A Good NAMA and a Bad NAMA

I was strongly in favour of the NAMA scheme, when it was first revealed: It seemed like it could really help resolve the banks’ liquidity problem, while costing the taxpayer nothing.

Remember, the banks had extended billions in commercial and development property loans, against security which was fast-falling in value in the crashing property market. To fund these and other loans long term, the banks needed liquidity. NAMA was to provide this liquidity by taking over the relatively illiquid property loan assets (which NAMA would not have to “mark to market” and could afford to sit on until property recovered) in exchange for liquid government bonds, which the banks could use to borrow cash from the ECB. The banks were to take a substantial haircut, 20-30% was envisaged, and be prepared to take on the long term price risk also, but, otherwise, they would have clarity in their balance sheets and financial position and could commence to rebuild profitability. There was no risk to the taxpayer who, in fact, would be in a strongly positive cash flow position. That was the Good NAMA, which would protect our banking system, keep it Irish owned, and deliver liquidity for the economy

What we got was the Bad NAMA: The Government was forced to accept the reality that, in fact, the scheme was a loan to the State by the banks, so interest had to be paid on the loan as long as the bonds- mere promises to pay real money in the future- were not redeemed. So, it chose to pay an artificial interest rate of c. 1.5%, which was the special interest rate the ECB used in its liquidity arrangement with banks across the Eurozone and nothing to do with the Irish government. This rate immediately devalued the bonds: considering that the Irish sovereign interest rate, reflecting perceived risk of Ireland and its government, was c. 4-5% – 6.5%, there was no possibility of selling on these Irish government-guaranteed promises at face value: in fact, over a period of ten years, the discount would have to be almost a third. Even then, the bonds were hardly marketable at any price, as they carried no redemption date (for cash) whatsoever! And, by reason of issuing so many bonds, the State’s financial credibility was undermined and its borrowing rate rose. Then, the ECB, who the Irish authorities initially claimed had been specially negotiated into the scheme-, must have wondered why it was expected to continue funding Irish banks until the NAMA boys redeemed the bonds, when its funding scheme for Eurozone banks had an increasingly short term horizon. Next thing that happened was that NAMA, forgetting its original objective, and thinking that the taxpayer might be at risk sometime, began to raise the haircut to astonishing levels, well beyond what could be sustained by the banking system, to the point where the Irish banks were obliged to mark down their portfolios to distressed price levels and without prospective benefit from a future market upturn, something which they could have done without any State rescue scheme, and which no other banks in the western world were forced to do! (Other countries bailed out, not the banks but their customers, so that banks could be repaid, or offered insurance schemes with the State holding the risk, or simply printed money and bought toxic assets from their banks at face value). Finally, NAMA backed out when push came to shove, as when AIB, having absorbed or set aside c. €10 billion in NAMA –related losses, and then looked like it was making progress in raising another €7.4 bn of new capital, as dictated by the Regulator, was hit by a sudden and last minute extra three billion bill from NAMA, in circumstances yet to be fully revealed.

So, there you have it: the Good NAMA set out to save the banking system and the economy; the Bad NAMA wrecked the banks profitability, put them into nationalisation or thereabouts, and leaves Irish depositors with the prospect of having their savings managed by foreign banks and regulators in the future.

We can look around the world and see banks still stuffed to the gills with truly toxic debt, credit default swaps and other fairy tale derivatives which can never be encashed or repaid, or offloading the stuff onto their central banks or propped by local government schemes, but still surviving, still functioning normally in the interests of their economies, as independent, privately-owned banks; and we can then look at ourselves and we must say: What a bunch of idiots we are, right patsies!

(Note: My sympathy for the banks does not extend to Anglo or Nationwide)

1 Comment(s)

  1. I fully agree

    BaronWuffit | Nov 20, 2010 | Reply

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