Economics 03/10/2009: IMF GFSR: partII

To continue with IMF’s World Outlook (from the earlier post here for GFSR and here for WO Part I):

Remember we left WO Part I on that table estimating expected future contraction in house prices. The table is:
Some interesting estimates of the ‘left to contract’ distance in house prices by countries and by measures of long-term equilibrium pricing, as of Q1 2009, taking into account the contractions achieved to date. As with the analysis of the last table, based on the historical averages Ireland has some room left for downgrades. Loads of room.

As we all know, Ireland is experiencing a perfect storm – a confluence of several simultaneous crises: housing bust, general property bust, general economic recession with global demand contractions, an unprecedented fiscal crisis and a financial sector meltdown. Clearly, these factors warrant much deeper contractions on the long-term adjustment path than what simple averages suggest.
The second chart above shows that indeed, this might be the case – Ireland is distinguished as the country with the greatest remaining room for further downward adjustments in house prices than any other country in the sample. This reflects Ireland’s economic, assets markets and property markets fundamentals comparative to other countries in the sample. So 15% to go still? And that is assuming only property crash has happened…

Chart below actually confirms the above, once we realize that the income measure used by IMF is our GDP. Of course, we are familiar with the following tow facts:

1. GDP in Ireland is currently 18.5% above GNP, and
2. GNP is a closer measure of our income in the country.
   

Thus, adjusting the above figure for GDP/GNP gap implies that instead of roughly 0.2 forward expected adjustment expressed in GDP terms as the income base, we are facing a 0.24 level of adjustment. Furthermore, given that Ireland is currently experiencing deeper income collapse than any of the charted peers, plus, given substantial declines in after-tax income following Budgets 2009 and 2009.II, the real extent of the remaining room to compression for Price-to-Income ratios comparisons is of the magnitude closer to 0.3 – in line with all of our peers. 24-30% still to move down for Irish house prices then?
Lastly, the chart above once again reinforces the conclusions reached by IMF in the second chart above and by my own recalibration of the IMF’s duration-to-amplitude model in the table above. Price to rent ratio still has a room for some contraction of the magnitude of ca 40%. This, of course will be reached through further declines in prices relative to rents and this process is currently being delayed by rents falling off at a faster rate than asking prices in recent months. In rental yield terms, some 40% left to cover for Irish prices. Hmmm… me recalls some stockbrokers recently were saying yields are at 6-8% already and the crisis is nearly over…

Is that really a case? Not per IMF:
So IMF is saying that Irish commercial rents have much further to fall – 30 plus percent more! Say yields also compress – if not by more than that, but at least that much. Ronan Lyons estimated recently that commercial yields in Ireland are around 3% pa. Bringing these to historical average will require prices falling dramatically more from current levels – as chart above implies.

Good prospects for Nama, then, which is overpaying for underlying real assets at today’s prices, let alone at where IMF would expect the prices to be in equilibrium… Will it be -40% from current levels or -30%, or -20% - no one can know for sure. But then again, Nama is a bet on prices actually rising from current levels, not falling.

Economics 30/09/2009: Global Financial Stability Report

Update: There is an interesting note in one of today's stockbrokers' reports: "AIB is to review its selection process for a successor to Eugene Sheehy, according to reports this morning. The Government will not endorse an internal candidate based on renewed signals according to the article. Separately, Minister Brian Lenihan said it was "inevitable" that further public capital will be required by the country's banks after the NAMA transfers."

Two points:

1. If Government is so aggressive in staking its control over AIB's selection of a CEO, why can't the same Government commit to firing the entire boards upon initiation of Nama? Governments change overnight, so why banks' boards are so different?
2. I must confess, I like Minister Lenihan's belated (this blog and other analysts have said months ago that there will be second round demand for funding post-Nama due to RWA changes triggered by Nama, and then due to second wave of defaults within mortgage and corporate loans portfolia) recognition of a simple financial / accounting reality. Strangely enough, the brokers themselves never factored this eventuality in their projections of Nama effect on banks balance sheets.
   

Oh, another little point: Minister Lenihan was last night explaining on RTE that BofI and IAB both raised circa Euro1bn bonds each with the issues oversubscribed by a healthy margin and that these were 3-3.5 year bonds. we should be impressed, then? Au contraire: those foreign investors (in the case of BofI 92% of the bond issue gone to foreign institutionals and banks) are making a rational bet that Ireland will continue to guarantee depositors through 2014 if not even longer, and that the Exchequer will rather destroy the households than see banks go under. In other words, the markets priced Irish banks now as being effectively fully guaranteed by the state - bondholders, shareholders, unsecured debt holders, furniture and office suppliers, staff - you name a counterparty working with Irish banking sector... they are all now implicitly guaranteed by you, me, ordinary taxpayers in Tallaght and elsewhere across the nation. Some success, then.

News: IMF's Global Financial Stability Report Chapter 1 is out today. This is the main section of the report and it focuses on two themes:

1. Continuation of the crisis in financial markets - the next wave of (shallower, but nonetheless present) risks to credit supply in globally over-stretched lending institutions; and
2. Future exist strategies from the virtually self-sustaining cycle of new debt issuance by the sovereigns that goes on to mop up scarce liquidity in the private sector, thus triggering a new round of debt issuance by the sovereigns (irony has it, I wrote about the threat of this merry-go-round link between public finances and private credit supply back in my days at NCB - in August 2008).

The report is a good read, even though it is a voluminous exercise - check it out on IMF's main website (at this hour I am still working with press access copy).

Ireland-specific stuff:
Nice chart above - Ireland was pretty heavy into ECB cash window back in 2007, but by 2009 we became number one junkies of cheap funding. Like an addict hanging about the corner shop in hope of a fix, our banks are now borrowing a whooping 7% of their total loans volumes through ECB. This is a sign of balance sheet weakness, but it is also a sign that the banks are doing virtually nothing to aggressively repair their balance sheets themselves. Why? Because Nama looms as a large rescue exercise on the horizon.
But, denial of a problem is not a new trait. Per chart above, through 2006, Irish banks were third from the bottom in providing for bad loans despite a massive rate of expansion in lending and concentration of this lending in few high risk areas (buy-to-rent UK markets, speculative land markets in Ireland, UK and US and so on). Now, taking the path the Eurozone average has taken since then, adjusting for the decline in underlying property markets in Ireland relative to the Eurozone, and for the shortfall on provisions prior to 2007, just to match current risk-pricing in the Eurozone banks, Irish banks would have to hike their bad loans provisions to 3-3.75%. And this is before we factor in the extremely high degree of loans concentrations in property markets in Ireland. Again, why are we not seeing such dramatic increases? One word: Nama.
Lastly, table above shows the spreads on bonds in the US and Eurozone. Two note worthy features here:

1. The rates of decline in all grades of bonds and across sovereign and corporate bonds shows that they are comparable to those experienced by Ireland. This debunks the myth that Irish bonds pricing improved on the back of something that Irish Government has done ('correcting' deficit or 'setting a right policy' for our economy). Instead, Irish bond prices moved in-line with global trends, being driven by improved appetite for risk in financial markets and not by our leaders' policies;
2. Current spreads on Irish bonds over German bunds suggest market pricing of Irish sovereign bonds that is comparable to US and European corporates. In effect, Ireland Inc is not being afforded by the markets the same level of credibility as our major European counterparts. One wonders why...
   

Economics 28/09/2009: Aggressive pre-Nama re-writing of loans?

Corrected version (hat tips to Adrem for correcting my math and for suggesting a good question to follow up on)


So I was told today, by a senior banker, that banks have been actively re-writing non-performing loans (since at least April this year) under new contracts with extended principal and interest holidays in covenants. These, in preparation for Nama, are priced at higher rates so they can get more on the loans once Nama discount applies.

This makes sense.

Do the math - assume:

• 20% cross-collateralized Euro100mln loan (see explanation of this below), written in 2006
  
• 3 years rolled up interest at 19.1% accumulated at 6% pa - which gives us loan face value at placement on the bank watch list of Euro119mln
  
• New covenants set in April 2009 at 9%pa, with no interest yield or principal repayment required for the next 3 years.
  
• On the date of Nama initiation, then, the loan is performing with expected yield of 9% on Euro119mln.
  
• Now, suppose the LTV ratio of the loan is 75% of principal (meaning the value of the underlying collateral was 133mln in 2006)
  
• Assume that collateral value has fallen 30% (an under-estimate to be palatable to all optimists out there), which means that with 20% cross-collateralization writedown, plus 2% inflation annually since 2006 (cumulative inflation discount of 6.1%) collateral now is valued at 63mln,
  
• By the time new covenants on the loan kick in in 2011, the rolled up interest on the loan and principal will mean total loan value will be roughly Euro 154mln.
  
