Here is the FT view.
The Bacon NAMA report is here.
FT on NAMA
- Post author By Philip Lane
- Post date April 9, 2009
- Categories In Banking Crisis
- Tags NAMA
- 3 Comments on FT on NAMA
Category: Banking Crisis
My previous post discussed the price that our new National Asset Management Agency (NAMA) could pay for impaired loans from the perspective of how much of a loss relative to book value the banks could take under the assumption that the government didn’t invest more than its €7 billion planned re-capitalisation. The answer was that the discount from book value would have to pretty small relative to the figures being widely quoted for likely losses.
Admittedly, this was a bit of an around-the-houses way of warming up to the NAMA discussion and Patrick was completely correct in his comment that the key sentence in the speech was
If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.
I have examined the government’s banking proposals and will have more to say later about their substance. However, before discussing the details, I’d like to focus on some figures that will help shed light on a question that I’ve already heard many times today—how much will our National Asset Management Agency (NAMA) pay for the bad assets of our major banks?
As we wait for today’s budget announcements, it is worth reflecting on the challenges of getting the right design and pricing for the asset purchase scheme now being trailed.
Some bloggers have made up their minds that the government will overpay for the assets. How can such an outcome be avoided? I have a slightly novel suggestion for this.
As in the United States, there will be a huge gap between what the banks claim the assets are worth and the value that the rest of the market would place on them.
Finding a mechanism that places a generally accepted price on the assets is as difficult here as it is in the US. Any asset purchase scheme will require a further detailed scrutiny and evaluation of the assets to be purchased.
It is to be hoped that the initial announcement of an asset purchase scheme will not lock the government into prematurely firm commitments on pricing and financial restructuring of the banks. The worst possible thing would be to crystallize the taxpayers’ costs at too high a level.
Buying the assets at inflated prices would surely be politically unacceptable. Indeed, Government sources have clearly trailed that they will not pay current book value for the assets.
Each country’s situation is slightly different. If we were to subtract now the present value of all prospective loan losses (taking recent analysts’ estimates), the main Irish banks would be severely undercapitalized. Removing the problem loans at anything close to the prices implied in the analysts’ estimates will require the banks to take immediate write-downs that have the same effect.
Therefore implementation of the asset purchase scheme at realistic asset prices will create the need for a further recapitalization of the banks.
Injection of more preference shares by the Government will not do the trick. If the banks are to move forward in a sound manner, and be accepted as financially self-sufficent, they must have sufficient equity capital. In quieter times there would be enthusiastic private sector buyers for equity in such cleaned-up banks. Failing that, the residual equity investor is likely to be the government. When you do the sums using the analysts’ estimated, this has to imply huge dilution of the existing shareholders. No wonder many commentators have concluded that full, albeit temporary, government ownership is on the cards.
Given this background, it might be better to do something just a little more complicated: let the asset management company pay even less than fair price for the bad loans, and in return give the existing shareholders of the banks an equity stake in the AMC. This has the advantage of making sure that the surviving bank really is clean, and neatly defuses shareholder objections that they are being expropriated. Of course they are even less likely to own much or any of the surviving bank, unless they choose to contribute to its recapitalization. Other existing risk capital providers, such as the holders of unguaranteed subordinated debt, could also be compensated for write-down by acquiring a stake in the AMC.
Let’s hope this week’s statements do not shut off possibilities such as this which can protect the taxpayer without destabilizing market confidence by allowing well-adapted financial contracts to bridge the gap between taxpayer and shareholder.
Although my idea may seem novel, specialists will recognize it as only an adaptation into our current circumstances of the most conventional form of bank resolution mechanism. It can work.
With an announcement coming from the government on Tuesday, I think the best that can be hoped for at this point concerning our banking problems is some sort of “kicking to touch” in which the Minister announces that further time is being taken to consider the available options. If this is indeed the case, then we are going to need a much better-informed debate about these options over the next few weeks than has been served up in recent months by the Irish media.
There are a number of possible ways that the government can solve the problems with our leading banks. However, the various plans being discussed differ greatly in terms of (a) How the losses associated with bad property loans are allocated between the taxpayer and bank shareholders and (b) Who owns and controls the cleaned-up banks. If the media were serving the public well, there would have been an extensive discussion of these issues. Unfortunately, this has not been the case.
As an example, consider today’s column in the Irish Times by John McManus. Note that my point here is not to pick on McManus, who I consider to be an excellent journalist often willing to be tough on the government on business issues, but to illustrate the weakness of the coverage from even our leading journalists.