On today’s RTE Radio News at One, David Murphy made a point about NAMA that I’ve heard many times recently but that I’m having great difficulty understanding. Murphy explained that the government bonds issued to purchase loans for NAMA would imply a large interest bill and that the idea behind NAMA purchasing good property loans as well as bad was so that the good loans could help to pay the interest on the NAMA bonds.
Let me explain why I don’t understand this.
Last night’s The Week in Politics on RTE featured an important discussion between the Minister for Finance, Brian Lenihan, and Fine Gael finance spokesman, Richard Bruton (The discussion is in the first clip on the webpage after Brian Dowling’s report). They discussed a number of issues such as NAMA and Anglo Irish Bank. However, to my mind, the most important discussion related to bank bond holders.
Full text of NTMA chief Michael Somers’s appearance at the Public Accounts Committee is now available here.
Last night on The Week in Politics, Fine Gael’s Leo Varadkar criticised proposals for nationalisation of the banks on a couple of grounds, one of which was that it “wipes out 300,000 small shareholders.” Later, in describing FG’s plan he said that the new banks created as part of this plan “would buy the good loans off the banks, take the good loans off the banks and set up a clean bank and, by doing that, you then create capital for the old banks and give them some chance of survival.”
Those watching would probably interpret these comments to imply that Fine Gael’s plan does not involve nationalisation and that it would be better for bank shareholders than what has been proposed under nationalisation. In my opinion, neither of these positions are correct.
The German government announced a plan last week for dealing with problem assets on the books of its banks. This plan has been compared favourably to NAMA by a number of Irish commentators but I’m not really sure why.
The essence of the plan, as described by the Wall Street Journal, is as follows
banks will have the option of putting structured products, such as mortgage-backed securities, into special-purpose vehicles at 90% of their present book value, which is often far above the assets’ likely market value if sold today.
In return, the vehicle would give its parent bank a note promising to repay it an equivalent amount in up to 20 years’ time. The German state would guarantee the repayment in exchange for a fee from the bank, which would free up capital by swapping toxic assets for a risk-free note.
In addition, the bank would have to pay the vehicle the difference, spread out over as long as 20 years, between 90% of an asset’s book value and its estimated ultimate value when it matures. If an asset’s ultimate value turns out to be less than auditors’ estimates, the bank will have to pay dividends to the German state instead of to shareholders until the full loss is covered. If assets perform better than expected, the bank gets the upside.