Tag: NAMA

Non-Anglo Haircut is What Matters for Taxpayer

I flagged this last night but, going by the discussion we’re having at the previous thread, I think it’s worth saying a bit louder. The only thing that matters for assessing the potential cost to the taxpayer of NAMA overpayment is the average haircut on non-Anglo loans. Anglo is a nationalised bank and this transaction is one arm of the state paying another arm of the state.

So we simply do not know right now the extent to which the taxpayer may be exposed. Nor should stock markets really know how to react to this information when valuing AIB and BOI, unless they have been supplied with information that we don’t have. However, the “cowboy factor” makes it likely that the discounts applied to Anglo (and perhaps EBS and INBS) will be greater than those for AIB and BOI. So I’d be pretty confident that the haircuts for these banks will be less than the 30% average.

We know that the markets were expecting something like “the stockbroker scenario” involving a discount of about one-quarter (the stockbrokers gradually increased their estimated haircut over the past few months as irresponsible, mischievous, destabilising and opinionated economists lead a public fuss about the price to be paid for the assets).

Can we be sure that the average haircut of 30% announced today implies a larger haircut for the two main banks than was anticipated? Well we know that AIB and BOI are transferring €40 billion in book value loans to NAMA. A discount of a quarter would imply payment of €30 billion. Since we are paying €54 billion for the loans, this would imply paying €24 billion for the remaining €37 billion in loans which would be an average haircut of 35%. That seems perfectly plausible to me.

So, as regards the future of our two main banks, I don’t think we know any more than we did this morning. And yes fellow NAMA anoraks, the failure to announce any details about the two types of bonds is incredibly annoying and, frankly, hard to justify on any grounds that I can think of.

Update: AIB telling media that the discount on their €24 billion of assets (€17 billion in land and development) will be less than the average discount of 30% and that they will only need to raise €2 billion. AIB shares up 26% in after-hours trading in New York. BOI up 16%.

NAMA Details

NAMA background documentation here. No announcements about average haircuts for AIB and BOI and how much of the average 30% discount is in the Anglo loans. Very disappointing.

NAMA From Heaven?

Fianna Fail Deputy Sean Fleming appeared on RTE’s Six-One News last night and said the following:

There’s a lot of confusion on this. NAMA … The banks … This money is being borrowed from the European Central Bank. The taxpayer is not contributing any of this money tomorrow. The European Central Bank is providing all the money and all that has to happen is that during the ten years of NAMA or thereabouts, they will repay those loans back.

Today, Minister Willie O’Dea appeared on Morning Ireland and said:

The ECB have undertaken to make these bonds available to NAMA at one and a half percent.

Appearing on the same program, Fine Gael’s George Lee objected to this statement as being false, so Minister O’Dea rephrased his position as:

The ECB has agreed to give NAMA money … If the ECB disagreed so fundamentally, as George Lee suggested, with the plan, then they wouldn’t be prepared to come up with the money.

I suggest to our readers that the following are facts:

  1. NAMA will purchase loans from the banks with bonds backed by the Irish taxpayer.
  2. The Irish government, in the form of NAMA, will be paying interest on these bonds to the Irish banks at an initial rate of approximately 1.5 pecent.
  3. The ECB is not lending NAMA money at 1.5 percent.
  4. The ECB is not lending NAMA money at all as to do so would violate the EU Treaty’s prohibition of monetary financing of government. (Click here and read Article 101.)
  5. The ECB’s current operating rules mean that it will lend to any bank that has eligible collateral and government-backed bonds are eligible collateral
  6. The taxpayer is contributing the money to pay for the NAMA assets because the taxpayer will have to pay the interest and the principle on these bonds.

I would be interested in finding out does any contributor to this site think that any of the above statements are not facts. Anyone wanting to read an earlier description from this site of the relationship between NAMA, the banks and the ECB can click here.

(Beyond facts, I would point out that to argue that the taxpayer is not contributing money to buy NAMA assets is equivalent to arguing that the taxpayer is not liable for the public sector pay bill because this is being paid for by IOUs.)

Now ask youself. Are Deputy Fleming and Minister O’Dea (both highly trained accountants) unaware of these basic facts about the operation of the most important government financial decision in the history of the state? Or are they aware and deliberately peddling inaccuracies about how NAMA will work?

Then ask youself: Which scenario are you more comfortable with?

