Good Bank- FG's alternative to NAMA

[myk]

I don't want to clutter up one of the existing NAMA threads with this discussing. I'm going to copy and paste the whole article from Richard Bruton's website. I don't think it has the same copyright restrictions as on-line newspapers. I don't know much more details on the Good Bank plan, bar what is included here.
Richard Bruton TD| Fix The Banks

[SIZE=3]FG sets out radical new approach to banking crisis - Bruton[/SIZE]


There may be no easy routes out of this crisis, but until we are ready to draw a clear line between the impaired banks that will indefinitely feed off the taxpayer, and ways to support resumed lending to enterprises and households, there will not be a sustainable recovery in the Irish economy.
The Government’s plan for a National Asset Management Agency is a dangerous bailout for bank investors and poses huge risks to Irish taxpayers. The NAMA proposal has too many weaknesses to inspire confidence. Although immediate nationalisation would avoid some of the problems of NAMA, it still represents a high-risk strategy for taxpayers and a dangerous bailout for banks.


Fine Gael has set out an alternative twin track approach centred on:
1. Setting up a new National Recovery Bank to finance new investment and stimulate job creation;
2. Giving the retail banks a 16 month period to clean up their balance sheets.

The National Recovery Bank would be a wholesale bank, funded by the ECB, which could be up and running within four to six weeks. This approach has many advantages: it would get credit flowing immediately, inject new lending into the economy without delay, and help to stimulate job creation.

Existing relationships between businesses and their banks would be able to continue, but under a more prudent arrangement. Cash-starved businesses would be able to avail of credit facilities once again. And the retail banks would have an onus to clean up their balance sheets within the 16 month timeframe, or face administration.

This process would underpin the banking system now and into the future. It would leave the toxic property debts in the hands of the banks which made them, and which are better placed to recover them. Crucially, it would facilitate the recovery that the economy, businesses and families so urgently need.

There are serious concerns about the Government’s plans to set up NAMA, and nationalisation has too many drawbacks. I am urging Finance Minister Brian Lenihan to immediately engage with Fine Gael on these proposals.

[cyberianpan]

If the national recovery bank was viable the private sector would do it

ACC bank has a profile that fits the bill and one of the very few AAA rated[SIZE=1]*[/SIZE] banks in the world (Rabobank)

Yet they are shedding 30% of their jobs

cYp
[SIZE=1]* and no I haven't had some pauline conversion to the rating chimps - it is just handy as a relative tool[/SIZE]

[myk]

If the national recovery bank was viable the private sector would do it

ACC bank has a profile that fits the bill and one of the very few AAA rated[SIZE=1]*[/SIZE] banks in the world (Rabobank)

Yet they are shedding 30% of their jobs

cYp
[SIZE=1]* and no I haven't had some pauline conversion to the rating chimps - it is just handy as a relative tool[/SIZE]

But ACC are weighed down with historical debt in the Irish market, and presumably they wouldn't have access to the favourable credit that NAMA or the good bank would have. And presumably Rabo are contracting worldwide at the moment rather than expanding.

The good bank option probably does involve some subsidisation of lending costs, I'm not sure. But if it does, then it will be to encourage future lending, not historical losses.

I'm not saying it is without cost or a pain free option, the some of the existing banks would probably go down with large resulting costs, but on what I have read I do think it is a better alternative to NAMA

[BodyofEvidence]

But ACC are weighed down with historical debt in the Irish market, and presumably they wouldn't have access to the favourable credit that NAMA or the good bank would have. And presumably Rabo are contracting worldwide at the moment rather than expanding.

The good bank option probably does involve some subsidisation of lending costs, I'm not sure. But if it does, then it will be to encourage future lending, not historical losses.

