Nama: Or paying off developers’ bad debts with a mass return to the emigration queues…

There’s been a lot of toing and froing on the Nama (or ‘dirty bank’) debate. Labour want to nationalise the failing banks whilst, Fine Gael, their likely partners in any new government want a ‘clean bank’ option. Regardless of anything else, all three agree that the way out will require stringent action from government. David McWilliams has from the off been hinting that the Department of Finance is suffering ‘accountant’s fever’ ever since the crisis hit: balance the books regardless of the damage it will wreak!

On Sunday he argued that the main problem with the government’s preferred option (and Alan Duke’s joined with Garrett FitzGerald to form the ‘former FG Taoisigh for Nama’ at the weekend too) is that it not only leaves the individual culprits in the banks in situ, but it’s an attempt to buck the market by giving away the keys to the national treasury (perhaps indefinitely) to keep the international bond market happy. McWilliams offers a traders point of view of the underlying problem and suggests a much simpler way of ‘getting out the trash’…

The last thing the trader wants is a country wracked by political instability, where taxes are rising and growth is falling. The trade has no interest in a country that is suffering unnecessarily to keep banks afloat. Why do you think we are paying a huge premium over Germany for our borrowing? It is because investors need protection because they don’t believe in Nama.

They have taken the view that no democratic government can lumber the people with taxes to pay for the sins of a few. That’s not how the world works. So they are looking at the pressure cooker, waiting for it to blow. Once it blows, the pressure eases and we are back to business. Remember: the world is full of money.

The German, Chinese, Gulf States and Japanese current-account surpluses have to be spent somewhere. But to get this cash, we have to offer an attractive option, a new option that sends a signal that everything has changed. Nama merely tells the world that the ‘lads’ are still in charge and nothing has changed. There is a better option than Nama, which will impress international bond investors much more. This is what rational businessmen would do. We’d tell the creditors of the bank that we don’t want to extend the guarantee. It will lapse, as was envisaged, on October 1, 2010.

At the moment, with the guarantee in place, the creditors know that they will get 100 per cent of their money back. On October 1, 2010, they know that they will get close to zero because the banks they took a punt on are bust. So the clock is ticking, what do they want to do? Where do they want to deal? At what price are they prepared to trade? Is it 30 cent in the euro? 50 cent?

The pressure goes back where it belongs: on the risk takers in the money markets:

…at the moment, it’s a one-way bet, with you and me acting as underwriters. This approach allows us, the Irish people, to get out of the way and let the creditors deal with the banks, with the government acting as broker rather than principal.

So we do a deal with the creditors and maybe give them equity in a new Irish bank in a debt-equity swap, which we will help set up. The state issues a deposit guarantee, paid for with a guarantee insurance product. We then have an orderly examinership of the bank, selling – let’s say – the branch network of AIB or other assets to the new bank, and off we go.

And here’s the kicker for backers of the current government approach. It would/could make the country competitive again without destroying the treasury by paying notional values on property to keep the developers (who, according to official figures compiled by thestory.ie, largely paid for this government) in the style to which they have become accustomed:

No need for Nama, and land prices stay low, allowing us to ‘lock in’ the fantastic competitive opportunity that a fall in land prices gives us. Then a New Ireland would truly be open for real business again and we could begin to talk up the economy with confidence.

Keep an eye on the Liam Carroll appeal case. That, in effect is a developer testing the government’s own hypothesis that land values will rise again in so far highly sceptical court system. With all that lovely new commercial real estate sitting empty on the fringes of Dublin, and the empty brand new hotel space round the centre of town, it’s not clear to me where this rising value is going to come from. Or how a small country mortgaged to the hilt to provide wholescale public subsidy to such a large (and in and of itself) unproductive vested interest can expect to regain the dynamism of the past.

  • Mack

    I like McWilliams’ idea, Alan Ahearne explained some of the method in the madness on Saturday in the Irish Times. I get the impression he wants to be able to sustain something approaching the high levels of borrowing that drove the credit / property bubble (if not at bubble levels, certainly very high levels of wholesale borrowings). He must be hoping that this fuels private sector growth (via productive investment this time). If he’s right, this could lead to a faster recovery / economic growth. But it would come at the expense of having to underwrite the Irish banks borrowings (which in turn would make wholesale lenders and bond issuers feel comfortable in lending them large amounts of money).

