Budget Part II - Buying debt from the banks, how does it work?

JonathanAnon

I heard a guy on Vincent Browne the other night saying that when this was muted earlier in the week, that the bank shares went up by 15%. Anyone know how this works? The bank have 80 Billion of bad debts (I think), does the government estimate the value and purchase from them now?

The guy with Vincent seemed to think that this was very dangerous for the Irish state, more so than anything else done by the Minister so far.

edanto

I also agree that it sounds dangerous - but don't have a lot of details about it.

Can you research what is proposed and fill us in, please?

JonathanAnon

edanto wrote: »

I also agree that it sounds dangerous - but don't have a lot of details about it.

Can you research what is proposed and fill us in, please?

Just listening to Joan Burton there a few minutes ago. I dont think it has been outlined by Lenihan yet, but Burton reckons we will be carrying the burden of risk for properties in other countries also (as this is where some of the bank's monies are invested).

I think maybe my question should be addressed to the Minister.

General Strife

Back in October the banks said they were fine, no worries here.

2 months ago Lenihan said the banks were exposed to €10bn worth of bad debts.

Now the banks are exposed to €80bn of bad debt!

It's a complete joke. Should the government go ahead with this shambles of a plan to sweep away the debt incurred by the banks from the property bubble it will bury us for decades having to find the money to pay back just the interest on €80bn.

I also don't see a bailout for the thouands saddled with negative equity- Oh that's right no bailout there, you just keep on paying the failed institution 20% more than your house is actually worth. While they can go cap n' hand to the government who will happily prop their mates in the finance industry up for as long as need be.

Would the last person to leave Ireland please turn out the lights!

edanto

Damn. 80bn.

And what do we get for it?

Akrasia

edanto wrote: »

Damn. 80bn.

And what do we get for it?

90bn apparently, biggest bail out in the history of the irish state, 3 times the entire national income.

Its utterly ludicrous that we're scrimping and saving to try and save a few billion while with a stroke of a pen lenihan is giving 90 billion euros to the banks that caused this mess in the first place.

billions and billions of euros have just been flushed down the toilet.

nesf

Remember people that's 90 billion before discounting. So the Agency would purchase 90 billion worth of assets for much lower than that.

It also appears that the State can force banks to sell assets to them, so this hopefully will prevent banks from cherry picking the worst assets to offload on the taxpayer. So theoretically tax payers could also purchase assets with sunnier futures that would turn a profit over time and similar. Remember also, this is land being bought, land is always worth *something*, so it's not like the security that these loans would be based on could suddenly become zero.

amcalester

My understanding is that the govt will buy the 80bn of bad debts at a reduced value allowing the banks to write off the rest and move on while the State is exposed to a smaller amount.

If its done correctly then it shouldnt cost the State too much. It all depends on what the debts are assed at whether its todays market value, the amount outstanding or a future projected value taking into consideration falling property values.

JonathanAnon

Government have set up NAMA, an agency to remove all toxic debts (cleanse is their word) from the banks. This will supposedly free them up to start lending again. hmmm, I wonder.

It seems so wrong how these guys have been all bailed out.. terribly unjust.

johnnyskeleton

nesf wrote: »

Remember people that's 90 billion before discounting. So the Agency would purchase 90 billion worth of assets for much lower than that.

It's 80/90bn maximum exposure. Who knows how much of the loan books they will take over, and at what price. I wouldn't be surprised if they buy the majority of AIB & BOI's development books and parts of their commerical books. Anglo is already nationalised so a transfer from them to the NAMA is only transferring government obligations.

I think they are going to try to buy the loans at near face value. They should be paying 30c in the euro and that's being generous (especially for large sites and abandoned developments).

It also appears that the State can force banks to sell assets to them, so this hopefully will prevent banks from cherry picking the worst assets to offload on the taxpayer. So theoretically tax payers could also purchase assets with sunnier futures that would turn a profit over time and similar. Remember also, this is land being bought, land is always worth *something*, so it's not like the security that these loans would be based on could suddenly become zero.

Some sites have dropped by 80%. When you factor in interest on the loan over the last few years, interest while kept in the NAMA, legal costs (if repossessed), costs if sold, and administrative costs for operating the NAMA, some of the assets are essentially worthless.

If the NAMA also buys up SPVs and other exotic financial products (particularly from the US), they could already be effectively worthless.

nesf

johnnyskeleton wrote: »

If the NAMA also buys up SPVs and other exotic financial products (particularly from the US), they could already be effectively worthless.

As far as I am aware, there is not a substantial problem in the Irish banks regarding CDOs etc, thankfully.

johnnyskeleton

nesf wrote: »

As far as I am aware, there is not a substantial problem in the Irish banks regarding CDOs etc, thankfully.

