NAMA Tranche 2 Transferred

@Karl

I was being sardonic – never a wise move! I will take your word for it that I misunderstand your earlier point but I still think Mr Kerrigan is misreading your spreadsheet.

@Karl & Jagdip
I think Jagdip is entirely correct in his appraisal. We already know that the Anglo board has an unreasonably low estimate for the haircut for tranche 2 – even without a change in the level of haircut. As the haircut for all the other banks has increased, with INBS increasing by 14 percentage points, does anyone seriously expect that Anglo will buck the trend?

Back your horses – I’m for a double figure increase in the Anglo haircut…

It has to be said, though, that there is no necessity to do anything with future funding for Anglo immediately. Anglo only needs to be solvent at the end of the year…

@hoganmayhew

I think NAMA and indeed the banks transferring the loans are bound by the date stated in the LEV Regulation, ie analyses produced upto 10/1/10 and a review range of 1985 – 2005.

http://www.nama.ie/Publications/2010/NAMALongTermEconomicValueRegulation.pdf

As we know NAMA have selected 30th Nov as the Valuation Date and MfF says we must go back to the EU if we want to change that. But given Irish residential is off by 8%+ as is Irish commercial and Savills say that development land is *now* up to 90% off peak value, shouldn’t NAMA be respecting its own main objective – to protect the interests of the taxpayer – by seeking a change in the Valuation Date to a more current date?

We all knew LEV was State-aid, even the EU who modified the calculation of what was to be paid to the banks in the Feb 10 Decision. However, given the change in property values since the NAMA Valuation Date, banks are getting far more State-aid than was envisaged. At what point does the EU intervene and say we’re paying too much for these loans?

An just in case anyone is not confused enough already, here’s bank of ireland’s statement to the stock exchange this evening http://bit.ly/clFzgX and AIBs (much more succinct) statement is here http://bit.ly/960Ns0

@Paul Hunt

I’d agree that Anglo, INBS and EBS are special (basket) cases and if NAMA reduce their valuations then these three financial institutions may simply need a greater bail-out from the State. But even the EU must be getting unprecedentedly uncomfortable with the sums surrounding Anglo and INBS.

With respect to AIB and BoI, two institutions which the MfF said wouldn’t cost us a penny last Friday, why should these two commercial organisations get *additional* State-aid via inflated property valuations?

@Lorcan

For what it’s worth (plus LEV), Alan Dukes wrote a letter to the Indo that appears to claim that losses on the CBI collateral are already included in the 22 billion.

@Frank, thanks, I hadn’t seen that.

Does lead to other questions though..

If the director of Anglo knows where the writedowns are going to be, why does NAMA not know? (as appears to be the case today)

Also, if the writedowns are known, why do the Master Loan Repurchase Agreements still exist?

@ KW

care to change you view that the prices paid in subsequent tranches will be set so as to avoid full nationalisation of AIB.

It does look like there is some evidence of prudence on the part of NAMA. The body is arguably dropping its bid to reflect the underlying value of the collatoral. In so doing, they are even undermining the value of the NPRF investment in BOI. Full nationalisation of AIB looks more and more likely.

Increasingly, the focus is going to be on NAMA strategy to manage the situation. Will it sit on assets, develop them or sell in the near term?

@ tull

“care to change you view that the prices paid in subsequent tranches will be set so as to avoid full nationalisation of AIB.”

Good question. I’m sticking with my viewpoint on this but that’s not to say we haven’t reached squeaky bum time in Ballsbridge!

@Brian Lucey,

buonasera to you! The 2009 Anglo accounts put the total loan book at €72.1bn with just under €36bn earmarked for NAMA. The non-NAMA €36bn had a provision of €4.9bn so an extra €4bn would bring the provision upto €8.9bn or 24%.

http://www.angloirishbank.com/About-Us/Reports/Annual_Report_Accounts_2009/Annual_Report_Accounts_PDF.pdf (page 10 PDF)

The EU recently described Anglo as a “monoline” company involved in one sector only. Anglo has taken quite a few receivership cases this year in its own name for investment property (office blocks, hotels, shopping centres) and it is hard to imagine the losses on these loans will be much different to the NAMA stuff.

