Donal O’Mahony Returns
This post was written by Karl Whelan
Our old friend Donal O’Mahony from Davy’s returns to defend NAMA in today’s Irish Times and he’s on form.
The article starts with some reasonable observations:
IT HAS proved a prolonged and at times frustrating gestation period, but the policy prescription to stabilise the Irish banking system and help kick-start credit creation has finally reached its implementation stage. Nama’s journey has been an understandably arduous one, confronted as it has been by a welter of legislative, regulatory and, not least, administrative needs.
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. The delays, it seems, are simply something that must be endured.
The article quickly moves onto more familiar ground,
Informed by those catastrophic case-studies involving Iceland (banking nationalisation) and Lehman (bankruptcy), the Irish authorities have pursued the “least worst” option of system recapitalisation and part-nationalisation. A guiding principle has been that each of the five covered institutions is “systemically important”, such that creditor obligations continue to be discharged in a manner that befits Ireland’s deficit-financing dependencies in both the exchequer and banking accounts.
Donal, I’m told, is a smart guy. So I’m guessing he knows that Iceland’s banking problems didn’t stem from nationalising their banks. But if not, on the outside chance that he reads this blog, here’s a link to some stuff he could read up on. The guiding principle of only helping systemically important institutions is a good one. That this definition includes the EBS and Irish Nationwide suggests it’s a relatively flexible guiding principle.
We are then told that:
Ireland will soon find itself with two of the most strongly capitalised banks in Europe (AIB and Bank of Ireland).
Unlike some, I’m happy that the Regulator has insisted on equity levels of seven percent as opposed to some lower level. But let’s not get carried away here. You don’t have to look too hard to see there isn’t anything exceptional about the current targets set for year end.
The ECB’s Financial Stability Review from December reports an average core tier 1 ratio in the Euro area as of 2009:Q2 of 7.3% and this has probably risen since then. And it’s easy to find evidence for higher ratios elsewhere. The Bank of England’s Financial Stability Report from December 2009 informs us that the average core Tier 1 capital ratio for the UK banking sector is 9.6%. Dankse have a core Tier 1 capital ratio of 9.5% (see page 28 of their summary financial results.) Nordea have a core Tier 1 ratio of 10.3%.
Furthermore, concerns about future losses on mortgages and other loans are a greater factor for the Irish banks than for most of their comparators. I would argue that the current capital ratio targets are merely a good start towards getting the banks on a sound capital footing.
Donal argues that the recap announcements are having positive effects:
This realisation is already playing out in Irish bank funding markets, where credit spreads are now tightening appreciably against European peers. For example, subordinated debt spreads for Bank of Ireland have tightened by as much as 120 basis points over the past five weeks.
Of course, it is indeed great news for subordinated debt holders that there is increasing evidence that the Irish government is determined to use Irish taxpayer funds to see that they get their money back. Whether it’s good news for taxpayers is a different matter. I’d note on this that the opinion that subordinated debt holders should lose out when banks become insolvent is not an extreme “bond vigilante” position but a mainstream one in most of the world.
Then things pick up as Donal turns to the domestic debate:
Domestically, malcontents continue to vent their spleen against the Government’s stabilisation policies, in stark contrast to the increasingly receptive audiences overseas, including an endorsement from the International Monetary Fund last week. Of course, continued political opposition is the obligatory stock-in-trade, but the relentless criticisms of both media and academia is more bemusing at this juncture, not least given the paucity of credible alternatives proffered to date.
A classic paragraph. The spleen venting bit has a wonderful pot-kettle feel to it. But let me see if I understand this. Those who object to the government’s banking policies are “malcontents” who oppose its “stabilisation policies”. I dislike the government’s banking policies but largely support their fiscal policies: Does that make me only a partial malcontent or is full loyalty to the government required to avoid the malcontent label?
As for the IMF, I’m sure Donal’s well aware that the international organisations feel it’s best to welcome whatever progress the government is making to deal (however slowly) with its banking problems. The truth remains, however, that the IMF’s official position on the NAMA process was spelt out diplomatically (perhaps too diplomatically) in last summer’s Article IV report—they told the government that the loan losses were huge and that they’d be better off nationalising because the pricing process of buying loans from the private sector would be too complicated.
