The World’s Slowest Recap: A Cunning Plan?
This post was written by Karl Whelan
I think it is widely agreed that undecapitalised banking systems saddled with bad loans are a threat to the efficient functioning of the economy. I think it’s also widely agreed that, whatever the mechanism, the goal of any banking plan is to return the sector to a healthy well-capitalised condition.
Given that, I find it very disappointing that eighteen months after the Irish banks were thrown into crisis and at least a year since it was clear that losses threatened the solvency of the banks, we are still taking our time getting the banks recapitalised.
While every other country has unveiled and implemented bank recapitalisation plans, we are still waiting for the banks to formulate their recapitalisation plans. We also don’t know how much state capital will be required and the banks don’t have to reach their new capital targets until the year end. The Financial Times noted this week that Ireland’s was the slowest and most complex banking solution adopted around the world.
If you had told me early last year that at this point we would still be stuck with an undercapitalised banking system restricting credit and strangling the economy, I would have said that this was a very disappointing outcome. Indeed, one of my criticisms of the Fine Gael plan from last year is that it would have kept us with a zombified banking system up to September 2010, which seemed like a terrible outcome, but one which the government’s own policies are also bringing upon us.
You might imagine that Irish business journalists would also occasionally express disappointment at having the world’s slowest recapitalisation. However, the Irish media have their own ways of doing things and, in fact, we are regularly told that the slow pace of progress is all part of a cunning plan. We had to stabilise our fiscal situation first, you see.
So, for example, the Minister’s speech on Tuesday informed us that ”Crucial pieces of the jigsaw had to fall into place before we could embark on this ultimate phase of our bank rescue” with the first piece of the jigsaw being to get Ireland “fiscally stable and credible.”
The Brian Lenihan interview in the Independent with Brendan Keenan brings this message, unquestioned, to the plain people of Ireland:
He makes a point that tends to be overlooked in discussions of whether more should have been done sooner. It could not have been done 12 months ago, with the financial markets fretting over the scale of the budget deficit.
The country came close to not being able to borrow the money to keep it running. Attempting to cover the bank losses as well might have made that danger a reality.
Some of our more prominent economists are also adopting this line about careful sequencing.
Rude as it is to interrupt the Lenihan lovefest, I’d like to point out a few problems with this story.
First, it takes a somewhat Orwellian approach to describing the government’s strategy. The NAMA plan was announced last April in the Minister’s supplemental budget speech. At the time, there was lots of talk about how the government was adopting a bold integrated strategy of dealing with its twin fiscal and banking crises. I do not recall government politicians at any stage last year announcing that their real plan was to delay the transfer of loans so that the recapitalisation wouldn’t take place until the end of 2010. In fact, I recall quite the opposite—plenty of claims that the banks would be fixed by Christmas.
Second, I find it a bit disturbing that the government is apparently taking credit for the timing of the latest banking announcement. Are we to take from this that there was deliberate foot-dragging in the preparation and passing of legislation and in the legal and preparatory work relating to the transfer of the first tranche of loans? Perhaps, but I’d reckon this is more cock-up than conspiracy. The NAMA process of paying private sector banks for loans, involving detailed loan-by-loan evaluations was bound to be slow and tedious. Indeed, avoiding such a process was one of the arguments put forward in favour of nationalisation by the IMF and, em, me.
Third, there is no basis in reality for the idea that the market didn’t actually know last year that we were “attempting to cover bank losses” and could only be told the truth now in Spring 2010. The NAMA announcement in April of last year and its accompanying media campaign against the idea of nationalisation made it patently clear to international sovereign bond markets that the Irish taxpayer was on the hook for the bank losses. And the figures for estimates of those losses, while bigger now, were still huge last year. I’m afraid this is just another one of these cute-hoor “didn’t we do great to fool the sovereign bond guys” stories that the Irish media loves but which are actually quite silly (“Aren’t we clever hiding €54 billion in debt off the balance sheet? The sovereign bond analysts will never notice!” is another example of this line of thinking.)
Fourth, the financing of the banking bailout is coming in the form of NAMA bonds, promissory notes and funds from the NPRF, i.e. it is not requiring new borrowing in sovereign bond markets. This could have been done 12 months ago.
Finally, the self-congratulatory tone in relation to how we have “stabilised” the public finances is worrying. Have people who say this checked out our sovereign bond spreads, tax receipts or unemployment figures lately?
As far as I’m concerned, the meat of Tuesday’s announcements could have taken place this time last year. We could have announced last Spring that
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We had done an assessment of the bank’s property loan portfolios and we were asking them to write these down to realistic values (which could keep the banks above insolvency if the government was insistent on keeping the banks out of nationalisation.)
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We were setting up an asset management agency to take over these loans at these realistic values and these transfers would take place over the next year or so.
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The banks were required to be recapitalised by the mid-2009 with funds from the state if necessary.
This approach would have avoided nationalisation and recapitalised the banks at least a year ahead of what the current strategy is going to achieve.
That a year after the original NAMA announcement, we have made so little progress and that our banks have continued to restrict credit for another year, are not achievements to be celebrated.
Tags: NAMA
April 2nd, 2010 at 5:14 pm
We’re the only country that took the scenic route to nationalisation - NAMA - which was probably the right thing given the number and scale of impaired loans in question. More now than ever, the global system is becoming reputation based. We’re in the EU - we’re indebted to the EU - probably not a good idea for the apple to default on repayment to the apple tree.
What can we do about it? The only thing I can think of now is to push the EU commission to make transparent / publish as much of it’s conclusions on the balance sheet of Anglo as possible. If this bank can be wound up for cheaper (or even slightly more expensive) than keeping it open, then it shut be wound up, as long as a way can be found to guarantee the deposits and loans of legitimate groups like Credit Unions, some of who are thought to be clients of Anglo.
All I can say is this. There is corruption. It hasn’t gone away, and if Anglo survives I’d bet that if there is another crisis, it may well be through the back door of Anglo that it happens again. There’s something very smelly about that bank. Where’s the transparency?
