# 6 separate NAMAs?



## Brendan Burgess (21 May 2009)

As I see it, the 6 covered institutions have 6 different problems which require different solutions. 

I would suggest that each would have their own NAMA.  Of course, there would be only one administrative structure for NAMA and they would coordinate their response bearing in mind the taxpayers' interest. 

I also suggest not extending the guarantee for Anglo or Irish Nationwide but this would have to be managed carefully to avoid a complete collapse in confidence in Irish banks.

*Irish Life and Permanent *

Has a severe liquidity problem.
Is probably solvent because it has no property development loans.
Has a very valuable asset Irish Life. 

Irish Life could be sold off, although I suspect that it has been given as security for some of the bonds or securitised mortgages. The NTMA could buy Irish Life and sell it again when the market improves. 

If the capital position is then ok, permanent tsb would be able to funtion properly again without the guarantee. 

*EBS
*Something similar to Irish Life and Permanent but without a big asset to sell.

*Anglo Irish Bank
*Has already been nationalised, so there is no need to move loans to NAMA. Strangely enough, the right approach here might be to move its deposits and good loans to a Good Bank and wind down what is left.

It is not of systemic importance. It should be wound down as quickly as possible. 

The blanket guarantee should not be extended.
Deposits and new bonds could be guaranteed
The unguaranteed  bond holders would lose out. 

*Irish Nationwide
*Similar to Anglo Irish Bank. Move its good loans and wind down the rest. 

*AIB 
*AIB is of systemic importance to the Irish economy. 
Preferably, nationalise it on a temporary basis. 

Alternatively, sell off its Polish and American assets. Again to the NTMA if no other buyer is found. 

Move its big bad loans to AIB NAMA. 
Leave its good loans in place. 
Probably Leave its small bad loans in place as well. 

If AIB NAMA ends up with a deficit, charge this to AIB 
If AIB NAMA ends up in surplus, give the AIB shareholders some share in it.

*Bank of Ireland
*Broadly similar to AIB

*The government should buy AIB/Bank of Ireland unguaranteed bonds at a discount.
*If and when the government extends the guarantees for AIB and Bank of Ireland, these bonds will revert to full value.  They should be bought now.


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## Brendan Burgess (21 May 2009)

On reflection, do we need both AIB and Bank of Ireland? 

Could one be let go down? If AIB was let go, we would still have a functioning banking system in Bank of Ireland. 

We would not have competition, but at the moment preserving the solvency of the state is the first priority.

Brendan


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## dewdrop (21 May 2009)

What happens if the government does not extend the guarantee for a particular institution. I reckon the creditor will demand payment and what are the consequences of this?


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## Brendan Burgess (21 May 2009)

Presumably creditors can only demand payment if it is due. 

The holders of the bonds which mature after Sept 2010 cannot demand payment now, unless there is something in the bond agreement which triggers early repayment. Given that the market is now quoting these at 50% of the guaranteed bonds, I doubt if such early repayment is triggered.


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## Sunny (21 May 2009)

You mention winding down Anglo and Irish Nationwide by moving the good loans to a good bank and winding down the rest. It really is easier said than done to strip a bank of its assets like that. What do you do with the liabilities? As a bondholder, I would be straight into court if you stripped either institution of its good assets and left me with a bunch of problem loans. You could try splitting the liabilities pro rata between the two banks but again legally I don't think you would be able to do it.


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## Brendan Burgess (21 May 2009)

Hi Sunny

I don't think any solution is easy . 

The unguaranteed bond holders would presumably have lost everything if the government had not supported the Irish Nationwide. 

They might be better off with an orderly winding up than they would be if the government just allowed the guarantee expire in September 2010. 

When I say transfer the good loans, I mean selling them at their current value. I am not proposing stripping out assets and leaving liabilities. 



Brendan


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## Duke of Marmalade (21 May 2009)

A couple of comments, _Boss_

I really don't think you can let either of the big two fail. One of them may (or may not) have the technology and capacity to run a full banking system for the economy on its own, but the reality would be that if you shut down 40% of the money transmission system and also froze 40% of the people's deposits pending the liquidation process, you would instantly collapse the economy.

Having an XYZ NAMA where any future losses would be underwritten by XYZ would kid no-one. XYZ would not have got its bad loans of its balance sheet. The current proposal that a general levy would be applied to the whole banking sector should NAMA find itself in deficit does effectively get the bad loans of the banks' balance sheets. I don't think they would have to book a contingent liability.


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## z109 (21 May 2009)

As DoM says, the money transmission system is important. The UK financial authorities have put out a tender for the supply of a system that will allow instant takeover of accounts (or more probably over a weekend). All UK banks have to comply with it, I believe. Given that many (all?) of the Irish banks are also active in the UK market and presumably use a unified system within each bank, does this mean that we will end up with a defacto mass transfer system?

As I understand it, what happens in the US is that banks are closed down by the FDIC, the accounts are transferred to a new bank and the customer is informed that they now bank with a new bank. I believe that is the system the UK wants to introduce. So, no bank has to be kept alive just because it would be difficult to service its customers.