Paucity of alternatives? Of course, one can scream TINA all you want but the fact remains that we’re on our own going down this route. Every other country has completed its government-lead recapitalisations. There were plenty of alternative approaches that could have been taken.
Donal responds to Brian Lucey’s criticisms of the policy of NAMA’s bonds being linked to Euribor as follows:
Nama will in fact continuously match its assets (loans) and liabilities (bonds) with Euribor-based variable interest rates, the positive spread between which ensuring that performing loans trump non-performing loans in rendering Nama cash-flow positive on an operational basis.
However, to generate ongoing cash flows from loans, people have to be paying them back. Loans going into NAMA from AIB that are past due or impaired account for fifty five percent of the original face value of the transferred loans. The corresponding figures for Bank of Ireland and Anglo are fifty six percent and eighty three percent respectively. It’ll be some class of loaves and fishes act to turn that stuff into a cash-flow positive operation. NAMA, I suspect, may not have quite as clean a face as we were lead to believe.
Finally, Donal warns us that
Those who will judge the success or otherwise of Nama by the speed with which Irish credit aggregates revive need reminding that any renewed willingness to lend must be accompanied by a willingness to borrow.
So people who talk about the need to “help kick-start credit creation” or how we’re looking for a “much-needed revival in credit creation” are misleading the public. Perhaps Donal could have a word with the malcontent who wrote that stuff.
Tags: NAMA
April 13th, 2010 at 11:08 am
Whatever about the rights and wrongs of the rest of his article, he is right in his criticism of Brian Lucey. That article where he talked about selling off the deposit book as an easy solution to the Anglo mess was one of the most mis-leading, irresponsible pieces of so called informed opinion that I have read in long time.
Most people on this site are informed enough to know the difference between good analysis (Karl Whelan’s piece on Anglo’s Balance sheet was well thought out) and absolute rubbish which the article by Brian Lucey was. However, the man on the street doesn’t and when he sees a Professor of Finance from Ireland’s top university talking about easy solutions and saving billions, they believe it. There is no magic solution and trying to sell one through the media is irresponsible.
April 13th, 2010 at 11:14 am
Richard Bruton made an interesting point on Morning Ireland as to where the burden of proof lies in the current crisis. He says the burden lies with those who would innovate. David McWilliams said the same on Vincent Brown last night - we should do the simple thing.
So which approach is more normal - guaranteeing the banks or letting them fail? Both approaches have form so it is hard to say which is the standard approach. I might have to whip out my trusty Rogoff and Reinhart again.
Personally, I think we need to think long and hard about renewing the guarantee for Anglo next October. The higher the haircut, the greater the logic for pulling the plug.
David McWilliams said depositors would have a priority as “creditors in trust”. Richard Bruton on the other hand could not answer the question of how much we would save and which creditors could be burned or not if depositors got their money. This has become a crucial question. Would the NAMA money be divided equally amongst depositors and bondholders, i.e. parri passu, with the Government then seeking to subsidise the shortfall for depositors and leaving senior bondholders with a loss, albeit one cushioned by the State?
April 13th, 2010 at 11:16 am
If you get depressed reading Mr. O’Mahony’s misleading and dishonest article, I recommend this profile of Morgan Kelly to lift your spirits.
http://www.irishtimes.com/newspaper/education/2010/0413/1224268218570.html
April 13th, 2010 at 11:18 am
Malcontent! Dissident! Iceland! Talking down the economy!
Eh, what?
This is the same style of rhetorical tirade we saw after the ‘20′ and ‘46′ letters.
All factual evidence of alternative courses of action are ignored or poo-poo’d, those holding contrary opinions are labelled pejoratively, and the the original TINA position is justified with reference to whatever statistic is hanging around that fits the current frame of argument. Weak stuff indeed.
Quite like the ‘Quinn is systematic’ argument, and the ‘we have turned the corner’ guff, this style of argumentation only becomes true if you say it enough times that the majority of people accept it as true, and for that, you need to silence the critics, malcontents, and dissidents.