Anglo, the Baal of modern ireland

Anglo is the symptom; Allied is the disease. AIB delenda est.

@ Lorcan

I think you are right. The Anglo losses are a function of the amount being tranferred & the haircut. As the latter gets bigger, Anglo’s losses begin to exceed 22billion. So the state pours money into the hole (topkill?) or it negotiates with the bondholders. Since there are senior bondholders left other than those issued under the guarantee that yields nothing.

I expect to wake up one day to find that the CB has agreed to take a haircut on in Master Loan Agreement thus avoiding the need for further state support. I bet you this is spun as bond holders agreeing to take a haircut.

@anonym.

Usually that is true. But in the case of the Master Loan Repurchase Agreements, they are a solo run by our Central Bank. Or as the cb puts it, they are a: “provision of special liquidity facilities advanced outside of the Eurosystem’s monetary policy operations.”

So as a solo run, any losses will appear on the cb’s P&L account.

22b as a lower bound I feel now. Then were into uncharted territory. Whatever about a srs for commercial banks do we need one for central banks? What does a central bankruptcy look like?

I said above: we have no policy through which to introduce a degree of stability.

Take as an example, a modest home put on the market for rent in 2010. One of the key things to include in an advertisement is a bus route. This home is convenient to buses no’s, X, Y & Z. But who pays for the buses? Society pays. But the person renting the home gains the benefit. What we need to do is to tax that gain, which certain property owners accrue through the rental value of the property. And re-distribute the proceeds from the said tax, into imrprovements and extensions of the same public services, to areas which need better services. By such a taxation mechanism, the value of other properties can be enhanced, and it will make the problem of depressed values a lot easier to tackle, easier to plan around. The trouble is, we have too many homes in Ireland which are not convenient to bus routes, or train routes and never will be. I hope it is becoming apparent at this stage, to everyone who reads the Irish Economy blog, that very little of the ‘value’ of a ‘property’ is actually accounted for by construction costs during a period of economic prosperity, or otherwise. BOH.

Charlie Fell wrote in last Friday’s IT, China can handle its property bubble. BOH.

http://www.irishtimes.com/newspaper/finance/2010/0716/1224274815931.html

Looks like loan transfers from Anglo are set to become a real ding-dong according to the Irish Times this morning. Anglo is state owned and NAMA also? Increasingly it seems that the whole bank ‘rescue’ will result in tears for the taxpayer for a very long and expensive time.

Does anyone have a view as to why heavily insolvent Anglo would apparently object to transferring Paddy McKillen’s loans and getting nice fresh ECB-redeemable bonds in return?

According to Paddy his loans are good which would presumably mean Anglo got paid close to their nominal value? When you’re insolvent to the tune of billions as Anglo was(/is?), wouldn’t you be trying anything to raise cash?

Simon Carswell seems to be the only journalist to have the story in some detail.

http://www.irishtimes.com/newspaper/breaking/2010/0720/breaking1.html

@ Jagdip

same reason NAMA wants them – to provide positive cashflow against the bad loans, so that the operational cashflow aspect (as opposed to the core solvency/capital aspect) is better than it otherwise would be. Remember, Anglo is still looking for a reason to have a Good Bank element in future instead of a wind down of the entire entity. For every good loan it loses, the relative size of poor, bad, or less-than-perfect etc loans will increase, and so the case for Good Bank will be less.

Anglo is, in theory, doing what its supposed to be doing – looking after itself to the fullest extent possible as a legal corporate entity, for the benefit of its shareholders. But it seems bizarre that someone in the DoF/Taoiseach’s office is not making some phone calls to Aynesley & Co and telling them to back the funk off on this.

So, instead of resolving the bad debt, we know have four different branches of the Irish state – NAMA, Anglo, DoF and the Courts, arguing to decide what to do with the good loans!

You couldn’t make this stuff up….

Eoin said, As you said, classic quango sword fight, but NAMA is supposed to be the clear systematically essential quango, and Anglo the one we still have question marks over, so this shouldnt even be an argument.

