Alan Ahearne

August 17, 2009

Hi,

Quite quiet on the media front this weekend, Aug 16,  on NAMA. Out in front is The Sunday Business Post with articles by Alan Ahearne(economic adviser to Minister for Finance Brian Lenihan. He was previously a senior economist at the Federal Reserve Board in Washington DC).

There is also an article by Colm Mc Carthy, lectures in Economics at University college Dublin, in the same paper, p18,

“Speaking from the floor at the recent MacGill Summer School in Co Donegal, former Superquinn chairman Vincent O’ Doherty complained of the weak response to date in explaining to the general public what has happened. O Dohert hit the nail on the head – it is past time for an oireachtas inquiry into the failure of the Irish banking system”

Alan Ahearne’s article is headed ‘Asset fire sale must be avoided’. It is largely ideologically driven with not one mention of the word ‘nationalization’. Rather misleadingly, see IMF URL below, he makes the point, ‘Financial markets and international commentators have reacted positively to the Nama bill’.

In another circumspect comment Ahearne writes, ‘It follows that what is needed for  economic recovery is a scheme that cleans up the banks’ balance sheets and forces the banks and borrowers to be realistic about their financial position. This is what Nama is designed to achieve.’

OK, but what if I build a plane to fly me to Ireland from the UK and instead of flying me to Ireland it dumps me in the sea close to the Tuskar Rock just off the Wexford coast? Mr Ahearne refers to the Nama bill as if we could see it? But as yet its only a consultative document with vague aspirational proposals.  How will Nama make this magic work?

Perhaps one way Mr Ahearne will see Nama working will be when there’s  a convoy of legal firms representing the banks, the developers, Nama, at the Supreme Court for a couple of years arguing over the notional loan value Nama will put on one developers toxic debt?

He does give us the misleading, ‘No wonder, then, that the IMF, in its recent report on Ireland, describes  Nama as “pivotal to the orderly restructuring of the financial sector and limiting long-term damage to the Irish economy””.

http://www.boards.ie/vbulletin/showthread.php?t=2055602499

Here are some selective quotes from the IMF document:

If you’d like to read the IMF document in full, you can read it here:

http://www.imf.org/external/pubs/ft/scr/2009/cr09195.pdf

“The proposed National Asset Management Agency is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets. The authorities’ efforts to press ahead with supportive regulatory and supervisory measures will help manage the current stress and lower the risk of future crises.

21. As the authorities recognize, translating NAMA from concept to reality is pivotal to the orderly restructuring of the financial sector and limiting long-term damage to the economy. NAMA is to purchase property-development assets with a book value of between €80 and €90 billion from banks that are supported by the government’s guarantee. (The total assets of the guaranteed banks are €440 billion.) Since the assets are to be purchased at less than their book value, the resulting losses will require the authorities to inject more capital into some banks. If well managed, the distressed assets acquired by NAMA could, over time, produce a recovery value to compensate for the initial fiscal outlays. NAMA’s success will also be the precondition for a safe exit from the guarantee to creditors and depositors, which recent experience shows can be a long-drawn process unless aggressively managed (Text Table 1). If not effectively managed, weakness of the financial sector, public finances and economic growth can reinforce each other (Box 2).

22. A key aspect of NAMA’s success will be the prices at which the assets are purchased. This will determine the extent to which banks’ losses are transferred to the taxpayer. Since price determination is a major challenge, risk-sharing structures could be usefully explored. For example, if sold at a price that is clearly lower than the expected eventual recovery value, bank shareholders could be given a share in the upside. Similarly, the government could be given an opportunity to participate in the upside of the residual healthy bank. The authorities noted that they remained open to a number of refinements, including such upfront risk-sharing structures. Also, while there has been some public discussion of a bank-specific ex post “claw back” provision, the authorities are considering an industry-wide levy to recoup any losses suffered by NAMA.

25.  Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.”

6 Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure.

Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.

26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.”

OK, so you’ve read the above.

You now see it would appear that Mr Ahearne’s scaremongering on the subject of the dangers of a fire sale of assets is slightly disengenuous. He would rather distract your attention with arguments built on straw than deal with the real substantive issues facing our economy and Nama in particular.

He ought to re-read the advice of the IMF on Nama in relation to nationalisation. The substantive issues surrounding Nama are clearly dealt with by the IMF above. Mr Ahearne chooses to ignore the measured advice of the IMF on nationalization.

Hopefully Mr Ahearne instead of ignoring these issues will deal with them in a satisfactory way sometime in the future. On the evidence in his Sunday Business Post Article, I doubt it!

