Thanks for pursuing this with me. As previously stated, we are working off (very) incomplete data. Note that the interest income for 2011 (in table 7, budget projections) is €3.25 bn as compared with €1.6 bn (in table 5, cashflow projections). It was the difference between these interest figures that triggered my interest (excuse pun) and concerns.

Apologies for not replying sooner. I’m not saying you’re wrong. What you say is possible. Though I think it’s also possible that Interest Roll-up is included in Interest from Borrowers.

Below Table 5, Second Bullet point: “Based on data supplied by the institutions, it is estimated that 40% of the loans to be acquired by NAMA will be cashflow-generating (interest and principal) and that these loans typically pay an average spread of 2% over Euribor. Assuming no major adjustment in average margins, this will produce interest income of €12 billion over ten years.”

Working through a simple example, let’s assume it’s 2011 (full year) and 61bn outstanding loans. So interest income comes from 40% of pool. 61bn*40%*2.6% (asssume euribor @0.6% +200bps) = 634.4m, rather than the stated 1.6bn. If we assume the 1.6bn includes interest roll-up (i.e. 100% instead of 40%), then the 2.6% seems to work.

This does beg the question, where will the money come from to pay the coupon? I expect that NAMA would use lender advanced interest which is fairly common in MBS and very noticeable at present in Subprime pools. In effect the lender makes the interest payments for non-paying loans and this is rolled-up and deducted from recoveries at foreclosure. This supports cashflows for a period, but increases eventual loss severities.

If property prices collapsed to say 20% of their pre crisis levels, the banks capital cushion would be completely eroded & they would be deeply insolvent. In such a case, they would be unable to meet the claims of their bond holders and probably some of their depositors. The guarantee would be triggered and sovereign default would follow?

Alternatively, the state buys the toxic loans in a vain attempt to restructure them, warehouses them for a few years and given it is the Irish state, run by FF, fails to recover the full measure of value through a combination of incompetance and corruption. Result=sovereign default?

Given your insight into the working of the Irish state please handicap the outcomes.

Apologies for confusing you with someone else.

We clearly have different opinions about the societal dangers of a truly vicious bust.

Moi? You may be confusing me with an unrelated person who is or was involved in trade.

But I still don’t see the problem with letting property prices fall. You seem to see the “vast bust” [memo to self: don't make jokes] as a problem in itself. But you haven’t said what ill consequences the bust will have. Property prices would fall; folk would be forced to acknowledge that some of their “wealth” was imaginary. So what?

bjg

I agree totally with you.

NAMA (or something like it) is the right prescription (in my opinion) but that doesn’t mean it will work in rescuing the Irish economy from a savage reversal.

@ Brian J Goggin
” “… property prices would probably fall very far below below their trend/long-term value ….” Why would that, and the bankruptcies you anticipate, be a problem? ”

Answer: because without something like NAMA, the scale of bankruptcies (hundreds of thousands?) would so vast as to pauperise a nation.

Consider the scale of credit build-up in Ireland over the period 1997-2007. It was huge. I am not aware of many precedents for so quick a credit build-up. Implication: without official policy leaning against debt-deflation, we could face an equally vast bust.

Consider the the rise in Irish property values over the decade 1997 - 2007. It was also huge. I am not aware of any other countires where the rise was so huge over that period. Implication: without official policy leaning against debt-deflation, we could face an equally vast bust.

As a banker, you will be familiar with the concept of margin calls. As the value of a customer’s collateral falls, banks make margin calls: either invest fresh equity or liquidate the asset.

The further Irish property values fall, the greater will be the number of margin of margin calls that Irish banks should be making. The implications are:

1. The more margin calls are made, the further will property values fall triggering further rounds of margin calls. In debt-deflation, there is a contagion factor at work. Something like NAMA is needed to avoid this.

2. If Irish property falls go no further than down to trend / long-term value, the number of margin calls can be minimised and so too the extent of bankruptcies. Something like NAMA is needed to attempt this.

