NAMA is a semi state body set up by the government to purchase commercial and development property loans from the banks. NAMA will purchase the loans using government bonds. In short the Irish taxpayer secures the bonds.
The Irish government, under the aegis NAMA, will pay interest on these bonds to the Irish banks at initial rate of 1.5 % interest.
NAMA will pay somewhat more to the banks for the loans than their current market value, by endeavouring to estimate what the property underlying the loans will worth in five to seven years’ time, by which time it is anticipated that a recovery may have set in. The current “market value” (the actual value) is €47 billion. But the State is going to pay €54 billion - some €7 billion on top of the current market value and 70 per cent of the book value. The problem with this is that the property market may fall further. It is also possible that the property market may not recover for a prolonged period of time. If this transpires the banks will have been overpaid for the loans and the taxpayer will be left with assets, which are worth much less than it paid for them.
The ECB will lend to the Irish banks. The government-backed bonds will secure this lending. In short the Irish taxpayer provides the collateral. The taxpayer is liable for the principle and interest on these bonds.
The ECB will NOT lend to NAMA. To do so would contravene Article 101. Sean Fleming TD-on Six One News and Willie O’Dea Minister for Defence on Morning Ireland have claimed that the ECB is funding NAMA. Their assertions are factually incorrect.
The Irish taxpayer is taking the lions share of the risk. This has the potential to go seriously wrong. Quite frankly the state will pay too much for the assets. Already Bank of Ireland and AIB shares have risen sharply today with Mr Lenihan's announcement. Good news for the banks. But what about the poor taxpayer?
According to Richard Bruton:
“The Minister is asking us to give a commitment of €54 billion, €30,000 for every household in the State,” “The taxpayer is being asked not just to buy impaired loans from the banks. We are being asked to pay billions more than the market value for them. Remarkably this extraordinary act is being done without any forensic analysis of the costs and benefits, of the risks and threats.”
Showing posts with label NAMA. Show all posts
Showing posts with label NAMA. Show all posts
Wednesday, September 16, 2009
Sunday, September 6, 2009
Anglo Irish Bank Director Alan Dukes supports NAMA- surprise surprise
Dukes fails to answer the hard questions on NAMA
Alan Dukes was appointed as director of Anglo Irish Bank by the government and is certainly not an independent commentator on the NAMA proposals. He has long had a reputation as an independent thinker. This reputation is undeserved. He has never come up with creative economic policies. He always has a tendency to talk down to people. Unfortunately on NAMA he is devoid of creativity. He comes across as an elitist who lectures others. The fact that he was a former leader of FG is immaterial. He no longer represents party policy on the issue. In short he has moved away from FG. He should now do the decent thing and join FF- a party whose policy he appears to support. In addition he has always been close to Garret Fitzgerald who has also come out in favour of the NAMA approach.In the Irish Times article Fitzgerald stated that "I have hitherto avoided any comment on the relative merits of NAMA vis-à-vis other possible approaches because I have not felt competent to comment on the finer points of what is a highly technical issue". Fitzgerald has already come off second best in his battle with the 46 economists who have grave misgivings about NAMA. Professor Karl Whelan exposed the flaws in the Fitzgerald thinking in a debate with him on Newstalk radio. In reality Garret Fitzgerald lacks sufficient understanding of the flaws inherent in NAMA. He has failed to satisfactorily address the ten questions posed by Professor Brian Lucey.
Neither for that matter has Alan Dukes. Today Richard Crowley interviewed Dukes on RTE Radios This Week programme.
Not once did Dukes express any concern for the taxpayers. As far as Dukes is concerned the taxpayers can bail out the banks and to hell with the consequences. He failed to convincingly articulate reasons why we should accept NAMA. He failed to answer with conviction on the purchase price of assets. He fudged his answer. He rubbished the FG proposals without spelling out convincing reasons for so doing. Dukes and Fitzgerald have failed to push for RADICAL changes in the NAMA proposals-which are likely to go through. They are doing a disservice to the country. This is not about political point scoring. It is about securing the best deal for the taxpayer and the country.
Just to pose ONE of Professor Lucey’s ten questions
· Why does no independent analyst support the governments view on NAMA? This includes the Swedish finance minister who ran their bad bank system, who said to the Irish Times that he “favours the more severe mark-to-market write-down of assets rather than a ‘through the cycle’ valuation.”, and that “it (NAMA) does not sound like the right solution to buy assets from private banks.” It also includes the IMF who said " Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed ... there have been numerous instances (for example, Japan, Sweden and the United States)Don’t expect answers from Garret Fitzgerald and Alan Dukes. Too much respect has been shown to both of them. Both have been found wanting on NAMA.
