The fact is, there is a precendent for managing a nationalisation of a major bank in Europe – just look to Northern Rock.

    As Karl Whelan pointed out some time ago on this site, it could be done in a weekend, just copy paste the text of the UK act and replace Northern Rock with AIB and BOI. Let the others go to the wall.

  13. @ Pat: FIRE! Oooops. You ARE NOT supposed to use such language! Now where did you learn that term, I wonder? Some quite learned people thought it referred to that nice warm thing in the living room!

    Monetary Inflation, was truly massive in recent times – not that cash stuff – the virtual electronic stuff. Now its being deleted from the spreadsheets. mooB! Debris that litters the landscape is called debt. Better call the Greens to sluice it away, they seem to be adept at shoveling s**t – being green and all!

    The P+C economies have emigrated to – well, eastwards somewhere. Were left with the farm.

    Is the euro starting to drop – you think?

    B Peter

  14. @Concubhar O’Caolai
    There is no other country in the world where there banking system is as hopelessly insolvent as Ireland’s

  15. @E43Bn & no extra lending

    Is that the same David Murphy who live on RTE news said ‘ when we came up with NAMA’ before correcting himself and then said ‘ The government’.

    He along with many in the media was a major cheerleader for NAMA. Where are they now when NAMA has being finally exposed, as most of us had known from the outset, as a bail out for the Banks….

  16. @Robert

    As per every commentary on sovereign default since the Dubai worls episode, we are “one to be watch”. As per Dubai World episode, default of state owned companies can be interpreted as sovereign default. As per Colm McCarthy, our banking system is the most banjaxed in the EU. As per Colm McCarthy, we may not be able to save all our banks. If we nationalise one bank we may have nationalise them all because of loss of market confidence. If we do so then the contagion could spread to sovereign debt.

    I believe nationalisation can be credibly achieved in the context of the NAMA process. I am not saying that I have full confidence that will happen if necessary.

    @simpleton

    Those are indeed more fundamental points of debate vis-a-vis NAMA. I don’t necessarily agree that NAMA does not pass the test of being an effective part of the bank sector rehabilitation process. However, I could not definitively contradict you either. The efficacy of NAMA depends on its implementation rather than the legislation. That bridge is yet to be crossed.

    Your point about NAMA needing to speed up recovery becomes all the more fundamental in the context of Rogoff’s views on when the sovereign debt crisis is likely to manifest itself in all its horror, i.e., in two years time. We successfully treaded water in difficult circumstances and managed to avoid marching ourself into disaster with overly ambitious plans. That period is over. It is now time for decisive action.

  17. IMO for NAMA not to make horrendous losses, banks will need to provide credit to NAMA related assets. This will divert credit way from potentially more productive activities.

    Repo-ing NAMA bonds only temporarily removes them from the banks’ balance sheets (that’s repurchase agreement for you). They’re typically very short durations. I don’t see how repo-ing NAMA bonds (in itself) enables lending. What they do is improve the quality of the banks assets and improve weighted risk to captial ratios. What NAMA bonds don’t do is give the Irish banks 54bn to lend.

  18. @Zhou
    What losses do you expect from NAMA? Is Morgan Kelly’s minimum loss of €35Bn plus interest not enough to put you off? Please don’t use any jesuitical doctrines when answering.

  19. will somebody explain the problem to me? What is the issue with a bank NOT using a repurchase facility? For all the talk of ‘getting credit flowing’ there is nothing of the actual figures on the demand side and to expect it to ‘flow’ of itself disregards the risk associated with the present market. If the banks said ‘yep, we’ll repo it all and lend it within weeks’ (being the polar opposite of what they said they’d do) there would equally be an uproar, so what exactly is the point of contention?

  20. NAMA making losses is not the issue. It will. The issue WAS could these be reduced a few billion by taking out the shareholders and the subbies. The answer was no, these were sacrosanct.

  21. @E43

    I honestly do not know whether NAMA will make a profit or a loss or the degree of same. I hope that is crystal clear for you.

  22. @Karl Deeter

    “If the banks said ‘yep, we’ll repo it all and lend it within weeks’ (being the polar opposite of what they said they’d do) there would equally be an uproar…”

    You are 100% correct on that.

  23. @ Brian Lucey,

    But the two issues are interlinked – Nama’s ability to contain its losses depends on the price paid for Nama assets being sufficiently low to constrain the liquidity of the banks, and vice versa.

    This is so because, by taking the nationalisation option off the table, the government has effectively tied it hands. It’s either Nama loses billions or the banks don’t have enough liquid cash to lend.

    As the Swedish guy pointed out, once you nationalise, it doesn’t matter what price you pay for the zombie assets. Moreover, if the goal is to refloat clean banks, then it becomes in the taxpayers interest to make sure that the new, clean banks have strong liquidity positions (i.e. so they command a strong share price).

  24. @zhou
    Give us your expected NAMA loss.

    @Karl Deeter
    Please reread my previous post. We were told multiple times that the purpose of NAMA was to get credit flowing. There would be no outcry from anyone who does not have bank shares or bank bonds if it did that.
    If the banks aren’t going to lend a huge amount more lets buy BOI, make deal with AIB bondholders, suspend NAMA, and repeal the guarantee.

    We should not feed any more of our flesh to these zombies. We have given them €11 Bn this year already and it is all gone. Our real national deficit this year is approaching 20%. Next year NAMA will make it 43%. We should not have parents lying awake at night worrying about losing their homes while investors in bubble property investors like Anglo and Nationwide sleep peacefully at their expense, developers chant “NAMA, NAMA” at booze ups, the intact banks feast with the almost intact regulators, and the evil government which has been in power for 90% of the last twenty two years and drove a run-away property bubble that would have ruined the country whatever the bank regulators did brazenly smears public sector workers for all the country’s problems.

    N.B.
    Spain had great bank regulators but has still crashed – because of its government. Our government appointed a private banker to chair the bank regulator. Lenihan said the head of central bank did great job when he retired this year. Pat Neary – only appointed 2006, bubble burst early 2007 – was given huge sum when he left. Why if he was completely at fault – because the government stopped the regulation of the bubble. Neary’s predecessor is on board of ILP and…Merrill Lynch (NAMA’s creator). FF are evil slime.