I'm not saying it is without cost or a pain free option, the some of the existing banks would probably go down with large resulting costs, but on what I have read I do think it is a better alternative to NAMA

From Brian Lucey in the times

Nama plan just delaying the inevitable - The Irish Times - Mon, May 18, 2009

The Fine Gael approach is conceptually similar to that of the Federal Deposit Insurance Corporation in the United States when they move to rescue or liquidate failed banks.
However, as Karl Whelan points out on irisheconomy.ie: “The FDIC arrive secretly on a Friday afternoon – they don’t signal 16 months beforehand that they’ll be shutting a bank down.”
The reason for this is that a time period between announcement and effect allows for significant problems to emerge.
The Fine Gael plan would create a system which, at least for a while, is populated by undercapitalised or zombie banks, banks which are not be able to carry out their normal role in the economy. As well as undercapitalisation, the banks would be illiquid. As a consequence of the announced end of the guarantee, banks would not be able to source any funds that extended beyond September 2010 (when the guarantee ends) and so would be forced to rely only on the sluggish interbank markets, with the certainty that as the end of the guarantee looms, they would only be able to source short-term expensive funding.
The banks would not be able to extend new credit, nullifying the desire to pump credit to the SME sector.
Indeed, the effect of the drastic reductions in capital that would be a consequence of the banks having to, on their own, absorb toxic loans would be to reduce the banks to a state where they were unable to continue in business.
While it is proposed to rectify this at the end of the guarantee period by carving good banks out of bad, the plan would result in at best temporary zombification of the entire system and at worst a closure of the banks.
The consequences of this for the economy are well known and would be utterly disastrous. There is an issue common to both Nama and the Fine Gael plan: an assumption that they will, if implemented “get credit moving”. This is fallacious, as no plan thus far suggested can, in fact, increase credit.
A combination of a shrinking economy and shrinking capital bases of banks will inevitably result in shrinking lending. It cannot be otherwise.
The key issue is to manage the shrinkage, to ensure that the percentage of credit overall which extended to non-productive investment or overextending household leverage is drastically reduced.
Sectoral credit exposure management is properly the role of the financial regulator and the central bank.
Another issue with the Fine Gael plan is related to the period between announcement and implementation. Depositors would be told that deposits would be transferred to new, clean banks, when set up. In effect, the Fine Gael plan would be to say “I’m from the government, trust me”.
In an environment where not only trust in the banking system but in the political system is broken, this is not in my view sufficiently strong to stop people moving deposits to other credit institutions. Politicisation of credit decisions is rarely a good idea. There is no guarantee whatsoever that the National Recovery Bank would not be politicised.
Indeed, the plan says that “some” banks would be provided with new guarantees to enable them to operate in the interim between announcement and implementation. This raises the questions of who decides what banks get which funds and on what criteria.
Finally, the Fine Gael plan contains within it, as does Nama, the acceptance that the State will end up the owner of the banks – nationalisation. It states that if the new banks that are carved out are not able to raise funds, the State will provide.

[Malbekh]

Setting up a national bank even on a wholesale basis, will ensure businesses swap their existing bank facilities for the national one. Thus reducing capital in existing banks and ensuring the final bailout is even higher for the taxpayer.

The legislation needed to prevent such transfers in my opinion, would be unworkable.

The only solution to the current crisis is to nationalise and rationalise the banks under the guaranteed deposit scheme, use NAMA to deal with the toxic debt, maximise the return on the failed assets, and then denationalise the banks to get our money back.

This represents the smallest risk to the State and maximises the pain for private investors and shareholders.

The current option is a gamble as even Willie O'Dea admitted.

[myk]

From Brian Lucey in the times

Nama plan just delaying the inevitable - The Irish Times - Mon, May 18, 2009

But Brian Lucey seems to big ignoring the fact that the FG Good Bank would be established 16 months before the existing banks would face their acid test. In that time the Good Bank would be providing credit to the SME sector.

The other thing to say is that at the end of 16 month period it isn't a certainty that the existing banks would be wound up. If they are insolvent they would be, but in the absence of intervention they are liable to be wound up if they are insolvent in any case...

[myk]

Setting up a national bank even on a wholesale basis, will ensure businesses swap their existing bank facilities for the national one. Thus reducing capital in existing banks and ensuring the final bailout is even higher for the taxpayer.

The legislation needed to prevent such transfers in my opinion, would be unworkable.

