Another Fine Mess!

August 27, 2009

Below taken from the Irish Times, my comments italicised on per paragraph basis.

This is the text of an e-mail, dated Saturday, August 15th, sent to Irish economists by Alan Ahearne, special adviser to Minister for Finance Brian Lenihan. Mr Ahearne is a former lecturer in economics at NUI Galway and senior economist with the Federal Reserve in Washington”

If you are considering putting your name to this draft op-ed, could I ask you please to have a look at the attached piece that I prepared for tomorrow’s Sunday Business Post. I hope it will convince you that there are two sides to this story and the issues are much more complex than presented below.

Not sure if he’s referring to his own points, or to NAMA legislation, or the target of his points, the points  made by the 46 academics who’ve signed their names, see link above, but here again the word ‘complex’ is invoked by Ahearne I believe in a quite arrogant way. He implies they are beyond our grasp and absurdly ignores the logical demand that it ought to be his role to map out any complexity so that it too is out there for public scrutiny. Also on Nama, he is definitely a one man show. Alarm bells should be going off that he has not been able to muster support in academia for Nama, or indeed that he has not been able to persuade the signatories that he is right and they are wrong!

Many of the questions raised in Brian Lucey’s piece will no doubt be debated vigorously over the next 6-8 weeks as the Nama legislation makes its way through the Dáil. The reason the proposed legislation has been published in draft form is so that Deputies, Senators and the public can have an opportunity to consider it prior to its formal publication as a Bill in September.

As you know, the Dáil will return on September 16th to commence debate on the published actual Bill in the context of a wider debate on the future of our financial sector. The publication of the legislation in draft form will facilitate an informed debate at that time.

I would like to briefly point out some of the deficiencies in the note you have been asked to sign:

– “The first is the perceived lack of transparency.” This is wrong. The draft legislation sets out that Nama will be accountable to the Oireachtas in the usual manner. The agency will report to the Minister for Finance and reports will be laid before the Oireachtas. Nama accounts will be subject to audit by the CAG.

Obviously Ahearne has a different grasp of the word ‘transparency’ than the rest of us. See earlier posts on this topic. Presumably because of  ‘complexity’ we have to go without ‘transparency’. Suspicious isn’t it?

– “Duration and scope of Nama.” Issues relating to the scope of Nama are dealt with extensively in the draft legislation. I would invite you to read the legislation for yourself on this matter (and indeed on all other matters). It should be obvious that it would not be helpful to specify an end date for Nama in the legislation, since this might force Nama to engage in a firesale of assets in its final year.

His whole methodology is to use NAMA to withhold property/land based toxic loans from the market place, to create a false/artificial demand bubble, that future tax payers looking for mortgages or property for business will pay back to Nama and through them to transfer wealth from the poor to the rich!

Flexibility in this regard is for the protection of the taxpayer.

– “Nama . . . will not necessarily pay market prices for land and development.” Nama will not buy land and development; Nama will buy loans secured on property and other assets. There is a fundamental distinction. Moreover, there is no market at present either for land and development or for loans secured by land and development. That is why Nama is being set up. A “market price” does not exist. That is why the legislation and the EU Commission guidelines use the term “market value” instead of market price.

This is another misleading falsehood from Ahearne. The reason there is no ‘market value’ at the moment is that banks are frozen and buyers won’t buy at inflated property values. Fix the banks and most of all organise a fire sale of property over a maximum period of 5 years and banks and buyers will respond and provide loans at affordable ‘market value’ prices. Banks,shareholders, developers are awaiting the financial windfall that is NAMA, with its inflated property bubble evaluations, its crazily negative and unwise gambling in the market place. Only when the ‘land and development’ is tested in the market place will the value of those loan payments be realised!!

– The piece goes on to talk about adjusting upwards to “fair economic value”. Nowhere in the legislation is the term “fair economic value” used. The legislation uses the term “long term economic value” which is an EU term that the legislation is following.

The EU has a definition for “long term economic value”.

