The IMF versus the 20 Economists?

The Irish Times reports that in today’s Dail debate on the IMF Article 4 report, the Taoiseach said the following

The Opposition has claimed many times that no independent economist supports the Government’s approach to the banks. The IMF is independent, and more expert in advising on banking problems than most commentators, and it supports our approach.

So how out of line is the IMF’s position on banking with other economists who the government has consistently criticised, such as the signatories of the 20 guys Irish Times piece?

Continue reading “The IMF versus the 20 Economists?”

Bad Banks and Recapitalisation

This working paper by Dorothea Schäfer and Klaus F. Zimmermann “Bad Bank(s) and Recapitalization of the Banking Sector” is interesting in the context of the NAMA debate. Paper is here.  Abstract below:

With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value – assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.

Lenihan on the Banks at InterTradeIreland

Thanks to Philip for posting about the video of the the InterTradeIreland event. I was interested in the video footage because Ciaran O’Hagan had, justifiably, raised a question about my post last week about the Minister for Finance’s reported comments at this event. The Irish Times article I pointed to had partially summarised the Minister’s statement and Ciaran questioned whether we could really be sure that they had gotten it right.

Well, having looked at the video, I can say that the Times story accurately reflected what the Minister said. In addition, the Minister’s comments on the banking situation were actually far more interesting than reported by the Times, so I took them down and have repeated them below (on the video these comments start at about 8.50 in).

Continue reading “Lenihan on the Banks at InterTradeIreland”

IMF Report on NAMA and Nationalisation

One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.

Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances …  The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”

Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released.  It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later.  Naturally, however, I was drawn to page 19 of the report:

25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus  preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.

26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.

What do people think? A ringing endorsement of the government’s approach?

More Bad Signs on NAMA

Speaking on RTE’s The Week in Politics (about 16.20 minutes in) Minister for Health, Mary Harney noted repeatedly that NAMA would take on good loans as well as bad loans and then said the following:

This is an important issue. From the good loans they will get cash to run on a break even basis on a day-to-day basis. The ESRI has done a simulation study and they have suggested that over ten to fifteen years this will break even as far as the taxpayer is concerned and that’s the reason as well to take the good loans to raise the cash.

Two aspects of this statement are worrying—the discussion of good loans and the comments about breaking even. Continue reading “More Bad Signs on NAMA”

An Emerging Consensus on NAMA Overpayment?

One of the interesting aspects of the evolving public discussion about NAMA is that economists from the stockbroking community have become increasingly explicit about the fact that NAMA will overpay for its assets.  The latest example was the column in today’s Sunday Tribune by Oliver Gilvarry of Dolmen Stockbrokers.  He suggests that NAMA’s approach to pricing will be as follows:

The haircuts will be determined by what the banks can take without requiring large injections of capital.

Similar predictions have been made in other recent reports by Davys, JP Morgan and others.

Continue reading “An Emerging Consensus on NAMA Overpayment?”

Solvent Green Developers

Every week now, the Sunday newspapers compete with each other for overyhyped stories on the implications of NAMA.  This one from the Sunday Tribune about the plans of a wily group of “solvent developers”  has to be the best so far. Titled “Solvent developers to compete with Nama”, the story goes as follows:

Some of the country’s cash-rich developers are putting together war chests and are planning to compete with the National Asset Management Agency (Nama) when it tries to buy their debts from the bank.

At least two development groups have put funding of between €200m and €300m together as they don’t want their investment property loans in particular transferred to Nama, and hope to be in a position to buy their own loans at a significant discount.

Buying the loans, said a senior industry source, would effectively mean that the developers would take control of the properties at today’s prices rather than ones agreed at the peak of the market.

Most likely, this “plan” is either the product of the overactive imagination of said industry source or perhaps has been misinterpreted by the intrepid Tribune reporter.

Still, if there is any chance that this plan could be put into effect, let me be the first economist to recommend that it be extended beyond developers to the whole Irish public.  I’m solvent and I’d love to get my mortgage cut in half (i.e. buy my loan at a significant discount.)  I’m sure our readers would too. Perhaps we should set up a lobby group and get a senior industry source to brief the Tribune about it?

