Mr. Keenan and Political Economy

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 Secrets from the NAMA Temple

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 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

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.

Lenihan Says NAMA Will Stop Houses Prices Falling

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.

The World’s Slowest Recap: A Cunning Plan?

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.

Today in LTEV Mysteries

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.