Terry McDonough: It has been repeatedly asserted over the last few days that NAMA is the only game in town. Below is a list and description of the games currently being played. I would appreciate any corrections from readers of this blog.
“Good Bank” proposal.
The government takes over the deposits of the banks. These are liabilities. In exchange for taking the liabilities the government also assumes the best performing assets of the banks. This creates a clean bank with deposit obligations backed by performing assets. The government then invests in this bank to top up required capital. The bad assets are left with the shareholders and bond holders to work out in the “legacy” bank.
The advantage of this is that it doesn’t cost the government anything, as the bad assets are not bought and the capitalization of the banks confers ownership of a valuable asset, the clean bank. The losses are left to the shareholders and the bond holders.
A complication with this is the government has guaranteed the bond holders until September, 2010. This can be dealt with in several ways. The legacy bank can be required to manage its assets so as to meet all obligations falling due prior to September 2010. The government can withdraw the guarantee. This is not the same as defaulting on sovereign debt but does undermine government credibility. It could be done more easily by a new government. The Fine Gael proposal avoids this by setting up a clean bank from scratch now, and only splitting the private banks into government owned clean banks and bad privately owned legacy banks after the guarantee expires in 2010.
Upsides: Taxpayers leap free. The good bank under government control can decide to extend credit. Shareholders and bond holders take the hit.
Downsides: Bond holders take the hit and the bond markets are mad at Ireland.
Response to downside arguments: Since the Irish government is no longer responsible for the bad debts of the banking system, it is more solvent and better able to borrow on the bond markets. The bond investors are businessmen. They don’t hold grudges. In fact, they respect taking the tough decisions in the national interest.
This solution is often presented as temporary, as the clean bank can be sold eventually perhaps at a profit for the government. The clean bank could also be run into the future, emphasizing public priorities like local business and green investment. Credit is necessary and should be run as a public utility, rather than a gambling den as it is periodically under private control.
Nationalising the banks
This involves purchasing the bank stock by the government. This leaves the government in ownership of both the good and the bad assets of the banks. The government would probably then separate the nationalized banks into clean and “bad bank” divisions and further capitalize the clean division.
Upsides: Taxpayers pay less. If banks are judged valueless on balance, taxpayers pay nothing. Shareholders take the hit. Taxpayers get good as well as bad assets. Government can dictate that banks begin lending again.
Downsides: Bondholders now owed money by state institutions. Paying back bondholders can create substantial losses for the state. It has been argued that lenders in the future will not lend to a state bank. This is historically unsupported.
Like the “good bank” proposal, the nationalized state banks can either be sold off later or retained to provide credit outside the private bank cycle of boom and bust.
NAMA with bad assets purchased at current market prices
NAMA buys bad assets at current market prices. Banks forced to write down their losses. Government recapitalizes banks. Government ends up with majority ownership of banks.
Upsides: Taxpayers do not lose money in creating “bad bank.” Ownership shares could be used to mandate the restart of lending.
Downsides: Bondholders still owed money by clean bank, now majority-owned by government. This could mean substantial losses for the government in the future.
NAMA with Honohan amendment
NAMA pays roughly the market price for the bad assets. In addition, the banks receive shares in NAMA which entitle them to the profits if NAMA makes money after paying back the government. As with the above purchase of bad assets at market prices, the government is required to recapitalize the banks by taking substantial shares.
Upsides and downsides as above, with the added downside that if the bad assets perform better than the market expects the additional money goes to the banks rather than the taxpayer.
NAMA
NAMA acquires bad assets at some markup above market rates. The government then recapitalizes the banks but buys fewer shares because the banks now have capital received from the overpayment for the bad assets.
Upsides: Banks now cleansed of bad assets, but this advantage is shared by all of the above proposals.
Downsides: Government pays the same as under the above modified NAMA proposals for the bad assets and the bank recapitalization, but owns a smaller share in the banks. There is no guarantee that the banks will begin to lend again. Shares in the banks leave the government exposed to losses through payment of the bondholders.
Comment
The “Good Bank” option is clearly superior in that it is the only one which relieves the taxpayer from responsibility for compensating bond holders for losses. It also creates a government controlled bank which can be instructed to begin lending.
9 comments:
The good bank model is as you say but you leave out a serious downside - the fire sale of the distressed property assets.
What will happen in that scenario is a big happy party for the luckier Irish developers who cashed in their chips before the crash and the international elite of property moguls! This is how the rich get richer when the market goes up and when it goes down.
They will then sit of the land until the Irish economy recovers (with no help from them) and when sufficient value is added to their centrally located sites by the sweat of others - they will cash in - before the next crash.
You omit another option, that of the NAMA Trust. This start off similar to the good bank model. The government announces no extension of the guarantee after September 2010 and creates a NAMA Trust to look after shareholders interest in any rescue. The banks are encouraged to value their distressed property loans according to well established Charted Surveyors Association's methodology at 'market value' estimating the full losses on their loans.
