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Banks holding Ireland to Ransom?

by Frank Schnittger Mon Sep 7th, 2009 at 08:33:12 AM EST

I had a conversation last night with a banker who is doing the preparatory work for handing his bank's loan portfolio over to Nama (the National Asset Management Agency).  He argued that the total book value of the properties which will be handed over to Nama is c. €120 Billion and not the €90 Billion in the popular media which is in fact the value of the loans secured on those assets.  Thus, if the Government were to pay c. €60 Billion for those assets, they would be acquiring them at a 50% discount on their book value.

He further argued that many of the debts being handed over were not in fact distressed at all, and that some of the assets - e.g. well located commercial properties - had not lost all that much in market value to date.  Thus he felt that, depending on the price being paid, the taxpayer could end up doing quite well out of the deal.

He countered my suggestion that the Government was likely to fall over the Nama legislation and that Nama would never therefore happen with the view that, ultimately, the opposition parties would drop their opposition to the legislation as there was no alternative to Nama possible within the time frame for a bank rescue package that had to be achieved.  The government had to take the uncertainty hanging over the banks away before they could start lending to businesses again and the economy could recover.

The Banks are certainly losing no time in upping the ante for the Government by a wholesale withdrawal of overdraft facilities from small businesses which is threatening the survival of even sound businesses who require an ongoing overdraft facility to meet day to day cash flow requirements.   He had no comment to make on my suggestion that there might be a political motivation behind the bank's moves to withdraw essential credit facilities from huge numbers of businesses which have gained much media prominence in recent days.

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I argued that the Greens were unlikely to achieve grass roots approval for the legislation at their forthcoming national conference on the issue and he conceded that, as an ethically based party, they might well reject the measure, even if, as he thought likely, they would be decimated in any election arising.  However he felt that Fine Gael, the main opposition party, would ultimately fold its tent and row in behind a perhaps modified version of the Nama proposals because no party would want to inherit the mess that would be created if Nama failed.

I conceded that my faith in Fine Gael, as a conservative opposition party, was wafer thin, but that they had, for once, shown some backbone in articulating an alternative "good bank" proposal. This focuses on retrieving a functioning banking system from the remains of essentially bankrupt banks, not on buying up their toxic debt. Under this scenario the risk and the losses would not be shared by the taxpayer as ownership of the bad debt/assets would remain with the administrators of the bankrupt banks.

He argued that if the state allowed the banks to go bankrupt then Ireland would never again be able to find foreign creditors willing to fund our national debt (and widening Government deficit) and that the government had, in any case, already guaranteed most of the bondholders of bank paper.

I argued that international investors were used to writing off bad investments and would quickly move on to consider new tenders for funds to meet Ireland's credit requirements in an objective and unsentimental way.  There was simply no precedent for a Government bailing out bondholders and shareholders to the extent proposed, and that international investors did not even expect this.  

My banker friend begged to differ on this point, and argued that shareholders had already lost 90% of their investment and that many of these were either Irish pensioners and small investors who would make life very uncomfortable for the Government, or the national pension fund.  So any money the Government saved at one end, it would lose at the other.

I had to concede that the banks had an incredible stranglehold on Irish commercial and political life and noted my incredulity that, other than losing a Chief Executive or Director or two, there had been no focus on improving the management and cost efficiency of the banks themselves.  He noted that he had personally lost 90% of the value of his bank shares and 30/40% of his earnings which he used to get in the form of bonuses, but conceded that the banks had a huge number of incredibly well paid executives who had made incredibly bad decisions.  Reforms would come in due course, he opined, without sounding entirely convinced or convincing about it.

Meanwhile, today, in the real world, the Irish Times has published the third part of its opinion poll results - on the subject of Nama - and they do not make comforting reading for either the banks or the Government: Just 26% of voters show support for setting up Nama - The Irish Times - Sat, Sep 05, 2009

THE PUBLIC has divided views about the National Asset Management Agency (Nama) plan, with more people against the project than for it, although a substantial number of voters have no opinion, according to the latest Irish Times /TNS mrbi poll.

Asked if they supported the Government's Nama proposal as a way of removing bad loans from the banking system, 26 per cent of voters said they were for it, 40 per cent were against and 34 per cent had no opinion. When asked if they favoured nationalising the banks, 36 per cent said they were for, 38 per cent were against and 25 per cent had no opinion.

