NAMA Bonds–so who do you think is taking the risk?

The government, via NAMA, will pay for the banks’ assets by issuing “NAMA Bonds”. The banks will be given bonds totaling the estimated fair value of the assets the government will agree to take off their hands. That’s the taxpayers’ “risk”…no cash is paid..just a taxpayers’ bond, if you like, ..actually a promise to pay in the future, whenever the bond is to be redeemed.
To the right you see an image of an old bond, found on Wikipedia. Dutch-E.Ind-bond-1623-wIt was issued by the Dutch government back in 1623, and is a promise that if someone pays the government 2400 florins immediately, he will receive back repayment with interest in the future, and its signed by various officials of the government. The bond would have been issued primarily to the Dutch and English banks, and the cash raised would have been used to finance the war against Spain. The Dutch would use the cash to pay salaries to its soldiers and other regular government running costs.

Today’s Government in Ireland is about to issue bonds, to its own banks, in the amount of 50, or 60 or 70 Billion euros.  Imagine- if one bond was worth, not 2,400 florins, but 1,000,000 euros, it would still take Mr. Lenihan over 50,000 twirlings of his pen to sign them all !. Who would relish a job like that !

The truth is, of course, that these days there’s little calligraphic talent employed  in the bond design and issuance business, and maybe a lot less respect for real money…so that the whole thing can be done in a few seconds, aided by a computer I suppose. With a few stamps, all that vast amount of property assets  and income rolling in from thousands of perfoming loans is transferred into the ownership of the government–NAMA, that is- and 50 to 70 Billion of Irish government Bonds are credited to the Irish banks.

The Irish government will then sell the assets when it suits them and use the cash to pay the salaries of its soldiers and other regular governmental costs. (At least we can assume that, until the bonds’ terms are published..) .  And soon enough, almost before you know it, in ten years or so, the cash will be all gone and the bonds will still be around and the banks will come to the government and present the bonds and ask “Please pay us cash for these bonds…we need the cash to pay our workers salaries and other costs and to repay our loans”…and we can all hope that the government will be able to repay–that is “redeem” – the bonds, and will not just try to replace them with even newer promises, which they often do.

That’s the risk of this bond business – that the side who issues the bond may never redeem it.  And the higher the nominal value of the bond, the greater the risk.

Some say that in the case of NAMA the taxpayer carries the risk that the sale proceeds of the assets may be less than the face value of the bonds he has agreed to redeem sometime. But the way to resolve that one is to have an agreement that the banks will make up any shortfall, for example through a levy. And, please note, in that case there is no risk to the taxpayer because the taxpayer- via the government- has all the powers he needs to enforce that arrangement if needed. On the other hand, if the sale proceeds are greater than the face value of the bonds, shouldn’t the taxpayer hand over the surplus to the banks?  If this is not agreed, then isn’t the whole arrangement “immoral and unfair”, to use the words of professor Lucey,  and a simple rip off of the property and rights of 150,000 Irish shareholders in AIB and BOI?

And then there’s the credit risk the bank shareholders must take–the risk that the Irish government will not be able to redeem the bonds.  Its looking less and less credit-worthy these days and finds it hard to borrow more than a few billion euros in the financial markets at a credit-risk related interest rate of 4.5%.  Isn’t it outrageous that it expects 150,000 Irish citizens to lend it FIFTY billion or more worth of their property at an interest rate of only 1.5%? (That alone is a gain to the taxpayer of c. €15 billion euros over the assumed period of the loan)

Think about it…The taxpayer needs the cash from the banks…so that he doesn’t have to borrow it elsewhere, or pay extra taxes. The cash will substantially be used to pay regular government expenses – although some may be used to bail out the government’s own nationalized bank, Anglo Irish.  The taxpayer pays no money up front.  Even the legal and associated costs of issuing the bonds- €30 million- is to be paid by the banks !  The taxpayer then pays an interest rate on the borrowing at far less than the banks can get elsewhere, and far less than the taxpayer would have to pay  if he didnt have the banks to mug.  At the same time the taxpayer is charging 8% on the loan capital he has invested in the same banks- although the amount of his investment is 7-10 times less than he is receiving from them (a much smaller risk). Then the ultimate risk that the people who provide the goodies may never get it back is a risk that the banks’ shareholders must take…

In saying this, we assume that the government will delay redeeming these bonds for cash until well after its own financial crisis is over. So far, there has been no indication of when the bonds will be redeemed. Maybe we will know next Wednesday. So far it seems that the taxpayer takes the dough and the banks’ shareholders take the risk.

1 Comment(s)

  1. I welcome the information and comment provided

    Geoff McEnroe | Nov 25, 2009 | Reply

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