The Irish Economy

On RTE radio this morning (on Today with Pat Kenny with, em, Myles Dungan) Fianna Fail TD Frank Fahey said:

I stand by what I said about NAMA from the very beginning. NAMA is being funded … the bonds are being funded by the European Central Bank.

Now I know that language is a flexible thing and perhaps philosophy graduates could spend all night debating what the meaning of “being funded” is. But, I would suggest that the only reasonable interpretation of this statement is that it implies NAMA are receiving funds from the ECB.

This is not at all true. The ECB has no direct relationship with NAMA at all. NAMA bonds can be used by the banks that have received them as collateral for loans from the ECB but that’s it, that’s the full extent of the ECB’s involvement in relation to NAMA. Furthermore, AIB and BoI executives told the Oireachtas last year that they had no particular plans to use the bonds in this fashion.

The NAMA bonds are fully backed by the Irish government. They are a liability of the Irish state, albeit one entered into at the same time that it acquired some property assets that may or may not yield enough to pay off the bonds.

It is long past time for government politicians to stop misleading the Irish public that NAMA somehow involves the state getting money from the ECB. I would plead with any journalist interviewing Deputy Fahey or any other commentator making this claim in the future to point out to them that it has no grounding in fact.

Details here. Mysteriously, there are no Anglo loans being transferred yet in this tranche. We’re told “Loans will be acquired from the remaining institution – Anglo Irish Bank – over the coming weeks after all necessary due diligence material has been received and evaluated.” It does seem deeply odd that the bank that NAMA is supposedly having the greatest difficulty processing information from is one that is fully owned by the state. An alternative intepretation offered by Jagdip is that the delay relates to EU State Aid nexus.

The discounts on these loans are higher than the first tranche. I don’t think, however, that I can agree with Brian Woods II that this raises the potential profit for NAMA. The new tranche reflects new information on valuations not available when the business plan was put together, though unlike the first tranche, no valuation estimates have been provided. So, in this case, the lower prices paid likely also reflect a lower long-term economic value. It would, of course. be nice to see NAMA re-issue the business plan after each tranche but it ain’t gonna happen.

Here’s an interesting article from the Irish Times by Simon Carswell in which NAMA’s senior officials squirm about their changed assessment of the quality of their loan portfolio, blaming most of it on the fragile psychological state of our bankers last Autumn (poor dears). The highlight:

Mr McDonagh said some loans – on top of the 25 per cent that were generating income – were yielding some, if not all interest due, but Nama was still assessing this.

“Twenty-five per cent is cashflow generating – the rest has some cashflow generating,” he said.

It brings to mind our friend Maurice O’Leary’s favourite quote:

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

I had thought there was something a bit odd about how the NAMA business plan extrapolated from the 50% discount applied to the first tranche to come up with its figure for the amount it would be paying for its full portfolio. After all, the fraction of Anglo loans in the first tranche was higher than for the total portfolio and these are likely to be worse in quality than the average loans from AIB or BoI.  Surely, the correct approach would have been to calculate this figure applying the institution-by-institution discount from the first tranche to the total consideration, assuming for example that the first tranche haircut for AIB is the appropriate figure to apply to the rest of AIB’s NAMA portfolio.

So, I did the calculation (here’s the spreadsheet) and, lo and behold, it projects that NAMA will pay €41.7 billion for the portfolio, not the €40.5 billion they published in the business plan based on extrapolating from the first tranche aggregate discount.

It turns out that Jagdip had done the same calculations before me and discussed them here.  I agree with his comments there and believe this implies some pretty serious questions about the thinking that went into the production of this business plan.

Suffice to say, from here on, I will be assuming that NAMA are going to spend €41.7 billion, not €40.5 billion, and that the baseline case in which full long-term economic value is recovered actually implies a small loss rather than a profit.

Update: As Jagdip points out below, if the base case now becomes a loss of €200 million, this can be made up by not honouring €200 million of subordinated bonds. So the outcome is neither profit or loss. Of course, the “realise ten percent less than LTEV” scenario (known to some as the worst-case scenario) would now be a loss of €2 billion because the original €800 million loss in the business plan already accounted for the sub bonds not being honoured.

