A Day to Rejoice

Économiste Monétaire

Patrick Honohan to be appointed CB Governor:
http://www.rte.ie/business/2009/0903/centralbank.html

Chatter about this has been going on for months, I think it's a great choice.

silverharp

i dont mean this to be cranky but does it matter much who runs it now?

Économiste Monétaire

silverharp wrote: »

i dont mean this to be cranky but does it matter much who runs it now?

I think so. Check out his slides on NAMA at a recent conference: here. Slide 28 has a brief outline of a NAMA 2.0. Given that the Governor will be a principle advisor on NAMA going forward, I think his position would matter. Also, as far as I am aware, he's been quite critical of the lack of information provided to the general public (including himself and other economists trying to analyse the situation) coming from the CB and Financial Regulator.

I think it's a great leap to have someone who actually knows something about economics as the head of our central bank and sitting on the GC of the ECB.

http://www.esr.ie/Vol40_2/Vol-40-2-Honohan.pdf

Continued share price weakness, and increasing reliance on bank borrowing from the ECB (Figure 10) ensured that further steps to recapitalise the banks and remove the worst overhanging problem assets from their portfolio could not be indefinitely postponed. In early April 2009, the Government outlined its plans for a huge asset purchase scheme, designed to replace between €80 and €90 billion (book value) of loans from the banks’ balance sheets with low risk and marketable Government-guaranteed bonds requiring less regulatory capital backing. The loans are to be written down to market value before being purchased and the Government has clearly stated that any necessary further recapitalisation by it would be made in the form of new equity. Such an equity injection would strongly – perhaps fully – dilute the current shareholders’ interest, depending on the scale of the write-down that proves necessary.

The loans purchased in this operation are to include all of the development property related loans as well as “the largest property-backed exposures” of the participating banks. By centralising the development property portfolio of the banking system in a National Asset Management Agency (NAMA) – and removing problem loans from the lending teams that made them – it is hoped that a better job will be made of managing loan recovery.

Whatever price is paid for the assets purchased, the taxpayer is absorbing risks from shareholders and creditors of the banks. This risk-shifting extends beyond the lifetime of the current bank guarantee, and extends to those who are not currently guaranteed, as well as to the shareholders.

Concerns that the taxpayer would end up paying too much because of deficient pricing could be allayed by refining the NAMA proposal in a way that also achieves a better risk-sharing. Instead of simply paying a fixed best estimate price for the loans, a somewhat more sophisticated financial restructuring could be envisaged. Specifically, NAMA should make a two-part payment. One part is in bonds, but is pitched below the estimated value of the assets purchased. In addition, the bank shareholders – and possibly other risk capital providers – would be given some stake in the upside of NAMA’s eventual returns (for example by giving them an equity stake or warrant in NAMA). This would protect the taxpayer while being fair to the shareholder, and still removing the risk from the bank. This plan would, of course, increase the likelihood that the shareholder’s equity in the banks is wiped out following the asset sale, with the Government then holding a 100 per cent ownership stake, at least until new equity investment can be raised.

Achieving a good governance of NAMA is evidently crucial to ensure that it achieves its goals. But this is not easy to ensure. For example, transparency could run up against current banking secrecy laws: this issue cannot be brushed under the carpet if the integrity and credibility of NAMA is be assured. After all, many of the borrowers whose loans are being transferred are high-profile individuals who will vigorously contest efforts of the loan recovery operation. It is hard to see how costly and protracted litigation, not only on the constitutionality of the proposed scheme, but subsequently on individual recovery action, can be avoided. Ensuring that NAMA can overcome these difficulties and achieve the hoped-for efficiencies in recovery will be a challenge. The mandate of NAMA will also have to be unambiguous: if its recovery actions threaten employment will it be asked to stay its hand? Like state-owned banks all over the world, it is very easy for an asset management company to morph into an off-budget grant agency incurring hidden additional costs to the taxpayer.