April 13th, 2010 at 11:19 am
Hmmm… apparently there are malcontents around here. Recently we had dissidents too. It’s turning into a dodgy neighbourhood. We’ll have poets and playwrights next if we don’t watch it.
Of course, if we were going to resort to emotive language, we could pick from a wide variety of words to describe the government and their apologists. Good manners forbid.
Meantime, on NAMA, thank heavens that the EU was around to put a little bit of integrity onto the process. Even if it’s slow, at least it has to comply with some sort of ethic. We could have had a NAMA a la Brendan Keenan’s recent article, where the banks were to be recapitalized on the quiet.
April 13th, 2010 at 11:29 am
I would point out that The Government’s approach so far has left a number of policy options stil open to it (or its successor if it is ousted), including:
- 100% nationalisation
- withdrawal of the guarantee for Anglo and/or others
- introduction of a bank resolution scheme
Whilst hugely frustrating, the NAMA legislative process and now the NAMA due diligence and valuation process have given us time to get down and dirty with the banks in assessing their true position.
This is critical as we desperately need to know if there is more trouble coming down the line with BoI and AIB for loans of less than €5m. If so we need to preserve our capacity to deal with that.
Granted, we are running out of time on no. 3, and further granted that the economy has suffered huge (though not necessarily avoidable) damage over the last two years.
The EU also have an important role in what happens over the next few months. Watch this space.
April 13th, 2010 at 11:37 am
He does also raise once again the strangeness of suggesting that we “sell the Anglo deposit book for €21bn”, a point that has not been adressed by Prof Lucey as of yet…
April 13th, 2010 at 11:44 am
A siimple question for the apologists: under what circumstances would you burn the subbies? Presumably, worse circumstances than currently obtain. Is that possible? Is your position, in fact, that there are no circumstances, ever, that bond holders of any kind should bear losses?
April 13th, 2010 at 11:46 am
@ Simpleton
i think you’ve got this completely upside down. No one is trying to protect the subbies. I’ve just pointed out, near repeatedly, that its incredibly difficult to actually “burn” them involuntarily. For instance, what method would you use to burn them?
April 13th, 2010 at 11:58 am
@simpleton
I agree with Eoin there. I am all for burning subbies. It is a matter of great regret that we don’t have a bank resolution scheme. In the meantime, we have burnt a lot of them somewhat, but not enough.
I would go further again. We must burn the seniors in Anglo if honouring them will increase the chance of sovereign default. We need to do a Ben Franklin and put a line down the middle of the page. This must be done repeatedly in light of all new information.
If the cost of bailing out seniors in Anglo means there is a greater risk of funding difficulties and increased funding costs for the sovereign then they should be burnt too. I think we are getting close to this point.
However, we also need to know
(i) how much we can save by doing this (it may be less than the amount of the bonds),
(ii) how much it will cost to fund such a move over what period of time (i.e., will interest payments on the total cost start to run immediately),
(iii) how it will affect us in the growth and stability pact.
Generally, whatever move we make should be seen to be with the sanction and/or at the behest of the EU Commission/ECB.
April 13th, 2010 at 12:02 pm
@ Stephen Kinsella
I guess Donal O’Mahony displayed the same sense of certitude during bubble years when the conventional wisdom was to recommended slam dunk investments in the likes of Anglo — Europe’s apparently most successful bank - - and other slam dunks such as glass bottle dumps and the like.
It wasn’t the Donal O’Mahonys who were doing very well by going with the flow, who were the contrarians but the likes of Patrick Honohan producing compelling research showing the risk the banks were taking in huge jumps in foreign borrowing to fuel the bubble.
To paraphrase Nixon’s press secretary Ron Ziegler, it may well be a case of declaring all previous positions non-operative - - just like a car battery gone dead!
Less brass neck and a little more humility is in order given that none of the insiders shouted stop.
April 13th, 2010 at 12:07 pm
@zhou
Fiar enough but are you agreeing with Eoin or me? He argues (now) that we cant’t burn subbies even though we (now) all seem to want to. You suggest a method: a special resolution scheme. Are we now all, in fact, agreeing with each other about all of Anglo’s bond holders?