Day 2 of the new NAMA business plan and I’m sure people are already a little tired of it as tolerance for all things NAMA has dwindled for most of us. For those still interested, Constantin Gurdgiev has a number of useful calculations in this post.

I’ll conclude on this issue for now by making a few simple points as to why I think the outcome for the taxpayer is likely to be worse than indicated by the plan’s “worst-case scenario’’ of an €800 million loss to be recouped via a levy. (more…)

NAMA have now published their business plan (announcement here). I haven’t looked at it in full detail but a few comments are worth making at this point.

First, it’s not much of a plan. It doesn’t bother trying to update the draft plan’s year by year analysis of cashflows. As such, the scenario analysis, such as it is, seems like it will be pretty useless to those of trying to assess its credibility.

Second, in relation to Monday’s leaks, the prize for accuracy goes to the Indo’s John Mulligan who correctly reported the new information on cash flows was that NAMA now estimate that 25% of the loans are cash flow producing, which was more accurate than the Times report of about 20 per cent. To be specific, the plan says:

the draft Plan assumption was that 40% of acquired loans would be income-producing; however, the level of debtor impairment evident from the first tranche loan transfers suggests that 25% may be a more reasonable estimate. Similarly, the actual LTV ratios that have become evident during the Tranche 1 due diligence process have been higher than those indicated by institutions last autumn.

There are two possibilities in relation to the difference between the current and draft business plans in relation to their assessment of loan quality. Either the information provided to the government by the banks last year prior to the passing of the NAMA bill was highly inaccurate (speculate yourself as to why this might have been) or the loan portfolio is deteriorating rapidly.   It would be useful for NAMA to clarify the relative contributions of these two factors.

Third, I find it interesting that when NAMA CEO Brendan McDonagh appeared before the Oireachtas Finance Committee on April 13, NAMA had already paid for most of the first tranche of loans. And yet, at the time, McDonagh said that “we estimate the figure is probably closer to one third, that 33% of the loans are cashflow producing.”

It might be possible that the discrepancy between this estimate and the current estimate is accounted for by new information about Anglo’s loans, which were still being analysed when McDonagh gave his one-third estimate. That said, why it should be difficult for a government to find out how many people are repaying the NAMA-bound loans beats me (a point that applies doubly when the bank in case has been nationalised bank.) Less palatable is the idea that we are finding new nasty surprises about loans after we have already paid for them.

You might remember that a few months ago, NAMA CEO Brendan McDonagh appeared before the Oireachtas Finance Committee and told them that one third of NAMA’s assets are cashflow producing. I noted at the time (based on the information in bank annual reports) that this didn’t seem to me to be correct, with the likely figure being a good bit lower. Now, the media are leaking details of NAMA’s new and improved business plan and we are being told that “only about 20 per cent of the loans are generating any income, that is repayments or interest payments.”

This raises an interesting question: Was Mister McDonagh misinformed in April when he said that one-third of the loans were cashflow producing or have 13 percent of the loans stopped producing income between April and July? Neither answer is particularly palatable.

As for “In a worst-case scenario, Nama could end up losing several hundred million euro” one really has to wonder do the people who put this plan together know what a worst-case scenario means.  However, coming from the folks who brought us the 80% full recovery scenario, I suppose we shouldn’t be surprised.

AIB have released an interim management statement. As expected, the bank has not been able to pay the state its cash dividend of €280 million, so they are issuing shares for this amount instead. The NAMA bonds are referred to “enhancing our contingent liquidity resources.”

As an aside—and sorry to bring up Frank Fahey twice in two days—I’d note when I appeared on the radio with Deputy Fahey in February, he told listeners that the government would definitely be getting its cash dividend from AIB in May. I noted at the time that the coupon stopper was in place “to prevent the reduction of own funds by financial institutions which are still reliant on State aid to fulfil regulatory capital requirements” and so this was highly unlikely. To my mind, the fact that government politicians are sent out to continuously over-promise in relation to their banking strategy ultimately ends up just undermining their credibility.