Wednesday, September 2, 2009
Ireland:Recording of Garret Fitzgerald and Karl Whelan Newstalk Debate
Former Taoiseach Garret Fitzgerald and Professor Karl Whelan of UCD discuss Dr Fitzgerald’s criticism of a letter signed by 46 Economists in The Irish Times about NAMA.
Monday, August 31, 2009
NAMA: Garret Fitzgerald admits lack of competence
In an Irish Times article on Saturday Garret Fitzgerald made the case for what he termed responsible opposition on the issue of NAMA. Again today on RTE Radio’s Morning Ireland he sang a similar tune.
Both FG and Labour have serious misgivings in relation to NAMA-and rightly so. As opposition parties it is their solemn duty to point out the glaring inadequacies. Failure to do so would be highly irresponsible. In the Irish Times article he stated that "I have hitherto avoided any comment on the relative merits of NAMA vis-à-vis other possible approaches because I have not felt competent to comment on the finer points of what is a highly technical issue".
Quite frankly this is an amazing admission. Yet this morning Garret strongly criticized the 46 economists who expressed serious misgivings about NAMA. He is referring to such learned academics as Prof Brian Lucey, School of Business, Trinity College Dublin, Prof Karl Whelan, Department of Economics, University College Dublin, Dr Constantin Gurdgiev, lecturer in finance, School of Business, Trinity College Dublin,Dr Moore McDowell, senior lecturer in economics, Department of Economics, UCD amongst others. With a few dismissive comments Fitzgerald rubbished them. Garret with his admitted lack of competence knows more than all of them put together. His arrogance was breathtaking. Garret appears to want a quick fix and to hell with the long-term consequences. Now is the time to point out the glaring weaknesses in the government proposals.
As far as Garret Fitzgerald is concerned Ireland can marry NAMA in haste and repent at leisure.
Both FG and Labour have serious misgivings in relation to NAMA-and rightly so. As opposition parties it is their solemn duty to point out the glaring inadequacies. Failure to do so would be highly irresponsible. In the Irish Times article he stated that "I have hitherto avoided any comment on the relative merits of NAMA vis-à-vis other possible approaches because I have not felt competent to comment on the finer points of what is a highly technical issue".
Quite frankly this is an amazing admission. Yet this morning Garret strongly criticized the 46 economists who expressed serious misgivings about NAMA. He is referring to such learned academics as Prof Brian Lucey, School of Business, Trinity College Dublin, Prof Karl Whelan, Department of Economics, University College Dublin, Dr Constantin Gurdgiev, lecturer in finance, School of Business, Trinity College Dublin,Dr Moore McDowell, senior lecturer in economics, Department of Economics, UCD amongst others. With a few dismissive comments Fitzgerald rubbished them. Garret with his admitted lack of competence knows more than all of them put together. His arrogance was breathtaking. Garret appears to want a quick fix and to hell with the long-term consequences. Now is the time to point out the glaring weaknesses in the government proposals.
Amongst the questions posed by Brian Lucey are the following:
- What evidence does NAMA have that the current market price of property, land etc is not in fact the correct price to pay?
- What evidence does NAMA have that the current market price of these is not in fact going to decline for a number of years, as would be the case if Ireland were to follow the common experience of previous property crashes?
- Why would a temporary nationalisation of the banks be a bad thing, given that this would provide the taxpayer with a valuable asset which could be sold in future years?
- Why does no independent analyst support the governments view on NAMA? This includes the Swedish finance minister who ran their bad bank system, who said to the Irish Times that he “favours the more severe mark-to-market write-down of assets rather than a ‘through the cycle’ valuation.”, and that “it (NAMA) does not sound like the right solution to buy assets from private banks.” It also includes the IMF who said " Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed ... there have been numerous instances (for example, Japan, Sweden and the United States),
- where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector", in the context of saying that the likely losses for Irish banks were such as to render them insolvent.
- Why not force the equity and bond holders in Irish banks to take the first place in the queue to absorb the losses that the banks would have to book were current market prices to be paid for the loans made. After all, that’s what risk capital is for?
- If the state overpays for the loans relative to current market prices, what, apart from a functioning banking system, does the taxpayer gain?
- What percentage of book value of the loans should NAMA pay, given that current market prices for land and development properties are somewhere around 30% or less of book value?
- If NAMA were to pay say €60b for loans that are worth only €30b, how can this transfer of a full years tax revenue to private speculators be justified in this economic time?
- If, as is entirely possible, the loans transferred to NAMA do not provide sufficient income to meet the coupon payments of the bonds issues by NAMA, will the taxpayer, at least in the short term, not have to meet these payments?
As far as Garret Fitzgerald is concerned Ireland can marry NAMA in haste and repent at leisure.
Tuesday, August 25, 2009
Ireland:Brian Lucey Economist poses 10 Questions to the Government on Nama
Economist Brian M Lucey has been a strong critic of NAMA. He poses 10 Questions for TDs and Senators who support Nama.
