OVERVIEW:The enormous scale of the outlay involved in rescuing of the banks – through Nama and recapitalisation – is gradually becoming clearer, writes BARRY O'HALLORAN
THE STATE – or if you’d prefer, you the taxpayer – already owns one bank. As of yesterday, following an outlay of €21.8 billion, it is poised to take a majority stake in another, a minority holding in a third and will wind up with effective control of two building societies.
Along with this, Nama, which the taxpayer also owns, expects to buy €81 billion of property loans from AIB, Bank of Ireland, Anglo Irish Bank, Irish Nationwide Building Society and the Educational Building Society before the end of the year.
Yesterday it took the first step by taking control of 1,200 loans with a total value of €16 billion. Nama is paying €8.5 billion for these debts, which means that it is acquiring them at a 47 per cent discount. It will also pay discounted prices for the remaining €65 billion worth of loans. The actual scale of those discounts will not be known until it takes control of further tranches.
The agency is charged with cleaning up the financial institutions’ balance sheets, which have been left mortally wounded by the fact that each of them lent money to developers to buy properties at inflated prices at the height of the boom.
As property prices fell over the last two years, it became impossible to place a meaningful value on the properties against which the banks had lent this money.
This in turn made it impossible to place a meaningful value on the banks themselves. This scared off investors and acted as a major barrier to the banks raising money and prevented them from, among other things, lending money to functioning parts of the economy.
Between now and the end of the year, Nama will take all commercial property loans off the five participating banks and building societies.
This will in theory give them the opportunity to clean up their balance sheets for good, and hopefully raise money from investors and open lines of credit on wholesale money markets, so they can begin lending to solvent businesses and consumers.
However, before this can happen, the State will also have to give cash to each of the five institutions, in return for a stake in each. This is because the Financial Regulator, together with Central Bank governor Prof Patrick Honohan, say that they must raise extra capital to meet new standards designed to protect solvency and give them the scope to absorb losses.
Anglo Irish Bank’s loan book totals €72 billion, €36 billion of which is heading for Nama. It is handing over €10 billion in the first tranche.
Minister for Finance Brian Lenihan warned yesterday that winding up the bank would cost more than keeping it going.
Taxpayers have already provided it with €4 billion, and will have to hand over a further €8.3 billion this week. Mr Lenihan said that it could require up to €10 billion more, bringing the final bill for nationalising Anglo to €22.3 billion. The cost of winding it up is estimated at €30 billion.
AIB will ultimately have to transfer €23 billion in loans to Nama, and is transferring €3.29 billion. The regulator wants it to raise an additional €7.4 billion. The bank will have to begin selling businesses that it owns in the US, Britain and Poland.
This will not raise enough capital. If it has no other option, the Government can convert preference shares that it holds in AIB into ordinary shares, leaving the State as the bank’s majority shareholder. AIB has already received €3.5 billion from the taxpayer.
Bank of Ireland will ultimately hand over €12 billion worth of loans to Nama, and is transferring €1.93 billion in the first wave. It needs to raise a further €2.7 billion to meet the new standards required by the regulator. The bank has already told Mr Lenihan that it can raise this cash. The State has given the bank €3.5 billion and is likely to end up with a minority stake in the bank.
The State will end up with effective control of the EBS and Irish Nationwide.
The EBS will ultimately need €875 million, and is getting €100 million immediately. In addition. The State will give it a promissory note, a sort of IOU, that will allow it to call on more capital. It will transfer €1 billion to Nama, €140 million in the first wave.
Irish Nationwide will get €100 million in cash and a promissory note worth €2.6 billion. It will transfer €9 billion to Nama, €670 million in the first tranche.