    McWilliams’ approach would cost the taxpayer less, but would leave wholesale lenders reluctant to fund Irish banks on a large scale in the future.

    One path comes at a high up front cost, but promises greater private sector borrowing & lending in the future (NAMA) – the other comes at a reduced up front cost but with lower private sector borrowing in the future (McWilliams).

    http://www.irishtimes.com/newspaper/opinion/2009/0905/1224253890855.html

  • Mack

    McWilliams’ idea is more inline with free-market capitalism, the high level of borrowing caused the bubble and it’s associated bust. Having tried that route and bankrupted every single bank we perhaps should internalise the lesson and move on. It would be a long time before the market trusts us with high proportions of wholesale borrowings again..

    Ahearne’s is more like state-sponsored capitalism (or even a form of socialism). He must think there is a sweet spot, with the same business models that failed for the banks, with borrowing levels just a little lower, or standards in projects just a little a higher. Ahearne is willing to underwrite more risk taking than the market generally would. If he’s right we’ll come back quicker and stronger. If he’s wrong, we’re firing up the JCBs when we’re in a hole..

    Back to the casino?

  • Suilven

    Any successor ‘good’ bank(s) to AIB or BOI would be effectively still-born if they arose through wipe-out of the current bond investors – the wholesale lending and bond issuance markets would be closed to them. Not to mention that the ship has kind of sailed on this idea about a year ago, when the rest of the world was sorting out (as best it could) its financial system – a further bout of instability in the financial markets at this juncture which was caused by a deliberate government decision in Dublin would be viewed very harshly in Europe and America, IMO.

    Only two plausible options are Nama, or a lapse in the Irish government guarantee in 2010 followed by organised bankruptcy and firesale of AIB and BOI to suitable overseas banks (cf Bradford and Bingley to Santander in the UK). The latter would at least break up the cosy cabal of homegrown bankers and developers which has brought the Republic to its knees?

  • fin

    On the bright side I never that I’d see this coming from a DUP minister

    http://news.bbc.co.uk/1/hi/northern_ireland/8244232.stm

  • John East Belfast

    I assume when he is talking about the Bank’s creditors he is just talking about the sophisticated and institutional lenders to the Irish Banks ?

    ie what about all the private individuals with their life savings etc in the various banks ? He is not proposing they take 30 cents in the Euro ?

    And would it be legal to discriminate between the two types of Creditor ?

    Remember the reason this Guarantee was put in last year was to stop a run on Irish banks. If the Guarantee was given an expiry date there would be overnight queues outside Irish Banks of ordinary people and companies wanting their money back – how much would that be – Eur 30 billion at least in the Anglo alone at one stage.

    If the Guarantee was pulled it would be total chaos among the populace

  • Mack

    JEB –

    There are two guarantees, a long standing guarantee to depositors (that was supposed to be funded by the banks, but backed by government). This stood at €22k, then was upped to €100k and then included in the blanket guarantee. It certainly appears perfectly legit to descriminate between creditors (as happens between bondholders anyway with the various tiers of capital / senior debt etc).

  • John East Belfast

    Mack

    I am not so sure.

    If I was a Bond Holder I would call the Dublin Govt’s bluff.

    ie Although there is a Guarantee in place it was widely regarded as a master stroke at the time because nobody thought it would ever be called upon. It was put in place to stop a chaotic run on the Irish Banks.

    If the Bond Holders were being expected to take 30 cents in the Euro whilst the Govt provided 100% protection to the bank’s Other Creditors – depositors etc then they may as well just put the bank under and liquidate its assets. Under such a scenario the liabilities would be shared between them and the Govt (effectively) and they would probably get no less than 30 cents.

    However it will have precipated exactly what the Govt had tried to prevent – namely a run on the Banks where individuals, trusts, charities and Companies all come looking for their cash. As there isnt enough cash there then the banks will go bust and the Govt will end up with a multi Billion Euro shortfall.

    I really think this is a bad idea.

    the time to do something like this was last year – the Insurance industry would have had to take up the Bond Holders exposure (for what it was paid a premium to do) and the Govt would be taking up the other creditors. However the entire system would have collapsed into chaos – which is what would happen now in my opinion

  • Mack

    JEB –

    That sounds like a credible analysis, it’s a high risk strategy – we can probably bin that particular idea. I still think there are alternatives to NAMA though – e.g. the FG plan and temporary nationalisation.