- What evidence does NAMA have that the current market price of property, land etc is not in fact the correct price to pay?
- What evidence does NAMA have that the current market price of these is not in fact going to decline for a number of years, as would be the case if Ireland were to follow the common experience of previous property crashes?
- Why would a temporary nationalisation of the banks be a bad thing, given that this would provide the taxpayer with a valuable asset which could be sold in future years?
- Why does no independent analyst support the governments view on NAMA? This includes the Swedish finance minister who ran their bad bank system, who said to the Irish Times that he “favours the more severe mark-to-market write-down of assets rather than a ‘through the cycle’ valuation.”, and that “it (NAMA) does not sound like the right solution to buy assets from private banks.” It also includes the IMF who said " Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed ... there have been numerous instances (for example, Japan, Sweden and the United States),
- where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector", in the context of saying that the likely losses for Irish banks were such as to render them insolvent.
- Why not force the equity and bond holders in Irish banks to take the first place in the queue to absorb the losses that the banks would have to book were current market prices to be paid for the loans made. After all, that’s what risk capital is for?
- If the state overpays for the loans relative to current market prices, what, apart from a functioning banking system, does the taxpayer gain?
- What percentage of book value of the loans should NAMA pay, given that current market prices for land and development properties are somewhere around 30% or less of book value?
- If NAMA were to pay say €60b for loans that are worth only €30b, how can this transfer of a full years tax revenue to private speculators be justified in this economic time?
- If, as is entirely possible, the loans transferred to NAMA do not provide sufficient income to meet the coupon payments of the bonds issues by NAMA, will the taxpayer, at least in the short term, not have to meet these payments?
Ireland-Nama:Text of Letter from Richard Bruton TD to Brian Lenihan Minister for Finance August 25, 2009
August 25 2009
Dear Brian,
I am writing to you in response to your recent letter asking for comments and observations from Fine Gael on the draft NAMA Bill in order to facilitate a discussion at the Oireachtas Joint Committee on Finance and the Public Service on August 31.Fine Gael Concerns about NAMAAs you are aware, Enda announced last Friday that Fine Gael does not support the Government's approach to resolving the banking crisis. Our concerns about the NAMA Bill arise from its potentially colossal cost, from its uncertain benefits and from the evident unfairness of asking taxpayers to take responsibility for the reckless behaviour of developers and banks. In particular, we are concerned at:
* The likelihood of over-payment by taxpayers to bank shareholders and bondholders for toxic bank assets of highly uncertain value. The distinction in the draft Bill between current "fire sale" market prices for bank assets and their underlying property collateral and their long-term economic value has some valid theoretical underpinnings, but in practice the latter is impossible to estimate. The banking and property crashes in other countries such as Japan should be a cautionary tale for those who believe that the price for certain types of property will inevitably recover from current market prices. Given the scale of this venture, over-payment could hobble the public finances for a decade;
* The doubtful impact of NAMA on the current lack of bank credit for businesses and households; and
* The wisdom and fairness of transferring responsibility to the taxpayer for the collection of troubled developer debts, and the terrible incentives this creates for repeated reckless behaviour by banks at some future date.
A Fine Gael Alternative
As you know, Fine Gael has, as far back as last April, offered a two-track alternative to NAMA that we believe addresses these problems.
Under Track 1, we propose to ensure improved credit availability for businesses by the establishment a wholesale "Good Bank", or National Recovery Bank, capitalised by the State and further leveraged by the ECB and funding markets using the "asset covered bond" model that is well-established in other EU countries.
In parallel, under Track 2, the banks would be given until the end of the Guarantee period in September 2010 to pass a rigorous "stress test" to show that they had repaired their own balance sheets by selling assets (such as foreign subsidiaries), raising more deposits and negotiating down their own liabilities to long-term providers of risk capital and funding.
In the event that the banks cannot pass such a Stress Test by the end of the Guarantee period, Fine Gael's proposal is to split each failed bank into two, leaving the assets with the most uncertain values (the developer loans) in legacy property management companies owned largely by the shareholders and other classes of risk investors.
Deposits, other short-term liabilities, easy-to-value loans like mortgages and business overdrafts, the branch networks and the vast majority of the staff would all move safely and seamlessly into a new, going concern "clean bank", initially owned and guaranteed by the taxpayer. These new "clean banks" would be well capitalised with a clean balance sheet and fully open to resume lending.
We are confident that this break-up procedure would never prove necessary for most of the banks, as they and their investors would have every incentive to avoid it. All the major banks have already announced plans to buy back debt from their bondholders at a discount in a way that generates capital to absorb future losses. These types of "debt buybacks" and debt-to-equity conversions would accelerate dramatically under our policy and at greatly discounted prices.
