Saturday, August 22, 2009

Orwellian Doublespeak: Cowen and NAMA

Reading the latest statement of Taoiseach Brian Cowen that NAMA was being established on the best international advice I cant help thinking that Orwellian doublespeak is creeping into Irish reality.

White is black , black is white , misinforamtion is truth and NO ALTERNATIVE is the solution.
Overpaying is called discount to "long term economic value".
"International advice" is selective quoting of what the IMF says.

But the IMF says that NAMA is part of a solution FOLLOWING nationalisation , and yet Cowen selectively quotes only the bit that says that NAMA is part of the solution , forgetting that its the second element of a plan that requires first nationalisation.

"RecentFund 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 sheet sand pave the way to sales back to the private sector.”6 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"

As for the European commission , they say that the transfer of assets should be at prices close to the "real value" and that somehow is equated to this bogus notion of "long term economic value" that the government is trying to sell us.

PS Orwell actually used the terms doublethink and newspeak, but merging them you can get

Thursday, August 20, 2009

NAMA, FT and the IMF

Martina Devlin (of the "Ship of dreams", "The hollow heart" and "Temptation" fame, puts pen to paper again to support NAMA.

There is a lot of hot air in there, but I ll just concentrate on the idea that the FT (yes the Financial Times!!!) and the IMF have endorsed the NAMA plan.

I think you will agree with me that an endorsement of the NAMA by the FT is marginally more credible than turkeys voting for Christmas (hint: they don't!)
FT is a owned by a company that tries to sell papers to investors traders and the like, so you
would have hardly expected FT to say to their readership that they are toast if they have invested in the insolvent Irish banks (not good for business to piss off your readers)

As per the IMF endorsement, the Orwellian propaganda really excels itself here.
IMF explicitly says that NAMA only follows a nationalisation in order to avoid the pricing issue.

I wonder where did Ms Devlin got her ideas to write this piece!

Monday, August 17, 2009

An alternative proposal to NAMA

I want to outline here a possible alternative to NAMA and try to answer a number of objections that supporters of NAMA put.

Temporary State ownership first with a NAMA type structure to receive and fund the bad loans until their eventual disposal over time.

Non-Guaranteed Subordinated debt holders participate in the absorption of some of the capital losses via debt exchanges (debt for debt ).Partial compensation of shareholders through the issuance of well out of the money warrants. Losses would therefore borne by the taxpayer, the equity holders and the bond holders together.

Basic premise.

Irish banks are severely undercapitalised due to bad loan losses and therefore need to be freed of these losses, be recapitalised and grow again.
The losses are real, but who shoulders these losses is very important. In the proposed legislation the losses are significantly paid by the taxpayer. In the alternative solution of nationalisation +NAMA the losses are shared with the shareholders and the bondholders.

This is a more fair solution that is a least as efficient as NAMA in addressing the problems.

Common Objections to Nationalisation.
Nationalisation simply means a change in the ownership of the bad loans:
Yes it does, and this is exactly the intention!
With NAMA the taxpayer will have the downside (the losses).
With nationalisation the taxpayer will be the owner of the banks and therefore when the banks return to profitability the taxpayer will have the upside as well.
This is a strictly superior solution to NAMA alone

Nationalisation does absolutely nothing about the bad loans
The losses on these loans are real, they are not going away either way and nobody is denying these facts.
However, after nationalisation the bad loans will be segregated into a NAMA type structure and the rest of the bank will be allowed to operate unencumbered by them. This is the so called Swedish model, and this is the model that the IMF is suggesting as well.
The sequence of events is critical: Nationalisation occurs before the setting up of NAMA, not after.

Nationalisation doesn't guarantee any free flow of credit.
Neither does NAMA, does it?
But nationalisation has the advantage that safeguards the interest of the taxpayer through ownership of the banks.
It therefore seems to me that Nationalisation (plus NAMA) is a strictly superior choice to NAMA alone.