April 13th, 2010 at 12:10 pm
If you are going to ‘burn’ senior debt holders, why wouldn’t you burn deposit holders? Senior debt holders are compensated for a certain risk.
If the Government decide to liquidate Anglo, give depositors first claim on the assets and make up any difference while leaving the bondholders with nothing, what do you think will happen? Senior bondolders in the other Irish Banks will re-exaime the risk profile of their investment and won’t like what they see. The other banks would then face a further funding crisis, guarantee or no guarantee.
If you liquidate and allow the claims to rank pari passu, the State will be left with a huge bill to compensate the depositors.
The Government could protect the depositors by paying them off and leaving the bondholders with Anglo’s assets. The market would probably accept that solution. However the State would be left with a €27 billion bill for the depositors.
Or the Government could liquidate with no guarantee for bondholders and depositors and let normal practice occur.
There is no way to ‘burn’ bondholders without burning innocent depositors or taxpayers. Not that I can see anyway
April 13th, 2010 at 12:12 pm
“with a scale of loan-book toxicity that demands the collective responsibility of lenders, borrowers, regulators and commentators alike.”
Don’t forget analysts, brokers, financial advisers and professional advisers…
April 13th, 2010 at 12:19 pm
@simpleton
I think we always did all agree! Eoin is correct that there are concrete legal difficulties in burning subbies. Essentially they can petition for liquidation if you default on them. Everybody is in favour of a special resolution scheme, albeit we needed it in advance of the crisis as trying to enact it at the wrong time during the crisis could prompt a panic.
btw - meant to say “professional investors” in my last post.
April 13th, 2010 at 12:21 pm
@ Simpleton
eh, again, you seem confused - how do you change this from “want to do” to “can do”, thats the key to this. Again, i’ve mentioned on a ridiculously large amount of times that we need a resolution scheme to this end. I’ve gone as far as to suggest that Karl, Brian et al get some legal scholars in on the act as a resolution regime is as much (if not more) a legal issue rather than an economic one. There will also have to be some reference to how the market will react to this, and though this can be overcome, it is not something we can just ignore. It will also have to be viewed through the prism of the govt guarantee scheme. Not only are you completely misunderstanding where the likes of me and Zhou are coming from on this, you’re only misrepresenting our positions and over-simplifying your own - its far more complex than “are we agreed on what we want to do?”.
April 13th, 2010 at 12:22 pm
” Loans going into NAMA from AIB that are past due or impaired account for fifty five percent of the original face value of the transferred loans. The corresponding figures for Bank of Ireland and Anglo are fifty six percent and eighty three percent respectively. It’ll be some class of loaves and fishes act to turn that stuff into a cash-flow positive operation. ”
It’s not the percentage of the original face value which counts, is it? Should it not be the percentage of the total NAMA loan portfolio? NAMA has paid a small discount for the performing loans and a huge discount for the non-performing loans. Do we know what percentage of the NAMA loan book by value is performing loans?
April 13th, 2010 at 12:24 pm
@ Zhou/Simpleton
….and one more thing - who actually owns the subbies? Any chance its actually Irish credit unions and insurance companies? Again, we need to at least reflect how much can really be “saved” if these are some of the owners of these securities. Thats not a reason not to do it, its just something which may make the process a hell of a lot less rewarding than some people would have us believe.
April 13th, 2010 at 12:39 pm
@ Eoin
“….and one more thing - who actually owns the subbies? Any chance its actually Irish credit unions and insurance companies?”
No Eoin, there’s no chance. Be careful, you’re starting to sound a bit like a FF backbencher, particularly the one with initials FF.
April 13th, 2010 at 12:49 pm
@ Karl
didnt we have Leo the Great in FG saying that they did? And that they owned CDS against this (even though thats actually impossible per the ILCU rules)? Given that the Irish credit unions owned tons of Icelandic subbies, its not that unlikely surely?
April 13th, 2010 at 12:53 pm
Actually, I know of at least one credit union that was a big investor in the sub debt of the Irish banks. They had high yield and absolutely no risk remember!!
Still no reason to save the subbies though. Credit Unions could live with the cost. Might be more difficult with senior debt though.