April 2nd, 2010 at 5:35 pm
We are being treated very gently by the foreign media. Reguly is an Italian/Canadian who can be cutting when the mood strikes him.
http://www.theglobeandmail.com/report-on-business/commentary/ireland-one-piigs-club-member-seeking-eviction/article1519556/
April 2nd, 2010 at 5:58 pm
@Karl Whelan
You are wrong.
It has been pointed out previously on this Blog that “an asset management agency to take over these loans” could not have been set up any faster than NAMA, but for some reason you refuse to listen. So let’s go through it again.
You propose “setting up an asset management agency to take over these loans at these realistic values and these transfers would take place over the next year or so.”
First, a borrower has a legal contact with the bank from which they took out the loan. That loan could not be transferred to an asset company until special new legistaltion had been drawn up passed through the Dail that changed the laws regarding such contracts. That legislation was included in the NAMA Bill.
Second, all other aspects of the asset company (e.g. corporate structure, anti-lobby rules, etc) had to be included in legislation and passed through the Dail.
An asset company could not have been signed into law any earlier than November 2009.
Third, any asset relief sceme set up in the EU must follow the EU Commission rules. These rules insist that loans that are being transferred to an asset management compay must to be valued individually using a bottom-up approach. Loans cannot be transferred at some arbitrary “realistic values”. The bottom up valuation process could not legally begin until after the asset comany was signed into law in November 2009.
It hardly would have made sense to recapitalise the banks in mid-2009, as you propose, without knowing the outcome of the bottom-up valuation process which the EU insist had to be done.
A bogus arguement that has been forward for the full nationalisation of Bank of Ireland and AIB was that it would speed up the transfer of loans to the asset company. This is clearly false. The EU require a bottom-up valuation process, irrespective of the degree of State ownership of the banks. Loans cannot be transferred from Anglo to NAMA at “realistic values” without a loan-by-loan valuation, even though Anglo is nationalised. Banking is a commerical business. Irish banks compete with other EU banks, irrespective of whether they are nationalised or not.
April 2nd, 2010 at 6:06 pm
Hi Noel.
Welcome back. No less rude than the last time, I see.
Perhaps it escaped your attention that Tuesday’s annoucement only involved valuations for a first tranche of loans, that the “bottom-up” process of valuation has not yet taken place yet for the vast majority of loans and that the Regulator is still able to request that the banks raise extra capital to cover anticipated losses.
All of this could have been done last year. The announcement could have made clear that the forthcoming AMA was going to tick all the right legal\EU boxes prior to the actual transfers but, as we can see now, the process of recapitalisation did not have to wait for the transfers to actually happen. The idea that we have had to wait 12 months to get “valuations” done to tell us what everyone knows — that there are huge property-related losses on the banks balance sheets — is laughable.
But no, our way is the only way. Even though everyone else has recapitalised their banks yonks ago, we need to sit around and wait forever. Right Noel, whatever you say.
April 2nd, 2010 at 6:18 pm
And Noel, I did say this the last time as well but can we go easy on the bully-boy rhetoric?
“It has been pointed out previously on this Blog” = “I have said before on this blog”
“for some reason you refuse to listen” = “You disagree with me”
See, it’s easy to debate in a grown-up manner if you just make a small bit of effort. In any case, we can delete messages that veer over into being abusive, so just try to behave yourself, ok?
April 2nd, 2010 at 6:20 pm
It would definitely have sped things up, but there would still be a few thorny issues to resolve. One of them might be:
Capital markets might take into consideration that many of the senior executives are still in place and probably most of the management. The risk management of the banks seems to have been questionable and therefore lending to the banks could be seen as risky. Funds might become available but if the banks have to pay a risk premium for their funds they’d have to pass the cost on to their customers.
High charges to customers is likely to restrict growth.
Another might be that the banks might be stuck with paying high wages leading to further costs. The high wages may or may not exist but I suspect that the paper profits (now gone) justified a few (possibly more than a few) pay hikes to levels of pay that in the current business climate might be very difficult to justify. High costs again for the banks that they’d have to pass on to their customers. Again, the high charges is likely to restrict growth.
A well capitalised business bank, with good connections to customers and low costs could probably do very well in Ireland at the moment and would help domestic economic growth. But in the short term I’m not sure how such a bank could come into being.
April 2nd, 2010 at 6:39 pm
@ KW,
What it shows in my opinion, is that you are better off to avoid issues which are legal in their nature, as early as possible in the train of events. I mean, what we have in Irish banking, is a situation allowed to develop which not only has a serious economic dimension to it. It also has the legal dimension which complicates everything. It is not only an economic problem. It is also a massive, massive crime committed on the Irish nation. I think that minister Lenihan more or less confirmed that in his statement on Tuesday. If the interests of speed of economic resolution were the only goal, it might make sense to allow many crooks off the hook. It might mean we get things right now, sorted out quicker. But my question is Karl, would future generations down the line thank us for allowing the legal side of this to slip? Even if it means resolution today, is prolonged because we want to get to the bottom of the legal side? One of the things which could stunt economic growth more than anything, is if we re-float the ship, without investigating and find as many weaknesses in the vessel as we can today.
It should be the duty of regulation (bearing in mind all of the arguments about function of markets etc) to see to it, that as many of the legal issues we are now witness to, were avoided. I.e. To reduce the amount of that dimension in any financial crisis, which has to be solved, and thus delays an simple economic resolution. Regulation cannot catch everything, there are always rogues. Humans are humans. But professor Lucey is correct. We didn’t have light regulation in Ireland, we had no regulation. The institutions who stood back and watched are now as culpable, or more than those who ran all the games, fixes and deals. This is something for our legal process in Ireland to figure out to the best of its ability. The idea of light regulation itself had its dangers I think. It implied there was some other form of regulation, which was ‘heavy’ regulation. To explain, allow me to delve into marketing for a moment. The ’super size’ me campaign by fast food chains served a basic purpose. It wasn’t to sell more super sized meals. Its purpose was to allow consumers, to feel less guilty about choosing ‘regular’ or large, because a whole new weight category had been created above them. They felt they were being ‘good’ by not going for supersize, and you sell more regular and large meals. The same kind of psychology applies with ‘light’ or ‘no’ regulation, as opposed to ‘heavy’ regulation. BOH.
