IMF wants nationalisation of banks but there is an effective alternative

[patslatt]

The International Monetary Fund's recent report on the Irish economy suggests that the government nationalise the banks to avoid the difficulty of bank assets valuations which could impede the recapitalisation process. "The bad assets would still be carved out,but the thorny issue of purchase price would be less important and the period of price discovery longer,since the transactions are between two government entities.",the report states. The latter refers to the NAMA agency buying the assets of a nationalised bank.

But there is an effective way of dealing with the "thorny issue" of valuations without nationalisation.Since the banks are totally dependant on the government for recapitalisation,the government can exploit this by requiring all banks participating in the NAMA asset purchases to agree in advance not to contest any valuations of NAMA. A bank which refused would quickly become bankrupt,especially if the government refused to extend its guarantee of bank deposits beyond 2010 at that bank unless the depositors moved to another bank.

This is not to suggest that NAMA should manipulate low valuations. It could commit to contracting out property valuations to reputable valuation companies,getting volume discounts on valuation work. Some independent oversight could be provided by foreign valuers to guard against the possibility that Irish valuers could be too generous to banks.

Without the agreement of the banks to a single NAMA valuation,it is possible three valuations would be required, one each by the bank,NAMA and an independent valuer. The latter would be needed to reconcile the first two valuations. This could prove cumbersome, expensive and leave scope for litigation.

[hopi watcher]

What if all banks decide to contest or refuse to give the undertaking? All are let go to the wall?
Nationalisation is the only solution and the sooner the government come to terms with that reality the quicker we will all know the full extent of the mess we are in and the best route out. Capitalism has failed, time to give socialism a shot.

[patslatt]

What if all banks decide to contest or refuse to give the undertaking? All are let go to the wall?
Nationalisation is the only solution and the sooner the government come to terms with that reality the quicker we will all know the full extent of the mess we are in and the best route out. Capitalism has failed, time to give socialism a shot.

In the interest of shareholders and their own self interest,the bank managements and boards of directors won't bite the hand that feeds them.

As for socialism,the fall of the Soviet Union consigned it to the museums.

[mollox]

Without the agreement of the banks to a single NAMA valuation,it is possible three valuations would be required, one each by the bank,NAMA and an independent valuer. The latter would be needed to reconcile the first two valuations. This could prove cumbersome, expensive and leave scope for litigation.

I'm a shareholder in both AIB & BOI - so I'm naturally biased. I don't want either of those banks nationalised, and neither do I want them screwed on valuations, just because the Govt has them over a barrel and it would also satisfy populist demand.

At the same time, as a capitalist, I accept that if a fair valuation (to both parties) can't save the banks, then so be it.

From what Brian Lenihan has said to date, NAMA will determine the valuation - it won't be open to negotiation by the banks - which increases my concern about the Govt yielding to populist demands (and the scribblings of under-employed academics).

Here's an alternative methodology which I would favour.
NAMA and the bank both produce a valuation for each "parcel" of debt/property.
If they cannot agree the price between them, the case goes to independent arbitration.
The independent arbitrator then decides which of the two prices shall apply - he/she doesn't split the difference or come up with some other number.
The decision is "which price seems the most reasonable?".

Such an approach will force both parties - NAMA & banks - to be realistic in their proposed valuations - it's essentially winner take all. After a couple of arbitrations, it should drive both parties closer together and ensure that most "parcels" don't need to go to arbitration.

This will increase the speed at which the whole process can be completed and reduce the potential cost of every deal having to go to a 3rd party.

[patslatt]

I'm a shareholder in both AIB & BOI - so I'm naturally biased. I don't want either of those banks nationalised, and neither do I want them screwed on valuations, just because the Govt has them over a barrel and it would also satisfy populist demand.

At the same time, as a capitalist, I accept that if a fair valuation (to both parties) can't save the banks, then so be it.

From what Brian Lenihan has said to date, NAMA will determine the valuation - it won't be open to negotiation by the banks - which increases my concern about the Govt yielding to populist demands (and the scribblings of under-employed academics).

Here's an alternative methodology which I would favour.
NAMA and the bank both produce a valuation for each "parcel" of debt/property.
If they cannot agree the price between them, the case goes to independent arbitration.
The independent arbitrator then decides which of the two prices shall apply - he/she doesn't split the difference or come up with some other number.
The decision is "which price seems the most reasonable?".

Such an approach will force both parties - NAMA & banks - to be realistic in their proposed valuations - it's essentially winner take all. After a couple of arbitrations, it should drive both parties closer together and ensure that most "parcels" don't need to go to arbitration.

This will increase the speed at which the whole process can be completed and reduce the potential cost of every deal having to go to a 3rd party.

The winner could be the valuation closest to the independent valuation. That would give an incentive to compromise.

The problem is that the three valuations would have to be very formal,hence prohibitively expensive.

