Economics 24/07/2009: getting deeper into NAMA Wonderland

NAMA is a quagmire that is only getting bigger the longer we are looking at it. The latest reports now claim that the NAMA remit will be extended to cover foreign banks operating here, suggesting that cross-collateralised loans and holdings will be facing embarrassingly lengthy legal challenges otherwise. Of course, it was never the original Government intent to share the spoils of a taxpayer-paid bailout to prop up foreign banks. But hey, if sharing the trough is what it takes to rob the taxpayers, then our Government has no problem with this.

A revealing research note from Davy published today says it all: "From an equity investor’s point of view, an examinership process for a big developer such as Carroll would be preferable to
receivership/liquidation. The banks concerned would still have to take a write-down, but it offers the developer the prospect of survival and provides the banks with an opportunity to get back the remainder of their money. Having said that, it would obviously be preferable if these
actions stopped altogether, allowing NAMA to proceed unobstructed.[Read: the spoils will be richer if the lawyers stayed away from the feeding corale.] It is important to understand that examinerships are likely to occur only where developers are forced into a corner such as we have seen recently with ACC. Voluntary examinership is unlikely given that any successful restructuring of debt does not cancel a developer's personal guarantee to the lender (which many of them have)."

Now, examinerships are also possible, of course, if the developers are insolvent and have cash flow problems. But Davy would not mention that small tid-bit because they are fully aware that majority of the troubled developers are, in collusion with the banks, restructured. Anticipation of NAMA has also made many of them, undoubtedly, transfer all liquid assets to the shelters where no NAMA can touch them. So all of this implies two things:

1. The idea that NAMA will pursue vigorously non-performing developers is bonkers - there will be nothing to pursue comes 18 months since NAMA or the banks rescue (depending on how smart a given developer was) was first rumored. By the time NAMA is operative, there will be nothing left that is held in the name of each one of these developers that has any chance of ever being liquified.
2. The question as to whether this amazing delay in rolling out NAMA was knowingly applied by the Government to allow an escape clause for some loans holders. This is, of course, a speculation, but as any student of undergraduate economics knows, if you want to prevent people from taking preventative actions, any policy change should be unaticipated. Of course, as always, there is an alternative, but equally unpleasant, explanation as to why the Government chose to announce well in advance its desire to set up NAMA - the explanation of a panic response to a perceived crisis.

So do tell me now, how can Minister Lenihan claim that, based on the information he has seen,
it was "not inevitable" that NAMA would result in the state taking majority ownership of AIB and BofI. How? Well, this can be possible if and only if either

1. the haircuts applied to the NAMA purchases are deep enough to compensate for the cost of bonds, plus the impairment rate on loans transferred. Do the math - at 5% over 15 years coupon, applied to a purchase yielding 3% in revenue - 26% (not factoring in any inflation), the latter is anyone's guess, but judging by NIB, ACC, Nationwide etc examples, should be around 20-30%. Do the math, or
2. post-NAMA recapitalization of the banks will be done as a give-away of taxpayers money, while the banks post-default 'liability' on assets that Mr Lenihan was so keen to promote as a 'safeguard' for the taxpayers only few months ago will be nill.

Again, take you pick, but either the Government is aiming to be reckless with our money or deceitful.

Oh, and another thing - the new talk about NAMA liabilities being off the state balance sheet. This is kind of what Messrs Leniham and Cowman assumed will happen with the banks guarantees, until the international observers and analysts got a wind of it. Ditto with NAMA. Last week's decision by Eurostat, titled The statistical recording of public interventions to support financial institutions and financial markets during the financial crisis does allow for the possibility for Minister Leniham to hide NAMA liabilities off the front ledger of his Government. In particular, Eurostat's Section 8: Classification of certain new bodies allows the state to separately account for a funded entity "where ...the identification of an institutional unit in the national accounts requires that the body has "autonomy of decision" in respect of its principle function and either keeps a complete set of accounts or it would be possible and meaningful, from both an economic and legal viewpoint to compile a set of accounts if they were required". Now, if Cowen/Lenihan due can convince the readily convinceable EU Commission that NAMA undertaking has nothing to do with the General Government and has its own life and management. Never mind that the same taxpayers paying for Messr Lenihan and Cowen wages and their spending plans under the General Government expenditure will be underwriting NAMA. The charade of 'low debt Ireland' will then go on unperturbed.

In other words, if Lenihan is successful, some €60bn of bonds might be called something other than the official Irish Government debt. This is pure farce, but hey, may be as the taxpayers we can go on strike and tell Mr Lenihan to pay for NAMA out of its own pocket - afterall, it will be fully autonomous from the Government and therefore from us, the taxpayers?