Update: I just noticed that the Department of Finance press release contains the following:

The Minister explained:

“The €280 million in ordinary shares issued to the Fund will count towards the additional €7.4 billion equity capital requirement determined by the Financial Regulator so that AIB will meet the new base case capital standards.”

I’m not sure I understand this. The state is not putting any extra funds in, just receiving shares that dilute the existing ownership. Can the issuance of these pieces of paper in exchange for no money really raise regulatory capital? If this trick works, why can’t the bank’s ownership just issue a few million more shares to themselves for free? Then reaching the €7.4 billion target will be no bother.

I received an email recently from someone who objected to my characterisation of NAMA’s goal of being cashflow positive as something of a loaves and fishes act.

The argument put to me was that while Brendan McDonagh says that only one third of NAMA’s loans are income producing and NAMA is projecting to pay a discount of 47% for these loans, the fact that the interest rate on NAMA’s income generating loans are higher than on its bonds means that it will still generate positive cash flow.

Specifically, NAMA’s bonds will pay six-month Euribor while, we are told, that its assets are generally Euribor plus two percent. In this case, NAMA would be cash flow positive as long as 0.33(i+2) is greater than 0.53 i. This requires i < 3.3. In other words, as long as six month Euribor is less than 3.3% (it’s currently about one percent) then NAMA would be cash flow positive.

I don’t disagree with the algebra of the above paragraph. But I do disagree with some of its underlying assumptions. I’m going to write a couple of posts on the various aspects of NAMA’s cash flows.

Here, I want to discuss the extent to which NAMA’s loan portfolio is generating cash.

(more…)

NAMA CEO Brendan McDonagh appeared today before the Oireachtas Committee on Finance and Public Service. Here’s a copy of his opening statement. Normally, when there are important Oireachtas committee meetings, I usually have to wait for the transcript to go up on the website. However, thanks to the tireless work of our friend Jagdip Singh, you can get a lot of information on what happened today here and here as well as lots of excellent questions.

One statement from McDonagh that got a lot of attention today was that, of the loans in the first tranche, only one-third are paying interest. I wasn’t too surprised about this because it tallys well with information from the annual reports released by Anglo, AIB and Bank of Ireland.

As I noted earlier in comments, the amounts going in to NAMA from these banks in terms of initial face value are as follows: €36 billion from Anglo, €23 billion from AIB and €12 billion from BoI. That’s a total of €71 billion.

All three banks have released detailed analyses of the loans going into NAMA (here, here and here). From these, we know that €6.6 billion of Anglo’s NAMA-bound loans are neither past due or impaired while the figure for AIB is €10.4 billion and for BoI is €5.4 billion. Add them up and we get that, according to the banks own figures, only $22.4 billion of these loans are performing.

So, according to the figures released by the banks, of the original €71 billion in loans made, only €22.4 billion or 31.5% are currently performing.

One can also point out that if the discounts from face value of 50% for Anglo, 43% for AIB and 35% for BoI are applied across the board to the rest of the tranches, then NAMA will pay €18 billion, €13 billion and €8 billion respectively for a total of €39 billion for the loans from these three banks. So, for these banks, we are paying €39 billion euros for a portfolio of loans of which only €22.4 billion are ostensibly currently generating any revenue.

Our old friend Donal O’Mahony from Davy’s returns to defend NAMA in today’s Irish Times and he’s on form.

The article starts with some reasonable observations:

IT HAS proved a prolonged and at times frustrating gestation period, but the policy prescription to stabilise the Irish banking system and help kick-start credit creation has finally reached its implementation stage. Nama’s journey has been an understandably arduous one, confronted as it has been by a welter of legislative, regulatory and, not least, administrative needs.

Fair enough. However, one doesn’t get any sense from this article that there was an alternative to the slow and tedious procedures surrounding The World’s Slowest Recap^TM. The delays, it seems, are simply something that must be endured.

(more…)

A common jibe that journalists and politicians level at academics they disagree with, or perhaps just plain don’t like, is that the academics are disconnected from reality by virtue of their ivory tower employment. In relation to economists, this often takes the form of the tired line about the discipline originally being called “political economy” and academics putting forward proposals that are “good economics” but “bad politics”.