Note: The Merriam-Webster online dictionary defines solvent as “able to pay all legal debts”.  (I’m assuming the Tribune aren’t referring to the second meaning of the word, which is something “that dissolves or can dissolve” but now that I think about it, I’m not so sure.)

Market versus Economic Values

When the NAMA Project was announced, Peter Bacon discussed the pricing process as follows on Morning Ireland:

Peter Bacon: It will be set by reference to the market. The market, as you know, has fallen dramatically. And I think people have overestimated the difficulties in estimating what these market values are.

John Murray: At the moment there is no market.

Peter Bacon: Well, there is a market.

John Murray: Nothing is selling.

Peter Bacon: For example, in the residential sector, you have monthly indices telling us how house prices have fallen by 1.4% to whatever level. We have information about yields on commercial properties moving out to 8%. I think a lot of people are saying “well, there’s no market” but really what they’re saying is “we don’t like the answer that’s there.”

Continue reading “Market versus Economic Values”

McDonagh and Bacon at Dail Finance Commitee

All you NAMAphiles out there will be interested to know that Peter Bacon and Brendan McDonagh (interim Director of NAMA) appeared today before the Oireachtas Joint Committee on Finance and Public Service. (Updated stories now report that the Minister for Finance also attended.) So set your Sky Plus for Oireachtas Report!  Seriously, though, I will post a link to the full text of the meeting as soon as it is put up. Meanwhile, I can leave you with this interesting excerpt from the Irish Times breaking news report:

Mr McDonagh made a similar point today to the Committee saying: “We believe the Government is basically interested in keeping banks listed and relies on Nama to trigger a change of market sentiment”.

JPMorgan Chase analysts wrote in a note today: “We thus see sizeable chances of a smaller haircut to avoid further capital needs”.

Update: Here‘s the full text of the meeting.

Correction: It turns out that Mr. McDonagh did not say the line that the Irish Times had attributed to him (the updated version of the story no longer contains this quote.)  I had scanned the transcript to see did he say this line, which appeared a strange one to me.  In fact, this line is also an excerpt from the JP Morgan note.  Apologies for misleading readers by relying on our so-called paper of record.

A Prediction Market for Irish Toxic Assets?

Alan Holland of UCC has a paper proposing a prediction market to forecast prices for “toxic assets” to be transferred from Irish banks to the National Asset Management Agency (NAMA).

Abstract below and the full paper is available here.


We propose the development of a prediction market for forecasting prices for ‘toxic assets’ to be transferred from Irish banks to the National Asset Management Agency (NAMA). Such a market allows market participants to assume a stake in a security whose value is tied to a future event. We propose that
securities are created whose value hinges on the transfer amount paid forloans from NAMA to a bank. In essence, bets are accepted on whether the price is higher or lower than a certain quoted figure. The prices of the securities indicate expected transfer costs for toxic assets and they increase or decrease in line with market opinion. Prediction markets offer a proven means of aggregating distributed knowledge pertaining to fair market values in a scalable and transparent manner. They are incentive compatible
(i.e. induce truthful reporting) and robust to strategic manipulation. We propose that a prediction market is run in parallel with the pricing procedure recommended by the European Commission. This procedure need not necessarily take heed of the prediction markets view in all cases but it may offer guidance and a means of anomaly detection. An online prediction market would offer everybody an opportunity to ‘have their say’ in an open and transparent manner.

NAMA Purchases of Good Loans

On today’s RTE Radio News at One, David Murphy made a point about NAMA that I’ve heard many times recently but that I’m having great difficulty understanding.  Murphy explained that the government bonds issued to purchase loans for NAMA would imply a large interest bill and that the idea behind NAMA purchasing good property loans as well as bad was so that the good loans could help to pay the interest on the NAMA bonds.

Let me explain why I don’t understand this.