Lets be very clear about this, the basic question from the point of view of the Irish Economy blog, is the one asked by professor Brian Lucey (among others), so often. That is, why aren’t more economics professionals involved directly in the affairs of permanent government? There is an answer to this question, which I would like to pose if I may. I mentioned price volatility above. I have been thinking about it, and the super-volatility, that Ireland experiences is derived from several areas. Above I mentioned fossil fuel dependency and land value volatility. But we could also include the pro-cyclical economic policies of our elected governments. We could also include the narrow-ness and un-sustainability of our taxation base. But many peoples’ favourite root cause for volatility in Ireland, is the pro-German monetary policies of the European region. Compounded by all of that, are issues at the verges, such as Ireland’s dependence on foreign direct investment. Which comes and goes as quickly as the grey skies over the western coast. The thing I am most clear about myself, the reason we NAMA, is because we need an ajency in Ireland of some kind that can work despite of the many sources of price volatility at work in our economy. NAMA is able to operate according to a business plan which no other kind of organisation could. In Ireland, we need an ajency that can go about its business, and advance forward, based on the knowledge (inscribed into its own business plan), that it may make a horrendous loss, or may make a small profit. In the real world, companies have to seek out shareholder capital, which is free to move, if it feels the business plan is too ridiculous. You could not sell the NAMA business plan to any shareholders, except the ones that are captive, like the electorate of this little island. The point to bear in mind, is not that the business plan of NAMA predicts enormous volatility of outcomes. But where does the said volatility derive from? The reason why economists are not included in permanent government in Ireland, is because the said volatility exists, and it makes a complete joke of the concept of economic planning. NAMA as an agency, is one organised around these key assumptions. BOH.

It is not clear that there is wrangling between Anglo and NAMA. However, it does show up some of the problms that could have arisen if all the banks were nationalised.

@Jagdip

“As we know NAMA have selected 30th Nov as the Valuation Date and MfF says we must go back to the EU if we want to change that.”

Presumably changing the date to a later date would be a formality?

@Eoin

“well given that the LTEV cannot be more than the actual nominal on the loan (right?), a fully performing, non-provisioned loan might be transferring at original book value to NAMA. As such, there’s no ‘advantage’ to Anglo to transfer it (except for liqudity i suppose).”

I think the key is the application of the standard discount rate to LTEV where there is no cashflow, e.g. if Anglo lends €5m secured on land with LTEV of €100m but generating no cashflow then the €5m LTEV is still discounted to account for cost of funds and enforcement. If Anglo keeps the loan it expects to get all its money back plus all additional interest. However, if it goes to NAMA it takes a hit.

@zhou_enlai

Here’s what the MfF said three weeks ago in the Oireachtas – full link with context below the extract:

“The valuation date was set in advance of the voluntary application by the banks to be designated as participating institutions. Any change made now to the initial valuation date would create inconsistency between the valuation placed on assets already transferred as part of the first tranche and those transferred in subsequent tranches. It must be remembered that the European Commission on 26 February 2010 approved the approach taken in establishing NAMA and the valuation methodology adopted.A change to the valuation methodology would necessitate a new notification to the Commission, and a new decision by the Commission on whether or not to approve it. This would cause unnecessary and undesirable delay, and result in little or no gain. What is most important now is that NAMA completes the transfer of the eligible bank assets and meets the demanding deadlines it has been set.”

http://debates.oireachtas.ie/DDebate.aspx?F=DAL20100629.XML&Dail=30&Ex=All&Page=1

I have a question about the NAMA bonds. Mr. Fahy is on the radio again telling us that the ECB will fund NAMA. Aside from the non-sequitur that it is liquidity support, are we sure that NAMA bonds will be considered sovereign bonds?

weathervane on the ‘pin raised the question a good while back:
http://www.thepropertypin.com/viewtopic.php?f=50&t=24226&start=0
as to what sort of collateral the NAMA bonds would be. This was before NAMA was set up as a private company, so it was assumed they would be sovereign.

With the setup of the SIV, 51% privately owned, the NAMA bonds are no longer issued by the state. They are issued by a private company with a state guarantee.

Does this not make them simple corporate bonds with insurance? As such, would they attract a higher haircut than the equivalent sovereign bonds?

@Jagdip

That is interesting stuff. A change to the valuation date is not necessarily a change to the methodology. It is not clear the EU would have to approve it.

