The Big, unasked question about NAMA

We have referred before to the essential immorality of the NAMA scheme, under which bank shareholders must accept a valuation of their equity made by state officials and, if that valuation is sufficiently low, hand over their equity to the same state accordingly, even if, ultimately, the state sells off bank assets at an enormous profit, which is likely. Its some sort of state theft of private property, a theme we will return to.

Today we remind our readers of a big unasked question concerning NAMA. Having done a deal with AIB shareholders to take over certain assets at a valuation of c. 30% less than face value, a deal under which the AIB bank would also be required to sell off overseas subsidiaries and raise extra private capital in order to meet high capital ratio standards, NAMA suddenly declared in September 2010 that, after all, it was not going to value these certain assets at the expected valuation, but at half that, i.e. at a discount of c. 60%. That sudden turn caused the shareholders equity to tumble by c. 75%, any prospective private capital to go away, the bank to fall into state ownership and, eventually, a withdrawal of more than 50 billion of deposits, in spite of a state “guarantee” for these deposits. Naturally the banks Chairman and Managing Director resigned and have said nothing since.

NAMA “blamed” the bank for this sudden change of terms of their agreement.They suggetsed that, at a late stage in the valuation of thousands of individual loan assets, the valuations had to be halved. This is in spite of c. 30% of these loan assets being still in the “performing loan” category and c. 20% or more being related to loans against properties in the relatively booming UK market, where UK banks in the same market have had to suffer only a tiny write down on the values of similar assets. This action by NAMA came as a shock to shareholders and many other observers, including the very professional valuers at investment bank Goldman, Sachs, who had been doing their own calculations around the same time and who ultimately concluded, in a report available to but not mentioned in the Irish media, that, even in worst case circumstances, NAMA’s valuations are “unrealistically pessimistic”. Beyond throwing mud at the reputations of senior management in AIB, NAMA have not commented on this extraordinary turn about. Nor has any Irish journalist investigated the matter, although tens of thousands of Irish shareholders have lost billions as a result of NAMA’s unexplained behaviour. Instead NAMA’s feeble explanation has been accepted meekly by our Business and Economics “editors”.

So, what’s the real story? Well, I don’t know, but I’d like to propose a hypothesis: Officials made an awful botch of the NAMA scheme, and, rather than reveal their incompetence, they are simply letting the banks swing. The scheme was Irelands answer to the banks liquidity problems, emanating from the collapse of Lehman Bros. Rather than “rescue” Anglo Irish Bank alone, officials decided to “rescue” all banks, including relatively sound AIB and BOI, by taking over their long term property assets and arranging for the ECB to provide them cash until such time as these assets could be sold off, years later. Profit on AIB-BOI assets would go towards covering the expected greater losses on Anglo and INBS loans. In return for ECB cash the State would issue guarantees on the NAMA bonds, making them eligible for ECB funding.

It all looked pretty good if it could be worked, but, unfortunately, the officials either didn’t understand the proper role and function of the ECB or failed to properly explain to that institution what would be expected of it in the NAMA scheme. By the time the first short term ECB loans to banks were to be rolled over, the ECB twigged what was up and told the government that the Central Bank of Europe was absolutely not going to be used as a fund provider for a government arranged rescue of Irish banks and that the government must go borrow its own funds and provide them to the banks if they wished to continue the scheme. NAMA therefore was immediately told to stop issuing bonds as far as possible and in the meantime to minimise the amount issued, by imposing the maximum haircuts. The result was that AIB was allowed to virtually collapse into state ownership, in the conspiracy of silence of a very few insider officials, who seemed unconcerned by the losses and stress caused to elderly shareholders, including some suicides. The consequences have included a total loss of private international financial market confidence in the credibility of Irish State guarantees, and in the competence of its officials and the loss of €160 billion of deposits from the financial system. Next to go will be the IFSC, an offshore financial center that, like other such centers, requires international confidence in the quality of management and regulation by the local supervisory authorities.

