nama comment

Bonds or 6 month Treasury Bills? What is Going on?

I would also like to make a point on the ordinary NAMA bonds with 6 month re-sets. It appears that the Govt has found out that no such bonds can be issued. What we will be issuing will be ordinary 6 month treasury bills, as per the Minister:

“However, in the case of the six-month treasury bills which are the nature of the bonds which we will issue as consideration for the assets…”.

“….On Deputy Burton’s question as to whether the banks could collectively flood the market with all the six-month treasury notes in one simultaneous operation, while anything is theoretically possible, it is difficult to believe that banks which are systemically involved in the economy would have any interest or incentive so to do.
….Deputy Lee noted that interest rates are historically at a very low level and therefore some increase in interest rates is inevitable. What are the implications of this in terms of the six-month notes that are issued? The implication is that the notes are issued at the applicable rate from time to time. It is almost in the nature of a floating rate note that the State is issuing and it will vary depending on the applicable rate during the six-month period….”

How do we know how long the bills can or will be rolled over for and what is the mechanism? If it is linked to the SPV and it will hold the bills and pay cash then what will happen with the SNBs? The fog of economic war!

November 6th, 2009 at 2:33 pm

@YM

I certainly have many more misgivings about NAMA now than I had a couple of months ago.

Some things that concern me are:
1. The decoupling of NAMA and nationalisation.
2. The lack of any assessment of the MV of loans or their likely/possible MV.
3. The lack of any progress on a bank special resolution regime as recommended by Honohan and the IMF.
4. The use of 6 month treasury bills for long term debt with no clarity as to legal right to roll-over the debt. It looks like there won’t be NAMA debt and it is not clear to what extent access to ECB repo operations will be required or available.
5. The evisceration of risk sharing through subordinated debt. This suggests a deeper poblem as to the real state of banks’ balance sheets and the State’s willingness to support them.
6. The lack of any clear and effective incentivisation measure for the individual banks to maximise loan recoveries.
7. The lack of clarity as to how foreign banks are to be dealt with in the context of Zoe et al. It appears we are farming this seemingly intractable problem to the Board of NAMA without any legislative powers to assist them. I am not aware of any provision for the necessary payments to foreign banks.
8. The introduction of legal complexity and uncertainty through the SPV and the shareholders’ agreement.
9. The introduction of opaqueness through the SPV.
10. The lack of clarity as to periodic reporting.
11. The lack of clarity as to how banks’ entitlement to the annual coupon and/or administrative costs will be assessed.
12. The sloppy production of DoF papers to date.
13. The lack of correlation between the paper sent to Eurostat and the published bank information.
14. The lack of any clarity as to what condition the banks’ balance sheets will be in after NAMA. The idea of a bad bank is to create clarity and credibility. If we don’t achieve that then we have failed.

The above are comments on www.irisheconomy.ie

Rents at lowest level 'in decade'

Rents have fallen to their lowest level in a decade to an average of €771 a month, the latest property report revealed today.

Housing website Daft.ie recorded a 4 per cent fall in the last three months with the Dublin market hit harder than anywhere else.

Rents fell by more than 18 per cent in the year to October 2009, with average monthly rent across the country now down from more than €1,000 last year to under €775 last month.

Dublin continued to show the biggest falls in rent coming down by 5 per cent over the last three months, the report found. It said rents in Galway remained static, while rents in Cork and Limerick cities fell by 2.5 per cent.

Ronan Lyons, economist at Daft.ie, warned that the continued drop could disrupt the Government’s plan for bad-bank Nama.

“These recent falls in rent have pushed the average rental income back to levels last seen in 2000, which has much wider implications,” he said. “Nama was predicated on rents and yields remaining high between now and 2020.”

Mr Lyons warned that the bad-bank plan was based on property priced growing by 10 per cent and that the housing market would be less attractive to investors if rental values continued to fall.

“Currently the yield on residential property has risen by just 0.1 per cent in the last year, to 3.4 per cent on average, compared to the Nama benchmark of 6 per cent,” Mr Lyons said.

PA 

Wednesday, November 4, 2009

Economics 04/11/2009: NAMA's first falls in the land of legal finance

Posted by Dr. Constantin Gurdgiev International Swaps and Derivatives Association (ISDA) has issued an interesting opinion on Nama worth a read. Here are the main points (mind the legalese):

“…from an international perspective, a particular aspect of the NAMA Bill that has the potential to have a significant adverse effect on the transaction by participating institutions ...of domestic and cross-border financial transactions, including privately negotiated or “over-the-counter” (OTC) derivative transactions (“Relevant Transactions”).