Some of the Asset Management Companies put in place to deal with bank insolvency in various countries over the past quarter century have been deemed successful. The Swedish case is often mentioned, though at less than 8 per cent of GDP, it was managing a much smaller portfolio than envisaged for NAMA (50 per cent of GDP). The US and Spanish schemes of the 1980s also did well, but they were even smaller. The jury is still out on others, including the massive scheme in China, now into its second decade of operation. Some did not fare so well, including those of Mexico, Indonesia, Philippines and Senegal, all of which were contaminated by politicisation. With Ireland’s stronger societal institutions we should be able to avoid some of these pitfalls, but only if there is careful planning and if adequate legal and administrative structures are put in place. There is no obvious template which can be simply transplanted here.

After the write-downs, the banks too will likely be wholly or largely Stateowned. This will give rise to similar issues of governance and of the potential conflict between pursuit of shareholder value and some short-term politically sensitive consequences of prudent bank practice.

(pp. 226)

Time Magazine

Hurrah!

Congratulations, Prof. Honohan. A nicer (and more competent) man you're unlikely to meet.

techdiver

It's great to see that it has finally been established that we need qualified people in our top jobs. Appointing senior civil servants to top jobs based on length of tenure or who they know has proven to be disastrous for this country. Hopefully this is a sign of a shift of thinking on appointments to high offices.

Next up, Department of Finance. About time we had qualified people in there too.

DJDC

Good to someone with a good academic background and international working experience getting the job. For too long incomponent pen pushers and bean counters have been making decisions they are ill qualified to make.

More economists, scientists and engineers and less accountants, teachers and solicitors is whats needed throughout the civil service.

Flamed Diving

It would be great if the gov. took some of Paddys ideas about NAMA onboard, such as risk-sharing, but I am sceptical on two counts:

1) Given that NAMA is under the stewardship of the NTMA, does this even fall under his remit?

2) Given the popularity of Honohans alternative approaches to NAMA, is this simply a case of being swept under the rug?

http://www.independent.ie/business/irish/tcd-expert-to-be-named--as-central-bank-chief-1876748.html

in the mid-1980s when Prof Honohan was economic advisor to the then Taoiseach Garret FitzGerald.

http://www.irishtimes.com/newspaper/finance/2008/0919/1221690003389.html

IN MARCH 1985, the Government was forced to take over the Insurance Corporation of Ireland, a subsidiary of AIB, and bail out the bank after the insurer started incurring substantial losses on high-risk insurance policies.

The bank told the Garret FitzGerald-led government on March 8th that it could not afford to keep pumping money into ICI.

The government was advised by the Central Bank and senior civil servants that future liabilities and claims on ICI's insurance policies could bankrupt AIB, destroy international confidence in Irish banking and damage the country's economic fabric

Dr FitzGerald was alarmed that loan notes to AIB could be withdrawn if any part of the bank or any subsidiary became insolvent. "That could bring down the bank and finish the whole system," Dr FitzGerald said two years ago.

"This was a mad way to have arranged a banking system as vulnerable as that. The bank put it to us that if we didn't bail them out, they could go under."

The State purchased ICI for £1 and assumed its debts.

oh how it all sounds so familiar :rolleyes:

Anyway I wont be jumping for joy or proclaiming it a day to rejoice just yet. History has shown that to be folly. But for those who havent read it here is his paper on Resolving Ireland`s Banking Crisis.


http://www.esr.ie/Vol40_2/Vol-40-2-Honohan.pdf
^^

The Economic and Social Review, Vol. 40, No. 2, Summer, 2009, pp. 207–231
POLICY PAPER
Resolving Ireland’s Banking Crisis
PATRICK HONOHAN*
Trinity College Dublin and CEPR
Abstract:

blucey

Flamed Diving wrote: »

It would be great if the gov. took some of Paddys ideas about NAMA onboard, such as risk-sharing, but I am sceptical on two counts:

1) Given that NAMA is under the stewardship of the NTMA, does this even fall under his remit?

2) Given the popularity of Honohans alternative approaches to NAMA, is this simply a case of being swept under the rug?

1) No
2) that would be an ecumenical question.....