The State is borrowing from the Banks

Dannyboy83

http://brianodoherty.ie/wp/featured/2009/09/nama-is-manna-for-the-state/#more-280

I have just sent the following as a comment to Simon Carswell in the Irish Times, today, in response to his article " State takes the pain as NAMA tries to keep banks afloat"
"Simon , You are saying, or at least implying, that the State is borrowing funds to bail out the banks. "The State might be paying €54 billion for the loans, but this represents just the upfront cost..." And.."..the Government is borrowing €54 billion at a very favourable rate of about 1.5 per cent.."
The State needs a bail out

The State is neither paying money nor borrowing money to bail out banks! Smoke and mirrors has the nation confused.
The State is Not borrowing from the ECB...Later, the banks might do so, using NAMA bonds as collateral. The State is borrowing from the Banks !!...Taking 54 billion or so of bank's assets against State IOUs!...Do you not see that as a Borrowing deal? If it is not a lending-borrowing transaction, why is the State issuing "bonds", and paying interest?
I have been pleading in BrianODoherty.ie for some journalist to ask the Minister the question: What does the State intend to do with the money- cash- it receives through NAMA as it gradually liquidates the banks' property? Maybe 54 billion euros of property, over some years..(and more in my view) ! Will the State immediately hand back the cash, and take back some of the bonds?..or will it keep the cash for a little while- say ten years or more- and use it to finance the government budget deficits, thereby saving the taxpayer the need to shell out 54 bn in extra taxes? (And, it will be borrowing courtesy of an enormous subsidy from the banks...1.5% interest, compared to normal Irish government borrowing rate of 4.5% (= c. 30% of the principal sum over ten years !)

That is, the special interest rate alone which the State is insisting on will mean something like 15 bn. of income foregone by shareholders over ten years. Its about time that we showed some gratitude and sympathy for these shareholders, ordinary middle class Irish people, whose assets we are raiding in this time of State near-bankruptcy!.
"
I hope he publishes.
The fact of the matter is that the State is in "pain" because the regular tax base has been destroyed, by bad government policies of the last decade, and extremely poor political opposition, lacking any better policies. All of them, and supported by a willing media and a silent or misguided academia, allowed an enormous property bubble to develop, persued an "industrial" policy based on tax scavenging of other nations' tax revenues, and placed too much reliance on foreign mobile industrialists for our future economic welfare. We were naive, and stuipd, and even ignorant, and some of us were greedy, too.
Now we are, as Colm McCarthy let slip, nearly "bust", and the tax base is wrecked. So, to maintain a minimum of traditional services, so as to not scare the populace, and to stave off social revolution, we need, desperately, to raise an extra five to ten billion in government revenues annually for many years, over and above that which has already been indicated must be found from extra taxes and cuts. The taxpayer will not provide such extra sums. So, we can't even tell him about it. And the international debt markets will not provide such sums to Ireland, indeed no more than the occasional billion or so here and there, and then only at an interest rate of 4.5% currently, which reflects their perception of Irish sovereign risk.
So, along comes NAMA. Its not "nama", it MANNA, from heaven...A scheme whereby the State can raid the banks assets, to use them for its own purposes, and then pretend that the banks are baddies and deserve their fate !...More annon.

I'm having great difficulty understanding the rhetoric here.
Can someone dumb it down for me please?

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It is very confusing.
I've taken a look at this O'Doherty blog and I think his thesis runs contrary to most commentators.

He is making out that NAMA is a great deal for the Irish taxpayer (!!) and furthermore holds out a conspiracy theory that it is designed to raid the "assets" of the bank shareholders by using the Banks as a proxy for allowing the Irish state to raise debt at a great discount to the rates imposed on us in International markets due to our poor sovereign credit rating (we are in there with the PIIGs, Portugal,Italy and Greece).

There are small grains in truth there. I think the banks may indeed use some of the NAMA raised cash which they get from ECB repo operations to buy into some Irish government debt so as to adjust their portfolio because, despite the spin , NAMA won't provide enough of an incentive for the banks to use the extra liquidity they get to make new loans to businesses.

However, his thesis seems to be based on his belief that the "assets" that the state is getting in exchange for the NAMA bonds will more than pay for themselves. In other words he is ignoring the common view that the assets will be overvalued and that Long term economic value has been adjusted to boost up the amount gifted from the state to the banks to avoid the state having to take larger equity control in the banks. He also seems to be under the delusion that this 1.5% rate is something which will be available for the lifetime of NAMA. There is a lot of confusion over this and the common wisdom is that the bonds may be short dated and the rates will rise in accordance with ECB rate rises. Also the almost unlimited ECB repo operations will wind down sooner rather than later so the 1.5% - borrow short to lend long fallacy will break down.

I can only imagine that he is an enraged Bank shareholder (and many of us are even indirectly on account of pension schemes) and that he has taken an irrational stance that NAMA is all about screwing the Bank shareholders value to help the Government stave off the inevitability of tax increases.
Again I think he is deluded into thinking that the Banks assets are strong enough that they are not technically insolvent (pre-NAMA).

Sorry - hard to simplify or dumb down what is being said here.
Maybe someone else can chime in and analyse this guys position.