  25. It is clear that NAMA “the silver bullet” has been a bit overplayed (though never by me).

    Hopefully, what we will have post NAMA is a reasonably healthy banking system which will behave as prudent bankers should do in a recession, no less but also no more.

    Clearly it is not going to be a conduit for dishing out 54Bn of easy ECB cash to the populace, that would of course lead to disaster.

    Without a normalising of the banking system there would have been no lending at all, for there would be no funding.

    NAMA will hopefully fix one of the broken pieces of our economic system, but much else needs to happen before we are out of this.

  26. If ECB bases rates = 1.0% and if (taking AIB as a proxy) the average loan margin at Irish banks = c2.0%, then average lending rates = c3% at a time when inflation = -6.6% (CPI) or -2.8% (HICP). This means that real interest rates equal circa +10% (CPI basis) or circa +6% (HICP basis). Either way, real interest rates are astonishingly high given that we are in an economic depression.

    It would therefore be amazing – even if our banking system was properly functioning – if there was strong demand for fresh credit.

    Case in point: credit card debt. Nobody has asserted that the supply of credit via credit cards is constrained but there has been net repayment of credit card debt in recent times because (a) real interest rates are painfully high and (b) people’s balance sheets are overextended and need repair (i.e. equity build-up through savings).

    We got inappropriately low interest rates from 1997-2007 after joining EMU. The result was a property boom built on a credit bubble. Now we are getting interest rates that are inappropriately high from EMU – this is likely to be the case for some years. The results will be:
    a. deleveraging.
    b. debt deflation.
    c. anemic economic growth.
    d. net emigration.
    e. residential property price falls of (I would guesstimate) circa 80% from peak before we hit bottom.
    f. huge political and social stress.

    The Punch & Judy villains of many posters on this site (FF, greedy bankers, slack regulators) made mistakes to be sure. But the villain of the piece was our EMU entry.

    Just look at Spain. As far as I know FF is not in power there. Their banks are “not greedy”. And their regulators are “superb”. But their macroeconomic fate is similar to ours. That’s because the root-cause of our problems is the same.

    Ireland 2009 = Spain 2010?

  27. @Brian Lucey
    It is now clear that NAMA is to fix subordinate bondholders, shareholders as much as possible and give developers time and support. That is evil. The €54Bn should go in extra lending or not be borrowed. Lenihan has already flushed away an underpriced bank guarantee and €11Bn down our bank sewers – we will never see this money again. He has been in there for a year and two months. Now he is trying to put Mary Coughlan of all people in charge of fixing the plumbing. Someone needs to break down the door and drag out these incompetents.

  28. Guys, can I draw us back to the issues in the original post?

    In September, John Gormley said the following:

    “This is about injecting a stimulus into the Irish economy through a very good deal with the ECB”

    Link — http://www.irishtimes.com/newspaper/breaking/2009/0911/breaking8.html

    This sentiment was expressed publicly by supporters of the NAMA bill on many occasions. Indeed, there was barely any NAMA-related media appearances by government politicians in recent months that didn’t mention the ECB — I’m only highlighting this particular one to be concrete and to ward off accusations that it was never said.

    So here are the questions:

    1. What was this “very good deal” with the ECB in relation to the NAMA proposal? Can someone find a description of the deal?

    2. In light of the comments of Boucher and Sheehy, what role (if any) is being played by the ECB in the NAMA plan?

  29. @Cormac Lucey
    Businesses are crying out for credit. My experience and the experience of everyone I know and every business spokesperson confirms this. There is an almighty squeeze on.

    @All
    Pro-NAMA posters taking this line (after taking the line that it would get credit flowing for many months) are guilty of the same jesuitical deceit as Brian Lenihan. Please cancel your mental reservations – they’re getting tiring.

    FF stoked this bubble relentlessly. The EU told them to stop. The arrogant FF hierarchy dismissed them.

    http://www.irishtimes.com/newspaper/finance/2009/0515/1224246566927.html

    “A HALF DOZEN French financial journalists are waiting for Finance Minister Brian Lenihan in the Ambassador’s office….When President Nicolas Sarkozy and Taoiseach Brian Cowen were both finance ministers in 2004, Sarkozy asked one of his advisors: “Who’s that guy who sleeps through meetings? Why doesn’t he participate?”….
    …..Another journalist recalls that Xavier Musca, now Sarkozy’s economic advisor, warned Ireland and Spain around 2005: “Your boom economies are going to blow up in your faces.” Musca was head of the EU’s economic and finance committee then. “The Irish didn’t listen,” the journalist adds…

    Alexandrine Bouilhet, international economics editor at Le Figaro:

    “Tirades(?) like Bouilhet’s are not uncommon among French officials and bankers. “The Irish wanted to have their cake and eat it too,” she says. “Too much property. Too many tax breaks. And you wouldn’t listen. Under Europe’s protection, you attracted US companies with your policy of fiscal dumping. You raked in agricultural aid, and you voted No to the Lisbon Treaty. Then you played the lonely cowboy on the bank guarantee. There’s a feeling that Ireland has been cut down to size.”

    Cut down to size by Lenihan and Cowen.

    @All
    Interesting to see that Frank Fahey was the first

  30. @ALL
    Interesting to see that Frank Fahey was the first government spokeman to say that the banks would need extra funding on top of NAMA. He really is at the heart of the government’s decision-making on NAMA in spite of owning 40 properties. In any other country…

    http://www.independent.ie/national-news/financial-hurricane-that-put-the-wind-in-brian-lenihans-sails-1490370.html

    Re. the bank guarantee:
    “Senior government sources have said the suggestion came from JP McManus, while Dermot Desmond’s name has also been associated with the plan. David McWilliams has led the charge to claim the credit for it, much to the ire of Lenihan and his officials.”
    In any other country….

    “The initiative announced last Tuesday morning bears the hallmarks of a Charlie McCreevy masterstroke — and it is no coincidence that he was confirmed to have played some part in its development.”
    McCreevy was in charge of European financial regulation. If he was unhappy at the property bubble he could have intervened. He didn’t.
    If he or Lenihan had been finance minister since 1997 we would be as badly off now, or worse.

