Tag: Nationalisation

Lenihan Not Anticipating Further Nationalisations

Minister Lenihan has returned from his holidays to talk about NAMA on RTE’s This Week. I’m not sure much new was revealed from this interview. On the key question of what will happen with the major banks, the Minister argues that only “some allowance” will be incorporated for long-term economic value while at the same time he says “we don’t anticipate nationalising any other institutions in their entirety”.

To see what this means in practice, consider AIB. This bank has property-related loans of €48 billion, half of this being development loans. It is widely reported that €30 billion of these loans will be transferred to NAMA. The bank has private core tier 1 capital of about €8 billion. So the minister is saying that he is not anticipating a discount for AIB as high as 27 percent (because 27 percent of €30 billion is €8 billion.) 

Given what we know about the current financial situation of Irish property developers, the haircuts envisaged by the Minister appear to rely on a very substantial recovery in property values. And yet the Minister also rules out purchasing assets at multiples of their current market value, so I don’t see how the various comments here hang together.

It would be interesting to know on what basis the Minister’s anticipations about NAMA transfer values have been formulated. And since the people doing the mysterious long-term economic value calculations all work for the Minister, it is reasonable to ask how likely it is that these people can back out the right answer as to what the average haircut needs to be to fit with the Minister’s anticipated outcome.

Of course, this could all be a bait and switch, and the main banks could end up being nationalised. However, the spin suggests otherwise. The Minister’s latest comments contained a series of misleading remarks about nationalisation.

For instance, Minister Lenihan blames the cost to the taxpayer of re-capitalising Anglo on the fact that the bank was nationalised, rather than on his decision to guarantee almost all of Anglo’s liabilities last September. In relation to AIB or BOI, the implication is that the cost of sorting them out would be higher if we don’t overpay for the assets to keep them in private ownership. There are arguments worth airing against nationalisation but this just isn’t one of them. As long as the guarantee is kept in place, these banks need to be recapitalised, most likely by the state. Doing so by overpaying for assets rather than by getting an equity share really doesn’t save money.

An unnamed foreign country that nationalised its banks, leading to disaster, was mentioned by the Minister. I’m guessing the country the Minister has in mind is Iceland. Minister Lenihan may think a decision to nationalise the banks was the cause of Iceland’s problems. I’d wonder though.

Government Banking Policy Based on Best International Advice?

The Taoiseach has emerged to defend the government’s banking proposals. He has been reported as saying:

The proposal we have brought forward is on the basis of the best international advice, including the European Commission and the International Monetary Fund, and we are doing this in consultation with the European Central Bank.

Invoking international support for their approach has been a key element in the government’s PR strategy in recent months. However, these comments seem to me to confuse the actual roles being played by the various international organisations referred to.

Continue reading “Government Banking Policy Based on Best International Advice?”

NAMA Critics Want Firesales?

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.

Canadian Enthusiasm for NAMA? Mountie Move Rules Out Nationalisation?

On various lunchtime news reports today, I heard commentators discussing how today’s announcement of Canadian interest in acquiring a stake in AIB was a sign of international confidence in NAMA and helped to rule out nationalisation, and about how this is good news for current shareholders.

It has now been reported that the bank in question appears to be Royal Bank of Canada. This would be the very same Royal Bank of Canada whose Capital Markets Division yesterday released a report including the following statements:

Irish banks are in a vegetative state, in our view. Earnings power is in atrophy and free capital to unsecured debt holders is low to non-existent. Allied Irish (AIB), Anglo Irish (ANGIRI) and Bank of Ireland (BKIR) appear to be on ECB life-support. All non-guaranteed debt holders are effectively subordinated to the ECB. The NAMA proposal alone is insufficient to address the business model challenges facing the banks. As such, all non-guaranteed debt-holders are at substantial risk of uncertainty regarding the requirements of the NAMA proposal, distressed exchanges and potential nationalizations.

And this:

Irish banks are on ECB life-support and the ECB may decide their fate, in our view. The ECB appears to be acting as the lender of last resort for the Irish banks as their funding models have collapsed. This lending is well overcollateralized. Liquidity generated by NAMA may be used to repay ECB borrowings, limiting its benefit to the wider economy. Nationalization could keep the ECB in the game and allow more liquidity to remain in Ireland.

And this:

NAMA alone may not restart lending, other actions could be required. Distressed senior debt exchanges may assist in recapitalizing the banking system. Irish Nationwide’s offer to exchange senior debt at a discount to par for Irish government guaranteed debt adds a new twist to bank recapitalization.

Perhaps those reporters preparing to explain this story to the Irish public this weekend might rely on statements from the horse’s mouth rather than speculating about what RBC might be thinking about NAMA or the prospects of nationalisation. 

While RBC’s interest in purchasing a stake is being taken as a sign that AIB isn’t going to be nationalised, RBC’s own report into the Irish banks says they are likely to be nationalised and that bond-holders are also likely to take a hit. A fairer reading of this story would seem to be that RBC are only going to be interested in buying into AIB after it has been nationalised.

Note — Bloomberg story on RBC Capital Markets report is here. 

Update: Well this story just gets messier. Despite the Indo reporting RBC as the interested bank, I did phrase it as “appears to be” rather than “is” because you can never trust this kind of reporting. Indeed, RTE are now claiming the bank in question is Canadian Imperial Bank of Commerce. Of course, it is perfectly possible that CIBC have a completely different assessment of the Irish banking system than RBC but somehow I doubt it.

NAMA and Subsequent Private Equity Investment

Today’s Irish Times lead story on potential interest from a Canadian bank in taking a stake in AIB raises some important issues.  These are being well covered already in some comments at the end of the Carroll thread just below but I think they’re also worth hoisting up to the front page.

Continue reading “NAMA and Subsequent Private Equity Investment”