Any suggestion that the banks relied on a representation that the valuation date would be 30 November 2009 is more serious. It is unacceptable that the public of the State should be told that a statutory scheme designed and ratified by the legislature is actually subject to representations and provisos not specified in the legislation. Wereas the valuation date was specified int he regulations, the banks shareholders had approved the scheme prior to that date.

@Brian Lucey

It only shows up some of the problems. Nationalistion was supposed to cure the “lemon” problem. However, we see that even nationalised institutions are reluctant to accept lemon rices for good assets. We also see that nationalised institutions are inclined to fight for their own survival (although it is noted that the DoF also thinks Anglo’s survival for a period is in the State’s interest).

@Hog

Needing a bit of educationj here – why does the haircut matter? Does it affect the repo rate? Okay, a haircut of say 10% means they are only 90% good for liquidity purposes but would that be a serious weakness?

@zhou_enlai,

I’ve gone back and forth in my mind on the Valuation Date being part of the methodology. If there was a proposal to change it from 30th Nov 2009 to say a date in 2006, then I think that would be a sufficiently significant change to warrant EU approval. But changing the date from 30th Nov to 30th June for the remaining €60bn of loans (if it does require EU approval ) should not be a major exercise.

I’m sure the priority at the DoF is to get the loans transferred, but if a new Valuation Date causes a 1-month delay to the NAMA project for the sake of a €1-2bn saving to the taxpayer, my opinion is that NAMA should do it. I’d hate to think someone’s political ego would take priority over the interest of the tax payer just because they said Anglo’s recap would be an “upper limit” of €22bn and a change to the Valuation Date could lift that by a billion or two.

On the other hand, at some point the EU is going to figure that Nov 30th was so far from the Bottom that they may intervene to force NAMA to change the Valuation Date because the State-aid element in LEV grows too big. Maybe when the Q2 Permanent TSB HPI is published in the next 10 days? And to add balance, the UK where 20-33% of NAMA assets are located has improved since last Nov but those improvements are negated by the performance in NAMA’s primary market.

@ Hogan

just checked with the ECB database and its there! 1.5% haircut. Behold the wonders of the intraweb and bloomberg…

ISIN Code . . . . . .: XS0506171650
Other Registration No:
Liquidity Class . . .: L1C
Asset Type . . . . . : AT02
Reference Market . . : RMIE01
Price Specification. : PSIE03
Denomination . . . . : EUR
Issuance Date. . . . : 29/03/2010
Maturity Date. . . . : 01/03/2011
Country of Location. : CLBL
Coupon Rate (%). . . : .959
Issuer Name. . . . . : National Asset Management Ltd.
Issuer Other Name. . :
Issuer Residence . . : IRIE
Issuer Group. . . . .: IG3
Guarantor Name. . . .: Central government: Republic of Ireland
Guarantor Other Name.:
Guarantor Residence .: GRIE
Guarantor Group. . . : GG2
Coupon Definition . .: CD2
Valuation Haircut. . : 1.5
Ucits Compliant. . . : N

Jagdip says: I’ve gone back and forth in my mind on the Valuation Date being part of the methodology. If there was a proposal to change it from 30th Nov 2009 to say a date in 2006, then I think that would be a sufficiently significant change to warrant EU approval. But changing the date from 30th Nov to 30th June for the remaining €60bn of loans (if it does require EU approval ) should not be a major exercise.

But by that rule, does it also imply that as values change to a more favourable amount, from the bank’s perspective, does that mean that NAMA has to pay a ‘levy’ back to the bank? I think we assume too much here, in that development land values are going to keep diving down and down for ever. The 30th November 2009 date, seems to me to be a reasonable agreement between NAMA and the banks, that no matter what happens (up or down) beyond that point, the plan will not change. Anything else, who lead to undue administration overheads, increased exposure to litigation for the agency and excuse for more delays all round. We are not only fighting against monetary factors here, we are also fighting against time and complexity barriers, which may prove to be a lot more expensive – if we don’t get on with this. At a certain point, trying to argue for lower development land valulations from the NAMA point of view, has a huge penalty in terms of increased delays. We all know very well, that time was never going to be a friend of the NAMA type of strategy. BOH.

