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What price to pay for distressed assets?

by Frank Schnittger Wed Aug 26th, 2009 at 09:49:05 AM EST

The debate on NAMA, the National Assets Management Agency, or "bad bank" is hotting up in Ireland with the chief concerns centring on the price the state is going to pay for the distressed assets to be acquired from the Irish banks by the state on behalf of the taxpayer.  My own Letter to the Editor on the topic was published by the Irish Times, and now 46 Irish economists have added their voice to the debate.

The leader of the Opposition, Enda Kenny, says FG will fight Nama in Dáil vote - The Irish Times - Sat, Aug 22, 2009

Mr Kenny said "the whole Nama gamble is fundamentally unfair and unwise. It transfers responsibility for dealing with toxic loans from the banks who made them, and the investors who funded them, to the Irish taxpayer. Many professional investors that fuelled the crisis by recklessly giving tens of billion of euros to the banks without proper due diligence could walk away scot-free at the expense of the taxpayer."

His party instead favoured setting up "a good bank", with a credit facility of up to €20 billion. This "National Recovery Bank" would have no toxic assets and so could lend to small businesses at reasonable rates, he said.

Fine Gael would also nationalise banks that, by September 2010, when the current Government guarantee ends, had failed to strengthen their balance sheets. Bad assets would then be removed from such banks and be placed in a completely separate property management company, he said.

"This would not be owned by the taxpayers, like Nama, but by existing investors and bondholders. The banks, freed of their bad assets and the claims of their bondholders, would then trade as normal, with little or no impact on their retail customers or employees," he said.


The Minister for Finance criticised the Opposition proposal as not being serious...The Irish Times - Sun, Aug 23, 2009

"I'm very disappointed by the reaction of Enda Kenny because he hasn't put forward a viable alternative to Nama".

He said he had received a 'very constructive' letter from Labour's finance spokeswoman Joan Burton outlining her concerns about the establishment of the agency and how they could be addressed.

"But I don't see that note in what Enda Kenny said and I find his proposal in relation to setting up some new bank very strange," he told RTE Radio. "I think we need a far more realistic debate from Fine Gael on what the real problems facing the banking sector in the country are."

Mr Lenihan said the prospect of a collapse of the Irish banking sector had to be addressed or it could lead to a 'financial tsunami'.

However, in a statement issued this afternoon, Mr Varadkar said that Fianna Fáil "does not want a serious debate on the solution" to the banking crisis and described Nama as a 'gamble' which he said was 'fundamentally unfair and unwise'.

"Once again, it is their strategy to rubbish and abuse anyone who disagrees with their policies. We saw this before when they responded to Fine Gael's concerns about the property market, the banks and public finances by accusing us of talking the economy down and being unpatriotic," Mr Varadkar said.

"Nama is a €90 billion "double or quits" gamble by Fianna Fáil on the property market. A €22,500 bet for every man, woman and child in this country. Almost twenty years after the bursting of their own property bubble, Japanese property prices are still 50% below peak levels."

Mr Varadkar warned that "Many professional investors that fuelled the crisis by recklessly giving tens of billions of Euros to the banks without proper due diligence, could walk away scot-free at the expense of the taxpayers."

Both the opposition Labour party and the Government coalition partners, the Greens, have also voiced their concerns...
Nama not backed by public - Gilmore - The Irish Times - Tue, Aug 25, 2009

Labour Party leader Eamon Gilmore yesterday claimed that the Government does not enjoy popular public support for its controversial plans to establish the National Asset Management Agency (Nama).

Mr Gilmore said public opposition to Nama was "growing by the day", and again urged the Government to adopt his party's alternative proposal to temporarily nationalise the banks.

The intervention by the Labour Party leader came as Green Party chairman Dan Boyle said on Sunday that his party's support for Nama was not a given.

He said the Green Party leadership would have to respect the views and decisions of its membership at the two meetings it will convene on the legislation, in September and in October.

If the Greens oppose the legislation, the Government will most likely fall, as the Government majority has already been imperilled by the resignation of several Fianna Fail backbenchers from the party whip.

However the concerted criticism by 46 independent economists is likely to be the most damaging to the Governments case: Nama set to shift wealth to lenders and developers - The Irish Times - Wed, Aug 26, 2009

A number of proposals have been put forward which would avoid this in whole or in part and which would, we argue, be at least as effective as Nama in laying the ground for such a banking system. These models have been well discussed through a variety of blogs on the web and in the mainstream media.

