Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.

Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.

The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.

By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.  ….

This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.

So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.

Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.

Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama. (link to article)

Having heard the ‘debate’ afterward and having obtained a letter from one of the Green Party parliamentary party members to a senior ranking disillusioned member of the party in which a venerable Green legislator claims, as Alan did today, that academics commenting on Nama with a critical perspective are not fully appreciative of complexities of Nama and are not offering any solutions to the porblems Nama is supposed to tackle, I can say the following:

I stand by my original estimates of losses expected from Nama. Alan Ahearne’s quoted figures are based on thin air, as Dr Ahearne has failed to produce any evidence to support his assumptions or estimations, while my (and Brian Lucey’s) balancesheet for Nama has been in public domain and under public scrutiny for over two months now,

Points raised by myself, Brian Lucey and Karl Whelan (and some others as well) about the lack of safe guards, stop0loss rules, transparency, accountability and ownership of Nama and its assets are not academic, they are as real as Dr Ahearne’s salary in the employment of the Minister. Nay, they are actually more real, because families who will be paying for Nama deserve to be the rightful owners of Nama assets and deserve to have full access to Nama operations,

As far as I know, neither Dr Ahearne, nor his masters have offered any, I repeat, any clarifications as to the amendments they plan to propose for Nama legislation. In contrast, everyone can read my proposal for Nama3.0, Karl Whelan’s proposals for changing Nama legislation, Patrick Honohan’s ideas on how Nama can be fixed and altered, and so on. None of us have been paid for doing so, unlike Dr Ahearne who, having not failed to accuse us all of being ‘academic’ has (a) called us ‘colleagues’ (surely this makes his musings on the subject also ‘academic’, and (b) has managed to produce no new ideas on Nama beyond what his masters produced in the proposed legislation.

I am having a very hard time understanding how myself and other independent observers of Nama can be labelled ‘academic’ when the questions we raised about Nama are both immediately relevant to the issue of Nama operations and are countered from the opposing side by the nonsense of unsubstantiated numbers quoting and references to us ‘not appreciating the complexities’?

Here are couple of questions sent to me by one senior policy person in Ireland with my quick replies to them:

Q: Apparently, in one of the debates, a pro-Nama person suggested that Banks nationalisation cannot occur before Nama is paid for because, while the ECB will do the swap for Irish government bonds as a reasonable discount, they will not give the same deal for a nationalised bank. Or if they do help us, they will insist on their pound of flesh i.e.they will do an IMF on us and we will lose all economic sovereignty. My questions about that are… a) is that really true…

A: It is true in so far as the ECB lending window is for private banks that are solvent. However, it is a technicality, since the ECB will have to offer lending facility to the governments as well. It simply has not been confronted with such a prospect before, but hey, there is always a first one.

b) if Irish government put their shares in Trust for taxpayers as per Nama3.0 – hey presto no link to government – does that get over ECBproblem?

A: Yes, it does, further, recall that I have argued that (steps 3 and 4) the Government can provide for private ownership diluting its own share holding in the banks, so the banks will be owned by a trust (Nama), plus two large groups of private investors, with the Government nowhere to be seen. We can even go further and include as shareholders in Nama some developers/investors by offering them shares in Nama in return for equity in their development projects written against the loans.

Note to Opinion Columnists: It DOES Matter How We Deal With the Banks

This post was written by Karl Whelan

There’s been a flood of recent commentary on NAMA from opinion columnists, editorial writers and broadcast journalists. Unfortunately, much of this discussion has been premised on an incorrect but apparently appealing idea.

This is the idea that it doesn’t really matter which approach we take to resolving the banking crisis because the costs to the taxpayer are going to be about the same no matter what happens. We’ve guaranteed the liabilities, these people will argue, so basically we’re on the hook no matter what. And since all the plans are going to expose us to lots of risk, let’s just get on with the plan the government has.  link to full article

In answer to our own question we remember our usual repsonse to conspiracy theorists everywhere;- never underestimate the sheer incompetence of authorities.