The one successful manoeuvre of our top financial officials has been to shape the academic commentary against the bankers and completely mis-lead the sheeple in the media.

We’ve had the stress tests; now where’s the PR?

The results of the stress tests are being presented as an urgent and unexpected need for more capital to cover losses by the Irish banks. The reality is that the extra capital required is to protect the banks in the event that something highly unlikely might happen to our economy and society in the medium future. The assumptions underlying the stress tests are not realistic and, if applied in similar tests in other countries would undoubtedly foresee the theoretical failure of dozens, or hundreds, of banks across the UK, Europe and the US.

In our case, our attempt to predict a worst case scenario by using severely cautious assumptions, an attempt one suspects which is prompted more by the need to address our government’s loss of credibility in the last two years rather than that of our banks, is already being seen as reason for further sell off of bank shares and further loss of confidence in our banks. The fact that our Minister of Finance said today that he expects Irish bank paper to be further downgraded – this is being widely reported on the financial ticker tapes- is interpreted itself as a statement of lack of confidence in our banks by our own government !. (Of course this is not new, as we have had a Central Bank Governor stating from his first day in office that he would like to see our banks taken over for some token payments by any foreigners, even Chinese!)

Much of the damage done to our banks has been done by government policy and ill-considered statements by senior officials. The government guarantee, given in consideration of 70 bn takeover of banks assets, has proved to be prettry much worthless. The NAMA fiasco has wrecked participating banks and damaged sovereign credibility. The expectation that ECB could be tapped as a funder of the Irish bank rescue programme has proved to be embarrisingly ill-conceived. Some statements by officials have directly led to loss of deposits in the banks, and in reality the market has shown its opinion of the Irish Government’s guarantee for depositors by taking c. 100 bn euros out of our banks in the last six months

Its time for some PR, folks. If we can spend tens of millions on stress testing, why not spend 5 million or so countering negative reporting and interpretation in the financial markets? We should hire half a dozen foreign spokesmen, in Frankfurt, London, New York, Hong Kong, Paris, to help local journalists properly interpret what the reality is in Ireland, and support these by professionally produced factual data and other PR material in the local offices of the Irish Trade Board and IDA in the 30 countries or so where they operate.

Nobody wants the bank shareholders votes?

I haven’t heard one word of sympathy for bank shareholders (AIB and BOI) during the election campaign, in spite of the injustice done, and still being done, to them. And in spite of their very large numbers. There must be even more votes to be collected from bank bashers and general begrudgers.

As we have pointed out before, the majority of both the main banks was owned by c. 150,000 Irish resident individual “retail” small investors. That’s about 3000 per constituency and on top of that add spouses and family…making a total of perhaps 500,000 votes from bank shareholder families right across the nation. They are not normally wealthy people, but rather typical, but older, middle class…retired public officials, middle managers, retired professionals, farmers, small businessmen…the backbone of our economy and society. Some of them have been severely distressed by the loss of their savings , inability to keep up VHI payments and prospects of  low quality care in later life in public care homes.

What “injustice” you might ask? Well consider: The original NAMA deal  offered their banks liquidity in exchange for long term illiquid assets, at an expected discount of c. 30%. After the deal was done–i.e. banks had made their agreement with NAMA- that state institution lowered the buying price by c. 100%..i.e. paid half the expected price.  This had the effect of devaluing the shares in the banks by so much that, in effect, almost all equity in the banks was passed over to the State.  (So, a decision by officials concerning the possible future value of private property results in the propery being handed over to the officials… in  modern Ireland !) (In the case of AIB, NAMA upped the ante last September, after the AIB directors had all but  completed, successfully, the plan to recapitalise the bank that had been agreed with NAMA…Why has NAMA not been asked to properly explain its sudden change of mind and devaluation of AIB’s assets ? This happened at a time  when the renowned investment bank, Goldman Sachs was preparing its own report on Irish bank asset values, which estimated that NAMA’s valuations were “unrealistically pessimistic”, a report never discussed in the Irish media)

So, shareholders were done, wrecked and wiped out by mysterious decisions made, in their own interest, by officials. Not only that, but NAMA never paid  for the property anyway. Instead, the mechanism by which the banks were to be enabled to borrow liquidity, i.e. the government guarantee for tradable NAMA bonds, never worked out..In reality, the officials so mis-managed the bank support programme in Ireland that the credibility of both the banks and the sovereign Irish nation was  destroyed, to the point where no investor will lend money to the nation, on  any state guarantee, and a 100 bn. of deposits ran out of the banks.