April 13th, 2010 at 1:08 pm
@Eoin
Leo was suggesting defaulting on senior debtors, not subbies.
April 13th, 2010 at 1:12 pm
Of course, the identity of who you are defaulting on does matter if you will in turn be required to bail out those parties. These are important variables in any decision. Unfortunately, they are not available to us.
Also, senior bonds/debt which can be withdrawn before the expiry of the guarantee will be withdrawn unless the guarantee is extended in advance.
Therefore, the real figure is the amount of default which can be achieved on those senior bondholders/debtors who cannot withdraw money before the expiry of the guarantee and who will not have to be bailed out thereafter. This is almost definitely not the total amount of their senior debt as they will have a right to share in the NAMA money parri-passu with depositors.
April 13th, 2010 at 1:13 pm
@ Zhou
ah, thats a far more sensible position to have!!
April 13th, 2010 at 1:15 pm
@ Brendan
I think the percentage of the original face value is the useful statistic here because that’s what the discounts that have been reported are being based on. We have a good idea what’s going into NAMA based on the banks own reports but the only information we have on what NAMA paid are the aggregate discounts from face value.
Let’s look at Anglo, AIB and BoI.
The amounts going in to NAMA in terms of initial face value are 36bn, 23bn and 12bn, respectively.
If the discounts from face value of 50%, 43% and 35% are applied, then we will pay 18bn, 13bn and 8bn.
So these calculations would suggest that we’re going to pay €39bn for loans from these banks.
The banks report that of the loans going into NAMA, 6.6bn of Anglo’s loans are neither past due or impaired while the figure for AIB is 10.4bn and for BoI is 5.4bn.
Add them up and we get that, according to the banks own figures, only 22.4bn of these loans are performing (and AIB and BoI’s figures for performing assets may be rosily tinted.)
So, for these banks, we are paying €39bn euros for a portfolio of loans of which only €22.4bn are ostensibly currently performing.
April 13th, 2010 at 1:41 pm
@Karl
This querying of NAMA’s capacity for facial cleanliness is nit-picking. What prof Lucey said was that every 6 months we would be at the mercy of international predators as we are forced to roll over the NAMA loans i.e. a maturity mismatch. We would also be toasted by a rising yield curve. Both of these are patently in error. I note that you do not allude to the article’s reminder that the professor was proferring a 49Bn Miracle conversion of liabilities into assets, something which he hasn’t admitted so far and something which you yourself seem reluctant to pass comment on. Just because 46 academics sign up to a letter penned by prof Lucey does not mean he is infallible.
April 13th, 2010 at 1:46 pm
@ Karl
Bankers don’t bite the hands that feed them. And the do like heaping platitudes on their clients.
Though, let me be balanced, I’m glad he highlighted that even learned people like Professor L can make mistakes: e.g. assets/liabilities…
April 13th, 2010 at 1:57 pm
@ Brian Woods
Amazing how people are quick to run to the newspapers to tell the public how wrong the Government etc is but when they publish factually incorrect information to support their argument, they are no-where to be seen when asked to explain. Karl talks about loaves to fishes in his article in relation to NAMA. Brian Lucey’s 49bn miracle was just as bad but I guess it is easier to save the criticism for the politicians and bankers for their rubbish.
April 13th, 2010 at 2:07 pm
@KW
Your point that as so many loans are not paying interest, the claims that NAMA are correctly managing hedge interest rate risk is very well made.
@All
He is entitled to have a go at Brian Lucey over the apparent mis-speak about selling the 28 billion Anglo deposit book for 21 billion. But he says nothing at all about Anglo, despite having access to all the information, assuming they were on a 30% discount until NAMA Twilight Tuesday (as in Gotterdammerung - Twilight of the Gods) dawned.
@Garo
The Morgan Kelly piece is wonderfully refreshing.
His dismissal of Minister Lenihan deserves to be written by some graffiti artist with a cherry picker on the front of Treasury House under the climbing figure.
To be fair to Gordon Brown next door, he does deserve credit for the way in which he tackled the recapitalisation of their banks. I don’t think the man is a genius - he is more Mr. Plod - but that prompt action combined with his giving interest rate decision powers to the BoE will always stand to his credit.