Continue reading “NAMA Purchases of Good Loans”

FG, Bank Shareholders and Nationalisation

Last night on The Week in Politics, Fine Gael’s Leo Varadkar criticised proposals for nationalisation of the banks on a couple of grounds, one of which was that it “wipes out 300,000 small shareholders.” Later, in describing FG’s plan he said that the new banks created as part of this plan “would buy the good loans off the banks, take the good loans off the banks and set up a clean bank and, by doing that, you then create capital for the old banks and give them some chance of survival.”

Those watching would probably interpret these comments to imply that Fine Gael’s plan does not involve nationalisation and that it would be better for bank shareholders than what has been proposed under nationalisation. In my opinion, neither of these positions are correct.

Continue reading “FG, Bank Shareholders and Nationalisation”

Germany’s Bad Bank Plan

The German government announced a plan last week for dealing with problem assets on the books of its banks.  This plan has been compared favourably to NAMA by a number of Irish commentators but I’m not really sure why.

The essence of the plan, as described by the Wall Street Journal, is as follows

banks will have the option of putting structured products, such as mortgage-backed securities, into special-purpose vehicles at 90% of their present book value, which is often far above the assets’ likely market value if sold today.

In return, the vehicle would give its parent bank a note promising to repay it an equivalent amount in up to 20 years’ time. The German state would guarantee the repayment in exchange for a fee from the bank, which would free up capital by swapping toxic assets for a risk-free note.

In addition, the bank would have to pay the vehicle the difference, spread out over as long as 20 years, between 90% of an asset’s book value and its estimated ultimate value when it matures. If an asset’s ultimate value turns out to be less than auditors’ estimates, the bank will have to pay dividends to the German state instead of to shareholders until the full loss is covered. If assets perform better than expected, the bank gets the upside.

Continue reading “Germany’s Bad Bank Plan”

Thoughts on Fine Gael’s Bank Plan

As Patrick Honohan has noted often in his recent contributions, despite the confusion prevailing in Ireland today about our banking problems, there is wide agreement among banking experts about what constitutes best practice when dealing with banks that are either insolvent or failing to comply with capital adequacy regulations. Regulators seize the bank, place it into administration and the bank’s assets are used to pay off depositors first with bondholders getting paid off if there is anything left.

In our current circumstances, the almost-blanket guarantee on liabilities agreed on September 30 prevents such a solution from being imposed now on the covered Irish banks. I interpret Fine Gael’s new plan as an attempt to achieve an FDIC-style resolution while sticking within the restrictions imposed by the guarantee.

Continue reading “Thoughts on Fine Gael’s Bank Plan”

Text of NAMA Debate

For those who might be interested in the NAMA debates, the full text of all Dail debates can be found here.

Lots of interesting stuff was discussed in last night’s debate but my favourite moment was the Minister for Finance’s perfect invocation of the Baconian equivalence fallacy, complete with brass plate metaphor:

Nationalisation of the whole of the Irish banking system, which is what is being proposed in the motion, will not be the short-term panacea that some envisage. Wholesale nationalisation would do absolutely nothing to resolve to the banks’ bad debt problems and get credit flowing again to support economic recovery and jobs. Nationalisation may change the brass plate, but it does not provide the individual institution with any additional funding or any resolution of the bad debt problems which cripple our financial institutions.

Do We Really Need a NAMA?

While much of the recent media discussion about our banking problems has been framed as NAMA versus nationalisation, this has not been a fair reflection of the debate between economists. My four-point plan and the gang of 20 article explicitly allowed for the idea that a NAMA-like vehicle be used in conjunction with nationalisation.

That said, I’m a little worried now that the public may perceive the case for a NAMA as a slam dunk. My own preference for this approach came from thinking about the alternatives and deciding that the balance of the arguments were in favour of using an Asset Management Company (AMC) in conjunction with nationalisation. Since the NAMA proposals have been introduced, I’ve been getting a bit less enthusiastic about the idea, so I thought I’d write up what I see as the competing arguments for and against an AMC.

Continue reading “Do We Really Need a NAMA?”

Dail debate on NAMA: May 12 and 13

The Labour Party is sponsoring a debate in the Dail on Tuesday and Wednesday evenings this week on NAMA. The motion will call for the temporary nationalisation of the banks covered by the State guarantee.