Brendan Keenan’s column in today’s Sunday Independent is a classic example of this genre. Mr. Keenan argues that the various economists associated with this blog (the “dissident economists” formerly known as “opinionated economics lecturers”) are politically naive and their advice unsound. Specifically, Keenan proposes that we would be better off if, contrary to recommendations emanating from this site, the government had paid more to the banks for the NAMA loans and demanded lower capital ratios.

There is such a thing as political economy. Anglo would still have been a nightmare, but a somewhat more generous payment from Nama, and a less stern view on bank capital, would have made the numbers a lot less frightening.

That might have made it easier to get the deal with the trade unions approved, and get another unpleasant Budget through in December. Not only better politics, but possibly better economics than worrying about Tier One capital and Long-Term Economic Value.

I’m not sure that either the politics or the economics of this column are particularly compelling.

(more…)

The EU Commission has released the full text of its decision to approve NAMA announced on February 26. Emmet Oliver discusses the statement in today’s Independent. Thanks to Jagdip Singh for the hat tip. What I find frustrating about this process is why we get a minimal “EU approves NAMA” statement in February and a slightly-censored version of the full approval six weeks later. It would be far preferable for the full text to be released at the same time as the announcement of the decision.

Thanks also to Jagdip for getting us more information on the “NAMA total consideration” mystery. As outlined in his comment, Jagdip wrote to NAMA:

Dear Sirs,

I have studied your four publications from Tuesday 30th March 2010 with respect to the transfer of the first tranche of loans to NAMA. I write to ask if you could make publicly available the overall methodology to derive the Long Term Economic Value (LEV), Current Market Value (CMV) and consideration paid with respect to the first tranche of €16bn of gross loans.

In summary the gross loans of the first tranche are estimated at €16.03bn, the LEV is shown as €10.51bn, the CMV as €9.44bn and the consideration paid is €8.51bn. Could you explain in general terms how the LEV and CMV were calculated and why the consideration paid is different to the LEV.

Also the press have widely reported the estimated haircut on the first tranche at 47%. Would it be more accurate to quantify the haircut as 34% (1 - LEV/Loan Value or 1 - 10.51/16.03)?

I have read the Act and the LEV Regulations before writing to you and I can still not resolve the figures produced for the first tranche. I propose publishing any response from NAMA to the above questions on the irisheconomy.ie blog.

Jagdip received a reply (Garbo speaks!):

Thank you for your email.

Please see below a brief guide to how NAMA obtains these calculations:

1. The €16.03bn is the nominal value of the loan balances transferring to NAMA.

2. The property CMV represents the current market value of the property as at 30 November 2009.

3. An LEV uplift factor is applied to the property CMV to arrive at the property LEV which is one of many inputs to the valuation methodology to arrive at the consideration NAMA will pay for any of the transferring loans. In addition to the LEV of the property, the loan valuation is determined by reference the discount rates per the valuation regulations taking account of enforcement costs and the legal due diligence levy, and the potential for legal haircuts regarding defects in security and title amongst other inputs which influences the consideration paid by NAMA for the loans. The average LEV uplifts per participating institution are available on our website.

4. The discount applied can therefore be calculated as: (1- (Consideration paid/Loan balances at transfer)).

Some additional information is available on our website http://www.nama.ie.

As Jagdip notes, “defects in security and title” are likely to be the principal explanation for why the “total consideration paid” for the first tranche was below the “current” (i.e. November 2009) market value of the underlying assets. I think this means that the signed copy of the 46 guy letter is on its way to an anonymous NAMA official, who I’m sure will treasure it.

Between this reply and Brian O’Neill of NAMA’s letter to the Irish Times commenting on Brian Lucey’s criticisms of their ingenious linked-to-Euribor strategy (Brian’s original article here and reply to NAMA here) there is some sign of NAMA becoming a somewhat less secretive organisation. This is a welcome development though I suspect those who ask tough questions may find limits to this transparency.

In an interesting prediction, the Minister for Finance, Brian Lenihan, has said that Irish house prices will now hit bottom thanks to the NAMA transfers. The Sunday Independent reports:

Yesterday, Mr Lenihan told the Sunday Independent: “One of the good things about the steep discount, averaging 47 per cent, is that the residential property market will now be stabilised at a realistic level.”

