Hard to Deny Now that NAMA is a Developer Rescue Plan

I have been publicly critical of the idea of a “bad bank” plan in which the government overpays for bad assets since a number of months prior to the publication of Peter Bacon’s report. I have consistently objected to the plan on the grounds that it is a bailout of bank shareholders by the government, involving a large direct transfer of funds from the taxpayers to shareholders.

However, at no point have I suggested that NAMA would be a bailout for developers. I have always believed the Minister for Finance’s assurances that the developers who owed money to the Irish taxpayer would be followed to the Gates of Hell in order to get the money back. This, from the Minister’s appearance in August at the Oireachtas Committee on Finance and the Public Service, would be a pretty typical assurance:

The draft legislation also contains a number of provisions which will assist NAMA in its dealings with developers and ensure that every last cent due to the taxpayer is pursued vigorously.

Now, however, we find out how vigorous this pursuit will be. In its draft business plan, NAMA has told the public, and thus property developers, that it expects this vigorous pursuit of the €77 billion that NAMA will be owed to yield principal repayments of €1 billion in 2010 and 2011 and €2.5 billion in 2012. Only in 2013 does NAMA expect the vigorous pursuit to start making real inroads because, at that point, as if by magic, €7.5 billion per year in principal repayments start to pour in.

What this draft plan means is that the developers who owe us €77 billion have just been told that we have no plans to recoup this money any time soon. Effectively, the developers have been told that they can start paying back the money in 2013. Now we’ve been told that NAMA will haul in the developers and look for business plans and the like. However, in light of NAMA’s own business plan, it will be pretty hard for them to quibble with a developer who offers them a plan of “I’ll wait until 2013 and sure things will be grand then.”

It is with great reluctance, then, that I have to say that it’s now pretty hard to see this plan as anything other than a deliberate decision to show extreme forbearance to the property developers who got us into this mess in the first place.

Also, the following is now a fact. This government has told developers that as long as its in office (the latest date for an election is 2012) they will barely have to pay back any money. Interpret this fact how you wish.

NAMA Haven’t Seen Loan Files

From page 2 of the draft NAMA business plan:

It is important to emphasise that much of the information regarding the prospective NAMA portfolio included in this draft Business Plan is based on aggregate data which has been provided by the various institutions. The interim NAMA team has not had direct access to individual transaction records and loan files and will not be in a position to verify the integrity of the data until it carries out its own due diligence on each of the loans proposed for acquisition.

So have any of the famous forms requesting 300 pieces of information on individual loans been filled out? And if they have, where are they? When is whoever is keeping them planning to hand them over to NAMA?

NAMA Business Plan Default Rate Assumptions

NAMA’s draft business plan has many bizarre aspects. Chief among them, however, is the claim that only 20% of the loans purchased by NAMA will default, with the other 80% of loans eventually paying off in full. The plan justifies this as follows:

Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made.

Fianna Fail TD Frank Fahey on Morning Ireland stated that the UK bank in question was Barclays and that this comparison means that the 20% default rate assumption was “prudent” and “conservative” and “much bigger than it needs to be.”

So the argument here is that because the default rate on Barclays’s total loan book in the 1990s was less than 10%, this means that it’s ok to assume that the default rate on NAMA’s assets will only be 20%.

I think this is perhaps the most odious comparison we have heard yet in the NAMA debate. The Barclay’s loan book being referred to (its “whole book”) included all sorts of loans with low average default rates. However, the NAMA loan book is a selected class of assets—property and development loans—specifically chosen because the losses on these loans are so large they are threatening the solvency of the Irish banking system.

The reasoning underlying the default rate assumption is akin to asserting that because only 10 percent of men are taller than six foot, it’s reasonable to assume that no more than 20 percent of a basketball team will be taller than six foot.

The fact is that NAMA only exists because this particular class of assets is performing so badly that a radical state intervention is being planned to save the banks that made these loans. Perhaps I missed it, but I don’t recall such interventions being planned in relation to the total loan books of UK banks in the 1990s.