Only after private avenues for recapitalisation are exhausted should the Irish taxpayer through the NAMA Trust provide capital to the banks in exchange for equity. The bank shares will be very cheap, as they should be for a reckless bankrupt business. Sweetners can be offered to bondholders by offering some shareholding in the Trust.
The banks are not nationalsied, therefore there is no, even quasi-sovereign, defaulting of the senior bondholders and there is no question of political interference by any government, especially one with Fianna Fail, in future bank decision-making.
The NAMA trust is responsible for the proper management, devlopment and sale of the distressed assets. Zoning and planning permissions are revisited to remove any past FF influence in favour of their developer and banker friends.
Some land is sold, others are reapplied for appropriate permissions under a new plan-led sustainable planning and property taxation environment regime
Private and public (OPW) Professional teams are employed directly or as partners to build what should be built to best energy-exporting, carbon-negative, zero-waste, social-integrated standards. Skills and experience is gained to build up a new exporting environmental services sector.
Why is this option outlined in Sunday Independant by Trinity economist Constantin Gurdgiev not listed here? what is not to like in it from a Tasc point of view? Could there some ideological screening at play?
@Terence: If there are forty shades of green there must be 80 shades of NAMA, good banks, bad banks and ugly banks ! Thank you for the summary of positions. I am sure others such as those outlined by EOS could be added.
One thing puzzles me - you seem to favour the 'good bank solution' which you list separately to nationalisation (of existing banks). Did I understand you correctly? If so, this was not my sense of the 'G46' position last week - of which you are one. I tend more to the G46. However, I agree that a fresh start with a new recovery bank in the business of socially responsible credit and money broking is the way to go and this does not eschew open competition. Jim Stewart, in an earlier blog on this site, viewed nationalisation as undesirable since it did not address the banks capital shortfall and would not deal with capital value problems. He seemed to be of the 'good bank' view if I understood his position.
I’m glad a post like this on NAMA has come up.
With respect to the contributors here far too much time has been spend on picking over squabbles between academics over social welfare rates, wage levels and the like. Its not really that important in the scheme of things.
NAMA is the only show in town. It must be defeated. I fear, however, that the Irish population on the whole has not engaged enough with the issue to know that they are about to be robbed blind. It will almost certainly get past the Oireachtas with cursory amendments.
Is there any legislation pending that will address bank and credit regulation? I've read somewhere that there has been a reorganisation of the so-called regulatory body but can't find any real details.
Does anyone have any gen on this?
A rescue plan (whatever form it takes)without proper regulatory authority, procedures and enforcement is a waste of time in an era of nominal zero interest rates, quantitative easing and outright gambling by banks trying to increase profits in declining economies.
@EOS
The legacy bank would be owned by the bank shareholders and bondholders. They would foreclose and sell off property at a rate which would maximize their return. There would not necessarily be a firesale. I don't understand why waiting for prices to rise would make the assets more affordable for ordinary people rather than developers.
CG's NAMA trust is only a few days old as a published idea. I've looked up his article and I don't understand how it would work. He does claim that the shareholders and bondholders would suffer the write down under his plan so on these grounds it would be superior to NAMA.
I wanted to make two points - one is the superiority of the Good Bank option. But the other is more general - all of the alternative options under discussion are superior to the government's NAMA plan. CG's seems to be another one of these.
@Sli Eile
The problem with simple nationalization is that the government remains responsible for paying off bond holders. If the government could nationalize and then force the bond holders to write down the losses, it would indeed be similar then to the good bank proposal. The Good Bank proposal is cleaner and leaves the responsibility for working out bad assets in the hands of the shareholders and bond holders.
If there were any assets which the government intended to develop in a socially responsible manner they could be acquired at market value in return for the good bank assuming the deposit liabilities.
@Anonymous
A reorganisation of the institutional structures for the regulation of financial services was announced by the Department of Finance last June (http://tiny.cc/CuD1d).
Basically the government is proposing to establish a single regulatory body (The Central Bank of Ireland Commission) with responsibility for the supervision of financial institutions and the stability of the financial system in general.
All we know for now is that the above reform of our regulatory structures will be accompanied by "a significant expansion of regulatory capacity" and that the legislation that will underpin the reform "will seek to enhance the accountability of the new regulatory structures to the Oireachtas and to strengthen evaluation and quality assurance of regulatory performance".
@Terry One of the arguments for nationalisation now is that we have a unique opportunity with share prices on the floor, credit lines in disarray and bond markets hammered. I take your point about assuming the liabilties on bonds. The alternative is to allow bonds to be written down after September 2010. But that seems like a long way off!
I haven't read the G46 letter again but on my initial reading of it the argument presented for nationalisation - albeit temporary - was well made and clear. Do you reckon that there are differences or ever dissenting positions within the G46 on this?
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