• Now, to break even on this loan Nama will have to pay 1.5% interest charge on bonds, plus 0.5% management cost (including bank fees), implying that 3 year average mark-to-market writedown (at 2% pa or 6.1% cumulative) plus inflation at 1% pa on average (3% cumulative) is (1-63mln/154mln*0.91)*(100%)=62.7% (assuming no growth in the property market between now and 3 years from now).
  

Remember that figure in the Irish Times article signed by 46 economists, including myself? It stated that the real value of 90bn worth of distressed loans is around 30bn. That implied a mark-to-market writedown of just 67%! When published it caused Garret Fitz to go ballistic and the entire pro-Nama crowd to shout "Extremists are at the gates!" Not that far off from 62.7%.

Of course, this is an illustrative example. But notice that it assumed very modest decline in underlying assets value (30%) to date, plus a very generous (75%) LTV ratio. House prices alone are already down by more than 30% from the peak.

Challenge the rest of my assumptions?

Whether you do or not, one thing is clear - if you are a bank you had no incentive to manage your stressed loans since the very least this April. And you had a massive incentive to push up the face value of the loan without forcing it to become non-performing. The latter can be done by re-writing the loan with new roll up covenants.


Cross-collateralization:

Banks gave multiple loans on same properties in several forms -

1. most commonly, a property was valued several times consecutively and whatever capital gains accrued on the property, these gains were re-mortgaged under new loans;
2. also commonly, capital gains were priced out of new building permits being extended to the properties. I am aware of several cases of mega deals (hundreds of millions borrowed) where a developer/investor bought a site with the site itself being collateralized for this first round of borrowing at the market value, then rezoned it, taking out a new loan against the site value after rezoning in excess of original loan, then obtained a planning application and re-collateralized the site again;
3. less commonly, the banks simply did not check if a collateral property has already been pledged elsewhere.
   

What happens here then?

Suppose a site was bought for 100mln at 75LTV, so that the developer borrowed 75mln for it. New zoning applied lifting the site value to 200mln, providing another 75mln loan facility at 75%LTV on 200-100mln capital gains. The building permission was then granted that, say lifted the site value to 300mln, and a new loan was taken out at 75LTV. Total value of the site was 300mln. Suppose each step in borrowing and capital gains took 1 year (a very short period of time), suppose interest rate was 5%. This means that:
Loan 1 now totaled Euro83mln
Loan 2 now totaled Euro78.8mln
Loan 3 now totals Euro75mln.
At loan 3 origination, LTV ratio on the entire site was 236.8/300=79%.

I assumed in my calculations on the blog that 20% of loans are written against sites that are cross-collateralized - so that other banks hold claims against the same site.

This assumption is based on a guess. It can be challenged if someone has any evidence on better numbers.

Now, that means in example above that some 20% of the site value was cross-collateralized with another bank. If it was the first loan that was cross-collateralized, LTV rises to (236.8+20% of 75)/300=252/300 or 84%. If all three loans were cross-collateralized at 20%, the resulting LTV is (236.8*1.2)/300=284/300 or 95%.

So here you have the maths on Nama - 75LTVs on each loan in reality can mask a 95% LTV of total loan package.

Economics 23/09/2009: Cost of Nationalization

Today's note from Davy Stockbrokers throws into public domain a challenge and an accusation:

"Regrettably, the public debate on NAMA has been anything but rational and dispassionate. Confusion, misinformation and, at times, rank deception has run riot over the past several months... Tellingly, the brunt of discussion has majored on an anti-NAMA rant, with scant exposition of any credible alternatives."

If Davy is so dismissive of the 'alternatives' - of which there have been several rather involved ones - then Davy should be even more dismissive of the Nama proposal itself, for the Government still has no estimates for costs, returns, time horizons, detailed haircuts, borrowing terms for Nama bonds etc - after 6 months of working on it with an army of civil servants, highly paid consultants and having the likes of Davy on their side!

"Nowhere is this more depressingly obvious than in relation to the nationalisation option, wherein protagonists have tended to confine their treatises to a short paragraph or three, and where the potentially ruinous funding consequences for both the banks and sovereign have been glossed-over..."

Of course, unlike Davy or other stockbrokers, it is the independents: Brian Lucey, myself, Karl Whelan and Ronan Lyons who actually bothered to estimate - to the best of our resources - the expected costs of Nama to the taxpayers. Instead of focusing on the benefits and costs to the taxpayers, Irish stockbrokers focus on benefits to the banks and their shareholders. This is fine, and I will not accuse them of doing anything wrong here - their clients are, after all, not taxpayers, but shareholders. But it is rich of Davy team to throw around accusations of us, independnt analysts, 'glossing over' aspects of Nama - we are not the ones being paid by anyone for doing this work.

The emphasis on 'estimate' and 'expected' is there to address Davy accusations of 'rants' or 'deceptions'. If estimates are rants, Davy-own entire daily research output can be labeled as such.

But Davy folks are correct in one thing - we, the critics of Nama, have not produced an estimate of nationalization option cost. Instead, it was, me thinks, Brian Lenihan who promised to produce such estimates. May be Davy note was addressed to his attention?

Seeing the eagerness with which Davy folks would like to see some numbers on nationalization, below is the summary of estimates of such an undertaking developed by Peter Mathews (you can see his article on this in Sunday Business Post (here) and confirmed and elaborated by myself and Brian Lucey. (Again, note, one can only assume that our Davy folks do not read Sunday Business Post's Markets Section.)

I have argued in my Nama Trust proposal (aka Nama 3.0) (here) that we can avoid nationalization by buying out equity in the banks to support writedowns and then parking this equity in an escrow account jointly owned by all taxpayers. The banks will, then be owned by the Trust, not by the Government. Their shareholders will be Irish taxpayers as individuals, not the Government. The Trust will be there simply to provide a time buffer for orderly dibursal of shares over time.

Now, whether you call it 'nationalization' or 'Trust' or anything else, the problem with the banks in Ireland is that they need to write down something around 40% of the troubled assets values. This can be done by gifting them bonds (as Nama will do), or by buying equity in the banks in exchange for the same bonds, except, as below shows, at much lower cost.

In the first case, you get a promise of repayment from the banks and a pile of heavily defaulting loans. In the latter case, you get shares in the banks.

In the table above, the first set of red figures refers to the amount of equity capital that will be need for repairing banks baance sheets today (it can be issued form of bonds, just as Nama intends to do, which will be convirtible through ECB repo operations at the same 1% over 12 months). The amount we will need to put into banks under 'nationalization' or Nama Trust option is Euro30.88bn.

The bondholders will remain intact (so no additional cost of buying them out).

This upfront cost is over Euro 23bn cheaper than Nama. And it can be further reduced if we get at least subordinated bond holders to take a debt-for-equity swap, which they might agree to as they will be taking equity in much healthier banks.

The second and third red figures refer to the expected recovery on this equity purchase in 5 years time (not 15 as in the case of Nama). And all assumptions used to arrive at these two scenarios are listed. The figures are net of the original Nama cost. In other words, under these two scenarios, we can generate a healthy profit on Nama Trust, which we cannot hope to generate in the case of overpaying under the proposed Nama scheme.

In addition to the table above, I run another third scenario that assumes:

• 5% growth pa in banks shares (as opposed to 15% and 10% growth under scenarios A and B);
• Banks fully covering 1.5% cost of Government bonds (as in scenario B);
• Banks paying a dividend to the Exchequer of 2% on loans (net of bad loans) and charging 0.5% management fee, so net yeild is 1.5% on loans (as in Scenario B).

The bottom line in this scenario was ca €9bn in net return to the Exchequer on 'nationalization' within 5 years of operations.


Back to Davy note: "...the potentially ruinous funding consequences for both the banks and sovereign have been glossed-over..." Well, let me glance it over.

1. Nationalization can be avoided per my Nama Trust proposal, so there goes entire Davy 'argument'.
2. If the banks balance sheets are repaired with a 40% writedown of bad loans under the above costings while Nama would achieve only 30% writedown at a much higher cost, what 'ruinous' consequences do Davy folks envision for the banks? Their balancesheets will be cleaner after the above exercise, than after Nama!
3. If Irish Exchequer were to incur the total new debt of €30bn (per above proposal) and will end up holding real equity/assets against this debt, will Exchequer balancesheet deteriorate as much from such a transaction as it would from an issuance of €54bn in new debt secured against toxic assets such as non-performing loans? Again, it seems to me that a rational market participant (perhaps not the Davy researcher authoring the note) would prefer to lend to a state with smaller debt and real assets against it than to the one with higher debt and dodgy assets in hand.
   