The bottom line here is that it is patently clear that far more than 20% of these loans will fail to be paid back in full.  That this claim can be released to the public in the expectation of being taken seriously is an indication that we have really moved into cloud-cuckoo territory.

As an aside, I’d note that Fahey also stated that the banks “were borrowing the money at 1.5%”. This is the famous 1.5% that is the initial interest rate that the government is paying to the banks. Yet again, we see another example of government spokesmen who don’t even understand the basic mechanics of NAMA in the sense of who is lending money to whom and at what rate.

NAMA Business Plan

NAMA has released a draft business plan. It is a truly extraordinary document. To summarise, those who thought that NAMA would largely be a property fund—closing on delinquent developers and selling on the assets—are wrong. It appears that NAMA’s game plan is to wait a few years and then the vast majority of the developers will be able to pay back their loans in full.

Among the highlights:

  1. NAMA is assumed to make a net profit of €5.48 billion by the end of its anticipated lifetime of ten years.
  2. However, contrary to the million times that we have been told that NAMA will “wash its face” on an ongoing basis, it is projected that NAMA will pay out €16 billion in interest payments on its debt but will receive €12 billion in interest income on the loans acquired.
  3. In addition, fees and expenses will add up to €2.64 billion over ten years.
  4. The profit of €5.48 billion stems from NAMA recouping payments of €66.1 billion from loan repayments and asset recoveries to pay off the €54 billion in loans issued.
  5. Interestingly, from Table 5’s cash flow projections, the only year in which NAMA is not projected to lose money on an income flow basis is 2010 when an interest outflow of €1.3 billion will be offset by interest income of, em, €1.3 billion. Table 7’s “budget projections” attempts to show that NAMA will make a profit in 2010-2012. The difference between this and Table 5 is “The interest income projections in this table include the impact of contractual rolled-up interest on land and development loans in addition to interest income from cash flow-producing assets.” So any “profit” reported will be of a phantom variety.
  6. From Page 10: “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%). Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made. It is also assumed that €4 billion will be realised from the sale of underlying assets secured by the defaulting loans of €15 billion. These are conservative and prudent assumptions.” Yes you read that right. 80% of the loans will be repaid in full.
  7. The 80% who pay back their loans will be in no rush to do so. Repayments will be €1 billion next year and the year after, €2.5 billion in 2012. Then in 2013 (after the next election!) the loan repayments will start arriving in buckets—€7.5 billion every year.
  8. What if more than 20% of the loans can’t be paid back? The document tells us: “Stress-testing of this assumption indicates that the default rate would have to increase to 31% to erode in full NAMA’s projected Net Present Value gain of €4.8 billion.” Feel better now?
  9. NAMA will acquire €14.6 billion in derivatives positions, mainly interest rate swaps.
  10. By the turn of the year, NAMA will only have taken on 10 loans with a total value of €16 billion.
  11. NAMA’s potential new lending: “NAMA will inherit any commitments entered into by the banks as far as the drawdown of funds is concerned; it is estimated that undrawn commitments on loans transferring to NAMA are of the order of €6.5 billion.” This exceeds the €5 billion limit placed on it in the legislation. The document says “the limit can be adjusted by order of the Minister and Resolution of the Dáil, thus ensuring parliamentary accountability for borrowing levels.”

Anyone in the Green Party up for a revote?

When The Levy Breaks

When the levee breaks, I’ll have no place to stay.
Mean old levee taught me to weep and moan,
Lord, mean old levee taught me to weep and moan

Source.

The new Programme for Government document contains the government’s last approach to convincing the Greens, and to a lesser extent the general public, that NAMA will not be a costly exercise for the tax payer: A commitment to include a post-dated levy in the NAMA legislation.

I’ll try to boil the problems I see with this approach down to four observations.

Continue reading “When The Levy Breaks”

Greens Against NAMA Youtube Videos

The Greens Against Nama group have released a number of videos featuring interviews with various people who disagree with the Nama proposals. Link here. It looks like they may have more to upload but thus far there are a number of interesting interviews with people such as Ronan Lyons, Shane Ross and Peter Mathews, a former banker with ICC and currently an independent banking and property consultant.