But the proposed NAMA legislation is not following EU guidelines. Its following Ahearne/Lenihan myopic ‘transfer wealth to property speculator guidelines’ It would be great if it followed IMF and EU guidelines, painful, but our country would not end up being plundered by these guys. Here’s something of what the EU recommend:

“….Any pricing system would have to ensure that the overall contribution of beneficiary banks reduces the extent of net State intervention to the minimum necessary.”

This means you should not set up an agency like NAMA that could interfere in the market place for 30 plus years or more!!!!!!

“(40) … the Commission would consider a transfer value reflecting the underlying long-term economic value (the ‘real economic value’) of the assets, on the basis of underlying cash flows and broader time horizons, an acceptable benchmark”

19 Generally, the Commission considers that a uniform and objective cut-off date, such as the end of 2008, will ensure a level playing field among banks and Member States.”

Firstly, I believe these guidelines refer more to toxic paper based loans to do with derivatives, futures, etc that are not land, bricks and mortar, whose value is more easily assessed, but even applying these guidelines to the letter to our own toxic debt, the distance between Ahearne/Lenihan safety net protection for the Irish tax payer and what European guidelines set out in the above document is quite incredible. ‘Long term economic value’ is advised by European guidelines to have a cut off date, not to have a rolling loan per loan rolling evaluation changing over a period of ten/twenty/thirty years with problems of court challenges and arguments over which loan gets valued first. Oh, this toxic loan was valued at x last year, times have changed, this new loan were dealing with gets valued at x + y……Mess

“20 Where necessary, State support in relation to the risks of future assets can be tackled on the basis of the guarantee notice and the temporary framework.

21 This would be the case, for example, if the State swapped assets for government bonds in the amount of their nominal value but received contingent warrants on bank capital, the value of which depends on the eventual sales price of the impaired assets.”

Ahearne/Lenihan reckless exposed at its worst here. The EU focus on the protections to the tax payer. Instead of overpaying for these toxic loans, Ahearne/Lenihan offer total exposure to the risk that their payment for impaired loans to banks will not depend on the eventual sales price of the impaired assets. That is, they hope their luck will turn and indeed they will recoup their losses on the next throw of the global economic recovery dice!

“hair-cuts applicable to certain asset categories will have to be considered to approximate the real economic value of assets that are so complex that a reliable forecast of developments in the foreseeable future would appear impracticable.(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.”

No claw-back mechanisms proposed by Ahearne/Lenihan in their unconditional support of the banks and shareholders!!

Of greatest interest in the European document above is the focus it gives to the lack of forensic detail in Ahearne/Lenihen NAMA proposals in regard to the valuations. Guidelines such as the following seem to be completely abandoned in favour of some smoke and mirror back room loan per loan exercise without public scrutiny or oversight, the document Annex 4 is of particular interest in the care/advice it adopts in securing a safety net for any supports:

“Annex 4

Valuation and pricing principles and processes

I. Valuation methodology and procedure


Whatever the model chosen, the valuation process and particularly the assessment of the likelihood of future losses should be based on rigorous stress-testing against a scenario of protracted global recession. The valuation must be based on internationally recognised standards and benchmarks. A common valuation methodology agreed at the Community level and consistently implemented by Member States could greatly contribute to mitigating concerns regarding threats to a level playing field resulting from potentially significant implications of discrepant valuation In any event, any pricing of asset relief must include remuneration for the State that adequately takes account of the risks of future losses exceeding those that are projected in the determination of the ‘real economic value’ and any additional risk stemming from a transfer value above the real economic value.


The pricing system could also include warrants for shares in the banks equal in value to the assets (implying that a higher price paid will result in a higher potential equity stake). One model for such a pricing system could be an asset purchase scenario, in which such warrants will be returned to the bank once the assets are sold by the bad bank and if they have earned the necessary target return. If the assets do not yield such a return, the bank should pay the difference in cash to reach the target return. If the bank does not pay the cash, the state would sell the warrants to achieve the target return.

