Surely the banks will pull every trick they can to dilute that shareholding over time?

My apples and oranges solely relate to NAMA. I’ll confuse myself if I try to expand it :). Apples are the toxic loans going to NAMA, oranges are shares in the banks. You can reason that the upfront cost to the taxpayer is the price paid for the loans plus the amount of capital the banks will need. This upfront cost should be quite stable (higher loan discounts require more capital, lower loan discounts require less capital). The thing is the price tag to the taxpayer will be roughly the same.

Given the taxpayer will be paying a certain amount; it’s worth looking at what we get for our money. Regardless of what discount NAMA buys the loans at, the loans have the same value. So really it’s the %age bank shareholding the taxpayer takes that increases the value of what the taxpayer will hold. So back to my example, we’ve committed to spend 2 euro on fruit and buying apples is part of our purchase. We’re the only buyer. The vendor tells us his apples are worth 1.70 euro so he’ll throw in an orange to bring it to 2 euro. We tell the vendor his apples are worth 80 cent and require substantially more oranges.

Many complain about the lack of an ‘edit function’. OK. Lets build an edit function, and licence it, and make a few bob.

Why wouldn’t a bank ultimately do this anyway? Deleveraging actually makes the equity proposal more attractive in the future, meaning any issuance will have more investor attraction due to an implied reduction in the institutions risk. The international deleveraging has been happening, and will continue to happen - it is not contingent on capital injections.

Complex stuff indeed. Perhaps this is not a definitive answer yet, but my mind is still turning it over. De-leveraging as you describe it, has to be connected in some way with disposal of foreign subsidiaries doesn’t it? In the case of AIB at least. I quote Karl Whelan from IE, March 30th 2010: 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. To which ‘tull mcadoo’ responded: Not sure you are correct about asset sales. Broadly speaking, if a bank sells the asset for above the carrying value in the balance sheet it is a capital gain and accretive to capital. Poland and M&T meet this crieteria. AIB would struggle to make book value for its UK subs. @ Karl Deeter, my question is this: How does one rationalise, on the one hand, the de-leveraging process you describe, with the overseas asset disposal process on the other? What you [Karl Deeter] are suggesting of Irish banks getting their affairs in order (you are talking about perception of potential Irish bank equity holders), prior to an equity proposal. Accepting that AIB’s Polish subsidiary had desposits exceeding assets, and thereby was funding the wider group. I don’t know Karl, is AIB is losing useful assets (overseas subsidiaries) and reducing its exposure to Irish domestic assets, Irish mortgages and personal loans (de-leveraging) going to work? The objective of such an effort being, I presume, so AIB bank can present itself to buyers in a better light? If only there was a way AIB could hold onto overseas assets, and ditch some of the domestic stuff. Maybe to a third banking force? That would improve its ratios wouldn’t it, and make AIB more attractive to buyers? I think we need to separate all of the above from the problem that Morgan Kelly indentified on the Prime Time episode of September 30th 2008. Which is to do with confidence of banks who lend to Irish banks (bondholders), and trying to prevent runs on deposits (you and me, or institutional). Sub note: Your [Karl Deeter's] question reminds me of an article in yesterday’s Sunday Business Post by Samantha McCaughren, NTR gets set to address funding conundrum. I quote: A streamlined business clearly focused on renewable energy could be an easier story to sell to the market, sources suggested. Greenstar and the toll road business could be shed to help focus the message. But then you have to consider that NTR’s business and that of Irish banks is not the same. What the Irish banks are doing is not so much ’streamlining’ their business, so much as watching years of painstaking acquisition work, swirl around the outlet and go down the pipe. From an article, AIB goes back to its roots as the great offload begins, by David Clerkin’s in yesterday’s Sunday Business Post, While it will be difficult for Doherty to swallow the overseas disposals, the shrinkage of his empire will be even more painful as it will deprive him of units that have come through the meltdown in better shape than the mother ship. BOH.

Re: Ciaran O’Hagan SBP article: It appears to me as though appetite for risk has been quantified in somewhat mechanical terms by O’Hagan and by Greenspan. (In contrast to confidence which is best understood without the paraphenalia of economics maths sometimes - to go back to Maynard Keynes, behavioural-ism etc) As supply of government bonds with sufficient yields dry up, the traders are forced into down into riskier areas. O’Hagan says,

If that’s the case, it makes sense to grab as much yield as you can now. Indeed, Irish bonds seem to be the new fetish. The other higher-yielding eurozone sovereign, Greece, is still seen as too risky. Portugal and Spain are also in the cooler, while Italian yields are already too low to be attractive.

Furthermore, whilst people may be disgusted at the amounts being paid to the banks, it does illustrate clearly the true magnitude of the problem. That in turn should help in garnering acceptance of the necessary reforms and measures.

