NAMA – good for developers, not so good for taxpayers and mortage payers : September 7 2009

Alan Ahearne again weighed in suggesting , after the ’46’ that NAMA was going to work. I wasnt so sure and said so September 7 2009

OPINION:THE ARTICLE by Dr Alan Ahearne in Saturday s Irish Times, (which we can presumably take as being a statement on Nama from the Department of Finance and the Government) contains much that can be agreed with. Few would disagree the banking system must be cleansed and positioned to again take a central place in the economy. What I and I suspect most other critical thinkers would find harder to agree with is the assertion that the only method of achieving this is Nama-as-is, writes BRIAN LUCEY

This, let us recall, involves a conscious decision to use taxpayers money to overpay banks for their toxic assets, thereby transferring billions of euro from the taxpayers to bank shareholders. That the Government s economic adviser would express surprise that there has been a heated debate about a strategy to overpay by billions at a time of fiscal crisis suggests that the mandarins of Merrion Street are totally out of touch with reality.

Barely one in four people supports Nama, and while people may not understand all the technicalities, they do see the core immorality and unfairness at the heart of Nama. Tens of thousands of people own their own toxic assets , houses in negative equity. Yet the Government is not suggesting that they should come along and pay us more than they are currently worth according to a vague, as yet secret, formula built on a pyramid of unrealistic assumptions. So why then are bank shareholders getting this deal?

Beyond this, the argument rests on a series of weak assumptions. Most startling, perhaps, of all of these is a call for Irish banks for Irish people , when Dr Ahearne states: For our economy to recover, we need clean Irish banks . This continues a line of rhetoric against foreign banks operating in the State best exemplified by Fianna Fáil TD Ned O Keeffe, who stated that the damage done to the economy was brought about by the foreign banks who came into the country .

One thing we know from economics and from painful experience in this State is that competition, while sometimes raw and painful, generally benefits the customer. The ghost of 1930s protectionist and corporatist economic policies of the majority party of Government are stirring again, it seems.

Dr Ahearne notes that Nama bonds will be traded on international markets. This ignores the difficulties any new issue of debt is likely to face in the next few years. With no track record, yielding a coupon rate well below that of State bonds, these bonds will almost certainly trade at well below face value. I assume the Nama bonds will be issued with a maturity which approximates assets of 10-year duration or longer. The assumption that the bond markets will swallow whatever amounts of Nama bonds are issued is untested and unbacked by anything other than hope or assertion.

A further assumption is crucial to the Nama debate that banks and property developers acted in a manner that was more restrained than the average household. We are asked to believe that in an era when young couples were getting 110 per cent mortgages, millionaire developers were only taking 75 per cent mortgages. It beggars belief to be asked to take this on trust.

The reality is that very little pure equity was used in the latter years of the bubble; a common practice was, it seems, to pledge the rise in previous developments as equity, to pledge stock market positions, to avail of tax shelters to generate tax savings then pledged, or to borrow elsewhere, unsecured on the new development. Dr Ahearne s arguments suggest that we are at or near the trough of property values, and that over the prospective and as yet mysterious lifetime of Nama, there will be a general uplift in property prices. Closely related is another, which seems to imply that the Government considers that contrary to all indications, we are near the peak (not the trough) of financing.

Values for some properties might reasonably be expected to experience some uplift when the current extremely high cost of financing purchases of property eases. The statement on costs of purchases is opaque, given that we are experiencing historically low rates of interest. A significant debate on property price paths has taken place over the last number of weeks. Significant evidence indicates that a decade or more can elapse with little upward movement in prices.

Last week this point was reiterated in court by Prof Morgan Kelly, and the Dutch Central Bank published research which indicates that Irish property prices are still well out of line with international norms. A plan B for Nama which lays out a scenario where property prices do not rise would be enormously helpful, and would be an essential part of any normal business plan.

Another assumption is that Nama will pay for itself Of course interest rates are expected to rise, but that will increase both Nama s income and outlays. This rests on two assumptions that the interest rates paid on the loans Nama will take over are floating, and that the assets which underpin these loans are sufficiently robust to continue servicing increased interest rates. Neither assumption, in my view, is reasonable. There is no rationale for assuming that over a 10-15 year period, interest rates and property yields move together, unless such a period includes a property boom. It would be good to see evidence that development loans were, in fact, floating rate rather than balloon or fixed loans. Information in aggregate cannot be commercially sensitive.

A new argument against nationalisation also emerges in the shape of the value of a stock market listing in providing monitoring and transparency. While a market listing is indeed useful, if the banks have to be nationalised then the relevant investor is the State, which, via the Central Bank, already knows what s going on in the banks with weekly detailed reports. Academic research indicates that it is corporate bonds, not equity markets, that are most efficient at monitoring corporate health.

The Government has set its face firmly against the non-senior bondholders taking any further hits, and thus we can suppose that the deep pool of traded debt of the Irish banks will remain traded, and thus transparency and monitoring can occur via this market.

Dr Ahearne also argues that nationalisation (after the banks realise any losses involved in Nama transfers) will not be required. He contends that the value of loans on the banks balance sheets already includes adequate provision for bad loans, and as such any further losses will not fully erode shareholders equity.

This begs the question that if the banks had made adequate provisions, then presumably Nama would not be required. It is precisely because they have not made these provisions that they wish to offload the toxic loans to the taxpayer. The circular logic continues with the Minister stating that the banks need not be nationalised, as doing so would mean the boards would have traded recklessly, and thus would have had to resign. As they have not resigned, the argument goes, the banks must be solvent.

Which again brings us to the question: why then do we need Nama with its accompanying transfers of billions of euro from the taxpayer to the shareholders?

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