Lenihan on Stiglitz

At Trinity College last night, Joe Stiglitz repeated his criticism of NAMA. The Irish Times reports:

He said Nama is likely to “burden this generation for 25-50 years or more. I am very uncomfortable with a government with such a minority support making such a decision.”

He said the view there is no alternative is “just wrong”.

“There is an alternative. Play by the rules of capitalism – if you can’t pay back your debt, shareholders and bondholders lose. If the Government puts in money, it needs to get control commensurate with the money put in. It also should get a return proportionate to the risk involved – in this case, it’s a big risk.”

The Minister for Finance has responded to Stiglitz’s criticisms. According to Bloomberg:

Lenihan pointed to the U.S. as an example of a rescue package that was attacked before succeeding.

“I simply do not accept his analysis,” Lenihan said. “As far as Professor Stiglitz is concerned, he made the same criticism of the U.S. bank package, which is now proved to be a tremendous success.”

Of course, the US TARP bank package, which Minister Lenihan is referring to as a tremendous success, started life like NAMA as a plan to overpay for troubled assets but was changed to become a plan in which the US government made equity investments in the leading financial institutions.

Stiglitz has argued that the terms of the TARP equity investments were insufficiently generous to the US taxpayer—see here for a report from TARP’s Congressional Oversight Panel which endorses this viewpoint. It would be misleading, however, to characterise the Stiglitz’s criticisms of TARP as being directly related to his views on NAMA. On this issue, see here for an interview with Joe from Feburary in which, among other things, he discusses proposals then being floated for the US government to purchase bad assets—he characterises Paulson’s orginal TARP plan as “cash for trash”.

TARP and Lending

I have noted before that even if one sets aside issues relating to fairness and cost to the Irish taxpayer, I don’t believe that NAMA will achieve what the government states is its purpose, namely “getting credit flowing again.”

In this context, it is interesting to see that there is a debate this week in the US, prompted by this government report, which focuses on, among other things, whether TARP increased lending at assisted institutions. Chicago’s Casey Mulligan writes about it here.

The report’s conclusions, on page 30, noted that there were US government officials who had concerns about the health of some of the banks being assisted and that statements that TARP was going to get lending going again created “unrealistic expectations.”

James Kwak of Baseline Scenario responds here that the politicians knew full well that TARP probably wouldn’t increase lending—that it was more an emergency measure to keep the banking system afloat—and that these claims were made simply to obtain the necessary political support for an unpopular measure. Sound familiar?

IT Article on NAMA

With the Lisbon debate now over bar the voting and counting, I’m hoping that despite widespread exhaustion with the topic of NAMA, we can now have a debate about this issue that doesn’t involve misleading spin about IOUs, free money from the ECB, support from international organisations and the like. It’s with that in mind that I have written this article for today’s Irish Times.

Reading it now, the tone seems a bit more strident than my usual approach but I think it’s important that misleading spin be seen for what it is so that we can return the focus to the basic questions of correctly diagnosing the problems with our banking sector and designing fair and efficient ways to deal with them.

For that reason, I don’t plan to engage in a comment-fest here on the various distractions that have been been central elements of the government’s PR campaign on NAMA. If you don’t agree with me about free money, IOUs, ECB, international organisations, or frogs and locusts, fine, but I’ve said my piece on these and don’t see much benefit from repeating myself any more.

Bloomberg Article on NAMA

Thanks to commenter Blake for flagging this article from Bloomberg about the NAMA plan.

The reference in the article to the original US Trouble Asset Relief Plan (TARP) is a useful one in light of our current public debate and one that I’ve thought about blogging about a few times lately. It is indeed the case that US Treasury Secretary Hank Paulson wanted to use large amounts of US taxpayers money to purchase distressed assets from US banks, an idea that sounds a lot like NAMA. However, the US Treasury ended up deciding that a better approach was to use the funds to purchase equity stakes in banks for the taxpayer. There were various criticisms at the time that the terms of these equity purchases were too generous to exisiting shareholders but it seems now as though many of these deals will provide a decent return to the US government.

