Nama: “Fit for purpose? The banks or Biffo’s Government?”

More on the Nama situation later, but for now MIriam Lord caught the atmosphere in the Dail yesterday with a cracking opening to her Parliamentary sketch. Enter the principals:

Then we had to endure The Head with Two Brians – not for the faint hearted. The sight of Cowen and Lenihan reassuring a nervous public that they will lead them on the path to financial salvation is not a good one.

“We need an Irish banking system fit for purpose . . . this is the way forward,” says BrianC.

“We are now in a position to stabilise the deficit and we are on a firm path to economic security,” soothes BrianL.

But they have a dark past – their previous promises haven’t worked out. Why believe them now? That’s what Richard Bruton wanted to know, when he said the latest phase in the Government’s attempt to save the banking system would lead to a doubling of the national debt and the mortgaging of our futures.

And the nub of the matter: the Nama ‘haircut’ (ie the government discount on the banks bad debts:

The language of Nama is impenetrable to most of us, which makes what went on in the Dáil all the more frightening. The Government had predicted the financial institutions would take a “30 per cent haircut” when they were taken over by Nama. But no. They were scalped. “The weighted average haircut across these institutions is 47 per cent,” Brian Lenihan told the chamber.

Then:

Richard Bruton and Joan Burton blew Lenihan out of the water. They focused on the disgusting amounts of taxpayers’ money needed to keep the developers’ piggy bank – Anglo Irish – from going under. “It is simply wrong for Ministers to come in here and pretend that taxpayers have an obligation to pay off all that money,” said Bruton. “It’s wrong . . . [that] it’s monopoly money. It’s no such thing. It’s hard cash that our grandchildren will have to pay.”

The Opposition was in no doubt that the decision by the Government to commit, for years to come, so many billions of taxpayers’ money to the banks will have disastrous consequences for the country. By the look on the faces of many across the floor, they aren’t so sure about it either. The shocking figures about Anglo Irish Bank hit them hard.

Lord conveys a vulnerability that is clearly unnerving for backbenchers of a party which has become accustomed to a permanent place in Government for the last twenty years. There will be much pain awaiting all of them when they go home to their constituencies tomorrow evening. If people vote with their wallets, this will cut deeply into the national pysche.

And that is without factoring into the titanic personal struggle the Minister of Finance is privately engaged in. Much personal trust is invested in him, both by his own party and (reluctantly perhaps) those on the opposition benches. If he is, by reasons of health is forced to step down, there is not a great deal of spare talent, or public trust, left to Biffo on the sub’s bench.

In which case a party coup may not be too far him….

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  • Mack

    It’s very difficult to make something of the figures. Every article has different numbers. Still reading and trying to make sense of it.

    Today Brian Lenihan claims the total cost will be at least €32 billion. Yesterday Elaine Byrne said the cost to date was €27 bn (so only a €5bn increase? come on!).

    The Irish Examiner said that Anglo alone could cost €40bn (never mind the speculation that derivatives have created a black hole there we could be paying off for decades) and the total cost would be €75bn.

    Do the recaptalisations announced so far cover the entirety of the haircut that will be applied across all of the tranches or just some of them?

    Karl Whelan reckons a 47% haircut would still be an overpayment. I wonder does he mean there is no chance of recovering 53% of the loan values – i.e. NAMA as company will be loss making – or that at current market rates the collateral is worth less than 53% of the loan? The later could mean NAMA could recover some of the losses incurred in recapitalisation eventually.

    The Irish Times suggest

    €31.8 billion in fresh capital and close to €40 billion in debt issued to the banks to pay for their discounted property loans.