April 2nd, 2010 at 6:46 pm
To clarify the above, when you rolled out the idea of light regulation, it created by extension, a heavier category of regulation, which could be called ’supersize me’. That implied in turn, that when regulators found themselves in situations of making a choice, they suddenly had three categories of regulation to choose from - none, light and super size. You see how that might affect the dynamics of a decision making process? It is subtle, but quite clever. BOH.
April 2nd, 2010 at 6:56 pm
@ Noel
The argument that the legislation could not have been passed before November does not bear scrutiny. Although lengthy, the legislative provisions are not particularly complicated. The brief was to put together an Act which would address potential legal pitfalls in assigning banks assets. It was also necessary to ensure the technical defects in the legal security did not redound against NAMA. Thus, for example, NAMA is not subject to the normal rules on registering charges with the Companies Office. Special provision was put in to deal with “ransom” strips. None of these issues are particularly complicated in legal or drafting terms: it just requires some “looking around corners”, i.e. anticipating what arguments might have been raised by someone trying to resist a transfer.
In terms of the economic issues, the Act is - possibly deliberately so - vague. LTEV is defined in a broad brush way, with the detail to filled in by the Minister in regulations. (As discussed on other threads, the regulations are not much more specific).
In fact, the Government was able to produce a draft of the legislation in July. Thereafter delay ensued because of the Oireachtas vacation, and a somewhat leisurely passage through Parliament.
April 2nd, 2010 at 7:14 pm
@Karl Whelan
I don’t mean to be rude.
At least we are making progress.
You wrote: “The announcement could have made clear that the forthcoming AMA was going to tick all the right legal\EU boxes prior to the actual transfers but, as we can see now, the process of recapitalisation did not have to wait for the transfers to actually happen.”
I take it from your reply that you concede that the transfers could not have taken place “over the next year or so” — contrary to what you wrote above. The actual transfers had to wait until the legal establishment of the asset company and the bottom-up valuation. Under your proposal, the earliest the first transfers could have taken place is March 2010.
You are right that the State could have injected equity capital into the banks last year. Of course it would have been doing so without knowing how much capital to put in. 2bn, 4bn, 6bn, 8bn ???? The valuations of the first tranche provided the crucial information the Regulator needed. It allowed him to make a firm estimate of the total NAMA losses. Otherwise he was shooting in the dark. Would he have been able to calculate last year that Bank of Ireland needed 2.7bn in new capital, a good part of which it could raise from a rights issue?
Just coming back to the rudeness thing, you recently wrote the following about Minister Eamonn Ryan” “the consistent evidence that senior Ministers do not understand the banking situation is extremely worrying.”
Am I to take it that you can be rude to people, but no-one can be rude to you?
April 2nd, 2010 at 7:22 pm
You don’t need loan by loan valuation for capital injections. The US did a capital assessment for the top 19 banks, 2/3 of the system, in 2 months this time last year. SCAP. And the consensus is that it worked.
April 2nd, 2010 at 7:26 pm
@gadge
“In fact, the Government was able to produce a draft of the legislation in July. Thereafter delay ensued because of the Oireachtas vacation, and a somewhat leisurely passage through Parliament.”
If I recall correctly, the draft was produced in late July, after the Dail had closed for the summer. As for a “leisurely passage” weren’t there a few 5am sessions in September/October?
The point is that had the State injected equity capital into the banks last year, this injection in itself would not have sped up the setting up of an asset company or the necessary bottom-up valuations.
April 2nd, 2010 at 7:29 pm
@ Noel
“Under your proposal, the earliest the first transfers could have taken place is March 2010.”
Like Gadge, I don’t think it needed to take so long to pass the NAMA bill. I also don’t think it needed to take so long to do the valuations. Hence “next year or so” but even if you take March 2010 as the date, you see my point that you can recap prior to the actual transfers.
On the valuation process, I disagree that it has provided crucial information. Interesting information for sure but not crucial for the valuations. In my opinion, the valuations provided are driven mainly by a desire to avoid full nationalisation rather than the actual underlying values. But look, the point is that even if the Regulator got an initial stab at the capitalisation requirements wrong they could come back and revise these requirements later (just as may be done if Tuesday’s figures are wrong.)
And as for rudeness to Mr. Ryan, his statements about having to leave the Euro were unfounded and inflammatory and I was calling it as I saw it. I saw your comments on the other hand as shouting rather than debating, whereas your follow-up comment is just fine and allows room for trying to understand where the other person is coming from.
But, at the end of day, it’s my house so it’s my rules. I get to make the call as to what gets deleted and what doesn’t. As most regulars can attest, I let just about everything in. But it’s not a democracy.
April 2nd, 2010 at 8:25 pm
@ Karl
That last paragraph reads like something Brian Lenihan would say if he had a blog. It’s a shame he’s running the department of Finance with the same attitude.
April 2nd, 2010 at 8:27 pm
Moody’s judgment of NAMA as ‘ingenious’ is an accolade that Brendan Keenan is quick to massage into a piece of cake icing:
http://www.independent.ie/business/irish/namas-836450bn-bill-may-never-arrive-for-taxpayers-2122240.html
Of all the pieces I have read recently, I find this to be the most disturbing of all. The implication is that NAMA is some kind of consol bond carousel. Suggesting to the public that NAMA bonds may not have to be repaid (costless) is such folly that it beggars belief.
April 2nd, 2010 at 8:34 pm
Thanks Alchemist. It’s hard to keep up with Keenan these days isn’t it?
April 2nd, 2010 at 8:45 pm
It may be demonstrated in the long term that delaying this way, reaching for a international upterm may have been judged, rightly or wrongly to have been in the national interest.
April 2nd, 2010 at 8:48 pm
I found another priceless quote along the same lines from BK quoted here by yogan over 3yrs ago
“Governments don’t have to pay back debt, they only have to pay interest”
http://www.thepropertypin.com/viewtopic.php?f=4&t=2631&p=362281
April 2nd, 2010 at 9:05 pm
Is the suggestion that the banks might not want to redeem the nama bonds as outlandish as it sounds? If the bonds are non-tradeable, surely they are of limited use to the banks? Moreover, will the banks not be attempting to pay off their earlier borrowing:- if so, then will the banks not want to redeem the nama bonds as soon as they are allowed to?