The latest poll was taken on Monday and Tuesday of this week among a representative sample of 1,000 voters in face-to-face interviews at 100 sampling points in all 43 constituencies. The margin of error is plus or minus 3 per cent.

A striking feature of the poll is that while Fianna Fáil supporters are the most strongly supportive of Nama, Green Party, supporters are the most strongly against.

Among Fianna Fáil voters, 46 per cent favour Nama, while 26 per cent are against. Among the Greens, 50 per cent are against the plan while only 21 per cent are for it.

Labour supporters are almost as hostile as the Greens, with 47 per cent against and 21 per cent for. Among Fine Gael supporters, 44 per cent are against and 25 per cent for the plan. Among Sinn Féin voters, 37 per cent are against and 24 per cent for.

In terms of social class, the strongest support for Nama comes from the best-off AB and C1 categories, with 32 per cent for and 42 per cent against. The strongest opposition comes from the poorest DE category with 19 per cent for, 39 per cent against and 42 per cent having no opinion. In terms of age groups, the strongest support comes from the 25 to 34-year-olds, while in regional terms voters in the rest of Leinster and Connacht Ulster are significantly more supportive than those in Dublin and Munster.

On the prospect of nationalisation, Green Party voters are even more strongly in favour of that approach than Labour supporters, while Fianna Fáil voters are the most sceptical.

Fifty four per cent of Greens favour nationalisation while 26 per cent oppose it. Among Labour supporters, 48 per cent are in favour but 31 per cent are against. Sinn Féin voters are 43 per cent for and 32 per cent against.

Fine Gael voters are almost evenly divided on nationalisation, with 38 per cent for and 37 per cent against while Fianna Fáil supporters are against by 53 per cent to 31 per cent.

The strongest opposition to nationalisation comes from the best-off AB voters, with 44 per cent against and 40 per cent for while the most support for the proposal comes from the least well off DE category, with 36 per cent for and 35 per cent against.

In age terms, the strongest support is from 35 to 49-year-olds who are in favour of nationalisation by 44 per cent to 36 per cent, while the strongest opposition is found among the over-65s who are against by 40 per cent to 30 per cent.

The poll's findings raise serious issues for the Green Party which will hold a special conference in Athlone in a week's time to consider the Nama legislation. Given the strength of opposition among party voters to the legislation and the support for nationalisation, the Greens' Ministers will have their work cut out to get support for the line they have taken in backing the plan.

For the record, the Labour Party is proposing a nationalisation of the banks as this would avoid the need to put any price on the toxic assets at all.  Taxpayers would essentially inherit both the bank's bad assets and ongoing business and thus stood to gain if business recovered without shelling out c. €60 Billion on assets which - if Japan is any guide - may never recover that level of value again.   Shareholders and some bondholders could be largely wiped out under this proposal, depending on the price paid for the nationalised banks.

The Government (and Fine Gael) is opposed to the nationalisation proposal I suspect largely on commercial grounds: So much of the banks "profits" are dependent on screwing customers on bank charges, threatening foreclosure on their homes, and being very hard-nosed about refusing credit to businesses they think might be a credit risk, that a publicly owned bank could never behave in that way.  Ireland is a very small banking market and there is relatively little choice and competition between banks.  Any prospect of unreformed banks recovering after writing down their bad debts depends on it remaining that way.

So will Nama happen, and what will happen if it does?  My guess is that the Greens will oppose Nama but that the Government may reach an accommodation with Fine Gael whereby there will be some "risk sharing" between bondholders and taxpayers.  Now is not exactly a great time for Fine Gael to return to Government.

But unfortunately, I also don't see Nama working as advertised.  Having put c. €60 Billion at risk in the form of an investment in highly speculative assets - an investment my banker friend stressed would be "off-balance sheet" as if this made it somehow less real - the taxpayer will then be asked to stump up c. €10 Billion in investment in the banks themselves to restore their capital adequacy and "get credit flowing to industry again".

Having done so, the taxpayer will then discover that the bankers are paying themselves huge bonuses again, and that credit is still not flowing to industry as required to underpin an economic recovery.  In the meantime Ireland is saddled with a huge public debt (both on and off balance sheet), ever greater dependence on foreign "investors", and an asset cost and tax base still far too inflated to allow competitiveness to be restored any time soon.

