THE second NAMA business plan explodes many myths expounded when it was originally advocated.
Then we were told of the long-term economic value of the properties it would take over, 30% haircut on bank loans and NAMA’s overall profitability.
Respected economists and academics highlighted the fundamental flaws of many underlying assumptions. They were dismissed on the grounds that “there was no alternative”. Banking experts such as Constantin Gurdgiev, Brian Lucey and Peter Matthews maintained NAMA would lose €10 billion. They stand over their predictions. Their credibility is rising. Brian ‘Bluffer’ Lenihan sounds less convincing as the facts emerge.
The minister assured us last week “there is no question NAMA will entail a loss to the taxpayer”. I beg to differ. NAMA was utterly naive about information supplied by the banks. They understood at the outset that 40% of the loans were being serviced with interest repayments. In April this was reduced to one-third and now 25%.
The banks have huge motivation to conceal the full horror. The worse the loan book, the higher the impairment, the less they would be paid in ECB/NAMA bonds. Bigger discounts would inevitability lead to a greater dilution of their existing shareholder base, as they would be dependent on more external capital.
All corporate executives’ modus operandi is to maintain shareholder value. The only way to achieve this was to screw the taxpayer – so be it. Their overriding obligation was to prop up their broken balance sheets. We should not be surprised that they deftly ran rings around civil servants and politicos. The lower the real value of their loan portfolios, the more likely full bank nationalisation.
The astonishing aspect is the compliance of the Government. Normal practices were abandoned. Due diligence on all information supplied and the insistence on warranties to safeguard the validity of data are standard business procedures. Bank bailouts dispense with commonsense.
We should not expect anything better from bankers than expedient self-serving information. But where were our public interest bank directors – Dick Spring, Declan Collier (AIB); Joe Walsh, Tony Considine (B of I); Tony Spollen, Anne Riordan (EBS); Ray McSharry, Margaret Hayes (IL&P); Alan Dukes, Maurice Keane (Anglo). All of them have to explain what steps they took to ensure accountability and the state was not misled. What purpose do they serve if they are not in a position to seek protection for the taxpayer? These dogs have not barked in public, nor apparently in private boardrooms. How can they explain why their banks did not retain rental income and instead allowed property developers maintain their lifestyles.
Lenihan has brilliant skills of eloquence that reduce financial complexities to memorable simplistic one-liners.
Anglo? “Whatever the cost it would be more expensive to close it down”.
Systemic business failure and unprecedented unemployment? “The recession is over, we have turned (another) corner.” The latest misnomer, if NAMA makes a loss? ‘All will be recovered through a bank levy in 10 years’ time.”
Who pays? Not Anglo, Irish Nationwide and EBS – we own them. Rest assured any putative purchaser of AIB or B of I will insert a prior disclaimer of non-liability against any levy as a precondition to acquisition. This levy fantasy is merely more short-term media management.
We must be grateful to EU commissioner Joaquín Almunia, who is now resorting to Facebook and Twitter to express anxiety about the Anglo business plan. He still has not approved that survival scenario. We continue to fund 1,200 staff who aren’t issuing any new loans and are transferring the majority of their toxic debt collection to NAMA.
Almunia has consistently insisted on market values being applied to NAMA transfers. The 50% discount rate is primarily due to his scepticism and resolute limitation on socialising bank failures. More is the pity that Judge Peter Kelly and his colleagues in the Commercial Court are not sanctioning it. It would get short shrift on the grounds of excessive optimism.
NAMA’s latest epistle has some intriguing new features. They propose to dispose of 25% of the assets by 2013 and 40% by 2015. Expect a fire sale of greenfield sites that no longer have construction potential. Trophy hotels will be closed and offered to the state, principally local authorities, for social purposes. These measures show how bogus all the bullology was about long-term orderly management of the property market. The dumping of these properties in distressed circumstances will increase NAMA losses in the short term. As 1,490 more borrowers move to NAMA, the interest premium repayable on ECB bonds will fall due. If three-quarters of these loans are not servicing any repayments, NAMA faces a cashflow crisis.
The overall arithmetic for NAMA commenced with the proposition of €77bn of loans in exchange for €54bn in bonds. This became €81bn for €40bn bonds, as discounts increased. Now, a new component has been introduced – €14bn of derivative financial instruments have also been acquired, mostly from Anglo. This is in addition to toxic loans. These are supposed to be ‘low risk’ interest swaps. We have no explanation of the downside exposure in the event of interest rate hikes.
NAMA is paying €11.2bn for these. Remember subprime lending? They were financial derivatives. No external independent appraisal or verification has been provided for this facet of the plan.
SLOWLY some visibility is emerging on the extent of the overall taxpayer exposure for the Government’s plans to deal with the banking crisis. It seems the direct nationalisation costs of Anglo, INBS, and EBS will ultimately clock in at around €30bn. The truth comes in drips of revelations of partial information. Full disclosure would utterly repulse the public.
If NAMA loses €10bn, we are looking at a combined taxpayer liability of €40bn. The national solidarity bond is paying a 10-year return of 50% on capital. The simple maths mean that a generation of taxpayers can expect an additional €20 million of interest costs per decade. Lenihan’s bank bailout legacy could exceed €60bn.
Of the 1.8 million households in the state, half of these end up paying for everything. A generation of the coping class can do their own ready reckoner on what this will mean for their weekly domestic budget. The explosion of the national debt by 2014 will be in of the order of a multiple five times the level this Government inherited in 2007.
Residential property tax and water charges are only temporarily deferred until after the next general election. Taxpayers are in moral hazard. Brave Brian advised in the Dáil last week not to break into the Hallelujah Chorus just yet. We won’t.
Lenihan’s brilliant bluster and reassurance has all the appearances of a con job. The tide of credibility may be turning. Let’s hope he gets the all-clear with his health, so that he can challenge Cowen and assume the party leadership before the year’s end. He wouldn’t be the first FF finance minister that safely ensconced himself with promotion just before the full horror of his decisions became evident.
Wasn’t that precisely what Bertie and Cowen got away with?
© Irish Examiner Ltd. All rights reserved