Why would that, and the bankruptcies you anticipate, be a problem?

bjg

While NAMA is now the chosen vehicle for rescuing the banking system there has been insufficient attention paid to how it will operate. Basically, for it to succeed we need luck in terms of a global economic upturn and a rise in global inflation. Domestically, we need pro property policies from the government. The early indications are not favourable. The gradual withdrawal of mortgage tax relief, 80% windfall taxes, user charges all reduce the investment returns from investing in property or even buying v renting. Finally NAMA wil be the main owner of distressed property in the nation. Does it have the requisite finacial skills to maximise value for the state? We know very little about the qualifications of those runnning it. Will it be run to maximise value. The evidence internationally from asset recovery vehicles such as Credit Lyonnais in France is no supportive. Moreover, the evidence here in Ireland of the operation of state monoplies in any sphere is not comforting.

In short while NAMA may be the best idea available in theory, the likely outcome is going to be a disaster for future generations of taxpayers.

In the modern world, two things can happen easily without a keynsian hoarding effect:
1. You can buy as much gold as you like and bury it under the patio. Who cares?
2. If the central bank thinks that some of the currency in circulation is missing they can just print more. Physical notes make a tiny fraction of the notional currency that exists at any one time.

So a rise in the savings rate is not hoarding as Keynes would have known it.

If people don’t make their money available electronically by not keeping it on deposit (keeping it in current accounts for example), Central Banks can just legislate that one away - Mr. Greenspan authorised sweeps of checking accounts to increase the ‘efficiency’ of money usage.

My argument is not that there has been too much saving, but that there has been too much use made of it. Leverage ratios are too high, so savings have been recycled too much. Too much growth has been sought in an attempt to check recessions (a natural part of the cycle). The easy way to get growth now is to borrow from the future. That is what has been done.

Post I February 12th, 2010 at 11:52 pm
“I agree with most of what you are saying except for:
“Hoarding (rise in savings rate)” ”

Post II February 14th, 2010 at 3:04 pm
“It was an attempt to overcome hoarding, in effect…”

What exactly is your point?

“Why would it be a calamity for Ireland?”

Because under our economic conditions …

a. massive property overvaluation;
b. massive private sector overleverage;
c. severely restrictive monetary policy conditions;
d. broken banking system; and
e. aggressively pro-cyclical fiscal policy

… property prices would probably fall very far below below their trend/long-term value, without an aggressive state response (NAMA or something like it).

The difference between allowing the property market operate freely (and fall to well below trend / long-term value) and intervening to limit the extent of property price falls (to somewhere near trend/long-term value) could be the difference between many tens of thousands of personal bankruptcies and some hundreds of thousands of personal bankruptcies.

Why would it be a calamity for Ireland?

bjg

” “It would transform a calamity into a wipe-out. Is this what anyone wants?” Yes. Anyone in the market to buy a property would want prices as low as possible. ”

@ Brian J Goggin made the same point.

Comment: true. A total wipe-out would be favoured by those with cash reserves who are looking for a real multi-decade buying opportunity.

I have no borrowings and I have cash reserves (in economic matters, I eat my own cooking) so I would profit personally from such a development. But it would be a calamity for Ireland and I therefore would rather if we, as a society, could avoid it. (Having a big house is a bit pointless if family and friends are in deep financial and personal distress).

@ Pat Donnelly
You wrote

” Cormac Lucey You are assuming that the land etc will not further diminish in value. ”

Comment: not so. I actually expect that further substantial price falls are still to come.

To take residential housing as an example, I believe that the long-run trend price was only one third of the actual 2007 peak in 2007. Since then both rents and incomes have fallen, meaning that the gap between trend price and peak price has got even bigger.

I further believe that actual prices will not drop to trend prices and stay there. I believe that they will overshoot on the downside because:

a. that tends to happen anyway in such circumstances;
b. we are now in a deleveraging, sub-par growth state; and
c. ECB monetary policy is overly restrictive for Ireland’s conditions.

The challenge facing policy makers is to minimise the overshoot on the downside so as to minimise the number of citizens/companies that are forced into bankruptcy during this process.

@ yoganmahew wrote

” @Cormac I agree with most of what you are saying except for:
“Hoarding (rise in savings rate)” Like Keynes, Fisher was living in a time of hard currencies. Therefore hoarding was a real possibility. It is not anymore. People don’t keep bags of gold coins under their beds, well, not unless they are surrounded by beans and shotgun shells.

Comment: not so.