  31. On the afternoon of 16th September 2009, Finance Minister Brian Lenihan announced in Dail Eireann ….

    “AIB will sell €24 billion worth of loans to Nama, Bank of Ireland sell €16 billion in loans and nationalised Anglo Irish Bank will transfer €28 billion in loans. These loans will be swapped for bonds from Nama which the banks will be able to exchange for cash with the European Central Bank.”

  32. “DEPUTY MICHAEL AHERN Chairman:

    “Before continuing, I wish to make a comment. This meeting was proposed by Deputy Fahey in order to discuss the interest premiums over the cost of funds the banks will charge to restore profitability. We cannot discuss the whole banking situation, otherwise we would be here forever.”

    “This meeting was proposed by Deputy Fahey in order to discuss the interest premiums”?

    “The establishment of NAMA is now the critical development which will create a functioning bank system and return the banks to liquidity, as happened in Sweden. I believe NAMA will have significant success. It will get the banks back lending to the real economy by Christmas and begin to make a profit for the tax payer.”……. 23/09/09

    http://www.fiannafail.ie/news/entry/speech-by-frank-fahey-td-on-the-national-asset-management-agency-bill-2009-/

    Well if Frank Fahey says “I believe NAMA will have significant success. It will get the banks back lending to the real economy by Christmas” it must be true.

  33. @E43Bn & no extra lending: “We were told multiple times that the purpose of NAMA was to get credit flowing.”

    I think there is an important distinction between ‘getting credit flowing’ and ‘forcing credit distribution’, politicians, and most of you here seem to favour the latter, that by some miracle there will be a sudden stream of credit-worthy prospects requiring funding. It is simply not prudent in the midst of a deep recession to back losers, it isn’t prudent in the good times either, credit is flowing where appropriate, I see that in the mortgage markets, good applications get backing, bad ones don’t.

    The idea is to get loan/deposit ratios into an environment where lending and some moderate risk taking can occur, namely somewhere below 125% or there abouts, BOI will be c. 130ish after NAMA. but to say in advance ‘why aren’t you lending now’ or ‘will you suddenly lend more in the future’ is the wrong question, past examples in other economies demonstrate that credit demand slumps along with bubbles bursting, so the right question is ‘will you be healthy enough to lend responsibly to good applicants’ and the answer to that is yes, but it isn’t an immediate process.

  34. Karl Whelan wrote:
    2. In light of the comments of Boucher and Sheehy, what role (if any) is being played by the ECB in the NAMA plan?

    It would appear, none at all.

    From the FT:
    http://www.ft.com/cms/s/0/ec63054a-dff0-11de-9d40-00144feab49a.html

    “The European Central Bank is expected later on Thursday to announce fresh moves dismantling emergency actions taken to shore-up financial markets, after its governing council left official eurozone interest rates unchanged at 1 per cent … ”

    “The ECB is pressing ahead with its exit strategy because it believes financial markets have returned to more normal conditions and fears some eurozone banks have become dependent on its emergency liquidity. “The financial system and individual institutions within it must act now to ensure that a future removal of central bank support can be managed without painful ‘withdrawal symptoms’,” Mr Trichet told a banking conference in Frankfurt last month.”

  35. @E43Bn & no extra lending

    As you say above,

    “If the banks aren’t going to lend a huge amount more lets buy BOI, make deal with AIB bondholders, suspend NAMA, and repeal the guarantee.”

    I totally agree you! They will not be lending anything they have been advertising that they are open for business all along but the reality is they are not and after NAMA will only lend token amounts to deflect criticism. They are already saying they need more capital in addition to NAMA.

  36. Re: Charlie McCreevy ……

    The key moment for the Irish economy was 2003–2004.
    That was when our exports fell away and our current account deficit plummeted. This was also when Ireland lost its Finance Minister Charlie McCreevy.
    In the early 2000s, when Irish economic growth declined, he maintained strict control on growth in government spending.
    He maintained a surplus during his seven years in Finance, while also implementing a tax-cutting programme and major increases in Health and Education.
    In addition, he increased investment in infrastructural development to 5 per cent of GNP. Unemployment was reduced from 10%. to 4.4%.
    Real GDP growth during McCreevy’s time as Finance Minister represented the highest average of any western European country.

    In 2003, McCreevy was in direct conflict with his Taoiseach Bertie Ahern, with regard to the future direction of Irish economic policy.
    McCreevy wanted to rein in the economy at that point, which in hindsight was the correct course of action, but the Taoiseach wanted the opposite.
    Bertie Ahern wanted more property-related tax breaks to further fuel the already overheated construction and housing sectors.
    Mr. Ahern won out and Brian Cowen replaced Charlie McCreevy as Finance Minister.

    Brian Cowen then did Ahern’s bidding – with disastrous consequences for the Irish economy.
    It was allowed to develop into an out-of-control property boom, rather than focusing on developing a domestic exporting sector.

  37. @ E43Bn & no extra lending

    Hadn’t seen that Irish Times article.

    “Another journalist recalls that Xavier Musca, now Sarkozy’s economic advisor, warned Ireland and Spain around 2005: “Your boom economies are going to blow up in your faces.””

    How can Fianna Fail say they weren’t told?

  38. The question which would now be interesting to know is; why did Mr. Ahern go against his Finance Minister in 2003?
    Who, or what, would have influenced Mr. Ahern in that regard?
    Of course we’ll never know, but it’s possible with hindsight to have a very good guess and when you do it will allow you to see the bigger picture.
    This was the critical time, this was the Irish economy’s tipping point.
    We were at a crossroads and the man who is Taoiseach today was instrumental in taking us down the wrong road.
    Charlie McCreevy wanted no part of it and got out.

    On 3rd June 2006 Charlie McCreevy gave an interview to Jamie Smyth of the Irish Times.

    At one stage Mr. Smyth asked him;

    Will the services directive define your term as a commissioner?

    As minister for finance in Ireland I couldn’t swear I’d never heard of the directive but certainly it didn’t impinge on my consciousness when I was in Ireland and I don’t remember any debate on it in Ireland.

    When it came out here in the end of 2004 I had to prepare for the EP interview and I had to learn about it.
    It was the big issue and it has dominated the debate here for some time and dominated the work with the parliament.
    Myself, my cabinet and my services have put an extraordinary amount of time in the area.
    Sometimes you put a big effort into a certain area and you don’t achieve anything. I can think of many things in my life- not just my political life- and you don’t ever get any result out of it but at least now we seem to be getting a result.