Same here, although there were some that I've heard about, and at the end of the day, we just don't know because we are not being told.

nesf

johnnyskeleton wrote: »

Same here, although there were some that I've heard about, and at the end of the day, we just don't know because we are not being told.

Nah, it'd be highly unlikely to remain a secret for this long if it was a substantial problem. The main issue seems to be real estate debt, which is far preferable to CDOs etc.

Nody

Does anyone actually believe that the state will buy it at any where near the real value? The state will pay a nice premium to offload it from the banks' books to ensure that they are recapitalized and bailed out at the same time. Oh they will oh and ah about a fee for their service etc. but there would be no real point in buying it at face value.

Why? Because if that was the case the banks could turn around and resell it today and rebalance their books; but that is the whole problem in a nutshell, the values are now to low and it would crash the banks and the state will not allow that.

johnnyskeleton

nesf wrote: »

Nah, it'd be highly unlikely to remain a secret for this long if it was a substantial problem. The main issue seems to be real estate debt, which is far preferable to CDOs etc.

Think of all the things that came crawling out from the woodwork once we nationalised Anglo. There were so many dodgy dealings that we had no idea about. The banks have absolutely frozen on us, and it is only when something becomes completely worthless due to a big scandal (e.g. after the Iceland collapse PTSB announce their exposure).

Remember that a lot of this type of financial product avoids regulation and as such can be kept off balance sheet.

All in all, I think the Irish banks were probably too property obsessed to get involved in any of the exotic instruments that were going about, but I wouldn't be surprised if a few things did show up. After all, there were a number of international institutions with offices in the IFSC, including, for example, a number of Lehman brothers funds. I can well imagine the Irish banks seeing the unreal returns and wanting in. Also, one particular Irish bank's London branch could turn out to be a massive liability.

johnnyskeleton

Nody wrote: »

Does anyone actually believe that the state will buy it at any where near the real value? The state will pay a hansom premium to offload it from the banks' books to ensure that they are recapitalized and bailed out at the same time. Oh they will oh and ah about a fee for their service etc. but there would be no real point in buying it at face value.

Why? Because if that was the case the banks could turn around and resell it today and rebalance their books; but that is the whole problem in a nutshell, the values are now to low and it would crash the banks and the state will not allow that.

I can see the banks buying some of the loans at face value or near face value.

Let's say for example a loan is given for €200m backed by a piece of land which is now worth €100m. The banks currently have that loan down as more than €200m (due to rolled over interest), and I think the government is planning on buying the assets for the €200m + interest or near enough.

If they buy the assets at market value, the banks would collapse, if they buy them at just market value plus the minimum needed to keep the banks afloat, the banks would survive but wouldn't lend money. The government want to give them the full value so that the banks will have loads of money again to use on reckless lending.

parsi

I think it will work like this (by the way the Dept Finance site says the agency will be run by "professionals") :

Gov: We'd like to buy some debt please.

Bank: We have some lovely debt secured on a Dubai sand bank, the outstanding balance is 46.5 million but you can have it for 46.4 million. We've already made our profit on it.

Gov: Ah that's great thanks - that's a fine discount we got. Do you know anyone else selling ?

johnnyskeleton

parsi wrote: »

I think it will work like this (by the way the Dept Finance site says the agency will be run by "professionals") :

Gov: We'd like to buy some debt please.

Bank: We have some lovely debt secured on a Dubai sand bank, the outstanding balance is 46.5 million but you can have it for 46.4 million. We've already made our profit on it.


Gov: how about 40m. We need there to be some write down on your end.

Bank: But we'll go under then, and won't lend out any money to small businesses (aside: like we are going to do that anyway).

Gov: Ah that's great thanks - that's a fine discount we got. Do you know anyone else selling?

The banks have us over a barrel, and the government is encouraging them.

Daragh101

the banks are getting the best deal out of this, shares have risen in value aswell today.

cashmni1

It all seems too familiar to me. The banks run up a huge debt - like they did in the states.
The american banks say "hold on, we can sell this debt to the idiots in europe"
So the american banks start a trend of selling bad debts (maybe this was happening all along) and hoping for the best.
The idiots in Europe buy the debts and expect everything to work out just rosy.
It dosen't.
The banks can't pay their debts and the whole thing is exposed for what it really is....pure and utter recklessness and greed.
Now, the Irish gov, for whatever reason is going to bail out the banks for face value on their debts??
Back to square one where the banks are selling their bad debts again and hoping for the best. Same thing really.
What have the Irish banks to worry about? Nothing. The banks in this country are having a laugh. There is no penalty for the misguided advice that the banks have given the public. There is no penalty for clear and evident occourances of mishandling large amounts of money.
I understand that the banks have to be healthy to give out money, but why not do some more of their famous creative accountancy?
If a small firm (lets say construction consumables) looses money on windows but makes a huge profit on doors, the owner will transfer money from the doors section of the buisness to the windows section and at the end of the year balance his books. (Or am I way off the mark here?)
Why can the banks not do this?

edanto

Lets assume the govt gives the banks 50c in a euro.

