THE Government’s army of spin have been busy over the past week. They have been trying to convince us that the National Asset Management Agency (NAMA) plan is: the only way to restore bank credit to the wider economy; there is no alternative and they know what they are doing.
My scepticism starts with my intuition. I remember all too well when previous governments were bounced into similar bail outs. In 1985, as a government back- bencher, I recall entertaining delegations from AIB about their ICI debacle. Their systemic requirements necessitated special legislation and a financial levy. A short time later AIB shareholders prospered.
Some years later Larry Goodman encountered severe financial distress as a result of the Iran/Iraq war, export credit insurance default and diversified investments that went west. The Dáil had to be recalled to enact emergency legislation to provide examinership protection to his group. Goodman and the banks subsequently flourished.
These examples highlight the benefits for those that are bailed out. Who protects the taxpayer? I have a sinking feeling that the Government, the Department of Finance and the NTMA are making this up as they go along.
With each passing day, I become more concerned whether the zombie Department of Finance is fit for purpose. Don’t take my word for it. Minister Brian Lenihan appointed Alan Ahearne to advise him on the economy. On the February 18 he appointed Dr Peter Bacon to advise him on the banking crisis. This is hardly the sign of a political boss who is content with the adequacy and quality of his departmental advice.
Since budget day there has been considerable confusion as to precisely what the NAMA plan will involve. Originally, it was just bad loans. Then, it included other good property loans. There is no precedent for the relative scale and risks of this approach.
We are taking these toxic liabilities onto our national sovereign debt. The Swedish plan in the 1990s was set in the context of an orderly global economic environment. Now we have an unprecedented international depression. If this goes wrong Ireland’s finances face insolvency.
They key unexplained issue is the valuation process of these toxic debts. Already the arguments are evident for the tax payer paying too high a price.
The suggestion of a 15%-20% write-off is farcical. On average assets are impaired by 50%. Green field, undeveloped land banks have declined by 80%-90% in value. Rental incomes and returns are still going through a period of correction. This has not reached bottom. Who is to say what the ultimate downward floor price will be? The suave bankers, property developers, valuers and surveyors could run rings around NAMA. I hear there are rumours of American whiz kids being head hunted to run NAMA. I would much prefer if NAMA was a joint venture fund that would issue bonds representing both the tax payer and private investors.
Exclusively public funds are inevitably treated with softer criteria. Anyway, we are told that too big a discount would destroy the banks. So, we should over-pay in order to keep banks solvent. There is an alternative option. Other states are pursuing a risk insurance scheme on bad loans. This involves ultimately underwriting the bad debts but it does not involve the state nationalising large swathes of the property market. This is my biggest reservation. Let’s just imagine the scenario in four years’ time. NAMA will then own a huge chunk of the Irish property market. It will employ more than 1200 civil servants, collecting repayments or rental income.
At some point they will want to sell off these assets in an orderly manner and clear the liability on the bonds. What if the state wants to acquire some of this land for public infrastructure or other purposes?
Who will decide the resale policy? Estate agents and auctioneers should reflect on whether such an overhang of commercial property will not create the opposite of what’s intended.
Worst-case scenario, we could have indefinite paralysis in our property sector. These medium and long term considerations have not featured in any of the prevailing analysis I have read. The infallibility of Dr Bacon merits a little re-examination. His stewardship as executive chairman of Ballymore properties up to last year is unclear.
It is speculated that they owe Anglo Irish Bank e1.4bn. Leaving aside any conflict of interest he may have, is his record as impeccable as government spin doctors would have us believe?
Over the weekend, news reports and quotes from unnamed property developers suggest they plan to flee the country on Ryanair budget fares to escape the horrors of their creditors and NAMA. This anguish relates to the alleged absence of personal guarantees (ie the “non-recourse” terms) on their loans. If you owe e700ml to a bank, they are more worried than the borrower.
No amount of personal guarantees can bridge the extent of the gap of negative equity. Like Larry Goodman, these developers will convince NAMA that the only way out of the crisis is through their continued developmental personal property skills.
Another feature of this bailout I cannot support is the inclusion of overseas assets. Up to 35% of the portfolio of e90bn of loans is supposed to be outside of this state. We all know of individuals who have made painful forays into property speculation through apartments and houses abroad. Now the taxpayer is being told that some of these assets in Florida, Dubai and Britain are more saleable and less risky. If so, they don’t need our help. If not, why should we care? I advocate that the legislation establishing NAMA should exclude foreign assets. It seems to me all roads lead back to directly restoring the Irish banks to viability. Aside from the NAMA plan, the Government have decided to extend the state guarantee scheme to five years and any further bank recapitalisation will be by way of ordinary shares. We are already up to our tonsils in banking whether we like it or not. This should be the focus of our scarce resources. Even if the NAMA plan works, there is no guarantee in the foreseeable future that banks will have more cash for hard-pressed SMEs. The opposite could be the case due to the crystallising and writing off of mega debt, in one year.
It is impossible for anyone to assert with certainty where all of this credit crisis will finally end up. My instinct tells me that any NAMA plan should be minimalist. The overriding Government desire not to nationalise AIB and Bank of Ireland is becoming futile. We may have to accept the inevitable reality that our main banks cannot endure as currently structured. A state property quango that would operate for up to two decades is a frightening prospect and should be resisted. Bank nationalisation is preferable. If every property site with excessive property debt was to be liquidated now it would create an earthquake within our banks. Just because we need an orderly and timely market disposal of this toxic property, does not mean we have to be panicked into transferring this e90bn debt nightmare from bank shareholders onto the hapless taxpayer.