In an asset guarantee scenario, the guarantee fee could be paid in the form of shares with a fixed cumulative interest representing the target return. Where the guarantee needs to be drawn upon, the Member State could use the warrants to acquire shares corresponding to the amounts that had to be covered by the guarantee.”

…Continuing with Ahearn’s views on the published Irish Times letter by 46 academics critical of NAMA, given link above

– “In a reasonably short term property and development prices will rise.” This is wrong. Nowhere in the legislation has such an assumption been made. No one associated with the establishment of Nama has ever said that prices will rise in the short term. For the record, property cycles are 7/9 years in general.

Another misleading point of information, there is no evidence to suggest property cycles are 7/9 years. They could be triple or more this gamble!

– “Optimistic forecast of the Irish economy in the medium term.” This is wrong. No such assumption is made. That said, medium-term forecasts from the ESRI, IMF etc all project an eventual recovery in the Irish economy.

Meaningless point here, the point is not if, but when!

– “Price for land and speculative developments greatly in excess of the market clearing price.” There is no “market clearing price” for land and development under current conditions.

Because of NAMA’s interference in the market place and inaction on fixing the banks!!

– “General government deficit of close to €30 billion.” This is wrong and terribly sloppy. The GGD is projected to be €18 billion for 2009 and the consensus view is that it will not exceed €20 billion. The sloppy and at times misleading use of inaccurate numbers by some commentators has been a disturbing, and indeed sometimes damaging, feature of the economic and financial debate in this country.

Ahearne very rarely gives figures for anything, we await his figure on Sept 16 for the cost of the bail out. Another way the NAMA legislation keeps us in the dark!

– “It remains very probable that Nama will run at a loss.” This is wrong. Please see my comment about sloppy use of numbers above. Based on data supplied to date by the banks to Nama (which are currently being subject to due diligence by Nama), the agency should be self-financing.

Ahearn’s lack of transparency raises its head again. How can he make this absurd and ridiculous statement when they have not even given us the cost of the bail out. This is sloppy talk in the extreme.

– “True value of the loans is . . . closer to €30 billion.” Nama has requested 300 pieces of information about each borrower. Each loan will be valued separately and the actual amount of the discount will depend on a large range of factors including the quality of the underlying property and other collateral. The valuation methodology will have to be approved by the EU Commission. I’m afraid that anyone who is trying to suggest that they can make a reasonable guess at the “true value” of the loans without knowledge of any of the details about the individual loans is either delusional or is being disingenuous.

Show us your valuation methodology!!!!!!!!!!!! You ignore the IMF in its guarded recommendation of nationalisation. You ignore the multiple recommendations/guidelines of the EU safeguards in regard to debt management. You ignore your colleagues in Ireland who are collectively horrified at your proposals. Show us all your valuation methodology!. No smoke and mirrors, disengenuous case by case nonsense, show us how you are going to safeguard the interests of the Irish tax payer.

– “Cajoling or otherwise nudging the bondholders to engage in some debt for equity swaps.” This shows a startling lack of understanding of the bondholders’ position. They are covered by the State guarantee and in fact these bondholders may well have bought following the introduction of the guarantee. Any attempt to swap debt for equity is a default on the bonds that are guaranteed by the State.

Catastrophic mess this. So, I’m out of a job, can’t pay my mortgage, I renegotiate with the bank. But a bank in a state of collapse, because the bond holders have been state guaranteed, the bank can’t renegotiate debt for equity swaps or make other arrangements. Even though arguably the bond holders have recklessly loaned to these banks without due prudent diligence.

– “What is required is a working, healthy, banking system.” At least we are agreed one thing, which is: the object of the exercise is to conclude with a working healthy banking system. The remainder of the piece does not explain how taking over the banks would move to achieve a swift reorganisation and a returning of a reorganised banking system.

I’ve covered this at length, others can show him this.

I hope you agree that what you have been asked to sign is a rather poor piece that unfortunately does nothing to inform this crucial debate.

I think Ahearne’s letter is infantile to the extreme, he is completely out of his depth and one shudders to think that this paltry piece is meant to vindicate the NAMA project.




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