The advantage of this model over the current NAMA proposal is that the risks and responsibilities associated with working out distressed developer-related loans would remain with those professional bankers and investors that funded the loans and that are best placed to recover them. While the taxpayer may have to have some participation in the legacy property management companies, their losses will only be incurred after the private investors. Private investors would employ the best skills and judgement to recover as much of the money as possible, and there would be no public disquiet about a soft-touch approach for the well-connected developers.
I am, of course, aware of your oft-stated concerns regarding the implications of our proposal for financial stability. But it is international best practice for risk investors in the banks, including some classes of bond-holders, such as owners of subordinated debt, to absorb loan-related losses ahead of taxpayers. This, after all, is the nature of capitalism.Financial stability would also be maintained during this process by extending the Guarantee as necessary on debt roll-overs and all new funding coming into the banks until the sufficient recapitalisation has been achieved and confidence restored.
The Need for a Full Debate on Alternatives to NAMA.
It is disappointing that, given the enormity of the decisions we face over the coming months, that the Government has facilitated so little considered and objective evaluation of the benefits and weaknesses of the NAMA proposal vis--vis the alternatives. To justify its assertion that there is no workable alternative to NAMA, the Government to date has published nothing more than an 11-page summary of a report by Peter Bacon.
I would respectfully suggest that this has not been a formula for generating cross-party or widespread public support for any proposal to deal with the banking crisis. The draft NAMA Bill should now be delayed. In September, the Oireachtas Joint Committee on Finance and the Public Service should hear testimony from international and domestic experts of the pros and cons of the NAMA proposal vis-a-vis the alternatives that have been presented by other Parties and experts.
Detailed Observations on NAMA.
As I hope you appreciate, Fine Gael's preferred approach to resolving the bank crisis is based not on a dogmatic attachment to a particular model, but rather on a set of core principles: protecting the taxpayer from huge, unmanageable risks; minimising and ensuring a fair distribution of the losses associated with reckless lending by the banks and reckless investments by developers; and improving financial stability and credit availability for struggling businesses and families.
Notwithstanding our deep concerns about the principles underlying the Government's proposed approach to resolving the banking crisis, I am nonetheless concerned to submit detailed observations on how the draft NAMA Bill might be radically overhauled in order to protect the taxpayer and the wider economy.
Below I set out nine specific issues on which I would welcome further detailed engagement by the Minister at the Oireachtas Committee with a view to agreeing amendments to the draft Bill on which I hope all Parties might agree.
1. We want to explore how the Bill could be re-drafted to protect the taxpayer from over-payment to the banks by NAMA by minimising political interference in the process and by establishing a fully independent appeals mechanism that could also hear appeals against high valuations by NAMA.The Government had claimed prior to the publication of the draft Bill that the valuation process would be immune from political influence. But the draft Bill gives the Minister very substantial influence on the "adjustment factors" that NAMA must take into account when estimating the "long term value" premium over current market prices. Valuations and payments by NAMA to the banks can be over-ruled and increased by the Minister, while there is no corollary provision for independent or Ministerial challenge for over-payment by NAMA for bank assets.
2. We want to explore how the NAMA Bill could be re-drafted to ensure that owners of risk capital (both equity and subordinated debt) fully share in the losses resulting in write-downs by NAMA.In particular, we want further clarity as to what status the stated Government policy of avoiding nationalisation of the banks plays in the valuation process. We also want to understand the mechanisms for ensuring losses are absorbed by owners of non-equity risk capital (subordinated debt) in the event that the write-downs by NAMA more than wipe out all the equity in the banks.
3. We want to explore how the NAMA Bill could be re-drafted to allow for risk-sharing between the taxpayer and risk investors in the banks in the future work-out of the bad loans, as has been recommended by the IMF. We do not accept that the bank levy promised by Government to recover NAMA losses is a credible mechanism for risk-sharing between taxpayers and investors.In this regard, we would welcome your views on Professor Patrick Honohan's recommendation that NAMA should pay the banks less than fair value for bad loans, but in return give owners of bank equity and subordinated debt an ownership share in NAMA with upside potential.
4. We want to explore how the Bill could be re-drafted to re-assure the taxpayer that the over-riding objective of NAMA is to maximise the returns to taxpayers on assets purchased by collecting as much of the debts owed as possible, and to put in place the necessary clarity of mandate, robust incentives to achieve this objective, and set benchmarks of comparison. It is not appropriate that this be left to unpublished guidelines.
Only last November, the IMF finished a study on banking and property busts in seven other countries where the NAMA approach was adopted, and concluded that "Government-owned asset management companies appear largely ineffective in resolving distressed assets, largely due to political and legal constraints."
In layman's terms, the IMF believes that state quangos are much less skilled than private bankers at recovering loans from well-connected borrowers. In France, a similar state-owned asset management company in the 1990s lost a total of EUR18 billion (including funding costs) out of EUR28 billion of assets purchased from Credit Lyonnais.