@BWII & BOH
“Needing a bit of educationj here – why does the haircut matter? Does it affect the repo rate? Okay, a haircut of say 10% means they are only 90% good for liquidity purposes but would that be a serious weakness?”

The haircut matters because you get back less cash from repo (you are effectively paying a higher interest rate). If there had been a problem with the repo status of the NAMA bonds, it would have made them less useful to the banks.

@ hogan

re that EBS one seems to be some sort of structured “puttable” note. Probably little too funky for the ECB to be happy as designating as “govt” in terms of liquidity, tiny issue size of 5mm as well might have impacted on it.

@Brian Woods

The repo rate has nothing to do with the haircut. The haircut is simply a way to impose a margin on the collateral seller. A larger haircut simply means you get less cash for the bonds.

I asked Eamon Ryan on TV3 show last night
1. Why no Anglo loans transferred (ans: I don’t know)
2. Shouldn’t the November date be updated (ans: No, sure you have to pick a date)

@Sarah Carey

Indeed you do have to pick a date by reference to which you value. NAMA picked 30th November 2009, which given the first tranche was originally to have been transferred by Christmas was perfectly reasonable.

Since then NAMA has decided to have 15 tranches and there have been delays (EU, banks’ paperwork, life) and as we speak €60bn of NAMA’s loans are still with the banks. The Bottom last year has become Bottomier and our commercial capital values are off 8% from last Nov to end June (JLL) and our residential is off 8% to end March (PTSB) and would be expected to be off by more than that once Q2 is published. As to the future, who knows but I know not of a single economist, ratings agency, financial institution that is forecasting anything but further drops in residential for the next 6-42 months and the latest JLL commercial index indicates the fall in capital values is picking up pace (4.7% in Q2 vs 2% in Q1).

So as we speak valuing that €60bn of outstanding NAMA-bound loans at 30th November, 2009 rates (and even factoring in the LEV jiggery pokery) means NAMA will overpay for these loans by €1-2bn. NAMA has an obligation to protect the taxpayer (even if that is politically inconvenient) so NAMA should change the Valuation Date for the remaining €60bn of loans.

Again for balance the UK has fared better than NAMA’s primary market since last November but even there the decision by Zurich to write down its commercial development loans by 10% in Q2 is worrying and of course the UK only accounts for 20-33% of NAMA loans.

Yes a saving of €1-2bn on the NAMA swings might be offset by futher recap needs on the Anglo/INBS/EBS roundabout but a) we should be clear about State-aid and b) BoI and AIB are supposedly hale and hearty so why are we giving them more State-aid via inflated valuations?

@Gavin

“Should also say that interest on a repo is calulated on the Nominal Amount less the haircut so if I sell a €10m bond on repo with a 2% haircut, I pay interest on €9.8m”

I think I get it now. The haircut doesn’t really matter. I might get a car loan for 20k offering my house worth 500k as collateral security, but I only pay interest on the car loan.

@ Jagdip Singh,

This speaking about the bottom, and bottom-ier, strikes me as a bit suspicious. In general the comments here might appear to be a big one sided. Especially from a group of academic observers, who aught to be better able to understand reflexive behaviours in markets. To what extent do we know, the behaviour of market prices would not be boom-ie, or boom-ier, if NAMA had not struck an agreement with the lending institutions to set valuations at Nov 2009? I mean, the market since Nov 2009 in Ireland, has well registered the fact that NAMA is making progress, and that wheels have been set into motion. The knowledge held by the Irish property market today, that NAMA has managed to work its way through two tranches of the loans, may account for the slippage in property valuations we have witnessed since Nov 2009. I mean, as academic observers of the process, we should be able to understand basic concepts such as marketplace reflexivity, shouldn’t we? BOH.

@Eoin
“On private repo markets, Greek government debt was/is (difficult to really know anymore, very few accepting it) taking a 30-40% haircut.”
Exactly – Greek debt is now 100% haircut! How do you fund a bank if you can’t get cash? The Peter-Paul principle breaks down if you can’t get enough from Peter.

Meanwhile, away from the Commercial Court http://www.bbc.co.uk/news/uk-northern-ireland-10698956

Information asymmetries and surprises are seen as factors in contagion.

