# Re: A toxic bank?



## NorthDrum (7 Apr 2009)

_From the Minister's speech. *Bold *provided by Brendan to highlight the key points._

The Government also believes that further radical action is necessary to stabilise the banking system and ensure the supply of credit to the real economy. 

Cleansing and repairing the banks' balance sheets is considered fundamental to achieving a sustained recovery of the banking system.

The Government has decided to bring forward measures to address the issue of asset quality in the banking system. *A National Asset Management Agency will be established on a statutory basis*, under the aegis of the National Treasury Management Agency.

Assets will be transferred from the banks to the new National Asset Management Agency with the purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced. 

This will ensure a sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy. 

The Agency will have a commercial mandate and will have the central objective of maximising over time the income and capital value of the assets entrusted to it. 

Because it is clear that the principal uncertainties in relation to asset quality in the Irish banking system lie in the banks' land and development loans and in the largest aggregate associated exposures in the banks, these will be transferred to the Agency. 

These assets pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system. 

*The Agency will purchase the assets through the issue to the banks of Government bonds. *

This will result in a very significant increase in gross national debt, to be offset of course by the assets taken in. The cost of servicing this debt will be offset, as far as practical, from income accruing from the assets of the new Agency. 

The debt will be repaid from funds raised through the realisation of those assets over time. 

*The potential maximum book value of loans that will be transferred to the Agency is estimated to be in the region of €80 to €90bn, although the amount paid by the Agency will be significantly less than this to reflect the loss in value of the properties. *

In the longer term, *if the Agency were to fall short of recouping all of the costs, the Government intends that a levy should be applied to recoup any shortfall.*

*All borrowers will be required to meet their full legal obligations for repayment. There will be a hardening of the approach to these borrowers - *taxpayer's money is at stake, and the Agency will be expected to protect it in a commercial way and with an independent remit. 
It is important to note the State will not assume all of the risk in the acquisition of these assets. The assets will be valued on a basis which is sustainable for the taxpayer. 

This will entail an assumption of losses by the financial institution whose assets are removed. The State has already capitalised the Bank of Ireland for a 25% stake and is completing a due diligence of the Allied Irish Banks prior to capitalisation for a similar stake.

If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution. 

This initiative will be developed and implemented within the common EU framework detailed in the European Commission Guidance on the Treatment of Impaired Assets, working closely with the European Commission to obtain prior State aid approval. 

By drawing on the best advice and experience available internationally, we are committed to ensuring that this very significant measure will be an example of best practice and meets all of the objectives that the Government has set for it. 
*
The Government also intends in line with its previous indication to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years.* Access to longer-term funding in line with the mainstream approach in the EU - consistent with State aid rules - will contribute significantly to supporting the funding needs of the banks and to securing their continued stability. 

The Government is determined through these reforms to restore our banking system and the reputation of our regulatory and supervisory structures. 

We want to send a strong signal that the types of practices followed in some of our institutions are unacceptable, that the regulatory structures will be strengthened, that decisive action is being taken to repair banks' balance sheets but that Ireland remains committed to the continued development of a soundly based, well-regulated and competently supervised financial services sector.


----------



## Betsy Og (7 Apr 2009)

Intuitively I'm in favour of this - logically or rationally I dont know enough about it to give a ruling, and no doubt there will be as many opinions as people. However my musings might be summarised as follows:


I fear the economy is currently suffocating in the absence of bank lending, and the "bad bank" may reopen the oxygen valve again.
Doing something is better than doing nothing since everyone is crying out for leadership, and bold actions have had a positive effect before (i.e. the bank guarantee - ok it didnt solve everything but our banks didnt get shut down either).
Its a trodden (if not well) path before, & the speech hit most of the right notes - no unbridled risk without return (are you listening Michael Smith of the religious orders debacle) , keeping the banks on the hook, making them pay the shortfall. If he'd put in a comment about public floggings for bank staff I'm sure that would get a few people on side.
Time will tell, but whatever the outcome lets go down fightin'


----------



## UptheDeise (7 Apr 2009)

Betsy Og said:


> Intuitively I'm in favour of this - logically or rationally I dont know enough about it to give a ruling, and no doubt there will be as many opinions as people. However my musings might be summarised as follows:
> 
> 
> I fear the economy is currently suffocating in the absence of bank lending, and the "bad bank" may reopen the oxygen valve again.
> ...


 

I'm afraid doing something rather than nothing is what is making this crisis a lot worst. For a start the government should have let the banks fail and start afresh again.