He added: “You can now buy in confidence that the price is realistic.”

Perhaps I’m being stupid here, but I’m having troubles linking (a) The setting of prices that the government is willing to pay to banks for non-performing property loans (largely backed by commercial or development property) with (b) Prices that people are willing to pay for residential properties.

The Minister reckons the NAMA transfers will act to boost the residential property market. Just playing devil’s advocate, one could point a large surplus of properties for sale, high unemployment, pay cuts, future tax increases, higher mortgage interest margins, and future increases in ECB interest rates as factors that could act against whatever positive effect the NAMA transfers are supposed to have.

I think it is widely agreed that undecapitalised banking systems saddled with bad loans are a threat to the efficient functioning of the economy. I think it’s also widely agreed that, whatever the mechanism, the goal of any banking plan is to return the sector to a healthy well-capitalised condition.

Given that, I find it very disappointing that eighteen months after the Irish banks were thrown into crisis and at least a year since it was clear that losses threatened the solvency of the banks, we are still taking our time getting the banks recapitalised.

(more…)

Ok folks, let’s have a competition. According to page 3 of this document, we’re paying €8.5 billion for the first tranche of loans, which are backed by property with a calculated long-term economic value of €10.5 billion. First person to provide full details of how exactly this works gets a copy of the old NAMA protest article signed by all 46 guys. Should be worth a fortune in years to come. Zhou is doing trojan work on this right now and has been installed as odds on favourite by Paddy Power.

The Central Bank and Financial Regulator have released a document outlining their methodology in setting capital requirements for the banks. The banked calls this process its Prudential Capital Assessment Review (PCAR). It is available here.

There were things I liked in today’s announcements and things I disliked. More of the latter than the former. (more…)

Tomorrow we should finally see a resolution of much of the uncertainty that has been hanging over the Irish banking system. We are being told that the estimated prices for NAMA transfers will be announced, as well as the capital requirements set by the Central Bank and the new legal framework for the Central Bank and Financial Regulator.

With the news so soon to be released, there is little point in me speculating as to what is going to happen. What I would flag, however, is that there is something of a disconnect between two sets of statements doing the rounds in today’s media coverage.

First, there has clearly been widespread leaking that the NAMA loan transfers will see some banks taking considerably larger writedowns than had previously been expected. For instance, in the Irish Independent, Emmet Oliver writes that “AIB is set to be hit with a discount of up to 40pc”.

Second, much of the coverage mentions the idea of the state owning 70 percent of AIB and 40 percent of BoI. See, for instance, here and here. And note that Emmet Oliver’s full sentence is “AIB is set to be hit with a discount of up to 40pc, making majority State control all but inevitable” and he mentions the Minister’s “plan to take a 70pc stake in the lender.”

The disconnect is that these two sets of figures don’t seem to add up. There is nothing new about the idea of the state potentially owning 70 percent of AIB. Even based on previous expectations for NAMA discounts, this was always a possibility. For instance, I’m looking now at a Davy stockbrokers report from April of last year that projected a base case of the government owning 78% of AIB.

However, it is hard to reconcile the continuing circulation of the same ownership statistics as before with the new information (if such it is) on discounts and also on capital levels.

To give a concrete example, AIB’s annual report says that it had €9.5 billion in core equity capital at the end of 2009. This included the government’s €3.5 billion in preference shares (this isn’t core equity in my book, or most people’s, and it is likely to be converted to ordinary equity.) So that leaves €6 billion in private core equity capital. AIB is supposed to be transferring €24 billion in loans to NAMA. Forty percent of €24 billion is €9.6 billion.

So, do the math on this and you’d probably come to a different conclusion about ownership percentages than have been flagged by the media. One way or another, we’ll find out tomorrow, but today’s leaks are confusing, perhaps deliberately so.

Update: This post should have been clearer that AIB’s annual report already allows for €4.1 billion in provisions for losses on loans going into NAMA. So the calculations would involve an additional €5.5 billion in losses over and above that. With half a billion in equity capital and the need to get up to a core equity ratio of eight percent, the 70 percent state ownership doesn’t add up. Still, perhaps I’ll see tomorrow how it’s going to add up and still end up with the 70 percent outcome.