Back to Davy: "...the retention of impaired assets on bank balance sheets ...would continue to cast a deep pall over perceived solvency risks in the Irish banking system, leaving this country still bereft of the necessary refinancing flows from which green shoots might grow."

I would suggest that this statement is itself either a deception (deliberate) or a wild speculation (aka rant). There is absolutely no reason why fully repaired banks (with 40% writedown on the loans under the above costings and as opposed to Brian Lenihan's proposed Nama writedown of much shallower 30%) cannot have access to the same lending markets as banks post-Nama would. However, under the above proposal:

• Irish Government will take much lower (24bn Euro-lower) debt on its books, implying healthier bonds prices for the Government into the future - some savings that won't happen under Nama;
• Banks enjoy much more substantially repaired balance sheets (again, not the case with Nama);
• There is no second round demand for new capital from the banks (not the case with Nama as proposed).

So, again: judge for yourself. When is the insolvency risk for Irish banking system higher:
Case 1: more substantially repaired banks balance sheets and more fiscally sound positioned Exchequer; or
Case 2: lesser writedowns of bad loans and more indebted Exchequer?
If you vote for Option 1 (as any rational agent in the market would do), you vote for the above 'nationalization' exercise.

Lastly, Davy note lands a real woolie: "When all is said and done, NAMA is not a bail-out of developers, or bankers, but of a banking system and its host economy. In that respect, it is a bail-out of ourselves."

Under Nama, developers will be able to delay or avoid insolvency declarations and subsequent claims on their assets. If this is not a bail-out, it is a helping hand of sorts.

As per 'repairing economy' - there is absolutely no evidence to support an assertion that Nama will have any positive economic impact, but given that it will impose much higher cost than alternatives on households, it can have a very significant negative impact on the economy. Perhaps, Davy think that households are simply there to be skinned and that our economy does not depend on them.

Then again, Davy folks thought CFDs and leveraged property deals were gods-sent manna.

Now, let us get to the more rational side of economic impact debate:

1. Under my proposal above, banks get deeper repairs, so they will be healthier and their reputational capital will not be based on a handout rescue, but on actually having equity capital injection. This is a net positive that Nama does not deliver;
2. Under my costings above, the Exchequer and/or households end up being investors with a strong prospect of higher net recovery value over shorter term horizon than in the case of Nama. This is a net positive that Nama does not deliver;
3. Under the above exercise, the banks will not be able to unilaterally take liquidity arising from the injection overseas, so whatever liquidity is generated, will have to stick to our shores, and thus to our economy. They still can use this liquidity to pay down their expensive inter-bank loans, but at least they won't be able to run investment schemes with taxpayers' money abroad. Shareholders might look badly on this one, since the shareholders will be not foreign institutional investors, but domestic taxpayers. This is a net positive that Nama does not deliver;
4. Under the above exercise, we won't have to pay Nama staff and consultants any costs - banks will continue dealing with their bad loans. This is a net saving that Nama does not deliver;
5. Under the above Irish taxpayers won't have to face a massive tax bill of 54bn, but a smaller (though still massive) bill of 30bn. This is a net saving that Nama does not deliver;
6. Under the above proposal Irish banks will be able to access the same ECB window on the same terms as any other bank in the Eurozone. The will also be able to do the same with Nama, so there is no additional cost when it comes to borrowing.
7. Under the proposal above Irish Government debt will be €23bn lower (and adding the second round recapitalisation demand under Nama - €29bn lower) than in the case of Nama, providing potential easing to our cost of borrowing. This is a net benefit that Nama won't deliver.
   

I can go on with these arguments. But I am afraid it will be a bit too much rant for our Davy folks.

Economics 22/09/2009: Two further Nama points

Updated below:

Global Finance Magazine on the concept of ‘long-term economic value’ of distressed assets (here) and on effectiveness of bad assets purchasing schemes:

“Meanwhile, the passage of the Troubled Asset Relief Program (TARP) into law in the United States failed to alleviate strains in the financial markets...

The TARP empowers the US Treasury to buy troubled assets at heavily discounted prices, well below their long-term economic value. “No one yet knows what price will be paid for the toxic paper, or what the default rates will be on the underlying mortgages,” said Carl Weinberg, chief economist at High Frequency Economics. “

Over time, people will realize that all the underlying mortgages are not defaulting, and panicky market conditions should abate, according to Weinberg. “We have seen this game before,” he says. “In the 1980s highly indebted economies like Mexico, Brazil, the Philippines and Argentina bought back their own debt from panicked small banks at 20 cents on the dollar.”

20 cents on the Dollar, folks? Nama is buying defaulting developers loans (not sovereign bonds) at 79 cents of the Euro!!! I’d rather have Brazil’s and Argentina’s bonds, thank you very much.


Another interesting bit:

Robert Boyer’s paper “Assessing the impact of fair value upon financial crises” published in the Socio-Economic Review, 2007 deals with the expected effects of LTEV application to accounting standards, but the implications of this are pretty much the same for pricing (as in Nama). Boyer concludes that LTEV “gives at each instant a seemingly relevant liquidation value, but obscures the value creation process by mixing present profit with unrealized capital gains and losses. This discrepancy increases with an increased degree of uncertainty, which is at odds with widely held beliefs about the efficiency of existing financial markets. Fair value introduces an accounting accelerator on top of the already present and typical financial accelerator. …If fair value accounting is applied to banks, an extra volatility may be created...” What is this about? Three things, as far as Nama is concerned:

1. LTEV will simply translate future value (capital gains) on assets underlying Nama-purchased loans into monetisable value as if all future price appreciation expected under LTEV can be captured in full. This, of course is a matter of timing (knowing when to sell) and efficiency of sales (having zero cost of selling and no impact on selling price of the volumes of sales that Nama will have to undertake);
2. LTEV neglects to price in the effect of large asset holdings off the market (Nama holding vast portfolio of property-backed loans off the property market), which is likely to depress property prices over the life-time of Nama itself. The end result here – a gross overestimate of future expected prices.
3. As the two points above coincide in timing, they act to reinforce each other – an accounting accelerator occurs.
   

Who says you overpay only once?

Here is the rate at which the Government can currently borrow on a 6-months basis:
Let me explain:

• we can borrow in the form of ordinary bonds at 0.481% for 6 months period. These are convertible at repo window of ECB at a discount of 12% on face value and 1% interest rate. Total cost of injecting €1 into bank balance sheet is, thus, 15.2 cents; or
• we can issue Nama bonds at 1.5% with 5% in subordinated bonds, with banks taking these to the ECB repo window at 12% and 16% discounts respectively, borrowing at 1% against both. Total cost of injecting €1 into bank balance sheet is, thus, 16.4-18.1 cents depending on how ECB risk-weights subordinated bonds.

Cheap money in the Frank Fahey World of Stupid Economics?

Economics 21/09/2009: ECB's penalties?

Updated version (00:42am September 22)

On June 23, 2009, ECB opened bidding for its first 12-month refinancing operation.

Back in May 2009, the ECB announced that it would double the maximum length of time it lends money from six months to a year and in June it set the rate for 12-months financing at 1%.

Last time it applied a longer term horizon, ECB placed 348.6 billion euros in December 2007.

So in the nutshell, 1.5% coupon on our bonds bound for ECB and bearing 6 months maturity is a rotten deal.

How rotten? If we were to issue bonds at the ECB own long term financing facility rate with 12 months maturity. The expected cost of total borrowing over 15 years inclusive of the expected costs of roll-overs and reflective of the expected yield curve for ECB rates will be around €15.4bn. In contrast, current structure of 1.5% pa coupon plus 6-months maturity is expected to yield total interest cost of ca €17.5-18.9bn. Then again, what’s €2.1-3.5bn for the Government that burns through €400mln in borrowing on a weekly basis?

What is interesting is why didn't ECB make a similar deal with the Irish Government, allowing it to issue lower coupon bonds or extend maturity of these bonds or both? One can only speculate, for ECB will never tell one way or the other, but I suspect the answer to this lies within the ECB statement that Nama should not overpay for assets it purchases.

Hmmm... Leni took his plan to the ECB men, saying we will buy €77bn worth of stuff, that includes €9bn of rolled up interest, and we will pay €54bn for it. The ECB men pulled out a calculator and extracted: [€54bn/(€77bn-€9bn)-1]*100%=20.6%. The ECB men stared at Leni in disbelief... "Herr Brian, yor ekonomi iz in truble? Djast less fan 21% dropp in yor properti praicez?" 'Oh," replied Brian Lenihan, "but Frank Fahey School of Economics says you'll give us free money!" And here the ECB men smelled a rat...

Otherwise why would the ECB, amidst quantitative easing exercise, impose sanction-level conditions on our bonds? 6-months paper and 1.5% is worse than what ECB gives money to commercial banks at. Much worse, folks.

