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.
BUT
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."


NAMA IS NOT A ONE WAY STREET AND THERE IS A BETTER SOLUTION.