On that basis, does NAMA giving less information in relation to T2 increase the risk of investors losing confidence in Ireland?

@Brian O’Hanlon,

If NAMA never saw the light of day, would property prices be more or less than they are today?

I would have said prices would be lower without NAMA. Developers were led to believe that NAMA would hold their assets until the present madness of the crash in prices had been passed over and the LEV could be realised – this has meant that developers have avoided putting property on the market in a serious way. Developers know there is extra money available from NAMA (the €5bn pot) on easy terms to finish out projects.
NAMA has indicated that it may demolish which would tend to place a floor under values by removing supply.
All the optics surrounding NAMA have suggested it would stabilise property prices.

So I would have said the “reflexive behaviour” of the property market, as a result of NAMA, has been to maintain prices at artificially high prices. The reason that prices have continued to fall however – lack of credit, higher interest rates, lower wages, unemployment, higher taxes, emigration, overhang of supply, the ending of property mania – have nothing to do with NAMA.

So if NAMA wants to change the Valuation Date from 30th November, 2009 to 30th June, 2010 then banks can’t (in my opinion) say that is unfair because NAMA has depressed prices.

@ Jagdip,

Good reply, thanks for that. You ask: If NAMA never saw the light of day, would property prices be more or less than they are today?

What we do know is that Franco-German driven monetary policy (coupled with poor fiscal supervision from the EC), did lead to a period of unrealistic demand for property in the Irish market. We were told that influxes of new arrivals into Ireland, would put so much pressure upon our residential and commercial stock, that we needed to ramp up production of both to meet with demand. Failure to meet demand, would have resulted in worse inflation that we already had. We also know, that without EU intervention today into our banking policy, we would never have such a thing as NAMA (or NAMA bonds). By this logic of mine, both NAMA and the Irish property bubble were in large measure to do with Ireland’s membership of a wider European economy. We the Irish voted in favour of that, and perhaps we made a mistake. We should not try to represent NAMA as a purely Irish solution to an Irish problem. NAMA is symptomatic of a wider struggle by a small peripheral state in Europe to integrate itself into a larger political, social and economic framework – or to use the common phrase, we are trying to become ‘Europeans’. I am sure you will agree, the social progress made by this small state has been very impressive over the past decade. Ireland has become a destination on the map. Something it never was. I will not argue with you though, if your assertion is, economic planning in relation to Ireland, is still quite atrocious. BOH.

@ hog,

The T2 release strikes me as a “this is how far we’ve gotten, you wouldn’t believe the messing from Anglo”.

There is an important academic paper which deserves to be written on this subject in years to come. Difficulties experienced with nationalised banking institutions. Hopefully such a paper, if completed at some future time will shed important light on the subject, for all of our benefit. What was revealed last week, was how far advanced plans to nationalise INBS were, by late 2008. Long before the issue was on the radar of many economists here at this blog. Is this the area, in which Ireland needs more transparency in the future? Or does the scare the horses argument still hold any water? BOH.

@ BL,

We know two things now that we didn’t understand before it Ireland. Nationalisation does not guarantee absolute and full cooperation by a banking institution. Also, that plans for nationalisation were being drafted and debate in the permanent government, long prior to Sept ’08. The opportunity is now there, and will become even more feasible, for some economist to put some flesh on the bones on my two statements hence. BOH.

@ Brian Lucey,

Thanks for the link to your upcoming Cantillon conference btw, a really interesting line up of discussions and speakers. I’ll be busy at other stuff in September, but best of luck with it. An interesting couple of video presentations you might like to digest in the meantime, is about energy saving performance contracts, which they currently are employing in the United States. The video tutorials hit upon a number of different issues, all of which arise in debate and conversation about Ireland’s future, how Ireland can economise and become more efficient with its resources etc. Something Karl Whelan said lately on another thread, about NAMA: Its ability or lack thereof to generate returns on assets, above the liabilities which the state is exposed to. I was reminded about that in the video presentation about energy saving performance contracts. One of the key things underlying this new method of procurement, seems to be the need to support research and development facilities with reliable and economical energy provisions, over a long period of time. BOH.

http://www1.eere.energy.gov/femp/financing/superespcs_fda.html