Banks in 'weak' position on NAMA - RTE

[constitutionus]

RTÉ Business: Banks in 'weak position' on NAMA - report

My last check on Sharewatch indicates that the bank shares are falling following this warning, not as sharply as you'd expect however. The report also suggests both banks will need more capital injections, just the tidy sum of €3.3 billion in total between them though, so no great worries there, eh?

So what happens next?

shares are falling because its the end of the dead cat bounce.

these things happen every three months or so. theres been a steady decline for the last week and a half. the only exceptions are things like the permo which are based on rumours of them flogging off TSB which isnt a million miles away from what happend with ELAN and the rumours of its take over by lundbeck a few weeks ago.

the "recovery" is still along way off.

my guess would be what happens next is indeed another round of cash injections through the purchase of shares that'll probably put one of the banks in majority state ownership and another just less.

i wouldnt rule out two others being merged into one viable entity

(sorry im being so vague but i DONT want to get dave in trouble as theres precedent of some muppet setting off a run on a company for their own ends and i dont want to be accused of that. most people can figure out what institutions im on about anyway if theyve been paying attention )

after that i can see both banks surving long term and eventually buying themselves out from the GOV.

thats what i think anyway. one things for sure, if ANYONE at RTE knew what they were on about they wouldnt be talking on RTE, they'd be supping pinna coladas in the carribean. this whole thing is all still too close to call yet. but my bet is were still in for a good 5yrs at least before it becomes NEAR sorted.

[diablo]

Fair play to you, you smug ********************.


No, but neither do I think that the Govt has carte blanche to screw them via NAMA.

Particularly as they've been using populist bull to pass all the blame to the banks, when the big hole in the public finances is primarily the fault of successive FF-led Govts.

There is a lot of populist bull going around but talk of the banks being screwed by NAMA is ridiculous. The banks were run to a point where your shareholding would be worth zero today if it wasn't for government support. They are failed businesses.

The banks' management screwed shareholders.

And the really funny bit is that shareholders have not removed the management that oversaw a 99% reduction in shareholder value.

Can you see who is screwing shareholders yet ?

[BodyofEvidence]

Mind you, if the auditors in INBS (KPMG take a bow) are to be believed then a writedownof merely 5% is needed. Which would make nama cost 85bln....

[Dios]

The scope of the banks to resist is limited, but they should use every means possible to block any Govt attempt to effectively expropriate their assets.

The shareholders, of course!

Aha! I knew it.

[mollox]

Aha! I knew it.

No flies on you Sherlock!

[BodyofEvidence]

the banks and the minister get a right kicking in the irish times opinion piece today
Nationalising banks is the best option - The Irish Times - Fri, Apr 17, 2009

[Dios]

No flies on you Sherlock!

There are, but I sold them my BoI shares back in 2006.

the banks and the minister get a right kicking in the irish times opinion piece today
Nationalising banks is the best option - The Irish Times - Fri, Apr 17, 2009

Yeah, all the elaborate maneuvering to protect share prices is looking like increasingly transparent ass covering from FF. Its more or less corruption on an unheard-of scale, and the participants don't care if the country goes back to the dark ages as long as they get their pensions. It won't last long, in my opinion.

[Akrasia]

RTÉ Business: Banks in 'weak position' on NAMA - report

My last check on Sharewatch indicates that the bank shares are falling following this warning, not as sharply as you'd expect however. The report also suggests both banks will need more capital injections, just the tidy sum of €3.3 billion in total between them though, so no great worries there, eh?

So what happens next?

A discount of 25% would be a spectacularly generous offer (using our money)

It's shockingly appalling that we're letting the government get away with appointing bankers and stock brokers to assess the price the government is going to pay for these 'assets'.

The idea that the government will defer to these 'experts' to deflect responsibility from themselves is making me feel ill because everyone knows that these consultants are just feathering their own nest and are part of the problem that got us into this mess in the first place

We should be expecting writedowns of at the very least 50% with the actual value of these 'assets' being closer to 20% of their NBV by the time they're eventually offloaded at cents on the euro to vulture capitalists.

