[...]The Irish Economy » Blog Archive » Brian Lucey on banking policy[...]…

thanks Brian, here’s a link in case anyone else is interested in reading it:

http://www.askaboutmoney.com/showthread.php?t=135559&page=2

as the author says: “We don’t need muddled thinking”. I hope we get some further clarification.

It’s not online. But the author Brendan Burgess has posted it on his website Askaboutmoney.com You will find it under the NAMA section

The Indo article is quite incredibly damning of Prof Lucey, I do hope he posts a refutation, please say it isn’t so Brian.

do you (or anyone else) have a link to the Indo article you are talking about - i had a search myself but didn’t find it….

See today’s Indo for an expose of BL’s absolute howler.

I heard that radio debate. The others could be excused for thinking that BL meant selling the deposit book i.e. liabilities + assets. That happens, for sure, might pick up a few quid. But his article in the Indo the next day left no doubt about what he actually meant. He really did mean you could get someone to pay 21bn to take over their 28bn of deposit liabilites. A 49bn miracle that makes loaves and fishes look amatuerish. Absolutely unbelievable.

http://www.irisheconomy.ie/index.php/2010/04/03/anglo-what-are-the-options/

The problem with April Fools jokes is that not everybody is a university professor. Both the Sunday Times and the Irish Times didn’t spot the joke and are calling for Anglo to sell its deposits!! April Fool is dead and gone; it is time for Brian to let these two organs of the media in on the “joke”.

In your calculations you wrote down Anglo’s assets to c. 50 bn, but of that sum, c. €40 bn comprises NAMA bonds

The big issuie is whether NAMA bonds are tradeable or not and if so what are they worth. In my view they would be worth substantially less than face value because there is no promise to pay cash for them at maturity. And even if there was a promise to pay cash, their trading price would reflect the Irish sovereign risk discount of c. 4.5% at least. So, they would not seem to be suitable instruments for paying off the liabilities of Anglo

Of course, the bonds can be used to raise short term borrowing from ECB. But only short term and even that facility may not last longer than a year or so, and it is a facility offered only to Euro zone banks.

So, Brendan Keenan may well be correct in saying that these bonds may never be redeemed in cash and they might be comparable to UK War Loan, never to be redeemed but only useful for their interest payment guaranteed by the Queen. In the case of the NAMA bonds, however, the interest rate is not a long term rate but the lowest available short term euribor rate, normally available only inter-bank. In return for this paltry payoff, the banks’ shareholders (AIB/BOI) have to pass over real property, including performing loans, at an average discount of 47%, and are then told to go and raise real cash equity themselves, and it must be real cash and not including promissory notes

However, as citizens and taxpayers they benefit from their own, never acknowledged, generosity, because it saves their Governors having to borrow equivalent amounts of (tens of billions of) real cash at a proper interest rate of 4.5%, assuming the market could even contemplate making loans of that size available to Ireland, which it would not

Ergo, the real benefits of NAMA. And ergo, in my opinion, why we cannot let Anglo go (- we can’t pay off its creditors with NAMA bonds or promissory notes). (But, to go on too long perhaps…I doubt that the EU will accept the promissory note solution for the recapitalisation of Anglo…That, now, is a real distortion of the Irish banking market…making the other banks show real equity and letting Anglo show only promises of equity…!…It also violates international banking rules, Basel Agreements, etc…but, of course, maybe they have real equity that I’m not aware of.,..to tell the truth I have not looked at their BS)

I see that Brian O’Neill (Comms Officer at NTMA/NAMA) has had a pop at Brian Lucey in today’s Irish Times (letters page). Now there’s a public argument I wouldn’t mind seeing go back and forth in the pages of the IT but sadly BL is away.

The funding of the Irish system balance sheet as it is is too short in maturity/duration and has become too dependant on the ECB and wholesale money market. Two things will happen i) external operations in the UK etc will be sold or run down and the funding will not be needed ii) ECB etc funding will have to re reduced to be replaced by more stable long term borrowings. I am not sure how NAMA bonds count in all this. However to your point, these longer term bonds will have to be issued to correct the current mismatch.

The govt has issued a guarantee to cover all borrowing by AIB/BOI on Sept 30th 2008. It is not open ended and matures this Sept but it will be extended. The issue of excluding Anglo and nationalising and putting into deep freeze was advocated by the offficials on that night. However, the Taoiseach is believed to have vetoed it.

If that is the case then it would seem to me (and, if I am not mistaken, Joe Stiglitz) that the government should have used its balance sheet to issue a prospective guarantee i.e. of all future borrowings by BOI/AIB. While it is purely academic at this stage, I’m curious to know whether this option was ever considered.

The Irish banks need to raise 40bn plus debt in the next few year to match the duration of the assets and liabilities. They do not have enough long term funding and are too dependent on short term borrowings. They could reduce this amount by withholding credit or running off some loan books.

I would point out that if you did not pay off the bondholder s then loan books would have to shrink, the economy would contract and taxation receipts would not grow. It is also poosible theat the sovereign might have problem refinancing, although that is theory rather than fact.

Excellent article in the Indo, but is there two third questions and no second question in the “Are you sure you have a strategy” questionnaire?

Or is that just a deliberate error to check if any of those dozy freshers are still awake?

They are the biggest but not necessarily the dodgiest. In fact they could be better than the amateur property developers. Also Nama is only looking at loans over €5m. There will be plenty under €5m which will be pretty dodgy also.

@Deltahedge
No expert on banking but I think you can sell the deposit book. Someone else should be able to clarify this. I’d have thought you just let the liabilities mature and pay them off as they do. Most will be pretty short term.