We, the people, own a land parcel and are involved in debt management. So our govt is basically acting as a bank.

This is a very roundabout way of encouraging the banks to lend money to SMEs. So would it not make more sense for the govt to invest several billion in the credit union movement and empower them to lend to SMEs and invigorate the economy? And the hell with the developers and their buddies.

Dean D

The banks want capitalism when they're making profits and socialism to cover their losses.

Fishtits

If you do the sums on it, its cheaper just to Nationalise the banks and carry out the same exercise.

aare

I suspect that part of the idea is to buy up bad debts related to property...which, when foreclosed, has exactly the same value in terms of reducing the rent supplement bill as it would have had in 2007...

...while helping to keep the banks afloat.

Slideshowbob

So 90bn euro over population of say 3million

thats a figure of 30,000 euro on each persons head

did the banks reckon they could extract this profit out of every person for property porfolios over the coming years

Also

Take a developer - takes a risk - but economic downturn

if there had not been a downturn he would have made millions - the upside of his calculated risk

but as downturn - bailed out?!?!?

where is the downside to the developers risk!!!!????

SkepticOne

parsi wrote: »

I think it will work like this (by the way the Dept Finance site says the agency will be run by "professionals") :

Gov: We'd like to buy some debt please.

Bank: We have some lovely debt secured on a Dubai sand bank, the outstanding balance is 46.5 million but you can have it for 46.4 million. We've already made our profit on it.

Gov: Ah that's great thanks - that's a fine discount we got. Do you know anyone else selling ?

Very true. I think they would also drag in the national interest into their lobbying.

Bank: We really want to lend to SMEs but we can't because of all these distressed assets. You do want to help SME's and create jobs don't you?

I believe the same sort of lobbying tactic is used by the Construction Industry Federation sucessfully.

MadsL

Horses mouth....
FAQs
http://www.budget.gov.ie/2009SupApril09/downloads/Annex%20I%20-%20NAMA%20Frequently%20Asked%20Questions.pdf

SkepticOne

What people need to realise is that buying assets at above market value (it doesn't matter really what those assets are) is exactly the same as simply handing over cash. There is no need for any institution to be set up to do this.

It is exactly the same as my buying a heap of manure from you for €10,000. The heap of manure is simply a smokescreen for me handing you money.

The scheme though does have the added benefit in that these developers who overpaid for land at the top of the bubble will now be owing the money to their friends in the government and not banks.

I know if I were a developer who it is I would rather be owing money to!

Developers are the one group, despite having overbuild to excess, still get subsidies for their overpriced output.

PaulHardwick

This was the cracker of the whole lot.

We will buy bank debt at "market rate".

Another scam. The banks will be paid close to what the asset was worth, the plebs will then get raped as the asset is worth nothing now.

Another fraud, and you still keep watching the Friends repeats.

PaulHardwick

SkepticOne wrote: »

What people need to realise is that buying assets at above market value (it doesn't matter really what those assets are) is exactly the same as simply handing over cash. There is no need for any institution to be set up to do this.

It is exactly the same as my buying a heap of manure from you for €10,000. The heap of manure is simply a smokescreen for me handing you money.

That is it alright.

Rip off the plebs to pay their business mates.

Was there ever a more obvious scam than this one?????

nesf

From the One O'Clock news it appears that the 90 billion includes both performing and non-performing loans (i.e. not only distressed debt).

This is looking like less of a good deal for the banks.

lukasbasic

basically it works like that
- the bank prints non-existing money
- the bank lends the money to the people
- the bank earns additional money by selling those loans to investors (shares)
- the people stop paying (some)
- the government takes the money of all people to pay the banks so the banks and investors are happy (tax increases like yesterday)

happy days

edanto

nesf - you have a lot more training in economics than me. Can you poke holes in my idea suggestion, please?

http://www.boards.ie/vbulletin/showpost.php?p=59734338&postcount=21

nesf

edanto wrote: »

nesf - you have a lot more training in economics than me. Can you poke holes in my idea suggestion, please?

http://www.boards.ie/vbulletin/showpost.php?p=59734338&postcount=21

The problem is this. The banks at the moment can't borrow money at reasonable prices because everyone is worried about how many loans will fail. This is a long term problem that needs to be sorted, it isn't just about banks lending to SMEs in the short term.