Now, ECB is no stranger to being taken for a ride. What is telling is that ECB's reaction to 'abuses' in the past is very similar to its reaction to Nama to date.

Most recently, back in July 2008, both the Australian bank, Macquarie Group and the British building society Nationwide have used their Irish subsidiaries to upload hundreds of millions of dodgy ABS packages (in the case of Macquarie, €455mln was borrowed against the most ridiculous collateral –Australian car loans) at the ECB discount window.

On September 4, 2008, ECB’s President, Jean- Claude Trichet stated that he will make it more expensive for banks to borrow from the ECB against most asset-based securities, starting from February 1, 2009. Amidst the crisis gripping European markets at the time, ECB raised `haircut' on the securities it allows to be used as a collateral for 12-months borrowing from 2% to 12%. Additional 4.4% were to apply to paper with no immediate market price.

Note, Irish haircut on bad debts is in effect just below 21% - not that far off the haircuts applied by the ECB (16.4%) on lending backed by much more robust collateral (average European mortgage-securing assets - i.e prperty markets - are down single digits across the entire crisis) than dodgy Irish development projects (down 60-80% and some down 90% in value and falling). When ECB haircut on unsecured banks bonds is added, the total asset discount that ECB could have applied was in excess of 21%. But what is even more significant, the value of the underlying assets accepted by the ECB is supposed to be calculated as the market price less the haircut.

Again, this stands in contrast to Nama which is taking not senior bonds, but ordinary loans, and which is using farcical long-term-economic-value 'pricing', not current market prices. Despite this, Nama haircuts are just 20.6% (once rolled up interest is accounted for) on lower grade assets than the ECB would consider at its window…

No wonder they won’t let Ireland issue bonds with a coupon of 1% or less with 12-months maturity - as would be consistent with a rating on par or better than that for commercial banks. In effect, contrary to the assertions of Brian Lenihan, it is now clear that the 1.5% for 6-months paper deal is far from being endorsed by the ECB. Instead it is a reflection of ECB’s unease with the details of Nama plans. All in, the ECB is now applying nearly as strict terms to the Irish Government Nama bonds as it does to private sector bonds issued by less than thriving European banks.

In July 2008, before changes were announced, the ECB run two-tier pricing system, whereby haircuts of 0.5-5.5% applied to Government paper against the key ECB rate of 4.25%. Mortgage-backed securities – especially Spanish and Irish ones – incurred 18% haircut. Now, do the maths – the spread of 0.5-5.5% haircut on 4.25% lending rate implies the cost of capital of 5-10% for government bonds collateral and up to 24% for MBS. Since July 2008, Irish property markets have fallen by over 12%, so the same collateral rules, that were described by analysts as being loose back in 2008 would require a haircut of ca 27% at the very least, for 1-year long holding period. Again, Nama is implying a haircut of 20.6% on a 15-year holding period.

27% cut held over 1 year was a ‘loose’ condition that had to be drastically revised by the ECB, but 20.6% shave on 15-year holding is deemed by the Irish Government to be reasonable? Who do they think they are foolin?

Another interesting note: following the expression of it dissatisfaction with ‘loose’ borrowing by Spanish and Irish banks, the ECB started quietly talking to the banks urging them to fall in-line. Exactly the same has happened when the ECB issued its thinly veiled directive to Leni – ‘do not overpay for Nama assets’…

Economics 19/09/2009: Nama, bondholders and shareholders

Setting aside, for now, the issue of who subsidises who in Nama, a quick note on opportunity cost of the undertaking when it comes to the structure of Irish Financial Services in general.

June 2009 paper from a group of US and Canadian researchers, published for the European Finance Association, 2009 meeting (here) provides an interesting read. The study delivers "...a comprehensive analysis of a new and increasingly important phenomenon: the simultaneous holding of both equity and debt claims of the same company by non-bank institutional investors (“dual holders”). The presence of dual holders offers a unique opportunity to assess the existence and magnitude of shareholder-creditor conflicts. We find that syndicated loans with dual holder participation have loan yield spreads that are 13-20 basis points lower than those without. The difference is even greater after controlling for the selection effect. Further investigation of dual holders’ investment horizons and changes in borrowers’ credit quality lends support to the hypothesis that incentive alignment between shareholders and creditors plays an important role in lowering loan yield spreads."

Without giving too much technical detail, the study effectively says that inducing greater share of bond holders to also hold equity (or vice versa) results in lower cost of credit to the firm.

Now, recall that my Nama3.0 or Nama Trust proposal (here) has, as one of the first conditions for taxpayer bailout, a full or partial conversion of Irish Banks' debt holders into equity holders. This would have achieved two positive outcomes simultaneously:

1. reduce demand for taxpayer funds, while assuring that some private markets trading in banks' equity will remain post-Nama Trust implementation; and
2. per above study, lead to a long term improvement in the cost of liquidity for Irish banks.

Incidentally, the third net positive impact of such conversion would be effective risk-sharing, as bondholders will be given a direct stake in the Nama process, something that is not even attempted in the current 'risk sharing' proposals on the table.

Economics 18/09/2009: An Illustration to the Idiot's Guide to Economics

Per chart below, average monthly bond spreads for Irish Government 10-years paper for the last 8 months.We've read Brian Lenihan's lips and here is what he said:

August 2009 (here): "The proposal to establish a National Asset Management Agency has been widely supported internationally by bodies such as the IMF and the OECD and tellingly since
the announcement of the establishment of Nama in April, bond spreads above the German benchmark for Irish sovereign debt have halved, from almost 3 per cent over 10 year German Bonds to now just 1.5 per cent. Irish 10 year bond yields are now 4.8 per cent."

August 2009 (here): "Indeed, during May I had to undertake a tour of EU financial centres to correct misinformation that existed about Ireland. This tour had a positive impact and there has been a significant reduction in the spreads on the State’s borrowing."

Plenty more to be found in the same vein. So per chart above, we've read your lips, Minister and... they produce gibberish so far. As I have remarked on many occasions, Irish bond spreads decline was

• in line with other countries (and in particular - with APIIGS);
• had more to do with the global change in appetite for risk and little-to-nothing to do with Minister Lenihan's decisions or policies;
• lastly, per chart above, while Minister Lenihan was trying to sell his disastrous policies to the nation on the back of declining bond spreads, Ireland has moved from the already dubiously distinctive position of being the second most screwed up economy in the Eurozone after Greece prior to May 2009 to being the worst economy in the Eurozone in terms of its bonds spreads over German bund since Minister Lenihan (per above quote) undertook his courageous road show to Europe.
  

Per one observer comment on this: "we are now the largest pig in the APIIGS pen" - welcome to Lenihanomics?

And on a funny note (credit here)and courtesy of bocktherobber :

Economics 12/09/2009: More NAMA lies exposed

One interesting observation on Nama and a quick follow up to the developing story on ECB alleged unwillingness to deal with nationalized banks.

We, on the critics of Nama side, have expended much gunpowder arguing that there is a natural, legally binding order of rights contained in each asset class held by investors in and lenders to the banks. This order requires that first to take the hit in any balance sheet adjustment will be the shareholders. Then the subordinated debt holders and lastly the secured debt holders. This argument is used by myself and others to show that taxpayer must be last in the firing line - after all of the above take their dose of bitter medicine.

Yet in all of this excitement we forgot the humble contractors. Now, many of the loans Nama will buy into will be written against properties on which some work has been performed in the recent past, or is even ongoing today. The problem is, our heroic developers in many cases have not paid their bills to the contractors providing this work. As far as I can understand, these unpaid contractors are the holders of the priority right on repayment in the case of liquidation of the development firm - ahead of the bank holding lien on the property.

Of course, Nama can go and tell the larger contractors that, look guys, you forget your claims on work done, write it off as a loss on your taxes and we will look after you when time comes to finish the properties. Smaller contractors will be simply told to get lost - suing the state (Nama) is a very expensive business for them. This is dandy in the banana republic we live in. But estimated (rumored) 30% of the properties Nama will claim under loans purchases will be outside this state - in countries like the USA, UK, France, Germany, Bulgaria, Romania. Nama has no sway there and their courts are not going to toe Brian Lenihan's line of National Interest. So in these countries, the unpaid or underpaid contractors can seize the properties ahead of Nama, leaving Nama with loans devoid of collateral.

This should be fun to watch as our legal eagles from Nama fly over to, say,

• Newcastle to fight the UK system that treats people supplying work as real corporate citizens with real rights; or
• Plovdiv to fight Bulgarian courts, where a leather-jacketed Petar would have to explain to them that if you owe money to his cousin, you either should leave now and forget about that unfinished apartment complex 'with amazing views of the local dump' or risk never seeing your own little 4-bed in Howth ever again.