In this regard, a major weakness in the draft Bill is the absence of any principles to guide its relationship with the developers, such as the policy on foreclosures, bankruptcies, work-outs or any of the other hard-nosed aspects of asset management which must be present to protect taxpayers. For example, without explicit protections, there is a very real prospect that in a few years' time, these same individuals will pop up again to buy these assets at an enormous discount, only this time they will be backed by funding from the same banks whose liquidity problems are now being eased. This will not, in my view, be acceptable to the public.
It is not conducive to public confidence that this be left to unpublished, future guidelines to be drafted by the Minister. The "rules of engagement" between NAMA and developers in default of their loans must be clarified in advance.
5. We want to explore how the Bill could be re-drafted to deliver new innovative mechanisms for political oversight, transparency and accountability of this extraordinary agency. These would include giving the Oireachtas an oversight and approval role for the appointment of the directors and CEO, providing "whistle-blower" protections for insiders exposing mal-practice and ensuring detailed oversight and reporting to the Oireachtas by experts appointed by the Office of the Comptroller and Auditor General of all key stages in the NAMA process, such as loan valuation and asset recovery.
6. We want to explore how the Bill could be re-drafted to require banks that participate in the Scheme to use a proportion of the extra ECB liquidity generated to support bank lending to SMEs and households. There is a danger than banks will use the extra ECB funding only to build up their cash reserves or to pay down other inter-bank or market liabilities.
7. We want to explore how the Bill could be re-drafted to deliver new supports for home-owners at risk of repossession, such as a Scottish-style equity purchase scheme by NAMA for householders facing repossession from mortgage lenders designed to bring their debts down to manageable levels (combined with some mortgage debt write-down by the banks).
8. We need further clarity on the method of payment for loans by NAMA, with particular regard to the coupon to be paid on NAMA bonds in short and long-term and other terms and conditions. We need greater clarity on the agreement with the ECB on NAMA bonds, including whether the ECB has committed to accepting NAMA bonds as collateral for liquidity operations over full duration of life of NAMA.
9. We want to explore how the Bill could be re-drafted to establish the principles under which NAMA will manage the property market (in which it will be a weak monopoly seller) in Ireland's long-term economic interests.I look forward to further engagement and debate on this most important issue for the country over the coming weeks.
Sincerely,
Richard Bruton T.D.
Dear Brian,
I am writing to you in response to your recent letter asking for comments and observations from Fine Gael on the draft NAMA Bill in order to facilitate a discussion at the Oireachtas Joint Committee on Finance and the Public Service on August 31.Fine Gael Concerns about NAMAAs you are aware, Enda announced last Friday that Fine Gael does not support the Government's approach to resolving the banking crisis. Our concerns about the NAMA Bill arise from its potentially colossal cost, from its uncertain benefits and from the evident unfairness of asking taxpayers to take responsibility for the reckless behaviour of developers and banks. In particular, we are concerned at:
* The likelihood of over-payment by taxpayers to bank shareholders and bondholders for toxic bank assets of highly uncertain value. The distinction in the draft Bill between current "fire sale" market prices for bank assets and their underlying property collateral and their long-term economic value has some valid theoretical underpinnings, but in practice the latter is impossible to estimate. The banking and property crashes in other countries such as Japan should be a cautionary tale for those who believe that the price for certain types of property will inevitably recover from current market prices. Given the scale of this venture, over-payment could hobble the public finances for a decade;
* The doubtful impact of NAMA on the current lack of bank credit for businesses and households; and
* The wisdom and fairness of transferring responsibility to the taxpayer for the collection of troubled developer debts, and the terrible incentives this creates for repeated reckless behaviour by banks at some future date.
A Fine Gael Alternative
As you know, Fine Gael has, as far back as last April, offered a two-track alternative to NAMA that we believe addresses these problems.
Under Track 1, we propose to ensure improved credit availability for businesses by the establishment a wholesale "Good Bank", or National Recovery Bank, capitalised by the State and further leveraged by the ECB and funding markets using the "asset covered bond" model that is well-established in other EU countries.
In parallel, under Track 2, the banks would be given until the end of the Guarantee period in September 2010 to pass a rigorous "stress test" to show that they had repaired their own balance sheets by selling assets (such as foreign subsidiaries), raising more deposits and negotiating down their own liabilities to long-term providers of risk capital and funding.
In the event that the banks cannot pass such a Stress Test by the end of the Guarantee period, Fine Gael's proposal is to split each failed bank into two, leaving the assets with the most uncertain values (the developer loans) in legacy property management companies owned largely by the shareholders and other classes of risk investors.
Deposits, other short-term liabilities, easy-to-value loans like mortgages and business overdrafts, the branch networks and the vast majority of the staff would all move safely and seamlessly into a new, going concern "clean bank", initially owned and guaranteed by the taxpayer. These new "clean banks" would be well capitalised with a clean balance sheet and fully open to resume lending.