April 2nd, 2010 at 9:12 pm
To be fair to Mr. Keenan, you guys know what he means. People talk about the national debt as though it’s a total that has to be reduced to zero at some point whereas in fact you can usually roll over debt securities and things are fine as long as the debt levels are stable.
But clearly you do have to pay back individual debt securities with fixed terms and Brendan obviously knows this, so I think that’s just a poorly worded quote.
April 2nd, 2010 at 9:16 pm
@noel
“Just coming back to the rudeness thing, you recently wrote the following about Minister Eamonn Ryan” “the consistent evidence that senior Ministers do not understand the banking situation is extremely worrying.””
Rudeness? Hardly. Karl Whelan was making a statement of fact.
Anyone who witnessed Eamonn Ryan’s shameless spoofing recently on Vincent Browne’s show knows this to be a fact. This Minister does not know what a repo is. Happy to preach to the rest of us though, as needless billions of public money goes up in smoke.
If we want people to take risks, set up businesses that pay taxes then we are going to need credible people, not spoofers, in high places.
April 2nd, 2010 at 10:32 pm
Let’s set history straight. And let’s not make the assumption that an asset management agency was a necessary and appropriate solution for Ireland (so watch out, Noel). It was back in April 2009, when Nama first began to be seriously aired in public. The minister says in the interview that he had knowledge of the banking problems almost a year earlier, in 2008.
There were many reasons why sovereigns came under pressure towards the end of 2008. Foremost among them was a perception that European governments would suffer from a sharp rise in contingent liability from rescuing banks.
Taking banks off the government balance sheet would have most certainly reinforced government credit at the time, and have led to lower borrowing costs.
Ireland, within the EU, took on the biggest contingent liability as a GNP at the time. And so logically Ireland suffered the most within the eurozone over the period Sep 2008 - June 2009, in terms of higher relative borrowing costs (see below).
Let the facts be clear - this rise in borrowing costs relative to other EU sovereigns was in large part driven by Irish government decisions. The Irish government managed to stabilise at end 2008 the calamitous explosion in the budget deficit at a run rate of 15% in GNP (where it probably still is). So taxpayers can be thankful on that score.
However the Blanked Guarantee on 29 Sep most certainly contributed to undermining Irish government credit worthiness. One alternative, probably feasible, would have been a controlled wind down and sale of Irish banks and their assets, before, over and after Sep 2009. I have no doubt whatsoever that such an outcome would have substantially lowered borrowing costs for the Irish taxpayer in the months afterwards compared to developments since.
The Minister might be arguing that he only had the resources to deal with one problem at a time – the guarantee bought time, allowing all efforts to be focused on stabilising the budget deficit. Fine. Unfortunate, deadly costly but understandable.
It is however entirely disingenuous for the journalist – with the minister’s consent it seems - to suggest
Twelve months ago – April 2009 – was precisely when Nama was first mooted in public over 6 months after the Blanket Guarantee was imposed on the Irish taxpayer. Let’s be precise – the faithful day was the 7 April. It came across to me as a panic move (barely thought out) in response to a heavy bout of bad news in the preceding weeks (Ireland’s AAA at S&P was lost 30 March 2009). Moody’s immediately responded to Nama plan (it hadn’t yet been christened) on the 8 April by cutting the ratings on Irish banks. The same day, Ireland’s AAA Rating was cut by Fitch.
Lesson: taxpayer support for the banks undermined sovereign credit. Let’s get the history straight, before disingenuous reports start making the economic history that your grandchildren and great grandchildren will be reading.
Let’s be more precise about the history, lest anybody start telling fibs again (I sense that a number of writers on this blog are desperate to see events through rose tinted glasses. And on the whole, the public is desperate for feel good interpretations of the disaster that is befalling their purses in the years to come).
There were two great sell-offs or Irish… one against Bund (Sep 2008 to Mar 2009). This was helped along by aversion to EU sovereign risk on the whole, and best illustrated by IRISH – Bund yield spreads. The second big sell-off was specific to Ireland, and best illustrated by IRISH – GGB yield spreads (i.e. Greece Government Bonds).
Timescale of Round 1
2008-09-01. IRISH – Bund 2013 yield spread was 20bp.
GSEs blew up early Sep, Lehman 14 Sep, AIG 15 Sep.
2008-09-29 Irish Blanket Guarantee
2008-09-30 IRISH – Bund 2013 yield spread was 30bp, only 30bp.
2008-10-23 sell-off in EU riskier governments began to accelerate as European governments took on ever greater contingent liabilities. IRISH – Bund 2013 over 50bp
2008-11 Nov thru Dec Little action by Irish government on banks. Spread hit 100bp 4 Dec 2008.
2009-01-14 to 26 Sharp acceleration in sell off of IRISH, and European bond markets had difficulty functioning. IRISH - Bund 2013 rose from 150bp to 250bp.
Jan-March 2009 The riskier governments remained under pressure. Ireland peaked at over 250bp over Bund in March 2009.
Timescale of Round 2
From December 2008 through June 2009, Ireland almost continuously underperformed GGBs (i.e. Greece). The yield spread between 2018 benchmarks was -100bp in Dec 2009 (i.e. the Greece 2018 bond yielded 1% more than IRISH). It then moved to -35bp in early April (just before Nama was first seriously mooted in public), It was +70bp by end June
This sell-off was unique to IRISH, and came at a time when risk aversion at the whole was easing. So spreads were easing relative to Bunds, but widening sharply compared to e.g. Greece.
So over the period when ideas on Nama were crystallising, IRISH lost some 100bp vs. GGB in 2018 bonds. True, over the period April-June and beyond, IRISH narrowed against Bund. That had a lot to do with various factors outside of Ireland, notably strong global appetite for risk.
Lest any body asks (like on a previous post), I look at yields or assets swaps (and not CDS), as this is “real money”. The State borrows (mostly) in bonds, and certainly not in CDS. And investors can place their cash in bonds (barely in CDS).
