The saga of Independent News &Media (INM) and the clash of the two Titans involved is the stuff of a Hollywood blockbuster. If you ever had the pleasure of reading a book like Barbarians at the Gate, you will notice the similarities in the characters, the battles and the likely outcome.
Maybe someday, someone will take this material and turn it into drama, but right now, consider the solution on the table and ask whether something like this could be used to good effect for our economy.
As the current spin is that ‘‘there is no alternative to Nama’’, maybe the structure of the INM deal gives us another option rooted in traditional corporate finance, rather than the financial experimentation that Nama represents.
So let’s examine the INM deal in broadest-brush terms. The company has run up huge debts which, if they were to be paid, might tip it into bankruptcy. It also has two major shareholders at each other’s throats for control. The sums of money involved in this battle are staggering, as are the potential losses. But the clash of the Titans – although dramatic – is not the key driver of the story.
The rudiments of the story are as old as the economic cycle. A big company rides the boom and expands using borrowings, which looked affordable when revenues were booming and the share price soaring. Some assets were bought which may not look so rosy in more straitened times. Then recession hits, revenues collapse and the debts look like crippling the company.
The company goes back to the debt holders and says: ‘‘Listen lads, we have a problem and, frankly, our problem is your problem. We can’t pay all the debts today, but we believe that the company will be able to turn itself around in the next few years, so why don’t we do something creative instead of folding the company and you having to take a loss today?”
The fact that Tony and Gavin O’Reilly and Denis O’Brien are wrestling for control of the company is fascinating, but it’s not really the nuts and bolts of the story. The major narrative is whether they will have anything to fight over when the recession lifts. Park the individuals for now and look at the solution.
The bondholders have decided that it is in their interests to swap their debt for equity in the company. They have made a call, which can be summed up as follows:
‘‘We believe the company will make money in the future and therefore we have ‘hope value’. Otherwise, if we were to enforce the contracts for all the debt repayments now, we would strangle the company, and everyone, including ourselves, would lose.”
They have decided to take shares in the company, instead of debt. This means that the major shareholders lose significantly but, importantly, live to fight another day.
The bondholders now have a huge interest in the company turning itself around, because they will be paid through the share price. The fact that they bought the shares at close to rock bottom implies that they lose cashflow today in the hope of capital gain tomorrow.
This, in essence, is what has been achieved. The debt equity swap is one of the oldest tricks in corporate finance and is standard practice for companies and countries that find themselves in a debt induced quagmire after a boom fuelled by too much borrowing.
Now, armed with this template, let’s look at Ireland and our banks and housing mess. Let’s start with the people, not the institutions, because economics is about people, not bricks and mortar or corporate logos. Nobody in Ireland cares where we bank our money, as long as the bank is robust. This is the crux of the problem with Nama. Brian Lenihan, the Minister for Finance, seems to believe that the banks and their survival matters, but they don’t. Only the people matter.
The minister seems to believe that you can’t screw the bondholders, but the INM deal reveals that bondholders are eminently sensible and will do deals which make sense. It also reveals that the creditors are wise enough to realise that they too share some of the blame for lending too much to the company in the first place.
If they were happy to share the gain in the good times, they should be ready to share the losses in the bad times.
Despite all the international evidence, our government seems to believe that, if you do a deal with creditors of banks, you are screwing them. Furthermore, the Department of Finance contends that, if you screw bondholders now, the next time you go back to the market, they won’t be there for you.
In contrast, it knows that it can screw the people now, because the next time you go back to the Irish people, we will still be here. Unlike the bondholders, we can’t go anywhere; so we get screwed by the very people who are supposed to be acting in our best interest.
But it doesn’t have to be like this. What if the state looked at all the negative equity in the mortgage market – some 300,000 people at this stage are in this position – and dealt with the long-term solution to this huge and terrifying problem which is shattering families all around the country, by taking the equity in the house.
Why not create a new bank, let the rotten ones go and do a deal with old creditors based on their sharing the responsibility and the potential upside?
We could easily say to the people in negative equity that we are going to write off half the mortgage in their house, so that they can stay in it and try and sort out their lives without all the trauma of defaulting.