We are confident that this break-up procedure would never prove necessary for most of the banks, as they and their investors would have every incentive to avoid it. All the major banks have already announced plans to buy back debt from their bondholders at a discount in a way that generates capital to absorb future losses. These types of "debt buybacks" and debt-to-equity conversions would accelerate dramatically under our policy and at greatly discounted prices.
The advantage of this model over the current NAMA proposal is that the risks and responsibilities associated with working out distressed developer-related loans would remain with those professional bankers and investors that funded the loans and that are best placed to recover them. While the taxpayer may have to have some participation in the legacy property management companies, their losses will only be incurred after the private investors. Private investors would employ the best skills and judgement to recover as much of the money as possible, and there would be no public disquiet about a soft-touch approach for the well-connected developers.
I am, of course, aware of your oft-stated concerns regarding the implications of our proposal for financial stability. But it is international best practice for risk investors in the banks, including some classes of bond-holders, such as owners of subordinated debt, to absorb loan-related losses ahead of taxpayers. This, after all, is the nature of capitalism.Financial stability would also be maintained during this process by extending the Guarantee as necessary on debt roll-overs and all new funding coming into the banks until the sufficient recapitalisation has been achieved and confidence restored.
The Need for a Full Debate on Alternatives to NAMA.
It is disappointing that, given the enormity of the decisions we face over the coming months, that the Government has facilitated so little considered and objective evaluation of the benefits and weaknesses of the NAMA proposal vis--vis the alternatives. To justify its assertion that there is no workable alternative to NAMA, the Government to date has published nothing more than an 11-page summary of a report by Peter Bacon.
I would respectfully suggest that this has not been a formula for generating cross-party or widespread public support for any proposal to deal with the banking crisis. The draft NAMA Bill should now be delayed. In September, the Oireachtas Joint Committee on Finance and the Public Service should hear testimony from international and domestic experts of the pros and cons of the NAMA proposal vis-a-vis the alternatives that have been presented by other Parties and experts.
Detailed Observations on NAMA.
As I hope you appreciate, Fine Gael's preferred approach to resolving the bank crisis is based not on a dogmatic attachment to a particular model, but rather on a set of core principles: protecting the taxpayer from huge, unmanageable risks; minimising and ensuring a fair distribution of the losses associated with reckless lending by the banks and reckless investments by developers; and improving financial stability and credit availability for struggling businesses and families.
Notwithstanding our deep concerns about the principles underlying the Government's proposed approach to resolving the banking crisis, I am nonetheless concerned to submit detailed observations on how the draft NAMA Bill might be radically overhauled in order to protect the taxpayer and the wider economy.
Below I set out nine specific issues on which I would welcome further detailed engagement by the Minister at the Oireachtas Committee with a view to agreeing amendments to the draft Bill on which I hope all Parties might agree.
1. We want to explore how the Bill could be re-drafted to protect the taxpayer from over-payment to the banks by NAMA by minimising political interference in the process and by establishing a fully independent appeals mechanism that could also hear appeals against high valuations by NAMA.The Government had claimed prior to the publication of the draft Bill that the valuation process would be immune from political influence. But the draft Bill gives the Minister very substantial influence on the "adjustment factors" that NAMA must take into account when estimating the "long term value" premium over current market prices. Valuations and payments by NAMA to the banks can be over-ruled and increased by the Minister, while there is no corollary provision for independent or Ministerial challenge for over-payment by NAMA for bank assets.
2. We want to explore how the NAMA Bill could be re-drafted to ensure that owners of risk capital (both equity and subordinated debt) fully share in the losses resulting in write-downs by NAMA.In particular, we want further clarity as to what status the stated Government policy of avoiding nationalisation of the banks plays in the valuation process. We also want to understand the mechanisms for ensuring losses are absorbed by owners of non-equity risk capital (subordinated debt) in the event that the write-downs by NAMA more than wipe out all the equity in the banks.
3. We want to explore how the NAMA Bill could be re-drafted to allow for risk-sharing between the taxpayer and risk investors in the banks in the future work-out of the bad loans, as has been recommended by the IMF. We do not accept that the bank levy promised by Government to recover NAMA losses is a credible mechanism for risk-sharing between taxpayers and investors.In this regard, we would welcome your views on Professor Patrick Honohan's recommendation that NAMA should pay the banks less than fair value for bad loans, but in return give owners of bank equity and subordinated debt an ownership share in NAMA with upside potential.
4. We want to explore how the Bill could be re-drafted to re-assure the taxpayer that the over-riding objective of NAMA is to maximise the returns to taxpayers on assets purchased by collecting as much of the debts owed as possible, and to put in place the necessary clarity of mandate, robust incentives to achieve this objective, and set benchmarks of comparison. It is not appropriate that this be left to unpublished guidelines.
