Category: Banking Crisis

An Emerging Consensus on NAMA Overpayment?

One of the interesting aspects of the evolving public discussion about NAMA is that economists from the stockbroking community have become increasingly explicit about the fact that NAMA will overpay for its assets.  The latest example was the column in today’s Sunday Tribune by Oliver Gilvarry of Dolmen Stockbrokers.  He suggests that NAMA’s approach to pricing will be as follows:

The haircuts will be determined by what the banks can take without requiring large injections of capital.

Similar predictions have been made in other recent reports by Davys, JP Morgan and others.

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The maths of NAMA-type valuations

And it’s not just NAMA.  From Boston to Berlin, valuation of distressed assets is a hot topic these days.  Jacco Thijssen‘s new Irish Economy Note “Valuing Distressed Assets Using Optimal Stopping Theory” looks at some of the underlying maths that could be used.

Anglo Wind-Up Debate a Distraction

A common pattern when an important economic story comes along is that the media and politicians decide quickly what the issue boils down to and then, even though they’ve got it wrong, this sets the tone for weeks.  Recent examples of this phenomenon include the February\March “do we need a bad bank?” debate, which was followed by the equally specious “NAMA versus nationalisation” debate. 

Over the last few days, the media and political debate about Anglo Irish Bank has largely focused on the question of whether the bank should be wound down or kept on as a going concern.  Those who favour winding down the bank appear to view the funds the government has committed to re-capitalising Anglo as the cost of keeping the bank going and, on that basis, they argue strongly for the wind-down option as being cheaper for the taxpayer.

An example of this line of reasoning is an article in today’s Irish Independent (titled “Taxpayer getting bullied into saving Anglo Irish”) by new Fine Gael TD, George Lee. George puts the case for winding up the bank along these lines:

The problem, of course, is that the people associated with the bank, including the Government, are refusing to bury it … Instead of pumping billions into a failed bank that will never, ever again be profitable, it is much better to wind Anglo down.

I do not think that this is a useful way to characterise the decisions facing the government in relation to Anglo Irish Bank, for a few reasons.

Continue reading “Anglo Wind-Up Debate a Distraction”

Solvent Green Developers

Every week now, the Sunday newspapers compete with each other for overyhyped stories on the implications of NAMA.  This one from the Sunday Tribune about the plans of a wily group of “solvent developers”  has to be the best so far. Titled “Solvent developers to compete with Nama”, the story goes as follows:

Some of the country’s cash-rich developers are putting together war chests and are planning to compete with the National Asset Management Agency (Nama) when it tries to buy their debts from the bank.

At least two development groups have put funding of between €200m and €300m together as they don’t want their investment property loans in particular transferred to Nama, and hope to be in a position to buy their own loans at a significant discount.

Buying the loans, said a senior industry source, would effectively mean that the developers would take control of the properties at today’s prices rather than ones agreed at the peak of the market.

Most likely, this “plan” is either the product of the overactive imagination of said industry source or perhaps has been misinterpreted by the intrepid Tribune reporter.

Still, if there is any chance that this plan could be put into effect, let me be the first economist to recommend that it be extended beyond developers to the whole Irish public.  I’m solvent and I’d love to get my mortgage cut in half (i.e. buy my loan at a significant discount.)  I’m sure our readers would too. Perhaps we should set up a lobby group and get a senior industry source to brief the Tribune about it?

Note: The Merriam-Webster online dictionary defines solvent as “able to pay all legal debts”.  (I’m assuming the Tribune aren’t referring to the second meaning of the word, which is something “that dissolves or can dissolve” but now that I think about it, I’m not so sure.)

Two depressions revisited

Barry Eichengreen and I have posted an update to our column comparing the current global economic crisis with the Great Depression. The data are through the end of March (apart from the discount rate data, which are through the end of April). Further updates will be posted as the industrial output and trade data are processed by the international organisations which we are using as our source.

At the global level, March saw green shoots in the stock market, but not in the real economy — although world trade stabilised, and there was a clear deceleration in the rate of decline of world industrial output.

We are also, for the first time, posting data on individual countries. These emphasise the gravity of the current crisis. They also show green shoots in some countries, particularly in Eastern Europe and Japan. Hopefully subsequent numbers will confirm these encouraging signs.

Is this the end of the beginning, or a lull between storms? Hopefully the former, but how can one be certain, especially given the various unexploded landmines littering the economic landscape, and the steady increase in unemployment around the world with its potential to create new holes in the financial sector? The Great Depression also saw increases in output which turned out to be temporary, largely due to the policy mistakes of central bankers and politicians trapped by a gold standard mentality. As my column with Barry pointed out, the policy response has been much better this time around, and may be bearing fruit. Once the recovery is clearly under way, governments will need to start balancing the books. But a premature tightening of fiscal policy would be disastrous, which is why Europe needs to avoid artificial fiscal straitjackets.