I was reading something today which mentioned in 1995, Alan Greenspan spoke to the US estate agents to explain to them how much residential prices underpin confidence of people on main street. Everyone can collectively agree how far market values have fallen. It is a reality. There is no joy in that for many people, but there is a definite sense of realisation. When we talk about confidence as it affects the economy in Ireland, I would break it into three levels. The level of the ordinary punter on mainstream as described. Above that, there is the level of confidence in the banking institutions - as referred to by prof. Patrick Honohan in his The Week in Politics, interview in December 2009. Then above that again, there is a confidence which needs to exist at a level described by Morgan Kelly in the September 30th 2008 Prime Time episode linked above by Karl Whelan. In addition, I would like to point people to a Ciaran O’Hagan article which appeared in the Sunday Business Post on April 4th 2010. I suppose O’Hagan is describing something connected to confidence, which is appetite for risk, which Greenspan tried to quantify in his most recent paper also. BOH.

http://archives.tcm.ie/businesspost/2010/04/04/story48371.asp

I had a flick through Peter Shiff’s re-released book, Crash Proof 2.0 today. In regards to residential property, Schiff noted it makes sense to buy big ticket items like houses - or rental property as he call it. If you don’t buy, you need to rent. If you buy, you automatically save on rent, and that saving can be offset against payment on the debt you accept in order to own the property. You essentially become your own landlord, and it leads to situation where tenant and landlord have a good working relationship - because they are the same person. What Schiff does not agree with, is people who borrow money to overpay for a property, on purpose on hope assumption there will be a stupid-er monkey out there. All the monkeys can now argue together, how NAMA affects the marketplace in which all monkeys have to do business. But it was dumb monkeys who did not know their apples, oranges and bananas who caused all the trouble. There was serious , apple and sometimes banana gambling going on. BOH.

On the current issue, there surely has been a surfeit of spoof and window dressing.

Wouldn’t a bit of honesty/straight talking be worth trying?

1. Last year’s case for NAMA that it would have a big impact on the flow of credit was never credible.

2. As for the trade unions and the public pay deal, rather than seeking to make the case for bank bailouts more credible, wouldn’t it be more potent to address the inconvenient truth that the benchmarking payment was made without conditions, contrary to the recommendations of the first report and what had been stated as Government policy by the Minister for Finance?

http://www.finfacts.ie/irishfinancenews/article_1019286.shtml

3. The media provides the oxygen for spin.

Today there was the example of Batt O’Keeffe’s “landmark investment” announcement of 300 promised outsourcing jobs in Cork.

As most of the clients are Irish firms, there was of course no estimate of net jobs.

Why spoil good news and another recent case was IDA Ireland, which could not confirm the estimate of job losses in its Horizon 2020 strategy report for the period 2000-2014.

Good stuff.
“… a political economist would ask the following question - what political and institutional conditions enable the Irish government to adopt a policy that gives €22bn to a bank that will never put a cent back into the Irish economy? Yes - we could do with more here on ‘varieties of capitalism’ …

…. and an off-the-cuff response to your question:

(i) inter-connected upper-echelon POWER (ii) motive (bury secrets for 30 more yrs) (iii) opportunity (the state acts) (iv) path-dependent cronyism over 40 yrs (v) supine citizenry/serfs

It is a tradition that challenges the deductive neo-classical assumptions of classical Smithean political economy. The fundamental premise is that markets are social and political constructs. Therefore - it examines the institutional framework within which market interactions occur. This places firms and government actors at the centre of its explanations for specific observable outcomes.

Thus, political economists tend to view an OECD ’science of the economy’, (one size fits all approach) as lending itself to poor policy decisions. This is not because they require political choices (they do) but because the configuration of historically evolved institutions requires context specific policy responses. So, in this regard it would question the entirety of assumptions behind the policy response by both the Irish government and the EU commission.

The most refined ‘political economic’ analysis is the ‘Varieties of Capitalism’ approach (Hall and Soskice, 2002). This approach argues that there are two types of political economy - Liberal Market Economies (USA, UK, and Ireland) and Coordinated Market Economies (Germany, Japan). Firms in the former rely upon market to resolve coordination problems whilst firms in the latter (CMEs) rely upon non-market forms of strategic interaction. Others argue for a more heterogeneous approach to the study of comparative capitalism (Crouch, 2005). That is, there are many more types’ political economy and not just ‘two’. In fact, it is better to examine regions and sectors than macro-national economies.

So, in the current economic crisis a political economist would ask the following question - what political and institutional conditions enable the Irish government to adopt a policy that gives €22bn to a bank that will never put a cent back into the Irish economy? Or, why have some economies adopted a revenue based response to the crisis whilst others have adopted cost cutting measures? Or, why have some governments adopted a multi-lateral approach with trade unions and employers whilst others have adopted a unilateral approach?

Police and Justice transferred to Belfast at 12.00 last night.

