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."



  1. you just know what's going to happen with nama... in the medium term, certain developers, financiers or other investors will pick off attractive NAMA/state assets by "making an offer" to NAMA who will be enouraged to reduce its asset base and turn over these "bad assets". I would not be surprised if there are future scandals and dodgy dealings around this. politicians and pundits will argue that as the economy is picking up, we need to loosen state ownership, give the private sector a chance, get what we can for the nama assets and start paying back the EBU debt. i can see it coming,.

  2. The problem we are trying to solve is supposedly the poor availability of credit and the effect it will have on legitimate businesses.

    Just use the NAMA money to underpin a new bank run by the state.

    Leave the existing banks (private businesses who made billions in profits over the last few years) to sort out their own mess.

  3. Tony,

    Brian Lenihan has said that the money to fund NAMA will come from the ECB.

    NAMA will issue bonds back by the "full faith & credit" of the Republic of Ireland.

    NAMA will swap those bonds for the toxic loans currently on the books of the selected banks.

    The selected banks will deposit those bonds with the ECB in esxchange for cash.

    The ECB WILL NOT provide money for a New Bank. The ECB do not want any bank in Europe to fail. They can't handel it.

    The ECB is part of the problem.


  5. I don't see why this country cannot launch an arms-length, highly efficient, Semi-State Bank in direct and vigorous competition with the "private" bankster cabal.

    Screw the ECB. And the bloody EU for that matter.

  6. Anonymous said...

    August 19, 2009 7:35 PM

    We don't have our own currency.

    The ECB will not allow the creation of a "New Bank". By definition it would mean the liquidation of the existing banks.

    All deposits would flow to the New Bank.

    Get it?

    The ECB is the problem. They are driving this.

    They will give money for NAMA backed by the Irish Citezen/Taxpayer.

    They will NOT give money to any scheme which would liquidate the existing system.

  7. Yes, you are right about the ECB and what they might or might not "allow". That's why I said screw em ;-)

    The EU in general "won't allow" us do a lot of things, and its intention is to "not allow" us do even more things.

    NAMA will be a State Bank in everything but name - as you rightly point out: "backed by the Irish Citizen/Taxpayer" - BUT with both arms tied behind its back because of EU 'directives'. The lack of 'commercial' clout that that implies is probably the main reason NAMA is a catastrophic idea; a sitting duck to be picked off at will, with the resulting losses picked up by the the same said citizen/taxpayers.

    I cannot see how the existing system would be liquidated by the existence of a proper state bank. After all, the logic they are putting out is that once their toxic debt is removed, banksters will once again become active and 'competitive' etc. So let's level the pitch and see them do just that!

  8. “screw em”

    I’m inclined to agree.

    Maybe I misinterpreted what you said. I presumed that setting up a Semi-State Bank would exclude the use of NAMA.

    If it does then deposits will flow from the Zombie Banks to the Semi-State Bank.

    Game over for the Zombie Banks.

    If the Semi-State Bank is in addition to NAMA where does the money come from to capitalise the Semi-State. We can't print it.

  9. Let the ECB save these private companies if they want.

    If we follow the pure free market dogma that was gold before the crisis the state should not get involved in trying to support private firms (See 'Save Waterford Crystal with State Money' debate from a couple of years ago).

    The lack of funding problem and what should be done with the toxic debts and banks are to separate problems.

    We can address the funding problem by creating new private or state banks. That's how the market deals with a need. New ventures come in to fill it. See this link.

    There is no need to keep existing private banks who can't survive without help from the state. Even after NAMA these companies will have huge problems and may still fail. We have been told for years that if taxi drivers or farmers can't survive without state help they should be let fail and the people involved should do something else.

    I don't believe all of the banks will fail anyway. They have traded for an year now since all this broke.


  10. Tony,

    “We can address the funding problem by creating new private or state banks. That's how the market deals with a need. New ventures come in to fill it.”

    “Taylor Wessing is advising on a project that could see the launch of a new lending bank. The top 30 UK firm is advising six unnamed corporates that are backing the project, which has been put together as a result of of the difficulties companies are facing in obtaining finance in the current climate.“

    I agree a New Bank (State or Private) has the advantage of not being encumbered by the legacy of incompetent and (possibly) fraudulent practice.

    However, I don’t see any appetite from the private side to do this. I think it would already have been done (or in progress) given that BofI and AIB are zombies without the backing of Fianna Fail and the Green Party.

    That just leaves the State. Fianna Fail & The Greens have made up their mind on what will happen. I don’t think the Greens have the backbone to do the right thing and vote against the essence of NAMA.

    For clarity, the essence of NAMA is f**k the Citizen (even those not yet born) and the taxpayer.

  11. Hi, its me again - Must get me a name!

    I don't think its necessarily set in stone that deposits would inevitably flow from Zombie Bank Inc to State Bank Inc. Apart from a state guarantee, (which could be sold at a premium as is the current case), the major influence should surely be the rate of return? With Zombies freed of their Zomb, and thus enabled to lend productively, wouldn't we expect lean/fit competitiveness to prevail in holding on to deposits?