There are, of course, numerous difficulties in comparing bank rescue schemes across time and place but I think the TARP story is still instructive.

Many Questions Remain About NAMA

I know we’re all suffering from NAMA fatigue and I’m not sure I have it in me to write too many more posts on it. Still, I do want to flag that, independent of arguments about the merits of the plan or not, it is extraordinary how little we have been told about how the plan is going to work or about the basis for the estimates released last week. I don’t have time to get into it all but here’s a list of unanswered questions.

Continue reading “Many Questions Remain About NAMA”

Publicly-Owned Banks and the ECB

Commenter MM highlighted this article from Saturday’s Irish Times by John Kelly and Eunan King as an interesting argument in favour of the government’s current approach towards the banks and against nationalising banks. The Kelly-King duo wrote that an

advantage of the proposed Nama model is that keeping most of the banks as stock market entities enables the ECB to fund part of the Irish Government’s deficit, in a manner that provides the veneer that the central bank is not buying government bonds directly.

This is a practice prohibited under the rules governing the establishment of the ECB, because it amounts to the central bank simply printing money to finance Government spending.

I do not believe that this argument is correct. The clause in the European Treaty prohibiting monetary financing is Article 101 of the Consolidated Treaty of European Union (link here). This has two paragraphs and they read as follows:

1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions.

So while Paragraph 1 rules out the ECB giving loan facilities to, or purchasing bonds from, national governments, Paragraph 2 explicitly states that this does not apply to publicly owned credit institutions. As such, lending to nationalised banks does not break the prohibition on monetary financing.

Furthermore, even under the NAMA plan no central bank is “buying govenment bonds directly”. Rather, what is being proposed—whether we have a stand-alone NAMA or a NAMA used in conjunction with nationalisation of some banks—is using these bonds as collateral for loans from the ECB.

Jurgen Stark on ECB Operations

Here‘s an interesting speech from ECB Executive Board member Jurgen Stark about the plan for an exit strategy from the current non-standard operational framework.  Two quotes stand out for me:

As regards our area of responsibility, we are well prepared to phase out the measures we took in response to the crisis. The way these measures were implemented provides us with reasonable flexibility in unwinding them. For example, unless we decide otherwise, the maturity and size of our operations will automatically decrease, starting next year.

And, more interestingly,

It is therefore crucial to monitor the sources of funding constraints for banks. We need to judge whether these funding constraints relate to individual banks rather than to the functioning of the money market and the banking system as a whole. Our operational framework is not designed to counter funding problems at the individual bank level. Rather, our funding support is designed to alleviate funding risk to the extent that it is systemic.

Guest Post: Donal O’Mahony on NAMA

After a somewhat unsatisfactory appearance together on Prime Time last week, in which we got to share fourteen minutes of airtime with a trade union leader and a property developer, I asked Donal O’Mahony (Global Strategist with Davy’s) if he was interested in writing a guest post on NAMA for this blog. Donal agreed and his post is below the fold.

Continue reading “Guest Post: Donal O’Mahony on NAMA”

NAMA Bond Yield Formula Finally Revealed

Finally, and only after questioning prompted by Brian Lucey’s earlier appearance on Morning Ireland, the Minister for Finance decided it was appropriate to let us know exactly what type of bond he was issuing with €51.3 billion of our money. The regular NAMA bonds will be issued with a six-month rollover period with an interest rate set at a half percent above the ECB’s main refinancing rate. This ECB rate is now one percent but there is general agreement that it will rise over the next few years (click here for historical values).

It should be clear now that there is nothing especially good for the Irish taxpayer about the current low yield on these bonds. At a time of low short-interest rates, it can always appear as though one is saving money by borrowing short and rolling over this short-term debt. However, because bond market participants aren’t stupid, long-term rates are determined with reference to this short-term rollover strategy, so there is no “free lunch” from issuing short-dated rather than longer-dated bonds. (Here are my own teaching notes on this issue.)