ISDA’s main concern focuses on partial nature of property transfers under Nama.

“We note that ...the fact that the NAMA Bill envisages that partial property transfers – [i.e transfer of of some, but not all, of a participating institution’s rights and obligations arising under a Protected Arrangement, an arrangement with third parties legally protected under the international, Irish, UK, US or other national laws] - may be effected raises a significant risk of legal uncertainty for Protected Arrangements.” [In other words, what might be kosher for the Irish authorities under Nama might be violating international legal rights and obligations of parties related to Nama-impacted loans]

“If some, but not all, of such rights and obligations were “cherry-picked” for transfer pursuant to the NAMA Bill, the net position of that participating institution’s counterparty (and, indeed, of that participating institution) would be disrupted notwithstanding the provisions of Section 213” [of Nama legislative proposal].

“...During the UK consultations [on bailout packages] industry put particular emphasis on the possibility that the stabilisation measures provided for in the UK Banking Act 2009, which included a partial property transfer power (the power to effect a transfer of some but not all of the property, rights and liabilities of an affected UK institution), could be used to "cherry-pick" transactions, or even parts of transactions, under a netting arrangement, or otherwise disrupt the mutuality of obligations under a netting or set-off agreement... It is notable that, in the UK context, the validity of the industry concern in this regard was always acknowledged by the relevant authorities (HM Treasury, the Bank of England and the Financial Services Authority), so that the consultation process, in this regard, focused on how best to structure the relevant protections.” [This of course is not the case with Irish Nama case]

“As you are probably aware, the relevant protections were set out in Article 3(1) of The Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009, as amended by The Banking Act 2009 (Restriction of Partial Property Transfers) (Amendment) Order 2009. Article 3(1) provides that a partial property transfer, within the meaning of the legislation, may not provide for the transfer of some, but not all, of the "protected rights and liabilities" between the affected UK institution and a third party under a "netting agreement". [Once more, in Nama case, no due diligence was even performed in this area – it appears from the note by ISDA that the Irish authorities have totally failed to consider the impact of Nama transfers on third parties]


So what does this mean for participating institutions and their counterparties?

“Risk management policies of parties to Relevant Transactions tend to require such parties to monitor credit exposure to counterparties under Relevant Transactions and, where relevant, put in place appropriate risk-reducing close-out netting and collateral arrangements. In the case of a party that is subject to prudential supervision (such as an Irish or foreign bank), whether it can treat its exposure to a Relevant Transactions counterparty as net, and take related collateral arrangements into account for risk reducing purposes, will also be key to the level of capital that the party is required to allocate to Relevant Transactions with that counterparty.” [So standard legal framework requires third parties to hedge risk vis-à-vis Nama-impacted institutions, but this process is at risk under Nama partial transfers. Which implies that Nama actions will spill over to third parties outside Nama jurisdiction. The legal bonanza that will be Nama is now risking crossing many borders…]

“A supervised institution will not be able to recognise close-out netting or a related collateral arrangement unless it can satisfy its supervisor that the close-out netting or collateral arrangement is enforceable with a high degree of legal certainty and with no unduly restrictive assumptions or material qualifications.” [This is the crux of the argument – if Nama will only partially impact security of collateral, this partiality will imply that counterparties to Irish banks’ transactions will not be able to properly assess the security of collateral held by the banks and in cases where such security is jointly held by an Irish institution and a non-Irish one, there will be no means for assessing the risks incurred by non-Irish institutions due to Nama take over of the loans or underlying collateral titles. Nama, therefore, will risk inducing new risk on unrelated institutions.]

Absent Nama “such opinions can be obtained in respect of potential [Nama-]participating institutions in respect of many industry close-out netting and collateral agreements. If the position in this regard were to change [a change which will be triggered by Nama coming into force], the commercial and financial implications for potential participating institutions and their counterparties to Relevant Transactions would be severe in that:

(a) supervised institutions [aka all non-Irish banks and credit providers] would be constrained in their ability to extend credit, or otherwise incur exposures, to participating institutions;

(b) supervised participating institutions themselves would find their own ability to conduct business constrained by much heavier capital requirements and their access generally to liquidity would be impaired”. [In other words, Nama will mean that participating banks will have to pay a heavy premium in terms of capital provisions due to the Nama-induced deterioration of their own collateral rights].