In return, the banks’ creditors would own a certain proportion of the house and the homeowner would pay them a small dividend every year. When it came to selling the house – let’s say in ten years – the banks’ creditors and the homeowner would both share any upside.
So we create a debt/equity swap for the nation. No need for Nama, no need for higher national debts and no need for a monster property company, which will jam up the system for years. We also wind down our banks, create new ones and keep the bondholders on side with the new deal.
This is what happens in the real world. This is what happened at INM and it is what adults do when faced with a problem: we find a deal. It’s not unusual, it’s capitalism.
McWilliams Cleaning Solutions : by Moonpower ( formerly The Medicine Hat Show ) Edited and tuned to the Moon ( includes ingredients from German Runic Stones and Emperor Napoleon War Benefit Relief ) ( don’t mention comic) Projected Results : Part 1 Ireland Inc ( Top of The World National Debt Performance ) Ref: 00000000000000000B Directors: FF Cabinet ( to be removed immediately)- replace with ‘we are not sure’ MD: Brian Lenihae hung dried and smoked) — replace with ‘still don’t know’ Chairman : Brian Cowen ( Machiavellian & Poisoned Chalice Manager )( to be replaced any alcohol free Showbiz… Read more »
Fianna Fail Jailors Whore House Ireland Inc ( Captive State in Liquidation) ref: €90B Directors: FF Cabinet ( in the bar most of the time ) MD Brian Lenehan ( Slave Trader ) Chairman : Brian Cowen ( Machiavellian & Poisoned Chalice Manager ) Creditors : International Bondholders ( Slave Farm Owners ) Secured by Charges on All Irish Taxpayers and Passport Holders that are now deemed indentured as Irish Slaves indefinitely to Deep Black Vortex PLC ( under stewardship of ECB and soon to be IMF c/o Zimbabwe ) Shareholders : ALL Old Age Pensioners who got screwed by… Read more »
There are several aspects to this article. First the banks are capitalistic enterprises. Lenihan seems completely blind to this. But then this is to be expected. The Lenihans (including O’Rourke) are a clan of civil service employees – they completely misunderstand the profit motive. They also seem to take moral stances on ‘maintaining the pretence’ when it would be better to be completely honest. So Lenihan’s intellectual model for analyzing the banks is flawed. What David is saying is some elementary and intelligent that any eijet would get it. Except Lenihan, who has a mental construct, and an elabourate education.… Read more »
David, On the money as usual. You mentioned something similar to this idea maybe a year ago, no? I think essentially what you are saying is Ireland creates a ‘good bank’ that acts as a proxy for the renegotiated positions of Irish mortgage holders w.r.t. the banks bondholders. If the banks and bondholders were culpable in lending, then so, unfortunately, were the borrowers. This idea would require very careful structuring so that it did not result in smacktards with 15 times salary mortgages getting off the hook (by way of reduced mortgage payments), while more sensible mortgage holders are left… Read more »
When I was emigrating to Oz I was short of a couple of points . In order to gain the extra points I had to buy a $ 100,000 bond in a State government . I had 3 choices . Tasmania , South Australia or NSW . I knew nothing about bonds and neither did my accountant ( he concentrated all his efforts on sending me invoices ) Anyway with a bit of research over the internet and with the help of some friends in Oz we concluded that the SA Govt were the safest . In that they had… Read more »
Hi David, I like it when you come around to my way of thinking, ie: Lance the Boil, create a new good bank and jetison the ill ones that are listing. Shout it loud and clear. David: Nobody in Ireland cares where we bank our money … Brian Lenihan seems to believe that the banks and their survival matters, but they don’t. This is a key point. I am trying to figure out why any government would save our ill banks at all costs. Anglo is in a particularly bad state. The ECB and the E.Commision turned an initial blind… Read more »
Beanz Meanz O’Reilly and MiniCTC O’Brien fighting over a couple of newspapers reminds me of a couple of Maintz monks disputing a quiver of quill pens and a few sheets of vellum, when Johannes Gensfleisch bin Laden zum Gutenberg has opened his new printing shop just down the street. Web2 and mobile phones have changed the entire basis of world commerce. The new game in town is ‘who can get to a sales opportunity quickest with the mostest at the best price. Banks with 3-day clearance of cheques, employing armed military outriders for deliveries to ATMs, and offering zero percent… Read more »
Where is Furrylugs your Nation calls you .
