Key Post Key recent NAMA contributions

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PH has recently been appointed stable jockey to the Government, so this horse must be strong favourite, especially as recent pronouncements from BLe and AA suggest this is their latest thinking. It is dubbed Nama 2.0. It differs from NAMA 1.0 in that the banks will be paid a much more conservative amount than LTEV (though presumably still a relief over MV) in bonds and the shareholders will be compensated with a stake in NAMA. BL's latest position differs only in that the NAMA stake would be given to the banks and not their shareholders. NAMA 2.0 does seem to imply majority ownership by the State and possibly significantly so in AIB.
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A gentle rap on FG knuckles not to play hardball on NAMA. He also emphasises that senior bondholders cannot be torched and welcomes RB's clarification that this is the FG approach.
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Good point scoring stuff about how FF got us into the mess. But the substantive development is that he rows back from the apparent FG position that they wanted senior bondholders torched. However he still pedals the original FG solution which is that after September '10 the banks would be split into the good half and the bad half. The latter would get all the toxics and the risk takers would be transferred into this bad part. But the math seems to imply that "risk takers" must include some of the Senior Debt (having been swithced into equity). Why senior debt would accept such a switch when they have the exact same rights as depositors is not explained.
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This piece in today's Irish Times supports NAMA and makes a good quantitative argument that the extent of "overpayment" above MV will probably only be 10Bn. He suggests an MV of €50Bn vs a payment of €60Bn.
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Rebuts the G46 letter and in particular queries how they came up with a value of €30M for the transferred loans.
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G20 strikes back with reinforcements. Main contention is that the correct value for the loans transferred is €30Bn and nowhere near the sort of LTEVs being mooted by NAMA supporters. If this contention were correct then indeed they would have a case that this is a massive transfer of wealth from the taxpayer to the banks. On that premise they argue that now is the time to force the bank capital providers and crucially the suppliers of funding to share the pain. Comments by BLu on various blogs confirm that he does think the situation is so bad that senior bondholders have to share the losses. It is an extreme last resort, justified by a very extreme valuation, the problem is that this calculation is at least as speculative as any other.
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Argues that banks should be allowed collapse, and following the catharsis investors will hurry back, impressed by our financial nous. He cites similar historic precedents, but overall this contribution is at the polemical extreme.

I include the following quote from the IMF. They have this quaint concept of "the staff" who apparently favour in certain scenarios the same temporary nationalisation approach put forward by Labour. However the staff are rebuked by "the authorities" who clearly dislike nationalisation. The interesting thing about the IMF overall assessment is that it is very similar to NAMA 2.0, so perhaps that's where PH got the idea.

IMF said:

25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. 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. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.
26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.
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Duke

That is excellent thanks.

I found the[broken link removed] very interesting as well. It's hard going, but it provides a lot of figures. Maybe this should be in the links rather than in this thread?

Karl Whelan 6/9/09

KW is prof econ at UCD and a leading G46er. He does rather expose BLe's gaffe last week, already alluded to on AAM. BLe, when asked how he was sure that the "haircuts" would not entail nationalisation, incredibly answered that the stockmarket didn't think so. As KW rightly states, the stockmarket is simply attempting to second guess the minister and if he in turn is reading their assessment, that does seem a bit silly.

Brian Lenihan's [broken link removed]to Enda Kenny regarding Bondholders

This explains the status of bondholders to Fine Gael

It is the case that a decision has been made, as part of the State Aid submission made to the EU, not to make interest payments on certain subordinated debt of Anglo Irish Bank, but this is a very different situation.


First, the market does distinguish somewhat between senior and subordinated debt, and secondly subordinated debt of its nature carries with it different sets of terms and conditions, such that interest payments can in appropriate circumstances be deferred or left unpaid.


This is not the same as a default and certainly does not impact on any debt currently guaranteed by the Government.


This subordinated debt is different from senior debt which includes other types of bonds, such as certificates of deposits and commercial paper. Senior bonds are not part of the banks’ risk capital – they are part of the banks’ normal funding in the same way deposits are. Generally, they rank equally with ordinary deposits in a wind up situation, and they are issued at interest rates that reflect their much lower expected risk profile compared to subordinated debt.

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Richard Bruton's [broken link removed]of his error

It is accepted international practice for risk investors in the banks, including some classes of bond-holders, such as owners of subordinated debt, to absorb loan-related losses ahead of taxpayers.


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Only those long-term risk investors like shareholders and subordinated bonds that remain locked into the banks at the end of the guarantee period would lose the guarantee and be exposed to losses.


... But by allowing some investors and speculators to walk away scot-free from this crisis, the Government could be exposing the taxpayer to additional, unnecessary costs of up to €10 billion.

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