Give me Mr. Plod any day to smart-ass barrister with a genetic predisposition to outrageous non-sequiturs and conflation.
April 13th, 2010 at 2:14 pm
@ Karl,
Can we be certain that the ‘not past due/performing’ loans produce cashflow? It’s the old spectre of Interest roll-up I fear.
That said the lack of spread on the main NAMA bonds surprised me. As talk of higher discounts gained pace prior to the actual announcement, I thought higher spreads may be used to compensate the banks. I suspect EU involvement. As a taxpayer, this is something I welcome. I don’t think there’s any rollover risk as at maturity the bonds can be repaid with more bonds. The interest rate risk is there, but at least this isn’t a risk +50bps.
This zero spread over 6m euribor won’t help the banks’ net interest incomes, which are squeezed big time.
April 13th, 2010 at 2:34 pm
@ Some
I’ve largely left the “selling deposits” business alone on the grounds that Brian Lucey can defend himself, though he is away from work right now.
That said, I’ve been pretty clear that, whatever was meant by it, “selling deposits” is an unfortunate phrase and that deposits are a liability. Here’s a link to my position on this when asked directly what I thought:
http://www.irisheconomy.ie/index.php/2010/04/03/anglo-what-are-the-options/#comment-43916
April 13th, 2010 at 3:10 pm
@ Karl
“That said, I’ve been pretty clear that, whatever was meant by it, “selling deposits” is an unfortunate phrase and that deposits are a liability.”
First of all, it is quite clear that you know what you are talking about, no quibble there, jayz one professor making such a howler is careless but I’m sure Oscar Wilde would have something to say about two.
You are too kind in allowing prof Lucey the out of an “unfortunate phrase”. He would have had that out if the the damage had been limited to the original Newstalk program but his article in the Independent makes it abundantly clear what he meant.
Let’s hope that when he returns to this space he will put this horse down once and for all because it is quite chilling how other influential commentators have run with this ball. (pardon the mixed metaphors)
April 13th, 2010 at 3:40 pm
@All
Read the Davy piece earlier - the ’spin’ from a special interest group ’shouts’ from the page - at this stage I expect this ….. but still annoying.
Options on Anglo-Irish remain OPEN. Quinn cute-heuristic life-support (for Anglo-Irish) is a huge concern ….
Is there any evidence that this Admin is doing anything at all at all on Bank Resolution Mechanisms? Or is inept fear once again leading policy and crisis management - don’t scare the horses and let the rogue sovereign stallion cover everything as it crops up?…. until the sovereign stallion falls down from exhaustion, lack of resouces, and dies in the middle of the desert of the real ….
Suggest Brian Lucey go public if any ‘errors of judgment’ …. peer-review and academics well used to it - if not spinners will make use of it …………. to disparage the dissidents, malcontents, etc ………. a fairly orthodox bunch of generally conservative punters [ (-; ] who rightly question this ’socialism for the upper-echelons of this society’ and rightly question the unconscionable loading/socialization of ALL debt on the backs of present and future Irish serfs - strangely enough, has we a few enlightened Marxists around they would be in the same camp as the conservative orthodox in again rightly questioning this Banking Policy for Bankers, Developers, & the Well-Connected Upper-Echelons. The sovereign is now taking on so much unnecessary debt that it is placing future recovery in serious jeopardy ……. they appear to have no substantive medium term policies beyond ‘bail-out-all’ and fiscally ’slash-and-burn’ in a race to the bottom - which is the wrong race …
April 13th, 2010 at 4:06 pm
@David O’Donnell
I agree. If an error is made you are best off acknowledging and correcting. Not that the NAMA lobby won’t continue to unashamedly flood the public sphere with deceptions and untruths aka spin.
April 13th, 2010 at 4:13 pm
I agree that Brian Lucey is well able to defend himself, but the singling out of one suggestion (probably inaccurately expressed in a word-constrained op-ed piece) as a means of demolishing his entire critique is typical of the guardians of the Groupthink that is going on. The suggestion is not without precedent on these islands. Santander bought Bradford & Bingley’s deposit book in mid-2008 (gosh, did some people start dealing with insolvent banks that long ago!).