    When I left Irish politics I said I’d let history be the judge of what I did or didn’t do, lets let time pass and people can judge it. I am a bit blasé about those type of determinations, what you determine about someone in the short term is usually wrong. There is still plenty more to do on the European stage.

    http://www.irishtimes.com/newspaper/special/2006/mccreevy/index.htm

  39. @KW

    “1. What was this “very good deal” with the ECB in relation to the NAMA proposal? Can someone find a description of the deal?

    2. In light of the comments of Boucher and Sheehy, what role (if any) is being played by the ECB in the NAMA plan?”

    Good questions.

    My view is that the answer to no. 1 is that we were told that the ECB would allow us to issue nama bonds at a very low interest rate and that such bonds would be eligible for ECB repo operations. That was the main element of the good deal vis-a-vis NAMA.

    The answer to No. 2 is not clear as it is not certain that the answer to no. 1 applies anymore (unless the ECB pre-approved repo ops for NAMA Master SPV bonds secured on Govt Bonds accodring to an as yer undisclosed structure some time ago in private).

    A very real very good deal was the huge amount of money the ECB loaned to our banks to keep them alive.

  40. @ Karl

    “can I draw us back to the issues in the original post?”

    I’d love to, but i assume you’ve realised that at this point the NAMA-discussion forums (in fact, most forums) have essentially been taken over by a hardcore of anti-FF/NAMA posters (not you) who prefer to spout, repetitively and rantishly, rumours, opinions-as-facts, slurs on both politicians/posters, biblical style tales of good vs evil etc rather than actually discuss with rationality and reasonableness the points of the day. To be honest i’m getting bored with it. This site is slowly de-volving into politics.ie. I’ve noticed that many of the more level headed posters on here (on both sides) don’t contribute that much anymore to the NAMA threads, so i get the feeling that other people are thinking the same thing.

  41. @Eoin

    I skip over many posts. If one gets involved in tit-for-tat posting then all one’s posts are devalued.

  42. @Zhou

    I understand your concerns about the SPV arrangement affecting the status of the NAMA bonds as eligible collateral. However, I’m pretty sure they are sufficiently government backed to qualify as government bonds as far as the ECB is concerned — the whole “privately-owned” thing is widely accepted as a convenient fiction that only Eurostat pretend to believe.

    Note that Sheehy (after serious cross-examination by Kieran O’Donnell SC!) concedes that repoing the bonds with the ECB is “one of the options”. So it can be done. They’re just saying they don’t want to.

  43. @ Eoin

    For what it’s worth, my sense is the debate here is more balanced than you claim.

    Look at this thread. On the pro-NAMA side (with varying degrees of enthusiasm) we have had you, Karl D., Conchubhar, Brian Woods 2, Cormac Lucey and, of course, Zhou (whose enthusiasm for NAMA has, I guess, waned but is certainly not anti-FF.) I don’t see how this discussion can be classified as a consistent with your “anti-NAMA takeover” hypothesis.

    But look, if you don’t like the comments, then you don’t have to read or contribute. And, of course, there’s more to the site than the comments.

  44. @zhou
    Morgan Kelly gave a range of NAMA losses of €35Bn to €42Bn plus interest. What’s your range of outcomes?

    @Graham
    Morgan Kelly said Anglo wasn’t systemic – government admitted this.
    http://www.gavinsblog.com/2009/11/09/irelands-note-to-the-commission/

    And Kelly said there was no special deal with the ECB. As you point out this is now clear too. With a world financial crisis and Lisbon being rerun the ECB gave out liquidity to stop the system collapsing – not to fund the Irish government bailing out developers. They kept quiet as the NAMA lobby boasted about their secret deal because the Irish government’s credibility was already toxic enough. After the bank guarantee we almost collapsed.

    Here is another Jesuitical conundrum:

    The ECB are indicating that they will withdraw liquidity from private banks. We have got the European Commission to class the additional €54 Bn bonds issued to the banks by us as not being state funding. The Commission will presumably not inquire into whether it is state aid – like the preference shares – on this basis. If they do we could end up with NAMA plus FINE! But everyone is agreed this is NOT government debt.

    How then can the ECB look another country with a borrowing problem in the face and say if you keep on borrowing we will not lend against any more of your debt when they will be loaning money to our banks against €54Bn of bonds that all agree are not government debt.
    Because they love us so much?
    See my post above about what they really think about Ireland & deservedly so.

  45. Eoin Says:

    “@ Karl

    “can I draw us back to the issues in the original post?”

    I’d love to, but i assume you’ve realised that at this point the NAMA-discussion forums (in fact, most forums) have essentially been taken over by a hardcore of anti-FF/NAMA posters (not you) who prefer to spout, repetitively and rantishly, rumours, opinions-as-facts, slurs on both politicians/posters, biblical style tales of good vs evil etc rather than actually discuss with rationality and reasonableness the points of the day. To be honest i’m getting bored with it. This site is slowly de-volving into politics.ie. I’ve noticed that many of the more level headed posters on here (on both sides) don’t contribute that much anymore to the NAMA threads, so i get the feeling that other people are thinking the same thing.”

    Agreed, what we have here on NAMA is P.ie II, great for heat, but short on light and the NAMA threads keep on coming.

  46. @ Karl

    A banking balance sheet with €54Bn of Government bonds is a much more acceptable prospect to funders than one with €54Bn of property related loans.

    The ECB is the lender of last resort. Other private sector funders (including interbank) lend huge money to banks on a short term basis. They know they are lending into a fundamental asset/liability timing mismatch but they do so because of the lender of last resort (or in the current emergency because of the Government guarantee).

    The intention is that the last resort would only be used for temporary mismatches or indeed for any “mini run” on the banks. The fact that the ECB will accept these NAMA bonds at their window ensures that there will never be an issue with short term funding getting repaid.

    Whether this needed ECB blessing or whether it is our legal right, we have already differed on, but it is somewhat irrelevant.

    The barraging of Burton et al was trying to get Boucher/Sheehy to say that they were going to use these bonds to borrow from the ECB as a first resort. That is not the case, they will be implicitly using their hugely enhanced last resort facility to greatly improve their access to “normal” funding.

  47. @Eoin,

    Yes I was going to post a comment with words to the same effect.