This is actually a lot more serious than SMEs not being able to get loans. If any of the major banks fail (i.e. BoI or AIB) it would destroy an enormous amount of wealth that the Government would then have to cover. You really don't want this to happen, the last time widespread banking failures were allowed to happen was in the Great Depression of the 1930s in the US when there was no deposit insurance. This would a) screw over everyone who had deposit accounts, and more seriously b) screw over all the businesses that pay these people in the first place. Very bad stuff. Some people argue that banks should just be left fail, I don't think this is a realistic option given the nature of our banking system.


Giving the money straight to the SMEs doesn't solve the banking problem. We need to deal with the distressed debt in the banks. There are two main ways to do this, a) buy the debt at a discount from the banks and manage it in a separate entity or b) insure the debt so the Government covers the cost of any failed debt. a) while initially more expensive is far preferable to b) since at least with a) any performing debt will earn the tax payer a return while b) only subjects tax payers to the losses.

faceman

Nesf has really addressed the questions very well.

Something that hasnt been mentioned yet is that Sweden did this in the 90's when they were in financial crisis (and their housing market collapsed)

Sweden spent 4% of GDP to rescue their banks. After the returns were factored in the actual cost ended up being less than 2%. It was a succes for Sweden and I would argue their situation was worse than ours. (They had over 100 banks at the time)

However there are key points in their crisis that we are missing out on:
* They held banking officials to task over mismanagement.
* The government forced the banks to write down their losses immediately prior to recapitilisation.
* The government and opposition had a public face of solidarity when this was all going on. They got together for the greater good.

Basically they forced the banks to drain share capital before they recapitalised. They took control of the banks. When things started to pick up, the returns for the country were great as they were able to make now healthy banks public again.

InReality

amcalester wrote: »

My understanding is that the govt will buy the 80bn of bad debts at a reduced value allowing the banks to write off the rest and move on while the State is exposed to a smaller amount.

If its done correctly then it shouldnt cost the State too much. It all depends on what the debts are assed at whether its todays market value, the amount outstanding or a future projected value taking into consideration falling property values.

I think Richard Bruton was right yesterday when he said there was absolutely no reason to expect it to be done correctly.
Thats the huge & real risk here.

The Govt is saying that the NTMA will do a good job and are the best govt agency in the country, and they have brought down the national debt from 120% to near 30%.

This is pure spin in my opinion.

Firstly the task is valuing property based loans
The NTMA would have no more experience of valuing property loans than I have.

Secondly being the best govt agency in Ireland is not exactly a high bar.

Thirdly they NTMA did not bring down the debt "by magic" or financial trickery. Taxpayers money was used to pay off the national debt over the last few years. The NTMA had feck all to do with it.

NTMA - National Treasury Management Agency

InReality

Nerf could you see what are the holes in my "suggestion" post ?

http://www.boards.ie/vbulletin/showpost.php?p=59741603&postcount=13

nesf

InReality wrote: »

Nerf could you see what are the holes in my "suggestion" post ?

http://www.boards.ie/vbulletin/showpost.php?p=59741603&postcount=13

Anglo was a different situation to AIB/BoI because it wasn't a big clearing bank. It could have been left fail I think. It would have still cost us a fair bit to clean up. The Government had a point in that by nationalising it they can go through its books with a fine tooth comb to examine for irregularities. Whether that made it worth saving is an open question.

It doesn't address the problem being addressed by NAMA which is toxic debt in AIB, BoI etc.

InReality

nesf wrote: »

Anglo was a different situation to AIB/BoI because it wasn't a big clearing bank. It could have been left fail I think. It would have still cost us a fair bit to clean up. The Government had a point in that by nationalising it they can go through its books with a fine tooth comb to examine for irregularities. Whether that made it worth saving is an open question.

It doesn't address the problem being addressed by NAMA which is toxic debt in AIB, BoI etc.

Where would the cost occur be if anglo failed ?

nesf

InReality wrote: »

Where would the cost occur be if anglo failed ?

Intervening to spread out the mortgages held by ordinary people from Anglo to other people (i.e. sell them onto other banks, the Government might have to incur some of the cost here, more logistical than anything else). The Government would also have to cover the cost of any money lost through deposit accounts or through bonds issued by the bank after loans had been sold on to other parties. This would have been substantial given the deposit insurance that was put in place on the Government guaranteeing all accounts.

There is a cost to the taxpayer in leaving any bank fail unfortunately.