All share a number of key characteristics.

First, they work from the premise that those that have invested in risky capital in the banks (the shareholders and bondholders) must accept that the value of their asset is gravely impaired. At a minimum the equity element of the Irish banks, were they required to take on any significant part of the losses made in speculative lending, would be wiped out.

Second, they propose that certain classes of bondholders also be required to accept reductions in value. It is probable that the losses of the banks are such that even eliminating all equity value would not absorb said losses. Unlike the equity, most of the bonds are in great part covered by the 2008 State guarantee. However, the vast majority of this debt matures outside the September 2010 expiry date for this guarantee.

So the Government is in a strong position, if it chooses, to negotiate with bondholders to engage in some debt for equity swaps.

This on its own, however, is still unlikely to provide sufficient capital for the banks to operate without State support in an international environment that now demands far higher levels of capital than prevailed prior to the crisis.

Consequently the third element is that the State, on a temporary basis, becomes the pre-eminent shareholder in the banks, working swiftly to float a reorganised banking system anew. Alternative proposals have different "twists" to them. But the essence is that all three contain the three points mentioned above. Thus, to say that there is no alternative to Nama is incorrect.

We therefore urge the Government to reconsider its approach to payment for loans to be taken into Nama, to pay no more than current market value - which can be ascertained even in these times - and to require the investors in the banks to bear some of the cost of restructuring the system. Moreover, we also argue that the Government should not burden the State with more debt than is absolutely required.

A Government advisor reacted to this article by criticising the numbers used...Adviser criticises Nama 'guess' - The Irish Times - Wed, Aug 26, 2009

A special economic adviser to Minster for Finance Brian Lenihan has said a call by 46 economists for the National Asset Management (Nama) project to be reconsidered was based on a "careless use of numbers".

Economist Alan Ahearne said a claim by 46 economists that the Government will pay significantly above market value for the bad loans advanced by the banks and would end up buying loans with a true value of €30 billion was a "terrible estimate, [a] guess".

"The problem I have with the article is that it comes up with this valuation for the loans. They have put a value on what they think the loans are worth, of €30 billion."

Before any estimate can be made valuers need to know where the property on which the loan was secured was located, the original purchase price, the extent of borrower equity and the ability of the borrower to make repayments.

Dr Ahearne said Nama must, following EU guidelines, value each loan separately. "The idea that someone sitting in an Ivory tower with no information can come up with a number is ludicrous."

He said loans worth €90 billion - the amount of loans Nama is expected take on - would have purchased property worth €120 billion. Even assuming a 50 per cent fall in property values since the peak of the market would bring the value of the loans to €60, rather than the €30 billion suggested in the article, he said on RTÉ's Morning Ireland .

Agencies such as the IMF and other had estimated overall losses to the Irish banking system over three years of €35 billion, rather than the €60 billion suggested in the article.

"The amount of money paid for these loans will not assume, as it says in the article, optimistic assumptions for property prices.

Green Government Minister, Eamonn Ryan, also criticised the economists: Ryan denies cuts to fund Nama - The Irish Times - Wed, Aug 26, 2009

Minister Ryan said developers, speculators and bankers would pay for Nama.

"The taxpayers' job in this is not to bail them out, is not to provide any support to speculative decisions that were wrong," he told RTÉ.

"Our job is to get the economy working again and we have, with the assistance of the European Central Bank, the mechanism with which we can do that."

Commenting on today's article in The Irish Times by 46 economists who called for the Nama project to be reconsidered, Mr Ryan said:

"They should have been there been there five years ago or four years ago "when the real economic mistakes were being made in terms of a property bubble and a macro economic policy that actually should have been different."

"I wish they'd actually come out at that time and said that we need to be doing things differently," he added.

Ah yes, if you don't like the criticism, try to undermine the credibility of the critics.  It has to be said though that he has a point.  The Irish Economic academic establishment did not exactly cover itself in glory during the property bubble years, and the Green Party was not in power at the time...

Perversely, the Bank's share prices have actually risen today as the article by 46 economists was being published.  Private investors are evidently unfazed by the growing clamour to nationalise the banks and prevent them from off-loading their bad loans at taxpayers expense.

What is clear is that the summer recess has meant that the Government has lost control of the debate and that increasing authoritative and influential voices are proposing alternative approaches.  This combined with the MSM pre-occupation with green shoots in the World economy and stock market rallies makes the existing Nama proposals increasingly vulnerable to amendment if not wholesale dismissal.

