Most of the Irish academic economists contributing this site are anti-NAMA in its current form, and Karl Whelan has expressed an interest in giving more balance to the site by generating some pro-NAMA threads. Goldman Sachs’ chief European economist was gracious in allowing me to quote his recent email on Irish bank bailout policies including NAMA (the email was mentioned in today’s newspapers). See below the fold.
Author: Gregory Connor
Fintan O’Toole is a thoughtful and eloquent commentator on arts and social trends, and sometimes he gets things right about economic issues too! Today in the Irish Times he has a compelling piece on bank bailout policies toward Anglo Irish.
Contributor John is the first to “call” a recovery in Ireland. He suggests that this should trigger a blog-thread here on irisheconomy.ie at some point. I am a financial economist not a macroeconomist but I am curious to start such a thread and read what braver souls have to say. See John’s text below (from an earlier thread):
“For what its worth, I’ll stick my neck out and say that Ireland is now out of recession. I should emphasise that I’m referring to Q3 rather than to Q2. I don’t claim to be infallible. Its just my opinion based on a reading of the latest manufacturing, trade, retail and other statistics. I could quite easily be wrong. But, if I’m right, I trust the news (figures won’t be published for Q3 until December) will trigger a thread here. “
In a welcome shift, the government has indicated that NAMA may pay for bank loans by issuing two claims to the participating banks: standard government bonds in the amount of the minimum fair value of the loan assets, and a continent claim against any realized underpayment (I explain these terms below). It looks like the contingent claim might be classified as subordinated debt against NAMA as a separate government-owned entity. What are the policy objectives guiding this security design problem, and what would be the best feasible security design? What about the other huge contingent claim held by the banks (the bank liability guarantee)? Bringing the liability guarantee into the picture, and examining optimal design in the current circumstances, argues strongly for short-term nationalization as the best policy. However, if nationalization is ruled out for political reasons, then we can search for a second-best optimum excluding nationalization. I hope to write a technical note on this interesting problem over coming weeks, but in this blog entry I just want to make a few general remarks.
Perhaps the most contentious issue in NAMA planning is the distinction made between the long-term economic value and the current-market prices of bank assets, particularly developer loans collateralized by Irish property portfolios.
Optimists see a strong case for a liquidity-related price bounce in these bank assets, that is, low current-market prices recovering to higher “true economic value” prices over coming years, as financial market distress dissipates. This optimistic view, forecasting a bank asset price bounce, provides a strong justification for setting up NAMA, and also justifies paying the banks more than current-market prices for their bad loan portfolios (but still much less than accounting book value).
Pessimists forecast either flat or declining market prices for these bank assets over coming years. This pessimistic view implies that NAMA (if it comes into existence) should pay current-market prices or less for bank assets.
I think that the optimists might be over-extrapolating from the current US environment. There are important differences for the case of Irish bank assets. In my opinion, the market prices of US bank assets will bounce up strongly sometime during the next few years, whereas the prices of Irish bank assets will recover more modestly or not at all.