However, Mr Ahearne does mention

“(41) Consequently, the transfer value for asset purchase or asset insurance22 measures should be based on their real economic value. Moreover, adequate remuneration for the State shall be secured. Where Member States deem it necessary –notably to avoid technical insolvency- to use a transfer value of the assets that exceeds their real economic value, the aid element contained in the measure is correspondingly larger. It can only be accepted if it is accompanied by far-reaching restructuring and the introduction of conditions allowing the recovery of this additional aid at a later stage, for example through claw-back mechanisms.”

http://ec.europa.eu/competition/state_aid/legislation/impaired_assets.pdf

While Mr Ahearne gives great emphasis to the definition of  ‘real economic value’ above, he fails to mention or dwell upon the issue of,

“It can only be accepted if it is accompanied by far-reaching restructuring and the introduction of conditions allowing the recovery of this additional aid at a later stage, for example through claw-back mechanisms”

To my mind, this is the nub of the matter. What claw-back mechanisms does Mr Ahearne have in mind to protect the tax payer if he does not agree with nationalization?

Mr Ahearne’s views are devoid of substance because of their wilful blindness to the substantive issue of how to protect the tax payer. His ideology appears to be nothing more than the blind support of Nama with a blanket cheque written by the tax payer, designed to rescue the banks, the property developers and the legal gravy train, that will inevitably follow them if Mr Lenihan and Mr Ahearne get their way.

–rgds

Colm

The proposed National Asset Management Agency is potentially the right
mechanism to separate the good from the bad assets. Its success requires a comprehensive
and realistic assessment of impaired assets. The authorities’ efforts to press ahead with
supportive regulatory and supervisory measures will help manage the current stress and lower
the risk of future crises.
21. As the authorities recognize, translating NAMA from concept to reality is
pivotal to the orderly restructuring of the financial sector and limiting long-term
damage to the economy. NAMA is to purchase property-development assets with a book
value of between €80 and €90 billion from banks that are supported by the government’s
guarantee. (The total assets of the guaranteed banks are €440 billion.) Since the assets are to
be purchased at less than their book value, the resulting losses will require the authorities to
inject more capital into some banks. If well managed, the distressed assets acquired by
NAMA could, over time, produce a recovery value to compensate for the initial fiscal
outlays. NAMA’s success will also be the precondition for a safe exit from the guarantee to
creditors and depositors, which recent experience shows can be a long-drawn process unless
aggressively managed (Text Table 1). If not effectively managed, weakness of the financial
sector, public finances and economic growth can reinforce each other (Box 2).
22. A key aspect of NAMA’s success will be the prices at which the assets are
purchased. This will determine the extent to which banks’ losses are transferred to the
taxpayer. Since price determination is a major challenge, risk-sharing structures could be
usefully explored. For example, if sold at a price that is clearly lower than the expected
eventual recovery value, bank shareholders could be given a share in the upside. Similarly,
the government could be given an opportunity to participate in the upside of the residual
healthy bank. The authorities noted that they remained open to a number of refinements,
including such upfront risk-sharing structures. Also, while there has been some public
discussion of a bank-specific ex post “claw back” provision, the authorities are considering
an industry-wide levy to recoup any losses suffered by NAMA.
25. Staff noted that nationalization could become necessary but should be seen as
complementary to NAMA. Where the size of its impaired assets renders a bank critically
undercapitalized or insolvent, the only real option may be temporary nationalization. Recent
Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be
closed, merged, or temporarily placed in public ownership until private sector solutions can
be developed … there have been numerous instances (for example, Japan, Sweden and the
United States), where a period of public ownership has been used to cleanse balance sheets
and pave the way to sales back to the private sector.”6 Having taken control of the bank, the
shareholders would be fully diluted in the interest of protecting the taxpayer and thus
preserving the political legitimacy of the initiative. The bad assets would still be carved out,
but the thorny issue of purchase price would be less important, and the period of price
discovery longer, since the transactions are between two government-owned entities. The
management of the full range of bad assets would proceed under the NAMA structure.
Nationalization could also be used to effect needed mergers in the absence of more far
reaching resolution techniques.
26. The authorities prefer that banks stay partly in private ownership to provide
continued market pricing of their underlying assets. They disagreed with the staff’s view
that pricing of bad assets would be any easier under nationalization. They were also
concerned that nationalization may generate negative sentiment with implications for the
operational integrity of the banks. Staff emphasized nationalization would need to be
accompanied by a clear commitment to operate the banks in a transparent manner on a
commercial basis. In particular, nationalized banks should be subject to the same capital
requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy
to return the banks to private operation would be needed.
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