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## z109 (21 May 2009)

On the six NAMAs, that's what I've been saying for a while. It is, in fact, the Swedish solution - each bank sets up its own bad bank, which issued debt that is guaranteed by the state (for a price). The government underwrites equity issue in the good bank to recapitalise following the write-downs on the transfer of assets.

Many of the problems that have been identified with the operation of NAMA are removed.

Does it kick-start the banks into lending? No, probably not as the banks will transfer the assets at too low a haircut and take losses on the SPV for a number of years (write down the bad loans over years). But do we really need a flood of cheap money into the economy before the bubble has deflated?

Will it stop the banks collapsing? Almost certainly for most of them. INBS may be beyond salvage, but at least setting up the scheme initially may get the government off the hook for the full amount of INBS debt (it may last until after the initial guarantee expires).

But whatever solution is chosen, I agree with Brendan that this problem requires a better than one-size-fits-all approach. We also have to allow for the fact that if the recession is protracted, residential mortgages and consumer loans will come under increasing pressure. Setting up a system that doesn't have flexibility is not going to help.


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## tiger (21 May 2009)

Article in todays [broken link removed] suggests as well we shouldn't be looking for a one size fits all as well.


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## Duke of Marmalade (21 May 2009)

yoganmahew said:


> ...a system that will allow instant takeover of accounts (or more probably over a weekend).


 Okay, I can see that as a solution to money transmission. Of course, the new accounts would all have a zero balance, otherwise funds would need to be expropriated from the closed bank to match the balances and this would compromise other creditors of the failed bank. Not such a big issue for current accounts but a very serious defect for deposit accounts and I still contend that to put the deposit accounts of either of the big two into a liquidator's limbo would be economic disaster. Anyway none of this can be done until the bank guarantee expires.


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## z109 (21 May 2009)

The FDIC takes over the failed bank. They have the power to decide. In a guarantee scheme, you can have up to the guarantee limit at a minimum with the rest to be decided following the liquidation.

Honestly DoM, it works in the US. People don't end up with zero balances. Read up on it:
http://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation


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## Brendan Burgess (21 May 2009)

tiger said:


> Article in todays [broken link removed] suggests as well we shouldn't be looking for a one size fits all as well.



I have read that article and I don't see him suggesting that? 

Am I missing something?


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## Duke of Marmalade (21 May 2009)

_Yog_, I don't think that is the same as letting the bank fail. It seems to be just the FDIC taking over the bank. That is exactly what is at issue; should the government take over the bank in total, i.e. nationalise it, or take a majority ownership i.e. NAMA.

The different model suggested by the _Boss_ is that we simply let one of the banks "go down" i.e. screw the depositors. That just ain't a runner for the big 2.


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## Brendan Burgess (21 May 2009)

> The different model suggested by the _Boss_ is that we simply let one of the banks "go down" i.e. screw the depositors.


Duke - I am not suggesting that at all. I am suggesting that we do not extend the guarantee beyond September 2010.

The depositors will have plenty of time to move elsewhere.

The bond holders will be screwed if the banks are actually insolvent. Despite people's claims to the contrary, no one really knows if Anglo or Irish Nationwide is insolvent. In fact, we won't know for another 5 to 10 years.

Brendan


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## Duke of Marmalade (22 May 2009)

Ok, _boss_, thanks for the clarification though the term "go down" threw me a bit. 

I suppose the suggestion has some viability - it differs from the mainstream solutions in that bondholders of the "let go down" banks are left isolated. I suppose you could ask why should subordinated bondholders be bailed out?

Maybe this explains why long AIB paper in particular is trading at such discounts compared to long Irish sovereign paper, clearly international investors perceive your suggestion as a definite possibility.

_Upon reflection:_

The government *can't* let AIB "go down". AIB would not have the liquidity to fund the run on deposits - the government guarantee would be invoked. And the 3.5bn government prefs would be down the toilet. Too late for this one to be a runner.


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## Sunny (22 May 2009)

Brendan said:


> I have read that article and I don't see him suggesting that?
> 
> Am I missing something?


 
He might mean where it says that each institution will create new companies to administer the loans for NAMA, though the agency will manage the day to day decisons on the loans. To be honest, this is the first time I have heard this.


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## The_Banker (22 May 2009)

Would it not be an idea for the government to 'forcibly' merge BOI & AIB after the bad load issue is sorted out by NAMA? Soon the government will own over 50% of both institutions anyway. 
For a small country with a small population and with no one knowing how long this present downturn will last would not one large strong(er) bank be in a better position to avail of any future upturn?
Yes, there would probably be redundancies but I think they are coming to the banking industry anyway. Ulster Bank/First Active and ACC have aready started the ball rolling in this regard.
I know Michael Snodon sort of proposed this in the past when he suggest both banks merge their IT systems but after everything that has happened would this not be a good solution?


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## Brendan Burgess (22 May 2009)

I see no advantage in merging two struggling banks into one. 

They will need all their managment time now in addressing the existing problems.


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