Few quotes and comments (emphases are my throughout):
On recovery sources:
“The best that Irish policy makers can do is cheer on the signs of recovery in the Euro area and in the US. Recovery in our main export markets – although far from certain – is likely to be the only source of real green shoots next year.”
And this is not because our banks can’t function without a bailout. It is because our economy has been demolished and demoralized by the public policy that wastes taxpayers cash in tens of billions and taxes Irish workers into consumption growth oblivion. Will Nama solve it or make it better? No. Nama will take tens of billions more out of taxpayers hands and put the money into banks. Banks can do the following with the cash that is surplus on their capital reserves:
1) Lend out to Irish – already heavily leveraged businesses, earning a rate of return on these loans of 3-4%pa at best (they currently earn around 2-3% on their past loans); or
2) Buy European corporate bonds yielding 5-7% pa (blue chips).
Anyone’s guess what they will do with cash? For DKM it is a no-brainer: “Certainly it is hard to see the reconstruction of the banking system through the creation of NAMA contributing much to short-term recovery in the economy. Indeed, it could be argued that there is a very real danger that the operation of NAMA, subject as it is bound to be to the political whims of the moment, could have a prolonged negative impact on construction capital spending in the economy for years to come.”
“It is a racing certainty that the 2010 Budget … will involve substantial cuts in government spending, especially capital spending, and increases in taxes and charges. This reduction in public spending will take place against a background of highly depressed private demand which shows few signs of picking up. ...justified by the need to curtail public borrowing for the sake of future generations (and for the sake of the interest rate margins Ireland has to pay over German borrowing costs). Yet at the same time the Government is proposing to borrow massive amounts – which could be more than all the existing government debt outstanding – in order to become the virtual monopoly developer of land and property in the State for the next decade. It is as if public policy is being determined by the mad offspring of Hugo Chavez and Margaret Thatcher.”
Well, Thatcher reference is overdone - Brian Cowen has shown no ability to deliver any serious cuts in public spending so far. Plus Thatcher actually lowered tax burden. Nonetheless, amazingly, this simple reality of an inherent unresolvable contradiction between two policies pursued by the Government did not occur to that brilliant legal (i.e logic-trained) mind of Brian Lenihan. How?
“Enduring economic hardship now so that the State can become the sole lender to the property sector is a difficult sell.” Yes, folks, ‘Nama will work’ slogan is equivalent to ‘Speculative development and investments will work’ slogan. And we learned a thing or two about the latter one, haven’t we?
“The concept of NAMA was born out of a report by Dr. Peter Bacon, an economist turned property developer.” A pearl!
On Nama effectiveness in terms of credit flow restoration:
“The most likely use of the funds supplied by the NAMA purchases will be to reduce reliance on overseas funding especially funding in the wholesale money markets. In effect the balance sheets of Irish banks will shrink as assets are transferred to NAMA and foreign liabilities repaid. This may lead to a more sustainable banking system but will not lead to an expansion in credit.”
But have they – Leni, Coweee, Ah!Earn & Co – listened to any suggestions for bettering Nama? “The official response to the criticisms of the original NAMA proposals has been ad hoc, indicating that policy is being made on the hoof.”
“The question of the bank valuation of a property related loan versus a “market” value becomes more acute when it is realised that NAMA proposes to acquire performing loans… …It will be difficult for NAMA to pay less than the value of the loan to the bank from which the loan is acquired without substantial risk of litigation. Even if the management of banks is cowed by the scale of the public shareholding in the bank there would be no such constraint on private shareholders especially bondholders who face losses due to the acquisition by NAMA of assets at too low a price.”
Now, Brian Lenihan has absolutely no understanding of either finance or economics. Fine. No one is holding it against him personally. But he is a lawyer! Can he not see this argument coming?
“Defenders of NAMA have pointed out that it is a requirement of the EC that the long run economic value be paid for the loans. … this requirement is designed to prevent national governments from over-paying for loans and so subsidizing domestic banks at the expense of competing banks located in other jurisdictions. In any event it now appears that NAMA will not be paying the long run economic value for loans acquired from the banks.”
“The most recent suggestion is that the banks will receive part of the consideration in the form of a bond whose value will depend on the recovery rate of NAMA. This risk sharing sounds attractive but it begs the question as to how the bonds will be accounted for on the banks’ balance sheets.” This is exactly what I’ve been warning about in my recent blog post (here).
“The more enthusiastic supporters of NAMA have begun to sound like stockbrokers promoting an IPO. [Well, it is an IPO for them, for absent Nama, real value of banks shares is near nil – they are insolvent!] NAMA, it is asserted, will be profitable. On analysis, some part of its profit will arise from arbitraging the yield curve. By borrowing short – through the issue of floating rate bonds to the banks – and by lending long through the acquisition of longer term property debt NAMA can make a profit. [Again, do you think this is a way forward after the current crisis lessons on maturity mismatch risks?]
"It is open to the NTMA to make a similar profit by issuing similar short dated securities and
investing the proceeds in long dated German government securities." [Brilliant! In effect, having Nama is like having a state-run hedge fund. We have truly arrived to Alice in Wonderland.]