“…a concern remains that a [Nama-]participating institution’s counterparty’s net exposure could be disrupted by a partial property transfer of the type outlined [above]. If such a partial transfer of a bank asset by a participating institution to NAMA or a NAMA group entity occurred (or by NAMA or a NAMA group entity to a third party) occurs, the fact that the participating institution’s counterparty may terminate the agreement with the participating institution and enforce the close-out netting and collateral provisions will not provide comfort [at the immediate and massive cost to the Irish banks participating in Nama] if, as a result of the transfer, the transactions the subject of the netting/collateral arrangement have changed so that its net exposure differs from that which would have pertained but for the partial transfer.”

So, ISDA “strongly recommends that safeguards be introduced to the NAMA Bill to ensure that a Protected Arrangement may only be transferred as a whole under the NAMA Bill, or not at all, and that individual rights and obligations under the Protected Arrangement should not be vulnerable to cherrypicking.”

[In effect this will severely restrict two aspects of Nama operations:

1. this provision will increase the share of non-performing loans in the overall take up of loans by Nama, putting more pressure on Nama bottom line; and
2. this provision will also mean that some of the most toxic loans (with complex collateral rights, significant redrawing of covenants in the past, and/or substantial cross collateralization) will either have to be left with the banks as a whole or bought into Nama as a whole.]
   

But ISDA has expressed another concern: “An additional issue of concern to us is the proposal that, after acquisition of a bank asset by NAMA, …NAMA may change a term or condition of that bank asset where it is of the view that it is no longer reasonably practicable to operate that term or condition. ...the absence of legal certainty that would arise from this unilateral right to amend other contractual terms of Relevant Transactions – particularly when taken together with the provisions of Section 107 of the NAMA Bill – seems likely to have a negative impact on the ability of participating institutions to transact Relevant Transactions.” [In other words, if Nama is to have serious teeth in changing the terms and conditions of loans, it will risk freezing the entire future ability of the Irish banks to have meaningful access to international counterparties.]

[If anyone thinks things are tough in Irish financial markets now, wait till these aspect of Nama as an entity operating outside international norms and regulations come to play…]

NAMA
or
THE DEVIL HAS TWO HORNS

"No attempt or pretence, that was ever carried into practical operation amongst civilized men -- unless possibly the pretence of a "Divine Right,"-- on the part of some, to govern and enslave others, embodied so much of shameless absurdity, falsehood, impudence, robbery, usurpation, tyranny, and villany of every kind, as the attempt or pretence of establishing a government by consent, and getting the actual consent of only so many as may be necessary to keep the rest in subjection by force. Such a government is a mere conspiracy of the strong against the weak. It no more rests on consent than does the worst government on earth." -- Lysander Spooner - (1808-1887) Political theorist, activist, abolitionist Source: No Treason. No. II The Constitution, (Boston: Published by the Author, 1867)

Where does one start ?
On Sunday 25th of October the Sunday Business Post carried the most important revelation yet about the plans made by our Minister of Finance, Brian Lenihan, to keep control of the organisation NAMA in the event of any loss of the primary vote in the next elections; ie. that, not only would Fianna Fail keep control but they would also be able to keep complete secrecy about that control.
The essence of this matter was revealed inadvertently as far as the Government is concerned who would certainly wish that we had not received this information - however someone was looking at the Eurostat Agency papers for Freedom of Information which released details of a Special Purpose Vehicle entirely separate from the Nama structure created in order to privately acquire the loans and issue government bonds which we all understood as the primary business of NAMA itself.

The government will indeed guarantee the bonds for toxic loans but if NAMA fails to recoup expected finances to pay these IOUs the government (taxpayers), as we all previously understood, will have to find the money. However the new off-shoot is not to be connected in any way to a government and is to be privately controlled. The assets which this new organisation will control will then be off the Budget balance sheets - also acquiring assets from financial institutions and private loans that will run this SPV, that Lenihan hopes will be up to E50 million. This new group will be a separate legal entity from NAMA and government partakes of a minority 49% power therein and private entrepreneurs be they banks or their investors will have 51% stake and control of this loan portfolio.The purpose here is to keep NAMA's borrowings off the National Debt; but if faulted the debt must be paid by the taxpayer...