Paying 70bn of mine and my unborn childs money to these banks to 'buy' assets worth a fraction of that amount is treason and I would seriously consider changing my position on capital punishment if this goes through.

[Akrasia]

The scope of the banks to resist is limited, but they should use every means possible to block any Govt attempt to effectively expropriate their assets.

The primary duty of bank boards and executives is to protect what remains of shareholders value, rather than concern themselves with the public interest. The latter is the responsibility of the Govt & the Oireachtas, though they haven’t shown much skill in that regard over the past decade.

The interests of Bank shareholders would be better served by severely slimmed-down Zombie banks, with some long-term hope of recovery, than by nationalisation, which will extinguish entirely their investment interest. Zombie banks won’t serve the national interest, but that’s not the concern of the banks or their shareholders.

And people like you are always talking about "unions holding us to ransom" but you are actively calling for banks to sabbotage the economy to preserve shareholder value.

The shareholders have no rights anymore. They sacrificed those when they allowed/encouraged their companies to trade in a reckless manner.

They owned the companies, they had voting rights and they were happy to invest in these companies while they were manufacturing this crisis, they are only reaping their own crop.

I presume bank managements are actively working on such alternative strategies, in the event that NAMA is perceived to be acting in the manner suggested by the IT report.
If the political, media and popular view is “******************** the shareholders”, then shareholders can justifiably adopt a “******************** the national interest” stance.

by the way, you appear to be the only person worried about the banks being shafted by this process, all the signs are that the banks will do very very well, they will be absolved of their sins with minimal pennance while the innocent tax payers will be sent to hell

[cashinhand]

Nationalising banks is the best option

Twenty of Ireland’s leading academic economists argue that the Government has got it badly wrong. Nama is not the way to clean up the banking mess created by the property bubble: temporary but full-blooded nationalisation of the banks is the only way

OVER THE last number of months extraordinary changes have occurred in the Irish banking and financial scene. We believe that we are now at a critical stage in Irish economic history and that it is crucial that the Government take the right course of action to deal with the problems in our banking sector.

The banking system is widely perceived to have seized in terms of lending, and whether correct or not this perception needs to be addressed. We believe that the correct action to take now is nationalisation of the banking system, or at least that part of it that is of systemic importance.

We do not make this recommendation from any ideological position. In normal circumstances, none of us would recommend a nationalised banking system. However, these are far from normal times and we believe that in the current circumstances, nationalisation has become the best option open to the Government.
Furthermore, we explicitly recommend nationalisation only as a temporary measure. Once cleaned up, recapitalised, reorganised with new managerial structures, and potentially rebranded, we recommend that the banks be returned to private ownership.

In introducing its proposals for the National Asset Management Agency (Nama), Government Ministers and Peter Bacon, the consultant who recommended this plan to the Government, have stressed that they see their current plan as likely to produce a superior outcome to nationalisation (though they concede that majority State ownership may be required).

We disagree strongly. We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer.
We can summarise our arguments in favour of nationalisation, and against the Government’s current approach of limited recapitalisation and the introduction of an asset management agency, under four headings. We consider that nationalisation will better protect taxpayers’ interests, produce a more efficient and longer lasting solution to our banking problems, be more transparent in relation to pricing of distressed assets, and be far more likely to produce a banking system free from the toxic reputation that our current financial institutions have deservedly earned.

PROTECTING THE TAXPAYER
Our banks have made an enormous quantity of bad loans, mainly to property developers, and realisation of these losses will see a substantial erosion of their capital base. International financial regulations require that banks maintain certain levels of capital to be allowed to stay in business.

In addition, as the recession mounts, so too will bad debts in consumer and other commercial loans, and so our banks need outside capital investment to make up the losses on these loans. The highest grade, and most desirable, form of capital is ordinary share capital, and in the current circumstances the Irish Government is the only conceivable investor willing to provide this capital.