    This is a good site and we all have a responsibility to keep it that way. Obviously the figures of national debt are huge and it is understandable that some people might get a bit heated when discussing it etc.

    However the comments on this site will have no chance of being listed to by the powers that be if we allow a “free for all mob rule commentary” to be the norm.

    I sometimes wonder are there external forces outside the country deliberately spreading black propaganda to cause serious social turmoil within Ireland. Stranger things have happened in the past.

  48. The actions of the European Commission in regard to NAMA have been disgraceful. Never mind the fact that NAMA violates the EU’s own rules on state aid, the appearance of stability in the EMU system is all that matters. Fair play to Karl Whelan and the other economists on this blog who have blown apart the conspiracy (and there is no other word for it) between the state and the banks in regard to getting this charade up and running. When this mess ends up being teased-out day by day in front of a judge in Dublin Castle in 10 years time at least you’ll be able to say I told you so. I don’t know if that is consolation, but it’s hard to see any other reward in prospect from this sorry mess.

  49. @Brian Woods II

    Yes, I’d agree with most of that. Every so often we do manage to agree on things!

    Funnily enough, though, I didn’t hear any of those sentiments being expressed by NAMA supporters prior to the bill passing. Way back then (a few weeks ago) the received truth was that NAMA was a big ECB bailout of the Ireland, the whole point of which was to get cheap ECB credit pumped into the Irish economy.

    Indeed, all the way back on Nov 14, your opinion on this was as follows:
    “Ultimately the reality is that NAMA is borrowing cash from the ECB which is channeled back to the banks in return for their toxics.”

    http://www.irisheconomy.ie/index.php/2009/11/11/nama-not-borrowing-from-ecb/#comment-24382

  50. @ALL
    I was in a bad mood today partly caused by the latest NAMA betrayal. I will cut down on my criticism of FF – which I make so vociferously because it is so strangely absent in the media. Even when they are criticised by journalists most of it is to do with their “mishandling” of recent things. They handled the fuelling of the property bubble expertly. They have not handled the crash well – but then again they inflated a huge bubble. The crash was always going to be difficult to handle. FF should never be allowed forget that they caused our problems (in power 90% of the last 22 years).

  51. @Eoin
    A quick count shows 4 of the last 24 posts were on NAMA.

    Surely you of all people should be heartbroken that quantitative easing has been replaced by quantitative trickling? You believed it when you told us it surely?

    @Sporthog
    I’d be more woried about an internal conspiracy that has wilfully destroyed the country twice in the last thirty years. It’s called FF.

    I am spinning for no one and have no vested interest. Frank Fahey, who is at the centre of NAMA, is popularly known as “fourty gaffs”. You must be outraged by this conflict of interest.

    @Brian Woods 2
    Brian Lenihan must now give us a written, legally binding, irrevocable and published specification of the extra lending NAMA will result in. We should not accept any worthless verbal assurances from bankers brow-beaten by Lenihan into making them. The media should not let him away with nobbling them as he did the IMF and the European Commission. Eugene Sheehy has done us all some service by speaking candidly.

    @All
    The shocking thing is how so many pro-NAMA posters on this site who raved about the extra lending that it would produce are now saying:
    “well, that was all just spin wasn’t it”. I think we have all been given a lesson in how cynical and untrustworthy the NAMA lobby are.

  52. @Brian Woods 2
    “In addition to being unfair, it is questionable whether the bad bank proposal could achieve its goal of properly re-capitalising private sector banks. There may be limits on the price the Government can pay for impaired property loans under EU state aid rules. Banks may still have to write down their assets. It is easy to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place.”
    http://www.irishtimes.com/newspaper/finance/2009/0227/1224241886279.html

    Looks like Mr Whelan called it right, in February.

  53. @ Karl

    It looks like the ECB have no real interest in what NAMA does or does not do.

    Their sole reason for guaranteeing funding to our Banks was to make sure our Banks surrvived so as not to default on the German and Austrian bondholders.

    As these Banks are systemic they were worth saving. Part funding them through our zombies is political.

  54. @ E43bn

    “A quick count shows 4 of the last 24 posts were on NAMA”

    How many of the last 24 threads contained comments about NAMA? What percentage of the word count on this page would you say is attributable to you? What percentage of your brain is devoted to NAMA? Can you use the word Jesuitical on more occasions on this thread? (Word of the day toiletpaper?). Btw, i don’t actually need an answer from you…

    @ Karl

    i think the site is great, i really do, especially the comments section, but when a discussion about executive pay is peppered with comments about NAMA, when a discussion about public sector pay is peppered with comments about NAMA, when a discussion about NAMA bonds turns into a mud slinging exercise about the “evil slime” FF, well i just think people start to switch off.

    As for the actual topic at hand, i think the AIB/BOI comments about possibly not using the NAMA bonds at the ECB is a direct response to general market fears about over-reliance on the ECB discount window, especially after the comments from the Greek central bank about its own banking sector a week or two ago. I imagine they ultimately will subsitute the NAMA bonds for whatever their current collateral is that they are using with the ECB, so the NAMA bonds will actually be used, but it just won’t necessarily increase what they are ultimately have out from the ECB. They can then either sell the current collateral they have or use it for private repo. The other scenario is that they just leave them on balance sheet earning L+50bps (or whatever that turns out to be), but that doesnt really make much sense (which means its entirely possible).

  55. I will just jump in here quickly and offer something very small to the mixing pot. I have quickly scanned down through some of the posts above. Someone posted a link to Gavin’s blog, Morgan Kelly believed that Anglo Irish Bank was not ‘systemic’ and the government admits it.

    The point goes much further than that. From the court cases over the summer months, on of the main defenses used by Liam Carroll was that he was ‘systemic’. The widespread and general belief in Ireland during summer 2009 was indeed that Carroll and companies were systemic. Therefore, if the court had ruled in favour of Carroll, the belief would probably be safely enshrined today that Carroll is systemic-ally important to Ireland and the well being of all those who live on the island.

    Morgan Kelly was one of the main witnesses or expert opinions in contradiction of that notion in the said court case.

    Ireland and its political class in particular seem to be going through a quite painful re-learning process in trying to eliminate things which were previously thought to be ‘systemic’ but in reality are not. It is a process of elimination. Everyone couple of months the Irish government makes some more progress in discovering parts of the system which are not systemic-ally important.