Akrasia

nesf wrote: »

From the One O'Clock news it appears that the 90 billion includes both performing and non-performing loans (i.e. not only distressed debt).

This is looking like less of a good deal for the banks.

from the one o clock news? And who said that?

Why would the government set up a 'bad bank' and put performing assets into it. It completely misses the point.

edanto

Nesf I'm learning a lot about the banking industry in this thread.

I never realised that the feckers were guaranteed to be given our money to allow their companies survive even if they acted recklessly.

It's absolutely bonkers and I don't understand why you're not fuming about it. (I mean, I'm assuming you don't own a bank because you have time to post online)

eoinbn

edanto wrote: »

Nesf I'm learning a lot about the banking industry in this thread.

I never realised that the feckers were guaranteed to be given our money to allow their companies survive even if they acted recklessly.

It's absolutely bonkers and I don't understand why you're not fuming about it. (I mean, I'm assuming you don't own a bank because you have time to post online)

It was to stop a run on the banks which would of sunk them. People/companies were getting worried about their money in certain irish banks so they were taking it out. This of course was making the problem worse. If this was left happen to Anglo then you can be sure that the first thing everyone would do was to run down to their local bank and demand their money from AIB/BoI resulting in it also going under even though it wasn't really in danger.

SkepticOne

It will be spun as the government taking on those assets at a 'discount' from the (largely irrelevant now) book value of those loans. Therefore the majority of people will not see it as money being handed over. That is why people aren't fuming.

nesf

Akrasia wrote: »

from the one o clock news? And who said that?

David Murphy reporting on what was said by Lenihian this morning.

Akrasia wrote: »

Why would the government set up a 'bad bank' and put performing assets into it. It completely misses the point.

Easy, by taking both performing and non-performing loans of this type the tax payer can turn a profit. Think of it as punishment for the banks. If we're going to be taking on some of their bad loans we're going to be taking some of the better ones too to compensate the taxpayer for the expense.

nesf

edanto wrote: »

I never realised that the feckers were guaranteed to be given our money to allow their companies survive even if they acted recklessly.

Eh no, reread what I said. The banks can be left collapse, the Government isn't required to do anything to stop this by law. The problem for the Government is that there is a guarantee on all deposits with Irish banks (and a few other forms of debt/loans to the banks themselves).

So if a bank collapses the cost to the tax payer is covering the deposits in the bank that aren't covered when the assets of the bank are sold off. This would range from ordinary people's savings to the accounts of companies (which is even more problematic, imagine a company losing the account it had the next three months wages stored in...).

This wouldn't be of any benefit to bankers themselves except if they had money deposited with the bank like anyone else.

deiseman21

the foreigners aint buying ithttp://www.cnbc.com/id/15840232?video=1085923367&play=1

SkepticOne

nesf wrote: »

Easy, by taking both performing and non-performing loans of this type the tax payer can turn a profit. Think of it as punishment for the banks. If we're going to be taking on some of their bad loans we're going to be taking some of the better ones too to compensate the taxpayer for the expense.

Most of the assets they will be taking on will be performing but nevertheless they will be taken on at a vast premium to their market value due to the perceived risk of default. Hardly punishment.

The unfortunate thing is that we may never know the amount that we're handing over to the banks since these assets will never be tested against the market. This is what makes it the politically easy approach.

I think most people accept the need to improve the capital position of the banks but it needs to be done in a more transparent way. The current approach forces the people whether they like it or not to take a massive (tens of billions) punt on the future value of these assets or the underlying land.

nesf

deiseman21 wrote: »

the foreigners aint buying ithttp://www.cnbc.com/id/15840232?video=1085923367&play=1

Personally I've a sinking feeling that they haven't given the markets enough details of the actual mechanism which is most of the problem above. Plus the whole 90 billion figure was a mistake. It's the present book value of all the assets of this class rather than what the NAMA agency will actually spend on assets.

nesf

SkepticOne wrote: »

The unfortunate thing is that we may never know the amount that we're handing over to the banks since these assets will never be tested against the market. This is what makes it the politically easy approach.

Yeah except there is no functioning market for these assets right now. Which is part of the whole problem. There isn't really a market to test these assets against right now.

Personally I'm reserving final judgement until they give us details of the pricing/acquisition mechanism.

deiseman21

nesf wrote: »

Personally I've a sinking feeling that they haven't given the markets enough details of the actual mechanism which is most of the problem above. Plus the whole 90 billion figure was a mistake. It's the present book value of all the assets of this class rather than what the NAMA agency will actually spend on assets.

doesn't matter perception is the be all and end all on the international markets