With NAMA, valuations are not yet decided and will have to be decided in accordance with European Commission guidance.
A number of points here:
A) NAMA will pay more than the current market price: This is not speculation, this is in the Bill. (Paragraph 58).
This by definition introduces ambiguity and disagreement
I might consider that the current market value is unduly low, and you might think that the projections of the "long term economic value” are unrealistically high.
If we can have a mechanism that helps us avoid this disagreement, then we can avoid the risk of overpaying or underpaying.
The IMF solution (nationalisation first and then NAMA) explicitly addresses this issue:
"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."
To me this is unambiguously superior solution, and a much less contentious one.

b) "In accordance with European Commission guidance": This might provide cover on the legality of the proposed legislation but does not address the issue of the efficiency of the solution nor the issue of the potential superiority of an alternative solution.
Moreover, the European commission talks about the real economic value of the bad assets.
But does this mean the so called “long term economic value” or the current market price?
It seems that NAMA supporters all of a sudden have converted to the “markets are irrational” mantra, conveniently so...

Nationalised banks are prone to political interference
This is a very funny line of attack by the opponents of nationalisation that always point out that the main weakness of a nationalized bank is political interference and the politicization of the credit provision.
The question that needs to be asked of the government and the supporters of NAMA is the following: "Is the political class in Ireland able to set up a nationalised bank at an arms-length relationship to the government?”
If the answer is no, isn’t this an admission that the government and the whole Irish political class is corrupt? Isn’t there a question of its own legitimacy then?
If a Fianna Fail TD claims that nationalised banks are political and corrupt, then isn’t this an own goal of huge proportions?

The government has given a guarantee to all bank liabilities, so we can’t ask the bondholders to share the losses.
This is partially true and misleading for a very precise reason.
The government has given a temporary guarantee that expires on 29th September 2010.
Under the alternative solution (Nationalisation + NAMA) all bank liabilities maturing before that day will be repaid. Under no conditions will the Irish State default on any of its obligations.
There are over 30 billion of bond issued by Irish banks maturing after the expiration of the guarantee.(Though some of them are covered bonds that cannot be involved in a debt restructuring).
Why shouldn't the holders of these bonds asked to share the burden?

The international capital markets will react badly to a nationalisation and will raise the cost of funding for the Irish government.
Not true!
The cost of funds for the Irish government rose dramatically when the state guarantee was given in September. When international market saw that the Irish government was taking over a liability of tens of billions of euro they become jittery and stopped lending to Ireland at low rates.

We have already seen evidence that international bondholders have come to terms with the prospect of realizing partial losses on their Irish bank bond holdings. We have seen a good take up of the discounted debt buybacks offered by the Irish banks, which effectively crystallised losses for these investors. The fear that international bond investors will not return to the Irish bond market is grossly overstated by the government. The attempted solutions to this crisis vary between countries and are still evolving – the idea that bondholders should share some of the pain is not a new discussion.

If now the government reverses course and says that not all of these losses will be paid by the state and that some will be paid by the bondholders of the Irish banks, then the credit strength of the Irish government will improve and our cost of borrowing should actually fall.
It’s time to stop the scaremongering by people that have a vested interest in having bondholders get away for free and have taxpayers pay all the losses.
I have been in the international capital markets for over 15 years and I strongly believe that the Irish state will be much better off if it asks bondholders to contribute to the losses.

A word of history to and this long post

When AIB inherited huge liabilities in the Eighties after it bought the Insurance Corporation of Ireland (ICI), the State took over ICI and bailed out AIB and ensured that their depositors' money was not put at risk. However, to see that this was made possible an insurance levy was applied to every insurance premium taken out in the country. The levy was just 2%, but it still exists today. We are still paying for the estimated IR£180 Million + bailout after 27 years.

AT the time, our then Taoiseach, Charlie Haughey had this to say:
"It would be an absurdity, an unacceptable injustice and totally ridiculous if the general public, the great majority of whom have never benefited one iota from banking profits and many of whom have had very unhappy experiences at the hands of bankers, were asked to step in and take up an additional burden because of someone else's mistakes, mistakes made in this very specially privileged sector of our economy."


Write to your TD campaign gaining speed

Good news from the Tribune.

It seems that TDs are finally noticing that people dont want NAMA to happen.

But what I find infuriating is that some FF and government members still call this an anonymous campaign!
There are 3900 people with their names and pictures on Facebook

It shows how detached and insular out TDs are: they are shocked that the Irish citizen calls them to order , and they want to present that as some sort of shady campaign against what really?

