Alternative to NAMA… A Common Approach!

September 21, 2009

an infinite number of alternatives to NAMA,
as there are also an infinite number of amendments
that can be made to the NAMA legislation.
Here I would like to put forward an alternative to NAMA that could
achieve cross party support between Fine Gael, Labour, Sinn Fein and Independents. This alternative could also, though less likely, achieve support from the Greens and Fianna Fail.
Firstly, lets look at NAMA gamble. NAMA is predicated on the 47€ ‘market value’
evaluation of assets that are subject of toxic loans. The value given to these
loans carries a high risk of overpayment.
A proposed alternative is that of nationalisation of BOI and AIB.
While initial acquisition costs of these banks would be high,
the risk of overpayment for toxic loans would disappear.
A detailed proposal would have the banks cleansed and returned
to the market as denationalised sovereign entities. The period of
nationalisation could see the management of these banks sub contracted
to highly regulated banks such as one of the Canadian banks. The problem
with this proposal is that it does not have cross party support.
Another proposal is the ‘Good Bank’ alternative proposed by Fine Gael,
“Five months ago Fine Gael offered a two-track alternative to Nama.
Under track one, we propose, as a temporary measure, to improve credit
availability for struggling businesses and households by the establishment
a wholesale “good bank”, or national recovery bank, with initial investment
from the State and further funding from the ECB and markets, using a model
that is well established in EU countries. Enforcing the lending commitments
already made by AIB and Bank of Ireland in return for the €7 billion given
to them in new capital would be another priority.
Looking for common ground between the Fine Gael and Labour proposals one
cannot see any problem with this proposal. The details could even include the
relaunch of a cleansed bank eg Anglo Irish Bank if the toxic assets were dealt
with in the following way:
Firstly, lets look at the second track in the Fine Gael proposal once again
succinctly put in the above article:
“In parallel, under track two, the banks would be given until the end of the
guarantee period in September 2010 to pass a rigorous “stress test” to show
that they had repaired their own balance sheets by selling assets
(such as foreign subsidiaries), raising more deposits and negotiating with
their investors to write off their losses.
In the event that the banks cannot pass such a stress test by the end of the
guarantee period, Fine Gael’s proposal is to split each failed bank into two,
leaving the assets with the most uncertain values (the developer loans) in
legacy asset management companies owned largely by the shareholders and other
classes of risk investors. Deposits, other short-term liabilities, personal
loans, mortgages and business overdrafts, the branch networks and the vast
majority of the staff would all move safely and seamlessly into a new, going
concern “clean bank”, initially owned and guaranteed by the taxpayer.
These new “clean banks” would be free of toxic developer loans and fully open
to resume lending to small businesses and households.”
Note the exercise here is not to try to punch holes in either the Fine Gael or
the Labour proposals, but to look for common ground. Essentially, there is quite
a good deal of common ground here. Both Labour and Fine Gael believe there must be
short term solution to cleansing these banks. The selling of “assets
(such as foreign subsidiaries), raising more deposits and negotiating with
their investors to write off their losses” would happen under nationalisation also.
But the devil is in the detail of how to manage the toxic assets! At this point,
in order to achieve common ground its necessary to borrow the asset management concept
a variant of which is NAMA. Let’s say that in order to achieve common ground between
the Fine Gael and the Labour positions above, we will use an asset management agency,
let’s call it, ANAM (Agency for National Asset MAnagement).
Here Fine Gael would be asked to consider if instead of leaving the separated toxic
assets within legacy asset management companies owned largely by the shareholders and
other classes of risk investors, that, instead, they would agree to those toxic
assets being left within the banks but that their management comes under the umberella
of ANAM. ANAM would have powers similar to a bank regulator tasked also with clearing
the books of toxic loans in as short a timeframe as possible.
In order for Anam to work and the interests of the tax payer protected the tax payer
would require zero risk. Lets assume the only way to achieve zero risk is to nationalise banks
whose exposure to toxic debt is such as would have them fail a stress test. Lets
assume also that banks under test are systemic banks important to the Irish
economy each with a valuable brand name and that the cost of saving these banks
is cost effective in the long term for the tax payer and Irish economy;
and is more cost effective than the cost of letting these banks go under.
Lets assume that Labour and Fine Gael agree that other banks that do not fail the
stress test follow the model proposed by Fine Gael above and they also agree to
some involvement of ANAM in regard to the cleansing of their toxic loan portfolio.
So now, we are left with common ground that needs to be found in how to deal with
AIB and BOI.
Suppose we reduce the problem further assuming both AIB and BOI are given a
stress test and fail it ( Bank Stress Test FAQ here
We assume also that they fail this test ).
Assume both of these banks are nationalised. The European Central Bank will support
a business plan to cleanse the banks. Toxic loans and performing loans can be
separated out as Fine Gael already suggest. A common unified approach can be agreed
between Fine Gael and Labour and other parties including independents.

