What we dont know about NAMA and allied matters

Í read on that good blog, www.Irish Economy.ie, that the State proposes to provide promissory notes as its capital commitment to the funding of Anglo Irish Bank. If that’s true then it means that Anglo must be planning to raise equity elsewhere in order to meet the new (still just proposed) Basel III standards ( wherein banks should aim at having 7% core equity capital). Otherwise we have a situation where the Regulator and Central Bank Governor are insisting that the main privately owned banks – AIB/BOI- must meet this rather stringent standard, while the government -owned bank is allowed to compete without meeting regulatory standards…Can that be true?

Also there is continuing controversy over AIB’s solvency, with some “celebrity” commentatrors in the media stating that the bank is virtually “bust” and will certainly become majority owned by the State. On top of that there are still many commentators who do not understand that NAMA is a loan scheme wherein the banks make the loan to the State. Of course it suits the banks, up to a point, in that it is a quick way of liquidating rather illiquid assets, at a time of shortage of liquidty in the wholesale banking markets. But, as we have argued here for a long time, it is actually a hidden loan to the State at an outrageously low interest rate, and a big benefit to the taxpayer. So, I made a comment on the blog tonight, which I reproduce here for my other readers, both of them:

” At end 2010, AIB had net equity of c. 6 bn. The reason it has to raise €7.4 bn is because the NAMA people and Regulator have now told it to Assume that the NAMA discount over all its loans, including performing loans, will average c. 43% or c. €6bn more than was provided for; and on top of that the Regulator has decided it must not only have core tier 1 capital ratio of 8%- which it had at end-2009- but it must have core Equity capital of 7%, (c. €7 bn). (It had provisions of c. € 4bn against NAMA assets and another €1.3 bn against other loans, on top of the €6 bn equity)

In my blog I described (more accurately I should say”opined” ) how they can do that this year. AIB is far from insolvent, as some professors continue to claim- some commentators even use the word “bust”- its outrageous !- and barring some major unexpected development, the State shareholding in it, if any, will be a minority one

NAMA issues a bond, a promise to pay the holder (??- I assume, but is it tradeable, does anyone know?-) or the banks some real money in the future sometime. NAMA is technically a borrowing from the banks by the State/taxpayer. The government tried hard to obfuscate that fact, but the EU refused to accept the spin. Hence SPVs , etc…

In this day and age, and keeping in mind Basel III, bonds, loans and promissory notes will not add up to “core equity capital”. So, I dont know what the Regulator is at, if he imposes a stringent core equity capital ratio on AIB/BOI, but permits the owners of Anglo to get away with promises !

If NAMA bonds are acceptable to ECB–which it seems they are- then as far as I understand it, that would only be useable for raising “real money” loans from ECB by our banks on the ECB’s increasingly short term basis. I think the last one year loan was made yesterday and from now on only 6 month loans are available. So, what are the banks to do with these NAMA bonds after that?

If they are tradeable in the financial markets, as BL once said they would be, then, in order to trade at par value they would have to carry a coupon comparable to the sovereign guarantor’s current borrowing rate, currently c. 4.5%. If it is only 1.5%, – I dont know, can someone please advise?-then , based on the repayment schedule foreseen in the original NAMA Business plan, €50 bn of bonds face value would be worth, at NPV, something in the region of €10 bn less than otherwise. (Discount at 1.5% instead of 4.5%). ‘(This is extra real profit that the State is taking for itself, from bank shareholders, including itself, of course )

I suspect, though, that these bonds are unusual in that they are, for one reason or another, effectively not tradeable in the market. I just have that feeling. (Does anyone know for sure?). It may be why Eugene Sheehy was unwilling to confirm that AIB would cash in these bonds, when asked by a Dail committee. I admit I could be very wrong there…But I think journalists have not focussed enough on this aspect of NAMA. We simply have not asked the questions properly. (Another aspect we have let slip by is : What will the State do with all the NAMA cash, including property sale proceeds, which it will have available to it for years, before repayments begin to the banks?) (The idea that it will have to pay an average of €240 mn a year on lawyers fees is simply more obfuscation…Amazing how much you can fool, intelligent people!). That extra NAMA cash which it will hold is effectively a cash loan from the banks to the taxpayer, and at a steal of an interest rate– a scraping of the faces of the elderly bank shareholders ! (But maybe the interest rate has been adjusted since 1.5% was first indicated…?)

1 Comment(s)

  1. Brian
    You might have a look at the following item about 1.5% vs 4.5%

    http://www.planware.org/briansblog/2009/10/nama—the-real-default-rate.html

    Brian Flanagan | Apr 4, 2010 | Reply

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