Have our Brian Twins thought of that little pesky complication?

Now to the issue of ECB. Several of us - again from the Nama critics or sceptics - have done some digging on the issue. What my colleagues now firmly claim is that per their sources, there is a mandate on the ECB to actually treat publicly owned banks in exactly the same way as privately held banks so as not privilege the former over the latter.

Here is what I have found:

Per ECB own research paper The European Central Bank: History, Role and Functions written by Hanspeter K Scheller (link to it here) (Second revised edition, 2006), Annex I provides excerpts from the Treaty Establishing the European Community, Part 3 Community Policies, Title VII: Economic and monetary policy, Chapter 1 "Economic Policy":
"Article 101
1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."

Emphasis is mine. This clearly states that the pro-Nama supporters are simply wrong in claiming that the ECB will treat nationalized banks or Trust-owned banks any different from the privately held banks.

Further quoting from the same ECB publication:
"Article 21 Operations with public entities
21.1. In accordance with Article 101 of this Treaty, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.
21.2. The ECB and national central banks may act as fiscal agents for the entities referred to in Article 21.1.
21.3. The provisions of this Article shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions."

So the same stands. Now, last year, the ECB issued clarification on Article 101 prohibitions of financing (here) which actually stresses that this prohibition (restricting Central Banks from providing ‘overdraft facilities or any other type of credit facilities with the ECB or with the central banks of the Member States … in favour of …public authorities, other bodies governed by public law, or public undertakings' and Article 21.1 of the ECB Statute that mirrors this provision):

• also applies to any financing of the public sector’s obligations vis-à-vis third parties (so technically, either Nama as a state-own undertaking cannot borrow in the future from the ECB via debt issuance of its own - which will imply that Nama own bonds will have to be priced for sale in private markets only, implying horrific cost to the taxpayers of financing Nama work-out, or nationalized banks will have exactly the same access to the ECB lending in the future as Nama will) and
• crucially, that in dealing with publicly owned credit institutions there is no restriction of Article 1 under the ECB statues.
  

In fact, the legal opinion clearly states that Article 1 is designed to restrict National Central Banks' and ECB being used to finance 'public sector' - i.e to raise funds for the Exchequer, not for the credit institution operations.

Here is another interesting factoid. Chart below clearly shows that many European countries operate state owned banks. In Germany, for example the market share of state-owned banks is in excess of 40%.Source: http://ssrn.com/abstract=1360698

Are pro-Nama advocates saying that these banks have no access to ECB's discount window as well? Or will ECB treat them somehow differently from the nationalized Irish banks? If the latter is true, should this be kept hidden from the Lisbon Treaty debate? (Now, personally, I do not believe Irish banks, if nationalized, will have any trouble in raising funding either via ECB or via private markets, so the above question is a rhetorical one).

Now, logic of Article 1 as stated above, actually suggests that the ECB will have harder time allowing Nama - a state-owned non-credit institution explicitly prohibited from obtaining financing from the ECB - to swap its own bonds for ECB's cash than it would allow state-owned bank - a credit institution explicitly allowed to obtain such funding from ECB - to do so. ECB's own paper and legal opinions are confirming, therefore that it is Nama, not the nationalized banks, that would have much harder time getting support from the ECB!

Economics 12/09/2009: ECB, repos and Nama

It has not became customary for the Government and public officials to provide 'expert commentary' on Nama that in effect attempts to deflect substantive criticism by making unarguable, non-falsifiable assertions on Nama that can neither be confirmed, nor rejected, yes sound plausibly informed.

The latest such 'argument' against Nama critics floated in political circles - opposition parties, FF backbenchers etc - is that, per DofF, ECB will not be willing to take repo bond off nationalized banks.

What does this mean? In the lingo of Nama-supporters, this means that if we nationalize banks (either via a direct nationalization or via equity purchases post-Nama), the nationalized banks will not be able to use Nama bonds (or any other repurchase agreements paper) to swap with ECB for cash. The threat then is that the nationalized banks will have no access to a liquidity window at ECB and will not be able to operate.

Is this a serious threat? If true, it is a serious concern, because in our 'confident' economy of Ireland Inc, a combination of severe recession and Brian Cowen's economic (taxation) policies have effectively assured that no deposit-based lending can take place, so our banks are now fully reliant for funding on ECB and interbank markets.

But is it true? This we do not know and we cannot know, for DofF will neither confirm of deny they are saying this. And furthermore, they will never actually show the ECB statement confirming or denying it.

So what can we conclude about this threat?

Two things, really:

1. The latest DofF threat is bogus in its nature, for there are plenty proposals out there for repairing Nama that do not involve nationalization. If ECB is willing to support privately held banks (as opposed to plcs) and since ECB's definition of a 'supported' bank does not have a limit on how large share of public ownership can be as long as the bank remain private to some extent, then my proposal for Nama 3.0 or Nama Trust will work just fine. The alleged DofF 'fear' is misplaced and it is being floated out there simply to deflect public attention away from viable alternatives to Nama.
   
2. The latest claim is also bogus in terms of its logic. Suppose the ECB refuses to swap repos coming through a nationalized bank from Ireland. Since nationalization covers the entire domestic banking sector in Ireland, the ECB then refuses to take any bonds from any of the Irish banks, making the entire system of Irish banking illiquid. Now, Ireland is a Eurozone country. This act by ECB will force at least one Eurozone country into a combined liquidity and solvency meltdown. What do you think will be the expected effect on the Euro? Oh, yes, it will overnight become a twin to the Zimbabwean currency. Will the ECB agree to destroy its own reputation, monetary system and currency only to avoid repurchase operations with a more stable and less risky (post-nationalization) banking system of its member state?

In short, the rumors that DofF is claiming that the ECB will not swap with nationalized banks are so out of line with reality, they either cannot be true, or someone in ECB is flying high as a kite. You judge which one of these two alternatives is a more plausible one.

Economics 11/09/2009: Nama gets some deserved bashing

Brilliant Nama analysis from DKM (available here). Please, do read the whole thing!

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)

This, of course, implies that “most of the NAMA profits, if any, will be at the expense of the banks from which it acquired the asset.” How? You bought at LTEV, you sold at LTEV (remember - Nama will get the price right and it will pay the higher of two: current market price or LTEV). The only way you turn a profit is if your revenue stream during the period of managing the loan was greater than the costs of inflation, financing and administering/managing loans. But the latter are paid by the banks...


"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

Economics 10/09/2009: Greens' 'proposal' might lead to lingering capital problems post-Nama

Oliver Gilvarry of Dolmen - a clear supporter of Nama As Is proposal in today's note: "The tax will be 80% of the profits gained from the increase in land value following a re-zoning decision. The impact of risk sharing in NAMA will be to reduce the liquidity generated by the banks on the sale of loans to NAMA. It could also reduce the capital relief banks will experience from the transfer of loans as a certain amount of capital may have to be put aside for the subordinated NAMA bonds they will receive unlike the other NAMA bonds."

This is exactly the point I made yesterday (here). The Greens' helping hand can just as well cost the taxpayers when the banks come begging to Leni again... post-Nama.

And this bring us to Mr Cowen's performance on today's Prime Time. Hmmm - the Gods gotta be laughing somewhere in ancient Rome's temples. Mr Cowen now wants to bring living standards back to 2007 peak levels by taxing us to death, issuing more debt against our future incomes than was ever issued in this country history before, spending like a drunken sailor, not reforming public sector pay and pensions, running vast deficits and... hold your breath... restoring credit and liquidity flows with a Nama-style undertaking?

You can almost see this working in theory, can't you.

You can't? Well, to be honest neither can I. Here is why, quickly:

Nama is about working out bad loans written against bad assets. It is, therefore, an investment undertaking with a life-span of decades. Liquidity provision is a short-term undertaking aiming to increase money supply in the economy that is free to move across the economy.

Nama bonds will not provide such a 'liquidity event' for three reasons:

1. As an investment undertaking Nama will need credit of its own to work through the loans and underlying assets, so to assume that banks will simply lend-out the €60bn pot of cash they will get from Nama automatically assumes that the cost of working out Nama loans will be financed through some other sources. Is Brian Cowen actually envisioning another issue of debt to finance this undertaking?
2. As an undertaking to repair balance sheets of the banks, Nama will fund capital base, not lending funds on banks books. In other words, for banks with an average 173% loans to deposits ratio, any cash they can get will have to be locked in a vault. Nama funds cannot be disbursed in new loans.
3. The Greens have just shaved off a large chunk of the 'liquidity' pool through their 'risk sharing' gizmo.