Shifting these liabilities, even for a nominal payment, to a well-capitalised bank would not reduce the extent of the Government’s guarantee, but it would significantly reduce the risk that it would be called on and dud assets of an equivalent value could be written off without requiring recap. But this would probably be in wind-up scenario.
April 13th, 2010 at 4:39 pm
So its “Lie back and think of Ireland ….”,
or should that be “Bend over ….”?
April 13th, 2010 at 4:41 pm
Paul
I explained the Bradford and Bingley transaction in this article in the Indo.
http://www.askaboutmoney.com/showthread.php?t=135559&page=2
The deposit book and matching cash were sold to Santander.
The matching cash bit is what Brian Lucey missed. Without it, he managed to convert liabilities into assets. It wasn’t an unfortunate choice of words. It wasn’t a typo. So his suggestion that “Anglo can be wound up cheaply” is based on his failure to understand the difference between assets and liabilities.
April 13th, 2010 at 4:44 pm
@All
Only 33% of Nama loans being repaid
The National Asset Management Agency (Nama) has found up to 100 per cent speculative lending on agricultural land was “approved at all levels within the banks” and that only one-third of loans due to transfer to it are generating interest repayments.
http://www.irishtimes.com/newspaper/breaking/2010/0413/breaking54.html
April 13th, 2010 at 5:07 pm
Hi Karl
“It’ll be some class of loaves and fishes act to turn that stuff into a cash-flow positive operation. NAMA, I suspect, may not have quite as clean a face as we were lead to believe.”
You may well be right on this.
“The original estimate was that 40 per cent of the loans being transferred to Nama would generate interest repayments.
…
Two-thirds of the first tranche of loans are not “cashflow producing”, he added.”
I hadn’t seen this 40% estimate before. I wonder if it’s 40% by number of loans or by value of loans. It’s hard to see how the interest received on 33% of loans is covering the interest paid on 100% of loans.
April 13th, 2010 at 5:08 pm
That should read “interest paid on the bonds to finance 100% of loans”
April 13th, 2010 at 5:10 pm
@ Brendan
using Brian Lucey’s own article and nothing else but a pen and post-it, i can draw up a basic balance sheet which should have quite clearly shown there is an enourmous and immediate capital hole left in the wake of an Anglo wind up. He can argue all he wants that investing in Anglo is a bad idea, but to claim that selling the deposit book allows for a cheap exit is an awful error to make in his calculations. It indicates a complete misunderstanding of just how one would go about winding up a large financial institution and again underscores the need for a resolution tool to go about this.
His time would have been better spent writing an article about that, rather than snippy one liners about how he teaches a class to first year business studies students called “Do you have a strategy” and how these lessons are easily available on the web. One can only assume that “bank balance sheet accounting” is not as easily found in his course notes.
April 13th, 2010 at 5:13 pm
@Brendan Burgess,
Many thanks for the clarification. I am confident that considerable expertise is being applied to minimise the burden Anglo will impose on current and future taxpayers. However, I think you will concede that many of the people who were adamant that there was “no problem” as this false boom was being fuelled - I’m not including you personally - are now shouting TINA. So, having swallowed “the boom is getting boomier”, I suspect there is widespread public reluctance to swallow TINA and the tardy nature and lack of transparency of the bank resolution process doesn’t help.
Critiques and debate are vitally necessary and there is a requirement for much more transparency and open engagement on the goverment side. Pointing out an error in a critique should be an invitation to consider a revision; it should not be used (as some others are) to denigrate the person making the critique or as a means of seeking to eliminate the rationale for a critique.
April 13th, 2010 at 5:42 pm
@Brendan
The 40% is mentioned at para 29 of the latest Commission opinion. It does not say if it is by number or value but one assumes it is by value as by number would be meaningless. The fact that we do not know how much cash they are producing is unsatisfactory. If 40% cashflow producing was supposed to cover the interest on a 35% discounted loan book then 33% cashflow producing may cover the interest on a 50% discounted loan book. The amount of cash flow is a critical factor in determining the long term economic values of the loans.