The Government has put forward Nama as a vehicle to take these bad loans off the banks at a discounted rate. To the extent that the realisation of losses on these loans erodes the capital position of the banks, the Government has indicated that it is willing to supply equity capital in return for shares.

Crucially, however, the Government’s current descriptions of the range of outcomes from this process suggest that they are badly underestimating the scale of losses at our banks, and as such may end up substantially overpaying for bad assets.
Take our two leading banks, AIB and Bank of Ireland. Analysts have repeatedly estimated the extent of bad loans at these banks to be of the order of at least €20 billion. Losses of this sort would wipe out virtually the entire €27 billion of Tier 1 capital of these banks. This means that if the Government purchases these loans at fair market value, it will end up having to provide funds to replenish fully the equity capital of these banks and, in consequence, would end up with essentially full ownership of these banks.

There is thus a fundamental internal contradiction in the Government’s current position. The Government is claiming that it can simultaneously: (a) purchase the bad loans at a discount reflecting their true market value; (b) keep the banks well or adequately capitalised; and (c) keep them out of State ownership.
These three outcomes are simply mutually incompatible, and we are greatly concerned that the Nama process may operate to maintain the appearance that all three objectives have been achieved by failing to meet the first requirement. This would arise if Nama purchases the bad loans at a discount – but still well above market value.

With €90 billion in loans to be purchased, the consequences to the taxpayer of overpaying for bad assets by 10 to 30 per cent are truly appalling. To put these figures in perspective, the effect in a full year of the Budget measures taken last week was to save the exchequer €5 billion.

Peter Bacon and others have argued in recent days that the question of who owns the banks does not matter, because the ownership structure does not change the underlying size of loan losses. Frankly, this is argumentation by distraction.
Nobody is claiming that nationalisation changes the underlying loan losses on the bank balance sheets. However, what it does change is who owns the equity and also who has first claim on any increase in value in the new banks after they have been recapitalised. If nationalised, the taxpayer stands to get a return on their equity investment after the banks have been sold into private hands in a few years’ time, and this would substantially reduce the underlying cost to the taxpayer.
Furthermore, nationalisation offers an opportunity, should the Government see such a need, to share directly with the taxpayers the upside in restoring banking sector health. Such an opportunity could involve a voucher-style reprivatisation of the banks and could be used to provide economic stimulus at a time of scarce resources, at no new cost to the exchequer.

A MORE LASTING SOLUTION
With the Nama process charged with meeting the three mutually contradictory objectives above, it is also possible that objective (b), recapitalising, will not be fully met. In other words, a Government that needs to be seen to purchase the bad assets at a reasonable discount and that does not want to take too high an ownership share may end up skimping on the size of the recapitalisation programme. Thus, rather than create fully healthy banks capable of functioning without help from the State, this process may continue to leave us with zombie banks that still require the State-sponsored life-support machine that is the liability guarantee.

However, once nationalised and with the promise of future returns for the State, the incentive for the Government will be to create well-capitalised healthy banks that can be privatised and allowed to operate independently from the State, as quickly as possible. We believe that full nationalisation now will end up getting the State out of its involvement in the banking business faster than the current approach being taken by the Government.

In contrast, a circumstance where a drip-feed of recapitalisations is required would be the worst of all possible outcomes.

TRANSPARENCY
Peter Bacon and Government Ministers have stressed that it is necessary to keep the banks out of public hands so that the process is a transparent one.
The truth is exactly the opposite.

Every additional euro that the State pays for bad assets is an additional euro for the current bank capital holders and one euro less of valuable equity investment for the State. For this reason, the process by which Nama purchases the bad assets is going to be an extremely controversial one. Already, analysts are citing ranges from 15 per cent to 50 per cent as appropriate for the discount on these loans.