    This is manageable. The €31.8 billion is effectively a loss, the €40 billion (or most of it) should be recoverable. It’s up front payment for some assets that retain some valuable. If the Irish Times valuations are correct – I’d be hopefully. But everywhere it’s doom and gloom – so maybe they are wrong?

    http://www.irishtimes.com/newspaper/opinion/2010/0331/1224267399309.html

    http://www.independent.ie/business/irish/worst-nightmare-appalling-scale-of-bank-crisis-unveiled-2118115.html

    http://irishexaminer.com/home/the-75bn-gamble-115986.html

    http://www.irisheconomy.ie/index.php/2010/03/30/today’s-nama-announcements-the-good-the-bad-the-and-the-ugly/

  • The North has it’s own little game going on for colossal financial stakes too, Mack, and with a very bold and naive champion ……
    [quote]“There are thousands of savers with the PMS across Northern Ireland who are in real financial difficulties because their savings are inaccessible to them. ” …. Sammy Wilson DUP …. “Sammy Wilson presses Treasury on PMS” … Released 31/3/2010 … http://www.dup2win.com/%5B/quote%5D

    Is that another way of saying that they have been lost on imprudent reckless subprime gambles on speculative markets by the PMS? Money “fraudulently” obtained from gullible second and third party fellows spent on fantastic leveraged schemes built on the Ponzi of constant fabulous future growth is surely a criminal Pyramid scheme [or is it to be recognised and accepted as standard business practice] which would create a novel precedent if losses are to be covered and reimbursed to unwary punters, and one does wonder then who else can make a claim for such similar losses which would then probably also include all pension funds which have been mismanaged/raided by a crooked system and its criminal perps in pin stripe suits, ….. wide city boys?

    [quote]“I put the case to Ian Pearson and I hope that the Government now recognises the need for action and will move quickly to ensure that savers with the PMS can finally be sure in the knowledge that they will not lose out as a result of the problems which engulfed the society.”[/quote]

    You couldn’t make it up, could you, [although you’re all bound to be starting to realise that that is just exactly what is done every day] and one has to admire Sammy’s optimism, whenever such a precedent as would be set is so admirable and would introduce such change as would have Ulster Spirit feted around the world. Bravo Sammy, and don’t you just love the the typical Northern Irish understatement in “as a result of the problems which engulfed the society.” which must have it on a par with “the Troubles” whenever referring to a crazy sectarian civil war.

  • Mack

    David McWilliams in today’s Indo

    That’s when we were reassured that the cost to us would be capped by discounts of 30pc. Now, with yesterday’s announcement, we know the cost will soar as the “assets” are discounted by 50pc. And there is worse to come because, according to NAMA, 43pc of the loans to be transferred to it are ‘land’ (ie green fields and land less than 30pc developed) yet only 23pc of yesterday’s figures are ‘land’ — meaning the news on this front will get worse. Based on the estimates we will shovel billions of euro into the banks to keep them open.

    http://www.independent.ie/opinion/columnists/david-mcwilliams/david-mcwilliams-like-war-in-the-trenches-nama-plan-is-pure-folly-2118061.html

    Part of the problem is the terminology. The haircut isn’t the cost to us, it’s the discount we pay (as the owners of NAMA) – it’s the loss (sort of) the banks must recognise. The original loan would include a profit element, taking a haircut would wipe this out and add a loss. But the loss would not be equal to the size of the entire haircut.

    That said, we’re on the hook for bank loses and will have to recapitalise them – but that amount in it’s entirety need not be borne by taxpayers generally (i.e. banks can raise charges – as AIB have done with mortgage interest rates – pay lower rates of interest on deposit, or raise cash privately). The whole thing is still very murky..

  • Mack

    I think that €32bn might be fresh capital that is required.

    http://www.ft.com/cms/s/0/9b667690-3c07-11df-9412-00144feabdc0.html

    Ireland’s banks face a capital shortfall of up to €32bn, the country’s regulator and finance ministry said on Tuesday, with the Irish government liable for up to three-quarters of that figure.

    If you take Patrick Honohan’s input at face value – and he is well respected – if that’s the end of it, it’s not a complete disaster.

    Ireland’s budget deficit for 2009 alone was €24.64 bn and that is a recurring cost. (I.e. we’ll have to borrow a similar (but hopefully smaller) amount this year and next, having borrowed a large amount in 2008).

    I.e. it would appear that the banking bailout is smaller in scale to the fiscal crises.

  • jtwo

    Mack however you cut it with loan purchases, recap costs, higher borrowing charges or tighter lending the net result is still the bulk of Irish citizens getting it balls deep in the ass from the banks for a generation. Surely that’s the political reality?