In the 1930s the dollar ceased to be a hard currency when FDR broke the link with gold. He underlined this by then proceeding to expropriate gold holdings in the US.
http://en.wikipedia.org/wiki/Executive_Order_6102

In any event, a hoarding of cash or a net repayment of debts each have the same macroeconomic result: a rise in the savings rate. That was experienced in the US in the 1930s and is being experienced by us today.

Bottom line: debt-deflation has a contagion effect which, without official intervention to stem it, would lead to a much greater national economic calamity than a mere return to long-run trend values.

The remedies are (i) an aggressively reflationary fiscal policy, (ii) bank rescue and repair, and (iii) bank forbearance (not to avoid equilibrium values restoring themselves but to avoid trough prices way below those equilibrium values which would pauperise additional hundreds of thousands of citizens).

““What I said is that [having] smart people (good education) is important, smart ideas (investment in research) is important, and then letting smart people get together with smart ideas to do something is the third thing (the environment).”

I have found through my experience, that Craig is probably correct. However, we need the government in Ireland to create the environment - as far as construction goes anyhow. The government is good at being ‘the biggest employer in the country’ as Tanaiste Ms. Coughlan said. But what we also want the government to become, in the next couple of years, is like an investor. To fund and develop small teams to work together, integrating many different layers of the problem in some coordinated and intelligent fashion. This is something the private sector construction industry has found it difficult to do. I expect, all of the private consultants out there could become involved and become sponsors of such a program, in a way, by providing the human resources, young people, to a series of programs, designed to solve problems. In that way, the private sector would get to retain employees, fresh out of college, in some small way - but to allow them the experience of working closer with their fellow colleagues in other disciplines. I would imagine this model would work well, with many more industries too. I penned something called ‘The Shoe Box King’ at the blog recently, to describe what I had in mind. Minister for Foreign Affairs, Michael Martin, isn’t doing a bad job. But what other entreprises abroad really want to see, is working prototypes of a smart-er economy working in Ireland, at a youth-based level. Being smart-er, in 2010, has less to do with more gadgets I think, and more to do with the human relationships and smart-er cooperation amongst people. BOH.

It can go a number of ways. We need to bring in professionals into the picture more. There are problems with this however, as professionals have been excluded from the picture, and therefore lack sufficient experience in the trenches. The idea with construction, is that you divide the various tasks into specialities, and these specialities draw strict dividing lines around themselves, and work at arm’s length from one another. The important function that the builder/developer provided, was to glue this mess of remote experts together, into some kind of system, which could be financed and execute some work. Note, there are many stipulations with professionals, against their getting involved in anything sordid, that has to do with the business of building. It is a bit like the Jewish bankers, who were not prevented by their religion to charge interest. The old bankers of Venice found ways around that etc.

The problem with the system above, as I described is this: You send one group of people off to university and train them, educate them in the best models and to learn the best judgement. That party of experts, can communicate amongst themselves, the concepts and the ideals. But then, what happens in the boom, is another class of people, more motivated and driven, but with much less formal training become the drivers and decision makers of the industry. I would compare it to Steve Jobs at Apple. He was hardly what you could call a brilliant engineer. But he had the sense to travel up the road to Xerox Parc Laboratories, which invented everything in technology - they had 30% of the best brains in technology in the 1970s and 80s. The construction professionals in Ireland though, set themselves up to be raided is such a manner. Like Xerox Parc who had not intention of bringing any of their stuff to market, it took a motivated Steve Jobs to come along and go for the gamble. BOH.

Well said! The well off are now even better off as Cormac Lucey has noticed the deflationary spiral in which they will be better off and need no incentive to save. Taxes increased and few people suffer! You begin to live down to your name, you old socialist you!

Joseph
If the masses knew, we would have a rerun of the French Revolution. Part of me looks forward to that, but the rest thinks it might not be a good idea! It maybe a superb lever to convince government to live up to the term! Brian J Goggin may have a good idea about the executions but it is not original. Bags I the Madame LaFarge caps concession?

the next generation of builder/developers will in due course no doubt be well up to the task.

BTW, to clarify something: I don’t care about Carroll per se, but I do know a whole crew who had tried to keep that over-loaded vessel on some course, for a long time, deserved more than the raw deal which they got. BOH.