Only last November, the IMF finished a study on banking and property busts in seven other countries where the NAMA approach was adopted, and concluded that "Government-owned asset management companies appear largely ineffective in resolving distressed assets, largely due to political and legal constraints."
In layman's terms, the IMF believes that state quangos are much less skilled than private bankers at recovering loans from well-connected borrowers. In France, a similar state-owned asset management company in the 1990s lost a total of EUR18 billion (including funding costs) out of EUR28 billion of assets purchased from Credit Lyonnais.
In this regard, a major weakness in the draft Bill is the absence of any principles to guide its relationship with the developers, such as the policy on foreclosures, bankruptcies, work-outs or any of the other hard-nosed aspects of asset management which must be present to protect taxpayers. For example, without explicit protections, there is a very real prospect that in a few years' time, these same individuals will pop up again to buy these assets at an enormous discount, only this time they will be backed by funding from the same banks whose liquidity problems are now being eased. This will not, in my view, be acceptable to the public.
It is not conducive to public confidence that this be left to unpublished, future guidelines to be drafted by the Minister. The "rules of engagement" between NAMA and developers in default of their loans must be clarified in advance.
5. We want to explore how the Bill could be re-drafted to deliver new innovative mechanisms for political oversight, transparency and accountability of this extraordinary agency. These would include giving the Oireachtas an oversight and approval role for the appointment of the directors and CEO, providing "whistle-blower" protections for insiders exposing mal-practice and ensuring detailed oversight and reporting to the Oireachtas by experts appointed by the Office of the Comptroller and Auditor General of all key stages in the NAMA process, such as loan valuation and asset recovery.
6. We want to explore how the Bill could be re-drafted to require banks that participate in the Scheme to use a proportion of the extra ECB liquidity generated to support bank lending to SMEs and households. There is a danger than banks will use the extra ECB funding only to build up their cash reserves or to pay down other inter-bank or market liabilities.
7. We want to explore how the Bill could be re-drafted to deliver new supports for home-owners at risk of repossession, such as a Scottish-style equity purchase scheme by NAMA for householders facing repossession from mortgage lenders designed to bring their debts down to manageable levels (combined with some mortgage debt write-down by the banks).
8. We need further clarity on the method of payment for loans by NAMA, with particular regard to the coupon to be paid on NAMA bonds in short and long-term and other terms and conditions. We need greater clarity on the agreement with the ECB on NAMA bonds, including whether the ECB has committed to accepting NAMA bonds as collateral for liquidity operations over full duration of life of NAMA.
9. We want to explore how the Bill could be re-drafted to establish the principles under which NAMA will manage the property market (in which it will be a weak monopoly seller) in Ireland's long-term economic interests.I look forward to further engagement and debate on this most important issue for the country over the coming weeks.
Sincerely,
Richard Bruton T.D.
Friday, August 14, 2009
Ireland: Reasons why Greens should not leave Government at a NAMA Conference
It is scarcely surprising that-as of now- four Green Party constituency organisations have passed motions calling for a special convention on NAMA, the “bad bank” being set up by the Government to buy toxic loans from lenders.
A convention will be held by the Greens before the legislation goes into the Dáil on September 16th if a similar motion is passed by one more constituency organisation.
The party suffered a shattering reverse in the June local government elections and now holds only three seats nationwide. This was exacerbated by the abysmal performance of Dan Boyle and Deirdre De Burca in the Euro elections. Independent Patricia McKenna-who left the party- secured a higher vote than the official Green candidate Deirdre De Burca in the Dublin Euro Constituency. Party fortunes are at a low ebb.
Some observers suspect that the Green Party may be searching for an exit strategy. Such a conference might offer such a possibility. Superficially this might appear to be an attractive option. However if considered at a deeper level it would be- in all probability -highly unwise for the following reasons:
(1) In general, electorates tend to punish small political parties, which precipitate elections.
(2) The electorate would view such a move with the utmost cynicism. The Greens would be perceived as being more interested in saving their own political skins.
(3) They would be viewed as a party unsuitable for government and incapable of taking unpopular decisions. Greens would be labelled cowards. A vote for a Green TD would be a wasted vote.
(4) An immediate election would cost the party its full complement of seats.
(5) Remaining in Government ensures that the party has 6 TDs and 2 Senators until the 2012 General Election and offers it some prospect of surviving.
If it loses its TDs in an early election it is FINISHED as a political force. No doubt party leader John Gormley is well aware of the hostile reception awaiting Green and FF candidates at the doorsteps in an early election campaign. It is a case of hang together or hang separately. Would turkeys vote for Christmas? The Greens are now trapped in government by the need for self preservation.