One of the false statements put out about NAMA is the one that NAMA is the only game in town! Another is that the Government is willing to consider alternatives to NAMA. The latter is especially devious because ‘alternatives’ is interpreted by the government as ‘amendments’to NAMA, but I would like to put forward the fact that there are an infinite number of alternatives to NAMA, as there are also an infinite number of amendments that can be made to the NAMA legislation.

Here I would like to put forward one alternative to NAMA that could achieve cross party support between Fine Gael, Labour, Sinn Fein and Independents. This alternative could also, though less likely, achieve support from the Greens and Fianna Fail. This is but one of any number of alternatives.

NAMA is predicated on the €47 billion ‘market value’ evaluation of assets that are subject of toxic loans. The value given to these loans carries a high risk of overpayment being a huge overstatement of their real market value. In ‘Business’ p3, Sunday Independent, Sept 20, ’09, property prices will have to rise by 25% over the next ten years to give NAMA a maximum profit of €4.7bn. However a fall of just -10% over the same period will mean a €9 billion loss to the tax payer.

It is indeed possible that Lenihan has overstated the market value €47 billion. It could be as stated in earlier post closer to €30 billion or less. This risky miscalculation can do untold damage to our economy and turn us into an economic wasteland. According to the above figures if there is a fall of just 10% and we have miscalculated the market price of property, ie that its closer to €30 rather than €47 billion, then the loss to the tax payer will be in the region of € 26 billion or more. This will lead to poor services infrastructure and consequent damage to quality and way of life in Ireland and consequent poor value for outside investors.

A proposed alternative is that of nationalisation of BOI and AIB.  While initial acquisition costs of these banks would be high, the risk of overpayment for toxic loans would disappear. Tax payers would benefit from any future upturn in the value of  assets including in any resale/relaunch of the cleansed sovereign banks into the market place. A detailed proposal would have the banks cleansed and returned to the market as denationalised sovereign entities. The period of nationalisation could see the management of these banks sub contracted to highly regulated banks such as one of the Canadian banks.

The problem with this proposal is that it does not have cross party support.

Another proposal is the ‘Good Bank’ alternative proposed by Fine Gael, http://www.irishtimes.com/newspaper/opinion/2009/0828/1224253408843.html

“… Fine Gael offered a two-track alternative to Nama. Under track one, we propose, as a temporary measure, to improve credit availability for struggling businesses and households by the establishment a wholesale “good bank”, or national recovery bank, with initial investment from the State and further funding from the ECB and markets, using a model that is well established in EU countries. Enforcing the lending commitments already made by AIB and Bank of Ireland in return for the €7 billion given to them in new capital would be another priority.”

Looking for common ground between the Fine Gael and Labour proposals one cannot see any problem with this proposal. The details could even include the relaunch of a cleansed bank eg Anglo Irish Bank if the toxic assets were dealt with in a satisfactory way. But firstly, lets look at the second track in the Fine Gael proposal once again succinctly put in the above article:

“In parallel, under track two, the banks would be given until the end of the guarantee period in September 2010 to pass a rigorous “stress test” to show that they had repaired their own balance sheets by selling assets (such as foreign subsidiaries), raising more deposits and negotiating with their investors to write off their losses.

In the event that the banks cannot pass such a stress test by the end of the guarantee period, Fine Gael’s proposal is to split each failed bank into two, leaving the assets with the most uncertain values (the developer loans) in legacy asset management companies owned largely by the shareholders and other classes of risk investors. Deposits, other short-term liabilities, personal loans, mortgages and business overdrafts, the branch networks and the vast majority of the staff would all move safely and seamlessly into a new, going concern “clean bank”, initially owned and guaranteed by the taxpayer.

These new “clean banks” would be free of toxic developer loans and fully open to resume lending to small businesses and households.”

Looking for common ground, there is plenty to be found here. Note the phrase, “clean bank”, initially owned and guaranteed by the tax payer”.  Essentially we are talking of a bank nationalised in the short term.  The selling of “assets(such as foreign subsidiaries), raising more deposits and negotiating with their investors to write off their losses” would happen under Labour’s  nationalisation also.

But the devil is in the detail of how to manage the toxic assets! There is some divergence between Fine Gael and Labour on how to manage the toxic assets. It would appear any agreement between the two would pivot about this point.

I believe a common consensus could be reached.