Desmond’s Proposal for the Banks

Dermot Desmond has put forward an interesting alternative proposal to NAMA. You can read it here. Essentially, the proposal is for the Irish government to guarantee €60 billion in bonds issued by the banks themselves subject to various conditions such as the payment of a fee to the government, disallowing dividends to paid while the guarantee is outstanding and, importantly, allowing the government the right to purchase the banks for €1 in ten years time if the guaranteed obligations cannot be paid back. The banks are then given time to sort out their bad loan problems via setting up their own internal “bad banks.”

I think this is an interesting proposal and I wish that we could have had a better public debate involving proposals like this at an earlier stage. That said, let me put forwards a few (hopefully constructive) criticisms.

  1. Why does the amount of issued bonds have to be as high as €60 billion? This figure has been arrived at as a guess of the long-term economic value of assets being transferred to NAMA. If these assets are not being transferred, where does this figure come in to it?  To return to an earlier discussion, it seems highly unlikely that the banks would use €60 billion in fresh funding to make new loans. More likely, if they were able to issue bonds of this amount, they would use it to reduce their dependence on the ECB.
  2. Who will buy these bonds? I’m sure Mr. Desmond realises that, without NAMA or some other major intervention by the Irish government, the banks could not raise this kind of funding. This is why he is suggesting the government guarantee. But this effectively implies the issuance of €60 billion in debts that are viewed as quasi-sovereign obligations. Is there the market out there to purchase this much Irish government-backed debt? My understanding of the government’s position is that it’s partly driven by an assessment that the answer to this question is no. This is why they are directly issuing government bonds to the banks, which the banks can use in repo operations at the ECB. The NAMA plan does not involve direct issuance of large amounts of quasi-sovereign debt to the market all at one time.
  3. The proposal does nothing to recapitalise the banking system, focusing instead on liquidity problems. If, as many suspect, our main banks are either insolvent (or close to it) without NAMA’s intervention, then Desmond’s plan would leave us with undercapitalised banks given a ten year sentence to get themselves sorted out. This seems like a recipe for zombie banks with an incentive to restrict credit and get risk-weighted assets down as a way of returning to solvency. The ten-year Damacles sword will incentivize the banks to use retained earnings to pay off the guaranteed bonds rather than expand assets. Not a pretty picture.

Desmond’s main objection to nationalisation is that nationalising all the banks would lead to an uncompetitive banking sector. However, it may be possible to adopt a hybrid approach in which some banks are nationalised, recapitalised and then privatised, while others are perhaps given the type of liquidity help that Mr. Desmond envisages. One thing should be clear, however: Any coherent plan for our banking system must focus on its recapitalisation.

The Night Before

Since the Morgan Kelly thread is spiralling towards a Night Before the Big Event discussion, I thought I’d give our readers a dedicated pre-NAMA thread to hang out in.

Brian Lucey has posted his prediction:

My prediction for tomorrow:  55b regular (blue) NAMA bonds, max 5b subordinated (purple) NAMA-bonds to purchase low 80s of book value; we may get to know the bond issue more clearly – expect to hear that the bonds are being issued on 12-18m rollover basis, and that subbies are very longdated.

I’m not sure I can disagree too much with that but I do hope it’s wrong both on total payment (too high) and the amount of sub bonds issued (too low). Part of the point of the lobbying effort that I and others have put in has been to get the government to avoid such an outcome, so I’d be disappointed if that came to pass.

A couple of other bits of pre-match punditry:

1. Don’t focus on the average haircut. That will include the haircut on Anglo loans which is one hand of government paying another, so it has no implications for the taxpayer. Focus instead on the haircuts for BOI and (in particular) AIB.

2. Let’s hope we can get some proper evidence on the original value of the collateral put up for the loans being acquired—the commonly-cited though theoretical €120 billion figure for the original collateral value underlying the equally theoretical €90 billion in loans. Without convincing evidence for this figure, claims that we should add 25 percent to get at the discount being applied to original value of the collateral should be interpreted with a huge dollop of salt. Ideally, I would also like to see evidence provided on the amount of rolled-up interest in the loans being purchased as well as any reduction in net equity due to cross-collaterisation. Claims that this information is “commercially sensitive” should be countered by proposals that detailed, convincing, information could be provided to the main opposition spokesmen.

3. Full detailed information about both types of bonds should be revealed including the exact circumstances under which the NAMA subordinated debt will not pay off and the maturity and coupon formula for the regular bonds.

4.  Look for full details of planned recapitalisations to be announced. We should know by tomorrow what rates of regulatory capital the government intends for the banks after the NAMA transfer.

Anything else?