Those who think that the NAMA bonds are an especially good deal for the taxpayer might also note that the government is currently able to borrow at a six month duration at a rate of 0.5 percent—the yield on the latest six-month NTMA Treasury Bill auction. The extra amount being paid on the NAMA bonds can be justified as reflecting the higher sovereign default risk associated with longer dated debt.

I would note also that, given the relatively unremarkable nature of these bonds, any claims that their current low rate reflects some sort of special deal with the ECB—claims I never understood—need to be retired from circulation.

In relation to NAMA “washing its face” (it was washing its hands on Morning Ireland earlier—perhaps because of swine flu) there is no reason to expect the coming ECB interest rate hikes to generate corresponding increases in income from the 40% of NAMA assets that are generating income, so claims NAMA will always break even on an income basis appear to have little basis in reality.

Of course, we still don’t know anything yet about the maturity of these bonds. Or about the yield on the €2.7 billion in subordinated bonds. Or about the exact conditions under which the subordinated bonds will fail to pay off—though statements that they will pay off as long as property prices bounce back by 15% suggests that, as I had feared, the definition of “NAMA making a profit” will exclude interest costs.

But hey, Pat McCardle still reckons it’s all a secret EU conspiracy, so who am I to disagree? Perhaps Pat might enlighten us as to what changes the ECB have made to their current operational procedures to accomodate NAMA. Perhaps not.

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 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?

The Green Preferendum: Cod or Fish?

The Irish Times has the details of the Green Party preferendum.

1) Nama with strong Green Party policy conditions and only current market values being paid for transferred loans: 23 per cent;

2) The “Swedish solution” with each institution forced to write down its loan book to current market values and the possibility of separate asset management companies for individual banks: 20-21 per cent;

3) A free-market, laissez-faire approach, with banks left to fend for themselves: 14-15 per cent;

4) The Nama legislation in its present form: 13 per cent;

5) Partial nationalisation, with a “good bank” to assist small and medium enterprises: 12-13 per cent;

6) Full nationalisation: 12 per cent.

One can only imagine what subsequent ownership structure was envisaged by the Green Party faithful who voted for (1) and (2).

Rumour has it, the menu for dinner in Athlone was:

1) Chicken

2) Cod

3) Haddock

4) Sea Bass

5) Salmon

6) Fish

Hardly anybody picked option 6.

Gift Horses and The Taxpayer’s Pocket

With only a couple of days to go before the key details are announced, it seems to me that confusion over the role of the ECB has now become a central feature of most journalistic discussions of NAMA (I’ll pass on speculating as to why this is the case). Take this paragraph from an op-ed on the Greens in today’s Irish Times by Deaglan de Breadun:

A key point was that the European Central Bank is prepared to provide €60 billion on favourable terms to assist the Nama process. Moreover, the more pragmatic element in the party is reluctant to look this particular gift-horse in the mouth, especially since it will not be coming from the taxpayer’s pocket.

Is the fact that NAMA is being paid for by the issuance of Irish government bonds really so hard to understand? Even the role that the ECB is playing in the process—which I discussed here—isn’t really so complicated.

Moreover, doesn’t anyone find it strange that the same people who worry night and day about the government budget deficit—the issuance of €400 million in IOUs per week—and tell us that large cuts are necessary because of it, then regularly tell us that we don’t need to worry about the costs of NAMA because it just involves printing IOUs?

One might as well say that deficit financing spending is a fantastic idea (a gift-horse from the bond market!) because it doesn’t come from the taxpayer’s pocket.

Will NAMA Get Credit Flowing?

I have spent a lot of time arguing that, among the set of options available to us to put the Irish banking system back on track, the current NAMA proposals represent an approach that is unacceptably costly to the taxpayer. The sense I get back from those who defend these proposals is that, yes this may be risky for the taxpayer but that the risk is worth it because NAMA is going to “get credit flowing in the economy again.”

Forgetting for a minute the questions of cost or fairness, I would argue that there is little reason to think that the current NAMA proposals will achieve this goal over the next few years.

Continue reading “Will NAMA Get Credit Flowing?”