    What Lucey, Whelan, Gurdgiev and many others have drawn attention to is the ‘blanket-type nature’ of what the Irish government considers ‘systemic’. In their world, it all is systemic, and the closer one gets to construction kind of activity, the more systemic it is believed to be.

    I have spent this evening viewing a video lecture of John Geanakoplos speaking at Yale university. Geanakoplos was involved in a hedge fund for roughly a decade and he used his records of that time to understand leverage he could obtain at different times. What Geanakoplos talks about has a lot of relevance to what Morgan Kelly, or Karl Whelan or Brian Lucey talks about.

    Geanakoplos noted that at the height of the period when leverage of his hedge fund was 10 to 1, it would have been possible for 2 no. men in the United States – Bill Gates and Warren Buffet – to buy up all of the toxic asset portfolio, using the €150 billions worth of funding they had access to. Geanakoplos relates how the leverage involved with subprime mortgages was even higher, it was 16 to 1. Now Geanakoplos has ceased trading with the hedge fund. The collateral available in stock was worth too little to be of any use to him. It became pointless in 2009 and he stopped trading altogether.

    For instance, the 1998 crunch had only lasted 3 no. months and his hedge fund was able to ride through it. This is the first really important insight I have gotten into Ireland and those parties – Liam Carroll, Anglo Irish Bank etc – all of which were deemed systemic-ally important. All of these entities ceased trading in 2009 when their ‘collateral’ became worthless vapour. But it is very interesting, that no too long hence, they were considered to be systemic-ally important.

    Using hyper-leverage, guys like Carroll were basically able to move mountains. No doubt that looked impressive to everyone, not least those in Dail Eireann who have little better else to do with their time other than observe and comment to one another. The funny thing was, as close as I was to it all, I had to read in the newspaper about the €800 million ‘lost’ on the Irish stock exchange in one fail swoop. That was swept under the carpet. When entities which use excessive leverage are ‘punctured’ below the water line, much denial is used to brush the problem under the carpet, as the ship slowly takes on more watery ballast.

    In the last moments as the whole thing ‘gurgles’ and sinks, there is a cry from the captains post – this must not go down – it is systemic-ally important. Somehow or other, LTCM set the tone, became to role model if you will. What Geanakoplos, Kelly, Whelan, Lucey etc attempt to do more than anything is try to understand that model and how it behaves. It appears as though, collateral is the object to watch, not interest rates. Collateral is where we will find the answers.

    Leverage is used to ‘inflate’ to collosal proportions. A very small number of ‘optimists’ (to borrow Geanakoplos’s phrase) become very big. Then we are into a long drawn out period of collective denial where everyone is afraid to touch any part of the mechanism, for fear it might lead to systemic failure. Geanakoplos’s point is clear: without optimists we are screwed in any case. What we need to do is figure out a way, by regulation of collateral to save the ‘optimists’ from destroying themselves in each cycle. I also enjoyed the part of Geanakoplos’s lecture where he referred to CDS’s as a away for pessimists to become leveraged too!

    Regards, B.

  56. @ All

    In our society banks are profit making institutions.

    They make their profits in the main from two sources:

    1) Margins on deposits

    2) Margins on lending

    Banks lend not as a social obligation but to make profits.

    The problem is that without NAMA they would have nothing to lend. With NAMA they will have the funding. They WANT to lend to make a profit, and now they have the funding to do so.

    All this about requiring them to lend or making it a condition of taxpayer support just seems so illogical. We have a capitalist system, profit is the motive and the discipline.

    Without NAMA we have zombie banks who despite their desire to lend profitably haven’t got the funds.

    With NAMA they have the funds, but hey they are only going to lend profitably, we hope, don’t we?!

  57. @ Concubhar O’Caolai
    “s there a country other than Iceland that has nationalised its entire banking system? (not a rhetorical question by the way).”

    I think we did “nationalise” the banks in all but name 30th of September ’08 . Sooner rather than later we will have to put the signage up. But not until the last of the nama bonds have been exchanged for real money.

  58. @ Greg,

    yeah, it is a nice little 1 hour brisk talk. Quite polite etc. Search for Geanakoplos and Shiller on You Tube. I am sure there is extended versions of either economist’s talk available on the web too.

  59. @Karl Whelan
    I think that my reaction to NAMA on this thread although heated has actually missed the central point. There are things Brian Lenihan has told us which you have long argued were untrue but which the vast mass of the population and the media commentators – and me – believed.

    Lenihan repeatedly told us the following:
    The banks were chronically short of funds. As a result they had slashed lending. NAMA would give them a huge €54Bn of short-term variable rate Irish government bonds (currently 1.5% rate) in exchange for property loans. They would then sell these bonds and boost their cash deposits against which they lend out. Or they would take them to the ECB and borrow against them at 1%. This gave them a subsidy of .5% on this lending. Either way they would lend out this cash at much higher interest to the consumer. NAMA would directly result in so much extra lending that it was like quantitative easing i.e. where central banks in other countries e.g., UK, printed money and lodged it with their banks. With these extra deposits the UK banks were able to greatly increase their lending.
    Some questioned if the extra lending would be cheaper but media commentators and ordinary people (and me) took it for granted that lending would rise hugely.

    Only a few experts like yourself and Peter Mathews suggested the banks would take all the NAMA bonds and put them in their safes. It just didn’t make sense. But now we have been told by the banks themselves, without hardly any public controversy except on here, that none of this is true.
    Both of our major banks have already said that they are lending out all they intend to. As Boucher of BOI said, they were already giving, “absolute access to funding. We provided funding into this market when we had much more straitened liquidity circumstances than today”.

    As Sheehy of AIB said, “In regard to whether the banks will offer more money to a customer who enters one of our branches the day after NAMA is established, that will not happen.”

    The claim of a special deal from the ECB never made sense. The banks were free to buy Irish bonds at 1.5% and borrow at 1% at any time. So perhaps more people should have been wary about Lenihan’s credibility.
    NAMA’s benefit was that it exchanged a large amount of these bonds for toxic assets. This would allow for huge extra lending, as Lenihan repeatedly told us. What Lenihan didn’t tell us was that the banks never wanted to lend any more.