April 13th, 2010 at 5:57 pm
It’s not clear yet from the reporting what McDonagh meant by one third are cash-flow producing. However, if one uses original face value of the metric, then the figures I cited above show €71 billion in face value loans from AIB, BoI and Anglo, of which €22.4 are neither past due or impaired.
That’s 22.4 / 71 = 0.315.
So perhaps that’s the basis for McDonagh’s calculation also.
Should probably have just written a separate post on this.
April 13th, 2010 at 6:28 pm
The discount on the first tranche of loans with a nominal value of €16 billion is expected to be about 50 per cent, Mr McDonagh said.
Two-thirds of the first tranche of loans are not “cashflow producing”, he added.
http://www.irishtimes.com/newspaper/breaking/2010/0413/breaking54.html
This tragedy is only going in one direction … on first tranche …….. and lots of Anglo_Irish still to go in ………..
April 13th, 2010 at 7:23 pm
@Paul Hunt
“Critiques and debate are vitally necessary and there is a requirement for much more transparency and open engagement on the goverment side. Pointing out an error in a critique should be an invitation to consider a revision; it should not be used (as some others are) to denigrate the person making the critique or as a means of seeking to eliminate the rationale for a critique.”
+1 (and with no discount!)
April 13th, 2010 at 7:40 pm
+2
April 13th, 2010 at 7:55 pm
#right
Eoin et al.
Im busy doing something far more personally important now than getting into a peeing contest. If any of the anon “lucey’s wrong, nah nah nah nah na” wing want to email me (or indeed others on the blog who know whats going on) do so. I will, eventually, when i have time, make a response. Else, back off or go public. End of. Email me , with your real names, if you want more information.
April 13th, 2010 at 8:17 pm
@Brian Lucey
This is the public sphere, within which you are a not insignificant contributor; hence, I humbly suggest it wise to briefly respond to connected spinners, such as Mr O’Mahony et al, …. a paragraph on this blog should be sufficient.
April 13th, 2010 at 10:24 pm
@BL
Just admit you made a mistake and let’s move on. Heck, even the pope of Rome apologises these days.
April 14th, 2010 at 7:08 am
[...] hadn’t read this when I wrote the above, but Karl Whelan has covered much the same ground, and obviously with [...]
April 14th, 2010 at 1:48 pm
There is always a legitimate need for stability. This is in fact needed more when things are getting worse, as they are and will.
The possibility that the crises were predictable with predictable and manipulable consequences may have occurred to more than me? Who is behind this matters nothing if there is no one. But if there isn’t? If it is economic warfare? There appear to be factions within the ranks of the ungodly.
Going by history, impoverishment of the soldiery helps increase recruitment success. A large enough threat to the EU would accelerate the creation of the EA, the European Armed forces. Even without conscription, recruitment from poorer areas of the EU will be high. Do the mouthpieces know what is coming? I doubt it. But they can be inspired by the cry of “security” of the status quo. So expect all manner of support for rubbish merely because there is a closing of ranks.
My point is that this is merely part of a process, one that may last two decades. For example, suppose that Islam spreads and threatens usury? Bankers, the sine qua non of all warfare, may feel threatened. I refer to those who actually own massive capital and have been bankers for generations. They have a legitimate right to respond as western success has been through their efforts, distasteful though they may be.
April 14th, 2010 at 11:02 pm
@ All
oh, by the way, just realised, the very first comment on this thread, right at the top, by “Eoin” is not actually by me, must be a different Eoin, only saw it now! Actually agree almost 100% with what he’s saying, but just want to clarify that that was not in fact posted by me! The rest were, but not that one…
April 15th, 2010 at 9:03 pm
@All
Moore McDowell comments negatively on the article here:
http://www.irishtimes.com/letters/index.html#1224268370712
April 25th, 2010 at 9:16 pm
[...] received an email recently from someone who objected to my characterisation of NAMA’s goal of being cashflow positive as something of a loaves and fishes [...]
November 12th, 2010 at 3:58 am
Donal O’Mahony, WE DON’T BELIEVE YOU!!!