Number 25 !

August 23, 2009

Today, on RTE Radio 1 both Brian Lenihan Minister of Finance and Richard Bruton TD, Fine Gael Spokesperson on Finance were both interviewed on Today’s News At One.

Some interesting info from Brian Lenihan eg valuations will be assisted by both valuation experts familiar with the Irish market and also services provided by Hong Kong & Shanghai banking. Long term value of assets will be calculated on asset values since 1974 excluding the recent bubble. Does this amount to the view that a persons assets be calculated only up to the point they lost them in a bet, not after? This is ridiculous.

Irish property values must take the property bubble into account. Massive building projects, empty apartment buildings, unfinished estates on the fringes of satellite towns, lets pretend they don’t really exist?

We’ll just ignore them and value the houses on the fringe of some satellite town village by way of a mechanism that looks at the value of a new house in the village previous to the property bubble of the last 5 – 7 yrs.

One of the determinants of property value is demand. The value of a house rises in accordance with demand and supply. Previous to the property bubble our economy was doing well and there was strong demand for property which drove up prices.

Brian Lenihan is asking that toxic property be valued according  its value before the bubble when demand was high and supply was low. This does not make sense! He argues we should ignore the absence of demand and the over supply of property today in estimating the value of toxic property assets. We must await however until September the valuation estimates.

Brian Lenihan also stated that nationalization of the banks was not out of the question. In this he would appear to be closer to the Labour position than to the Fine Gael position.

Banks would be examined on a bank by bank basis with a decision being made on individual cases on the amount of equity the state should have in that bank measured by the amount of  investment  support it required of the state.

Fair enough but this is not prudent enough protection of the tax payers interests. What would be prudent would be the setting out in the legislation the requirement guarantees required in return for equity in support of bail out investment. What equity are we going to get in return for supporting these loans?

Checkout this:

Richard Bruton TD interviewed on the same programme once again reiterated Fine Gael policy


Create a State-owned ‘Good Bank’ and capitalise it with billions of tax payers’ money. The good bank can lend money to viable businesses and restore the flow of credit to the economy. Legacy banks are left to fend for themselves. Some may be rescued by additional tax payers’ money, but some could be allowed to fail.

The proposal above has not been costed by Fine Gael and much more detail given on the possible impact to our economy of this proposal should be given. Note the IMF report below does not discuss this option.

The failure of legacy banks could cause great damage to our economy and might rid us of  good as well as bad banking assets. But hopefully we will have more detail on this Fine Gael position as time goes by.

Meanwhile Conor Lenihan TD earlier with Rachel English on Radio 1 repeated the falsehood that NAMA had the backing of the IMF.

On the contrary, the IMF is very qualified in its support of NAMA, as in the following ( note authorities mean representatives on behalf of Irish government, ‘staff’ to mean ‘IMF staff, read full report here in particular 22 – 26, nb number 25 in this documenet

A key aspect of NAMA’s success will be the prices at which the assets are. This will determine the extent to which banks’ losses are transferred to the

Staff noted that nationalization could become necessary but should be seen as complimentary to NAMA.


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 up front 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.

The excerpts 22-26 in the quoted document show Conor Lenihan either has not read the IMF document or is clearly out to mislead us as to its support for FF policy. The  IMF is in favour of nationalization of banks that are in severe difficulty.

The IMF report also shows how flimsy the draft legislation is on how it will protect the tax payer. Some of the points raised by the IMF such as risk sharing, nationalization, insurance against loss by the tax payer, industry clawbacks to protect the tax payer are all absent from the legislation)

The IMF sees NAMA subject to agressive and prudent controls above working in tandem with NAMA, see above, …”the prices at which assets are…”

IMHO, for as long as our government continues to risk the tax payer at the expense of imprudent gambling with bankers, developers, on the valuation of assets based on spurious pre bubble measurements, the sooner it goes the better.

Best option of all, on the evidence above, is, bring in the IMF to temporarily manage our economy! Until we get people in with the smarts we see in their document we will be unable to undo this financial mess that has the potential to be a chatastrophic one.

In its present form, The current FF NAMA solution is a sieve ready to flush us down the shore.

It does not protect the tax payers interests, its a prop for the banks and developers, a gamble of hope that the toxic chips will turn to gold.

As long as we can parcel/hedge it onto the next generation, the problems we face will go away. Wrong! The opportunity to solve them now is being squandered.

Not surprising as the policies that created them were authored by those who favoured the developers, bankers, speculators in the first place! Their policies continue to do so under NAMA. The transfer of massive powers from the  tax payer to the rich through NAMA has implications for democracy itself.

Forget social services, a fair and just society, this is all about lining the pockets of the rich at our expense! Next post pp23 -60 Draft NAMA legislation..

NB checkout this excerpt from the IMF, Number 25 !


complementary to NAMA….

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.

…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.”

IMF clearly flag their support for this option above. But notice the opposition of FF to these suggestions by FF in 26 here:


…disagreed 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.”

OH no, here we have FF disagreeing with the IMF who would clearly be in favour of nationalization under the above rules.

But FF are  also citing IMF as supporting NAMA!  Spare us!

Our best option at the moment is to bring in the IMF and get a government of consensus that will clean up the mess in compliance with the best practice advice of both the IMF and the ECB.

The opportunity exists for a clean up of our economy. A firesale of toxic assets with nationalization of banks worthy of saving and allowing bad banks to fall on their own sword seems imho the best solution for our financial woes.

The large government bonds currently earmarked for saving developers and bankers could instead be spent on the purchase of housing/commercial stock at firesale prices, the creation of a property market based on realistic prices, and the stimulus of our economy through public work projects/social services and the support of our economy through the creation of banks worthy of putting to work in support of a clean/new Ireland INC.


Next up lets look at some more detail from the proposed NAMA legislation, pp 36 — 75




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