Saturday, August 1, 2009

NAMA 3.0: A real alternative

I was bemused to learn that a number of my economics colleagues are apparently starting to 'discover' the idea of resolving the banking crisis through the use of a voucher-styled equity acquisition in Irish banks and disbursement of these to the taxpayers. Oh, it makes me glad that potentially some of them - possibly including even those who would not give me a fulltime job in their august departments - are now coming around to accepting some of my original ideas.

So to clearly draw a line in the sand, I espoused the idea of voucher-styled recapitalization of Irish banks on the pages of Business & Finance, with Prof Brian Lucey (the only person who saw, amongst academics, any merit in this idea from the start) in the pages of the Irish Times, in the Sunday Times and in the Irish Independent, as well as, of course, on this blog. But my entire view on how the banking crisis should be handled is summarized here:

Step 1: Require banks to take full mark-to-market writedown on their loan book;
Step 2: Travel down the capital ranks to draw down shareholder equity, deplete perpetual bond holders and so on to cover the writedowns;
Step 3: Force the bond holders into debt for equity swap;
Step 4: Open enrollment for a share-participation in Irish banks recapitalization to SVFs, vulture funds and any other form of private capital;
Step 5: Cover all remaining shortfalls in capital base with Government bonds swapped for equity after Steps 1-4 are completed and after an independent assessment of the value of the remaining loans is carried out to determine the true extent of banks under-capitalization;

Step 6: Hold equity in an escrow account (NAMA3.0) on behalf of the taxpayers, appointing a Supervisory Board to every bank recapitalized by the taxpayers money. The SB should consist of one appointee by the Minister for Finance, 3 direct independent representatives of the taxpayers, who are charged with explicitly guarding the taxpayers' interests, 1 representative of the bank board, 1 representative of NAMA3.0 and 1 independent director. Each member (other than those from NAMA3.0 and the bank) will hold a veto power. A requirement that risk and credit committees of NAMA3.0 include at least 51% majority of independent experts who cannot be employees of the state, NAMA3.0 or any other parties to this undertaking;

Step 7: NAMA3.0 accountability: no indemnity for negligence and incompetence for any employee or director of the escrow organization; no cross borrowing by the Exchequer from NAMA3.0 is allowed, so Brian Lenihan and his successors cannot raid the nest egg; ownership of shares in the account accrues to the taxpayers, not to the state or the public sector; NAMA3.0 cannot lend money to continue any of the banks' projects;

Step 8: NAMA3.0 transparency: full disclosure of all recapitalization acts and shares held in NAMA3.0 - on the web, updated live; full disclosure of all employment contracts, wages, bonuses etc, CVs of all managers and directors and disclosure of all potential conflicts of interest; full disclosure and updating of the comprehensive NAMA3.0 balance sheet, cost/benefit analysis of the undertaking and live weekly mark-to-market report on the value of shares held;

Step 9: NAMA3.0 operational efficiencies: NAMA3.0 can, with consent of the Minister for Finance and in orderly (market-respecting) fashion disburse all or a part of its shareholdings so as to maximize the return to the taxpayers. This disbursal should be fully notified to the public immediately post execution, with price achieved fully disclosed. NAMA3.0 will then have 30 days to issue every resident of this country - registered at the date of creation of NAMA3.0 - his or her share of the sale proceeds net of NAMA3.0 operating costs and a special withholding tax of 25% on CGT, in a form of the cheque;

Step 10: NAMA3.0 legal remit over assets: NAMA3.0 in recapitalizing the banks will have a mandate to help the banks collect on outstanding loans by aiding them in seizing requisite collateral. In doing so, NAMA3.0 will have to agree a procedure to address problems of cross-collateralization of specific assets. NAMA3.0 will have a right to impose seize borrower's property (applicable only to developers) when such property has been legally shielded from authorities or banks at any time after July 2008.

Step 11: Conditions for banks' participation in NAMA3.0 banks wishing to participate in this undertaking will be required to adhere to the following rules, including, but not limited to, the caps on executive compensation at the banks and the requirement to set up fully independent, veto-wielding risk assessment committee at each bank with a mandatory requirement for a position of a taxpayers' representative on the board that cannot be occupied by a civil servant or anyone who has worked in the Irish banking or development industry in the last 10 years;

Step 12: Re-legitimising the public system of regulation in Financial Services: as a part of NAMA3.0, the Government must address the ever-widening crisis of markets, investors' and taxpayers' trust in the Irish system of Financial Services regulation. Many steps must be taken to address this problem, and these can be worked out over time - suggest away. But in my view, there must be a stipulation that all and any regulatory authorities (and their senior level employees) that were involved in regulating the banking and housing sector in this country until now must be forced to take a mandatory pension cut of 50%, a salary cut to put them at -10% relative to their UK counterparts wages, and return any and all lump sum funds they collected upon their retirement. The Government must impose measures to prevent banks from beefing up their profit margins through squeezing their preforming customers. The measures to force the banks to reduce their cost bases by laying off surplus workers must be enforced. From now on, every regulatory office should be required to publish all minutes of its meetings, disclose all its voting, decisions and rulings to the public, create a public oversight board that must include members of the Dail from non-Governing Parties, a taxpayer representative and independent directors.

This is a sketch of NAMA3.0. Please feel free to build a bigger picture with me


Mad in Manhattan said...

What about the people who sold the land to the developers? The farmers, older folks, the Doyle family who sold their hotels in Ballsbridge for billions.

These people made huge windfall profits when they sold. But now we know the monies they received are actually being paid over by the Irish taxpayer, who was never a party to these transactions.

Why are they not being required to disgorge at least part of their profits on transactions which in hindsight were perverse illusions?

The Galway Tent said...

Not so "stoopid" at all, at all?

85 per cent of the public think that Nama is "another bail-out for the banks".

80 per cent of the public think Nama is a "bail-out for builders and developers".

- Sunday Independent/Quantum Research

Mad in Manhattan said...

I've only experienced one property bubble in my lifetime that rivaled the Irish one. It was Japan in the 1980's. The bubble peaked in 1989, and by 15 years later in 2004, some properties in Tokyo's Ginza district were worth less than 1% of their peak price. So let's see Nama take a haircut of 99%+ on any property it takes over.

Incidentally, 20 years later, Japan property prices are still falling.

Luca said...

All wonderfully neat and nice but contains numerous flaws:

1. We can't burn bondholders today and then go off and try and sell sovereign debt tomorrow to finance current expenditure.

2. A scheme that involves *voluntary* participation in the recapitalisation project is just a tad optimistic, no?

Basically, I see this proposal resulting in enormous problems re. our credit rating which will make recapitalisation even more difficult when it transpires that nobody wants to buy your SVFs.

Why would I would to invest in a rickety Irish bank when I can currently make 15-20% on recovering international equites.


Mark Dowling said...

If I understand the post correctly, I have some questions:

1. Who, exactly, are "the taxpayers"?

2. (follows from 1) How do we prevent intra-EU immigration and demands for participation in the ultimate dispersion (pace the payment of childrens allowance for "offshore" offspring)

3. How will these direct appointees of the taxpayers be selected?

4. Why are the remittances done "per taxpayer" in a progressive taxation economy, and why are they treated as cap gain withholding - which for most taxpayers will mean full recovery on submission of tax return, no?