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The Minister for Finance criticised the Opposition proposal as not being serious...

The unserious Opposition proposal sounds quite a lot like what the rightist Swedish government did back in the early 90's crisis.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Aug 26th, 2009 at 10:08:54 AM EST
Ideologically, Fine Gael would be quite conservative and not above some opportunistic populist opposition to the Government Nama proposals.  Creating a "good bank" rather than a "bad bank" could be little more than a PR advisor's idea.  What their opposition shows, however, is that opposition from both right and left is hardening to the Nama proposals, and that a range of alternatives - centring on investors/bondholders shouldering more of the risk - are becoming part of the political narrative.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 26th, 2009 at 10:19:34 AM EST
[ Parent ]
His party instead favoured setting up "a good bank", with a credit facility of up to €20 billion. This "National Recovery Bank" would have no toxic assets and so could lend to small businesses at reasonable rates, he said.

It is somewhere between gratifying and amusing to see a conservative Irish political party putting forth a proposal so similar to what I proposed eleven months ago for the US.  At the very least it should get money from the banking sector flowing in increased quantities to Fine Gael.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 26th, 2009 at 06:04:50 PM EST
[ Parent ]
The Government is making a great play of the fact that the IMF etc. and serious people internationally support their proposals.  hy wouldn't they - if it is international bond holders who are being bailed out.

Their idea that bondholders/shareholders should continue to own the bad assets in Nama is also somewhat similar to Chris' idea of a debt equity swap.  At least we are having a real debate about real political/financial issues.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 26th, 2009 at 06:48:28 PM EST
[ Parent ]
I should have said Fibe Gael's idea of a debt equity swap for bondholders - which runs counter to the Government's proposals of the taxpayer taking on all the risk.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 26th, 2009 at 06:50:36 PM EST
[ Parent ]
The danger here is that the Government will find some way to extend the guarantee to the bondholders, presuming that they indeed are the clients of said bondholders.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 26th, 2009 at 07:05:42 PM EST
[ Parent ]
The bondholders have already been guaranteed... see my LTE referenced in first paragraph

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 26th, 2009 at 07:14:31 PM EST
[ Parent ]
Sorry, I intended to refer to the banks, whose guarantee runs out in 2010.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Aug 26th, 2009 at 07:36:11 PM EST
[ Parent ]
I think the bondholder guarantee also runs out in 2010 - which raises the possibility of a debt/equity swap at that stage.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Aug 27th, 2009 at 05:28:51 AM EST
[ Parent ]
As you know, I believe it is possible to execute what is essentially a debt/equity swap within a NAMA consisting of a corporate framework agreement, as opposed to the NAMA organisation currently envisaged.

The outcome would be that there would be no "price" paid since there would be no sale transaction. Instead, the banks would give up their existing rights as secured debtors and receive in exchange undated rights (eg billionths) in a "pool" of land/property rentals.

Such Units would then be a perfect long term low risk investment eg for pension funds. I could email you something - maybe a long'ish LTE - in the next day or two?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Aug 26th, 2009 at 03:10:19 PM EST
Please do.  We are at a point where the debate is very fluid and receptive to new ideas... especially if they can be presented as a lower risk, pragmatic, non ideological solution...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Aug 26th, 2009 at 06:42:25 PM EST
[ Parent ]
Don't fracking pay for distressed assets. Put the bankrupt financial firm in receivership, find the liabilities that you want to be able to discharge to keep the economy running, put enough good assets in place, starting with the firm's, to back those assets. If there aren't enough good assets, make it good with sovereign debt and take a preferential charge against the original firm.

Then send the original firm through bankruptcy and let the distressed assets be sold at fire sale prices to whomever wishes to hold them.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Aug 26th, 2009 at 11:08:51 PM EST
If only we could do that!

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Aug 27th, 2009 at 12:41:12 AM EST
[ Parent ]
The obstacle is political, not technical. Those who should be doing it don't want to.

It is being done to smallish banks, though. See the FDIC's failed bank list.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Aug 27th, 2009 at 04:26:37 AM EST
[ Parent ]
This is the way it's always and everywhere been done. Why has it been resisted so universally for the past 2 years? (Yes, two years: the crisis started in June 2007, not in September 2008).

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Thu Aug 27th, 2009 at 04:03:00 AM EST
[ Parent ]


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