Anyway back to the post, after this interlude. The Financial Times noted this week that Ireland’s was the slowest and most complex banking solution adopted around the world. Bang on. And Ireland is far still from paying the full price of that folly.
As for the sovereign bond analyst never noticing, the issue is rather will journalists and cash investors notice? And then will they care that much? Ireland is immensely lucky to be given the benefit of the doubt for now (bang on, Mickey Hickey).
April 2nd, 2010 at 10:33 pm
@ karl
‘Are we to take from this that there was deliberate foot-dragging in the preparation and passing of legislation and in the legal and preparatory work relating to the transfer of the first tranche of loans?’
You are a patient man, but it looks you are going to need a lot more patience before this is over.
It took time for us to understand that the climate had changed fundamentally. We kept hoping it was temporary blip, and tried to carry on as usual. It was eventually agreed that something had to be done.
From that point on, the nature of the problem began to be understood. The banks were insolvent and the sovereign was unfit. Credibility of the rescuer had to be established first, so fiscal correction had to be made and regulation had to be upgraded.
A ’special’ off balance sheet mechanism had to be devised which would cleanse and recapitalise the banks without requiring the sovereign to expose its unfitness in the capital markets.
The necessary ‘ECB support for the NAMA bonds had to be solicited. The relevant legislation had to be drafted and passed. The arrangements for treating promissory notes as Tier 1 capital had to be agreed.
The relationship between government and bank management had to be put on a more distanced footing. Radioactive Anglo material had to be sealed off in the teeth of howls from the opposition.
The MoF has managed all that without coming unstuck. Credit for political skill where credit is due. I suppose it is the Irish version of a soft landing.
Happy Easter
April 2nd, 2010 at 10:35 pm
Is this not just the established policy of the Government? Shove the problem into a Tribunal, then play for time and hope the public has short memories.
In this case, NAMA is the Tribunal and the leisurely approach is all part of the well-worn Ahern strategy of making the problem go anywhere other than his office.
Meanwhile, Micawber-like, we can hope something will turn up.
April 2nd, 2010 at 10:40 pm
+1 bg
I for one promise to not vote FF or greens for the rest of my life. I will also make every effort to influence my children and grand children to follow suit. That is if they bother to stick around to help clean up this mess.
April 2nd, 2010 at 10:41 pm
@Ciaran O’Hagan
Excellent post. Thank you for the time. Cross-posted to thepropertypin (I hope that’s okay) for those that don’t read here and for tired eyes like my own.
April 2nd, 2010 at 10:49 pm
@ Paul Quigley
I’d agree with some of that. But I also think there’s been a serious element of fiddling while Rome burns and that sorting things out quicker would have had significant positive effects on the economy, which in turn would have helped the fiscal situation.
I’d also disagree with some of the specific points:
1. I’ve long railed against fans of off-balance sheet borrowing so I don’t see that as important. Due you really think folks like Ciaran O’Hagan don’t see this debt and count it?
2. I don’t think you’re right about the idea that there was some complication in getting any type of government bonds, promissory notes or whatever counting towards Tier 1 capital. It seems there’s a general confusion here about regulatory capital — it’s not one specific instrument, it’s essentially the gap between assets and liabilities. Give a bank sufficient assets and it’s well capitalised. If I get the time, I might write a longer post about this.
3. On the idea that some complicated campaign had to be waged to the get the ECB to allow NAMA bonds to be eligible collateral, I never understoood this and said so many times last summer\autumn. Government-backed bonds are on the list of eligible collateral. This can’t have taken the DoF boffins long to sort out.
@ Ciaran
Thanks very much of this material, which is extremely useful.
April 2nd, 2010 at 10:57 pm
@Ciarán O’Hagan
Great summary!
April 2nd, 2010 at 11:03 pm
@Karl Whelan
“To be fair to Mr. Keenan, you guys know what he means. People talk about the national debt as though it’s a total that has to be reduced to zero at some point whereas in fact you can usually roll over debt securities and things are fine as long as the debt levels are stable.
But clearly you do have to pay back individual debt securities with fixed terms and Brendan obviously knows this, so I think that’s just a poorly worded quote.”
1. Who’s interested in fairness?!
2. The tone of the interview was that this debt never has to be paid back.
It may have been true in the past that inflation and growth would reduce the proportion that existing debt was of GDP, that expansion of asset bases meant that insurance companies would be happy with a permanent rollover of debt (i.e. they end up with perpetual securities that reset every 2, 5, 10 or 30 years), but that may no longer be the case.
In the ten years of the cyclical upswing from 1997 to 2007, the national debt in money terms decreased from 38 bn to 37 bn. As the national debt includes the offsetting effect of the NPRF, it is fair to say that in GGD cash terms it increased by 50%. So in the best cycle there has ever been in the history of the state (for all that much of it was bubble), not only did we not save a red euro cent, but we went on an unimaginable spending spree.
And now, the cycle has turned. The country is in a depression. Unlike, say, Finland we have not saved anything. This has been masked by bubbled GDP, further pumped by transfer pricing. The percentages lie, because the absolute amount and the level of overspending matters. The NPRF is so much borrowed money. If I have a fiver in my pocket and I owe you a tenner, I’m not exactly flush, am I?
Let’s look to the future, though. What’s the likely inflation rate, going forward like. Well, the ECB have committed to below 2%. If we go above that, as we did in the past ten, we’ll become so astonishingly uncompetitive, we’ll be bust again. We will have to abide by the european economic cycle. We can’t have a credit boom to get out of having a recession (as we kicked off in 2001-2). So we will have to accept that we need to save for the recession. Which means we are going to have to retire debt in future. We leave ourselves too little room if we do not.
So I contend that it is no longer enough to say that “governments don’t pay back debt” in a glib “inflation will take care of that for us”, because inflation may not, and growth may not with the drag that interest payments will have. We need to plan now how we will pay back this ‘excess’ debt, over what timeframe and how we will pay for the infrastructure spending we view as necessary in the future. It is likely that we won’t be able to borrow for it…
April 2nd, 2010 at 11:06 pm
@Karl Whelan
“Government-backed bonds are on the list of eligible collateral. This can’t have taken the DoF boffins long to sort out.”
