Government playing fast and loose with banking

Brian Lenihan is using estimates of estimates to justify the NAMA plan writes Bill Hobbs
21st September 2009
NAMA is designed to do one thing and that is to stop banking destroying the economy. Playing fast and lose with language, Government is busy spinning misleading and inaccurate sound bites designed to sell the new dogma – the NAMA soft landing and social dividend.


NAMA is designed to bail out the banks at the expense of taxpayers who are overexposed by at least €16bn. This figure is made up of two quite startling numbers. €9bn in loan arrears (rolled up unpaid interest) and a €7bn overpayment principally engineered to keep AIB and Bank of Ireland in private ownership.


The two big banks are so large they are impossible to bail out using traditional options. Given the dire state of public finances, nationalisation is unaffordable and it is taking a unique arrangement with the ECB to orchestrate what has at best will buy some time. And as the entirety of commercial land and property loan book of five banks is being nationalised, NAMA will become the only game in town for financing the recovery of what is left of the Irish property sector.


Government is saying the €77bn in loans it is buying are currently estimated to be worth €47bn but will pay €54bn and has declined to say how both these figures break down between the banks. It needs to pay more as if it were to stick with the lower amount the two big banks would have to be nationalised. This is something government cannot afford.


So it has to manipulate the value upwards by an amount it reckons will prevent it having to take the banks into full public ownership. It also needs their share price to improve as if it has to provide additional capital it will end up with a lower shareholding. The hope is private investors may find the banks an attractive proposition. But while NAMA may have to provide for liquidity, the banks capital base remains dangerously thin and exposed to further loan losses.


As soon as Minister Lenihan finished unveiling NAMA in the Dail, AIB started claiming its share of the pain was lower than the Minister’s overall estimates. It is not the first time AIB has said something only to have to retract it months later. After an initial speculative jump, its share price has slid back to semi-zombie price status. As has Bank of Ireland’s, which was a tad more circumspect in telling its story as it warned of challenges it still faces.


The logic of Minister Lenihan’s story is based on estimates of what approximates the full extent of Irish banks catastrophic loan losses. But the estimates are subject to verification as every loan and each bank is different.

With estimates based on estimates of estimates, trying to figure it all out is like trying to pin jelly to a wall which is of course what was intended. In short the story spun by the Minister allowed the banks to spin their own version or as he said the market would be able to make out what he was saying.


To add spice to the NAMA soft landing story, Minister Lenihan confidently predicted that property has reached the floor and could only go up from here, as prime commercial property yields in Dublin are high when compared to other capital cities.


With only €8bn of the €77bn loans apparently lent on good quality commercial property, the Minister extrapolated his confident prediction for all Irish property. But yields are high only as rents haven’t come down yet and anecdotal evidence is rents are rapidly adjusting downwards. Meanwhile Government is sitting on legislation doing away with upward only rent reviews which underpin property values.


A critical factor in the Ministers estimates is the belief property on average has fallen by 47%. Yet not a scintilla of supporting evidence has been produced to support this figure. In talking up the property market he seemed to thread a thin line between optimism and delusion as have other Ministers since. Some are leading property economists saying property could yet collapse by 60-80%, which means the bottom has not yet been reached.


Based on the Minister’s lead, his colleagues maintain property has only to increase by 10% over ten years for NAMA to be a success and it will cover its costs from the start.


This has all the hallmarks of a calculated deception, as it all too conveniently ignores the costs of funding NAMA which will probably rise by at least 200% within the next few years.


Some Ministers are even saying the ECB is providing a special deal on “cheap money”. Yet the interest NAMA will pay is 50% higher than its best rate, reflecting NAMA’s risk profile. The ECB may have a temporary arrangement but does not cut sweat heart deals nor has it said it has for NAMA. And as it begins to unravel its emergency support system for European banking, NAMA and the banks face an uncertainty fraught with interest rate and liquidity funding risks.


NAMA may well initially cover its costs only because some good loans will generate interest. But loan quality will come under pressure as the ECB rates rise ands default risks rise.


Government says that NAMA provides an economic stimulus. However this is likely to be too weak and subject to leakage. As the banks swop or sell on NAMA bonds for cash they will use the bulk of it to mend their balance sheets and the balance to make good low risk loans.

Both Anglo Irish and INBS will transfer 35bn in loans, including the lion’s share of rolled up interest. Anglo will not be able to generate a red cent in lending, if any at all, for years. INBS already a dead man walking will shrink to a husk to be taken over.


This week the Minister produced some more pieces of the NAMA jigsaw puzzle but did not produce the box with the picture on top. He has done nothing more than invite people to imagine what the picture might look like. Which is worrying as no one not even the Minister knows what’s on the lid of the box.