Further, even if the original NAMA bargain was delivered by NAMA, it was immoral, because it clearly put the downside risk- of the target sales price for bank assets not being achieved- onto the shareholders of the banks, but kept all the upside potential gain for the State itself. Should we allow that in modern Ireland? And now that NAMA has in effect reduced the target price to c. half the envisaged level, shouldn’t the shareholders be given a break and a promise that they will be paid any extra profit that NAMA will make on their property, considering that they’ve already had to take such an enormous loss on it?

Service back up, sort of

We moved our server from one data center and replaced it with a new one in a second location. Then the second one crashed and all data was temporarily lost. Now we seem to have everything going again, except music to your right. But keep the faith !

Service Interruption

I regret to advise that this site may not be always accessible during the period up to January 31, 2011. This is due to the need to move to a new server in a new data center, and transfer all operating system, software and files. We regret any inconvenience to our members.

More good news for the banks not mentioned !

This is a post I sent to the IrishEconomy.ie blog today. The discussion followed a recent speech by CB Governor Paddy Honohan

When the Governor raised the matter of accounting practices, I thought he was going to tell us some good news. He said:

I have already railed elsewhere against the backward-looking loan-loss provisioning practices encouraged by International Financial Reporting Standards (IFRS) and still all too pervasive in the reporting by most of the Irish banks. …”

But he should know that IFRS is to be changed !!.

Firstly, though, it seems to me that the losses being incurred by our main banks are related NOT to already crystallised losses, but to estimates–including overestimated NAMA figures- related to “marking to market” of tens of billions of euros worth of loans still with many years to run. (Many of the properties, we can be sure, will over time be inflated out of their current loss status). It is for this – estimates of future losses which must be debited to P&L account now – that we must shove out the shareholders and let the State take over the banks. (Uniquely in the world, of course !)

But, IFRS is to be changed. The Governor should have reminded us that the G20 two years ago asked the International Accounting Standards Board to develop a more realistic and less catastrophic accounting treatment for banks’ impaired banking assets (i.e.loan book losses as opposed to equity trading losses). They did, and proposed their solution to governments a year ago. Their solution basically would permit many banks to re-estimate their loan losses every year and write them off gradually over the remaining maturity periods of the loans (in certain circumstances). This will be enormously helpful to Irish banks and to the capital requirements/ Basle ratios situation. But the EU has refused to agree the new proposals as yet–they probably will agree a version in early 2011- because it doesn’t suit the French/German banks, who derive much of their profit from trading activities, as opposed to banking.

Why didn’t the Governor talk about this, since he raised the topic of accounting treatment of impaired assets?? What’s he trying to hide??

I also dealt with this prospect previously ..http://brianodoherty.ie/wp/featured/2010/11/stop-committing-economic-suicide..-as-follows/

– or scroll down a few posts to see it.

Goldman Sachs says Irish bank losses not so bad

Why don’t they let us see the report published last week by Goldman Sachs, which says, in essence, that we have been far to negative in estimating our financial losses, at bank and national level. As a result, we are forcing the banks to raise unnecessary capital (and the shareholders to consequently take unnecessary losses). Some new capital may be required, but not on the scale indicated by the regulator.