[weathervane]

Establishing even ballpark valuations for illiquid assets in a market subject to this level of uncertainty is effectively impossible. Talking about "independent" valuations is meaningless. This fact, although acknowledged by most economists when discussing NAMA, seems to be missing from the general debate. The idea that property "experts" - i.e. estate agents, have something meaningful to contribute to this process is laughable.
The US government abandoned the first version of TARP (i.e. buy impaired assets from banks) because they came to the conclusion that, in the absence of any liquidity, it was impossible to value these assets. Granted the assets the US was focusing on were primarily credit derivatives of various kinds, but those derivatives derive their value from exactly the types of assets we're talking about here - loans secured on property.
The only way to establish the value of these assets is sell them into a liquid market - thats not going to be possible for the foreseeable future.
The only alternative is to bypass the valuation problem, nationalise the banks, then let NAMA extract the impaired assets, and refloat the clean(er) banks. Because that transfer will be between different entities owned by the same shareholders (us) there is no scope for a wealth transfer and therefore no problem with valuation.
None of the above is original - most people with even a passing knowledge of asset valuation is proposing this approach.
Anyone proposing the current approach of "valuing" the assets should be outlining specifically how this would be done.
wv

[hopi watcher]

In the interest of shareholders and their own self interest,the bank managements and boards of directors won't bite the hand that feeds them.

As for socialism,the fall of the Soviet Union consigned it to the museums.

So what's your concern?
What has the Soviet Union to do with socialism? QAre you always this confused? BTW, are you watching the RTE news? Capitalism's finest.

[patslatt]

Establishing even ballpark valuations for illiquid assets in a market subject to this level of uncertainty is effectively impossible. Talking about "independent" valuations is meaningless. This fact, although acknowledged by most economists when discussing NAMA, seems to be missing from the general debate. The idea that property "experts" - i.e. estate agents, have something meaningful to contribute to this process is laughable.
The US government abandoned the first version of TARP (i.e. buy impaired assets from banks) because they came to the conclusion that, in the absence of any liquidity, it was impossible to value these assets. Granted the assets the US was focusing on were primarily credit derivatives of various kinds, but those derivatives derive their value from exactly the types of assets we're talking about here - loans secured on property.
The only way to establish the value of these assets is sell them into a liquid market - thats not going to be possible for the foreseeable future.
The only alternative is to bypass the valuation problem, nationalise the banks, then let NAMA extract the impaired assets, and refloat the clean(er) banks. Because that transfer will be between different entities owned by the same shareholders (us) there is no scope for a wealth transfer and therefore no problem with valuation.
None of the above is original - most people with even a passing knowledge of asset valuation is proposing this approach.
Anyone proposing the current approach of "valuing" the assets should be outlining specifically how this would be done.
wv

NAMA and the banks could be forced to narrow differences in asset valuations by an auction process,in which an independent valuation is kept secret from them. If Nama's bid for an asset was closer to this valuation than a bank's asking price,NAMA's bid would prevail in the auction,but if the bank's asking price was closer,its price would prevail.

The problem with this auction approach is the high expense of doing three valuations for each asset. This expense could be reduced sharply by contracting for volume discounts.

[mollox]

The winner could be the valuation closest to the independent valuation. That would give an incentive to compromise.

The problem is that the three valuations would have to be very formal,hence prohibitively expensive.

The approach I've proposed should force NAMA & banks to narrow the gap in their respective valuations - hopefully to the point that they themselves would agree to "split the difference" in most cases, thus obviating the need for a 3rd independent valuation.

[goosebump]

Establishing even ballpark valuations for illiquid assets in a market subject to this level of uncertainty is effectively impossible. Talking about "independent" valuations is meaningless. This fact, although acknowledged by most economists when discussing NAMA, seems to be missing from the general debate. The idea that property "experts" - i.e. estate agents, have something meaningful to contribute to this process is laughable.
The US government abandoned the first version of TARP (i.e. buy impaired assets from banks) because they came to the conclusion that, in the absence of any liquidity, it was impossible to value these assets. Granted the assets the US was focusing on were primarily credit derivatives of various kinds, but those derivatives derive their value from exactly the types of assets we're talking about here - loans secured on property.
The only way to establish the value of these assets is sell them into a liquid market - thats not going to be possible for the foreseeable future.
The only alternative is to bypass the valuation problem, nationalise the banks, then let NAMA extract the impaired assets, and refloat the clean(er) banks. Because that transfer will be between different entities owned by the same shareholders (us) there is no scope for a wealth transfer and therefore no problem with valuation.
None of the above is original - most people with even a passing knowledge of asset valuation is proposing this approach.
Anyone proposing the current approach of "valuing" the assets should be outlining specifically how this would be done.
wv

Good post.

I don't think anyone disagrees that nationalisation will make the valuation process easier. The question is whether or not this benefit is outweighed by the downsides of nationalisation, and lets not forget, NAMA includes a nationalisation trigger, should the process not work out as planned.