Now, Taoiseach has clearly told the nation when he claimed that Nama is based on 'international advice' and 'best advice available'. Given that the side critical of Nama includes virtually all leading Irish economics and finance specialists from academia and a handful of foreign academics, including at least 3 Nobel Prize winners, plus Swedish politicians responsible for their 'bad bank' work-out, I fail to see how can the 'best advice available' actually completely exclude the truly best advice made available to the Government.

Finally, Cowen refused to step in to offer even a momentary protection to ordinary households when he was asked if mortgage defaulters will be protected. Mr Cowen has made it now record-clear that his Government is unconcerned about consumers, taxpayers and ordinary entrepreneurs. It is banks who must be rescued.

The more they (Leni, Ahearne, Cowen - oh, and why not call Mary Coughlan out of her retirement to pedal Nama-cakes too) dig, the deeper is the hole... after all they did dig Brian Cowen out of his hole where he resided for some 5 months post April Budget and back into the RTE studios - twice within the span of 5 days last...

Economics 09/09/2009: Snakes/Economist Hiding in Tall Grasses

Per previous post: let me give a quick clarification. The tip I received on carbon tax trade-off is a tip. It is marked as such. I have full confidence to trust my source on it, though. Do read analysis - Carbon Tax is coming and it will be a compulsory and consumer-abusing tax, as even in theory, there will be plenty of people who will never be able to modify their behaviour to avoid it.

Now to something that I was holding back for some time, but few people have urged me to post.


I must confess that with some bemusement and irritation I observed the last couple of weeks of debates about Nama.

No, it is not the stranger than Alice-in-Wonderland world of our media that has swallowed line, hook and sinker the selling pitch of Nama-we-need-it-sooo-desperately by the DofF and numerous stock brokers that got me in the end.

And not the fact that the pro-Nama camp had to drag out Garet Fitzgerald out to drum up few obvious and irrelevant factoids about the deficit and string onto them a whoopingly outlandish conclusion that absent Nama we’ll have IMF running Ireland.

In reality, of course, with Nama, someone like ECB (not the IMF) will run Ireland. Flushing over €20-50bn into the proverbial toilet of rescuing shareholders and bondholders of Irish credit institutions (yes, this is how much Nama is likely to cost us in the end) will make us completely broke. As someone aptly remarked some time ago ‘what can’t go on usually doesn’t’.

Nor even the fact that we have politicos accusing economists for causing the current crisis and trying to shut down any debate about Nama in the name of patriotism. I thought we passed that stage of the infantile debate with our dear leader Bertie Ahearne a couple of years back.

And even Alan Ahearne’s embrace of a Nationalist idea of the state-bailed ‘Irish banking system for Ireland’ leaves me not as flustered, for one would expect it from the former US Fed employee after all (I am being sarcastic here).

No, all of these egregious abuses of public debate and media mandate pale in comparison with the ridiculous accusations – raised on air by an RTE presenter and in print by a newspaper editorial – that the 46 economists and academics who signed the Irish Times letter somehow withdrew from the debate once the Government hacks came back with irrelevant answers to irrelevant questions.

What these journalists missed is that:

1. The new ‘pro-Nama’ answers contained in Alan Ahearne’s email to the ‘colleagues’ urging them not to sign the Irish Times oped were nothing more than a set of PR cues issued by the public officials following the publication of Nama legislation. Virtually word for word. The Journos, extolling the virtues of Ahearne’s response didn’t have a clue they were being led on a short leash by the Government spin doctors;
2. No one has withdrawn from the debate on Nama, and moreover, as customary, the Gang of 46 has engaged directly with both the media and the public in explaining their views and providing feasible alternatives to the Government’s Nama vision.
   

To the second point: in the week when 46 economists ‘hid in tall grass’ per RTE and the Irish Independent, Karl Whelan and Brian Lucey were very much active in the Nama debate.

But perhaps even more surprising to the said two media outfits would be to find out that I too was busy. Here is a picture taken by my wife in the middle of Friuli wine yards of North-Eastern Italy…
Wait for it – I was doing an interview about Nama on RTE Drivetime, on the same day when RTE’s other august show ‘could not find a single one of the 46 economists’ to talk about Nama. For the record, the other show's guys did call my mobile number twice, but never left a message. And this means that when I called their 'registered' RTE number back, I had no idea which programme called me in the first place – a silly waste of a €1.50.

Oh, and here is the link to my article on Nama published by, wait for it, …the Irish Independent a day after the Irish Times letter of 46 and a day before and a week before the two editorials telling the world that 46 economists have gone into hiding scared off by Alan Ahearne-Brian Lenihan PR blitz.

Well, readers of this blog would know that in the two weeks of my absence from Ireland (physically) I produce 11 blog posts on the topic of Nama.

I also did a briefing for an investment manager in the US and another appearance by phone on a radio programme in Ireland, both dealing with Nama within a day after the Irish Times article publication took place.

I know this is a bit of 'hiding in the grass' by our extremely workaholic journalists' standards, but 11 posts, 3 press articles, several radio appearances and series of professional briefings on Nama in two weeks is, sorry, a bit more than the average number of articles Indo's own columnists produce in a given two weeks period of work, let alone during a family vocation. And they are full time journos, while I am a mere freelancer on the side! Tall grass, gents?

In contrast, Messr Lenihan and Ahearne were allowed (as they are entitled to) uninterrupted taking of their family vacations after publication of Nama legislation. And not a single journalist or politico now accusing the 46 economists of ‘hiding’ away from the debate have voiced a single question as to why neither Lenihan nor Ahearne have never appeared to face any one of the Nama critics from the academic side or professional side in a public debate prior to the publication of Nama legislation?

As anyone who hiked the Wild West knows – tall grass and stealthy snakes usually appear to those who fear them most.

Economics 02/09/2009: ECB legal eagles picking at the NAMA carcass

The ECB  legal opinion note on Nama provides some interesting reading.

Per ECB (§1.1) Nama is designed to “expeditiously deal with the assets acquired by it and protect or otherwise enhance the long-term economic value of those assets, in the interests of the Irish State”. Several things are going on here.

1. the ‘expeditious’ nature of Nama is referred to in Part 1 §2 (b) line (viii) of the draft bill and Part 2, Chapter 1, §10 (1)(b). However, §2 page 21 states: “
2. So far as possible, NAMA shall, expeditiously and consistently with the achievement of  the purposes specified in subsection (1), obtain the best achievable financial return for the State…” Has anyone spotted a slight contradiction? Assets will be disposed expeditiously, Nama will act expeditiously, but asset pricing will be based on long-term valuations. This is known as a maturity mismatch risk – the objectives are ‘expeditiously’ short-medium term, pricing is long-term.
3. As the ECB states, repeating Nama legislation language correctly, Nama will aim to guard the interest of the Irish state. Now, the State does not have the existent allocated means for such an undertaking, so to pay for Nama, it has to use taxpayers’ money in an emergency draw on resources. Since the Irish State is not spending on Nama the money that belongs to it, why should the State interests be protected by Nama and not those of the payee, i.e the taxpayer? Of course, the only way that Nama legislation makes sense from the point of view of protecting our property rights and liberty is if State interest = Taxpayer interest. This is, alas, not so. Irish State under the current Government has been run as a thiefdom of public sector unions and vested interest groups. This, of course, is not and should not be of concern to the ECB. But it should be of concern to ourselves, the taxpayers, and to the opposition.

Further per ECB §1.1: “As noted by the Minister, replacing property related loans with Irish Government bonds will strengthen the balance sheets of the banks”. So this is it, then, the ECB has clearly agreed that Nama bonds will not be off-balancesheet for the Exchequer, but will be ‘Government bonds’ and thus countable into the overall:

• Public debt;
• Future public bonds risk premia;
• Future demand for public bonds issued by the Irish Exchequer

Now, note that consistent with what minister Lenihan told the Oireachtas committee yesterday – something that the Government evaded saying out loud – the bonds will have to be ‘marketable’ in the open market, so their pricing cannot bear artificially low interest rates. This validates my (and other’s) earlier assumptions on long-term Irish bonds pricing for Nama at a coupon of 5-6%pa in 2021.

ECB §1.3 recognizes that Nama is planning to purchase a wide range of assets, including “any other class of assets” (other than loans and collateralized products). This, of course, opens Nama to political favouritism with the banks (in exchange for no layoffs and for not skinning their customers) and with the specific developers. It also, potentially, allows Nama to expand its mandate to cover mortgages and other loans. In the end, this little clause opens up a possibility to a wholesale redrawing of the already blurred boundaries between Irish businesses and the State.

The same paragraph in the ECB note also acknowledges that Nama will cover rolled up interest and re-financed products – a land mine when it comes to overall portfolio pricing and quality.

