"Whether bankers are gambling for resurrection, or running for cover for fear of losing their jobs, more capital is called for. The international evidence on this point is clear: capital is a prerequisite for recovery...''
Patrick Honohan, Summer 2009, The Economic and Social Review
Brian Lenihan's speech introducing the second stage of the Nama bill contained a few genuine surprises. Nama is purchasing €77bn of loans, not €90bn as previously promised. The much trumpeted 'risk sharing' mechanism demanded by the Greens turned out to be more about risk than sharing, with only 5% of loans being paid for using subordinated bonds. The suggestions before the Lenihan speech was that up to 20% of all the loans could be paid for via subordinated debt.
But the real surprise, and it was a frustrating surprise, was that Lenihan opted, presumably on advice from officials, to avoid telling the markets, taxpayers, shareholders and debt holders, what the government estimates the five banks need in additional capital.
This capital is not the front-loaded capital being provided by Nama bonds, but the capital that will have to be funded by direct government borrowing, via the usual route of the European bond markets.
Lenihan's rather nebulous commentary on the subject of bank capital was not received well by even Dublin's stockbrokers, who are regarded as being far more government friendly than the 46 academics who've been assailing Nama for weeks.
"It is likely that some institutions will require additional capital in order to absorb the losses arising from the transfer of their impaired assets,'' was all Lenihan would say on the subject on Wednesday.
This drew a somewhat perplexed response from Dublin's stockbrokers, who have been trenchant Nama supporters since the idea was first floated by economic consultant Peter Bacon.
"The minister made no reference to required capital levels post-Nama, which surprised us. One source suggested to us that this has not been decided yet, so we are trying to square the circle here,'' said Davy analyst Scott Rankin.
Other stockbrokers in private are not so sanguine. They believe it is a major miscalculation by the government not to release their capital requirement estimates for the banks. While bank shares surged in the wake of a less than harsh 'haircut' on the loan assets, Goodbody has warned that future capital requirements is what shareholders should have been paying attention to.
"Our models show that valuations are starting to look stretched when the market comes around to recognising the substantial capital requirements of the Irish banks over the medium term,'' said the broker.
The decision by Lenihan not to release the vital capital information became even more peculiar later in the week when individual banks giving their own estimates for how much capital they require. AIB told the market it could raise €2bn of capital either from asset sales, a rights issue or an outside investor, while Bank of Ireland said it could generate capital "internally'' or through a rights issue.
Most observers believe the €2bn is the absolute minimum amount of capital AIB is going to need to weather the remainder of the banking crisis. As for Bank of Ireland, a capital requirement of €1.7bn is the bare minimum, according to most of the Dublin brokers.
The reason for the government's coyness over capital levels is said to relate to the fact that most loans have yet to be officially valued, but modelling of the broad nature of the portfolios is surely not beyond the Department of Finance and its advisors.
A darker motive for not releasing the capital figure is that a large portion of the requirement is likely to relate to Anglo Irish bank, the nationalised property lender. The government is buying €28bn of its loans, although by late last week, the write-down on these loans was not being disclosed by Lenihan or Anglo Irish Bank itself.
Anglo Irish Bank would be insolvent if the Nama loans were moved out tomorrow, but the bigger problem for Lenihan is filling the huge gaping hole caused by writing down these loans in the first place. To bring Anglo Irish bank's capital up to 5% equity would cost €3bn; to bring it to 6% would require €3.5bn.
If the minister had disclosed these horror show figures on Wednesday it would have triggered another fresh wave of indignation over Anglo and its poisoned legacy. Irish Nationwide, meanwhile, would also be insolvent if the Nama loans were transfered tomorrow and it's going to cost at least €1.5bn to fill the capital hole in its books.
It is clear that the Department of Finance has wide ranging and detailed data on the loan books of the banks and consequently their capital deficiencies.
"There are the institutions in which we have had the opportunity over the last year to carry out the necessary due diligence, analysis and stress testing,'' Lenihan admitted last week.
Unlike authorities in the US, these stress test results have yet to be released in Ireland and probably never will. But while this is partially understandable, the decision to now allow all five institutions to "explore all available options for raising such capital'', seems a strange one when the minister himself was only saying recently to this newspaper he wasn't prepared to wait forever for private capital to come along for the banks.
The urgency of getting capital into the banks cannot be underplayed. Patrick Hologan, the new governor of the Central Bank, has written persuasively on this point (see quotation earlier).
"Times such as the present induce... managers to become more risk averse for fear that their actions will lead to bankruptcy. If capital is low, this implies a highly conservative policy for lending and other activities. This seems closer to what we are observing in the larger Irish banks today''.
The failure to move forward purposefully on capital injections was not the only missing element in the Nama proposals last week.
The banks also have not been given tangible targets for lending, with Lenihan only saying that "in terms of specific credit supply measures attaching to Nama, the government continues to examine options''.