  • Mack

    jtwo –

    Mack however you cut it with loan purchases, recap costs, higher borrowing charges or tighter lending the net result is still the bulk of Irish citizens getting it balls deep in the ass from the banks for a generation. Surely that’s the political reality?

    Sort of. I don’t think the public should have been put on the hook for the bust banks.

    The question mark now is over the scale of the problem. It appears to be smaller than our other crises (general government finances), it doesn’t appear to be large enough to drag the country under. But I’m not sure we can trust the figures we have either.

    But even if the banks weren’t bust, trading conditions could well detoriate anyway (i.e. although this crises was internally created, we still have global credit crunch and banks like HBOS – which have their own problems – probably would have pulled out anyway, the reduced competition giving scope for Irish banks to raise charges etc). Customers, unlike taxpayers, are free to shop around…

  • Mack

    From the FT

    Terrible though this all is, Ireland looks not only to be managing it but doing so with an informed public debate. So far, there is a scattering of go-slows rather than strikes; government and unions on Tuesday reached a deal on public sector pay and reform. Ireland is starting to claw back lost competitiveness.

    There is no sign of a backlash against the euro or the European Union, nor any discernible polarisation. Fianna Fáil and Fine Gael (the main opposition party), the Tweedledum and Tweedledee of Irish politics, have made populism mainstream, weakening the force of radical tributaries. Targets for pent-up anger, moreover, have appeared right on cue, with two chiefs of the now nationalised Anglo Irish Bank arrested and questioned this month in a local depiction of the perp walk.

    It is becoming apparent that Ireland’s modern economy – based on exports of processed and fresh food, IT services and software, pharmaceuticals and medical equipment – is holding up well. New jobs are starting to come in.

    Signs of Celtic Tiger Clawing Back Growth.

  • Mack

    Constantin Gurdgiev reckons that NAMA has overpaid in the first tranche by €1.2 and €3.1 billion. This would translate into a loss €9.6-25.3 billion from Nama operations. Based on the fall in land / property values since Nov 30, 2009

    http://trueeconomics.blogspot.com/2010/03/economics-31032010-expensive-joke.html

    —–

    By the way from Ronan Lyon’s last September

    The Minister for Finance has stated that the best estimate of the fall from the peak so far for NAMA’s properties is 47% on average.

    Could be a coincidence, but that was just what the average haircut was in the first tranche. You would expect, if valuations were based off data from Nov 30th the haircut to be bigger. So in forthcoming tranches the haircut should be even bigger to make up the gap?

  • Mack
  • Mack

    From Irish Economy – Philip Lane –

    The current projection is that the State injection into the banking system will soon stand at €33 billion or so. This is made up of €3.5bn preference shares in BOI (some of which will probably be converted into ordinary equity); €3.5bn preference shares in AIB (some or all of which will probably be converted into ordinary equity); €22bn in Anglo (€4 already put in + €8.3bn + an expected further €10bn); €2.7bn into INBS; and about €1bn into EBS.

    €33 billion is about 22 percent of GDP (26 percent approx of GNP). The injections into AIB and Bank of Ireland could ultimately deliver some level of payoff to the taxpayer, such that final cost could approach the mean value for a systemic banking crisis. In the other direction, additional fiscal injections in the future would raise the total bailout cost.

    http://www.irisheconomy.ie/index.php/2010/03/31/the-fiscal-cost-of-the-irish-banking-crisis-in-comparative-perspective/

    A consensus view of a direct cost of around €32-33bn then for the banking crisis? Could be higher or lower, but at least it’s a one off cost and not a recurring cost..

  • old school

    “New jobs coming in” Financial Times, yet todays Q1 report shows a rise in unemployment
    “Exports are holding up” Financial Times, yet recent report shows exports have dropped worse than expected.
    Surely if you get a job in Financial Times, you’d at least be clued in on the subject matter. Bit like a Sports writer getting the results wrong.

  • Mack

    Old School –

    I think the FT are talking only about specific sectors. A bit like Brian Lenihan who said recently that apart from the continuing impact of falling construction output the decline in the economy had stopped (or as translating by David McWilliams apart from the parts that are falling the economy has stabilised).