Paranoia and siege mentality of the guilty?

Sunday, August 16, 2009

What the Canadian Bank interest in AIB tells us about NAMA

On Thursday it was announced that CIBC has an interest in buying a stake AIB but only after the NAMA clear out has gone through. The media heralded the CIBC interest as proof that NAMA is the right course of action. This conclusion could not be further from the truth. What does CIBCs interest in AIB tell us about NAMA? It tells us what we should already know at this stage, the taxpayer is going to massively overpay for severely impaired assets, and hence incur instant losses and be on the hook thereafter. Whilst bank stakeholders old and potential new ones are left with a clean slate and only upside exposure.

Let us be clear on this, CIBC does not want to buy a stake in AIB today at just over 2 euro. They want to buy it after the taxpayers pay a ludicrous price for the banks worst performing assets. AIB in an integral part of Ireland's banking system and it will be again be profitable in the future. AIB, stripped of its worst assets for more than they are worth, makes AIB at 2 euro be a spectacular proposition for any investor. Of course, CIBC are interested! CIBC have practically zero downside in taking a stake in AIB after the asset transfer, practically zero. It is both shocking and laughable that the media interpret this as a massive positive shift in sentiment of foreign investors towards Ireland. We as taxpayers are being asked to pay a massive premium so private investors can have a free option on the viable and profitable parts of our banking sector.

There is no denying that action needs to be taken on our banks and there is no denying that this will incur a cost to the taxpayer. However shouldn’t it be the taxpayer as the entity that is lumbered with all the risk, be the ones who get opportunity to recoup some of their losses through ownership of the banks? Why is temporary nationalization of our banks NOT being proposed by our government? Surely this should have been the natural conculsion of our government if they want to minimize the absolute cost to the taxpayer. Again and again our government shows a clear preference toward protecting the interest of a small few bank stakeholders over the current and future health of our nation.

Thursday, August 13, 2009

Huge Positive Development againt NAMA

A special convention has been requested by 4 constituencies within the Green party to re examine the party’s stance on NAMA.
A party source was quoted today saying the aim was to alter or stop NAMA in its tracks and put forward a motion to demand a no vote from green TDS.
IF the vote goes ahead a two thirds majority will be required for it to succeed and Green TDs will be ordered to vote No To NAMA.
More on this later

Wednesday, August 12, 2009

Liam Carroll and NAMA

The Supreme court yesterday rejected the attempts of a group of companies controlled by Liam Carroll to get court protection from their creditors, and now there is a risk that a liquidation will follow.

Nobody seems to know what will happen next and how the different players will act ( the government, the banks , ACC Bank).

However one thing is clear: the propaganda has already started.

A spokesperson for the Minister of Finance said that the decision will have no effect on NAMA, without giving any more explanations.

RTE in their reporting yesterday evening are already speculating on a number of things.
One is the possibility that the main Carroll creditors ( essentially AIB and BOI) will pay off ACC and then get on with the plan to stuff NAMA with another 2.8 billion of bad loans( this is the total amount that the Carroll group has borrowed).

It is quite amazing to imagine that AIB which is owed over 500 million by Carroll will pay off another bank first , just with the intention of stuffing NAMA then. Indeed if this were to happen it would be a clear proof that the banks will roll over these losses to NAMA.

Even more extraordinary was the idea that the people responsible for the liquidation of the Carroll group "when appointed [..]might decide that it might be better off to wait for NAMA, that they might get a better deal"!!
This is a clear admission that NAMA will pay OVER THE ODDS for worthless assets!

And then the inevitable scaremongering followed, that if Liam Carroll's property portfolio is liquidated there will be sever repercussions for the property market, again implying that NAMA is the only way to avoid the pain.

This is an utterly false reporting , NAMA will just take the losses from the banks and give them to all of us, but the losses are real and no amount of accounting trickery can avoid reality.

This type of reporting and scaremongering is what keeps people from reacting to NAMA, in the hope that someone else will pay for the mess. The reality is that we will all pay for the mess , unless if we demand that the people responsible pay and these are the banks , the bank stakeholders and the developers.