One thing I have never understood is why zero coupon bonds were considered so bad. Mr. Bacon came out against them strongly in his initial plan as they wouldn’t attract so great a price, but surely that is irrelevant? It might mean more have to be issued to come to an agreeable price, but they could be issued for varying durations to spread the risk to the state - matched to the expected income from NAMA as it were (
), but without the annual costs and risks of the NAMA bonds?
April 2nd, 2010 at 11:30 pm
@yoganmahew
Probably because the banks wanted the €1bn pa in interest payments.
April 2nd, 2010 at 11:40 pm
@D_E
Well yeah. But that implies that the original reports were nobbled from the start. Now, we don’t believe that, do we? Yet…
April 3rd, 2010 at 12:22 am
@Karl Whelan
“even if the Regulator got an initial stab at the capitalisation requirements wrong they could come back and revise these requirements”
But the question is whether an injection of new capital last year would have made a difference to the supply of credit. You finish your original post by blaming the delay in the resolution of the banking crisis for the fact that “that our banks have continued to restrict credit for another year.”
But lack of capital was only part of the story.
As Patrick Honohan said about capital injections:
“It would be well to realise, though, that such injections are a necessary but not sufficient condition for expanded bank lending. As is evident worldwide, one cannot rely on a mechanical multiplier in this rgard.”
http://www.irishtimes.com/newspaper/opinion/2008/1211/1228864660643.html
Irish banks had to restrict lending over the past year because their access to wholesale funds has been restricted. Although the banks have a State guarentee, concerns about the solvency of the State itself have depressed wholesale lending to Irish banks. That is why the December budget was so important.
The optimal timing was probably: a credibility boosting December budget followed by what turned out to be the 30 March announcment in mid-January, when the Dail returned from the Xmas break. So the banking resolution is 2.5 months behind where it should be.
But for that to have happened, the NAMA bill would have to had passed in mid-September. That, in turn, would have required an all-party agreement to fast-track the bill. But an all-party agreement in September was not possible, because NAMA was the subject of such heated public debate back then. That debate, much of it spurious, caused the delay that you are now complaining about.
April 3rd, 2010 at 12:48 am
Ah right so Noel, it’s all the opposition’s fault. Is that what they say down the local cumainn?
April 3rd, 2010 at 1:44 am
I haven’t much followed this thread today, but following on my earlier comment about regulation in Ireland - it do think it is linked to the problem of slow-ness in the re-capitalisation process today. We define the purpose of regulation of our market system(s) in Ireland incorrectly. We ask of regulation, that it be able to save us from crisises. That asks too much of regulation. The truth is, given the efficient function-ing of the market, which regulation is designed to implement, there is no firm economic research which suggests that economic crisises will not happen and re-occur. So what then is the function of regulation, if it is not to prevent crisises happening?
I suggest that from now on, we look at regulation realistically. I believe, the function of regulation is simply this, it is to buy a sovereign some time to re-organise itself in the event of a financial crisis, which can hit that soverign for a whole plethora of reasons. Consider the plight of those foot soldiers who were ’sent over the top’ in the first world war on offensive attacks. They ran into barbed wire in no-man’s land. Barbed wire, an invention which came from the great plains of the United States in the 1800s, to prevent cattle from running. Never before seen in any major conflict, in the great war it changed everything. What we do see in Ireland today, is a failure of regulation because we have too much legal barbed wire in the way of our offensive. Our troops are getting shot down in no man’s land, and hence we have to hide in our trenches, creating trench art out of bullets with our pen knives, like we are doing here. We have to ‘winter’ it out, because of another invention of WWI, tinned food. Previously the troops had been able to sit out the winter away from the battle lines. Commanders command from way behind the lines via communications. Ireland as a country has been pinned down into its trenches by the constant threat of artillery fire from the markets, if we so much as twitch. It is time to change tactics and it is time to change generals. BOH.
April 3rd, 2010 at 1:50 am
@Noel
“Irish banks had to restrict lending over the past year because their access to wholesale funds has been restricted.”
Step back 20,25 or 30, and the rest, in years. Irish banks never lent in quantities of any significance to industry or manufacturing start-ups. Back in 1969 pre-EEC, Joe Lee had a piece in the Irish Times railing against the crippling conservatism of Irish investment culture. Traditional focus has been on property and the professions. Look at historical trends in prices of farm land (crazy in the last fifteen years given the minute per acre returns).
It is understandable that the banks aren’t lending. Personal debt is horrendous. There is little indigenous manufacturing industry left after the property splurge, their familiar territory. Excluding the multinationals, what’s left are service enterprises and tributaries to the property sector. With almost 500k unemployed and some 300K reliant on reduced public service salaries (800k on the government payroll directly), why would would they lend to these sectors? (aside: why do car dealers insist on referring to their retail sector as an industry in a country that doesn’t manufacture cars?). It is not be prudent. Step into any accountant’s office and the main differences between now and two years ago are less staff, less clients and more P45s being written. The economy is in a decline and is unlikely barring an act of providence to jump ahead of healthier EU states. Under NAMA the leverage inflicted on the population is so great that it hard to see how growth will recover in the medium term. Tom Gross (PIMCO) recently released one of his periodic state of the world pieces and he was quite pessimistic about highly leveraged economies returning to minimal growth rates. Ireland ranked as tolerable for bondholders just about but volatile. Conditions will get a worse in the near future as the government hoovers more money out of the economy to meet debt obligations, not just a little worse, and the kind of conditions that prevail in Latvia currently, for instance, can’t be discounted.
April 3rd, 2010 at 2:22 am
The Alchemist
Snappy false name…..
Correct. But as I have said before, it suits those who are still rich, to actively devastate the asset base as they will pick up gems cheaply.
Devastate the asset base! Do it slowly over decades or do it now. That is the only choice. Add borrowings until the reduction in prices occurs. Simple!
In addition, capital is so scarce that it will become very expensive, very soon. Taxes usually apply to activity. We needed and still need to activate the economy. Liquidate now. Costs will be lower and activity can pick up.