    This revelation is simply shocking. We have been outrageously deceived. In a mature democracy this fib would be Lenihan’s last.

  60. The real problem for AIB and BoI is that even after the purchase of impaired loans their “assets” will still be far less than their deposits. It is now clear, it always was in my mind that NAMA will be unable to make up the difference. Hence further re-capitalisation will be required in 2010 and 2011. Their business model is broken they will have to shrink their balance sheets. The EU have already indicated they are not happy to continue the emergency measures.

    In reality, Irelands shrunken economy will be unable to keep both BoI and AIB going. That is the answer to those that think lending will re-commence. Lending will not re-commence post nama because it simply cannot.

  61. @ E43Bn & no extra lending

    From Karl Whelans Post September Post “Will NAMA get credit flowing again?”

    “The short answer is that “NO” NAMA will not get credit flowing. The long answer is, these banks are going to spend years repairing their balance sheets. The liquidity injection they receive from their NAMA bonds has to go to finance their own debts. After borrowing left, right and centre, they even sold off their own headquarters to pump money into property, they are going to be concerned about their own survival for years to come. They are going to be much smaller entities. Their operations will shrink their traditional methods of making money are destroyed. They will have to find new ways of making money. Also, they are operating in a country that is, to use McCarthys recent expression, “bust”. Hardly a good environment for a banks that are trying to survive. They will follow the money trail and the money trail is outside of Ireland for the next ten years minimum.

    The problem with NAMA is, that it was presented as an economic stimulus package, when, in fact, it is the opposite. It eliminates any possibility of the real economy getting stimulus now or any time soon. By choosing NAMA the government have made stimulus contingent on a broken banking sector with a defunct business model. The government believes that it will repair itself and making loans to businesses. It is not going to work. Alternatively, it will be so slow that it will be less than useless to stem the tide of business closures and unemployment.”

    As you can see from my post earlier I have become even more pessimistic!

  62. @brian o’hanlon

    collateral can be managed, generally it is via margin accounts, the issue of non-market securities (such as properties that don’t trade on an exchange) fudges the boundaries, but that can happen on traded securities as well: take a CDS – on one hand you have the risk of the underlying not working out, and even if you win your bet you have a counterparty risk – AIG is the greatest example of this. but regulating derivatives won’t autofix anything, there are some that cannot be easily standardized but that still have a place, the issue perhaps should be one of standalone liquidity or capital requirements outside of pooled minimum reserves, so that every contract or potential liability has a specific portion of its own non-core capital as a protective measure, leverage of itself only magnifies results.

  63. I’m hope I’m not quoting from a spoof website, though it seems genuine. It’s good to see the Willie O’Dea has embraced technology. Willie seems to have been under the impression that NAMA bonds were off to the ECB.

    “…The Government will not pay anything to the banks. Instead, it will issue them with IOUs that they can use to get funds from the European Central Bank.
    This will enable the Banks to get working properly again and provide money for responsible lending to hard pressed families and businesses. NAMA will relieve the Banks of billions of largely distressed loans that cannot be used as collateral to borrow in the money markets or from the European Central Bank.
    The probability is that NAMA is likely to make a profit, or at least break even. This is because NAMA will be taking on many good performing loans as well as the bad ones. The potential income NAMA will make on the loans it takes over will be higher than the 1.5% rate it will pay on the IOUs.
    The legislation guarantees this further by providing additional risk sharing safeguards to ensure that the Banks will be liable for any shortfalls, if they arise.
    There has been much speculation in recent weeks on the valuation of loans. A lot of this has focussed on specific figures plucked out of the air. This has only served to skew the debate into a misleading “one size fits all” approach to valuing the loans. The Labour Party appears to have fallen into this trap.
    Each loan will be analysed and scrutinised one by one over coming months to give us a realistic appraisal. The European Commission will send in independent valuers to verify that these values are realistic. The EU’s State Aid rules will not allow NAMA to overpay for the loans. Doing it the other way around by setting an average and working backwards makes no sense whatsoever.
    On Wednesday, Finance Minister, Brian Lenihan will announce estimates of the values. What he announces will be just that – an estimate. Only after each loan, including the collateral and securities attached to it, has been scrutinised and audited will an IOU be issued for that loan. The first batch of IOUs are expected to be issued and cashed at the ECB within months, giving the country a much needed cash injection in the run-up to Christmas.”

    http://willieodea.net/index.php?option=com_content&task=view&id=134&Itemid=1

    I’ve opted for a longer than usual quote as he touches on a number of important issues.

  64. @Karl Deeter
    I remember you speaking very eloquently about the plight of people in mortgage arrears. You said that they were being crucified. We now all agree that NAMA will result in no extra lending. Surely the time has now come for NAMA to be scrapped? We could then focus all our energies on fostering job growth so that those in negative equity at least have jobs again.

  65. @Ahura Mazda
    “The Government will not pay anything to the banks. Instead, it will issue them with IOUs that they can use to get funds from the European Central Bank.” Mr Whelan has proved many times that this is simply wrong. We always knew that the banks were free to use Irish bonds as collateral with the ECB at any time. But although we all knew there was no special deal with the ECB government ministers made these claims repeatedly and never retracted them. Even more astoundingly the media and the opposition let them away with it.

    http://www.irisheconomy.ie/index.php/2009/09/16/nama-from-heaven/

    FF TD and accountant Sean Fleming, on the Six-One News:
    “There’s a lot of confusion on this. NAMA … The banks … This money is being borrowed from the European Central Bank. The taxpayer is not contributing any of this money tomorrow. The European Central Bank is providing all the money and all that has to happen is that during the ten years of NAMA or thereabouts, they will repay those loans back.”

    Wille O’Dea, accountant, on Morning Ireland:
    “The ECB has agreed to give NAMA money … If the ECB disagreed so fundamentally, as George Lee suggested, with the plan, then they wouldn’t be prepared to come up with the money.”

    The media allowed them to get away with this outrageous spoofing. But now the outrageous spoofing has just got more outragier. Now we learn that this €54Bn going to the banks from the taxpayer is not being lent out.
    THIS IS AMAZING! The banks are NOT going anywhere near the ECB. The mention of the ECB was a total red herring. Surely the media should be outraged at this? Surely George Lee and Richard Bruton should be?