Today’s Sunday Times carries an important story from Sarah McInerney and Stephen O’Brien. Many people had been thinking that the market valuations applied to loans being transferred to NAMA would be less than had been assumed a few months ago because property prices are still falling.

However, it turns out that this isn’t necessarily the case. In an answer to a Dail question from Fine Gael TD Deirdre Clune on March 10, Minister Lenihan said the following:

Section 73 of the NAMA Act sets out that NAMA may set a date by reference to which the market value of a bank asset or property is to be determined. NAMA have set this date as 30 November 2009. It follows that any property decreases or increases after 30 November 2009 will not be reflected in the NAMA market valuations.

So, NAMA no longer cares about the current value of the assets it is acquiring. Even though no assets have yet being transferred and the transfers will take place in a drip-drip fashion over the next year or so, NAMA will not bother calculating the actual market valuations for these assets. Instead, NAMA is adopting a Marty McFly approach to asset pricing: Let’s just go back to November 2009, when things weren’t quite as bad as they are now.

This decision raises a number of questions:

1. Who made this decision? The Sunday Times indicates that Minister Lenihan has made this decision. The Minister’s Dail answer suggests that “NAMA have set this date.”  So was this a political decision or one made by a NAMA official? Since the figures for asset transfers are so huge, even relatively modest changes in property prices since November 2009 would result in a reduction of billions in the amount of taxpayer money being used to acquire these loans. When a decision of this magnitude is made, the public deserves to know who made it and to have the rationale explained.
2. When was this decision made and why was it announced in such a low-key fashion that it wasn’t reported in the national media until eleven days later? NAMA’s webpage contains plenty of material. Why wasn’t this decision explained?

As regular readers will know, I have always been sceptical of the NAMA pricing process. We have known from the start of this process that transfer prices close to what these assets are really worth will result in the banks being insolvent and probably being nationalised, an outcome that the government has consistently stated that it does not want. So, even before the details of the bill was released, there were clear signals that the process was unlikely to ever really be about finding the true value of these assets and more likely to be about paying a high enough price to prevent insolvency.

However, the strictures of the European Commission have required a formal approach based on paying market value plus a potential LTEV adjustment. And falling market prices have had the potential to drive the banks into insolvency, even under LTEV pricing.

This appears to be where the November 2009 decision comes in. At one stroke, falling prices in the current market don’t matter. With one leap into the silver DeLorean (an Irish car!) we no longer need to worry about trivialities like what the assets we’re acquiring are actually worth. And sure nobody will notice if we barely tell them.

Finally, I note from the Sunday Independent that part of the reason for the delay in the transfer of assets is that “At least two institutions are said to be digging in their heels on the valuations.”

So here we are, an asset sale with only one buyer, acquiring assets from sellers who are insolvent if the assets are sold for their market value. However, the buyer has committed to paying the sellers more than market value. And rather than being grateful, the sellers are “digging in their heels” on valuations. You couldn’t make it up.

Ronan has updated his analysis on property yields and its implications for NAMA and long-term economic value. It doesn’t make for comfortable reading. I wonder does Ronan understand the mystery of the standard discount rate …

Following the approval of NAMA by the European Commission, the Department of Finance has published revised guidelines in relation to NAMA’s pricing of assets. This is a revised version of these regulations released before Christmas. Based on a quick read, there are appear to be a couple of changes, both of which show that the Commission is pushing the government towards paying lower prices.

The first relates to the discount rate used to value cash flows when coming up with long-term economic value.  These had provided for an adjustment of 0.8 percent above the relevant government bond rate. This adjustment is now 1.7 percent.  This change will lower the value of the assets.

Government bond rates are, of course, lower now than they were last September. This is probably what the Minister was referring to when he said “There will, however, be a reduction in the interest rates used for loan discounting purposes” a comment widely (and now it seems incorrectly) reported as being related to the Commission’s recommendations. We see now that the Commission’s recommendations, taken on their own, will imply lower prices paid.

The other change I can spot relates to the (to me) mysterious “Standard Discount Rate”. The regulations for this used to be as follows.