How to undo all the positive aspects of the Celtic Tiger in one easy lesson...  In any case the financial and political elites will have preserved their position and the incremental 10% of the workforce who have lost their jobs, thousands of pensioners who have lost their investments and medical benefits, and the great unwashed who will suffer the €5 Billion p.a. cuts in public services identified by the McCarthy report will simply be the victims of a global recession.

The Irish elite had nothing to do with it.  Honest guv...

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I think that the best that NAMA can do is to stem the haemorrhage of secured credit from the system as the bubble deflates.

What it will not do is lead to increased credit creation, unless and until the income of individuals and enterprises rises, asset prices stabilise, and their solvency (balance sheet) improves.

I believe that this will require systemic fiscal reform.

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

by ChrisCook (cojockathotmaildotcom) on Sat Sep 5th, 2009 at 01:06:35 PM EST
Cowen defends Nama despite poll - The Irish Times - Sat, Sep 05, 2009

Speaking on radio this morning, however, Brian Cowen said: "It's critical that we confront this issue head on, and in a comprehensive way.

"More commentators are coming around to the fact that this is the best way to do it," the Taoiseach said, speaking on Today FM.

However, Fine Gael TD Alan Shatter today said Nama demonstrated the Taoiseach was continuing where he left off as minister for finance.

In a statement today, the frontbencher said it was "high time" the Taoiseach admitted the "catastrophic decisions" he made as minister for finance.

"In reply to a question last night on the Late Late Show with regard to what mistakes he made as Minister for Finance, the Taoiseach stated that `looking back now, we should have taxed housing more than we did.'

"This extraordinary statement proves not only that the Taoiseach has learnt nothing but that he remains in denial of his gross incompetence as Minister for Finance and of his own responsibility for the banking crisis and economic catastrophe that has hit the country," Mr Shatter said.

"His single biggest failure was to ensure we had a proper functioning bank regulatory system that would have prevented a lot of the problems that came after.

"He failed to listen to the advice of those who warned that banks providing between 90 per cent to 100 per cent property loans were creating a housing bubble. He failed to rein in the banks and to listen to warnings being given by our Central Bank, the ESRI and Fine Gael's finance spokesperson, Richard Bruton," Mr Shatter said.

"Tragically for the country, Nama shows that Brian Cowen as Taoiseach is continuing where he left off as Minister for Finance."

Labour leader Eamon Gilmore said there was not public support for what the Government was doing, nor the Government itself.

"Fianna Fáil are now trying to ride against the wishes of the people and trying to force through a strategy . . . which is good for the banks and good for the property developers but is not good for the Irish public and the taxpayer," he said.

Brian Cowen's comment that "More commentators are coming around to the fact that this is the best way to do it," flies in the face of a growing chorus of economists and others against the Nama proposals, but note the Fine Gael front bencher, Alan Shatter's, focus on Cowen's past mistakes rather than focusing on Fine Gael's alternative "good bank" proposal.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 5th, 2009 at 01:14:25 PM EST
Former Fine Gael Leader and Taoiseach Garrett Fitzgerald has supported the Government Nama proposals and now he has been joined by another former Fine Gael leader, Alan Dukes.  It looks like Fine Gael opposition to Nama is weakening and they will eventually accept the proposal with some amendments.

Fine Gael banks plan is 'cumbersome', says Dukes - The Irish Times - Sun, Sep 06, 2009

Ex-Fine Gael leader Alan Dukes has labelled his former party's solution to the banking crisis as "cumbersome".

Speaking today Mr Dukes described the Fine Gael plan of creating recovery banks as "very cumbersome, very doubtful of success and much less clear than the Nama [National Asset Management Agency] proposal."

Mr Dukes said he had "grave doubts about the feasibility of the [Fine Gael] proposal".

He is the second former Fine Gael leader to criticise the party's stance on Nama after former taoiseach Garret FitzGerald warned of dire implications of the Opposition defeating the legislation in the Dáil last week.

Mr Dukes - who was appointed to the board of the nationalised Anglo Irish Bank by the Government - told RTÉ's This Week programme that Nama is the "best of the proposals on the table".