“NAMA is also expected to make a profit because when the loans are repaid (or the security underlying the loans realised) the proceeds will exceed the original cost. If one assumes that what is ultimately realised is the long term economic value of the assets then NAMA can only make a profit by paying less than the long term economic value.” [And hence we have another contradiction: pay LTEV and you can’t get profit if your estimation of LTEV was correct. There is no free lunch, folks!]
In fact Nama has to realise the underlying properties or close the loans at
- (price paid today = LTEV) +
- (inflation cumulated over the holding period) +
- (the cost of borrowing over this horizon) +
- (the cost of administering the loans by the banks and Nama) --
- (cash flow during the holding period)
"In the case of the windfall tax the distant sounds of belatedly closing stable doors can be heard. And, of course, the best way to depress any recovery in future property values is to impose a high tax on appreciation". [So the Greens’ proposal is like shooting your leg off while running] "The requirement that NAMA responds to social and political demands highlights all too clearly the dangers of creating a state-owned virtual monopoly presence in development land and property.”
“The Government has rightly warned of the dangers – mainly in terms of price discovery – of a wholly nationalized banking sector. It does not appear to have the same concerns about a similar nationalization of property development.” Another brilliant point.
“Our best guess is that a recovery in investment in development related construction will be some distance off and some of the longer term economic growth projections which have not taken account of the radically changed institutional environment caused by NAMA are too optimistic.”
This is correct, and I will be revisiting my longer term forecasts for Irish economy to reflect Nama costs explicitly in days ahead, so stay tuned.
PS: Per earlier reader/follower request:
List of foreign ‘stars’ who criticised Nama:
Mr Bo Lundgren (a man with real experience handling major bank crisis)
ZEW President, Professor Wolfgang Franz
Robert Engel (Nobel Prize, Financial Econometrics)
Paul Krugman (Nobel Prize)
Professor Roberto Rigobon (MIT)
Professor Michael Goldstein (Babson College)
Domestically - at least 46 economists and finance specialists (many are finance specialists)
On pro-Nama academic side: one Alan Ahearne - an economist with no finance experience
Hey Constatin, thanks for the names of the economic "stars" who criticized NAMA, if you had any links to articles where they outline their views I'd be very interested in reading them, in the meantime here is a video that you are sure to enjoy (or maybe not):
ReplyDeletehttp://www.youtube.com/watch?v=sxg6c-QuXVE
Great post, Constantin, and previously on the greens sell-out, thanks. Unfortunately, the Irish people are going to be sold out in the Dail this week or next. I attended a pathetically attended demo in Dublin earlier which shows what we're up against, and there were a lot of the usual socialists at it. The Irish people are going to get what they deserve.
ReplyDeleteGreat post, Constantin, here's a link that will put a smile on your face
ReplyDeleteThe IFB is solely dedicated to the prevention of financial crime, providing a range of fraud prevention services to its membershttp://www.ifb.ie/homepage/index.php
"The concept of NAMA was born out of a report by Dr. Peter Bacon, an economist turned property developer".
ReplyDeleteA gem alright Constantin - mainly because it's not true !! Asset Recovery Agencies have been used well before Mr Bacon but as usual don't let facts get in the way.
The issue around the sub-ordinated debt is hilarious - you want the government to pay less for the loans, they decide to do that by paying some in the form of sub-ordinate debt, this debt is less valuable to the banks which means effectively they are getting less than if they didn't get sub-ordinate debt. So now it's an issue that the banks are getting less for the loans !!
The argument on LTEV is childish - you don't accept that the LTEV is being paid and yet you try to use LTEV to argue against the potential for profit from NAMA. ARA's have broken even and made profit in the past. Your costings are structured incorrectly and ignore the fact that the running costs of the debt will be met IN FULL from the income stream derived from the performing loans - you know that but choose to ignore it - not very academic really.
The argument on the banks not actually putting credit back into the system is not true either - the banks balance sheets will be repaired by the NAMA exercise which will mean that they can obtain credit in the wholesale markets. I don't think the Guarantee model makes any sense at all - I note Dermot Desmond loves it !! The Guarantee model simply means we rely on the banks to sort out their loans themselves and we guarantee them in the meantime - they have not indicated any ability to sort out these loans so why would they suddenly start now. The Guarantee model is just deferred NAMA - we guarantee the banks debts for a couple of years and then find that they haven't resolved them but to withdraw the guarantee would buckle the banks so we. . . . set up an asset recovery agency !!
Also NAMA provides an opportunity for the State to extract a social dividend that they failed to extract during the boom - converting properties to social uses, re-zoning and dezoning land that they control etc.
The argument that the windfall tax will dampen down recovery in property values betrays a lack of understanding of the most basic market forces - I understood that the windfall tax was on the profits of rezoning - that means that rezoning and developing new properties is not as attractive as it used to be but doesn't mean that development isn't attractive. In fact if new zoning is not happening then surely existing zoned land will regain value even faster?
The post NAMA retail banking environment will be very different to the current one - all the foreign banks will (most likely) withdraw - I'm assuming the government will rebuff the rather transparent approach by LBG to offload Halifax into the new retail bank. There will be 3 banks - AIB, BoI, NewBank (ptsb, EBS and Nationwide post NAMA) - these will compete for business and will do so by offering credit. They will have access to credit because the will have been recapitalised and "cleansed" where appropriate of toxic assets. to argue that post NAMA they will somehow be zombies but to a greater extent than they would in a guarantee environment is not backed by facts. But then again not much of this is !!