The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs.

The 2.75 percent is now 5.25 percent. From previous discussions, the prize for best answer as to what the standard discount rate was went to Frank Galton: NAMA LTEV = LTEV*(1-Standard Discount Rate). Assuming that’s correct, then this latest change would also imply lower prices. Anyone who understands the standard discount rate (or can see any other interesting changes) feel free to explain it to us.

I guess the news that the Commission has approved NAMA (statement here) will get some attention over the next few days but it’s hardly too surprising. EU guidelines allow governments to introduce an asset management agency of this type and it’s very hard to imagine that the Department of Finance had designed something that wasn’t guaranteed to get approved. However, as I’ve noted before, if you read those guidelines closely, they also suggest that the Commission isn’t in favour of packages that are overly friendly to providers of risk capital.  For instance, the guidelines state

(21) As a general principle, banks ought to bear the losses associated with impaired assets to the maximum extent …

(22) Once assets have been properly evaluated and losses are correctly identified, and if this would lead to a situation of technical insolvency without State intervention, the bank should be put either into administration or be orderly wound up, according to Community and national law. In such a situation, with a view to preserving financial stability and confidence, protection or guarantees to bondholders may be appropriate.

(23) Where putting a bank into administration or its orderly winding up appears unadvisable for reasons of financial stability, aid in the form of guarantee or asset purchase, limited to the strict minimum, could be awarded to banks so that they may continue to operate for the period necessary to allow to devise a plan for either restructuring or orderly winding-up. In such cases, shareholders should also be expected to bear losses at least until the regulatory limits of capital adequacy are reached. Nationalisation options may also be considered.

The relatively tough line suggested by these statements has been evident in the Commission’s rulings on payments to subordinated bonds and on various restructuring plans. This approach undoubtedly limits the government’s ability to overpay for the assets going into NAMA and with the assets falling in price with every passing month, the opportunity to keep the banks from actual or near insolvency via overpayment seems to be slipping away.

In my exchanges with our old friend John the Optimist, I have regularly pointed out economists shouldn’t necessarily be judged on their forecasts and I certainly have made calls here that have turned out to be incorrect. However, I will take this opportunity to point out that tomorrow is the one year anniversary of this column that I wrote for the Irish Times. Among other things which I’d still stand by, the column pointed out the following:

In addition to being unfair, it is questionable whether the bad bank proposal could achieve its goal of properly re-capitalising private sector banks. There may be limits on the price the Government can pay for impaired property loans under EU state aid rules. Banks may still have to write down their assets. It is easy to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place.

And here we are.

As many of you may have heard, Fine Gael’s Senator Eugene Regan (who’s been having a busy few weeks) submitted a formal complaint about NAMA to the European Commission in January. Last week, Regan followed this up by submitting a detailed discussion of how the NAMA legislation is inconsistent with the EU’s guidelines on impaired asset schemes. The detailed document is here and the summary is here.

Today’s newspapers report (here and here) that control over Sean Dunne’s properties has been transferred to companies whose main shareholders are Ulster Bank, Co-operative Centrale Raiffeisen Boerleen Bank and Kaupthing (Iceland! Iceland!). Personally, I’m relieved that Mr. Dunne’s bankers are not in NAMA, so the Irish taxpayer won’t be at risk of making losses on his loans, either through NAMA overpaying them or through losses generated for state-owned banks. 

The fact that these non-NAMA banks have intervened on Mr. Dunne’s business reminded me of comments from Minister Lenihan in his Last Word interview on Monday. About ten minutes in, the Minister said the following:

There’s no one being bailed out here. Builders have to pay. We’ve already begun to see spectacular crashes among developers. They’re not being bailed out. That is another line of rhetoric we had to listen to for about six months last year, that this was all about bailing out builders. It’s not about bailing out builders and it’s very clear again to anyone who’s reading the newspapers now that it’s not about bailing out builders. Builders who are not paying their debts are going to the wall. That’s what NAMA’s all about.