Thursday, May 14, 2009
Ireland:Scrap NAMA and set up National Recovery Bank to drive new lending and job creation - Bruton
FG is opposed both the Government's creation of the National Asset Management Agency (NAMA) and Labour's temporary nationalisation plans for Irish banks.
Richard Bruton argues correctly that:
Richard Bruton argues correctly that:
"Under Labour's proposal the taxpayer will become fully responsible for all the unknown, but potentially massive, banking losses that will materialise over the coming years"He further argues that:
Under both NAMA and nationalisation, loan losses will only be shared between ordinary shareholders and taxpayers, while other providers of long-term capital and funding walk away scot free.
He criticizes proposals to waste taxpayers' money by propping up dodgy developer debt and bailing out international bond markets. He suggests that the Government should invest scarce taxpayers' money in clean banks with healthy balance sheets and an appetite to lend to struggling Irish businesses.
FG proposals to tackle Ireland's Banking Crisis:
Speaking during the Oireachtas debate on the banking crisis, Fine Gael Deputy Leader & Finance Spokesman Richard Bruton TD called for the establishment of a new State-run National Recovery Bank to drive new bank lending for investment and job creation, instead of the Government’s misguided National Asset Management Agency.“Eight months into the crisis, the Government has failed to get banks lending again. Thousands of jobs continue to be lost every month as credit facilities are withdrawn from viable businesses and financing remains scarce for new investment.“Fine Gael is deeply disturbed that the Government has rushed headlong into the NAMA scheme whereby the taxpayer will shoulder the responsibility for working out the losses on the massive €90 billion pot of loans on development lands and unsold or partially-built properties. This is an undertaking of Napoleonic proportions.“At a time of huge uncertainty when Governments the world over are cautiously groping towards solutions, this is not the time for a small country with a deep problem in the public finances to plunge into a project on a scale never before attempted. A similar, though more modest, approach adopted by the French Government in 1995 following the Credit Lyonnais crisis ended up costing taxpayers there €18 billion.“It is especially foolish to do this on the basis of a flimsy recommendation without any detailed evaluation of the potential hazards along the way. Huge concerns have been raised by many independent commentators about:
• The difficulty of pricing the loans to be purchased and the risk of taxpayers left shouldering huge losses;• The risk of long court battles with developers;
• The moral hazard of bailing out bondholders and other professional investors who created a banking bubble;
• The difficulty of managing an agency on this gigantic scale;
• The politicisation of loan recovery and write off.
“None of the many legitimate questions are being answered. Yet we learn that already a Chief Executive and an interim board is about to put this grand experiment into action.
“I can well understand why many favour nationalisation over this extraordinary gamble proposed by the Fianna Fáil Government. However we must also tread carefully regarding the option of nationalisation. It may not require the immediate injection of cash up front, but it does force the taxpayer to shoulder all of the problems created by the banks. It risks the taxpayer having to pay too much for the shares. It allows professional investors who funded highly risky activity by the banks to walk away scot free. And it politicises new lending decisions by the banks which in other countries have seen big powerful companies win out over smaller businesses.
“Fine Gael favours a different approach. The first step is to establish a National Recovery Bank. This would be a wholesale bank funded by the ECB which would stand ready to provide the necessary liquidity to the covered banks to get credit flowing. It would be willing to buy at a fair market price the small business lending books or the mortgage books of any bank. The key features of the National Recovery Bank would be as follows:
• The necessary capital would be provided by the State, and could initially be in the range of €2 billion;
• It would be set up under well-established Irish Asset Covered Security (ACS) legislation, allowing it to efficiently raise additional funding of €30-€40 billion, initially from the European Central Bank and over time from private markets when they re-open;
• It could be established and operational within four to six weeks, and inject new lending into the economy without delay.“The advantages of this proposal over the other options are several:
• It immediately gets credit flowing – a straight fusion into the blood stream of small business;
• It helps banks to strengthen their balance sheet by swapping parts of their loan book for cash;
• It creates a solid spine to underpin present and future banking for the economy at a time when existing banks are intent on shrinking their own balance sheets to protect their independence;
• It allows existing relationships between businesses with their banks to continue, but in a new prudent framework dictated by the State bank;
• It leaves toxic property-related loans in the hands of the private banks who made them, and who have better skills and incentives than any State agency to recover as much as possible from those loans;
• It allows the banks to refocus on restructuring their operations and on working out the losses that they have incurred in an orderly way.
“Fine Gael recognises that the establishment of this National Recovery Bank is just a first step. The problem of unwinding non-performing loans remains. However, it would be foolish for the taxpayer to rush into undertaking this huge responsibility, either through NAMA or through nationalisation, without a proper assessment of the landscape ahead and a system for sharing out the losses equitably. The taxpayer simply can’t save everyone in this situation. Other countries are also coming to recognise this and are developing ways in which professional investors share in the cost of adjustment. Ireland would be foolish to rush in to solutions that close off new thinking.”
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