For our children’s sake, let’s hope NAMA can beat the sharp operators

AFTER months of fevered activity in the attorney general’s office, the NAMA bill is ready – the most significant legislation in the history of the State. Its 400 pages and 200 sections will nationalise massive chunks of the property and lending market. It is the most speculative gamble by any government to rescue the banks. There is no international precedent for such State intervention.

Government, financiers and property developers say there is no alternative. We agree fixing the banks is a fundamental prerequisite to economic recovery. We accept that if every bad property loan was to be liquidated the market could not cope. An orderly period is necessary to allow the market to stabilise. A mechanism is required to manage these assets and then dispose of them. That’s as far as the consensus goes.

Substantive answers rather than glib assurances are required. NAMA could become an economic suicide mission for this State. Before Dáil approval, we need to be convinced the Government is not making it up as it goes along. I have six concerns.

1. The NAMA debt could engulf our public finances.

The national debt increases by €25bn this year due to the imbalance of spending over tax revenue. This fiscal crisis requires crude and savage adjustments to public spending and tax hikes. The collapse of our tax revenue has resulted in a structural deficit of 12.5% of GDP. An additional €80-€90bn of toxic bank loans, while our GNP is €175bn, may simply be too much to manage.

Other countries have exited from blanket bank guarantees. Over the period 1993 to 2007 a number of countries have had to cover the liabilities of their banks. These include Finland, Sweden, Indonesia, Japan, Korea and Turkey. They did not risk the submergence of their states’ finances. The scale of our net bailout is equivalent to one year’s tax revenue, as the IMF calculates the bank losses through the end of 2010 to be €35bn. This equates to 20% of our GDP.

2. The taxpayer will get screwed.

The narrative presented to the commercial court recently has been truly frightening. Liam Carroll’s Zoe group is reported to have liabilities of €1.3bn. An immediate enforced fire sale of these assets might yield €400m. John Fleming’s Tivway company was subject to ACC legal proceedings to recover €22m. More spectacular examples of toxic negative equity have yet to emerge. Irish banks demand a sweetheart deal from NAMA. The “mark to market” ratio may be as low as 14% of bank loan book values. Astonishingly, we hear maximum discounts may be only 33%. We await credible answers as to the transparent valuation procedures that would protect the taxpayer. Our bankers and property developers are in total denial. Will a national valuation board, separate to NAMA, be established, as was done in Sweden?

3. Property paralysis.

Before embarking down a road from which there is no turning back, we need to assess the long-term impact of NAMA’s giant property portfolio. The management of NAMA’s assets will be a massive undertaking. What policy will they have in relation to rental movements and eviction of tenants? How long will it take eventually to dispose of these properties?

Will there be an overhang on the market of NAMA’s property portfolio for 15 years or more? Who will provide the finance to buy back the assets from NAMA? Public policy awaits.

Each property loan and asset will require a business plan and disposal strategy. NAMA could be given powers compulsorily to acquire adjoining lands. President McAleese will have to assess this legislation’s constitutionality. Property owners’ rights have been enshrined and vindicated consistently by the Supreme Court. National Treasury Management Agency boss Dr Michael Somers has already warned of a legal bloodbath in the Four Courts.

4. Cronyism.

Dublin city has a village mentality. “Players” are connected with the “right people”. NAMA made a questionable start through the appointment of professional advisers. Arthur Cox Solicitors retain some of the best legal brains in the country. But is it appropriate that the same law firm should act for the minister for finance, Bank of Ireland, NAMA and perhaps other individuals affected by this legislation?

Anecdotes abound about past sightings of Seán Dunne, Sean FitzPatrick and Bertie Ahern in pubs during the Celtic Tiger era. Nothing sinister involved, just a cosy intimacy between the world of politicians, bankers and developers. Personal friendships will pose potential conflicts of interest in relation to individual properties and loans.

Previous legislative bailouts such as Larry Goodman’s examinership and AIB’s ICI debacle provide ample evidence that individuals at the epicentre of insolvency may prosper, while the public shoulder the costs and risks. Rumours are rampant that our largest developers are transferring properties to spouses and relatives to circumvent “personal guarantees” being invoked to seize their lucrative personal assets.

5. No upside for the taxpayer.

The Government has opposed any public ownership for either AIB or Bank of Ireland – €3.5bn was paid to each of these banks, along with a further €3bn for Anglo Irish Bank. This €10bn doesn’t entitle the public to a long-term equity stake. Harsher criteria on property valuations and discounts would crystallise heavy losses on the banks’ balance sheets. The State could acquire a majority stake through recapitalisation. This is a conflict between taxpayers and bank shareholders.

FIVE years hence, this banking crisis may be a distant memory. If the state cleans up their accounts, the culture of mega profits and whopping salary bonuses could then return. Early signs show this in the US and Britain. The Minister for Finance is powerless to prevent mortgage interest rate hikes. Less competition among banks is inevitable.

The IMF stated “that pricing of bad assets would be easier under nationalisation”. The NAMA agenda poses less risk for the taxpayer if there is a common ownership through temporary nationalisation. As of now it looks like all pain with little gain.

6. Still no credit for business.

NAMA is supposed to restore the banks to health so they can lend to small and medium enterprises. Endless business surveys by the Small Firms Association, ISME, retail organisations and sectoral groups reflect a lack of availability of loan credit and working capital.

Typically, we hear of interest rate charges being systematically increased by 0.5% to 2% for viable businesses. Existing credit facilities are being rolled over rather than any extra cash.

Banks’ first priority, further to their bailout, will be to pay off the State’s preference shares and bondholders. The sharp analysts advise there is little prospect of extra credit for two years. Banks will not be compelled to lend to small businesses.

In summary, Brian Lenihan, Brendan McDonagh and Peter Bacon need to convince us that NAMA can navigate this minefield of smart suits and sharp operators. If NAMA is outmanoeuvred, a generation will carry the costs for more than two decades. We need an exhaustive preemptive summer debate to avoid future regrets.