‘Marry in haste and repent at leisure’. This is the risk of the Government’s courtship with the banks through NAMA. Panic today, and misplaced optimism that tomorrow will look after itself, should not guide this massive step.

The NAMA proposal is being driven by a fixation about deposits being pulled out of Irish banks. The short-term attraction of NAMA is that it offers a solution to this problem. By all accounts, the ECB has agreed to supply an unlimited amount of funding to the Irish banks on the security of paper issued to them by NAMA. In one bound the banks’ liquidity problems are solved. What’s more, they get money at 1% – a quarter of the price they would have to pay in the open market.

Fear of another liquidity crisis for Irish banks should not panic us into a solution that might save the banks now, only to hobble the country for the next ten years. The longer-term risks of this approach are becoming more obvious by the day.

The Government’s plan is that NAMA will take on €90 billion of loans but avoid wiping out the shareholders in the banks in the process. To do this, the absolute limit to the write-down on these loans is the €23 billion in shareholders’ equity. It implies a maximum write-down of 25% on the transferred loans.

From presentations to the Commercial Court, developers are suggesting that in a wind-up situation lenders will lose 75% of their money. The Government’s policy is only credible, therefore, if it believes that its management of the impaired loans can realise three times the value of what they would secure in the current market. This is a mighty assumption and €45 billion of taxpayers’ money will be riding on it.

MISPLACED OPTIMISM

The policy of requiring NAMA to overpay for the distressed loans is being cloaked under a new concept of ‘long-term economic value’. This means NAMA can ignore the current weak market prices of development land and other property assets, and adopt a contrived estimate of the value of the assets in five to ten years’ time that is consistent with keeping the banks above water. The enormous worry is that misplaced optimism is underpinning this concept.

Seventeen years after the bursting of the property bubble in Japan, for example, property prices are still 40-50% below their peak levels. The idea that prices for commercial property and development land will rebound back anywhere near boom-time prices is a fool’s optimism. We cannot afford policy-making to be built on the hunch of those who up to recently were telling us that the property bubble was based on sound economic fundamentals.

Besides, there are serious doubts about how good NAMA will be at managing debt recovery. The intention seems to be that the management of the impaired loans will be left with the banks. There are grave reasons to doubt the success of this approach. The consensus is that the skill of asset recovery is a very different one from the skills of bankers. It is dirty work involving aggressive foreclosure against many of the loan holders. Not only may the banks lack the skills, but with no ‘skin in the game’, they will only have the agency fee paid by Government as the incentive to do this tough work.

The property portfolio will be truly enormous. NAMA will be the property market. Buyers and funding will be scarce. Will it be the familiar names teaming up with the same banks to buy back at a discount?

The low cost of funding NAMA in the short term is the real lure for the Government. The ECB in an act of extraordinary solidarity have agreed that they will issue liquidity at 1% on the security of the paper that the Government uses to buy the impaired loans from the banks. No doubt the Government sees the opportunity to buy the loans from the banks with IOUs carrying a variable coupon rate at little more than the 1% ECB rate. However, the tax payer faces the prospect of carrying this debt for 10 to 15 years. The ECB may in time de-list such bonds as security for liquidity. The Government will then have to refinance these purchases with borrowing at full free-market rates.

HARD-HEADED ANALYSIS OF CHOICES LACKING

It has repeatedly been said of the banking crisis that those who led us into this crisis are not the ones that should lead us out. However, we appear to be condemned to being led into NAMA by those who led us into the mess. What is particularly disconcerting is that tough evidence-based analysis of these huge pitfalls in the NAMA process has not been provided by Government. Instead it has drummed up support from those who have little choice but to endorse it. The Central Bank tells us, without analysis, that it is a good thing. The ESRI, again without analysis, also rallied to its cause. The NTMA, after initial scepticism, has been pulled back onto the Reservation. No doubt learned bankers will follow suit.

In this time of deep recession the Irish public cannot save everyone as the Government seems to believe. It cannot protect shareholders from wipe out, bond holders from any forced changes and shoulder €70 billion in extra debts with little prospect of early return. It cannot risk further undermining our credit rating on which we already pay a 2% risk premium over German borrowers

I remain convinced that there are alternatives.

 We can get the ECB to advance liquidity for our banks through a mechanism other than NAMA. For example, France and Denmark have established banks with state equity which is funding lending and is backed by ECB liquidity. This is exactly the model of the National Recovery Bank advocated by Fine Gael which the Government has contemptuously dismissed as a ‘magic bank’.

 We can design a process whereby banks are given every chance to clean up their own balance sheets and get seaworthy again while remaining in private hands – by selling good loans, by working out bad loans, by disposing of non-core assets like foreign subsidiaries and by renegotiating the terms of their own liabilities to international investors.

 We can design a system to allow banks whose business model is irretrievably broken to be wound down in an orderly way.

NAMA could still play a role in an alternative model but it would not offer the taxpayer as the fall guy for all the losses caused by poor decisions of private investors.

In this time of crisis there is a natural tendency to want to rally round, to ask everyone to put on the green jersey and back the manager. However, for an opposition party, the patriotic thing is to ask the probing questions that the Government would rather leave unasked. The stakes are too high to duck hard questions for fear of what the neighbours might think. If an unasked question leaves a faulty plank in place, the uncritical consensus will not stop us from falling through the hole, when that plank gives way.