You may follow the debate live on the web at The times are 7pm to 8.30 pm on both Tuesday and Wednedays evenings this week May 12 and 13th May.

Baseline Scenario on US Banks

With AIB and BOI share prices having quadrupled over the past few months thanks to increased hopes of a NAMA-based bailout from the taxpayer, it is interesting to note the similiarities with how the situation has developed in the US, as outlined in this piece by the Baseline Scenario guys.   On why the administration has not shut down insolvent banks, Johnson and Kwak write:

One reason is that taking over banks has somehow been redefined as “nationalization,” with the images it conjures up of forced confiscation of property. Yet there are no guns involved here. Ordinarily, when an investor puts a large amount of new capital into a bank, it gets some measure of control in return. Yet Treasury has bent over backward to minimize its voting shares, beginning with the initial round of recapitalizations and continuing through the latest Citigroup bailout in February.

Perhaps after fighting off charges of “socialism” from the McCain campaign, the Obama administration is wary of any steps that could be described as nationalization. And so instead of insisting on its well-understood duty to shut down failing banks for the public good, it has tied its hands by taking this option off the table.

Access to Funds for Nationalised Banks

On last night’s RTE News at 9, David Murphy (fresh from an interview with the Minister for Finance) reported his understanding of the government’s thinking on the banks as follows:

It’s had a good long hard look at the two main banks, AIB and Bank of Ireland, and it’s clear AIB has an awful lot of problems and the government may well end up owning 70% of AIB. It did look at nationalising it, I think, and the situation is that if it does go down that road, other lenders in other countries, some of them won’t even lend to banks which are owned by governments. And for that reason, it’s ruled out nationalising AIB.

I am highly sceptical of this line of reasoning.  It is possible that there are financial institutions out there who will (a) Lend directly to the Irish government and (b) Lend to a 70% state-owned bank with a government liability guarantee, and yet who will somehow refuse to consider (c) Lending indirectly to the Irish government via a loan to a 100% state-owned bank.

Continue reading “Access to Funds for Nationalised Banks”

Oireachtas Joint Committee on Finance and the Public Service to discuss NAMA

The Committee will benefit from the expertise of Patrick Honohan and Karl Whelan on Wednesday afternoon: read the announcement here.

Update: Patrick’s introductory presentation is here; text of his introductory remarks here.

Update: Karl’s presentation is here.


On last night’s Prime Time, when asked about nationalisation, Peter Bacon warned that the government would have to buy the privately-held shares and said “they can’t expropriate shareholders’ value.” On the face of it, there isn’t too much to discuss here. I have advocated that the government should purchase the shares at their closing listed stock market value. Indeed, I don’t know any advocate of nationalisation who has suggested “expropriating” valuable shares from those that hold them.

The reason I’m writing about this, however, is that a couple of other people have also mentioned to me lately that they think this legal concern about expropriation is, in fact, the “real reason” why the government is reluctant to nationalise. “Real reasons” according to this line of thinking, are reasons so important that you don’t talk about them to the public.

Continue reading “Expropriation?”

Negative Equity in Ireland

Ronan Lyons reports some striking calculations on the potential extent of negative equity in Ireland.  He estimates that as many as 340,000 homes may be in negative equity, which corresponds to about one home in five.  These calculations raise a number of other important questions.  What fraction of these loans may end up being defaulted on?  And what are the likely losses for the banks?  These losses have not been incorporated into any of the calculations relating to the loans going into NAMA, so these losses will be over and above any losses associated with NAMA transfers.

More Swedish Bank Blogging

Swedish bank blogging is undoubtedly the new craze on the interweb.  I enjoyed this story of the poney-tailed Swedish finance minister scolding Geithner for his plan and the linked-to story dubbing the Swedes “the acknowledged masters of bank rescues” (As an honour, it reminded me a little of when Ireland were the acknowledged masters of Eurovision.)  Charlie Fell also has a nice piece in today’s Irish Times comparing the NAMA plan with what happened in Sweden.

Continue reading “More Swedish Bank Blogging”