Delay evil, hasten good. It is all that we can do.
April 3rd, 2010 at 2:24 am
It does not help that the MSM, dependent upon advertizing, will print lies about the economy, all talking up prospects. Reality will come, but it will take time and the less damage we do in the meantime, the less we need to repay out of our reduced earnings.
April 3rd, 2010 at 2:29 am
Yoganmahew
Well said! I find that the arguments for NAMA all end up in the sands of a vast desert, yet simple sentences of yours show just how wrong that strategy has been and will be.
April 3rd, 2010 at 4:09 am
What would Sean Lemass do?
April 3rd, 2010 at 7:49 am
It seems to me that the price of delay is the price of saving FF by making sure the tsunami is kept at bay until after the next election.
April 3rd, 2010 at 8:22 am
Is it possible that it has been so slow simply because the people who needed to make decisions (mainly politicians) don’t actually know what they’re doing, have little understanding of economics and they get confused/slow up/delay making decisions if there are too many choices put before them or they hear conflicting ‘expert’ advice… etc. There may be lots of other human factors such as avoiding a decision (or deliberatley making the wrong one) because it will hurt supporters, etc.
All I’m saying is maybe it’s because they act like politicians with normal human weaknesses that it’s taken so long and not some other more complicated reason? I would hate to give them too much credit… such as they might have actually known what they were doing. The words ‘tossers’ comes to mind.
April 3rd, 2010 at 8:23 am
@Paul - and that sort of reason too.
April 3rd, 2010 at 9:39 am
@ The Alchemist
‘Step back 20,25 or 30, and the rest, in years. Irish banks never lent in quantities of any significance to industry or manufacturing start-ups…
‘the kind of conditions that prevail in Latvia currently, for instance, can’t be discounted….’
Nice to hear some of the old political economy tunes. Historically informed and globally sensitive. Keep playing.
@ Noel
‘But an all-party agreement in September was not possible, because NAMA was the subject of such heated public debate back then. That debate, much of it spurious, caused the delay………’
All-party agreement was never reached. The debate is genuine, but it has, as you say, slowed things down. The main obstacle, however, is a breakdown of trust in the poltiical system. We can’t spoof our way out of a crisis of these dimensions.
The party of government, and especially the Taoiseach, are hopelessly compromised by their holding of power during the period when gross regulatory failure occurred. That’s not a partisan observation. Remember the sin of hubris, of which the ancient Greeks spoke.
It is the mark of personal and political maturity to acknowledge error, and step aside where necessary. A new Dail, or a National Goverment is long overdue. Clinging on in the hope of a ‘recovery’ increases public cynicism about politicians (ref Joseph’s closing comment above)
Fianna Fail has played a big role in Irish history, but it is in the party’s own long term interests to depart governement with some dignity.
April 3rd, 2010 at 9:56 am
http://www.nakedcapitalism.com/2010/04/orwell-watch-democracy-being-linked-to-socialism.html
There is evidence of spin being effective in the article. I have to say that the Irish government has been very ineffective in their spin. I wonder why given that Lisbon brought out far more of it? I wonder how much unanimity there may be at the top?
April 3rd, 2010 at 10:58 am
@ Noel
“First, a borrower has a legal contact with the bank from which they took out the loan. That loan could not be transferred to an asset company until special new legistaltion had been drawn up passed through the Dail that changed the laws regarding such contracts. That legislation was included in the NAMA Bill”.
Although some on here might just say “you are wrong”, I will merely say I disagree with you.
A lot of loans will have transferability language bulit into them especially the larger ones so outright sale could be achieved without a veto from the borrower. For those that do not there are many ways to transfer the economics of a loan - a funded sub participation, an unfunded sub participation, a bespoke CDS, a CLN etc. All very easy to set up. Also, a series of Total Return Swaps or bespoke securitisations could be employed. All possible to do within a time range of 1-30 days.
Your other logistical reason for delay - ” The bottom up valuation process could not legally begin until after the asset comany was signed into law in November 2009.” - is possibly legally correct but the process could have been done commercially very quickly in advance of that. A simple loan can and does take minutes to value. A more complex one maybe a couple of days.
An interesting aside is that in order to value a loan, the valuer should take account of demand FOR THAT LOAN (not the underlying property) which implies knowing what the loan would command in the secondary loan market. I understand that no account was taken of actual loan demand and that valuations were carried out irrespective of the market. So if you were only employing a spreadsheet, it would be very easy to come up with a “valuation”. Interestingly, improvements in the loan market would probably have compensated for the continued deterioration in the propert market although I’d still be surprised if valuations then or now would be as higj as 53%.
Noel, looking back from afar and being able to see the wood from the trees (as some posters on here can even though they are still in the wood), it has been both sad and infuriating to see our country’s humiliation compounded by incompetence, resulting in generations being strangled by massive debts (be they “IOUs” or “promissory” or straight bonds).
Please - enough of the justifications.
April 3rd, 2010 at 11:17 am
@All
I meant to ask…..
I presume that once the government has (eventually) finished recapitalising them that the banks will then spend the next few years finding every device they can to dilute any public shareholding and reduce the value of said ‘investment’ as severely as possible?
Other than straightforward rights issues (which, for the sake of argument, let’s say the government doesn’t take up) are there any other instruments/approaches the banks can use to achieve this?
Has the minister done anything to safeguard us (the taxpayer) against such a dilution happening?
Or am I wrong in this thinking and the reality is more likely that the banks will be perfect gentlemen and consider us as their most important shareholders and do everything they can to ensure that ’shareholder value’ is uppermost in their minds.
April 3rd, 2010 at 11:18 am
http://www.reuters.com/article/idUSTRE6302U520100401?
April 3rd, 2010 at 12:27 pm
With bondholders escaping unscathed - and taxpayers being hosed - the market reaction is not surprising. But I wonder how long it will take before this sanguine sentiment turns rapidly to concern about the ability to service future debt as the real economy continues to shrink.