@Paul Hunt +1

@All
Brendan Keenan is a journalist - and the Indo has been rather ‘establishment’ of late ……….. and in support of Keenan, he does recognise the danger of freedom-lovin free-mawrketeering ideologies(more dangerous than Marxism!) ……….. even if he does get a mite confused between the orthodox, the mainstream, the heterodox, and the dissident.

I wonder would Profs Lane, Lucey, and Whelan self-describe as ‘heterodox’? I jest of course - takes one to know one (-;

I have to spend 2 euro on fruit. Like it or lump it, I’ll be spending 2 euro on fruit. The vendor offers me 4 apples and 1 orange. As I am the only buyer and the apples look overly ripe, I push for a fairer or better deal. I offer 2 euro for 4 apples, 3 oranges and 1 banana.

It mightn’t capture the finer points, but even a monkey would identify the better deal (Ok, I admit loading the monkey odds by including the banana).

If the account debited for the mortgage does not have sufficient funds at the time of debit…

How can you have a non payment of mortgage campaign? The bank has your current a/c. Maybe you could ask to be paid in potatoes and hairy bacon, but that is against the Truck Acts.

as far as I can see Karl submits insights here on a daily basis which are much more informed than Mr. Keenan….hack he may be but the least he could do is get the facts right

@all

Mr. Keenan must think the Irish public have very low IQs, we can add, we can subtract and we can even draw our own conclusions when given the correct information…….it might be politically expedient if FF understood this, FF motto for the next election “You Can’t Handle The Truth”

I also think Brendan Keenan is neglecting the international aspect to this. Brian Lenihan said the loan transfers to NAMA would be credible. This is because they have to be credible to inspire confidence in our national debt levels. Overly generous prices could fatally undermine the notion that the NAMA debt should be viewed as separate from the national debt because it is backed by valuable assets. The idea that we could sneak less credible prices past them strikes me as a bit fanciful, though maybe the international financiers really are that thick.

Brendan Keenan rightly says that a solution which fixes the banks to a degree that enables them to assist in the economic recovery is the minimum which must be done now. I think it is incompatible to suggest that keeping the capital requirements low and over-paying for the loans would have been enough to position the banks so they can assist in the recovery. As Colm McCarthy has repeatedly pointed out, the losses have already occured. Not recognizing them will not cure the problem. As Alan Ahearne has pointed out, banks failing to recognise their losses and therefore not properly recapitalising has been a disaster in Japan (although some would say Japan may have done as well as could be hoped for).

Those are interesting points but they don’t answer the specific question: is there a defined correlation that shows that a bank will automatically run out to raise equity rather than delever based on its capital? (don’t mix tier 1 with capital general)

Why wouldn’t a bank ultimately do this anyway? Deleveraging actually makes the equity proposal more attractive in the future, meaning any issuance will have more investor attraction due to an implied reduction in the institutions risk. The international deleveraging has been happening, and will continue to happen - it is not contingent on capital injections.

I suspect some of the more perceptive strategists in the Government camp might not be best pleased at Mr. Keenan’s highlighting of its weakness and illegitimacy in this way. The critique, from an economic perspective, is very valuable. But it is not helpful to seek to evade the logical conclusion of this critique: this Government is both unwilling and unable to make and enforce the economic policy decisions that will minimise damage to future economic prosperity.

There has been a consistent line spun that because the US banks are getting a free carry trade from the US treasury and federal reserve, that the Irish banks should get some arbitrage too. Lend (!) to the government at euribor+ in return for equity that doesn’t pay dividends and bust loans, and borrow from the ECB at euribor-…

That’s the spin for our loan to Greece:

Government sources said the Minister was likely to bring forward the legislation “in the coming weeks”, adding that the State could well make a profit on any loans it extends to Athens. Ireland’s contribution – between €450 million and €500 million, according to sources – will be set in line with the State’s 1.64 per cent holding of share capital in the European Central Bank.

While the Government currently borrows at about 2.35 per cent over a three-year term, the cost of a three-year fixed-rate loan to Greece under the deal struck yesterday would be about 5 per cent. This would be significantly less than the rate at which Athens currently borrows, which is in excess of 7 per cent.

I don’t see any big problem here. Brian Lucey tells us that Anglo could offload its 28bn of deposit liabilities and receive 21bn of assets in return, a 49bn miracle windfall which will blow all this problem away. If only we had academics like Brian in charge of our national finances.

I have read Brendan Keenan for years and will continue to do so.

I’ll be honest, I buy the Thursday Independent often, just to read Keenan’s article. I don’t look at the rest of the paper. I wouldn’t just buy the Indo to read David McWilliams however. Although, McWilliams as part of the Sunday Business Post does add value for me. That and Vincent Browne’s column on the back page always brightens up Sunday mornings. Friday’s Irish Times, the business section, is the one I hate going without, any week. Thumbs up. BOH.