I think what this misses is that all of the spectacular crashes that we’ve seen so far have come from developers who had the misfortune to borrow money from banks who didn’t get into the NAMA scheme. Perhaps I’ve missed them, but I can’t recall any stories about big developers being closed on by AIB or Bank of Ireland. Indeed, the contrary is the case. Instead there have been stories such as NAMA-bound banks lending Liam Carroll money to pay off unsecured creditors and accepting patently unrealistic business plans in order to give bankrupt developers more rope.

In addition, NAMA’s infamous draft business plan also states that eighty percent of the loans due will be repaid in full, though very little of the repayments will appear until 2013. This is essentially an official statement that NAMA’s officials are planning a program of forbearance for bankrupt developers.  When one factors in the fact that NAMA will have the power to extend further credit to certain developers, the difference between “extreme forbearance plus additional lending”  and “bailout” may appear to be something of a fine line.

All this means that, much as he would like to, it is unlikely that Minister Lenihan will be able to continue dismissing concerns about NAMA’s relationships with developers quite as easily as Matt Cooper allowed him.

When the NAMA bill was being debated in the Dail last Autumn, the public was regularly told that the plan was to have the first tranche of loans transferred by the end of last year. Today’s Sunday Business Post reports that further delays are now expected due to delays in preparations at the banks and due to the absence of clearance from the European Commission. The story reports that a verdict from the Commission may not come until the end of February at the earliest.

Stories such as this and this from the today’s Sunday Tribune also make it clear that it is going to be very difficult to attract private funds to the banks. At this point, it is perhaps a legitimate question to ask whether events have not overtaken the whole NAMA-Long-Term-Economic-Value strategy to keep the banks out of some form of temporary nationalisation.

Standard and Poor’s have again downgraded the Irish banks. The Irish Times story about this is here. The S&P Press releases are here (need to sign up but it’s free.) The reasons for the downgrade of AIB are summarised as follows:

“The negative outlook reflects our view that the quantum and timing of equity raised through recapitalization may not be sufficient to support an ‘A-’  rating, combined with our expectation of significant losses from the remaining loan book and weak operating income as a result of the challenging economic environment,” said Ms. Curtin.

Negative rating action could occur if we consider that AIB’s recapitalization plans for 2010 are insufficient to adequately recapitalize the bank by our measures or are unlikely to be fully executed in 2010. Negative rating action could also occur if earnings pressures exceed our base-case expectations. The outlook could be revised to stable if there was reduced uncertainty regarding AIB’s ability to restore its capital position to an adequate level in the near term, and greater clarity on the strategic direction of the bank and scope of restructuring.

In relation to Bank of Ireland, the press release states:

“The rating action reflects our opinion of BOI’s prospects in light of our updated view on economic and industry risk in the bank’s core markets, together with our expectations regarding future credit losses,” said Standard & Poor’s credit analyst Giles Edwards.

It also factors in our view of the likely impact of its participation in Ireland’s National Asset Management Agency (NAMA) and associated restructuring and capital raising. We have lowered the ratings due to our view that the environment will remain challenging over the medium term and BOI’s financial profile will be weaker than we had previously expected, with capital expected to be only adequate by our measures and the bank continuing to make losses through 2011. 

S&P’s concerns about future loan losses and capital adequacy of both the major Irish banks are likely to be shared by many potential private equity investors.

The troubles of developer Bernard McNamara are receiving a lot of coverage: Stories about it in today’s Irish Times are here, here and here, while McNamara’s interview on RTE yesterday is available here (starts 40 minutes in – hearing him blame professional valuers for him paying too much for the Glass Bottle site was priceless).

It is worth noting that, as with Liam Carroll, the fact that Bernard McNamara borrowed some money from outside the network of NAMA-bound banks (in this case, €62.5 million from clients of Davy’s clients) is the only reason that we are able to see the true state of his finances.

And, of course, these stories raise the following question: Since Carroll and McNamara are hopelessly insolvent, who exactly is going to account for the eighty percent of NAMA’s loans that its business plan tells us will be paying back in full?

Some of you may have always suspected that NAMA will be a body with close links to FF. This appears to be the smoking gun. Indeed, I’d say that this story doesn’t leave mushroom for doubts any more.

Just when it seems like everyone is suffering a pay cut because of the fiscal crisis, along comes a feel-good story like this one.