§1.10 states that “NAMA (or a NAMA group entity) may, with the  Minister’s  approval, borrow, with or without the Minister’s guarantee, such sums as it determines to be necessary for the performance of its functions (including debt securities borrowed from the Minister or NTMA and debt securities issued by NAMA or a NAMA group entity to provide consideration for the acquisition of bank assets).” What does it mean? Well, the first part (before the brackets) means that Nama can borrow funds on its own. The liability for such borrowing will fall on Nama or on the taxpayers. Care to tell what happens if Nama cannot meet its liabilities on borrowings not guaranteed by the State? Yes, right, the Minister will have to rescue Nama from Nama… using the taxpayers funds! Why would we allow a state-owned entity with defined remit an open access to borrowing?!

The bit in the brackets is also telling. It shows that Nama will be able to issue its own bonds (debt securities) and that it will be able to ‘borrow’ bonds from the Government. The latter, of course, means that the following scheme to finance Brian Cowen’s egregious public sector payoffs (oh, sorry – deficits) can be run:

Step 1: Nama, with a permission of Brian Lenihan, ‘borrows’ from NTMA freshly issued bonds.

Step 2: Nama ‘lends’ these bonds to the banks who then monetize them through the ECB;

Step 3: Banks ‘repay’ Nama with cash;

Step 4: Nama ‘repays’ the Exchequer;

Step 5: end game is: Brian Lenihan gets Mr Cowen more dosh to waste on public sector expenditures; Nama is clear, and the banks got a shave off the transaction. The taxpayers are, without being informed, soaked for the amount of bonds issued by NTMA.

§2.1 of the Note clearly is extremely guarded when it comes to assessing the potential effectiveness of Nama on liquidity markets and on the Irish banking sector. It does not show full credence of the ECB in the scheme’s ability to repair our broken banking sector. This, in itself, is understandable, as ECB is always reluctant to go out of its comfort zone endorsing adventurous member states’ plans. But it is a serious concern, given that the Government has no plan B should Nama fail to repair credit flow or inter-bank funding in the Irish economy. In addition, §2.1 is not really dealing with the issue of credit flow, but rather with the ability of Irish banks to access funding. So ECB is being cautious in endorsing Nama as a tool for clearing banks’ balance sheets, not as a tool for repairing the overall credit flows.

§2.4.3 is worth quoting in full: “Third, regarding the valuation of eligible assets, asset-specific haircuts on the eligible assets’ book values appear to be contemplated, and independent third-party expert opinions play a role in the valuation process for the NAMA scheme. The detailed provisions of the draft law regarding valuation issues reflect the fact that the pricing of eligible assets is a crucial and complex issue that is likely to determine the overall success of the NAMA scheme. Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.”

Several things worth noting here:

1. Unlike in the case of Nama effectiveness on economy and inter-bank credit, the ECB is clear that “the measures contemplated by the draft law should [not ‘might’] restore confidence in the Irish banking system”. This, of course, simply means that banks’ shareholders and bond holders will win unambiguously from Nama. And the economy and the taxpayers, well, they just might see some improvements… Any questions, anyone, as to who benefits?
2. The ECB is clearly unhappy about the ‘long-term economic value’ being used as a basis for pricing. The ECB is also clearly concerned that Nama pricing will provide an ‘undue premium payments’ to the banks – in other words, a pay off at the expense of the taxpayers. Now, per ECB remark, the entire process hinges on whether we can trust Nama (i.e Irish Government) not to skin the taxpayers to give a helping subsidy to its cronies (national banks). You be the judge if you can extend them this trust.
3. The ECB, alongside myself and other critics of Nama, and in contrast with the Government position, clearly states that ‘assumptions’ are crucial. Assumptions that go into pricing models are, of course, of preeminent importance for they will determine exactly the level of pricing deployed. The Government, to date, has not produced any basic assumptions to be used in pricing, other than those contained in overly optimistic statements by the Taoiseach and other members of the Cabinet. These, of course, have ranged from calling the end of Irish recession back in May this year, to a ridiculously uninformed estimates of the speed of property prices adjustments post bust in other countries (7-8 years estimate by the Government officials and consultants), 15 years plus estimated by academics (my own estimate based on IMF and OECD data for past busts since 1970 through 2003 is that for the serious busts similar to the one experienced by Ireland today, the correction takes on average 18 years and in some instances can take more than 20 years).

 To repeat here a simple mathematical exercise. If our current values are at 50% of the 2006-2007 peak, and we are to get back to the same peak values in 8 years, the required rate of growth in property prices to achieve this feat will be 9.1% per annum on average. To get to 80% of the peak price in 8 years requires over 7.6% annual average growth rate from 2010 on.

Oh, and as I’ve said before, this is before you factor in the cost of financing. At, say 5% pa, we are looking at double digit growth required annually on average for the next 8 years to get us to within 60% of the peak value in 2006-2007, let alone to 80%!

You be the judge if we can get such growth stats out of the property market, especially with Nama sitting on a pile of surplus properties, but to put it into perspective – the craze of 2003-2007 have not seen such rates of price inflation.

§2.4.4. clearly states ECB’s dislike of the levy idea as being potentially destabilizing to the banking sector. It is also hinting at possible illegality of such a levy as being a challenge to the need to provide a ‘level playing field’ for participating institutions.

§2.4.6 refers to the risk of political interference in Nama and the potential impact of Nama under political tutelage on banks in the longer term. This is related to the fact that the ECB is cautious about endorsing Nama’s economic effects. And the same is confirmed in §2.4.7, but this time around from the point of the banks themselves. Here the ECB is noting that Nama might lead to credit markets remaining tight as banks might focus on “preserving and rebuilding their own equity, instead of lending into the economy”. But, of course, the ECB’s note on this is not an accident – Nama legislation, that is allegedly designed explicitly to ensure restoration of functioning banking system in Ireland has absolutely nothing to say about this crucial factor. 

So on the net, I wouldn’t count the ECB note as a sound endorsement of the Nama plan as outlined so far by the Government. And I am not surprised – the entire idea of Nama, inclusive of the proposed legislation leave more questions unanswered and more concerns unaddressed than a first year undergraduate paper on how to manage the economy.

Economics 31/08/2009: Myths of Nama's Parrots

The Sunday papers revealed to me the bizarre lack of independent and critical thinking amongst our senior journalists on the matters of policy.

The best example was the Sindo’s editorial on the subject of 46 economists’ signing the article in the Irish Times last week. In effect, Sindo is of the view that publicly employed academic economists and finance specialists cannot criticize Nama. What’s next? As PMD puts it: "Publicly employed physicists cannot assert existence of gravity?"

To his credit, Shane Ross stands tall.

In the mean time the Sunday Tribune article (here) exemplified some of the ‘new’ mythology of ‘official’ Nama position, while simultaneously revealing the lack of media’s ability to question the spin fed to it by the officials. These are worth dealing with in some more detail than Sindo’s article:

Myth 1: The ‘official’ version of Nama now claims that LTV ratios on Nama-bound loans were low, so the face value of the loans covers actually greater original value of the collateral. "But while the loans are for €90bn, the properties secured on those loans cost considerably more (we are not talking about 100% mortgages here).”

As far as I know, this 'arithmetic' was first floated at the official briefing for the journalists by the DofF. 

There is absolutely no evidence that the developers took 75% LTV ratios. Despite this, my earlier post (here) has dealt with this, showing that even at LTV ratios of 50-60% it is unlikely that Nama will be able to break even by 2021. Or for that matter, under majority scenarios until much later than that. Given that some people who’s incomes will be used to finance Nama will by then have lost their

• Savings;
• Pensions;
•  Homes

to Nama – due to the need to finance Nama costs out of our current income, implying much higher taxation – what measure of democratic accountability, equity, fairness etc can compel this Government and DofF to make such claims is simply unimaginable to me.

Contrary to DofF briefing claim on low LTVs, there is plenty of evidence from property consortia and from court cases (e.g Mr Carroll’s) that much higher LTV ratios were used in practice. In many cases the percentage that was not lent on the property directly was made up of additional cross-collateralised loans to the consortia itself, other members of this consortia or to the original borrower (developer) in a personal capacity. There were multiple cases of the same property being cross-collateralised for multiple loans.

Take a 'clean' (as in completely transparent, free of double-borrowing and cross-collateralisation) example. 

If a property was purchased for 100K in early 2005 at 50% LTV and rezoned, this ‘asset’ would have seen its market value rise 3 fold. In late 2006 this property would have the value of 330K and a loan of just 50K. The surplus value or equity of 280K could have been re-mortgaged at, say 50% LTV again. Total loans written against the property would total 190K. The surplus equity of 140K could have been borrowed against again in 2007 at, say 50% LTV ratio, resulting in a total loan volume of 260K. What is the overall LTV ratio on this property? At 2006 value of the property: we have LTV ratio of 79% in the end of these simple multiple loans trips each one of these loans was 50%.