Without muddying the waters too much, but rather to get the consensual motors running, here are some starting off points that could be considered:

To achieve common ground its necessary to borrow the asset management concept a variant of which is NAMA. Let’s say that in order to achieve common ground between the Fine Gael and the Labour positions above, we will use an asset management agency, let’s call it, ANAM (Agency for National Asset MAnagement).

Here Fine Gael would be asked to consider if instead of leaving the separated toxic assets within legacy asset management companies owned largely by  shareholders and other classes of risk investors, that, instead, they would agree to those toxic assets being left within the banks but that their management come under the umbrella of ANAM. ANAM would have powers similar to a bank regulator but  tasked also with clearing the books of toxic loans in as short a timeframe as possible.

In order for Anam to work and the interests of the tax payer protected the tax payer would require zero risk. Lets assume the only way to achieve zero risk is to nationalise banks whose exposure to toxic debt is such as would have them fail a stress test. Lets assume also that banks under test are systemic banks important to the Irish economy each with a valuable brand name and that the cost of saving these banks is cost effective in the long term for the tax payer and Irish economy; and is more cost effective than the cost of letting these banks go under.

Lets assume that Labour and Fine Gael agree that other banks that do not fail the stress test follow the model proposed by Fine Gael above and they also agree to some involvement of ANAM in regard to the cleansing of their toxic loan portfolio, no details given here except to observe that one of the methods used by these banks could well be a process of consolidation/amalgamation into a new bank, that with some government share investment this new bank can function as a going concern able to manage its own debt.

Lets agree Fine Gael and Labour allow these banks to go about their own business with the guarantee that the State, if required, can step in, in return for an equity stake investment, to provide for full recapitalisation to whatever levels the markets require, then the problem with these banks is sorted!

So now, we are left with common ground that needs to be found in how to deal with AIB and BOI.  Suppose  both AIB and BOI are given a stress test and fail it ( Bank Stress Test FAQ here

http://blogs.wsj.com/economics/2009/02/25/bank-stress-test-faq/

Assume, instead of splitting these two banks into ‘good’ and ‘bad banks’ both of these banks are nationalised. ANAM, a bad bank, could take the toxic assets into a single independent ‘bad bank’. This would allow the AIB and BOI to resume normal trading unfettered by the toxic loans on their books.

The problem would now be reduced to the management of the ‘bad bank’ and the legislation providing for its setting up.

There are great difficulties here but they are not insoluble. Some difficulties would be in the decision of how collateral assets subject of toxic loans would be disposed of e.g by way of firesale over a short period of 5 years doing as the Swedish did farming out these assets into a number of property management companies for disposal into the market place in the short term, or a combination of other methods.

For example, the tax payer could benefit through the purchase of agricultural land close to towns eg for use as municipal parks. Such infrastructure eg schools/colleges/university residences/swimming pools/libraries/civic theatres could be the subject of a parallel ‘Marshall Plan’ type investment in our economy with monies saved from not having to pay the  LTEV(Long Term Economic Value) bailout gift promoted by abjectly by Fianna Fail and the sorry Greens.

The European Central Bank will support a business plan to cleanse the banks. It would appear they will even support a bad business plan such as the one proposed by Fianna Fail and the Greens.  A joint approach/consensus/agreement could be found  by Labour and Fine Gael along similar lines to the above.  So, it would also appear we are at a turning point in the history of this country and two roads beckon.

One road leads to the short term bailout of banks and shareholders and developers to the further expense of tax payers; with further risky gambling  of tax payers money and the generation of another false and toxic property bubble. This road will lead to long term damage to the economy as the undertow of the consequences of this poor decision making will be felt by way of lack of competitiveness going into the future and other damaging liabilities.

It will lead to uncompetitive property values, an economy with a cancerous and malignant NAMA tumour long into the future with political interference and corruption and unwanted meddling in the market place,  and further scalping of the tax payer to pay for future grabbing of tax payers money to bail out banks and shareholders.

It will be a noose around the neck of every tax payer in the country with untold cash injections to support gambling losses and further risk taking, the result of bad decision making into the future.

Another road could be that  toxic loans and performing loans can be separated out as Fine Gael already suggest. A common unified approach can be agreed between Fine Gael and Labour driven by both a good bank and nationalisation scenario along the above lines. This could have the support of other parties including independents.

This latter approach however demands we have a minimum of smarts to get it to work.  If we do not have these smarts, then we deserve to follow pitiable Fianna Fail and the abject Greens like a bunch of lemmings preparing to head over the cliff.

Or we can, as so many young Irish are preparing to do,  just leave!

rgds

Colm

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