The Government was right not to nationalise AIB and Bank of Ireland

[Brendan Burgess]

Although I am a shareholder in AIB, I initially strongly supported the nationalisation of the banks to give the taxpayer some payoff for the risk involved with NAMA. I had changed my mind in the light of the arguments put forward about the impact of nationalisation on the bond markets. Given the figures released on Wednesday, I am more convinced that ever that nationalisation would have been a huge mistake.

Total loans €40 billion ( 52% of total)

Market value of loans: €24 billion (52% of €47 billion)
What Nama will pay in good bonds: €27 billion (52% of 54 – 2.7)

Overpayment: € 3 billion
Net overpayment: € 2.25 billion given that the taxpayer owns 25% of the shares

Of course, the big risk is that the market value is overestimated and/or that prices will continue to fall.

This €2.25 billion is not a waste of taxpayers’ money in that half of it at least is being returned to shareholders who are taxpayers. It might be an unfair distribution from taxpayers to shareholders, but a lot of tax and expenditure is unfair.

Under the circumstances, it’s a risk well worth taking to ensure that the bond markets continue to function.

What to do with Anglo and the Irish Nationwide are separate decisions for separate threads.

 

[tiger]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Of course, the big risk is that the market value is overestimated and/or that prices will continue to fall.

Unfortunately I believe this to be a certainty rather than a risk.

Last night's prime time, where they showed a site (field) in the midlands that was sold for €11M is the type of stuff we're potentially dealing with. That land won't be developed on for the next 10+ years and therefore has little more than agricultural value.

Another issue is interest rates. We'll be paying more than 1.5% over the lifetime of NAMA, given that they are 6month bonds.

 

[kaplan]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Brendan
I don't think nationalisation was ever an immediate option, here's what I've posted on another thread:

An AMC's objective to rescue viable banks and manage out their losses. In Ireland's case it is to prevent banks from destroying the economy. But the two biggest banks are too big to bail out - force them to write down their loans and the state would have to take them into public ownership which is something it cannot afford to do.
Translated into NAMA this means Government must arrange a bad loan buyout without triggering nationalisation. Enter LTEV which is effectively a mechansim to buy the loans at a price that allows the banks to remain in private hands (for now). The €7bn uplift (net retention) is probably targetted at AIB and BOI. In this sense it is a capital subsidy as its payment prevents the write down of loans. And as bonds for loans releases rwa capital it can be seen as a subsidy top up.
The hope is banks will self-build capital either through asset sales (poland etc) and or raise equity from shareholders. Hence AIB 2bn...the success of the latter depends on investor confidence - the bet is the banks will stand on their own two feet - but given their thin capital base and loan loss exposure post-nama they remain unnattractive. Gov will want to see a rise in share price as if it has to inject more capital it will not want to take on full ownership.

Share warrants - I do not agree the state owns 25% of shares but has a call option on 25% if the prefs are not bought out- whilst the value of the warrants has risen it's not tradable either for shares or cash- see BOI notes - it will target warrant buy backs if it can over the next year reducing coupon costs and state influence. Also careful with assumptions on the ministers global estimates - the 47bn market value depends on bank loan diversification - My bet is the bulk of ltev is targetted at boi and aib

 

[Brendan Burgess]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Share warrants - I do not agree the state owns 25% of shares but has a call option on 25% if the prefs are not bought out- whilst the value of the warrants has risen it's not tradable either for shares or cash- see BOI notes - it will target warrant buy backs if it can over the next year reducing coupon costs and state influence. Also careful with assumptions on the ministers global estimates - the 47bn market value depends on bank loan diversification - My bet is the bulk of ltev is targetted at boi and aib

Update - the warrants are full explained in this post

 

[Brendan Burgess]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Last night's prime time, where they showed a site (field) in the midlands that was sold for €11M is the type of stuff we're potentially dealing with. That land won't be developed on for the next 10+ years and therefore has little more than agricultural value.

Tiger

You can't make a judgement based on one very extreme example.

40% of the loans are actually performing.

Some of the non performing loans have positive equity.

And of course there are some examples of development land bought at the peak which are now worth less than agricultural land.

Brendan

 

[tiger]

Re: The Government were right not to nationalise AIB and Bank of Ireland

You can't make a judgement based on one very extreme example.

Yes, it's an extreme example. Plus if the loan is being serviced or is backed by assets worth €11M, then it doesn't matter what the field is worth now.

Unfortunately the pessimist in me doesn't believe that it's extreme or untypical. I see lots of newly built empty office space around the IFSC/East wall area. I see lots of empty newly built housing estates anytime I drive down the country. My fear is that the majority of these will never(*) find a buyer or tennant.
(*) never = within the next 5-10 years. After that they'll be derilict anyway.

It's a massive leap into the unknown that the tax payer shouldn't be making.

 

[kaplan]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Brendan

Careful with using the Ministers data set. It's based on desk top estimates only and probably meta data from portfolion management credit risk systems. The 40/60 good bad split contains loans a bank may deem as performing but could be high risk nonetheless - in reality good loans are more likely to go bad. And they have a habit of being paid off. Which means the duration of the 40% good loan element will be shorter than the bad element.

 

[Brendan Burgess]

Re: The Government were right not to nationalise AIB and Bank of Ireland

good loans are more likely to go bad. And they have a habit of being paid off.

I would have thought that a loan which was paid off was a good loan?

You can't have it both ways.

Brendan

 

[Bronte]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Of course, the big risk is that the market value is overestimated and/or that prices will continue to fall.

Normally I would say property will recover but in the case of Ireland the increase in property values from circa 2000 to 2006 was pure and utter madness. We have seen property fall back it is generally agreed 50%. But property is still overpriced relative to people's purchasing power, relative to other countries and relative to the 10 to 15 times rental value.

 

[goosebump]

Re: The Government were right not to nationalise AIB and Bank of Ireland

Last night's prime time, where they showed a site (field) in the midlands that was sold for €11M is the type of stuff we're potentially dealing with. That land won't be developed on for the next 10+ years and therefore has little more than agricultural value.

The degree to which these 'Mullingar Fields' make up the value of NAMA is being overestimated in my view.

Even if there were 50 of these scenarios, you're talking about €500m, which is approx. 1% of the estimated value of the NAMA loans.