The flaw of both Denis the Menace, and The Wily O’Reilly is that they are both are missing the business opportunity of a lifetime. Malcolm hits the nail on the head. Newspapers are a declining technology. And anyway much of the content is fairytales. Just look at the IT and it’s coverage of economics between 1997 and 2007. One article per week from such Einsteins as Dan McLoughlin and Austin Hughes. (eh, where are they now ?? :))) The two “big O” egos should get sense, and go into banking instead of papers. Buy one large building in West Dublin,… Read more »
We need to differentiate between two competing factors for predominance ultimately. The deposit base – which is savings of PAYE taxpayers for their own investment and future consumption, and which represents the future prospects of the society and economy. The misallocated money thrown into the property ponzi scheme – which will never come back, and which demads strong repayment. Violating number 1 is a violation of Article 45, Bunreacht na hEireann. Though I do not know if Article 45 has any power any more. Violating number 2 would destroy the careers of bankers, punish the rich for throwing money into… Read more »
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I don’t know if anybody seen Prof. Niall Ferguson’s documentary “The Ascent of Money”. There is one really good episode concerning Risk. For some reason, it suddenly seems relevant. I think it is the fact that current policy is about dissipating risk across the system. The problem here is that this will break the system. Effectively the public welfare state will be broken by the efforts to take risk out of capitalism. We have to accept that there needs to be pain, as a result of the correction. The fairytale mindset (it all ends happily ever after) is inately stupid-but… Read more »
David, while I admire your perseverance, I’m afraid you’re again ignoring the difference between government (specifically this one) and business. The deal between the bondholders and INM is (by in large) a deal between honourable business professionals who’s common goal is to make profit and they will work towards that goal, be it save a failing institution. They have a certain level of trust towards one another. Contrast the above to what bondholders would have to deal with, when sitting down to negotiate with our lads in charge or their civil servants. One sides goal would be to make a… Read more »
I believe the main stumbling block to David’s idea are the Mandarins in Merrion Square who only have one mindset and that is ‘what is in it for them alone’ .It is this cold poker faced little hitlers that have ruined the nation and the Government ( especially Berti ) did not try to stop that sooner .All of them need to be shafted by the appointment of an over see body appointed by the electorate and be seen to do that .
David, a very good idea; then again, I would find almost any capitalist solution better than NAMA. Deco is correct, too: Capitalist entities should survive by their own capitalist rules.
Here is a useful article; summary of issues we should have with NAMA and raise them with anyone who will listen, before its too late:
http://www.progressive-economy.ie/2009/10/guest-post-by-brendan-williams.html?showComment=1254831392365#c7860681842859430998
Couldn’t Agree More
Captain, aarrrrrrrrrrrghhhhhhh, our ship’ POnzi Rep’ is headed for the rock’s. $400,o00,000 per week borrowings to pay bills = heading for the rocks, rrrrrrrrrrrrrrrrrrrrrrrrrrrrrr. Taxx revenues falling off cliff, rrrrrrrrrrrrrrrrrrr. Competitiveness KAPUT, rrrrr. Captain, der ‘ar rumblings ya see amongst the crewww captain, rrrrrrrrrrrr The trough is running out, and the rich will get the lifeboats. Crony networks are a imploding and everyone is at each other throats captain. The public / taxpayer and the gov / bankers / corporate’s live in two different worlds. So, David, does your article reckon BL etc is bulldozing NAMA through on the basis… Read more »
Folks, Mark Little just left Nobel prize-winning economist, Joseph Stiglitz. He says, re NAMA, that the idea of overpaying banks for impaired loans is “criminal”.
I agree.
It should be on Prime Time tonight (if editorial policy allows the truth, for a change), just before DMcW’s new documentary, “Addicted to Money”.
Let’s keep at it!