Dynastic fortunes were created. Yet the system over-reached itself and crashed. Global losses on loans and financial securities exceed $4 trillion. Governments have had to support the western financial system to the tune of $9 trillion.

British taxpayers’ share of that support exceeds $2 trillion – proportionally the largest of any country, and by a substantial margin. Yet our bankers are again insisting that they pay themselves packages wildly above those in any other industry. Stephen Hester, CEO of RBS, doubtless argues that his near £10m deal is below the going rate in financial services, and that he is making sacrifices to help the stricken bank recover. But why are personal rewards so extravagantly high in a sector that adds so little value and creates so much systemic risk that others have to bear? What kind of financial system do we want?

The Guardian suggests breaking up banks that are too big to fail, new banks created and review the long-running relationship between the City and wider British economy should be. Without root-and-branch reform a great opportunity is going begging. Read the article in full here.

The too big to fail problem has been central to the degeneration and corruption of the financial system in the north Atlantic region over the past two decades. The ‘too large to fail’ category is sometimes extended to become the ‘too big to fail’, ‘too interconnected to fail’, ‘too complex to fail’ and ‘too international’ to fail problem, but the real issue is size.  The real issue is size.  Even if a financial business is highly interconnected, that is, if its total exposure to the rest of the world and the exposure of the rest of the world to the financial entity are complex and far-reaching, it can still be allowed to fail if the total amounts involved are small.  A complex but small business is no threat to systemic stability; neither is a highly international but small business.  Size is the core of the problem; the other dimensions (interconnectedness, complexity and international linkages) only matter (and indeed worsen the instability problem) if the institution in question is big.  So how do we prevent banks and other financial businesses from becoming too large to fail?  Link to article

Simon Johnson from the Baseline Scenario has his own take on this too and wonders what further nightmare we are storing up by ducking the issue.

The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense.  In this view, the underlying cause of the crisis is much simpler – the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution.  At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs.  More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

We’ll double our national debt (as a percent of GDP), and for what?  To further entrench a rent-seeking set of firms that the government determined are “too big to fail,” but will not now take any steps to break up or otherwise limit their size.  Link to article

“On the face of it, the announcement looks like good news. AIB get to replace €2.4 billion of one type of debt with €1.3 billion of a different kind of debt. (Full gory details here.) This reduces AIB’s liabilities by €1.1 billion and boosts the core (shareholder) equity capital of the banks. To the extent that this gives the shareholders a greater cushion it’s good news for them. From the point of view of radical nationalisation advocates like me and, um, the IMF, it also means more equity capital can be used to absorb losses before the call on making up the rest of the capital shortfall moves onto the State.

However, when you dig a bit deeper, there is less to be enthusiastic about:

1.
The new bonds are “10 year bullet dated subordinated Lower Tier 2” – the key is that they are dated, so now they count under the guarantee (See page 5). So while technically, the loss-sharing burden on the state is reduced by the €1.1 billion profit that AIB booked, the contingent liability for the state is increased by the €1.3 billion that gets added to the list of guaranteed debt. And if you believe that the losses are such that they should wipe out the equity of the banks, then the extra €1.1 billion will still get wiped out and the state will have lost any opportunity to clean out non-guaranteed subdebt holders. So this could cost the state more in the long run, provided we extend the guarantee in its present form, as it appears the government wants to do.  Link to full article

And there’s another twist. Who’ll pay for these bad loans? The Irish taxpayer, of course. After tomorrow’s EGM when shareholders vote on a €3.5 billion State recapitalisation package we will all be on the hook.

And it’s only going to get worse as the economic climate in Ireland worsens and more borrowers default. AIB’s “criticised” loans have already risen by €9 billion to €24.3 billion in the first three months of the year.

For analysis by Dr Constantin Gurdgiev of what AIB’s Interim Management Statement really means click here