However the Government decides to price these assets, whether it be via accountancy firms, auctioneers or economic consultants, the process is going to have an element of arbitrariness to it and is unlikely to be one that will be widely seen as fair and transparent.

By contrast, nationalisation per se requires no such controversial asset-pricing process. Nationalisation can still involve a Nama, if the Government believes that reprivatisation of the banks would proceed best if certain of the most toxic and compromised assets have to be taken off the bank books altogether rather than just written down to market price.

However, the valuation process in this case would cease to be controversial, as the Government would own both the Nama and the banks, so the price would hardly matter. The Swedish bad bank experience (widely mis-reported in this country) involved an asset valuation board that set the price for assets transferred from nationalised banks, but the process was not a controversial one.

A related argument that Government officials have made against nationalisation is that it would remove the stock market listing and market monitoring function, rendering opaque the quality of the State-owned banks. However, the experience of recent years is one that would have to cast doubt on the ability of markets to effectively monitor financial institutions.

TOXIC REPUTATIONS
The Government’s plans seem likely to keep in place the current management at our biggest banks.

For instance, the smaller discounts on bad loans being cited would, if paid, likely allow Bank of Ireland to maintain its recent levels of equity capital without taking more funds from the Government than the €3.5 billion it has already taken (in return for preference shares which give an option for a 25 per cent State share.)

This type of incremental change will do little to restore the battered reputation of Irish banking. It would be difficult to avoid claims of crony capitalism and golden circles were billions of State monies to be placed into the banks with minimal changes in their governance structure.

Nationalisation provides the opportunity for a fresh start for Irish banking. The State should run the temporarily nationalised banks as independent semi-State operations headed by highly independent boards of senior figures of the utmost integrity. Executives for these banks should be sourced through an international search, and remunerated accordingly.

These executive boards should be charged with a clear mandate to improve risk management practices, restore the brand image of Irish banking and finance, and return the banks to private ownership in a reasonably short time frame, for as high a stock price as possible.

This would certainly see substantial changes in senior management and board members in these banks, and allow for a rebuilding of the reputational capital of these institutions.

To conclude, we consider that the Government’s approach of limited recapitalisation supplemented by Nama represents only a partial solution to our banking problems, and one that is unlikely to protect the taxpayer. A nationalised banking system with a mandate to restructure and reprivatise would be a preferable approach at this time.

List of signatories
This commentary has been written by a group of Ireland’s leading academic economists, several of whom have analysed and commented on the banking and financial crisis on these pages and elsewhere over the past year. They are:
Karl Whelan, professor of economics, dept of economics, UCD; John Cotter, associate professor of finance, Smurfit School, UCD; Don Bredin, senior lecturer in finance, Smurfit School, UCD; Elaine Hutson, lecturer in finance, Smurfit School, UCD; Cal Muckley, lecturer in finance, Smurfit School, UCD; Shane Whelan, senior lecturer in actuarial studies, school of mathematics, UCD; Kevin O’Rourke, professor of economics, Trinity College Dublin; Frank Barry, professor of international business and development, school of business, Trinity College Dublin; Pearse Colbert, professor of accounting, school of business, Trinity College Dublin; Brian Lucey, associate professor of finance, school of business, Trinity College Dublin; Patrick McCabe, senior lecturer in accounting, school of business, Trinity College Dublin; Alex Sevic, lecturer in finance, school of business, Trinity College Dublin; Constantin Gurdgiev, lecturer in finance, school of business, Trinity College Dublin; Valerio Poti, lecturer in finance, DCU business school; Jennifer Berrill, lecturer in finance, DCU business school; Ciarán Mac an Bhaird, lecturer in finance, Fiontar, DCU; Gregory Connor, professor of finance, department of economics, finance and accounting, NUI Maynooth; Rowena Pecchenino, professor of economics, department of economics, finance and accounting, NUI Maynooth; James Deegan, professor of economics, Kemmy School of Business, Limerick; and Cormac Ó Gráda, professor of economics, UCD