Ulster Bank extended enormous amounts of credit to Carroll to gain control of Greencore. Everyone working for Carroll said, he will be a genius if he pulls off the Greencore deal. The company doesn’t need a ‘genius’, but it does need a leader or a captain if it wants to execute any business plan. The major torpedo which sunk Carroll’s vessel was North Wall Quay. It was brought to a sudden hault, by the intervention of Sean Dunne, whose major lender was Ulster bank. We know Sean Fitzpatrick helped to rubber stamp, the permission for North Wall Quay development, which turned out to be false. We also know Fitzpatrick was trying to flog Anglo Irish to anyone who would listen, at that time. This is something the banking inquiry should look at. BOH.

I can only echo your heartfelt cry for much more “speaking truth to power”, but when that power is virtually absolute in a domestic context and is only constrained by the state’s involvement in sovereign debt markets and by the extent to which national sovereignty is pooled via international treaties it is “saothar in aisce”.

I wish you had the kind of PR/media resources at your disposal that FF do so that you could get things like this known to a wider (mass) audience.

As for journalists not challenging minister Lenihan when he comes out with guff like this….. don’t get me started. When I was first studying journalism, the first question we were taught to ask was “Is that true?”

There’s obviously too much attention in journalism these days on being able to build a website or scouring Facebook for photos of the recently deceased than there is on actually being a professional journalist and challenging what people say.

Yes.

Should I care who (as long as it’s not me qua me or me qua taxpayer) owns these sites and crumbling concrete?

But I’d prefer if we could have crucifixions as well. We could charge for admission (and sell TV rights), which would help to reduce the national debt.

bjg

Like Keynes, Fisher was living in a time of hard currencies. Therefore hoarding was a real possibility. It is not anymore. People don’t keep bags of gold coins under their beds, well, not unless they are surrounded by beans and shotgun shells. Savings are deposited where they are available for use. As banks can fractionally multiply these deposits into more assets (and so more deposits) excess savings are good…

Indeed, one might argue that we have come out of a period of excess savings where assets have been monetised and leveraged. The problem being not so much the amount on deposit, but the amount on margin (the leveraging of those deposits). Hypo Real Estate had a leverage ration of 99:1 counting its off balance-sheet dalliances on the north keys…

Conflict of interest? I bet they couldn’t even spell it in your local branch…

The buyers (of the loans) more than lightly will be hedge funds. Not Mr. and Mrs. Joe Soap. This is what NAMA is about. Doing the pre-processing, so that the hedge funds can then do the packaging. It is like Intel in Kildare grows the silicon wafers. But Intel in Malaysia, packages the final product. If NAMA does it’s job properly, we can export this problem to some part of the globe, where they are looking for this kind of risk package. Long Term Capital Management turned these kinds of games all the time.

To clarify some issues. We are not a country with a lot of ‘property’. In some key areas of the country, such as Dublin, the over-supply isn’t the big problem. Growth will soak up that problem in due course. What we are, is a country with 3 no. times more debt on our shoulders than 10 years ago, and we have at best, only the same income producing capability. That is the problem, the property related loans. Not the property per se. What NAMA is selling, its raw product, is the risk that Irish people will sort out this ‘3 to 1′ ratio problem, in the next 10 to 20 years.

What the Irish bank(s) have is a concentrated exposure to the risk presented by those property-related loan(s). This prevents them from doing their job(s) in Ireland. Their shareholders are suspicious, and therefore capitalisation becomes a problem. Capitalisation becomes more expensive. Now here is the crux, that Karl Whelan and others may be pointing out. We took successive actions to solve a problem of capitalisation.

(Think of it like a patient in a hospital, and the patient has already been diagnosed and treated according to some visible symptoms. Our doctors must have been over-tired and over-worked, late that night when the patient arrived)

In our attempts at solving capitalisation, we ignored the bigger problem of insolvency. In other words, we might have made the initial problems worse, in how we handled the situation. This puts things in a different light, because now the hospital staff are fighting with one another, to try and figure out who to blame, for screwing up the patient. The patient in turn, now has more leverage with the hospital, because they messed it up. BOH.

Riddle me this. A country has a lot of property(& wants to sell), it also has a banking system that will be deleveraging it’s property portfolio for the medium term. Who lends to the buyers?