But it doesn’t undermine the argument. Anglo has €85b of assets on its balance sheet and €81b liabilities. The €85b has some value. I’ve worked out my figures earlier on (in 10 minutes), I’d like to see theirs.

What do the banks need to raise 40 bn over the next few years for? To refinance their existing bondholders?

I’m not advocating a sovereign default. I’m pointing out that the government’s actions in paying off the bondholders have pushed the fiscal capacity of the state beyond breaking point and therefore make a default more rather than less likely.

If this seems alarmist, please don’t cite plaudits from commentators such as Moody’s in support of a more sanguine view. I can well recall reading their assessment of Ireland in 2006 and being mystified by their bullish assesment.

Consider this. No Western European developed country has in this crisis repudiated the claim of senior bond holders in systemically important banks. Now, I suspect we agree that Anglo was not systemic and its liabilities should not have been guaranteed.

No major bank was nationalised 100%. Every trick in the book was pulled to ensure this was the case. You had shotgun weddings in the case of Wachovia, Fortis etc. You had asset protection schemes in BofA, Citi , RBS and you had injections of capital into the Lloyds, RBs, Citi etc.

You might not like it but our Govt is actually following international best practise in the case of AIB/BOI. To repeat Anglo is differant, the actions of FF here were at best incompetant and at worst medacious.

No as regards defaulting on senior debt here and now and even in Anglo. The Irish banks need to raise about 40bn of senior debt from the market over the next couple of years. Anglo has a loss of 22bn and about 5bn of senior debt. Do you think it is wise to gamble that defaulting on Anglo now will not harm the effort at borrowing this money?

Now as regards defaulting on sovereign debt as you suggest, how do you fund the 25billion deficit if you do that. How many public servants do you want to lay off to close the gap?

The mechanism through which this transfer of value is to occur is essentially the securitision of a dwindling taxation base.

It has been clear from the outset of this scheme that the executive have deemed the health, education, social welfare and infrastructure needs of the nation to be subordinate to those of the bondholders.

I claim only a rudimentary knowledge of sovereign debt instruments, which I have gleaned from the FT, the economist etc. I suspect, but cannot confirm, that some of the bondholders may have offloaded the risk by purchasing credit default swaps.

If this is indeed the case then the bondholders would have nothing to lose if Richard Bruton and Willem Buiter called them in for a chat. They would simply call up XYZ Captial in Mayfair or Greenwich and present them with an ISDA notice asking them to make good on the CDS.

Accordingly, it follows that Lenihan, Bacon, the Department of Finance and HSBC’s Financial Institutions Group have effectively allowed these deserving fund managers to take the Swiss Chalet off the market for now and forestall that oh so tiresome conversation with the trophy wife about her credit card bill; shame about those with medical conditions that necessitate state support.

It was argued (unconvincingly, in my view) ad nausuem that any attempt to limit the bondholders recovery to the value of the assets they financed would have a detrimental effect on the market for government debt. How is this argument squared with the decision of the UK Government to deny any taxpayer bailout for the Northern Rock bondholders? Or the weekly bank closures by the FDIC?

At this stage the only options available to the incoming government that is intent on providing some minimal level of social service will involve retrospective legislation in some as yet to be determined form and repudiation/restructuring of sovereign debt.

According to what I’ve been reading, it’s probably got the best paperwork, best title, etc. because they came from professional developers and not from some hick builder in partnership with his local councillor in Ballybogoff??

Good hard data seems so hard to find when you start looking at NAMA. I wonder how much of the stuff to go over still is land that’s only worth a fraction of what was actually paid for it.

But that’s by the by, what outstanding questions do you think still need answering?

Can we have a go at putting them all in one place (here)?

Obviously, “who are the bondholders?” seems to be on a number of lips.

What are the real losses at the banks and how long is it going to take to disclose them?

What’s the real cost of shutting down Anglo and where’s the proof of that?

I’m wondering (like BL) what the state of the rest of the loans going over to NAMA are like if this first tranche is supposed to be the best of the bunch… and I’m wondering if the financial regulator has really done a stress test on ‘worst case scenario’ should those remaining loans waiting to go over turn out to be a right basket case…. and do they need a further worst case scenario stress test on the non-NAMA loans e.g. how higher than expected mortgage/personal loan/cards/etc. default rates might impact things.

Why did Lenihan ignore Seelig’s (IMF) advice last April - NAMA wouldn’t get credit flowing into the economy - and how did he come to end up on the board at NAMA after that advice?

What are the other big questions we want to see answered?

And am I the only one who thinks all that’s been happening this week plus arrest of Fitzpatrick last week and administrators going into Quinn this week….. is all looking a bit….. orchestrated?

You are getting a bit of stick on your IT article in the comments section. Just a heads up as I think you have poor internet contact.

But more than anything else he points that the only way we can afford this disaster is to restore competitiveness to the economy. And with so many in the public sector still stuck in the victimhood of the problem not being of their creation (while overlooking that their pay increases and enormous expansion was based on those self same problem revenues), though this attitude is changing in the face of enormous private sector based long term unemployment, how much misery do we the public need to suffer from these selfish public sector union members before they finally get it.

Alan Dukes has stated that until NAMA revealed on Monday the discount on the loans being transferred, they were working off 30%.

He says this as Chairman designate of the bank with full access to all its resources.

And we are expected to believe his estimates of how much it would take to close the bank.

Yes on Mr Gillen - worse than drivel. And the Minister on Iceland, again, seasoned up with a bit of Argentina …. further obfuscatory fear-mongering …. this is really dire stuff.