Now, suppose Nama buys these at a 30% discount on the loan value, i.e. for 182K. Nama is instantaneously in the negative equity to the tune of 82K, or 45%.

The property market (depending on the type of property) is now around 2000-2004 (well below 2005 levels). How much below? Well, let us say 10% below. So the underlying property is now worth… 90K, and the negative equity is now 92K or 51%.

What is the rate of growth in the market we should expect to get back from this level of negative equity to a nominal break point on Nama? For 10 year horizon – an annualized rate of +7.2% per annum. For 15 year horizon +4.7%, for 20 year horizon +3.5%.

If inflation averages the ECB target rate of 2% pa over the next 20 years, we need a property prices growth of 5.5% per annum minimum for Nama to break even on this “50% LTV ratio loans package” in 20 years time!

Myth 1 is busted.

Myth 2: property crashes are benign… "Previous property crashes in London, Paris and Stockholm suggest that, within 10 years, prices recover to 30% below the top of the bubble".

I have shown in another post (here) that this is not consistent with the evidence from the past busts. So let me not repeat myself here. Furthermore, do any of us really believe we will get back to within 30% of the madness of the 2006-2007 markets ever again?

Instead, consider the statement itself.

First, this refers to nominal prices. Real prices (inflation adjusted) are much slower to recover.

Second, this refers to a simple price recovery. 

But Nama is about more costs than just the cost of loans bought. It is also about a cost of loans financing. So, suppose we take DofF and the journos for what they claim. 

Suppose our property prices will be back to 30% below the top of the bubble in 10 years from now. At 5% per annum the cost of bonds financing for Nama, 0.75% per annum cost of recapitalization financing (ca 8% shot – one off in 2010, taking into account the present value of this cash, recapitalization will actually cost closer to 1% pa over the 10 year horizon, but let us give the difference as a margin of error in favor of Nama). We have: the original (2007 value) 100K loan with LTV of 75% (DofF number) worth 75K on bank’s book today will be purchased by Nama at a 30% discount for 52.5K in 2010. Within 10 years time, property value is 70K. Nama can sell property for this amount and pay down 52.5K of the original loan purchase prices. Except, by then, Nama would have accumulated additional 33K in interest charges on bonds… 

Total loss to Nama on this transaction = 70K-52.5K-33K=15.5K, so Nama will still be posting a 30% loss on its operations.

Myth 2 is busted.

Myth 3: Bond markets do not like privatizations and they love Brian Lenihan’s policies. "Within five days of Anglo Irish being nationalised, the rate which Ireland is charged for borrowing money internationally had risen."

Firstly, while it is true that the bond spreads rose when the Government nationalised its not at all evident or even apparent that this happened

1. Because we nationalised Anglo or   
2. Because we had to nationalise Anglo.

In other words, did Irish Government bond spreads reflect the Government new exposure due to nationalization or did they reflect the fact that nationalization simply showed to the rest of the world just how sick our system really was.

Put differently, did the cardiogram go off charts because the patient went into a cardiac arrest, or did it go off charts because the patient was connected to the machine reading the cardiogram?

Recent research from the ECB (cited by me in the press and here on this blog before, you can find the original paper in the The Determinants of Long-Term Sovereign Bond Yield Spreads in the Euro Area.  Monthly Bulletin, pages  71–72, July 2009) showed no evidence that Ireland’s critically elevated levels of bond spreads at the time before, during and after the Anglo nationalization were somehow out of line with the general model. They were, per ECB model, reflective of the fundamentals in Ireland, not of the ‘nationalization’ one-off episode.

Incidentally, similarly, Greek, Spanish, Portugal’s and other APIIGS’ countries spreads rose at the same time as Irish and in similar proportions. They didn’t nationalize their banks… So what is the DofF talking about here and why is our media parroting this claim as some unquestionable truth?

Now, one of my TCD students has just completed a research paper applying the ECB model to Irish bond spreads. The break point in our bond spreads occurs about the same time that it occurred for other APIIGS -  October 2007. Not that close to Anglo event…

What is also interesting is that the current period of ‘falling spreads’ for Ireland – lauded as a sign that the Irish Government is being trusted by the international markets in all its hard work to destroy our private sector economy… ooops, sorry, to ‘correct our fiscal deficit’ in Leniham-speak, is really fully in line with just one factor – the overall improved sentiment in the global markets. Our ‘leadership’ clowns are riding the coat tails of the US and EU ‘bottoming out’ euphoria, not some miraculous change in sentiment to Ireland they are going to leave behind to the next Government.

Myth 3 is also busted.

Myth 4: "There is a reason why no country has nationalised its entire banking system."

Now, our own journalists simply do not treat other banks operating in this country as a part of the ‘banking system’… Just think two events in the recent past when scaring kids with ‘foreigners’ was en vogue:

1)    Anglo’s “shortsellers from New York and London are out to get us”. Of course it turned out that the shortsellers from abroad were spot on right about their reading of the bank’s position, while all the damage done to the Anglo was done from inside the bank – from its own senior management;

2)    American ‘vulture funds are swooping onto the wounded Irish banking system’. Of course were they to take our sick banks over, we wouldn’t have a need to cull family budgets for generations to come to finance Nama… wouldn’t we?

Every time someone says ‘we need to protect our national [insert any business-related noun here]’, I know I am smelling a rat. ‘Protecting national banking’ means, as Nama clearly illustrates, vast transfer of income and wealth from ordinary people of Ireland to shareholders and bondholders of these banks. I have nothing against the latter two groups of fine people and institutions, but I certainly do not love them enough to sacrifice my son’s college tuition fund and my own and my wife’s pensions to bail them out.

In reality, of course, the idea that ‘nationalizing’ 6 banks in Ireland will leave Ireland with no privately-owned banks is bonkers. Ireland has significant international banking sector that would be even greater in size were we not shielding BofI and AIB from competition through supporting their legacy positions. Furthermore, under my Nama3.0 proposal (see here), we would not nationalize any of the banks at all. We would simply change their ownership from that of the few who took wrong risks to that of the many who are now expected to pay for the mistakes of the others.

Myth 4 is busted.

 

Myth 5: "But the nationalisation option throws up enormous difficulties. The state would have to pay in the region of €5bn to shareholders of AIB and Bank of Ireland,"

Under my Nama3.0 proposal, we would first force the banks to take writedowns, then use remaining share holders’ and bond holders’ equity and debt holdings to offset these losses, then use private investors and swap-participating bondholders to recapitalize the banks. Only after that will there be a cost of the taxpayers. At any rate, this cost will be much lower than the 60bn cost of Nama purchases, plus tens of billions in bonds financing costs associated with Nama.

Furthermore, let us not forget that after Nama we will have to recapitalize the banks no matter what and that this recapitalization is likely to cost us well in excess of 5bn itself.

After all, we paid nothing for Anglo in excess of direct recapitalization costs involved, which are much lower than the cost of Nama buying Anglo’s loans and ‘managing’ them. Furthermore, the same costs were paid to AIB and BofI as well, despite these banks remaining 'private'.

Myth 5 is busted too.

Myth 6: "There is a reluctance to lend money to banks that do not have the transparency that stock market membership brings, and that are viewed as being open to political interference."

This is false.

1. Irish banks and banking institutions - listed or mutually owned - are not transparent already, as the Anglo saga clearly illustrated, as AIB repeated blunders in public statements have clearly highlighted and as the reluctance of all of these banks to take realistic writedowns on the loans attests. Were the Tribune folks actually to give it a thought - we know that AIB, BofI and the rest of the pack are artificially depressing expected losses on their loans in anticipation of Nama, since, by the entire Nama existence we know that absent Nama they would sustain losses much greater than their current capital reserves allow. So what 'transparency' are we talking about?
2. Irish banks cannot borrow without the twin ECB and Irish Government Guarantee supports, despite them not being in national ownership;
3. Irish banks will not be nationalized in Nama3.0 set up and their shares will be fully liquid;
4. Many private (Rabo, a host of Swiss banks and Belgian banks) and nationalized (Northern Rock) banks are capable of borrowing well better and cheaper than the Irish banks underpinned by full state guarantee.

Myth busted.

It is not the ignorance or the lack of knowledge amongst some of our leading journalists that defies my belief, but the innate lack of intellectual curiosity to question the spin they are being spoon-fed by the ‘official’ Ireland.

Hence, Mary Robinson is being paraded around the press as some sort of a ‘wise’ financial guru full of wisdom to breath new air into the debate about Nama. Spare me this nonsense!