Dear David McWilliams, What you suggest re the effective bail out 300,000 people in Negative Equity will simply never happen. Just one (of the many) reason(s) why: It simply punishes those who did not take what was a hugely risky punt Irish Property market. (Property it’s self being hugely risky investment vehicle, and Irish property even more so). In effect what you propose above would reward those who stood to (and in many, many cases did) benefit from buying Property ~ with a bail out. Punish those who did not take the risk (despite huge pressures). Please correct me if… Read more »
David, “We could easily say to the people in negative equity that we are going to write off half the mortgage in their house, so that they can stay in it and try and sort out their lives without all the trauma of defaulting.” Before you do that, please allow those of us who could not afford to get on the property ladder, the chance to buy a house (plenty out there I believe), to share in the bonanza of mortgages half written off. What about the part time landlords who expanded their little portfolio during the boom, do they… Read more »
gag,
http://www.gocomics.com/jeffdanziger/2009/10/04/
tim’s link.
When central bankers are giving interviews on how lucky we all are receiving triple this, and double benefit and quadruple child allowance it makes one truly queasy. One scratches ones head and ponders, where is this going, to borrow a phrase from malcolm mcclure, mind fu2k. Will we see bank officials handing out pamphlets on contraception at the bank. Will we be met with benefit recepient assessing scan checks before opening accounts, weird. What professional business is it for central bankers to be giving interviews across the meeja commenting on this. Oh i get it, the central bank us the… Read more »
Folks, confirmation, just in:
“The Ceann Comhairle has announced that he will resign his position next week when he will make a statement to the House.”
Folks, DMcW speaking major truth to ordinary people in his new documentary “Addicted to Money”!
He is explaining it in the “lady-bird” version, to bring more people “on-board”, in order that more people understand NAMA.
He is performing a major public service, I suggest.
Go, David, Go!
David, you really nailed it at the end of ‘addicted to money’ tonight. I’ve watched all the docu’s across all the station ‘s and some, regarding the financial firestorm, now underway, and this docu tonight ‘kicked some a$$’.
Folks, here it is, on JO’D: Taoiseach: 23.35: “In indicating his intention to step down from the office of Ceann Comhairle, John O’Donoghue TD acted in the best interests of Dáil Éireann, and the office of Ceann Comhairle. He has been a most effective and fair Ceann Comhairle who has acted with commitment and integrity to ensure that the members of Dáil Éireann ould debate freely and fairly the issues of the day. I thank him for his contribution to this Dáil as Ceann Comhairle and I wish him well for the future.” ENDS. Fall-guy! Can we, please, look at… Read more »
Folks, Roubini speaks:
Do not monetize deficits;
Do increase regulation.
Just another voice that can be used against NAMA?
http://www.rgemonitor.com/roubini-monitor/257791/
Cork (UCC) economist who has two articles on why NAMA is not such a bad deal (!!??!!) is inviting comments from readers:
http://www.corkeconomics.com/?p=639
Anyone want to tell him a thing or two?
Let’s keep at it!
Too much moral hazard here – better than NAMA, but I’m afraid if you took on a debt, you have to pay it back. I emigrated because property was overvalued. My brother is 38, married, 1 kid and rents. There were options to avoid paying stupid money for basic shelter. Why those who decided not to partake in the insanity should now not be rewarded while those who inflated the bubble get a reprieve is entirely beyond me. Not sure where this came from, but it seems pretty apt to describe what the world is up to at the moment.… Read more »
David, The more I think about this the more problems I seem to see with it. I’m sorry to be so negative. This +ve/-ve equity thing is also a red herring I think. As I suggested above, there are people who are in +ve equity who cannot afford to pay their mortgages, perhaps because of unemployment, but there are also people who are in -ve equity who can afford to continue paying their mortgages. Dividing people in to +ve/-ve equity categories is risky, as the real factor to be considered is affordability. I still think that a scheme like this… Read more »
Interestingly, when Batista, the brutal and vicious dictator of Cuba fled the country after the Revolutionary forces rolled into Havana, he loaded his plane with bars of gold and bags of cash, the amount is not clearly known but it was enormous sum, not too dissimilar then to the golden handshakes that we have been witnessing over the last year, culminating most recently with that man who claimed back his £1 donation to UNICEF! Let his name live forever (for all the wrong reasons).
http://www.independent.ie/national-news/ceann-comhairle-reclaimed-pound1-donation-to-charity-1905969.html
Mafia the lot, when will the people act?