Today’s NAMA Announcements: The Good, The Bad and the Ugly
This post was written by Karl Whelan
There were things I liked in today’s announcements and things I disliked. More of the latter than the former.
1. Capital Ratios: I had worried in the past that one of the ways the government would keep state ownership percentages down would be to only require low levels of capital. Today’s requirement of 7 percent equity ratio by year-end, however, indicates that this isn’t going to be case. I’d have preferred a slightly higher figure but, by and large, this shows that the new Central Bank team of Honohan and Elderfield are doing their job to safeguard the future stability of the system.
2. The Discount on the Initial Tranche: While still probably an overpayment, it’s less of an overpayment than one might have expected.
1. What’s the Estimated Average Haircut? Today’s hide the ball strategy means that we still don’t know the answer to this question. The media will repeat the 47% discount ad nauseam but this is clearly not going to be the average discount. For instance, AIB is transferring €23 billion in book value assets to NAMA. The discount on its initial transfers is 43%. If this was applied to all of the transferred loans, you’d have €9.89 billion which exceeds the current total of AIB’s ordinary and preference share capital and would require more than the announced €7.4 billion recap requirement. Also, we’re told that the regulator’s capital requirement will take into account foreseeable future losses. So there’s no way to work backwards from the capital requirements to the actual prices NAMA will pay. I find this very frustrating.
2. AIB, Dead Bank Walking? As I understand it, the regulator is requiring the bank to have equity capital of €7.4 billion by the year end, without factoring in bank-shrinking mechanisms due to disposals. With risk-weighted assets of €120 billion at the end of last year, sending €23 billion into NAMA, it would have RWA of €97 billion. This would require ordinary shareholder capital of €6.8 billion. We’re told that the bank will need to raise €7.4 billion. These figures suggest that there is essentially no private equity capital left in this bank. However, the government are presenting the figures in such a way that nobody will ever hear about this. And we’re giving Colm Doherty a month to formulate a plan to save his neck.
3. Insolvency, Minister, Say it … Insolvency: Anglo is insolvent. AIB would be too if we weren’t insistent on denying it. Anglo owe about €2 billion in subordinated debt. AIB owe €4 billion. I do not believe that putting these banks into a resolution regime and negotiating with these bondholders will result in Ireland Inc being wound up. These are providers of risk capital, who lose money when the banks run out equity. Well these banks have run out of equity and the Irish government is still making sure that the sub-bond holders get all their money back. There’ll be some bottles of champagne getting popped in London and New York tonight, grateful that Minister Lenihan has come through for them.
4. Anglo Wind Up Comments: Discussing the cost of winding up Anglo by listing its total liabilities is, frankly, stupid. What the huge additional costs are that are associated with a slowish windup of the bank over a number of years, nobody knows. This stuff is scaremongering and not very convincing scaremongering at that.
5. Speed of Progress: The Minister rejected criticisms that the plan is being put into place too slowly on the grounds that “Crucial pieces of the jigsaw had to fall into place.” However, it was the government’s decision to formulate the problem as a one hundred piece jigsaw rather than a ten piece one. The fact is that essentially every other advanced country has put in place plans to recapitalise their banking systems, many of them over a year ago. We are putting in place the world’s slowest recapitalisation, and today’s announcements amounted to kicking the can down the road for another month or two. Meanwhile, we’re left with a zombie banking system.
6. Asset Disposal Stuff: The media gives the impression that much of the €7.4 billion will be obtained from “asset disposals.” However, despite what the Minister’s speech says and despite what you hear every day from financial journalists, banks don’t actually raise capital by selling assets. If a bank sells an asset and gets cash, it has changed the composition of its assets but it hasn’t raised capital. There are some technical issues to do with valuation of goodwill and other stuff, but the principal thing that selling Polish and US subcomponents does is shrink the size of the bank. It reduces RWA and so the capital ratio is raised.
I’ll let you guys decide what was ugly.