In particular Goldman blames NAMA, as being far too pessimistic in estimating the value of banks assets being transferred to it. Even in a worst case scenario, the organisation is “unrealistically” pessimistic, they say. Our banks, which are forced by our government (-who then takes them over !!-) to face their full losses- and more – up front–uniquely in the world – have not in fact, lost that much more, as a percentage of their total loans, than banks in other countries, whose losses are covered up by government rescue schemes. (This applies in the EU also, where bank losses in every country are effectively cloaked by hidden bail outs). Goldman says:

“…Aggregating over the entire loan book, the assumptions
would give us gross credit losses for domestic banks of
€35bn over the 5-year cycle, which amounts to 8.4% of
total loans, and 22% of GDP (Table 1). This compares
with our colleagues’ estimates of total credit losses
worth 7% of GDP for domestic banks in the US, and
6.5% of GDP in the UK…”

They also say:

“…But if our estimates suggest anything, it is that the
ultimate losses, and the ultimate burden on the Irish
government, will be quite a bit lower than estimated by
NAMA, which is likely to make money on its
investments. Correspondingly, the government will
significantly have over-capitalised the banks, perhaps
by tens of billions of Euros….”

Its extraordinary that our media have not reported this to our people !.

Unwind NAMA and let the ECB off the hook

This is a post I sent to IrishEconomy.ie blog today:


To all, and especially those who recently insisted that we could keep on issuing NAMA bonds….The situation is very clear:
It’s the ECB that wants a bail out!!
THEY, themselves, want to be “bailed out”, of the alleged obligation on them to keep on cashing NAMA bonds (which they most probably never agreed to, but the Irish government has managed to impose on them)
So, ECB wants the Irish government to find some other way to handle the bank liquidity problem..OK?…Even if it means that the EU must extend loans to Dublin.

So, we must unwind the NAMA scheme–at least for not yet nationalised banks- because it is that scheme that has seriously damaged our credibility. (What do you think bond investors think of us when we put our sovereign guarantee on joke bonds..bonds that “mature” in six months when the issuer has no chance of redeeming them for many years, bonds that the issuer pays 1.5% on, when his real risk rate is a large multiple of that, bonds with no firm redemption (for cash) commitment, for any date ?? This is what’s damaged our credibility).

And this is what is extremely difficult to recover from politically. Just look at the damage we have done to our better banks…forcing them, uniquely in the world, to mark €80 bn. to market when loans still have years to run, etc. The European bond investors like schemes wherein governments support banks, not ruin them and keep them private, not nationalise them, and show some sophistication in handling liquidity problems, in discussion with partners, not landing partners with bag loads of joker bonds worth less than Monopoly money. They must think the people in charge of our banking sector and economic policy are idiots.

So, unwind all that, apologise, fall on swords, etc. In just handing property back to BOI-AIB alone we save perhaps €20bn. of future NAMA (=State perceived) obligations…or c. 15% of the National debt v. GNP ratio… in a few strokes of the pen. Here’s more detail : http://brianodoherty.ie/wp/featured/2010/11/stop-committing-economic-suicide..-as-follows/

After that,. Investors will see that a deficit reduction of €6 bn. is in fact a very big step towards resolving the structural fiscal problem and should enable us to get back into the bond market at a fair price. If not, then we can go to the EFSF.

So, then, what to do about the banks liquidity problem? Maintain the guarantee for a while—it already duplicates the NAMA guarantee anyway…and discuss sensibly with the ECB and partners some resolution of the (short term) problem. The solution is out there and some of the brilliant minds who contribute to this blog will find it, if they start thinking positively and even if MK can’t see it.

And one more very important thing we must do for national credibility in this matter…Someone must advise the Governor that his job is to defend the national banking sector, not go around offering it for sale abroad!

