My bet is NAMA will lose €12bn and bank customers will pay for it

THE NAMA debate has moved on. This week and next, the Dáil will amend the detailed provisions of the legislation.

There is a general acceptance that the broken balance sheets of our banks have to be addressed. Our economy cannot afford zombie banks.

The mechanism of converting illiquid debts into cashable bonds provides a way forward. The Government and the taxpayer need an exit plan from the state bank guarantee. The publication of the draft business plan has exposed NAMA’s fundamental flaw — the overpricing and false valuation of the banks’ assets.

The Government’s agreement to pay €54bn for the banks’ toxic debts must be revisited. Since commerce began, business plans are designed to please. Bankers, shareholders and potential investors have to be courted with positive prospects of profits. By definition, they are optimistic and pleasing. They rarely, if ever, adhere to their targets.

The 35-page NAMA thesis is a statement of hope. Would judges Peter Kelly or Frank Clarke in the High Court give it the same treatment as Liam Carroll’s Zoe business plans? Fanciful and artificial. Would that the taxpayer could refer it before giving our banks such a bailout?

The key assumption underlying the plan is that the level of loan default will not exceed 20%. Should this rise to 33% the same plan will yield significant losses to the taxpayer.

The ESRI has forecast the ultimate decline in the residential property market, from peak values, will be 50%. Commercial property is projected to decline by a similar amount. These two portfolios are as good as it gets.

Unfortunately, two-thirds of the NAMA loans relate to greenfield sites, zoned land, development projects and properties without tenants. NAMA cheerleaders say we cannot extrapolate from the particular to the general.

The Ringsend former glass bottle site has reduced in value from €413m to €60m. The realisable value of the Carroll group assets is currently €300m in exchange for debts of €1.3bn. Can we really believe these specific, tangible, known examples are untypical and unrepresentative? NAMA hasn’t yet scrutinised the detailed files of individual loans.

The plan outlines the costs of running NAMA. Over a decade this is estimated at €2.64bn or €240m per annum. This burgeoning bureaucracy and its panel of valuers are being entrusted with €54bn of our money. We desperately need a strong independent NAMA board and chairman. Let’s hope the voices for sanity on the valuation issue will be afforded a seat at the table. Perhaps Michael O’Leary could act as chairman. This board will have an additional €5bn to fund the completion of construction projects. Their development expertise is unknown, their modus operandi and criteria entirely vague.

Foreign debts make up 30% of NAMA’s loan portfolio. We are exposed to an exchange rate currency risk. The likelihood is that interest rates will move upwards over the decade.

As the global economy moves out of recession, our ECB masters priority will be to curb inflationary pressures by increasing rates. This can only put more pressure on borrowers to default. Non-performing loans represent the biggest risk in the NAMA plan.

NAMA’s operations relate exclusively to the five Irish financial institutions which are subject to the state bank guarantee. Ulster Bank, National Irish Bank, Bank of Scotland and the ACC have all operated here during our property and credit bubble. They are estimated to have €60bn of potentially toxic loans. What are they doing instead of NAMA? It has emerged over the past week that they are moving towards a private sector commercial equivalent of NAMA.

The Asset Resolution Corporation (ARC) is being established to purchase distressed impaired assets from these banks. It is intended that this will be funded by investor finance, such as pension funds. The model is not dissimilar to NAMA. It is parallel. A key difference is that it anticipates releasing the banks from their toxic loans with a 40%-50% haircut. They are funded by hard-nosed realists, whereas NAMA can rely on zombie taxpayers.

The Dáil is due to be entertained by a massive number of proposed amendments. Fine Gael’s tally is 99 while Labour has a further 56. A lot of these focus on the plight of mortgagees. The Irish mortgage market comprises 650,000 loans, with total finance of €148bn. It is estimated up to 200,000 mortgages may enter negative equity (ie, the loan is worth more than the house). A moratorium on house repossessions and other forms of respite are being advocated.

While this is good politics, it exposes a further risk to NAMA. At any point in the next decade our political masters may choose to use it for votes. Why not convert empty residential accommodation into social housing for local authority tenant applicants? We could use NAMA’s green field sites for public infrastructure projects, such as public transport and amenity areas. The potential for social dividends are limitless. The worst aspect of NAMA has been the lack of transparency. Just how bad is the story from Anglo Irish Bank and Irish Nationwide Building Society? The taxpayer has already stumped up an irrecoverable €4bn for Anglo. We will be caught for a further €3-6bn. Even the EU Commission wants this disastrous institution wound up. The €5m minimum threshold of loans eligible to enter NAMA is being set aside for these establishments. Who knows what fraud or rogue activity may be contained in these manure heaps? Phantom equity and multiple debts on the same secured property are inevitably going to be revealed.

EVERY time scepticism is raised about NAMA’s business plan, there is a predictable response. “There is no alternative” and “our banks are systemic and must be saved” are Pavlovian defences. This is glib and facile.

NAMA can be made work if it sticks to market principles. The more we adhere to current realisable values and less long term economic hope estimates, the better are our prospects of success. The ultimate issue is the extent of bank recapitalisation post NAMA transfers. JP Morgan estimates AIB and Bank of Ireland may need up to €11bn. The best option for the taxpayer is to maximise the hair cut and then shovel the cash into our banks as shareholders. This ensures we, rather than bankers’ bonuses and speculative shareholders, get the gain.

There will be a new dawn for our banking sector. This should involve a new merged entity of EBS, Nationwide and Permanent TSB. Our retail branch network has significant over-capacity and needs to be rationalised. Banking costs need to be severely reduced. Irish banks have bluffed and arm-wrestled our Government and bureaucrats into submission.

This business plan is merely desktop spreadsheet economics —make up your own set of figures. My best guess is that NAMA will lose €12bn. A future banking levy to recover this will be passed on to customers rather than shareholders. The solution is simple: proceed with NAMA, but do not allow it to overpay for defaulting loans.