----------



## z101 (8 Apr 2009)

I believe a third of the 80-90 billion is on foreign property, and half of this is in Northern Ireland.

Sinn Fein will be delighted, we're buying a united Ireland...


----------



## charliemacck (8 Apr 2009)

Ceatharlach said:


> I believe a third of the 80-90 billion is on foreign property, and half of this is in Northern Ireland.
> 
> Sinn Fein will be delighted, we're buying a united Ireland...


 
It makes absolutely no financial sense, unless you realise that Fianna Fail need to help out their developer buddies. Not only do these guys fund them, but they know where the bodies are buried.


----------



## Betsy Og (9 Apr 2009)

I'm getting worried now, the latest is that the developers will only owe what NAMA paid for the debts. This is crazy. 

On the basis that some loans will turn out to be absolutely worthless, NAMA needs the scope to make profits (i.e. getting most or all of the book value of the debt, having paid far less) on other loans in order for this not to be a major drain on the taxpayer AND in order for it not to be bail out for the developers. 

I'm going to head-butt Brian Lenihan if he royally fecks this up !!!


----------



## Guest116 (9 Apr 2009)

Betsy Og said:


> I'm getting worried now, the latest is that the developers will only owe what NAMA paid for the debts. This is crazy.


 
Where is that written? I would really doubt that is the case.


----------



## Betsy Og (9 Apr 2009)

aristotle25 said:


> Where is that written? I would really doubt that is the case.


 
The was a guy on Newstalk this morning, a Mr. Moynihan, FF Cork NW, who is part of some committee charged with devising our banking strategy. He was asked specifically what the developers will owe and that was his clear response.

Now maybe he has it wrong, it hasnt been decided, he was flying a kite etc. etc. but that's what he said, & by jaysus I'm going to eat the first FFailer who calls to my door if thats what is agreed.


----------



## Sunny (9 Apr 2009)

Betsy Og said:


> The was a guy on Newstalk this morning, a Mr. Moynihan, FF Cork NW, who is part of some committee charged with devising our banking strategy. He was asked specifically what the developers will owe and that was his clear response.
> 
> Now maybe he has it wrong, it hasnt been decided, he was flying a kite etc. etc. but that's what he said, & by jaysus I'm going to eat the first FFailer who calls to my door if thats what is agreed.


 
Its rubbish. Thats the problem with most poltiticans. They open their mouths and involve themselves in things they don't understand


----------



## Guest116 (9 Apr 2009)

No chance of that being the case. There is no way that would be allowed.


----------



## infinity (9 Apr 2009)

can someone give me a dummies guide as to how this is supposed to work ? I don't really get it.

I'll use very basic example.

*Bank A
*Cash: 50 million
Good Loans: 50 million
Bad Loans: 100 million
*Available to lend: 0*

So the bank can't loan out any more money as it doesn't have any!

Is the plan then for the government (i.e. us) to buy the bad loans at a discounted price from the bank. For arguments sake lets say the get this at a 50% discount.


*Bank A
*Cash: 50 million
Good Loans: 50 million
Sale of Bad Loans: 50 million
*Available to lend: 100 million*

*Bad Bank*
Loans: 100 million


So is the objective to pursue the people that owe the 100 million to try to get as much as possible of it ? If they only get 60 million they have still made a profit of 10 million. *Bank A* has still 'lost' 50 million but at least they are in a position to operate.

So if, for example, this 100 million 'bad loan' was taken out by one guy. Is he now 40 million better off because of all this ???


----------



## Conan (9 Apr 2009)

This point has been made clear in the press NAMA conference yesterday. If a developer borrowed €100m to buy a property, but that property is now valued (say) at €60m when taken over by NAMA, the developer still owes €100m and will be pursued for that.
I did not hear what Mr. Moynihan said, but if he implied that the developer would only be pursued for €60m, he is wrong. God preserve us from lobby-fodder.


----------



## diarmuidc (9 Apr 2009)

Surely the key to this whole process is how much NAMA will pay for assets. The problem will be that the incompetent/corrupt government will overpay for the assets leaving the taxpayers holding overpriced junk.


----------



## Sunny (9 Apr 2009)

diarmuidc said:


> Surely the key to this whole process is how much NAMA will pay for assets. The problem will be that the incompetent/corrupt government will overpay for the assets leaving the taxpayers holding overpriced junk.


