Thursday, 17 September 2009

NAMA: Gamble of the Century

Slí Eile: Its now N-Day plus one. So, what do we know now that we didn’t know last Tuesday? And what would people outside this island say about NAMA? The acronym NAMA can mean different things like The North American Mycological Association (NAMA) which, according to Wikipedia is a ‘non-profit organization of amateurs and professionals who are interested in fungi, including mushrooms, morels, truffles, molds, and related organisms.’

Growing mushrooms is a science of sorts. A feature of some mushrooms is the sudden way they can spring up over night. Still, some mushrooms are very poisonous and are best left in the ground. Some reactions are along the lines of ‘leave bad alone’ when considering the morels, truffles, molds and related organisms in the lunar landscapes about us fenced in with hoarding announcing the ultimate living experience of shopping, carousing, sporting and playing and now literally going to the dogs. It mirrors similar post-crash paradise schemes in California which by now add a whole new meaning to sink estates.

Dermot Desmond (fourth in the Irish rich list – not to be sneezed at) has an interesting take on NAMA. His line is (i) don’t nationalise (no surprise I suppose) (ii) oppose NAMA-as-is because he says it doesn’t address the core problem of liquidity, and (iii) let each bank set up its own ‘delinquent asset management subsidiary (MgmtCo) which would hold all of the assets which would otherwise be transferred into Nama’. He urges that the primary risk of bad loans should rest with ‘the equity and capital providers in the banks that made the loans.’ I don’t disagree with him on that latter point.

The risk – under NAMA-as-it-is is threefold:
1 Current market prices of the assets in question (€47bn) could fall further and there is plenty of historical and international evidence to support this view – that leaves those Citizens who do actually pay significant taxes (as distinct from those super rich to whom we are all indebted in more ways than one) to pick up any increases in the shortfall of €7bn between current value (€47bn) and estimated bond issue (€54bn)
2 The capital/liquidity position of the main banks is still a problem and will in all likelihood require further massive injections of capital – some of it borrowed from ECB but with the risk largely on the backs of our children and grandchildren.
3 The discount factor of 30% together with the total book value involved (€77bn) seem to be like moving targets.

We simply don’t know whether we are facing into an L-shaped economic future, a W-shaped future or a U-shaped future. (it seems as if most commentators are assuming U). If the Dublin Consensus gets it ways we could be heading for some combination of L and W.

On the unlikely assumption of no further drop in the average price of assets, it looks as if the total risk-exposure for the banks is in subordinated debt coming to €2.7bn (or 5% of the total bond issue of €54bn). That’s a drop in the ocean (for the banks) – just about what is spent on primary schools. The idea that assets will track long-term trends in consumer prices is risible. US economists like Paul Krugman might call it ketchup economics: ‘two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup’ from which some conclude that the ketchup market is perfectly efficient. ‘Fanciful’ as a Supreme Court Judge said recently.

A feature of NAMA, as it filters through from stage 0 rumours about banks in difficulty to stage 1 suppositions to stage 2 partial insight to stage 3 clarifications on Morning Ireland to stage 4 no we never meant that to stage 5 that was 2009 but we have moved on now … is the way in which risky economic assets are traded between the State, banks, commercial property and land interests and ultimately international lending institutions including the European Central Bank. In many ways, the debate about NAMA has descended into a debate about risk and how risk should be shared out between economic and institutional actors – and between generations.
Over the summer, NAMA 2.0 emerged. Its proponent, Patrick Honohan now Governor of the Central Bank designate, outlined a scheme that would shift much of the risk to the banks. Essentially, it involved paying a low price for the assets today and compensate bank shareholders with a prospective share in future NAMA profits on rising asset values – only if that happens (the key point). The current NAMA-as-is proposals are a far cry from NAMA2.0. Not a mention of a greenish bank levy in the draft legislation so far. What guarantee is there that a future Government will deliver on this promise in any significant way? Previous promises on bank levies were not delivered.

To put it another way, it is proposed that the banks get €51.3bn by way of low-interest bonds in the coming 12 months with the remaining €2.7bn in subordinated debt accruing only if all goes to plan. We are told that NAMA only needs to see an average 10% growth in asset prices over the coming decade. The maths behind this will be interesting to see especially as there is no account of what NAMA itself will cost or what a scenario of ECB rates climbing back up to much higher levels (which is very likely). After all the complex discussions and speculation, it looks like a very simple model based on very simple assumptions in a very risk-controlled world.

A big fish in the pond is our dear Anglo-Irish now in state ownership requiring a transfer or €28bn in toxic mushrooms. The, by now, iconic picture of unfinished Anglo HQ by the Liffey is a work of surrealist art along with all the other monuments across the land – exceeding in number the magic forts where wild mushrooms grow. The case of Anglo is the most obscene of all. It would be tragic-comic case were it not so crippling for those facing cuts, job losses, income decline and erosion in public services. On the one hand, further borrowing or targetted fiscal stimulus is out of the question says the Dublin Consensus. At the same time, we are being asked to underwrite a huge financial exchange involving massive risk exposure - to free up liquidity. This is called Quantitative Easing Irish style.

By the way, the book value of €77bn includes €9bn in ‘rolled up interest’ not paid by borrowers. Remember that the next time a ‘cleaned up bank’ comes after you if you can’t afford the interest on your home mortgage.

1 comment:

Shay Begorrah said...

So, just to get this straight:

The main voices supporting NAMA are the ones who got us into this situation and their economic priorities and philosophy are basically unchanged.

The small and tragically uninfluential group who predicted a rum end to the property boom and the roots of the current crisis oppose NAMA.

So we are getting NAMA.

The real question is why will they get away with it? Why are we so placid? Where are our shoe throwers?

You might make fun of Arthur Morgan but if ever there was a time for legislative disruption this is it.