April 3rd, 2010 at 3:04 pm
http://www.safehaven.com/article-16273.htm
Reggie Middleton turns in a good article on Ireland’s woes, taking a quick tour around Europe. Quite good. Sadly frightening. Massive debt owed by and to Ireland.
Safehaven is goldbug territory. Delving there for many years has shown that what appeared to be paranoia was in fact mere truth.
April 3rd, 2010 at 3:26 pm
http://www.safehaven.com/article-16303.htm
Not so familiar with Gordon Long and the article is all about the USA. But the trillions needed for refi in the next few years really seems impressive.
Is there a limit to capital, if the banks are bust and governments are already committed? When? It seems inevitable that the demand will force up rates at a time of depression. What will give?
Karl Deeter
The IMF are backed by banks. So refi of banks is likely to get good press. Has Ireland turned into a bank?
April 3rd, 2010 at 4:36 pm
@Karl Deeter
It is refreshing to see that your level of debate has now sunk to posting links to Financial Analysis sites, why don’t you include something from Fitch’s, Moody’s, Blomberg, etc. etc.
We would never find those without your guiding hand.
Have you so little left to say on your own behalf?
@ paul quigley
“A new Dail, or a National Goverment is long overdue. ”
This National Government idea now appears to be part of FF strategy, to continue to be part of Government, still in a position of influence, still with access to the levers of power, still in a position to evade responsibility for the National Disaster they have inflicted on the country.
They even have RTE/Pravda on board, with so-called phone-in polls orchestrated by J. Duffy, allowing FF to escape the wrath of the people by becoming a part of a so-called National Government.
“Fianna Fail has played a big role in Irish history, but it is in the party’s own long term interests to depart governement with some dignity.”
How can you square this statement with your call for a National Government? How could you exclude FF from this enterprise?
Why are you worried about the long-term interests of the FF party?
FF’s biggest role in Irish History has been to beggar the country at least twice, and this latest effort, over the course of the ten-year Great Irish Property Bubble was the biggest.
For this they should be remember, but consigned to the Trash-can of History
April 3rd, 2010 at 6:10 pm
@Toby
You put your finger on the real reason for the delay.
Lenihan has been Micawber like waiting for something to turn up to make the pain less unbearable.
Even now he is expecting the recovery to start on July 1st at 0:00:01 and for money to start flowing into the exchequer.
He should have taken the same attitude as the Japanese Emperor did in August 1945. Endure the unendurable.
After all, it is not as if our problems were complicated.
We didn’t have an enormous volume of derivative toxicity that was difficult to value.
Common or garden property bubble problems were easy to value as numerous people have shown for the last 18 months by simple back of the envelope calculations. If you have the biggest asset bubble in modern history, then you apply the greatest discount in modern history.
But to be fair to Lenihan he is a politician and perhaps he felt that we needed to suffer an Hiroshima/Nagasaki moment before it became politically acceptable.
September 29th 2008 should have been that moment but we had to wait till March 30th 2010.
And all that has turned up in the meantime are more and more problems.
I wouldn’t expect too much to happen on July 1st.
April 3rd, 2010 at 8:27 pm
@Maurice O’Leary
“We didn’t have an enormous volume of derivative toxicity that was difficult to value.”
I suspect you are wrong there and that this is part of the fiasco we are now enduring.
As you say, common or garden property bubbles with accompanying financial crises are easy to value. If ours was average it should cost about 12% of bank assets, that is, about 50 bn euro. We are moving well away from that point. There is therefore something uncommon about our bust.
Whether it is the scale or the duration of the bubble, the universality of it, the crony nature of it; all are possibilities. My favourite, though, is the idea that much of what the banks have counted both as assets and as profit for the last seven years simply didn’t exist.
It was unstable financial engineering in revaluations, slice and dice equity stakes, loans used to leverage loans. all wrapped in a taramasalata of cash-out Interest Rate Swaps with Anglo as the point man for Ireland and Lehman Brothers as their sole counterparty.
So when Mr. Cowen and Mr. Lenihan blame Lehman’s it is not for the reason that we think it is. It is not because of the waves it caused, but simply because Anglo bet the farm on it and every bank and every other person bet the farm on Anglo, Mr. Quinn being no exception…
April 3rd, 2010 at 9:26 pm
@Pat Donnelly
thanks so much for the link to the http://www.safehaven.com/article-16273.htm article - very interesting.
April 4th, 2010 at 11:06 pm
@ yogan
‘Whether it is the scale or the duration of the bubble, the universality of it, the crony nature of it; all are possibilities. My favourite, though, is the idea that much of what the banks have counted both as assets and as profit for the last seven years simply didn’t exist’
That has echoes of the Flann O’Brien novel in which the Irish swords were so sharp that the point was stuck a few inches in you before you could feel anything.
‘It was unstable financial engineering in revaluations, slice and dice equity stakes, loans used to leverage loans. all wrapped in a taramasalata of cash-out Interest Rate Swaps with Anglo as the point man for Ireland and Lehman Brothers as their sole counterparty’
A touch of the Hunter Thompson’s there as well. You are on song tonight.
April 5th, 2010 at 2:44 pm
This is a Google translation link from Die Welt (The World) which is the German equialent of the British Times in its heyday. Hope the translation survives the linking process.
http://translate.google.ca/translate?hl=en&sl=de&u=http://www.welt.de/wirtschaft/article7050701/Sparen-wie-die-Letten-was-Griechenland-erwartet.html&ei=Y-a5S4ShGYOKlwfl-eiXCg&sa=X&oi=translate&ct=result&resnum=1&ved=0CAkQ7gEwAA&prev=/search%3Fq%3Dhttp://www.welt.de/wirtschaft/article7050701/Sparen-wie-die-Letten-was-Griechenland-erwartet.html%26hl%3Den%26client%3Dfirefox-a%26hs%3DwKS%26sa%3DG%26rls%3Dorg.mozilla:en-GB:official%26channel%3Ds
April 5th, 2010 at 9:39 pm
@paul quigley
Thanks! Embarrassed now!
April 13th, 2010 at 10:42 am
[...] Fair enough. However, one doesn’t get any sense from this article that there was an alternative to the slow and tedious procedures surrounding The World’s Slowest RecapTM. [...]