Will the loans be brought in from the Banks (presumably from the ECB bonds they receive for loading the original NAMA structure with toxic loans) or from subsidiary investment managers?

The new group will apparently need E100 million as a structural basic, half of which must initially be provided by the private investors. For other money it is believed the Government is going to target pension funds to invest in this prong of the devil-horns of NAMA, or foreign asset managers. This group will be facilated with development connections to the assets behind the toxic debts in order to make money to pay a dividend and possibly a 10% bonus to the investors, plus any money still owing on loans when the organisation is to be wound up in 10-20 years time.

Infact we see that this private SPV (NAMA) institution is the real driving organ of development for the present Government and that NAMA such as we have hitherto known it is a theatrical facade for public consumption.The SPV will have its own board of directors with autonomy of decision over day to day activity in development of assets, a majority of nominees determined by the 51% influence of the private investors and only a "government" veto " between these gamblers and ourselves the citizens to stave off any possible disaster.....

From this information we must conclude that the majority stake to be held by bankers and Fianna Fail cronies will infact be making decisions on the future of both landbanks and development construction - for what else does "day to day activiry" mean? These people are being brought together to make decisions daily - on what exactly? These people will be the control staff of the visible NAMA which cannot be lobbied by either the construction firms concerned with these toxic debts, no by any member of the public. Although transparency has been freely used in terms of explanation, infact secrecy is the name of this game.

Remember, an SPV with 51% private monopoly over 49% government authority, a government that may hastily use a wee veto if something seems to be going "wrong" is now revealed as the driving force of Brian lenihan's "plans". What is the measure of WRONG and indeed what is the measure of legality about this entire "solution" for Ireland's financial crisis?

AIB Bank Managing Director -
His wage will be above the Cap set by Brian Lenihan?

Mr Doherty is AIB’s preferred choice as chief executive and is set to be appointed to the new post of managing director in a compromise reached with the Government, which had favoured the appointment of an external candidate.

As part of the deal, the bank’s chairman Dan O’Connor will assume management responsibilities as executive chairman, working alongside Mr Doherty.

According to today's reports, it was expected that both Mr Doherty and Mr O’Connor would remain on their existing salary and pay levels as the role of chief executive will remain vacant.

Labour finance spokeswoman Joan Burton criticised the possibility that AIB executives would remain on higher salaries, saying it represented "game, set and match for the old guard in Irish banking and total capitulation on the part of Minister for Finance".

"The taxpayers who have already contributed €3.5 billion towards the recapitalisation of AIB, and who are now told they face extra charges and cuts in services in the budget, are being asked to accept that it is fine for a banker to earn more than 20 times the average industrial wage," she said.

"The appointment to the position of executive chairman of Mr O'Connor, who has been a member of the board of AIB since 2007, would make a mockery of all of the promises we have had from the Taoiseach and Minister Lenihan that they were going to deliver real regime changes in the bank."

Fine Gael's enterprise spokesman Leo Varadkar said AIB was giving two fingers to taxpayers and the Government by ignoring the €500,000 salary cap.

“AIB’s decision to appoint Mr Doherty as managing director, and for chairman Dan O’Connor to take on an executive role, is little more than a special purpose vehicle to get around the salary cap. It is also bad corporate governance to combine the executive and Chairman’s roles. This scenario gave rise to problems at Anglo Irish, DCC and Fás," he said.

Mr Varadkar called on the Minister refuse the appointment and the proposed salary level.

As part of the reshuffle at senior management level, AIB will also signal that it plans to appoint two external candidates to senior executive roles – chief financial officer and chief risk officer.

In a further compromise reached with Government, the bank will agree to appoint Michael Somers, who is retiring as chief executive of the State’s debt manager, the National Treasury Management Agency, to the post of deputy chairman. The appointment is being made at the insistence of the Government in an attempt to foster public confidence in the bank.

The Government holds a 25 per cent stake in the bank following the State’s €3.5 billion capital investment last May.

AIB’s board had wanted the Government to accept the appointment of Mr Doherty, who ran the bank’s profitable capital markets division, as chief executive. However, following the controversy surrounding Bank of Ireland’s appointment of an insider, Richie Boucher, as its chief executive last January, the Government encouraged the bank to seek an external appointee instead.

After a trawl of both internal and external candidates, the board of the bank felt that Mr Doherty was the best candidate for the job. The proposed salary of €500,000 for the role of chief executive was reported to have been a reason why some outside candidates turned the job down.