    On the other side, whether we call it 60bn or 90bn, (and it doesn't really matter - pick a number and sound serious) the NAMA Department of a State Bank would be in possession of real tangible fixed assets - land, buildings etc. History tells us that no matter how bad any recession has ever been 'at the time', such assets invariably appreciate over time. Too often we undervalue the TIME factor in the old [Interest = Principal x TIME x Rate /100] formula. So, which international big-boy investor would turn down the opportunity of, say, a 10-15 year State-Tangible-Asset-Backed Bank Bond [STABBB!] - say, also, in several recurring issues at 5-year intervals, as just one means of raising new capital? And think of the new job prospects and other income streams available to the new carefully managed Irish State-Bank Investment Portfolio!

    The real crux in all of this is not capital, but time. I am reminded of my poor sainted father, who 45 years ago was living in a state of shock because he had bought a house, and to do it he had had to take out a mortgage of £450. QED ;-)

  12. Anonymous said...

    @ August 20, 2009 12:02 AM

    Yes getting a nom de plume would be useful. Otherwise I have to address each “Anonymous” by the time line. And while I am sure it is not you but some Anonymous are in fact Anonymice.

    “I don't think it’s necessarily set in stone that deposits would inevitably flow from Zombie Bank Inc to State Bank Inc.”

    I did not set it in stone. You did. How do I know that not knowing anything about you?

    Once you (the depositor) realise that the guarantee is useless funds will flow at a rate that would make the runs on banks in the 1930’s blush.

    A “New Bank” by definition means that the State will rescind the guarantee. You must agree this. Otherwise there is no point in setting up a new bank. Do I have to explain that?

    By the way, when the Dail & Senate passed the “Credit Institutions (Financial Support) Bill 2008” they did so while being misled by the then and current Minister of Finance. He said that there was a “liquidity crisis” and told the Dail that the banks were solvent. So, he either lied or he was ignorant, and remains ignorant, of the truth.

    This was never a liquidity crisis, it was, is and will always be a solvency crisis. These zombie banks are bankrupt. The debt must die. What Cowen, Lenihan and Gormley are doing is throwing this cadaver into your drinking well.

    You have to drink from that well, as do you children and your grandchildren.

    How does your water taste when there’s a stinking corpse in it?

    Brian Lenihan had better hope he was ignorant when he described this as a liquidity crisis. If he was not ignorant he is guilty of misleading the Dail to the point of Treason.

    Either way the Dail & Senate were mislead.

    AND, then the Three Chief Clowns/Fraudsters (Cowen, Lenihan, Gormley) did this,

    “Taoiseach Brian Cowen said the extension of the guarantee would "contribute significantly to supporting the funding needs of the bank and securing their continued stability".”

    That, just to make it clear is a perpetual extension of a €490,000,000,000 liability for the State (Citizen/Taxpayer).

    So Anonymous,

    You then say,

    “Apart from a state guarantee, (which could be sold at a premium as is the current case), the major influence should surely be the rate of return? With Zombies freed of their Zomb, and thus enabled to lend productively, wouldn't we expect lean/fit competitiveness to prevail in holding on to deposits?”

    When you say “Apart from the State Guarantee”, do you mean that it doesn’t exist or do you mean that you will hold your nose when you drink from the well?

    The “major influence should surely be the rate of return?”

    Really, are you serious?

    Are return and risk not joined at the hip?

    Of course a Zombie Bank can offer a return if everything it does is back by the “full faith & credit” of the Republic of Ireland.

    Give a second hand car salesman the “full faith & credit” of the Republic of Ireland and he could offer a 10% return on all deposits, and the blow the lot on a “cash for clunkers scheme” just to satisfy his own self interest.

    Get it?

    Then you say “wouldn't we expect lean/fit competitiveness to prevail”

    I don’t wish to be rude, but in what parallel universe is it that competition exists where one side has an endless supply of money?

  13. Now look here "Wellington", that was particularly tetchy and unfair.

    If you are running a blog and inviting comments, presumably so as people can air ideas and discuss things, then what is the point of "talking down" at your contributors and being small-minded by being dismissive?


    "All deposits would flow to the New Bank.
    Get it?" [setting it in stone]

    "Get it?"

    "If it does then deposits will flow from the Zombie Banks to the Semi-State Bank" [setting it in stone]

    "I did not set it in stone. You did. How do I know that not knowing anything about you?" [whatever]

    "How does your water taste when there’s a stinking corpse in it?"

    "Really, are you serious?"

    "Parallel Universe?"


    Bloody lousy out of you.

  14. "If you are running a blog and inviting comments"

    I'm not running this.

    My comments stand.

    Without the Guarantee deposits will flow from the zombies.

    With the Guarantee there's no point in having a new bank as the zombies have an unlimited supply of money on which to undercut their competition.

    My apologies if I upset you.