"The Nama proposal in itself has big questions hanging over it because of the nature of the problem. We don't know whether we've hit the bottom of the property market yet, we don't know how long it will take to recover and we don't know how far it will recover."

Mr Dukes also criticised the Labour Party's proposal to nationalise the banks. "Having the three major banks in the country nationalised would create very very difficult problems for any government."

"When the time came to float there would be an enormous political row about what they are worth and what they State should get for them . . . I think it would create a whole set of new problems."

However, speaking on the same programme, Labour leader Eamon Gilmore defended nationalisation and said it is "the only sensible option to pursue to get our banks cleaned up and get a functioning banking system working again for the country".

"The risk for the taxpayer is reduced, and secondly the taxpayer has something to gain when the banks are restored to good order."

Mr Gilmore said that Nama is the most "expensive and risky route" and that his party would be publishing a detailed critique of the Bill later in the week.

In a statement today, Labour spokeswoman on finance Joan Burton said she had written to the Minister for Finance, questioning the legal and constitutional aspects of the Nama Bill.

Referring to Section 58, the section of the Bill which deals with valuation, Ms Burton said: "According to the section, the concept of `long-term economic value' is defined as the value that the property can reasonably be expected to attain in a stable financial system when 'current crisis conditions' are `ameliorated' and in which a future price or yield of the asset is consistent with reasonable expectations having regard to the long-term historical average.

"`Current crisis conditions' is not defined in the Bill," she said, adding: "the basic question arises as to whether `current crisis conditions' means the conditions prevailing at the time the Act is passed or whether it means the conditions then prevailing at any future time when the Act has to be construed and interpreted by a court at a future date."



notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Sep 6th, 2009 at 12:10:47 PM EST
Nationalization is scary.. for the bankers...

But nationalization will only come when the economy is so bad that there is no other option.
If you can keep the economy going putting a lot of money on bankers pockets, then, this will be the way to go.

Obama and Bush proved that point.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Sep 7th, 2009 at 12:01:49 PM EST
The Anglo-Irish Bank has already been nationalised.  There is general acceptance that the big two - AIB and Bank of Ireland - are technically insolvent. If Nama only pays them "market rates" for their loan portfolio they will go bust unless their is a massive injection of public funds.  The Government proposal (at present) is to pay "long term economic value" - i.e. above current market rates for the loan portfolio - which is a nonsensical economic concept which implies that current market prices are unreal and that previous bubble prices can be recovered.  In reality it is just a hidden way of subventing the banks.

The Labour party argue, therefore, that we might as well nationalise the banks now in the first place.  

My problem is that even nationalisation requires the taxpayer to take ownership of the toxic debts.  Why not leave the risk investors - shareholders and and bondholders - to take the hit they accepted when they made their risk investment - and focus on rescuing a functioning ongoing banking system from a receivership/examinership process.

I.e. let the banks go bust, and buy the viable ongoing parts of the business from the receiver leaving him to administer the toxic assets on behalf of shareholders/bondholders.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 7th, 2009 at 01:16:06 PM EST
[ Parent ]
Frank Schnittger:
I.e. let the banks go bust

yes, amputate the frontal lobe, it is necrotic...

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Tue Sep 8th, 2009 at 08:34:08 PM EST
[ Parent ]
Daily Express | UK News :: 67% want vote on EU membership
Ukip leader Nigel Farage said: "The Irish referendum will put Europe back at the heart of the debate. The question the Tories would rather not face is coming back."

Nigel Farage was on Irish radio today coming out rather badly in a joust with Michael Martin, Irish Minister for External Affairs.  The UKIP desperately want Ireland to vote No because that puts their issue centre stage in the UK.  Frankly, most of Europe couldn't give a damn if the UK opted out of the EU - although it would create a difficult situation for Ireland as the UK is still a very important trading partner.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Sep 9th, 2009 at 07:29:43 PM EST
I suspect it'd hurt Ireland a bit, but not to an extent that it wouldn't recover, of course.

The Little Englanders are determined to tank Britain, though.  One of these days they may get their wish.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Sep 9th, 2009 at 07:44:47 PM EST
[ Parent ]
with Scotland voting on independence next year, a British withdrawal could become an English one...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Sep 13th, 2009 at 02:36:00 PM EST
[ Parent ]


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