MH said:

“It’s interesting that the long established firms Sisks and G&T Crampton didn’t end up in the knacker’s yard like the arrivistes.”

Good point. When I post on this Irish Economy blog, I always try to work in some explanation, which tries to deal with the systemic problems in Ireland, as opposed to the individuals. (Carroll, Dunne, McNamara are all individuals) Even the example that Karl Whelan gives, of BOI and AIB lending to them, to give them more rope. What Karl Whelan doesn’t understand, not being up to his oxsters in build-er culture, is that Carroll, Dunne and McNamara had walked off the range, as far as their build-ing business was concerned. Saying they were still designing business plans to operate as build-ers, and pay ‘unsecured creditors’ misses the whole point. I know all the ‘unsecured creditors’ and here is how it was. The un-secured creditors would never have taken action against Carroll the build-er. In fact, they wanted Carroll the build-er to keep going. Carroll didn’t.

I have to use an analogy to explain this. It is like the teenage rock band. The drummer, the base guitar player, the support vocalists etc, the work-men and women in the band do all they can. But the lead singer gets ideas, and feels he is being held back by his band. He tries to figure out a scheme to ‘lose them’ but let them down gently. That is what it was like for Carroll in the last few years of the boom. In fact, Carroll attracted too much of the ‘old band’ around the place, after he had quitted. He attracted too much of the riff-raff, at a time, when he had become the largest investor on the Irish stock exchange. Billy Connolly in the movie, Still Crazy, about the band, Strange Fruit is about as close to a representation as you can get.

The systemic part I want to point out, looking at last night’s Prime Time, where the Dragon’s Den lady needed credit to fill her orders. She had orders for 3 no. times the amount of production she could fill. That was Liam Carroll 10 or 20 years ago. He was the guy in the Dragon’s Den, and all of his ‘unsecured creditors’ were working with him. The Irish banks did re-invent Liam Carroll and others, as ‘born-again build-ers’. Having got the guy out of the Dragon’s Den scale of enterprise, they proceeded to inflate and build up this figure. All the Strange Fruit’s could do was look from the side lines and scowl/weep.

That is what I find so hilarious about the Prime Time emphasis on credit for small and medium enterprise. You couldn’t get more ’small and medium’ and Carroll’s operation 10 or 20 years ago. BOH.

Thanks for the comments. Tables 5 & 7 should fit together in the sense that they should be derived from the same fully-integrated proforma financial model - my “day job” is the development and sale of such tools to businesses!

On your observations:
#1. The interest income for the first three years has been taken from table 7 so the amount should not need adjustment. If this is not being paid when due, it should be either rolled up for eventual payment or written off. If the former, it is missing from the cashflow projections. If the latter, then the figures in table 7 are plain wrong.
#2. As you say the projections in table 5 don’t include any rolled up interest in the principal repayments. So where is it?

Overall, there seems to be about €10 bn in interest is “floating around” and hasn’t been explained. If I’m correct, this is a massive undisclosed subsidy/support and raises questions about the plan/projections used to secure Eurostat approvals last Autumn.

I agree that more detail is required, but I don’t think it exists. Or at least nothing that links start to finish.

It’s not apparent how table 5 and 7 can fit together.

Equally, the logic of LTEV doesn’t sit with the Cashflows In ~ NAMA places a long term economic value of 54bn on the underlying properties, yet expects to generate 78bn (includes 4bn from asset recoveries). My understanding of LTEV is it’s what NAMA considers to be a reasonable future market value. If so, where will the borrowers find the 24bn gap.

With respect to your spreadsheet, I’d make a couple of observations:
1. Column Q: I suspect the interest amount shown in Table 7 seems to refer to contractual interest on 77bn (regardless of whether it’s being paid). As the NAMA model assumes 15bn defaults, it may be appropriate to adjust the interest amount by 62/77.
2. Column O: The Business Plan suggests only 40% of loans generate interest income. If you adjust the values in this column to infer the rate paid, you get values are a good deal higher than Euribor + 2%. This is why I think the Business Plan’s Interest Income may include Roll-up. It would be more appropriate to capitalize the rolled-up interest, but the NAMA plan doesn’t do this as the principal payments add to 62.1bn