The only solution to the current crisis is to nationalise and rationalise the banks under the guaranteed deposit scheme, use NAMA to deal with the toxic debt, maximise the return on the failed assets, and then denationalise the banks to get our money back.

This represents the smallest risk to the State and maximises the pain for private investors and shareholders.

The current option is a gamble as even Willie O'Dea admitted.

The above is certainly preferable to the current NAMA plan. Though as to your first line. If banks go into administration under the FG plan, the shareholders and bondholders take the hit first before the tax payer. What is the market value of the capital (equity and bond) in private hands of the guaranteed banks? I remember hearing figures of Euro200bn from government ministers at the time of the initiation guarantee.

[Malbekh]

The above is certainly preferable to the current NAMA plan. Though as to your first line. If banks go into administration under the FG plan, the shareholders and bondholders take the hit first before the tax payer. What is the market value of the capital (equity and bond) in private hands of the guaranteed banks? I remember hearing figures of Euro200bn from government ministers at the time of the initiation guarantee.

You're absolutely right. Thanks to our fantastic bank deposit guarantee scheme (endorsed by FG) we're absolutely screwed by depositors looking for their money back.

Let's just deal with Anglo-Irish. Anglo-Irish has been nationalised and is a Zombie bank. The only reason it hasn't been mothballed is that we are informed the cost to do so is €60b.

However, this €60b is half made up of ECB and Central Bank loans as approved by the government and half belong to commercial and retail investors getting a nice bit of interest on their guaranteed deposits.

In shutting down Anglo-Irish therefore (by merging it in with IL&P and INBS), all you are doing is transferring these deposits from one guaranteed deposit account to another.

Therefore, no mass withdrawal of funds and no burden on the taxpayer.

(this is my simple interpretation of it, no problem in being corrected)

My main issue with NAMA and Burton's plan is that they both admit that nationalisation of the banks may happen. In order to ensure that the chances of this happening they will ensure that the 'haircut' given to the developers is the least possible.

This is wrong. The developers should be decapitated. (I use this purely in a mathematical context)

[myk]

My main issue with NAMA and Burton's plan is that they both admit that nationalisation of the banks may happen. In order to ensure that the chances of this happening they will ensure that the 'haircut' given to the developers is the least possible.

This is wrong. The developers should be decapitated. (I use this purely in a mathematical context)

Sorry the haircut under NAMA is for the banks, not the developers.

But NAMA is being set up to go easy on the developers, the provision to allow NAMA to extend new loans to currently defaulting debtors is a clear example.

Plus I don't trust the government not to treat the developers with kid gloves. This is also a risk under nationalisation, which as you rightly point out may happen regardless of whether a good bank or bad bank plan is employed.

I don't see how the good bank plan can suit developers or bank shareholders in anyway more than nationalisation, and of course it clearly suits them less than NAMA.

[Hal]

“Existing relationships between businesses and their banks would be able to continue, but under a more prudent arrangement. Cash-starved businesses would be able to avail of credit facilities once again. And the retail banks would have an onus to clean up their balance sheets within the 16 month timeframe, or face administration.”

How would “Cash-starved businesses would be able to avail of credit facilities once again” There is nothing in the proposal to refinance the existing banks, where would they be able to restore credit facilities to cash starved businesses.

Fine Gael has set out an alternative twin track approach centred on:
1. Setting up a new National Recovery Bank to finance new investment and stimulate job creation;
2. Giving the retail banks a 16 month period to clean up their balance sheets.

In other words businesses that are in need of normal credit facilities can go hang, this bank is only for “new investment” and “job creation”, job maintenance is your old banks problem

And the 16 months is so he can get out from under the bank guarantee, can you imagine the bank run there would be in the months up to September next year. On the basis of this plan it is his clear intention to let the current banks go bust as there is not one of them that would be able to sort out their bad loans in 16 months.

This plan would be a disaster and is designed only to have something to say and is definitely not designed as something to do.

You could call it the “We will close all our banks in 16 months time plan” with the immediate result of a wipe out of all share value, including the pension funds invested there and a run on the banks which they would not be able to meet……enter the taxpayer.