    I am having trouble accessing his website (?) but thankfully he supplied his thoughts to The Sunday Independent for posterity.
    http://www.independent.ie/national-news/call-spade-a-spade-and-bury-the-myths-1885338.html

    You will remember that the media and the opposition by and large agreed with the government that the Lisbon No campaign had been guilty of making wrong and misleading claims. So where was the outrage at this claim in a national newspaper:

    “The Government will not pay anything to the banks. It will issue them with IOUs they can use to get funds from the European Central Bank (ECB).”

    How can they continue to allow the NAMA lobby to get away with it?

  66. @ Karl Whelan
    I hope we have learned some lessons from our other “campaign” otherwise our candidate may be our maneuvered. I don’t like being beaten twice. Two ministerial posts filled via the senate should be part of any new governments agenda at least until we get around to proper reform.

  67. @All
    The most shocking thing about O’Dea’s article is that it is wrong on every substantive point. All of them. In fact you get the truth only by adopting the Morgan Kelly approach to Brian Lenihan (“a master of what Princeton philosopher Harry Frankfurt defined succinctly in his 1986 paper, On Bullshit”), based on Lenihan’s, “almost eerie ability to predict exactly the opposite of what is going to happen.”
    http://www.irishtimes.com/newspaper/opinion/2009/1013/1224256508947.html

    Apply this approach to the following statement by O’Dea:
    “This is not a bail-out for the banks, property developers or speculators.”

  68. Taking the estimates in Morgan Kelly’s article:

    “A less futile exercise is to ask how much Nama would have cost at the end of similar credit-fuelled price bubbles. A decade after their peaks, Tokyo land prices had fallen by five-sixths, while Irish farmland, adjusted for inflation, had fallen by three-quarters. Had Brian Lenihan bought €77 billion of either, applying the proposed Nama discount of 30 per cent, he would have lost €35 billion-€40 billion on our behalf, or roughly €20,000 per taxpayer, and that is before adding interest.”
    I will take the loss as €35Bn.

    “Once the ECB slams the window on its fingers, the Government will be forced to borrow at market rates of 5 per cent or more. In the next decade, this will add another €25 billion or so to taxpayers’ losses from Nama.”

    That gets you to €60 Bn. Add on another €5Bn minimum to finish developments which aren’t needed and you get €65 Bn. Then there are the economic costs of propping up the property market which I am not including. Therefore for every €1 we don’t put into NAMA we save €1.20 plus economic costs avoided.

    So, we are going to lose €65Bn when, “All that needs to be done is for ownership of Irish banks to be transferred to their bondholders. This process of converting debt into equity occurs sufficiently often in banking to have a name: resolution. Resolution offers a way for Irish banks to be adequately recapitalised at no cost to the taxpayer, and able to manage their business without political interference.”

    It is simply astonishing that the the great majority of the establishment of our country are cheering NAMA on while most of the rest pull their punches. This is an outrage.

  69. @ E43Bn & no extra lending,

    I’ve a recollection of some government folk claim that because NAMA bonds had low coupons as it would force banks to repo and lend to the private sector. I’d need to see/hear the quote again to figure out the logic.

    Anyone else remember if this? Who said it?

  70. @Ahura mazda
    Dara Calleary said that the banks would lend after NAMA because they would be under a moral duty to do do. Brian Lenihan said they would lend because cash was king. The banks just needed to replace their illiquid assets with cash and then as lending was so profitable it would be lent out.
    He didn’t say a little cash. Or even substantial cash. He implied that lots of it would be lent out. It looks he has been using mental reservation on us.

    “I said there would be a substantial increase in lending. I didn’t say when it would be.”

    He held up a sign during the Lisbon 2 campaign (I voted yes) saying
    “Yes to jobs”. He issued a press release stressing Lisbon 2’s importance for jobs. Then the day of the result he said there was no promise of new jobs. Went out of his way to state it. Mental Reservation.

    FF of course campaigned on the slogan, “Yes to Recovery”. When?
    New name, “FF: The Mental Reservation Party”.

    When will Lenihan admit NAMA will not result in a material increase in credit? We should take bets.

  71. @ E65Bn plus economic costs

    Greg, thought I was loosing the plot the other day on another thread when I said that NAMA losses would be 31bn. However, you are making me look like I am a profligate optimist, which I probably am. I was working from Peter Mathews papers and the logic behind his approach. I felt Peter was being too conservative because he was hoping against hope that the government might actually listen to him.

    Whatever was in our minister for finance’s mind it was game, set and match to nama from day one and when he got the Damascus road conversion of Alan Aherne to bolster him it was a done deal. This is not being anti FF it is what the history books will explicitly say.

  72. @ E65Bn plus economic costs

    “Once the ECB slams the window on its fingers, the Government will be forced to borrow at market rates of 5 per cent or more. In the next decade, this will add another €25 billion or so to taxpayers’ losses from Nama.”

    Do you have the link to the original Kelly article, or how Kelly has worked out the €25bn. The thing is this will be forgotten as time goes on. The funding cost of Irish debt will be blamed on other factors and the NAMA cost will get lost in the fog of war.

    With further “investment” in Anglo, BofI and AIB you should soon be able to change your name to “€100bn bank bailout”.

  73. @ E65Bn plus economic costs & NO lending

    Thanks for that.

    Yet another that I missed.

    Difficult to keep up really.

  74. @E43Bn & no extra lending
    (to me) “I remember you speaking very eloquently about the plight of people in mortgage arrears. You said that they were being crucified. We now all agree that NAMA will result in no extra lending. Surely the time has now come for NAMA to be scrapped? We could then focus all our energies on fostering job growth so that those in negative equity at least have jobs again.”

    I have to draw a line between what i see as the validity of NAMA and those in mortgage arrears, NAMA isn’t about ‘extra’ lending, its about creating liquidity scenarios where ‘normal lending’ can occur. People in serious arrears are quite a separate (albeit very serious) issue, I don’t see them as being the same thing, in that fixing one fixes the other.

  75. @ Karl Whelan

    For the record. I have been advised that:-

    Art 28.7.1 of Constitution states that the Taoiseach, the Tanaiste and the member of the Government who is in charge of the Department of Finance must be members of Dail Eireann” hence cannot be Senators from the Senate

    No Finance minister then from the Senate then!

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