    Incidentally a net increase in jobs is not necessarily inconsistent with a net increase in unemployment.

  • Mack

    By the way Irish exports fell 3% in 2009, imports fell 22% opening up a huge trade surplus.

    http://www.rte.ie/business/2010/0326/cso.html

    A 3% fall especially given that exports increased in 2008 in Ireland when the fell 20% in Germany (in 2008), isn’t so bad. Broadly over the course of the recession exports have held up.

    http://www.finfacts.ie/irishfinancenews/article_1016310.shtml

    http://www.dw-world.de/dw/article/0,,4086585,00.html

  • Mack

    Just to keep everything here –

    Over on the Irish Economy thread economist Brian Lucey reckons –
    The losses on NAMA can reasonably be expected to be 20b. Thats another 12% of GDP.
    meanwhile, over on P.ie Philip’s post is being taken as proof that shure its grand really.
    http://www.politics.ie/economy/126967-irish-economy-cost-our-banking-crisis-only-little-more-than-normal.html

    That’s within Constantin Gurdgiev’s range, though closer to the top end.

    Ronan Lyons has a graph showing the estimated Long Term Economic Value (LETV) growth path assumed in the NAMA business plan.

    http://www.ronanlyons.com/wp-content/uploads/2010/03/nama-tranche1.png

    If you compare that to actual historical nominal house price growth rates in the UK, Ireland, USA a bigger nominal upturn over 10 years or so (and hence NAMA making a nominal profit) is possible. Especially with commodity inflation (particularly oil), the end (or lessing of Chinese disinflation) and any attempt in developed ecomonies to inflate away their debt.

    http://derekbrawn.com/images/Property/Intl_New_HPIs_Growth.png

  • Mack

    Constantin Gurdgiev has another blog highlighting some potential implementation issues with NAMA

    Problem 1: borrowing short to lend long is what got out banks into this mess in the first place. Now, Nama will have exactly the same risk-loaded funding structure as the worst of our banks. For example, at the peak of risk-loading, Anglo carried about 50% of its funding in short-term inter-banks loans. Nama will do the same for 100% of its funding requirement. Scared yet?

    Nama will be loading up with short term debt as the yield curve for Libor and Euribor is pointing up. In other words, every progressive reset (6 months) and roll-over of the debt (12 months) will be more expensive to the State. My third year UCD undergrads last Fall knew that this is a bad risk. Nama, having paid millions to advisers and ‘experienced’ staff couldn’t get it right! Trembling yet?

    http://trueeconomics.blogspot.com/2010/03/economics-31032010-nama-funding-scheme.html

    Central Bank chief Patrick Honahan has an article in the FT

    They will also ensure that core tier one capital will remain above 4 per cent even under an additional severe stress. Strongly capitalised to this extent, the banks will clearly stand on their own two feet and no longer have to depend on state guarantees, which will be phased out.

    So the banks will be strong enough to survive a wave of mortgage defaults?

    http://www.ft.com/cms/s/0/da83ac20-3cfd-11df-bbcf-00144feabdc0.html

  • Mack

    Manufacturing sector returns to growth.

    New export orders raced ahead at the strongest rate since the survey began in 1998. New orders increased at their most rapid rate in 30 months, providing evidence that the Irish domestic market may also have bottomed out,’ he stated.

  • Mack

    Beginning to suspect NAMA is a piece of Machivellian genuis.

    Brian Lucey in the Irish Times –

    Funding at the short end of the maturity spectrum will allow the proponents for Nama to claim that it is cheap. It is apparent that neither the NTMA, Nama, the Department of Finance advisers, the Minister nor the Cabinet are aware that the yield curve, which indicates the future cost of funds, is upward sloping; if they do they do not seem to care.

    Of course they don’t care, they’ll lose the next election and it’ll be someone else’s problem then.

    http://www.irishtimes.com/newspaper/opinion/2010/0401/1224267465785.html

    Also thinking the original 30% haircut plan was very clever. It would have hidden much of the bank loses in NAMA, also to be realised over the term of the next government – perhaps causing FG & Lab funding problems forcing them to make cuts etc..