 
That is the key. It is also important not to underpay for the loans as well because then you are just putting pressure on banks balance sheets and will probably have to stump up more money to recapitalise them.

Whatever about BOI and AIB, does anyone see any way that Irish Nationwide can survive this process considering the amount of loans they will be transferring? They will need massive amounts of capital and there is no justification for asking taxpayers to prop up that institution.


----------



## infinity (9 Apr 2009)

is it the case that NAMA will buy the loan from Bank A for 50 million and actually seize the asset from the developer hoping to sell it at some future point for 60 million ?

bank loses 50 million (off their balance sheet), government makes 10 million (in 10 years time), developer loses nothing? (he loses an asset he is glad to get rid of)

The developer just walks away....no assets....but no loan hanging over him ?

All of these huge property deals will be tied up in various companies with no assets anyway - so the hope of pursuing these guys is probably hopeless?


----------



## Guest116 (9 Apr 2009)

infinity said:


> is it the case that NAMA will buy the loan from Bank A for 50 million and actually seize the asset from the developer hoping to sell it at some future point for 60 million ?
> 
> bank loses 50 million (off their balance sheet), government makes 10 million (in 10 years time), developer loses nothing? (he loses an asset he is glad to get rid of)
> 
> ...


 
No, the NAMA will not "own" the asset, they will just be responsible for ensuring the developer pays the outstanding loan and they will manage that whole process.

So NAMA might take the asset from the bank for say 60% of what it is currently worth. The bank takes a hit on their balance sheet and it is expected that the developer will eventually pay back the loan so therefore the NAMA (government) will take the profit betweeb the lower cost they paid for the asset and the full price repaid by the developer.


----------



## infinity (9 Apr 2009)

aristotle25 said:


> No, the NAMA will not "own" the asset, they will just be responsible for ensuring the developer pays the outstanding loan and they will manage that whole process.



The developer has probably bought the asset through "ACME Construction Ltd" - I'd say it's more likely he will just fold this up. So NAMA will probably end up owning them anyway.

The Ltd Co probably has assets worth 0 so there is nothing to pursue ?


----------



## Sunny (9 Apr 2009)

infinity said:


> The developer has probably bought the asset through "ACME Construction Ltd" - I'd say it's more likely he will just fold this up. So NAMA will probably end up owning them anyway.
> 
> The Ltd Co probably has assets worth 0 so there is nothing to pursue ?


 
There is the land or property that the loan was secured against. If the developer defaults on the loan, then NAMA can take ownership of the asset and try to recover the debt that way. It doesn't matter how the developer structured the deal. The loan docs should ensure that NAMA will either get repaid from the borrower or will have land or property to sell to recover part or all of the loan.


----------



## Betsy Og (9 Apr 2009)

I suppose the theory is that eventually property values will come back and NAMA, if it isnt paid by then, will sell to cover its costs. Only the government could afford to wait that long & if we leave the debt in the banks then the general economy withers for lack of credit.

While I think we'll feel a bit raw in the future as NAMA inevitable makes a loss, but maybe better that than being oblierated .. slowly... over the next 18 months or so.

Anyway, tis a bank holiday "Friday" (if you know what I mean), I've just had green shoots for lunch (tis all I can afford !!) so green shoots all round, especially you guys in the US


----------



## dewdrop (9 Apr 2009)

Mr Moynihan who is FF Chairman of some Finance Committee clearly stated that the liability would be restricted to what NAMA paid for the loan.  Hopefully this is incorrect and I fail to understand why the Government will not spell out in simple langauge that these developers will be pursued for the last penny they owe.  It is the impression that they will not be pursued is causing all the anger and disgust. The oft repeated phrase "written down debt" creates the impression that they are going to get away with it .


----------



## infinity (9 Apr 2009)

Sunny said:


> The loan docs should ensure that NAMA will either get repaid from the borrower or will have land or property to sell to recover part or all of the loan.



I think this is where it will all unravel. The assets that the loans were secured against have themselves plummeted in value. I think the bottom line is a large proportion of these loans will NEVER be repaid and the tax payer picks up the pieces.

The developer may have purchased something for €100 million. €10 million of his own money and €90 million of the banks. The bank looked for security on this loan and he may have put up other land 'worth' €90 million as security.

house of cards !


----------



## infinity (9 Apr 2009)

I'd like the politicians to discuss some real world examples. Their wishy washy talk is not helping me understand!

I know they will say that it's complex and I don't understand - trust them - it will all be fine!! yeah right


----------

