Today’s op-ed column in the Irish Independent by Martina Devlin (or perhaps that should be MarTINA Devlin) is worth commenting on because it’s essentially a one-stop-shop for all the arguments we will be hearing over the next few weeks about the need to pass the NAMA legislation and to do so quickly. The article features a host of misleading arguments.
Page 15 of the draft NAMA legislation tells us that the definition of a “credit facility” includes instruments such as “a hedging or derivative facility.” Section 56, starting on page 46, then defines eligible assets for purchase by NAMA as a range of different types of “credit facilities” as well as “any other class of bank asset the acquisition of which, in the opinion of the Minister, is necessary for the purposes of this Act.”
In theory, this allows NAMA to purchase derivatives from the banks. And indeed, it turns out that they are doing so. Click here to find a tender notice issued yesterday for “a Derivatives Valuation Service Provider to provide valuation services (the “Services”) in respect of derivatives positions which will be transferred to NAMA.”
Part of the work of the service provider will be as follows:
Determine derivatives’ valuations based on market-accepted methodologies and market rates. Valuations will incorporate adjustments which will be based on the creditworthiness of the derivatives’ counterparties and which will be specified in guidelines agreed by NAMA with the service provider.
Today’s Sunday Business Post carries two interesting opinion pieces. Alan Ahearne writes a defence of the NAMA approach (you can read it here), while Colm McCarthy recommends an inquiry into the banking crisis (you can read it here). The latter suggestion has been adopted elsewhere (for example, in Iceland).
I’ve been reading some funny stuff in the Sunday newspapers about how those who oppose the current NAMA plan are in favour of having a big fire sale of property assets. I’m not sure if anyone has ever proposed this as an alternative to NAMA (it would be interesting to know if any of the prominent NAMA critics have.) But since I’m generally associated with NAMA criticism, I thought I’d clarify that I certainly have never suggested this.
For instance, in the four point plan article I put forward in April, I proposed that after nationalisation of our two main banks the government could “set up a State asset management company to sell these assets over time to attempt to recoup as much as possible. “Over time” means over time, not an instant firesale. And an “attempt to recoup as much as possible” most likely would imply a careful sequencing of sales. But, of course, being in favour selling the assets over time in a careful sequencing is still consistent with starting to sell some of them soon.
Perhaps what’s going here is that there’s a (deliberate?) mixing up of the idea of transferring loans to NAMA at low prices with the idea of having a property firesale. I guess there may be people who think that calls to wipe out the bank shareholders via the losses incurred with the NAMA purchases and then nationalise (not my preferred sequencing, mind you) rely somehow on writing down development loans at Carroll-liquidation levels.
This is not all the case, however. AIB, for instance, have €24 billion in development assets alone and €8 billion in core equity capital. So one doesn’t need to rely on Carroll-liquidation levels of discounts on loans to conclude that this bank is insolvent.
Indeed, the current debate about “the right price” to transfer the assets illustrates a highly unfortunate aspect of the government’s plan that had been flagged by critics all along, which is that the pricing on transfer was always going to be incredibly controversial.
A plan involving nationalisation, an asset management company and a stake for the bank shareholders in the AMC (as proposed by Patrick Honohan) would allow for the banking system to be quickly placed on a sound footing and shareholders to be treated fairly without having to rely on the wisdom of Solomon to decide the right price at which the assets should be transferred. But, of course, that is an alternative and as we know now, There Is No Alternative.