Today’s Irish Times contains a head-to-head set of articles from me and Scott Rankin of Davy’s about the NAMA plan.
As is often the case, the articles are accompanied by a weirdly misleading headline—“Will NAMA aid the ailing banks?”. I am listed in the “No” column because I don’t like the NAMA plan. But my problem with this plan is not that it won’t “aid” the ailing banks.
The problem with the banks is under-capitalisation. Of course, any plan that injects enough money can solve this problem by re-capitalising the banks. The relevant question is how is this done and at what cost to the taxpayer—my concern is that this plan may “aid” bank shareholders considerably at the expense of taxpayers. More generally, I hope the Irish financial media will move on from their focus on “Will the plan work?” to examine the question of how it operates.
Scott Rankin’s final sentence is worth a short comment. He writes:
One important point to understand is that if nationalisation is not an option, then the liability to the State from these assets does not necessarily diminish if a bigger haircut is agreed on transfer, that is, if it’s 35 per cent rather than 15 per cent. If Nama achieves a bigger haircut on day one (and hence saving for the taxpayer) this probably means more government capital required to recapitalise the banks.
This argument makes it sounds like the “haircut” (the discount over book value at which the state purchases the bad loans) simply doesn’t matter. One way or another, we need to provide the funds to re-capitalise the banks. But look carefully, folks, is it really the case that the composition of these funds doesn’t matter?
The bad loans will end up returning some concrete amount of money to the state and this amount will be completely independent of the haircut we apply now. The state gains nothing from reducing the haircut by a euro. But it loses a euro of equity capital investment.
And contrary to Scott’s argument, this equity investment is not a “liability” for the state: It is an asset and can be cashed in for a return at a later date. In calculating the long-run cost of this program for the taxpayer, the size of the haircut matters greatly.