All Irish official debt now guaranteed by Germany

It seems that Chancellor Merkel has clarified her previous suggestions that bond holders must not rely on an EU bailout for Irish and other sovereign debt by saying her proposal only commences from 2013. All existing debt will therefore be free of all but EU sovereign risk to debt holders

That’s what it seems to me. There is no way to avoid the conclusion that all of our existing debt, guaranteed by the State, will rest on an implicit–and almost explicit- EU backstop guarantee. Brilliant ! The risk spread over German Bunds should therefore disppear, or almost so, in relation to presently outstanding debt and debt to be issued in the near future

Most of the currently issued Irish debt– that is “promises to pay” guaranteed by the Irish State – relates to NAMA. This year, something like €30-40 bn. of NAMA bonds are being issued. Up to now, the money market chaps didn’t really expect that our State could redeem these bonds fully.. and neither did I. (Especially as their Term Sheets do not contain a firm redemption commitment, other than to offer more bonds in exchange). But now, Angela Merkel has added her promise to them…Is that right?

This seems marvellous !..It means that the Irish government is borrowing up to €40 bn. of encashable property from the banks, at an incredible interest rate of c. 1.5%, to be used when it needs to use it – i.e. sell for cash when ready- and without a firm repayment date to the banks. Meanwhile, the banks get their funds to be going on with–in the form of borrowings– from the European Central Bank. What a deal! for the State….(And Shane Ross wanted us to join the sterling area, not the Euro !) (Of course, expect the ECB to say something about that..They may pressure the goverment here to pay the banks- i.e. redeem the bonds- immediately upon selling the property, and meantime to pay a proper interest rate on the bonds)

This can only be good for bank shares, too, to the (considerable) extent that the government guarantee which was (recently unsuccessfully) backstopping the banks normal market funding operations, a guarantee of diminishing credibility, had a major depressing influence on bank share values and should now become a real positive for the banks.

I don’t know that Angela really realises what she has done. A year ago there was no EU guarantee backstopping Irish obligations, short of an expensive and humiliating EU-IMF bailout. Then she suggested that it was unfair to German taxpayers that investors in Irish bonds should get away scott free in the event of a collapse. That really depressed the bond prices, and bank shares. But now, in saying that her ideas about loss-sharing won’t come into force for 3 more years, she has effectively stated that there will be an EU guarantee for Irish bonds before then.

Tausend Dank, Frau Merkel !

Morgan Kelly gets it wrong..

Prof. Morgan Kelly writes an hysterical piece in the Irish Times today saying we are all doomed. And, he offers no solution…he sees none. His main shocking prediction is that AIB will cost us as much as Anglo, mainly because it will lose a fortune on its residential mortgages, over the next few years. So, I had to respond a little and I reproduce my contibution here, for you Sheila, and your sister..


What we don’t need at this time is hysterical commentary, dumping on our banks and economy and unable to propose solutions to perceived problems. Also, its improper of the Irish Times not to lend part of its OpEd page to a more positive and optimistic evaluation of our circumstances. It seems they only wish to publicise the negative and depress the nation, and bond markets, further than what the real situation merits.
At an AIB meeting last year, the Chairman stated categorically that the bank had not repossessed a house in over eight years. Its last detailed financial report, earlier this year, stated that it never pursued a policy of providing more than 92% mortages and those only to first timers, although at the time foreign banks were offering 100%+ interest only deals. (I don’t think Morgan Kelly complained about that practice by foreigners, although he did call the property market correctly, as did tens of thousands of ordinary Irish residents who decided Not to buy in those years.)
In alleging that AIB will cost the taxpayer c. €34 bn., Mr. Kelly seems to be plucking from some fruity tree of knowledge superior to that of our Regulator, the EU stress testers and the banks own management and directors, including new directors, not to mention the NAMA evaluators. Kelly attributes the bulk of his forecast loss to likely losses on residential mortgages. But AIB is not the largest provider of residential mortgages and seems to be in the best position in terms of impairment ratios. In any case, Mr. Kelly should know that mortgages are long term loans and, under the new rules for accounting treatment of impaired financial assets, proposed by the International Accounting Standards Board, and which are very likely to be adopted by EU nations in the near future, predicted losses on mortgages can be estimated annually and then amortised over the remaining period of the loan. The period is long enough for losses to be replaced by profits as inflation increases house prices and, if not, the annual debit to P/L will be easily covered by the bank’s operating profits, even if losses are to be estimated at catastrophic levels.

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